The large investment firms, the ones that advertise and everyone knows well, as well as many others, pay their advisors a percentage of revenue they have generated from their clients. In addition to, a fixed percentage of assets, revenues come from commissions, product fees, transaction fees, and revenue sharing agreements and these bias the large firm advisors to place their clients’ wealth in their proprietary investment funds, or in funds with clandestine revenue sharing arrangements. Because they get paid out of revenue, their incentive is to use the high revenue generating products and they’re pressured by management to that end. But, no individual firm has a monopoly on the best investment talent. In fact the best investment talent leaves these firms, because they can’t stomach the politics.
These large firms love to hire ex-teachers and ex-military because teachers have a large network of children they’ve gotten to know, as well as, their parents. Teachers are generally liked and trusted, so naturally clients will trust them with their wealth. And of course, children grow up to become investors, too. Ex-military are very diligent in going out and raising money. They take orders well and are unquestioning by prior career training. That’s a super fit for the firms that want to push high profit margin funds. Can it be worse than this? You bet. These advisors that you’ll meet are good looking and tall and come from wealthy families. That’s right, good looking, tall, and a superior talent or access to collect clients, that’s the wire-house formula. And it works. None of this, however, gives them an edge on advising you and managing your money. A few might be smart, but not by design. By design, they want unquestioning advisors that believe they are best serving their clients, while unknowingly using inferior and high profit margin mutual fund products.
But the greatest disadvantage of using these firms is they never go to cash in anticipation of a market crash. They can’t, because it’s equivalent to dialing down their profits. It is calendar year earnings that are the most important focus of these large firms, not your long term investment performance. Instead they tell their clients, “You can’t time the market.” These firms don’t even share the same institutional research with their retail advisors that they share with their institutional clients. They have a whole other set of worthless research. And that’s by design as well. First, the retail advisor base will have difficulty understanding the institutional research, and second, you can’t have everyone getting out of the market at the same time. These are big firms with trillions of dollars under management. It’s more profitable for them to treat their more valuable untrusting clients better and use the less valuable trusting clients as a source of liquidity for when the valuable clients want to get out.