“Free Advice” Can Cost You a Fortune

You can get “free advice” from many sources- not only from your stockbroker, but also from your insurance agent, your financial planner, and other professionals. This isn’t really advice, and it certainly is not free.  You saw how free advice, embedded in the hyped-up ratings and research reports issued by major Wall Street firms, cost investors a fortune, luring them into Nasdaq stocks that brought losses averaging over $60 for every $100 invested near the peak. In subsequent chapters, I’ll show you how free advice in other areas (from bonds to insurance) can also be quite expensive.  With free advice, you can actually get hurt in three different ways:

1. You pay significant commissions that, despite any assurances to the contrary, inevitably wind up coming out of your pocket.
2. You buy investments that are more likely than usual to be under-performers or outright losers.
3. You wind up getting stuck with plans or programs that lock you in with various kinds of exit penalties. Then, when a better, alternative opportunity comes your way, you have to either pass it up or pay through the nose to switch.

In short, taking free advice can be like walking into the ring with a professional wrestler. First, he socks it to you with commissions. Then, he dumps you into bad investments. And last, he pins you down on the mat and won’t let you go. Therefore, rule number 2 of investing is: Never act on so-called free advice.

How can you tell? It’s actually quite simple. Everyone you deal with in the financial industry is either a salesperson or an advisor. It is impossible for anyone to be both at the same time.

Salespeople will tell you that they are not charging you for the advice. They will tell you it “comes with the service” or it’s covered by the transaction fees or commissions. That’s a dead giveaway.

Advisors tell you, up front, what fee they are going to charge you, charge the fee, and then tell you what they charged you. It couldn’t be clearer.

Source: The Four Pillars of Investing by William Bernstein

jlangva August 10th, 2017

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