If you are looking for advice on investing, you can look just about anywhere and get some opinion. It is important to understand the reason behind the advice that someone is giving, and also the education and evidence behind the advice given.
Suitability Vs Fiduciary
Brokers/life insurance agents/banks that offer investment advice have an obligation to provide advice that is merely “suitable” for their clients. This means that they don’t have to act solely in the best interest of their clients. For example, a mutual fund may be “suitable,” even though it has a much higher management fee and a lower expected return than a comparable, less expensive index or institutional fund. If they have 2 funds that are suitable for a client, and they choose the one that gives them the most commission, they have legally done nothing wrong.
Registered Investment Adviser (RIA) firms have a fiduciary duty that legally binds them to always act in the best interest of their clients. In the example discussed above, advisers with an RIA firm would violate their fiduciary duty if they recommended the fund that benefited them the most. RIA firms cannot receive commissions from selling investment advice/products. 1
The Financial Media
“The financial media on the other hand have no legal obligation to viewers or readers other than what is imposed by common law (such as laws relating to libel, slander and defamation). The financial media’s lack of a high legal standard explains the wide swing in the quality of the information it disseminates.” 1
Terrible, Irresponsible Advice
“Enter Jim Cramer.”
“In a shameful, irresponsible segment aired on his Mad Money show, Cramer counseled investors to “think about the unthinkable” and gave “advice”. His “insights” included:”
“An observation that “Wall Street” has designated some stocks (such as Costco, ConAgra and Coca-Cola) as “safety stocks.””
“Cramer offers no historical data indicating that stock picking and market timing are prudent strategies. Even if they were, I am aware of no credible evidence that Cramer’s stock recommendations are likely to be more accurate than those of a monkey throwing a dart at a board.”
“Larry Swedroe did a comprehensive analysis of Cramer’s stock picking ability in this blog post. He referenced peer-reviewed studies (something Cramer never does) that found that volume soars when Cramer recommends a stock, but profits quickly disappeared. Swedroe concluded that “after costs Cramer’s picks have negative value to investors who act on the buy recommendations.””
“Here’s the underlying problem. Many investors are unable to distinguish between sound, evidence-based advice… and the wacky entertainment provided by Cramer. Especially in times of crises, those who succumb to Cramer’s nonsense may find their retirement dreams seriously affected. For CNBC and Cramer, it’s apparently of little concern, as long as those advertising revenues keep rolling in.”” 1
Key Takeaways
- Never fully trust advice or products sold to you by someone who does not have a fiduciary duty to do what is in your best interest.
- The Media does not care about your retirement account, and are only there to make money.
By Jimmy Hancock
References
Solin, Dan. “Best and Worst Investing Advice During the Shutdown.” Web log post. The Huffington Post. TheHuffingtonPost.com, 15 Oct. 2013. Web. 21 Oct. 2013.