A few days ago I was reading an article about investing in antiques. At the end of the article, the author said that you should ask your financial advisor whether antiques are a good fit for your portfolio. This is such poor advice that I just about fell out of my chair.
There are some questions that are completely OK to ask your financial advisor. For example, it would be appropriate to enquire if you have enough bond exposure in your portfolio or if you are in a position to participate in stock IPOs. But there are some questions you should absolutely, positively never ask your financial advisor. And many of these forbidden questions revolve around investing in tangible assets.
There is a good reason for my trepidation. Many financial advisors make their money via commissions on transactions executed or fees on assets under management. Both of these compensation schemes require the advisor to maximize your exposure to traditional financial assets.
In the former case, the advisor only makes money when you execute a trade – usually a stock, bond or ETF purchase – using funds under his auspices. This is, incidentally, one of the worst ways a financial advisor can be remunerated because it encourages churn, or excessive trading, in your account. Load mutual funds that are subject to an up-front or deferred sales commission also fall into this category.
Financial advisors that receive money based on management fees are better than those that are commission based, but still may not give you completely unbiased advice. Their management fees are calculated using assets under management. But the term “management” here more or less applies only to brokerage assets.
If you should withdraw a significant sum of money from your brokerage account for any purpose – even to buy high quality alternative assets like fine art, antiques, precious metals or even real estate – it will reduce the assets under your advisor’s management. This will have the effect of reducing your advisor’s future management fees. A lot of financial advisors, even those who are otherwise honest, will find it difficult to recommend a savvy investment in tangible assets that will inevitably decrease their compensation.
But the real reason not to ask your financial advisor about tangible assets is that vanishingly few of them have any knowledge of the topic! Most financial advisors start out as employees of large financial firms like Ameriprise Financial, Edward Jones or Charles Schwab. These companies typically have a multi-month training regime in place. This might sound like ample training time at first glance, but that perception is incorrect.
First, a new hire at one these gigantic companies must get the appropriate credentials – usually a series 7 and 63 or 66 license – by passing industry tests. Once that is accomplished, the next thing a company wants its freshly minted advisors to do is sell, sell, sell! I should know. I trained as a financial advisor at a large firm. Among my peers hired fresh off the street were a used-car salesman who had very flexible morals and a pretty red-head who was dumb as a rock. They were typical of the caliber of candidate one often encounters in these programs.
If my revelations are making you a bit queasy about financial advisors, then good. The licensing tests aren’t that hard to pass and the primary skill necessary in the field is the ability to weather rejection well. Notice that I have mentioned nothing about intelligence, ethics or enthusiasm. That is because most retail wealth management companies simply don’t care about any of those traits in the least.
Now, I am oversimplifying the retail financial industry slightly. There are some genuinely good financial advisors out there. They usually possess many years experience, having paid their dues at the large, meat-grinder firms. Once they have built up a significant number of clients, they often leave their parent company and go into business for themselves. And, perhaps most importantly, they usually bill via an hourly rate or a flat fee. This means their advice is truly independent, or at least as independent as is reasonably possible in an industry that is infamous for its corruption.
Of course, even very experienced financial advisors still usually know next to nothing about tangible assets. Most wouldn’t know the difference between an investment grade bronze Art Deco plaque and a banana. At best, they may be vaguely aware of the traditional role of gold and silver bullion in hedging a paper asset portfolio against depreciating fiat currencies. This, however, is a very low bar to require from someone advising you on your money.
Precious metals are the gateway asset to the land of tangible investments. Although gold and silver are good, far more tantalizingly exotic tangible assets lay beyond. However, a certain amount of specialized knowledge is needed to be able to intelligently dive into those more obscure tangible investments. So don’t bother to ask your financial advisor for his opinion on investment quality antiques or other tangible assets. Chances are he is not qualified to hold an opinion.
