“Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway.” — Warren Buffett
I am a recovering investment advisor.
I say recovering because it took me a while to see behind the curtain.
Just like in the Wizard of Oz when the wizard was exposed.
In the movie, the guy says: “Pay no attention to the man behind the curtain!”
Well, Wall Street has a curtain and most people have not seen behind it.
I’ve had over 1,200 one-on-one phone calls with high net worth investors, and average net worth was over $2 million.
Most people have no idea of the dark things going on in Wall Street.
Today I’m gonna pull back the curtain for you.
1. Wall Street Does Not Have Your Best Interest in Mind
Wall Street does not have your best interest in mind.
That might not be a surprise to you, but I will show proof of why this is the case.
There’s a book by Tony Robbins called Money: Master the Game.
The book talks about Wall Street mutual funds and says their annual fee is 1.2%.
1.2% to 1.4% is a common advertised fee for mutual funds.
But they also have hidden fees.
These fees they legally don’t have to disclose.
They can be called things like cash drag fee, administrative fee, or expense fee.
Really, all those names are a bunch of BS.
They can call them whatever they want, but they’re all in a mutual fund.
The mutual fund actually ends up having about a 3.2% expense on average.
That’s way higher than 1.2%!
If you have a financial advisor, let’s say somebody at a big Wall Street firm, commonly their fee for managing your assets is 1.5-2%.
So now we’re in the range of 4.7% to 5.4%, which is almost all of your returns.
Stocks on average, when you count the up and down years, are around 6% to 7%.
They are taking almost all of your money.
Nobody ever talks about this!
We have trillions of dollars in retirement accounts in the US.
We’ve bought the line that putting money into Wall Street is the way to save.
But it’s not really giving the returns we think we’ll get.
They say that as an investment advisor, you have to put people into suitable investments.
Sounds a bit weird, doesn’t it?
The advisors will say they have a suitable investment that will give you a mediocre return and you’re gonna be ho hum with it for the next 20 years.
But it’s suitable for you, so everything will turn out great!
That’s kinda crazy when you think about it.
Think about an advisor giving you these suggestions in another context:
Would you like a suitable spouse?
Would you like a suitable car?
Would you like to go on a suitable vacation?
That sounds like the most boring, terrible thing ever.
Wall Street is set up to get you into a box.
According to them, this box is good enough for you and will get you where you want to go.
Wall Street wants to get you to invest in paper assets and make you think they are real assets.
Let me explain what I mean by this.
When you own a company share, it’s a digital or printed paper that says you own that share.
The advantage of paper assets is that they can be traded very quickly.
You can know immediately what they’re worth all the time.
Real assets are typically very different from that.
You don’t always know what something’s worth.
If I want to sell my house, I can’t instantly go on an exchange and sell it in five minutes or less.
It might take months.
With real assets, there’s less liquidity, which is a disadvantage.
But you actually own something real versus owning something that’s just paper.
Those things are very different.
The way Wall Street does this is by having shares of a product.
This can be really shady.
I like to own physical gold, but if I were to buy an ETF that had gold, Wall Street would buy one bar of gold and sell many shares.
There is a real asset, but they’re selling paper.
If there’s a run on gold but they’ve sold the shares, they only have one bar of gold for the 10 or 20 people who own the shares.
Who gets the gold?
That’s a real issue.
As long as everybody doesn’t want their stuff at the same time, we’re okay.
But if that does happen, things won’t be so easy.
By owning real assets like gold or real estate, you own physical assets.
In 1929, the stock market crashed.
It took 25 years to recover.
The Dow Jones is somewhere in the range of 33,000 at the time of publication.
If the market crashed the same way as 1929, it would take until 2047 for it to get back to the same level.
Think about that for a minute.
If the stock market crashed and it took 25 years to recover, that would be absolutely terrible – especially if you have your retirement funds in there! And
There are things that are paper assets; there’s also something called counterparty risk.
Let’s say somebody sells you a share.
What happens if the issuing bank or broker has financial trouble?
What happens when the company has financial trouble?
What happens when there’s an insurance company that’s not able to pay?
All of these can cause a counterparty risk.
Somebody owes a certain amount on that asset or owes the ability to issue the stock.
They can fail to repay.
This can cause major issues.
Wall Street has spent billions of dollars to convince you that paper assets are actually real and safe.
But it’s because they spend billions of dollars that we all believe it.
People will start buying more commodities.
There will come a point where financial assets will not perform the way you want.
Now let’s get into the alignment of interest between Wall Street and investors.
2. Wall Street Fees Create Misalignment of Interest
Wall Street fees create a misalignment of interest.
When they charge a fee for managing your money, a lot of times they’re incentivized to sell you certain products.
It’s like if I go to a used car lot and talk to Fast Eddie.
Fast Eddie is really excited to see me in that nice 1972 Buick that I have no interest in. Ha!
But that doesn’t matter.
He really wants to sell me the Buick anyway.
Because he’s incentivized to sell me a car.
In place of Fast Eddie’s Buick, Wall Street is incentivized to sell you securities.
They’re also incentivized to sell you their types of mutual funds.
If you have a Wall Street money manager, often they will put you into funds that will make them more money.
They’re incentivized to do that.
Looking back on being an investment advisor, there was not a big emphasis on investment management.
Instead, they emphasized people management.
It was more about managing investors psychology.
If things went down, it was more about getting people not to sell.
Why is that?
I think there’s some value in saying you shouldn’t sell if things crash 50% because the market will go right back up.
There’s also value in pointing out buying opportunities.
But you can see the person giving this advice is incentivized to get you to buy and hold.
Their fees are based on assets.
Under management, there’s an element of ego.
Questions come up in the investment advisor world like: How much money are you managing?
It’s not about the person on the other side of that.
It’s about how much you are doing.
If an advisor says something is a great investment, I try to look at what they are actually doing.
Most of the people managing money don’t have any skin in the game.
A recent study reported that of the 15,000 mutual funds out there, 50% of the managers didn’t have a single dollar in the fund at all.
Those that do have money in the fund could have very minimal shares.
People are selling stuff that they don’t actually believe in themselves.
Isn’t that terrible?
There is also something called performance-based investing.
This exists in hedge funds.
It exists in what we do as well, which is multifamily syndication.
In performance-based investing, the sponsor is incentivized to put money into the deal.
They get paid based on the deal’s performance.
If the deal goes well, the sponsor reaps the rewards.
If the deal doesn’t go well, the sponsor isn’t as happy.
I think this is a better way to do it.
They say financial management is like brain surgery.
You have to trust the experts.
If you’re sick and have a brain tumor, you want a brain surgeon working on it.
For financial management, I would say that it’s the complete opposite.
Oftentimes the experts are actually marketing by Wall Street.
3. Another Way to Invest
There is another way to invest.
It’s a way that makes more sense than following Wall Street blindly into a hole.
This way is called looking for aligned interest.
The Wall Street manager handling your money has no skin in the game, right?
If we raise $10 million for a multifamily deal, we are typically putting in 5% to 10% of the amount.
That’s $500,000 to $1 million dollars of our own money.
We’re very interested in making sure that our properties perform.
It’s a very simple thing, but it’s not typically disclosed in Wall Street.
It’s almost rude if you ask the manager whether they have money in certain investments.
It’s like if you have a business partner and they haven’t invented anything – they have nothing to lose.
You, as the main investor, have much more at risk.
That doesn’t make you feel very good, does it?
This is why aligned interest is really important.
This typically exists a lot more in the real asset world rather than the paper asset world.
One of the dark secrets is that there’s such a misalignment of interest.
Wall Street has to cheat people in order to maintain their own interests over the interests of the regular investor.
They don’t do this all of a sudden like Bernie Madoff.
It’s more like a death by a thousand paper cuts with fees and other hidden stuff.
It’s below the belt decisions that should not be made – but they are very often.
Look for real assets.
Obviously, the negative side (or negative and positive depending how you look at it) is that real assets are less liquid.
In a panic, this can actually be a good thing because the asset is harder to sell.
The prices of real assets tend to be a lot less volatile.
The positive side is you get to have a much stabler asset.
If you can minimize your counterparty risk, you can have less paper assets and more real financial assets.
This is especially true these days when debt is cheap.
Owning productive assets will make you much better off.
The biggest thing is to start diversifying and start small.
This is a plan I give to a lot of people.
I remember one call with a doctor who had a net worth of $5 million.
He had never invested in anything but stocks and bonds.
The best advice for that person, and maybe for you as well, it’s to get started.
Getting together $75,000 or $100,000 to invest in one deal, which for some people is a lot of money.
However, somebody who’s worth $5 million, that’s a very small percentage of their net worth.
Invest in one deal, maybe a couple of deals, and then learn.
They’ll pay attention because they’re involved.
Now I want to hear from you!
What are you invested in that is taking you out of Wall Street and into Main Street?
Let us know in the comments.
Before you leave, make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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Disclaimer: I am not your investment advisor. This is for educational purposes only. I am not giving specific advice on what you can do. I am simply giving my opinions.