In an age of unfettered digital access and Do-It-Yourself grit, today’s investors aren’t the same passive or uninformed clients they once were. Most are still not experts, but their lack of passivity helps them notice certain things that’ll get them thinking. For instance, most are aware that the US economy is somewhat in a precarious position. Almost all of them know that their dollar’s purchasing power is about to take a plunge due to the Federal Reserve’s position toward overshooting its inflation target.
So, given all the uncertainties in the market and economy, and given the severe devaluation that the dollar is about to encounter, many wealthier investors are wondering “why in the heck isn’t my financial advisor suggesting that I allocate a healthy portion of my portfolio to gold?”.
Good question. The answers, though, are underwhelmingly simple and utterly disappointing. Either…
- They can’t;
- They won’t financially benefit despite your best interests; or
- They’re afraid of the possibility that a lot of what they do, the new breed of investors can do for themselves with enough practice and experience.
So, when a client calls to complain that their portfolios are overexposed to a stock market whose valuations have unpegged from fundamental reality, or that their bond exposures (what financial advisors would call a “safe haven”) aren’t yielding diddly squat, and that gold has been outperforming stocks and bonds, financial advisors have to make the most predictable and most cliched sales/propaganda move: downplay or vilify the value of gold.
If even the smallest gold allocation can be one of your best investment prospects for the next decade, it’s like kryptonite to most financial advisors. It shines a light on all of their weaknesses, which, over time, can expose the fading relevance of their entire industry. It doesn’t mean that you’ll be a successful investor without their knowledge, but it does mean that the truly competent and honest financial investors who have your best interest at heart are few and far between. And most of these rare types would never underestimate the value of sound money.
But let’s take this slow and go over the main reasons in detail as to why your financial advisor will not recommend gold. Perhaps then, you’ll understand why gold’s recent rise has caught quite a few financial advisors ill-prepared, stressed out over having to repeat the same stale explanations, and for some, questioning the existential validity of their own careers.
1 - Financial advisors are licensed to work primarily with equities
There’s a well known saying: If all you have is a hammer, everything looks like a nail. It’s equivalent in the world of financial advisors: if their licensing requirements and compensation revolves around equity and debt securities, then those instruments make up the majority of their knowledge, experience, and, ultimately, preference. Gold is often beyond their professional domain, as with other asset classes that don’t fall within the world of equities.
So, if you’re looking for expert financial advice, you have to understand that a financial advisor’s scope of knowledge is specialized, hence limited. And if he or she makes grand statements about the broader economy, it’s often easy to recognize the bias of seeing the entire world from the perspective of the stock market. In short, it’s a hammer that sees everything as a nail.
2 - Financial advisors can’t make money selling gold
They can be compensated with fees and commission for selling or managing securities--stocks, ETFs, and mutual funds--but they can’t be compensated for selling you precious metals. Besides, when it comes to managing an equities portfolio, financial advisors can charge fees for rebalancing your portfolio of stocks, as there are hundreds if not thousands of equities out there to churn. With gold, there isn’t much to rebalance, besides adding or reducing allocations. But this doesn’t matter anyway as financial advisors can’t be compensated for gold trades.
3 - Financial advisors don’t want you to withdraw your funds for a separate gold allocation
Nobody likes losing clients, especially financial advisors. The more money your advisor has under management (AUM), the more s/he can charge transaction and management fees. Plus, it’s a career booster, as financial advisors want to grow (not reduce) their AUM. Withdrawing your funds to purchase a private stash of gold or silver takes money away from your advisor’s pot. Hence, the need to discourage gold investment. Now, if financial advisors were able to sell and manage gold, they’d be singing a very different tune. Sadly, they're looking out for your best financial interests as long as it doesn’t run counter to theirs.
4 - Your money is how they can weather most bear markets and recessions
First of all, no matter what your financial advisor tells you to include in your portfolio, the truth is, you don’t really know what’s in your advisor’s portfolio (whether s/he even has a successful portfolio to begin with, invests in financial instruments beyond equities, or trades derivatives among other investment pursuits).
But one thing is certain: your financial advisor doesn’t “own” your risk (read: YOUR risk). Should a recession hit your unhedged stock portfolio, or should your dollar-denominated assets lose purchasing power due to inflation, you must understand that those are your losses, not your advisor’s. In fact, your advisor will likely make money while you lose money, as a large portion of your advisor’s compensation comes from charging fees, not generating market returns.
5 - Gold and broad market index funds make financial advisors virtually irrelevant
No person can consistently time the markets or call tops or bottoms. No advisor can successfully predict sector rotations, as sector rotations appear virtually random (Fisher Investments research has done a great job demonstrating this in a published study). And no financial advisor can help you hedge your portfolio against inflation using only stocks and bonds (annuity contracts comprise yet another beast to avoid, though it exceeds the scope of this article).
Given all these unknowns, your best bet is to diversify, don’t try to time markets, and don’t over concentrate your portfolio in any given sector. And when it comes to diversifying your stock portfolio, what simpler and more effective way to accomplish this than by simply buying an index fund? Index funds are passive: you buy, hold, and dollar cost average. Why would you need to pay a financial advisor to manage your funds when you can simply purchase a “passive” S&P 500 ETF?
When it comes to hedging your portfolio and other assets against inflation, simply go to a reputable gold dealer, and buy physical gold (paper gold doesn’t count, as you technically don’t own anything other than a promissory note)? Learn something about making balanced allocations, and add a comfortable percentage of gold and silver to your portfolio (anywhere from 5% to 25% depending on your long-term financial goals and risk tolerance).
Want to weather all storms while not missing out on any market opportunities? Divide your portfolio into four parts: 25% S&P 500, 25% investment-grade bonds, 25% gold, and 25% cash.
The Bottom Line
Some of these suggestions may seem simplistic to you, as it certainly will to a financial advisor who has a much more complex understanding of certain markets. But there’s a point where complexity adds more risk and fragility to a strategy. Investing is simple to do once you’ve learned a few basic principles. Why pay extra for a narrow scope of complexity that may not be applicable to all market and economic scenarios? Why always use a hammer when there are plenty of other tools you can use to build your financial future? And among these other tools, gold happens to be one of the most applicable and necessary to survive the current economic environment; and it will be for the next decade given the Fed’s inflationary policies. Yet, financial advisors can neither profit from it nor knowledgeably advise clients on gold--both signify a loss to their bottom line. And that’s why most financial advisors are finding gold to be a bit distressing. As it’s rise may be with us for at least the next decade.