Many investors make the mistake of assuming advisers who appear wealthy must be financially savvy and will make them rich. Scammers count on the allure of real or imaginary wealth.
To be sure, hiring a penniless pauper to advise you on how to get rich makes no sense.
On the other hand, many people believe that financial advisers who appear to be wealthier than they are or, better still, who are really rich must be successful investors. That’s how these advisers got to be rich, right?
Rich advisers will create riches for them, many naive investors believe.
Rich Advisers May Not Be Financially Savvy
While that makes a certain amount of sense, many wealthy advisers have not have made their money through astute investing. They are simply adept at making money off their clients or transferring client wealth to themselves.
As Fred Schwed, Jr. wrote in his classic book in 1940, Where are the customer’s yachts?:
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“Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,
“Look, those are the bankers’ and brokers’ yachts.”
“Where are the customers’ yachts?” asked the naïve visitor.
Warren Buffett famously said in a 2016 annual letter to Berkshire Hathaway BRK.B shareholders, “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients.”
In short, investors should never assume a wealthy financial adviser is an investment sage. The standard fee structure in the money management industry provides that managers get paid handsomely, say a 1-2% annual asset-based fee, regardless of the outcome. In addition, many managers get a staggering percentage of any gains, say 20-30%. No matter how much money they lose, they get paid. And if they gamble and win big, they get really rich—billions. It’s heads they win, tails the investor loses.
The very fact that, according to standard industry practice, financial advisers are paid lavish fees regardless of whether or not they make money for their clients suggests that marketing or raising money from investors is the key to success, not investment acumen.
As I explain in my practical guide to investment scamming, How To Steal A Lot of Money—Legally, since investors believe that rich advisers will make them rich, successful investment scammers often work very hard to appear wealthy.
The classic chick-and-egg challenge for scammers is how to get other people to willingly hand over money (for investment) before the scammers have had a chance to pilfer enough client money to make themselves rich.
Scammers don’t have to actually be rich—just look it. All they have to do is convince others that they’re loaded.
Rich Advisers May Not Be Rich
Thanks to technological advances, like Photoshop and social media, it’s easier than ever to look attractive, rich, successful, and highly-regarded by colleagues and clients online, as well as socially prominent even if you’re actually a penniless loser.
Perception is reality, so being able to manipulate how people see you is critical. It is well worth a scammer’s time to study all the tools that are available to enhance how he is perceived by others online.
It is beyond the scope of this article to do much more than draw your attention to the fact that investment scammers are already and likely will continue to be at the forefront of online reputation manipulation. Most of us are selective in our Facebook and other social media postings to convince others that our lives are possibly far more attractive and eventful than in reality. Fraudsters, on the other hand, use every technological advance to further their business purposes: ripping people off.
My favorite low-tech, on-a-shoestring “wealth-enhancers” for scammers include:
- Go to the nearest Ferrari, Bentley or Lamborghini dealer and take a selfie sitting in a flashy car. Put the picture of you posing in “your” car on Facebook for prospective clients to see.
- Go to an executive airport and pose as close as possible to the most impressive, yet nondescript personal jet you can find. Put the picture on Facebook or, better still, your “company” website.
While I won’t name the scammers, trust me the Ferrari and private jet ruses are examples from true-crimes I’ve investigated.
- Up-tech with image editing software and you can, as they advertise, “reimagine reality.” A picture of you standing next to your good friends, Donald Trump or Bill Clinton may enhance your credibility and no one’s ever going to ask them if they remember having met you.
- For $185.00, buy yourself a counterfeit Rolex Blue Dial Submariner that looks exactly like the real thing costing $15,000.00 and probably tells better time.
- Fake pearls and fake diamonds are difficult to identify—even for experts.
- Search online and you’ll find tons of articles about how to look, dress and act like a millionaire.
Remember, scammers must craft an identity to appeal to the victims they have targeted. To appeal to less sophisticated victims flashy indicia of wealth may be all the scammer needs. On the other hand, if the scammer is trying to cozy-up to established wealthy folks (i.e., old money) he may have to be more discrete or refined in his approach. Impressing men or women for romantic purposes is a different exercise than luring in unsuspecting investors—although there definitely are some similarities.
In conclusion, don’t make the mistake of assuming that a financial adviser who has seemingly accumulated wealth is necessarily a savvy investor, or is even wealthy. Money management is largely a confidence game: Some well-known money managers are great marketers, but lousy investors. They may have made a ton of money for themselves— not-so-much for their clients.