By Mike Kaselnak,
Certified Senior Advisor,
Piece of Pie Marketing
Health, family and finances are probably the three biggest issues we all face. Doctors undergo eight or more years of post-graduate training before they are no longer directly supervised. Similarly, must go through at least six years of post-graduate training. However, when it comes to finances, you can take a four-hour test and be on your own.
Don't knock a system that has been working fine for years, right? Unfortunately, we have been seeing the fruit of the rotten system for the last five years. There are the supposed non-biased analysts recommending stocks for kickbacks, and inappropriate sales of variable annuities to the list. And the list goes on. Why did this happen?
Most people in the financial industry are well intentioned. I think they are just not as informed as they should be. Ideally, brokers should work with a system that supports and nurtures their education and career growth. You'll get a healthier client and prospect base if you can educate your clients about getting what they want from their investments, not by selling them a particular product.
Below are a few of the myths that people in the brokerage industry believe and tout. You are holding yourself back from greater success - and doing a disservice to your clients - if you have fallen into one or more of these traps.
#1: Average rate of return. Everybody - brokers, mutual funds, and magazines - want to talk about average rate of return. And average rate of return works, if you don't spend any money! But the reason people save money is to eventually spend it, at which time average rate of return becomes the biggest lie perpetuated by the financial industry. You can get a 6% average rate of return any number of ways. You can get 6% every single year, or any number of returns when divided by the number of years will give you an average 6% rate of return. Look at the charts below. If someone was promised a 6% rate of return and thus pulled out 6% of the original principal every year the results could vary a lot. Believing in average rate of return can decimate a portfolio in as little as three years.
If the numbers work out right, you end up with a 5% greater return than a year in year out 6% rate of return. If the numbers don't work out right you could be in a hole that you can never dig out of. Oh but you say, your clients shouldn't pull money out in the bad years. Do things that require money only happen in good years? Should your retired clients only do the wonderful things in good years? Ask them what can happen if they wait just one year to pursue a life long goal? They will give you plenty of examples!
#2: Past performance is no guarantee of future performance. Aren't they required to state that? Do they want the client to believe it? Where do they put the disclaimer? Why is it at the bottom of the page in very small print? Where do they put past performance? Why does the graph or table cover 95 percent of the page in very big print?
Of course, they say this because they have to. Why? Because it is true! Past performance is no guarantee of future performance! The only thing I can guarantee is the future performance will not be the same as past performance. The only way that can happen is for the next five years to be the same as the last five years or the next 10 years to be the same as the last 10 years. I guarantee you that is not going to happen.
What does a broker (or mutual fund) want the client to believe when average rate of return is promoted with tiny little writing at the bottom of the page stating that past performance is no guarantee of future performance? They are showing the tables and mountain graphs because they are selling the hope that the next five or 10 years can look like the last five or 10 years. Can they? Well it depends on what they have to work with. And I can guarantee it will not be the same conditions they had to work with in the past.
If they are required by law to say that past performance is no guarantee, for good reason, and yet they promote the past performance as "proof" of what it will do in the future, what do you call that? Well, in Minnesota we call that dishonest. Yes, I know, we're too nice here. In other places in the country they would call it a lot worse than that.
#3: You'll do great if you stay in the market for the long haul. I guess that's true. The trouble comes in defining long haul. Back in the early 90s, brokers said it was 10 years. Mid 90s, five years. Late 90s, three years. Then another crash and we're back to brokers saying 10 years. What is the long-term rate of return they kick around as a fact? 10%?
If I gave you an investment that guaranteed your clients a 9% rate of return over the next 10 years, how much of it could you sell? I asked 100 advisors that question. They all said that if they had a product like that they could sell enough to retire in a year. Everyone would want it. Well if brokerage houses are sure that the market will give a 10% rate of return over the next 10 years why don't they offer an investment that would pay the customer 9% and they would rake in billions of dollars every year on the hundreds of billions that would be invested in this sure thing.
Oh, maybe you didn't mean 10 years was long haul. You really define long haul as 20 years. Well guys, how much of an investment guaranteeing 9% over the next 20 years could you sell? Probably half as much. You might retire after two years of selling, instead of one.
If this is a sure thing, why don't the brokerages offer this investment? Because they are not sure enough that an investment held for the long term will make 10% to put their own money on the line. The clients' money, well that's OK. But their money? Hell no!
#4: Actively managed accounts do not beat the index regularly enough to validate paying the exorbitant fees that are charged. About a third of all funds beat the market in any particular year. The next year, a different third of funds will beat the market. In fact, as each year passes, it becomes increasingly difficult for a fund to stay ahead of the market. After a decade, only a handful of funds have beaten the market. Are these are the well-balanced and diversified funds? Nope, except for a very few, they are sector funds.
You could be on your yacht in the Bahamas sipping a Pina Colada if you knew what sector to be invested in every year or even every other year. No one has figured out the whole sector investing thing. Or if they have, they aren't showing us (I know I wouldn't).
Study after study has proven that it is extremely difficult to beat the market over time. Only 5 to 15% can claim that over 10 year periods. Yet how many funds, managers and brokers want us to believe they can beat the market? 100%. That means 85 to 95% of them are either lying or grossly misinformed. Which do you want managing your parents' money, someone who is lying or someone who is grossly misinformed?
A friend of mine, Jack Keeter, is a leader in the senior market. He has built a fantastic money management practice because of his concern for his clients. He told me that he pays an economist $50,000 a year to manage his clients' money. Why? He asked me, "How can I possibly take care of my clients, answer their questions, phone calls and concerns if I am doing the research to find the right investments for my clients. Conversely, how can I take the time necessary to research the best investments for my clients if I am constantly in front of my clients taking care of them?"
You can't both take care of your clients and be an expert investor. The day is too short. Calculate how much time you have to spend with each client using a 40-hour workweek. Don't count the time you spend prospecting and on vacation. I don't think your client would be too pleased with the amount of time you can dedicate to any given portfolio.
This is why our company, Piece of Pie Marketing, insists that its brokers specialize. It's hard enough to stay on top of constantly changing tax laws and regulations for just one niche, without trying to diversify. Figure out your specialty. Then, if you are not an expert on the investments that you recommend, please become one. This fundamental step has helped our brokers nearly triple their sales in just one year.
It's not only okay to seek support, it is vital if we are to improve our industry's reputation and increase trust in our services. If you'd like information on finding a mentor for your business, visit www.pieceofpiemarketing.net.
Editor's Note: Michael Kaselnak's affinity for investing and financial matters began more than 20 years ago when he began investing in the stock market through a class in high school. After spending several years in the U.S. navy as an instructor in the Submarine Nuclear Power Program, he finally was able to tie his love of finances to his career as a financial planner.
Michael works exclusively with people age 55 and above, educating and assisting them with their particular needs in financial matters. He runs monthly educational workshops at senior centers across Minnesota on topics such as tax savings, catastrophic illness, investing, and asset protection. In 1997, he became a Certified Senior Advisor (CSA).
He has been quoted in several national periodicals on issues dealing with seniors and their finances. Mr. Kaselnak has written two books dealing with seniors and their financial concerns: Get Their Hands Off Your Piece of Pie and Senior Planning for the Millennium and Beyond.
