Sellers of Debt

Shrewd investors have a blunt name for much of the financial-advice profession: Sellers of Debt. It sounds unkind. Then you read the pay slips, and it all starts to make sense.

What the payslip says the job is

An advisor’s title suggests a counsellor. Their pay grid describes a salesman — and the product that pays best is borrowing. When Paul Meyer of the Securities Litigation and Consulting Group examined securities-based lending in a 2015 study, he published one firm’s actual schedule:

At least one firm in that study rewarded even the branch support staff for steering a client toward borrowing rather than withdrawing their own money. Read that twice: the client had the cash, and the building was paid to talk them out of using it.

Why the law permits it

Because most of these people are not, legally, your advisor. A fiduciary must put your interest first. Much of the industry is held only to a suitability standard: the product must merely not be inappropriate for someone like you. Between “best for you” and “not obviously wrong for you” sits every commission in the business. The title says counsellor; the law often says salesman.

Which is why the Shrewd defence is two polite questions, and takes one minute: “Are you a fiduciary — always, on every product you sell me?” and “How exactly are you paid on this recommendation?” Watch what happens to the answers. Advice is what survives those questions; everything that does not survive them was a sale wearing advice’s clothes.

The proof from the gentlest profession

If you doubt that incentives quietly steer honest people, economists Steven Levitt and Chad Syverson found a natural experiment: compare how estate agents sell your house with how they sell their own. Same people, same market, same week — only the ownership of the commission changes. Their own homes stayed on the market 9.5 days longer and sold for 3.7 percent more (Review of Economics and Statistics, 2008). Patience appeared the moment the money was theirs. Nobody was lying; the incentive simply pointed elsewhere. Blame the incentives, not the individuals — and pay neither.

The Shrewd insight: nobody sells you the product they own. Ask what the seller holds, and you have asked the only question that matters.

“It’s only one percent”

Now the fee itself — and the reason it is so easy to wave through. The White House’s Council of Economic Advisers, reviewing the research in 2015, found that conflicted advice costs the affected saver about one percentage point of return a year: roughly $17 billion annually on American retirement accounts alone. One point. Against a good year of 7 percent, it looks like a rounding error.

It is not, because it compounds exactly as your money would have. Here is $100,000 left alone at 7 percent, against the same $100,000 advised at 6:

This is the table an investor carries in their head — and it is still the flattering one. Two subtractions are missing.

Those dollars are not real dollars

Every figure above is nominal: dollars of some future year, which buy far less than today’s. What you can actually spend is the real amount, after inflation. We assume inflation of 3 percent a year throughout, close to the long-run average. So take the same two columns and add a third — the advised saver’s own money, restated in today’s purchasing power:

Notice what inflation does to the fee’s importance. Inflation is charged on the whole pot, while the fee comes out of the growth — so the smaller the real return, the larger the share of it a fixed fee eats. Against a 4 percent real return, one point is a quarter of your progress every year.

And the tax office charges the mirage

The last subtraction is the cruellest, and it is not a single bite at the end: capital-gains tax is charged along the way, and it is charged on the nominal gain — the inflated, partly imaginary one — not on the real gain you actually enjoyed. Assume the mildest realistic timetable: a reckoning once a decade, at 30 percent. Keep every figure again, and add the tax and what survives it:

This table shows the devastating effect of combining all three — fees, inflation and tax. What the investor had calculated with a nifty calculator to be well over $1 million after 40 years turned out to be not even a doubling of their savings. And this table makes things look better than most investors will experience, because the tax is applied only once every ten years — implying a decade of deferred tax at every step. Buying and selling more frequently, as most people do and as advisors tend to recommend, produces a worse result again.

Nothing up our sleeve: the tax, line by line

That tax column deserves to be shown rather than asserted, because the step everybody misses is not the tax itself — it is the subtraction. Money handed to the tax office leaves the account and never comes back, so each decade starts smaller than it ended. There are only four moves, repeated four times:

1. Take the balance the decade starts with. 2. Grow it for ten years at the advised 6 percent, which multiplies it by 1.7908. 3. The increase is the nominal gain; hand 30 percent of it over. 4. What remains starts the next decade — and the tax does not.

Those are still nominal dollars. Deflate each one by the 3 percent inflation running underneath the whole exercise and the same four rows say what the money would actually buy:

Try to find where this stuff is discussed — you won’t find it anywhere, but the Shrewd’m community know it all too well.

That is the devastation, and each lens did its own part: the fee took the first share of the growth, the tax office charged full rates on gains inflation had invented — killing any chance of compound effect with the “safe 7% portfolio” — and then inflation shrank what precious little remained into their honest peanut units. The projection in your head subtracts none of the three.

The Shrewd insight: a fee is quoted against your nominal return but paid out of your real one, and the tax rate is levied on the nominal return, obliterating the real after-tax (and rarely discussed) return. That is the whole trick — and no brochure will ever draw you the last two columns.

So why do the successful Shrewds — people who could afford any fee — pay almost none of them? Because their wealth was built largely from what they refused: the loans not taken, the products not bought, the point not paid. What that refusal builds, in money and in freedom, is the last page.