“I have saved a sum of money and would like to invest it. Where should I begin?”
The majority of people would say the quickest and easiest way to invest your money is with an investment adviser. It seems pretty easy, you give him or her your nest egg and they invest it for you. You might be thinking: “Handling investments are their forte and they most certainly have a lot more knowledge than a novice investor like me”. Investing with an investment adviser seems like the obvious choice, but in fact it isn’t. Here’s why…
1. Money, Money, Money, Always Sunny in the Investment Advisers' World
Investment advisers might provide a service to their clients but it is important to remember that investment products are designed like any other product for sale: to make money for the people selling them. Every time an investment manager makes a transaction on behalf of a client, they make money - whether the client achieves their desired returns or not.
They also charge investors for the privilege of investing with them, not to mention the added management fees and exit fees that can eat into your profits. The potential impacts on the overall rate of return are surprising.
According to the UK’s consumer watchdog, Which?:
“The threat posed to your returns through high charges can be very dramatic. Research from Which? shows that if you invested £10,000 in a fund with no charges, and it grew by 6% annually for 20 years, you’d get a return of £32,071 - just over £22,000 growth.
If you invested in a fund with the industry average ongoing charge of 1.67%, your return would be reduced to £23,344 - meaning £9,000 of your growth goes on charges. If the total expense ratio was 2.5%, £12,000 would be paid out in charges. That’s not even factoring other costs, such as transaction costs.”
By taking the latter into consideration, paying charges or fees doesn’t seem like the best idea anymore. Who are investment managers making money for? You or themselves?
2. Investing For Their Own Pockets
While the financial industry likes to cloak itself in mystery, hard facts relating to revenue and salaries are not things it can easily mask. Easily accessed figures clearly show that those who master the language of selling and managing financial services can make a lot of money for themselves.
In New York, the average salary in the securities industry is around $370,000. This is more than five times the average salary in the rest of the private sector - it was twice the average salary 25 years ago. In 2012, despite only accounting for 5% of private sector jobs, the US securities industry generated 22% of the country’s wages.
Brian Moynihan, CEO of Bank of America made $14 million in 2013: a huge amount of money in anyone’s book. But this is loose change compared with what the top hedge fund managers took home. The top 5 made $21 billion between them - more than the total salaries of all the kindergarten teachers across the States. The number one earner in 2013 was hedge fund manager David Tepper who took home $3.5 billion: 0.001% of the total $36 trillion value of global stocks that year. Money made off your investments!
3. Trustworthiness Isn't Their Strong Suit
In 2011, the same year the company was awarded the Institutional Hedge Fund Firm of the Year award, a Delaware bankruptcy court found that Tepper’s Appaloosa Management was one of four hedge funds involved in insider trading during the restructuring of Washington Mutual bank. Tepper’s funds lost 3.5 per cent that year. But, having charged all his investors a 2% management fee at the very least and retaining 20-30% of profits for himself, he still took home $2.2 billion.
Tepper isn't the only investment manager that has been accused and charged for fraud. September, this year, three hedge fund managers were sentenced in connection with $40 million "Black Diamond" ponzi scheme. Another hedge fund manager was charged with bilking investors out of more than $1 million so that he could buy a Lexus. Investment adviser, James Nicholson, has been sentenced to a 40-year prison term for running a $140 million ponzi scheme at his hedge fund firm. Lastly, who can forget Bernard Madoff, with his $64.8 billion ponzi scheme? This selfish act had a massive influence on the lives of many of the investors he stole from; investors that will never recover from it. Some of the 250 victims, including people in their 80s, lost all or most of their life savings.
Do you still think it's a good idea to trust an investment adviser with your money?
The only fund I invest in is my own retirement fund. It’s easy to see why naïve investors get sucked into hedge funds with their grand promises of huge returns. But they are also very high risk and people are losing more than they’re winning. Hedge funds used to be the reserve of the mega-wealthy but that’s not the case anymore. Many hedge funds now require a fraction of the investment of the Appaloosa funds and investors with less money to lose are now jumping on board.
Hanging on to a dream of high returns based on a history of loss is certainly not something I’d ever sanction. Value stocks in my view are the only way to go, especially now that investing tools are simplifying the means for independent investors to become successful investors.
Make the wise choice and fire your investment managers. Without them you will be well on your way to the financial future you've always wanted. Enjoy market-beating returns and never pay a cent in fees or charges ever again.
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