Throughout history, philosophers, rulers, and business people have spent massive amounts of time spreading things they thought to be true that turned out not to be. Galileo was imprisoned in 1633 for holding the belief that the earth revolved around the sun.
Today, in the second decade of the 21st century, there are ideas that are spreading that, through careful research and understanding, can be clearly seen as utterly false. For instance, the idea that a country can spend its way into prosperity and print money to create debt to infinity has been tried many times before. It has never worked.
401(k): The Modern Day Fallacy
One of these is what has been referred to as traditional financial planning (although it is not really all that traditional, as it was essentially started in 1980). This is something that needs to be studied and understood by all, but the tragedy is that most Americans do not do so.
There has been (and will continue to be) constant debate as to where professionals should put their money. But why would someone as lauded as Robert Kiyosaki, author of the best-seller Rich Dad Poor Dad, say, “The 401(k) is for people who are planning to be poor when they retire”?
When I first read that statement in Kiyosaki’s book Cash Flow Quadrant, it struck me as odd. I thought the 401(k) plan was evident conventional wisdom. Everyone should put money in their 401(k), especially if the money is being matched! For a number of years, I had been encouraging people to put money in 401(k)’s. At the very least, take the match. But this quote enticed me to do more research. This launched a journey into what became much more than why or why not to fund a 401(k).
It became a holistic effort to discover what is truly working most effectively for people around the country. It became a journey that was quite astounding, and it just might shock you too! In fact, much of this information is beginning to create quite a firestorm within the industry.
There are so many financial professionals out there. And with all the different financial professionals and gurus out there saying 100 different things, how do you know what’s right? Or, at least, how do you know what is best for you?
There are essentially two sides of the fence. On one side, you have the big firm loyalists. On the other side, you have the advocates of independent planning. Both sides are consistently going back and forth about what’s right. FDP advisors would be on the independent advocate side.
Where Are You Getting Your Advice From?
Let’s look at the current state of our financial planning environment, how it’s treating Americans, and why it’s so hard to change. According to the Bureau of Labor Statistics, there were 206,800 financial advisors and 411,500 insurance agents in the U.S. at of the end of 2010.
So, from where do you think the majority of Americans are receiving their financial advice? Sensibly, it is mostly coming from these financial advisors and insurance agents. The problem here is that most of these financial services professionals work at large, well-known financial institutions.
The reason I state that as a problem is because, in my humble opinion, most of the professionals at these large institutions are getting their information from these large institutions, and then they’re passing this information along to you. We’ll talk about this more in a bit.
The Problem With Publicly Traded Companies
But first, you must understand that the majority of these large institutions are publicly traded. Meaning they are owned by public shareholders, and they are bought and sold on the exchange daily. One of the greatest tragedies of our modern economy, I believe, is how much focus is put on the quarterly earnings of these publicly traded companies.
A Washington Post article from September 2009 stated that “the focus on short-term financial performance by investors, money managers, and corporate executives has systematically robbed the economy of the patient capital it needs to produce sustained and vigorous economic growth.”
Growth takes time, and one of the main reasons we found ourselves in the crisis of 2008 was because we forgot that very principle. This is exceptionally relevant to the consumer as it relates to putting his money with a publicly traded financial institution. These companies have an obligation, a priority above all, to provide value to their shareholders – those that own the company. The company inherently exists for the benefit of the shareholders.
So in our modern economy, with analysts lurking at every corner watching for disappointing quarterly performance and ready to downgrade the stock, it makes for a difficult long-term approach. Publicly traded companies are forced to focus heavily on the profit of the next few months rather than the coming years and decades.
Therefore, from the consumer’s perspective, it makes it hard to believe that these companies always have your best interest at heart. They cannot serve two masters, so they are essentially unable to consistently focus on both the short-term interests of the shareholders and the long-term interests of their clients.
I do believe that most advisors come into the business with the intention to serve their clients first, and many of them stick to that intention throughout their career. However, we all make decisions based on the information we receive and process. If an advisor is tied to representing only one company, then he is likely receiving information and advice from that company, and is then passing that information along to the customer.
It is very improbable that a company would train their advisors to recommend and sell products to clients that will not make the company substantial money. For these publicly traded companies, everything revolves around quarterly profits.
The next time you speak with your advisor or are interviewing a prospective advisor to work with I would highly advise you to find out if the advisor sells products from a publicly traded company.
This article was an excerpt from The Wealthy Physician. Download your free e-book of The Wealthy Physician here.
Chase Chandler is a driving force in the financial and economic industry. As the founder and managing partner of Chandler Advisors, his team focuses on educating medical professionals on alternative financial, insurance, and risk management strategies.