Why do investors pay for inferior returns? We can do better. How?

Timothy A. Brown, FRI
CEO www.roicorp.com

One of my clients asked me the other day if he thought my traditional brokerage service would be under threat because of all the developments in technology. Just look at travel agents. Who really uses them anymore?

How about the financial services industry? Everybody could buy and sell their own stocks using a do-it- yourself direct investment account. Why would the traditional full-service, full-fee financial advisor/stock trader stay in business?

Circling back to my industry and using the residential real estate as a close parallel, why is it that traditional real estate agents continue to earn 5% of the sale of over 97% of all Canadian homes? There are all kinds of self-serve websites. With all the advent in technology and social media, it is quite easy to market a home and it has been a seller’s market for several years, so why are people still paying 5% to have their house sold?

My industry is very secure and not necessarily easily disrupted by technology, but of course I am biased, and I am a traditionalist, and I am obviously going to defend my company, our fees, and our future business cycle.

But the purpose of this article is to talk about the financial services industry. When they produce exceptional returns, I would be more than happy to pay them their traditional percentage to manage my money or buy and sell my stocks and bonds and other entities.

The problem is that all statistics show that the best investment managers rarely, if ever, beat the indexes. The most reliable index is the Standard & Poor’s 500 and that can be easily bought and sold via exchange traded funds, which any individual investor at any age can buy within minutes. No advice is required to buy the top 500 companies in the United States of America. None!

So why do we pay the players of this industry when the advice of the experts produces less than what we can achieve on our own? Why do they stay in business? Why do we continue to pay them? They do nothing for us and in fact, they are doing more damage to our financial portfolios than good. It is habit and fear. Nothing more, nothing less.

If a real estate agent sells your house for far more than you expected and you are thrilled, the 5% does not mean anything any longer.

If a dental practice broker sells your practice for a record amount, the 10% charged would appear nominal (and it is tax deductible) and you should be happy.

While no one in any brokerage can guarantee a result, such as real estate, stocks and bonds or my industry, I can tell you that if somebody is creating value for you, pay their fees happily.

If somebody is doing a disservice to you and costing you money, I do not understand why you continue to pay them.

How to gamble on stocks and bonds and win

 

WHY DO WE KEEP GAMBLING ON STOCKS AND BONDS?

Timothy Brown

My amateur study of professionals at large who are typically high achieving and high-income earners reveals that we have a high tolerance for risk. There is no secret there, and researchers have been looking at that for a millennium.

But why is it in today’s day and age that high-income earners who are also subjected to the highest tax rates feels compelled to gamble with their hard-earned after-tax dollars when we know full well the chances of success are minimal, if not ruinous?

One of the investment newsletters I subscribe to recently touched upon the word “folly”. It is a noun, and it generally means a lack of good sense, understanding, or foresight or an act or instance of foolishness or a costly undertaking having an absurd or ruinous outcome.

We have all done it. I have done it. My mentor Milan Somborac says he has made every mistake known to the investor and I think I am not far behind him. Thankfully, I could afford to make most of those mistakes, but one was darn near the end of my financial well-being. I escaped with dignity because I used foresight to know to get out.

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How to live longer, happier — practise part time for life (PTFL).

How to live longer, happier – practice part time for life (PTFL).

Timothy Brown

Recently, I was speaking with Dr. Milan Somborac, the founder of the Monday Morning Millionaire program and he produced this quotation: “Retirement is the leading cause of death, so let death be your retirement.”

I coined the phrase “part time for life” (PTFL) many years ago to explain the phenomenon of mature professionals (dentists) continuing to work part time, as opposed to full time, in order to stay active and to stay stimulated.

Dentists can do this. They can sell their practice today but keep their license and continue to practice dentistry part time for the remainder of their lives. There are many corporations and individual practice owners who are thrilled to have a senior experienced dentist in a part-time associate position.

The high stress level related to dentistry is in part connected to the business side of dentistry.  The primary source of stress in dental practice ownership is human resource management. Most dentists are not properly trained for human resource management. Given it is a micro/small work environment, toxic employees impact everyone – and it happens everywhere – more often that we as owners even know. Thus, turnover is frequent. Turnover is also in part due to the fact that most of the people working in dental practice are young females.

Getting out of ownership equals getting out of stress. Keep your license. Continue to work part time for 10, 20 or 30 years and watch out for retirement. According to Milan, it is a leading cause of death.