5 Investing Myths Used by Financial Salespeople: Part 1

The Stock Market has Generated 10% Annual Returns

Salesmen are only as good as their sales pitch, and unfortunately in the financial advisory business the difference between a salesperson and a financial advisor can be difficult to determine. Finding an advisor that is committed to you as the client, is not always easy, but this series of blog posts is dedicated to helping potential clients determine ways to discern the difference.

Many financial professionals are nothing more than glorified salespeople. Their primary objective is to sell a client an investment and gather new assets from new clients. Rinse and repeat. Salespeople will never talk about downside risk and will use a variety of compliance approved sales literature to perpetuate a sale with a client.

Have you ever met with an advisor who basically uses sales literature as a tool to get you to agree with their suggestions? If you feel like that every time you meet with your so-called “financial guy or financial gal”, it may be time to make a change.

A financial advisor should be focused on you, your goals, your retirement objectives, and ultimately your personal risk tolerance. If potential loss or investment risk is never discussed, you are likely meeting with a salesperson. Obviously, all financial professionals have to explain their recommendations, but investors should be focused on the advisor’s form initially.

If the investment conversation initiates with a discussion about long-term stock market performance without any mention of risk or the client’s personal risk tolerance . . . generally speaking this is not a good sign.

A common place strategy is to discuss long-term stock market returns to convince investors to buy an investment on the spot. Essentially, financial salespeople will use charts and graphs to get investors to agree that an investment has produced great returns over the long-run historically, and consequently the client wants to purchase the investment. This approach should cause concern, but if the investment is discussed without a lengthy conversation regarding the investment’s potential risk . . . it is time to seek out a new financial advisor.

An old financial salesperson’s favorite “pitch” is to show a chart that indicates that the stock market has generated an 8% to 10% annual return over the longer-term. The chart shown below is an example of what financial salespeople will use to convince investors to buy a stock based investment:
Graph 1

“This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”
Chart Courtesy of STA Wealth Management

The statement that equity markets have delivered nearly 10% per year is not entirely inaccurate. However, here are a few of the inconvenient truths that financial salespeople will not discuss:

  • The S&P 500 does not and will not return 10% every single year. There are years like 2003 where the S&P 500 Index returned 28.70% or 2009 when the annual return was 26.50%.
  • The S&P 500 Index also has years where it has negative returns. In 2002, the S&P 500 returned -22.10% and in 2008 the index’s return was -37%.
  • The charts that financial salespeople will show clients do not typically include taxes, inflation, fund management expenses, or asset management fees.
  • There is no demonstration in the chart above of the day-to-day volatility or variance in returns for an investor that is 100% invested in the U.S. stock market.

It is important to understand that showing a few long-term charts is not an investment strategy. In fact, very few individual investors have a risk tolerance that would equate to having 100% of their investments in stocks at any given time. The “propaganda” financial salespeople use in many cases to convince clients to buy an investment may not be applicable to their risk tolerance or portfolio objectives.

It is important to understand how an investment will perform, but also the level of risk it takes to produce that performance. If risk and the impact an investment would have on a client’s overall portfolio in different market conditions is not even mentioned, you are sitting in front of a salesperson, not a financial advisor.

The chart shown below provides a clearer picture about the real rate of return the S&P 500 Index would produce in a real world scenario.
Graph 2

“This chart or graph is hypothetical and for illustrative purposes only. It is not intended to show the performance or return of any particular investment. Past performance cannot guarantee comparable future results.”
Chart Courtesy of STA Wealth Management

As can be seen, the real return under the above assumptions shown in light red is under 7% per year. Clearly, the return characteristics would be different in retirement accounts as they are tax deferred.

However, the primary point to understand is that as a potential investor, when you are meeting with a financial advisor for the first time, you need to pay close attention to what is being presented to you.

If the advisor immediately begins discussing an investment or investment portfolio and the entire focus is the long-term investment or portfolio return without any discussion of the sequence of returns, downside risk, or overall portfolio volatility you need to seek out better financial advice elsewhere.

The conversation initially should be focused totally on the client’s personal situation, investment goals, risk tolerance, and overall financial objective. The advisor should be asking the potential client a series of questions and focusing on the client early in the relationship. In the first meeting, a major focus on individual investments and their performance is likely a warning sign about the kind of financial professional you are meeting with.

The next topic in the series covering the 5 Investing Myths Used by Financial Salespeople will be the discussion about financial plans that always seem to paint a rosy picture in the future. Until next time . . . Happy Investing!

http://streettalklive.com/index.php/blog.html?id=2738

http://www.zerohedge.com/news/2015-06-02/5-investing-myths-debunked

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