Bad advice the wealthy get

Having been in the business four decades, there is one trend that hasn’t changed: the ultrawealthy being constantly bombarded with bad financial advice. In this newsletter we’re going to discuss the major form that this bad advice tends to take, what the outcomes are, and how to prevent yourself from falling prey to it.

Here are some of the typical ways that wealthy people tend to be ill-informed by the investment community:

Peddling of return without risk

One of the signs you are about to be swindled is hearing about investments that come with low or no risk. An asset’s return should be proportional to its risk; the higher return, generally the higher the risk that goes along with the investment.

Return is basically the compensation for the risk you are taking. It is a direct relationship. Anybody who chops out half of the equation and tells you otherwise is a snake oil salesperson.

Preying upon by fear of missing out

If you are already wealthy, you don’t have to aggressively accumulate capital. Your task is to preserve what you have and remain wealthy. Most of the ultrawealthy people I know can live without making incremental investments that impose undue risk. However, this flies in the face of what is presented to them. Wealthy people are constantly lured in by sales pitches that make them feel they’ll be suffering if they don’t participate in the “opportunity of a lifetime.”

There are usually two primary fears people tend to have:

  • Terror of losing all of your money
  • Terror of everyone getting wealthy except you

Everything always comes back to these two emotions.

To exacerbate the issue, successful people tend to have Type A attributes and tend to be risk and growth-oriented, particularly while working. These attributes don’t just shut off in retirement or just because they no longer worry about paying the bills – this drives the seeking of outlier investment outcomes.

Anytime somebody tries to convince you that you are going to be at a loss by not participating in some type of investment, ask yourself what the baseline result would be if you decided to forgo it. Do your research and find the truth. Would you be fine without it? If so, then do exactly that.

Luring you in with exotic investments

According to my personal motto, “Andy’s Theorem”, the complexity of an investment is directly proportionate to how excessive its fees are. Scammers seeking exorbitant fees know how to appeal to our predilection for the sophisticated. Fascinating things can be very alluring. However, in my four decades of experience I have found that often these sexy investments are made to appear that way due to opacity and complexity, both of which do not spell good outcomes for the investor.

Money should only be directed towards investments that are transparently presented. Often these exotic instruments are made to seem that way due to a lack of clarity. It may be intriguing, but if you can’t understand the simple logic behind the proposition, it may just be smoke-and-mirrors.

Enticing you with new investment paradigms

Our brains are hard-wired to seek novelty, and investments are no different. Often, however, new investment paradigms are a recycled version of past ones, adorned in a new veneer.

Don’t let the thrill of something new to cause you to abandon your reasoning. There are plenty of tried-and-true investments that work just fine. It may be less exciting, but investing isn’t a form of entertainment; it is a form of sustenance and all that really matters is the bottom line. What return should you expect, and is it in line with the risk you’d be taking? What is the cost of this investment? What are the tax implications? These are the practical aspects that you must keep in mind.

Getting past it

As you can see, the bad advice takes many forms. Only thing that changes is who is doing the peddling, but the story ends up the same – lackluster returns, high fees, tax consequences, and possibly litigation in extreme cases.

Perhaps the better question is why are the very wealthy so susceptible to these pitches? In my experience it’s a combination of pride, competitiveness, and even boredom. In other words, there are usually behavioral factors at play.

You may feel that it’s not a big deal or it’s just a small amount of your money, but the reality is that someone worked hard somewhere along the line to earn the right to it. No matter how wealthy you are, every penny should be put to wise use, not squandered away.

The best cure is prevention and that comes through anchored, sober counsel. As a wealth advisor, it is my role to remain steadfast and objective in the wake of these forces. Any time you are presented with a financial product or service, it is imperative that we have a conversation so that I can render a sound and independent opinion. Please reach out if you are ever in such a situation.