Investing is Broken
Current financial investing options are riddled with hefty minimums, management fees, high commissions and an unfriendly user experience. And I’m being nice.
Want to work with a financial advisor? Great, you’ll need at least $500,000 to get someone’s attention. Got your advisor on the phone? Congrats – that’ll be 2% of your assets (even if she loses your money).
Wanna do-it-yourself? You could join a discount brokerage and source your investments from the thousands of financial sites on the Internet. Be careful though, the authors get paid per article – and have no skin in the game. What’s worse – because your commissions are 10 bucks a trade, picking up 100 shares at $10 each puts you in the hole 1% immediately. Yikes.
Still interested but only have $20 stashed away? Consider going down the “zero commission” route where you can even invest on your shiny new Apple Watch (I suspect this is the reason why you only have $20 in your bank account). Don’t forget to read the fine print: We may take advantage of you with our margin rates, get rich by hitting you with hidden fees and offer you a questionable execution experience. But hey it’s “zero commission” and it sounds oh so promising.
Don’t invest in stocks? No problem – index funds are en vogue. Consider any number of Robo-Advisors where its only 5 clicks to invest. From there you can sit back and let a series of 1s and 0s (i.e. robots) manage your money. Just be wary about dealing with life’s curveballs and challenges – the financial advisor above told me that Robo-Advisors can’t help you there. And I know that FA isn’t biased (hint of sarcasm).
Last, but not least, let’s not forget the service where you type in your brokerage account credentials, pay a small management fee and in return they tell you if you are a great, average or crappy investor. Are you serious?
All kidding aside, the above is a broad generalization and caricature of the various solutions available to retail investors today. Each category has formidable leaders and offers something unique to the customer. Most importantly, these companies have helped us get to where we are today. That said, I’m not satisfied. I’ve yet to find a solution that helps me answer the most important questions:
Where should I put my money? And how do I know the advice I’m getting is good?
I’ve been a fan of tapping my personal network for investment ideas for a long time now. While I value original thought and creativity, I have much more fun collaborating and making money to boot. In fact, my best investments have been ideas that I have found through these networks. And I’d bet that your best investments could come from your networks too.
I had this conversation verbatim a few months ago:
“Hey you should check out Company ABC – I like it a lot.”
“Sure, I’ll check it out – why do you like it?”
“Well - margins are up and management has been buying on dips – that got my attention. I also think the two new board members will force the company to be more shareholder friendly…I’ll e-mail you my full thoughts.”
“Interesting, should I put in $10k? How much are you in for?”
“$5k. Yep, $2k looks good - Later.”
After a conversation like this, one would typically check a few numbers, read a report or two, and maybe scan an earnings call transcript. Then make the investment if things look good. As an aside, let’s be honest, we know people who invest on gut, momentum or a sixth sense - whatever you want to call it - and they do really well.
But what if that conversation went differently when you asked, “How much are you in for?” What if the answer to that question was zero? Would you take the stock recommendation as seriously? Probably not. Legalities and personal finances aside, why does it make sense for a professional to advise me on my financial situation if they are going to get paid regardless of performance? We all know that asset management really means “asset gathering”. We also know that the dirty “not-so-secret” secret of this industry is management fees. Fiduciaries should not get fee rich while investors scramble to cover their losses. And brokers should not get rich through trading commissions. It’s a game of musical chairs and we’re in the back half of the last song.
Current retail solutions are in need of a complete overhaul and here are a few starting points.
1. Address financial literacy and capital allocation on a basic level. Recommending that your client purchase any dividend yielding stock or an index fund is not sufficient. Each recommendation should offer clear and thoughtful rationale about why it makes sense for you.
2. An asset recommended for purchase should be backed by money (or credit) of the advisor. If the security is good enough for the client, it should be good enough for the advisor. I realize this may not be feasible from a financial perspective, but the days of recommending (without committing) should never happen again. There is a need for an alignment of incentives and the goal of this point could be achieved multiple ways.
3. Build a true alignment of incentives. While a pure performance model may keep an investment advisory firm away from Park Avenue near term, a business built around what the customer truly wants – a true alignment of incentives – will place the advisor in rare company. I can’t tell you the number of times that a prospective customer has called me and literally begged me to take his money - and the answer has been no. Not because we don’t want the business, but the customer’s needs are better suited elsewhere. Treat the customer right and they will flock to you.
If you’re frustrated with your current investing alternatives please get in touch with us at Instavest or at @goinstavest. We’d love to hear from you.
Use promo code FLY01 and get $50 if you sign up now.
Saleem S. Khatri and Zain Allarakhia are Co-Founders of Instavest, the financial alternative everyone has been waiting for.