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Two Things You Portfolio is Missing Your Advisor Doesn’t Want You to Know About

The pandemic has shaken up the world and has got you reassessing your finances. It’s great that you have decided to do something about it as you realize you need to invest more in your paycheck.

A visit to the local A.G. Edwards or Edward Jones and you’re on your way, right? Not exactly.

Your intake interview with the financial professional consists of a lot of questions about your job, goals, kids, current finances, etc. Don’t be fooled. They’re not assessing the best plan for growing and preserving your wealth, they’re assessing the best plan for putting the most money in their pockets with their broker fees and commissions.

After the interrogation, you get a risk profile based on their “proprietary formula” and a recommended allocation consisting of stocks, bonds, cash or cash equivalents like CDs or Money Market accounts.

Many advisers will use the 110 Rule. ​​The 110 Rule recommends a stock allocation based on a percentage taken by subtracting your age from 110.

​​If you’re 35, the recommended stock allocation will be 75% (110-35). Most of the remainder of your allocation will go to bonds with a very small fraction reserved for cash.

The rationale for the 110 Rule is that you should keep more of your assets in stocks in your youth to take advantage of higher returns. Stocks are higher risk but you’re young enough that there are plenty of investing years ahead to spread out that risk.

Then, as you get older, your allocation should shift away from higher-risk stocks toward less risky bonds that generate consistent, reliable income.

The allocation rule seems to make sense, but there are glaring problems with your adviser’s financial plan for you:

  • First, it is missing two elements that are in every ultra-wealthy investor’s portfolio – income and an exit plan.
  • Second, there’s a conflict of interest between the appropriate plan for you to build wealth and the adviser’s financial interests.

The savviest investors – ultra-wealthy individuals and sophisticated institutions – have long turned to income-producing assets with defined exit plans for achieving financial freedom.

These assets aren’t found in the public markets but are instead found in the private ones.

So why do savvy investors like income-producing assets?

Besides generating consistent cash flow ideal for compounding wealth, income is also a sign of intrinsic value.​

  • Assets with intrinsic value don’t rely on speculation to make their owners money and they appreciate separate from inflation.
  • Assets with intrinsic value work for their owners by making them money independent of the asset’s price.
  • Assets with intrinsic value also have underlying tangible assets at their foundation.

​​Income-producing businesses have factories, equipment, etc. backing the enterprise. Rent-producing real estate is backed by land and buildings.

The advantage of assets backed by tangible property is that you can never lose your entire investment unlike with public equities where when a company goes bankrupt, the common stockholders are often left with nothing upon liquidation.

The other element essential to every savvy investor’s portfolio is a defined exit plan:

  • A defined exit plan is a vital cog in the big picture of a private investment opportunity. A defined exit plan is a sign that management has a business plan and has the expertise, personnel, processes, and a timeline for executing that plan.
  • A defined exit plan typically also means a long-term investment window. A long lockup window prevents investor departures and volatility that would prevent management from realizing the company’s business plan before the targeted time frame.

If you want to model the savviest investors, you’ll need these two essential elements of income and defined exit in your portfolio.

So why will your financial adviser never recommend assets with these attributes in your portfolio? Because their compensation structure is in direct conflict with your wealth-building goals. 

Financial advisers depend on commissions from transactions for their living. The more transactions they execute, the more they make.

This transaction-based commission structure is ideal for exploiting the public equities market but clashes with the type of private assets that generate income and have long investment windows that savvy investors covet.

Imagine you’re on a bus and you have to get to your final destination, “Financial Independence.” The more miles that go by, the closer you get to your destination, but here’s the problem with having a financial adviser:

If you have a financial adviser, he is at the wheel of your bus. He doesn’t care if he gets to your destination or not. His compensation is not based on getting you to your destination. Instead, he gets paid based on the number of stops he makes along your route. The more stops he makes the more money he makes. The person who pays the price is you who may never get to your destination.

While a financial adviser is at the wheel, there will be winning transactions and there will be losing transactions. Whether you make money or not will depend on having more winners than losers.

It’s no different than Las Vegas where the value of your purse (portfolio) is based purely on speculation. Overall, financial advisers are lousy at beating the house. More than 90% of advisers fail to even match the S&P index.

In other words, you’re better off putting your money in an index fund than to entrust it with a financial adviser. And don’t count on a financial adviser to steer you towards the assets that will build true wealth with cash flow and defined exit plans.

That’s because these assets only exist in the private markets where the lockup periods are a minimum of 5-7 years. Advisers would go hungry without the ability to churn your account with those types of timeframes.

The wealthiest investors do not rely on advisers and they do not rely on speculation – from appreciation in stock prices – for their gains.

Instead, they seek out income investments with volatility-deflating long-term windows – investments with intrinsic value that appreciate over time as the value of the underlying tangible asset grow from increased productivity or rents.

Diversification of income investments across multiple asset segments and multiple geographic locations ensures continued cash flow through hard economic times.

For achieving financial independence get off the Wall Street bus and shun financial advisers.

Get on the bus smart investors are riding. The bus that pays you to ride and that has a clear destination (i.e., a DEFINED exit).

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