“Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said, ‘Look, those are the bankers’ and brokers’ yachts.’
‘Where are the customers’ yachts?’ asked the naive visitor.”Book: Where are the Customers’ Yachts?
I’m not sure about you.
I’ve never heard of someone who have said his financial advisor has made him rich.
If you have been thinking your financial advisor’s role is to make you rich, you have mistaken for a long time and you deserve to be disappointed for your unrealistic expectation. Financial advisory service is structured to help you stay rich, not to help you get rich. Know the difference.
I’m going to tell you why in this article and you might see wealth building differently from hereon.
Markowitz Kicked Kelly’s Ass
This is based on a true event inspired by book Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street
The story started a long time ago.
Bear with me,
I’ll keep it short but it is important you understand this before we can explain why the financial industry is shaped this way.
It happened in the 50s in the United States.
Two bright people (John Kelly and Harry Markowitz) had differing views about sizing an investment. How much money should you bet since you are uncertain of the
John Kelly worked in Bell Labs and he found that the fastest way to grow your capital is to bet enough on the investment if the probability of win suggests so.
At the same
This was eventually known as the Kelly Criterion.
Harry Markowitz believed otherwise.
Harry believed one should diversify into a large number of investments in order to minimise the risk.
It is not about growing the capital at the fastest rate but to do so at a rate that is in line with the investor’s appetite for risk. This is known as the Modern Portfolio Theory and it won Markowitz his Nobel Prize for Economics.
The financial industry at large adopted the Modern Portfolio Theory and hence you keep hearing terms like diversification, volatility and asset allocation.
However, you must understand that when your investments spread too much, the returns start to drop. I give you an example; my mum likes to buy
There are a few dissidents who practised the secret art of Kelly Criterion and made tons of money that they couldn’t hide from the world – Warren Buffett and George Soros.
“Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”– Warren Buffett
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.”– George Soros
But the majority of people were subject to the mediocrity of Modern Portfolio Theory for the past 60 years and counting.
And they didn’t even know it.
Insurance Policies don’t make you Rich
First, insurance is a form of protection and not designed to make you rich. Please don’t think of becoming a beneficiary of a large insurance payout because someone died.
It is inhumane and crass.
Insurance is supposed to take care of the living when breadwinners get sick or pass away. It is a bad thing and you should hope it doesn’t happen.
If the unfortunate happens, the money from the insurance policy would be a godsend.
That’s what it means when you buy insurance. It prevents you from falling into financial distress.
It is not about getting rich.
I repeat: it is for protection. Not for getting rich.
In fact, a rich person would also benefit from insurance because he has a lot more money to lose.
Especially if he has a high income and his family desires to maintain a particular lifestyle.
Protection aside, some insurance policies like a life insurance policy or an endowment policy has a cash payout at maturity. The usual selling point to you is that at least the premiums you paid will be returned to you and more. So your premiums aren’t ‘wasted’ and you can treat it as a savings plan.
The insurance companies would take your premiums (keep part of them) and put them into a myriad bonds and stocks as they practise diversification as espoused by the Modern Portfolio Theory. You hopefully get around 4% per year in terms of non-guaranteed returns.
4% per year can’t make you rich.
If you contribute $100 per month over the next 50 years, you end up with only $183,911. Hardly rich in Singapore’s standard.
On the other hand, 4% per year can make a rich man stay rich. If he buys a lump sum policy for $1m, he will end up with $7.1m after 50 years and in a rather safe way.
So there you go. Financial advisors can help a rich person stay rich but hardly make a poor person becoming rich.
Unit Trusts Don’t Make You Rich
If you said you are low risk, your advisor would recommend an income fund.
If you said you are aggressive, growth fund that is.
Balance fund would serve anyone in between.
You might have experienced such risk profiling before and that’s how financial advisory puts you into silos – the S, M, L of investing.
Regardless of which type of funds you choose, you cannot escape the influence of the Modern Portfolio Theory. Your money will be widely diversified into many stocks and bonds.
I found 452 unit trusts in Singapore with at least 10 years track record. The average annual return was 6.83% (data from FSMOne as of 17 Dec 2018)
If you put in $100 a month into a bunch of unit trusts for the next 50 years yielding 6.83% on average, you are going to end up with $463,145. Again, hardly rich.
If a rich guy plonked in $1m right from the start and stayed invested for 50 years at 6.83% per year, he’s going to have $27m!
See, financial advisors help the rich more than the poor.
So What Can You Do About It?
I hope you can see my point of view that financial advisors help people stay rich. Don’t outsource your poverty problems to your financial advisors.
So the hard truth is that you have to take things in your own hand if you want to be rich. No one owes you a living. You make your career and save enough capital to invest. Or you build a business and become rich yourself. Or you marry right. Whatever it is, your future is in your hands.
So do you have a financial adviser? What were you expected to get out of it and did you regret your decision? Or do you agree or disagree with what I wrote? Either way, leave your comment below because I read every single one of them.
Co-Founder. Believer of the Factor-based Investing approach. Running a Multi-Factor Portfolio that taps on the Value, Size, Profitability and Momentum Factors. Quant at heart. Believe the financial industry can treat their customers better. Wants to change the world.