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The Cost Of Conventional Investing

April 18th, 2013

By Matthew Petersen

What’s the first reaction you have when you realize that someone is trying to sell you something? Personally, I get defensive, my skeptic’s wall goes up, and my mind fills with rapid-fire thoughts and questions. Questions like:

 

Is he/she receiving a commission on this sale? Is there a competition to sell this product? If he/she is so eager, is this really the best product for me? Is he/she going to try to sell me something else, some sort of add-on?

 

Do you have similar reactions? Being sold creates an emotional response. The buyer feels like his/her best interest is being cared for, but in reality the sales technique is masking the true intention of the salesperson, which is to make a sale. Salespeople aren’t bad people; many of them are good individuals that are simply making a living that involves selling a product. Our economy thrives on product sales, but that doesn’t dismiss the immediate conflict of interest that arises when a salesperson is selling a product. If you spend $100 extra for a television, it isn’t the end of the world. You might feel slightly upset, but it’s a one-off premium expenditure. Investing, however, is a different story. Costs and expenses are normally reoccurring, and have larger implications on portfolio performance than the cost of the services provided.

 

Conventional investing, which consists of market timing, stock picking, mutual funds masked with those underlying strategies, and commission based management is the majority of the population’s investment method. The results are, more often than not, higher cost of management, greater expenses within the funds themselves, higher tax implications, and an emotional rollercoaster that involves statistical underperformance to benchmarks and possible lack of transparency regarding the direction towards retirement. As you can see, being sold in investing is expensive and possibly life changing.

 

Prior to being with Petersen Hastings, I worked at an investment management firm in the mid-west. While sitting in a prospective client meeting with a senior advisor, I listened to this couple explain their goals and retirement hopes. The husband was already retired, but his wife still worked. She greatly wanted to be retired, and they both hoped that their financial situation had her only a year or two removed from retirement. This was the first meeting that included both the husband and the wife; the husband had one meeting prior to bring in financial statements. The financial advisor, after spending time with his team looking over their finances, had to break the bad news: Based on her current situation with her current financial professional, she would not be able to retire within their desired time frame. She was visibly upset, but the advisor had a plan for them with a clear-cut destination that explained how she could get to retirement.

 

Stories like this are disheartening, but that doesn’t mean they can’t have a happy ending. It’s stories like this that makes our job rewarding. We don’t like being the bearers of bad news, but we do get satisfaction from redirecting financial courses so that they can reach their financial destination and goals. Being sold in the investment world is costly, but having a financial advisor that is directly compensated from you, and only you, allows him/her to spend more time on the execution of your plan than the generation of more commission.

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