Before I launch into the substantive part of this article, read this almost Aesopian tale first:
One day, a scorpion looked around at the mountain where he lived and decided that he wanted a change. So he set out on a journey through the forests and hills. He climbed over rocks and under vines and kept going until he reached a river.
The river was wide and swift, and the scorpion stopped to reconsider the situation. He couldn’t see any way across. So he ran upriver and then checked downriver, all the while thinking that he might have to turn back.
Suddenly, he saw a frog sitting in the rushes by the bank of the stream on the other side of the river. He decided to ask the frog for help getting across the stream.
“Hellooo Mr. Frog!” called the scorpion across the water, “Would you be so kind as to give me a ride on your back across the river?”
“Well now, Mr. Scorpion! How do I know that if I try to help you, you won’t try to kill me?” asked the frog hesitantly.
“Because,” the scorpion replied, “If I try to kill you, then I would die too, for you see I cannot swim!”
Now this seemed to make sense to the frog. But he asked. “What about when I get close to the bank? You could still try to kill me and get back to the shore!”
“This is true,” agreed the scorpion, “But then I wouldn’t be able to get to the other side of the river!”
“Alright then…how do I know you won’t just wait till we get to the other side and THEN kill me?” said the frog.
“Ahh…,” crooned the scorpion, “Because you see, once you’ve taken me to the other side of this river, I will be so grateful for your help, that it would hardly be fair to reward you with death, now would it?!”
So the frog agreed to take the scorpion across the river. He swam over to the bank and settled himself near the mud to pick up his passenger. The scorpion crawled onto the frog’s back, his sharp claws prickling into the frog’s soft hide, and the frog slid into the river. The muddy water swirled around them, but the frog stayed near the surface so the scorpion would not drown. He kicked strongly through the first half of the stream, his flippers paddling wildly against the current.
Halfway across the river, the frog suddenly felt a sharp sting in his back and, out of the corner of his eye, saw the scorpion remove his stinger from the frog’s back. A deadening numbness began to creep into his limbs.
“You fool!” croaked the frog, “Now we shall both die! Why on earth did you do that?”
The scorpion shrugged, and did a little jig on the drowning frog’s back.
“I could not help myself. It is my nature.”
Then they both sank into the muddy waters of the swiftly flowing river.
I tell you this story for one reason: if you consider hiring a professional money manager to make decisions for your investing account, then you are putting him in a position where he must act against his nature—that is, his financial incentives—to help you out.
When you let someone else manage your money, that means it is your asset base that will generate paychecks for your manager—it is your asset base that allows him to send his kids to private schools, pay the mortgage on his house, buy his wife a Christmas present, and so on.
Charing you 2% annually and selling you mutual funds in which he can receive a commission is what constitutes his financial interest. Sure, he may charge you lower fees (0.5% or less) and buy and hold stocks for decades—in fact, I have heard from people who have had such excellent advisors—but often, it would be against their own immediate financial interest to help you out. That’s a dangerous place for you as a consumer to be—making money is fun and is often the main reason why people have jobs, and you don’t want to rely on people sacrificing that self-interest to help you out.
It’s a flawed system structure, and you are the patsy in this system. And to add further insult, many of those mutual funds and advisor selections put you in stocks like General Electric, Chevron, Apple, Microsoft, Johnson & Johnson, Procter & Gamble, and Pfizer. Those are all excellent companies, but they are the kinds of companies that you could pick yourself without any outsourcing that regularly takes money out of your pocket.
This type of thinking, by the way, is right out of the Charlie Munger playbook. He advises us that, whenever we about to enter an arrangement with another, we should mentally ask ourselves the question, “Cui Bono?” which means “Who benefits?” When you look at the economic incentives that will play into the decision-making of others around you, then you can get a good idea of whether they are going to act in your interests or not. If someone has to turn down easy money to do what is right for you, you better have a damn reason to trust that person before turning over your life savings to them.
Originally posted 2013-10-13 01:13:19.