Follow the Money

Who can you trust these days?

“You should….”, “Why don’t you…?”, “You ought to…”. 

There’s no shortage of free advice.  In fact, there appears to be a huge surplus of people who want to give others—family, friends, and strangers alike—directions on what to do and how to do it.  That’s not necessarily a bad thing IF you are able to screen out the worst advice, the uninformed advice, the misguided advice, the just plain stupid advice.  Do that, and you might be left with a few nuggets of wisdom for whatever area of life in which you are needing some guidance.

How about advice on handling your financial life: earning, spending, saving, and investing money?  There, too, advice abounds; and it’s not always free.  There are financial advisers and “wealth management” firms that want to invest that money for you—for a fee and/or a commission.  There’s nothing inherently wrong with that.  You don’t know how to fix a leaking faucet, you call a plumber.  You are clueless how to invest for retirement, you engage the services of a financial adviser.

The real question becomes “How do I know I’m getting the best advice and that the adviser is looking out for MY interests?”

Certain advisers have what is called a fiduciary responsibility, a regulatory duty to act in the client’s interest.  Personally, I think application of the rules can be subjective.  One adviser, for example, might think a certain investment is appropriate for a client, another adviser given the same client and set of facts might recommend another option.  And they both could be within the fiduciary guidelines.

I have my own caution for sorting through the financial advice:  Follow the money.  The premise of this phrase, popularized in the movie “All the President’s Men” about the 1970’s Watergate scandal, is that the trail of money leads to the heart of the truth.  To illustrate, a police detective could trace drugs and find users and small-time dealers.  But if he follows the money to the person in whose pocket it ends up, he nets the kingpin, the ringleader. 

So how is “following the money” useful in distinguishing between good and bad financial advice?  Simply this: figure out if or how the person offering the advice stands to profit if the advice is followed.  Therein you may find the possible motivation that puts his own interest above yours.

Is that wealth management firm investing your money in funds that have high fees and which pay high commissions to your adviser?  That might be justifiable if the return on your investment consistently nets you enough to outweigh its costs and still beats other, cheaper investment options.  The odds (and the market research) say it likely does not.

How about that “financial guru” being interviewed on the morning news? He’s trotting out charts and graphs that supposedly show the stock market is predicting a major crash and you had better move your money NOW, likely into some investment scheme he is pushing.  In his case, I think it’s wise to keep in mind that famous quip by Nobel prize-winning economist Paul Samuelson:  “The stock market has predicted nine of the last five recessions.” 

Charts and graphs are useful but not always predictive.  That talking head might just be trying to be the loudest voice of doom.  And if he is, and if he’s right, then he will be the next financial genius, making a fortune in speaker’s fees and book royalties.  And if he’s wrong…well, he’ll get smaller speaker's fees and sell fewer books, but there will be no real punishment for calling it wrong.  Collectively we quickly forget the wrong predictions.

Or perhaps you have a friend with new-found wealth he wants to share.  I’ve yet to meet someone who became wealthy through some fortuitous investment who then wanted to help make me rich by sharing his investment knowledge.  (Even if he did, that particular gravy train will have probably left the station long ago.  It’s the first people into a winning investment that reap the big rewards, not the latecomers.)  The occasional friend who has wanted to let me in “on the ground floor” of some investment opportunity truly wanted me on the ground floor—doing the work to earn profits that mostly took the escalator to his bank account.  Can we say “Ponzi scheme”?

So when you are presented with investment advice, don’t act hastily.  Take time to ask some questions, to probe a little, and to just use some common sense to determine who stands to win, who stands to lose.  And while I call this strategy “following the money”, it could just as easily be called “saving your money”.

Till next time,

Roger

“To show partiality is not good—yet a person will do wrong for a piece of bread.” Proverbs 28:21 NIV®*

*Scripture quotations taken from the Holy Bible, New International Version® NIV®

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