What your financial advisor isn’t telling you

Hello, future billionaires! We are back with another episode of the Invest Like a Billionaire podcast. I'm Ellis Hammond, and once again I am in the host seat because we have here the co-authors of the Invest Like a Billionaire book, Ben Fraser and Bob Fraser, and we're here to go dive deep into another key chapter, really I think a key lesson from this book, and this time is what your financial advisor isn't telling you. So Bob, I'll start with you. Most gray hairs in the room here. So, you know, kind of want to preface this with, I want to know what role does a financial advisor play? Just for clarity, my brother's a financial advisor. So does that make him a bad guy? Like, let me just ask this. Do you have a financial advisor and what role does a financial advisor play for you?

Yeah.

You know, we do talk about financial advisors and I think you can get the impression we're all very anti-advisor and I definitely want to dispel that. We're not. Throwing financial advisors under the bus. We think the system is flawed and like that, but financial advisors generally offer a good service and they're good people. And I have a financial advisor, Ben, you could talk about your initial, you know, you did an internship years and years ago with a financial advisor who did no alts, right? My financial advisor today is very alt savvy and he's a real unicorn. There's very few advisors who are very alt savvy. And a lot of them are limited in their platforms from doing alts, but advisors are— there's apples and oranges and bananas. They're all over the map of where they're at. So I think it's very difficult to say all of them are not helpful for sure.

Well, let's go through a couple of these reasons. You know, you guys talk about the industry being flawed. You know, one of the things we've mentioned is they don't know about private alts. Bob, you've taken some of these exams and tests. Can you talk through that?

Yeah, years and years ago, I became a professional trader, stock market trader for about 5 years, did super well in the stock market as an active investor and decided, hey, I want to go and why not go manage other people's money and let me go take the RIA exam. And I did. I started studying for the RIA exam. It's called the Series 65 and was shocked to discover that there's really almost zero discussion of alts. So your financial advisor doesn't really have to know hardly anything about ALTS. I mean, it's really pretty much, if I recall, 1 or 2 pages of information, that's it. And there are ALTS classifications like the Series 82, these kind of things, but most advisors are just not very ALTS savvy.

I'll share a little bit too. So when I first started working with Aspen Funds, and so Aspen Funds were a private alternative manager operator, And we're trying to raise capital for some of our new funds. There's some really exciting things we were doing in the mortgage note space. And so, I'm fresh to the industry. I'm new. I'm trying to think, "Hey, where's the capital? Who has capital? And how can I go and raise more money for our funds?" And we felt these are pretty compelling products. So, I go start calling all the financial advisors I knew and started networking with all of them I could. And it was a real education for me because my assumption was, "Well, these guys obviously can understand how good of an opportunity this is, and they have all the money, so it should be a no-brainer, right? We get in the same room when I can show them what we're doing. There's no way you say no. This is a no-brainer." Lo and behold, every single one said no. It was really eye-opening to me because it wasn't that they disagreed that it was a compelling business plan and investment. It was Actually a structural issue of how the system is set up that prevents advisors from being able to move clients' money into these products. And so we saw kind of firsthand the real shortcomings of this industry from our perspective, being on the, in the alternative investment sector, realizing that these products would actually solve massive problems for their clients. And they agreed with that. The financial advisor said, yes, this is exactly what my clients need, but I cannot invest in these.

So let's, let's talk about that. I mean, if they have their best interest in mind for the client, let's assume that, you know, we're not talking about ill-willed people here and we're talking about advisors like my brother who actually do care for his clients and wants the best outcome for his clients. Why isn't he showing them Aspen products or alternative investments?

Yeah, I think the first reason is they're tied to selling in-house products, especially if they work for a big wirehouse, a big custodian. They are generally incentivized, sometimes monetarily, to invest in the products that their company is selling, right? They have a natural reason to want to sell those products. And is that a conflict of interest? Maybe, maybe not, not all the time, but there's generally a natural disposition for only selling in-house products. Bob, you want to hit on that side of it?

Yeah. I don't think people realize that the big investment firms, the independent firms, you know, have a little more flexibility, but the big firms, The guys that are your financial advisors are really salesmen. They're considered Salesforce and they have quotas that they have to deliver of in-house products that they want to deliver. So when you're coming in to them and saying, hey, I want to buy— you're a vendor at the Apple Store and, you know, I walk in, I say, man, I want to buy a Microsoft Surface. You're like, oh, that's awesome. Yeah, they're a great product. Let me show you the Apple equivalent to that, you know? And that's really what's going on in a lot of these cases. They're not even allowed to sell these products. They're not listed on the platform. So you're forced to— your investor— to go into whatever products are listed on the in-house platform, not what's available in the universe. And there are a lot of reasons for that. But that just is.

What about commissions? I know when I go talk to these groups and trying to figure out, you know, to an RIA, hey, most of them don't even take a commission on referring clients to us. That's got to be a big deal because I imagine, you know, I always ask, like, think of what is your motivation then for wanting to send us clients?

Yeah, let's break down the industry. So there's really two broad classifications of financial advisors. Okay. There's what's called RIAs or registered investment advisors. And there's broker-dealers. Now the broker-dealer is kind of the older classification, and these are the big wirehouses and broker-dealers are legally allowed to get a commission from selling you a security, a financial product. And you think of, you know, Morgan Stanley, JP Morgan, these guys are the big brokerage houses that are broker-dealers. Dealers. And so they can get commissions. And so a lot of times, and you may not even know what license your broker is carrying, a lot of guys, a lot of advisors carry both. And so they may be earning commissions that you're not even aware of. So they'll be selling in-house products that are earning, one, they earn a commission as a salesman, and two, then the sponsor who is the big wirehouse also earns an additional fee for constructing and managing that product. So there's kind of dual layers of commissions that you're not even aware of. And broker-dealers don't even have to disclose that. And so it's kind of like, huh, you can do that. And the duty they have of broker-dealers is suitability. So their only requirement is to sell you something that can make sense for you. Now, RIAs is a newer classification and they have a higher fiduciary standard. They're actually fiduciaries. They're required to make the best decision for you, okay? And they're prohibited from taking commissions or they're not allowed to take commissions unless they have a broker-dealer license that they can take commissions on. So they're not allowed to take commissions beyond flat fees. Like they can take commissions on trades you're making, on, you know, an assets under management, kind of a quarterly or an annual number, but they can't take a commission on a product. So it seems like it's more, you know, aligned with your interests and it is, but they still don't have to disclose how much they're making from a particular deal. And they are still allowed to mark up products. So a lot of the big brokerages, these kind of things, they'll mark up bonds. They'll also make pretty massive commissions from insurance products, which is why a lot of these financial advisors are selling you insurance products. You can make up to 300% of a 1-year premium in a commission. So, and again, the financial advisors are not really disclosing this to you necessarily. That they can do all this.

I would say another big reason, and it's not even a monetary reason, is because these investments, private alternatives, are not on their platforms. It's outside their box, right? And what I, what I continued to find over and over again is my conversations with all these financial advisors is their primary goal was to steer all their clients into like 3 different buckets, 3 different portfolios that had different allocations. Based on the things that were in their, on their platforms, because it's extremely scalable, right? You can go and bring hundreds of millions of dollars or billions of assets, and it doesn't require any more work, you know, because you have this very simple streamlined process. But the problem is you're now selling, you know, one size fits all to everybody. And it's not this custom, you know, fit for the needs of the clients. Although they may have those fiduciary duties still. So it actually creates a disincentive for them to suggest investments that are off the platform because it's outside of the system that they've created. And because these advisors, they're in a, I would say a declining industry, a maturing industry that is being squeezed on every side from a margin standpoint, right? These robo-advisors, we talked about millennials are less trusting of advisors. What's happening is advisors' fees are getting squeezed. So they're making less money on every dollar of assets that they bring in. So they're again, further incentivized to try and keep this model as simple as possible because they're making less revenue on every dollar that they're bringing in. And so it creates these kinds of constraints operationally that make it very difficult for them to go outside the box.

So let's take an example. So typical, you know, advisor may charge 1% of assets under management. So if you have $10 million, in assets, they're going to charge you $100,000 a year. And it's illegal for him to get paid more if you make more money. So let's say I'm your financial advisor and I'm saying, hey, you know what? How about if I, instead of getting— trying to get you 10% returns, I'm going to try and get you 20% returns. And if I get you 20% returns, I want to get a percentage of that profit. I want to earn more money, right? It's actually illegal to do that. They break the law. And you think how anti-intuitive that is, right? You're a sales guy, Ellis. I mean, if you sell more, do you want to make more money? If you do a better job, do you want to make more money? Yeah. Our interests are aligned. So your interests are not aligned with your financial advisor, right? They don't share your upside. In fact, they don't share your downside either. So they're incentivized more to kind of just do middle of the road. It's like, Let's not shoot for the moon. Let's not lose you any money. And one of our friends, a very large, very successful financial advisor, he said, you know, the only time I get calls from my clients is when the stock market crashes and they lose money. So my goal is to make sure they never lose money. I don't really care if they make money, but I just don't want them to lose money. Now, what if you, as a guy who had $10 million placed with them, heard him say that? Would you think, oh, that's my guy? Yeah, I don't care what I make. I just don't want to lose money. And I want to pay him 1% to do that for me. It's like, hell no. So the system necessarily disaligns incentives. And I understand why they don't want investors' advisors to get paid for making moonshots, right? Because they're not— they don't share the risk, right? So I'm going to take my investor's money. I'm going to invest in some crazy moonshot that I'm going to get commissions on. Or, you know, if they win, and I don't really care if they lose. So I understand why they're doing it. But it's not ideal. And you, you gotta understand that your, your investment advisor is not on the same page. They have differing incentives than you have.

So for anyone who, you know, this is, because most people have a financial advisor. And so how would you recommend a listener saying, okay, I'm ready to invest in alts, or I want to start investing alts. Most of them have to go talk to their advisor because they're managing their money. What does that conversation look like? Because I see this all the time from our perspective, and some folks come back and some folks don't because they'll go talk to their advisor, right? And I'm curious, what do you recommend to someone?

I would read the book first, and then I would go talk to your financial advisor and flush them out and say, how do you feel about alternative? Which alternatives do you think are good alternatives, right? And how many alts do you place your customers in? What are your most favorite alts? I'm like, uh, I don't really have any. I don't place any of them in any, you know, so flush them out, flush them out, get them to be honest about alts. And typically you'll come with your alt and they'll scare you away from it. But ask the bigger questions and they may be a unicorn and they may not. They may come be honest with you and say, oh, I'm not allowed to do that actually. Well then you know, right? And then now be honest and say, look, you need to read this book and until you do, you're going to manage 20% of my portfolio. Until you become old savvy.

I think another, another big issue we talked about, a lot of investors assume that their financial advisors are experts in alternative investing because they're quote unquote experts in investments. Right. But the challenge is, like we said earlier, they didn't learn it in their studies for their exams for what actually required them to become an investment advisor. And they're not having continuing education about this. And so what I found most time when we're either talking directly with advisors, or we hear from clients indirectly that they've talked to their advisors, they would have a big blanket statement. How many times you heard this, Ellis? Oh, they're just too risky. This deal is too risky. That's like the ultimate scapegoat to basically say, I don't understand it. I don't know how to do due diligence on this. And it's outside of the system. And I'm not incentivized to do it. That's really what they're saying. And so to Bob Fraser's point, you can ask these questions, kind of indirectly getting at Do they have an expertise in alternatives? You know, and if they have some alternatives, well, let me see some of those. But another issue, a lot of times, this is where you have to go another step further, is a lot of those quote unquote alternative investments that advisors are promoting or suggesting, recommending, are very fat with fees. They're actually not the best alternatives that you can find out there. And Bob, you've experienced this firsthand, right, with one of your earlier advisors that was sending you deals. You're like, I would never invest in this in a million years.

Oof. Yeah. So I have one guy who's actually a CPA and a broker-dealer, and he did my taxes and everything. We mentioned alts and he started sending me just a large number of alts and really pushing them. And they all have giant sales commissions. And you can actually look in the PPM, it's what's called sales fees and sales commissions and up to 10% of the deal. So meaning I make a $100,000 investment, they get a $10,000 commission out of the gate. And my investment is actually $90,000, not $100,000. They take it off the top. And then I looked at the deals and they're just the stinkiest deals I ever saw in the planet. And a lot of times the stuff that's being offered by broker-dealers is heavily commissioned like that. And it's just nothing I would touch with a 10-foot pole.

What I'm seeing a lot too now, as I'm speaking to more RIAs, is I think a lot of advisors or RIA groups are realizing that they need to be able to differentiate themselves from a 60/40 model, right? And even though they actually— because we work groups that don't even get paid for having some of this, but it is a way to differentiate themselves. Because like, what's the difference of going to this shop that offers a 60/40 portfolio model or this shop? It's like, yeah, exactly, we all do the same. And they admittedly know like, hey, we all do the same thing, right? And so it's interesting to start to see, I think, a lot of sophisticated and ethical advisors like, yeah, we probably need to start introducing this. And I've, I've literally heard them say this.

The advisors are under massive pressure and the advisor industry, as Ben mentioned, is massively under pressure, right? They're being pushed from the low end by robo-advisors that honestly, AI advisor is doing a better job than they're doing, right? And for cheaper. Meanwhile, their clients are all beating on them. Get me into private alts, you know, or hey, how do I protect from inflation? And so they're not answering the questions. They're not meeting the needs of the investors. And so they're getting beat on from all fronts.

So Bob, what is the value that you're— like you said in the beginning of the show, you have a financial advisor. So what is the way that you leverage a financial advisor in, you know, your portfolio or in your wealth creation process?

And they're super helpful. I mean, they do a real good job with kind of modified indexing where there's actually some smarter ways to index where you can do tax loss kind of harvesting in index strategy. There's a way to set up a private insurance company for wealthy people. They really help with the taxes, the estate planning, and all this kind of things. That's not my expertise. I'm not an expert in any of those things. And so really helping me think through a lot of those things is just excellent. And they actually are very alt-smart and alt-sap as well.

That's a wrap for this week, everyone. Check out the show notes to this episode for a link to the preorder. And again, it means so much if you actually go and preorder this book, as we are on a goal to truly hit bestseller, not just because that sounds cool, but because we actually want to help a lot of people. So please go preorder the book. The link is in the show notes, or you can go to thebillionairebook.org. And next week, we will be back for our final episode in this book launch series, and we're going to be talking about how billionaires think differently and what that means for you and your portfolio. It's gonna be a good one.

We'll see you there.