TL;DR: The Financial Industrial Complex is a group of companies that make money selling poor financial advice and underperforming financial products. You don’t need their advice or their products to get a good return from publicly traded securities – just buy a few low cost passive index funds. Perhaps more importantly though, the FIC will never tell you about the alternative investment options out there that could seriously accelerate your path to Ramen Retirement and long term wealth creation. If you’re ready to take control of your financial future, start investigating these alternatives as well, and see if they might be a good fit for your portfolio.
I spend a lot of time thinking about where and how to invest my money. After doing this for 20 years, I can tell you there is something deeply wrong with the investment advice and options offered up to the average American. The narrative of how to invest, grow your wealth, and save for retirement has been completely controlled by what I call the Financial Industrial Complex (FIC) – a set of large financial institutions that support themselves by taking money from the masses to line their own pockets by shaving off a few percent of every dollar managed, every year, for at best mediocre financial advice and returns.
The financial institutions I’m referring to are brand names you’ve all heard of: Bank of America, Morgan Stanley, Merrill Lynch, JP Morgan, Fidelity. You’ve heard of them because they are the ones controlling the airwaves. They are shouting the loudest. They shout from highway billboards, from sporting event sponsorships, increasingly from online targeted ads. They send in overpaid ‘advisors‘ to your place of work to help you ‘think about your investment options‘. Wherever, however they can get to you, they will. Because it’s so damn profitable.
How do you think they can afford to advertise so much? Because they stand to make so much money if they can sign you up for their menu of investment options. But that menu is going to make you sick.
There are a few problems with what they have to offer:
- Overpriced financial advice
- Bad financial outcomes
- Only telling you half the story
Let’s dig a little deeper.
Overpriced financial advice
These businesses are shockingly simple – they offer ‘investment advice’ for a fee that is a percent of the assets you invest with them. If you choose to sign up for this ‘advice’ you’ll be paying 1-2% of your invested assets EVERY YEAR! 1-2% doesn’t sound like much, but on a $500K portfolio, 2% amounts to $10K per year! That’s like buying a new car every year just to have someone sit down for 30 minutes and talk about your investment options. I can save you that $10K right now. If you’re under 50, all you need to do is buy two funds:
- VTI – Vanguard Total Stock Market – for exposure to US equities
- VEU – Vanguard All-World Ex-US – for exposure to the rest of the world
Go with 60% VTI and 40% VEU, then rebalance every once in a while to maintain that ratio. Done.
Bad financial outcomes
But the worst part is you don’t get anything of value for that $10K a year. In some cases, it might even hurt you. These ‘financial advisors’ are glorified salespeople. They are not investment professionals. They will not find you investment options that will somehow massively outperform the market. In the best case scenario, they will allocate your money to a mix of diversified, low cost index funds. But more often, they will steer you into expensive ‘managed’ funds offered by their firm that charge an additional 1-2% to manage your money, while they underperform against the market.
Even if you could get access to the world’s best stock pickers, you would be wise to question whether it’s worth the added fees. Most hedge funds, who theoretically employ true professional investors, underperform the market as well.
So in total, you can expect to pay 2-3% of your total assets, every year, just to have these ‘financial advisors’ underperform the market for you. Even assuming they manage to match market performance, that 2-3% is a HUGE cost. Considering 7% returns are a good estimate of long term market performance, 2.5% amounts to a whopping 36% of your total returns. In effect, you are giving up 1/3 to 1/2 of your potential investment gains to advisors you don’t need, who often provide bad advice.
The heroes of this game are the low fee index funds (like Vanguard) that have been shouting from the rooftops for the last 30 years about the massive savings and gains that can come from a passive investment strategy coupled with low fees. If you want to invest in publicly traded securities, as outlined above, check out VTI and VEU from Vanguard to set yourself up for success.
Only telling you half the story
But that’s not the whole story. While companies like Vanguard are doing a great job helping investors who want to buy publicly traded securities, nobody is talking about the other options on the table. This is, in part, because those other options are slightly more complicated. But in truth, it’s because those financial firms can’t make as much money selling them. The FIC thrives on the ability to create a homogenous, commoditized set of assets they can sell to the masses at scale. This allows them to minimize the cost of creating the asset, and frees their time / energy / money to focus on acquiring customers (see => advertising to you anywhere they can!).
But just because the FIC can’t make money off selling you alternative investments, that doesn’t mean you can’t make money buying those alternative investments. In truth, the simple fact that the FIC isn’t able to invest in a certain space means there will likely be less competition, and the potential for higher returns. Now what do I mean by alternative investments? I am talking about investments in:
- Privately owned real estate
- Syndicated real estate investment funds
- Privately held small to medium sized businesses
- Venture backed startups
Now I realize that some of the above suggestions might sound daunting, but I’m here to tell you it’s not as hard as you think. I wouldn’t advise investing in startups for most people, and the right SMBs might be difficult to invest in. But I do feel direct investment in real estate is something a lot more people should consider, given the limited complexity, and significant potential returns:
The right investments in real estate can generate returns of 15%+ / year after all fees. That is easily double what you might expect from average stock market returns.
The point here is that the best investment opportunities will not come knocking down your door. You need to seek them out. In the absence of putting in the time and carving your own path, you’ll default to the easy options provided by the FIC. Just remember those easy options come at a cost. The people shouting the loudest often have the most to gain from it.
Truth is, nobody cares about your financial future like you do. Not even your financial advisor who claims to have a fiduciary duty to care. That’s bullshit. It’s your money on the line. You need to think and act for yourself. Part of that requires thinking about your investing strategy independently, thinking for yourself, and making the right decisions accordingly.
I’m not a financial advisor, but I have explored the world of investing and carved a path that works to reach Ramen Retirement sooner, and grow generational wealth. If you’re interested in learning more, check out the rest of my material, or drop me a line to chat at: firstname.lastname@example.org.
Here’s to your happiness, health, and wealth. Enjoy!