“Invert always invert. It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backwards.” Charlie Munger
These words from Charlie Munger’s 1986 speech can be used as a lifeline for investors being fleeced by unscrupulous brokers. Turning their advice upside down and applying it to the salespersons life can be a very enlightening exercise.
For instance many brokers will say, “You get what you pay for. The reason for the high fund expenses is you don’t want to be average, do you?” This has been proven false by many studies. it has been determined that the largest impact on a fund’s performance is cost.
It has also been determined that most investors vastly underperform the market averages. Being an average investor would actually classify you as an excellent investor.
Here is how you can invert this pitch. “Since cost does not matter, then it seems logical your income will not suffer if your commission for selling me this fund was cut in half or eliminated. After all, you don’t want to be compensated like the ‘average’ salesperson, do you?” Let him refute this logic.
Another way to collect enhanced fees and commissions is to sell complicated strategies that even the salesperson often does not understand. The idea is this will cause “no harm” and add “certainty” to your returns. Many variable annuities fall into this category.
Charlie Munger would have a field day with this. Here is an imaginary reply he might counter with, “Since complexity does not matter, and will not lead to unexpected surprises, I have a proposal for you. How about we create a bonus formula for you that only an actuary will understand? Based on what you just told me, this uncertainty will have no effect on your family’s lifestyle.”
The sound of crickets will most likely be his response.
Another way many salespeople will look to separate you from your money is to get you to invest in illiquid investments. This means you will not be able to sell them if you really need to.
The rewards for agreeing to lock up your money are guaranteed returns and a hedge against the movements of public markets. . A very common investment that would fall under this category would be a Private R.E.I.T.
In the past, we have seen many investors get more than they bargained for in this deal. Salespeople who hawk this product often receive commissions over 10%. This almost guarantees your returns will be disappointing.
To keep with our “inversion” thing, there is a great response to the logic of this argument. How about replying like this, “For the next 5-10 years you will not be able to change jobs even though many lucrative opportunities are available.” Finish with, “Being stuck in a job with below-average compensation will have no influence over your financial future.”
Something tells me he just might change the subject.
The retail brokerage industry is beset with plethora of conflicts of interest. According to industry organizations like SIFMA, this plays no role in the decision process of allocating your investment assets. They are fighting tooth and nail a proposed rule to make brokers act in their clients’ best interests. They feel this is unnecessary regulation and will eliminate their servicing of small investors.
A great response to this misguided perception of the role of incentives in human behavior would be this. “Your colleagues will receive large bonuses if you lose 50% of your client book. This will have no influence on their behavior towards you. The decisions they make in the workplace will be impartial and evidence-based. Therefore, this should not affect your take-home pay.”
This just might cause some reflection about how client unfriendly the current conflicted sales based financial service model really is. At the very least, he most likely will never bother you again.
The damaging, wealth-destructive effects of this model have the greatest impact on the small investor. They have very little in savings and need every penny to work for them.
The brokers say they want to help the little guy, but the proposed fiduciary rule will leave this group underserved. Inverting this statement could have profound ramifications for our society.
An inverted retort would go something like this, “So what you are saying is low-fee robo-advisors and fee-only RIAs will do investors a disservice by creating a globally- diversified portfolio based on their time frame and risk tolerance?”
Continue with, “According to you, evidence-based investing will impede wealth accumulation. But sector bets; market timing; complicated, illiquid proprietary investments; and stock picking will provide a better way?”
Charlie Munger has it right. Working backwards will repudiate false premises based on opinions, false narratives and conflicts of interest. Try this the next time someone financial salesperson comes knocking on your door to sign you up. Yes, some firms still actually do this!
“So, you mean to tell me that my best option to receive sound financial advice is to buy investments from a complete stranger, with little experience, and who spends most of his time learning how to sell instead of understanding my unique financial situation?”
By addressing the problem backwards, he will move in reverse from your home, praying you will never tell your neighbors of your inverting strategy!