The Value of Advice
I’m not a big fan of non-fiduciary financial advisors. I’m confident that all of my clients are not fans as well. This week I was reminded of how much I dislike them. I helped a new client who purchased a fixed annuity by a financial advisor who positively was not providing advice in their best interest. The annual rate of return on this fixed annuity will not be much higher than a 3-year CD. In this case, the financial advisor didn’t take the time to understand their full financial situation before selling them this product. The day before I met another client who likewise needed help with an annuity. This 90 year old client purchased a fixed annuity by another advisor when she was 80 years old. The annual rate of return for the last 10 years has been a measly 2%. There is so much atrocious advice out there not being given in the best interest clients.
Nowadays people are on alert for bad advice. It’s akin with cable news, you don’t know what’s fake or real. This freezes many people into not taking any advice, even if the advice could make them a fortune. The utmost example of missing out on great advice happens regularly on my favorite TV show, Shark Tank. The sharks are some of the best business people in the world that are all self-made millionaires and billionaires. They offer their capital in exchange for ownership in an entrepreneur’s big idea. There are countless success stories of people becoming millionaires overnight by making deals with these sharks. If you want your children to learn about business, this show will teach them as much as a good MBA business class on entrepreneurship.
This month I watched one entrepreneur make the mistake of a lifetime. He just couldn’t pay up for advice. He apparently didn’t know that when the incentive structure is in-line with the advice that is being given, it will likely be in his best interest. Mark Cuban, who is worth around $3.7 billion, and is well regarded as one of the most astute business people, was the only shark willing to make a deal with this college student. Mark sought 30% of his business in exchange for $100,000. This company had no sales and all the other sharks couldn’t believe that he was even making an offer. This poor entrepreneur was somehow stuck up on giving up 30% ownership of his company. When the college student countered Mark’s offer of 20% ownership, Mark paused for dramatic effect, and said nooooooo. And that was it. This college student had just passed on a deal of a lifetime with one of the greatest entrepreneurs of our lifetime. If this amiss entrepreneur had a phone to call me, here is what I would have said.
If you give Mark 30% ownership, he will have a greater incentive for your business to succeed. Your interest will be aligned with his. Your remaining 70% ownership stake is going to have a much greater value with Mark as a business partner. He has a vast network of connections to launch your product overnight. You will also benefit from learning from one the greatest entrepreneurs of your generation. Mark will also have access to more capital required to grow your business. Or you can go back to your dorm room empty handed without the $100k and still have no sales.
I felt as bad for this college student as I did for my clients who purchased the annuities. What they both had in common was they didn’t understand the incentive structure of the person providing them the advice. In the case of the advisor, the incentives were clearly in favor of him making an immediate 7% commission. If there was no commission, I doubt there would have been a sale. In the case of turning down Mark’s offer, the incentive structure was perfectly in-line to make him wealthy beyond his wildest imagination. This lesson was a good teaching moment on incentives for my own kids (don’t ever turn down an offer from Mark Cuban or someone like him) and to be cautious when taking advice from a non-fiduciary advisor who is selling products.
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