Current financial investing options are riddled with hefty minimums, management fees, high commissions and an unfriendly user experience. And I’m being nice.
Want to work with a financial advisor? Great, you’ll need at least $500,000 to get someone’s attention. Got your advisor on the phone? Congrats – that’ll be 2% of your assets (even if she loses your money).
Wanna do-it-yourself? You could join a discount brokerage and source your investments from the thousands of financial sites on the Internet. Be careful though, the authors get paid per article – and have no skin in the game. What’s worse – because your commissions are 10 bucks a trade, picking up 100 shares at $10 each puts you in the hole 1% immediately. Yikes.
Still interested but only have $20 stashed away? Sweet – you should go down the “zero commission” route where you can even invest on your shiny new Apple Watch (I suspect this is the reason why you only have $20 in your bank account). Don’t forget to read the fine print: We may take advantage of you with our margin rates, get rich by hitting you with hidden fees and offer you a questionable execution experience. But hey it’s “zero commission” and it sounds oh so promising.
Don’t invest in stocks? No problem – index funds are en vogue. Consider any number of Robo-Advisors where its only 5 clicks to invest. From there you can sit back and let a series of 1s and 0s manage your money. Just be wary about dealing with life’s curveballs and challenges – the financial advisor above told me that Robo-Advisors can’t help you there. Thanks, brah.
Last, but not least, let’s not forget the advisor who doubles as the backseat Uber driver. Here’s how these guys typically work: You type in your brokerage account credentials, pay a small management fee and in return they tell you if you are a great, average or crappy investor. Are you serious?
All kidding aside, the above is a broad generalization and caricature of the various solutions available to retail investors today. Each category has formidable leaders and offers something unique to the customer. Nevertheless, I’ve yet to find a solution that helps me answer the most important questions: Where should I put my money? And how do I know the advice I’m getting is good?
I’ve been a fan of tapping my personal network for investment ideas for a long time now. While I value original thought and creativity, I have much more fun collaborating and making money to boot. In fact, my best investments have been ideas that I have found through these networks. And I’d bet that your best investments could come from your networks too. I had this conversation verbatim a few weeks ago:
“Hey you should check out Company ABC – I like it a lot.”
“Sure, I’ll check it out – why do you like it?”
“Well - margins are up and management has been buying on dips – the tide is turning! Who knows, maybe Twitter will buy them (because Twitter is trying to buy everything these days).”
“Interesting, should I put in $10k? How much are you in for?”
“$15k. Yep, $10k looks good - Later.”
After a conversation like this, one would typically check a few numbers, read a report or two, and maybe scan an earnings call transcript. Then make the investment if things look good.
But what if that conversation went differently when you asked, “How much are you in for?” What if the answer to that question was “0”? Would you take the stock recommendation as seriously? Probably not. Legalities and personal finances aside, why does it make sense for a professional to advise you on your financial situation if they are going to get paid regardless of your investment performance? We all know that asset management really means “asset gathering”. We also know that the dirty “not-so-secret” secret of this industry is management fees. Fiduciaries should not get fee rich while investors scramble to cover their losses. And brokers should not get rich through trading commissions. They know that their business model is not sustainable. It’s a game of musical chairs and we’re in the back half of the last song.
Current retail solutions are in need of a complete overhaul. To be effective, first, they must address financial literacy and capital allocation on a basic level. Recommending that your client purchase any dividend yielding stock or an index fund is not sufficient. Each recommendation should offer clear and thoughtful rationale. Second, an asset recommended for purchase should be backed by money (or credit) of the advisor. If the security is good enough for the client, it should be good enough for the advisor. Third, while a pure performance model may keep an investment advisory firm away from Park Avenue near term, a business built around what the customer truly wants – a true alignment of incentives – will place the advisor in rare company. Treat the customer right and they will flock to you.
Put your money where your mouth is and let’s fix retail investing.
Saleem S. Khatri is the Co-Founder and CEO of Instavest, a website where investors post their investments and then other investors can replicate those positions and donate a portion of their profits.