The Riddle of the Middle - Why the middle class struggles to find help with money problems.

You’re in the middle class. You don’t know exactly what parameters qualify you to be in the middle class, but by default you’re here. All you know is, “I’m not rich enough to do whatever I want, but I’m not poor enough to get help.” Being in the middle class is as lonely and uncertain as a dark alley at night, but as crowded and congested as Disney in Spring. You live a great life sandwiched between the dream (if you have it) of jumping to the upper class level, and the gravitational pull of everything in our economy that can pull you down a level.

I have a good job, and make decent money, but I often wonder: where did all the money go at the end of the month?

Assuming you do a great job of not getting kicked out of the middle class party, but not so great of a job that you’re not invited to the upper class, you have a dilemma. The dilemma is staying part of the middle class, and not just staying part of it, but thriving in it. 

If x=obstacle and y=aid, how can x=y?

Now in order to thrive in any environment, whether it be business, sports, personal finance or anything else, one needs to know what they’re up against.  You need to know the obstacles.  We can all rattle off many of the most common obstacles of the middle class…outrageous health care costs, rising cost of living significantly outpacing wage increases, rising college costs, uncertainty of employment, market corrections, etc. All of those are true, and very real threats, and any one of those things, let alone all of them, can crush the financial well-being of a family. However, there is another obstacle that I believe is very unique to the middle class, an obstacle that is designed to appear like a solution to the problem, but is actually a part of the problem. Riddle me this?

A financial advisor, tax attorney, CPA, insurance agent, and investment manager walk into a bar… 

(side note: investment manager and financial advisor are not the same thing, but both can be both… that’s for another post)

A solution to the financial woes you face in the middle class is having a good financial advisor. The problem is that the advisor is part of a larger industry that has become somewhat of an obstacle itself to the middle class. Understand that I’m not putting down financial advisors, or the financial services industry. On the contrary, we have a separate firm called Parkside Wealth Solutions that is our financial advisory practice. I am a financial advisor and know a lot of great financial advisors who are excellent at creating major positive impact in a family’s life. That aside, the reason that the financial services industry is postured as a solution but is really part of the problem can be summed up as follows:

The financial services industry is truly designed for the upper-middle to upper class, yet marketed to everyone. 

In order for that to make more sense, let’s dive briefly into the design of the financial services industry. Advisors are largely compensated based on the amount of assets a client brings to the table. In the majority of financial services firms, those assets need to be liquid, able to be managed by someone else of your choosing, and typically need to be invested over a long time horizon (e.g. retirement years). Put simply, this has to be money that can be put mainly into the stock market in some form or fashion…stocks, bonds, mutual funds, ETF’s, etc. Sometimes insurance and annuity products are used as well, which are also focused on the long-term time horizon. 

The financial services industry is trained to focus on investments and investment performance, but how well your mutual funds did this year will not help you to make your household budget more efficient, or help you navigate the decision to replace your vehicle, or help you decide whether to re-fi, pay down your mortgage or borrow from you heloc to consolidate other debts.  

The way the advisor usually gets paid is by a percentage of that money that they are managing for you. The industry average is somewhere around 1% charged annually on assets under management (AUM).  However, there are also fees for the portfolio managers, fund managers, trading costs, and other internal expenses that you pay, but usually never see. A good financial advisor or money manager will be transparent as to what these additional costs are.  I’ll have a separate blog post coming soon to provide more detail on this topic. 

Now that we know the financial services industry is generally incentivized to gather as many assets as possible, let’s look at two potential clients Jim and Sally.  Jim comes to his advisor with $50k in mutual fund investments that can be managed, and a 401k at work (that can’t be managed) with $100k. Sally comes to the same advisor with $1.5mm in investments, all of which can be managed. If the advisor is charging the industry average of 1% on the AUM; on Jim he’ll make $500/year ($50k x 1%), and on Sally he’ll make $15,000/year ($1.5mm x 1%). 

“That’s all well and good” you say, “but what’s the problem?” No problem for Sally. She’s who the industry was designed for. She may be upper middle class, and still face some of the middle class dilemma, but generally speaking her problems are more about her money working for her and the long term efficiency of her investments. Also, Sally can likely go to her advisor and ask for advice on whether or not she should pay off her mortgage sooner, or buy or lease her next vehicle, or how best to cover medical expenses this year etc.  That advisor won’t make any more money offering that advice, but at $15k/year in fees, he’s more likely to go above and beyond to service that client. 

Jim on the other hand will have a much different experience. While he’ll also get long term investment management, what he really needs is help and guidance through those everyday financial decisions he faces as a member of the middle class. Those issues that may be secondary problems for Sally, are front and center for Jim. For $500/year that advisor is not incentivized to give Jim the help he really needs and deserves. Now let’s have a little grace for our advisor friend. He is running a business after all, and probably wants to help a guy like Jim, but his business isn’t built to be able to give Jim what he truly needs.

This is the reason for Parkside Wealth. 

Throughout my experience in the financial services industry, I found the middle class largely lacked a place to turn to get unbiased advice, guidance and direction. Often I’d come across Jims who went to their insurance guy for advice, but was only offered a shiny new insurance policy as a solution. Jim ran to a financial advisor, but was only given some nice looking mutual funds with a long-term investment plan. Jim ran to his accountant, but his accountant told Jim he needs to start a business so he can itemize deductions. Jim went to his mortgage guy for advice on his home, but Jim was only offered a pretty new re-fi. Everywhere Jim went, he got the product or solution that the particular professional was trained and incentivized to offer. Jim ended up with an impressive collection of insurance agents, financial advisors, accountants, mortgage guys, and even a know-it-all neighbor, and none of them knew each other or worked together on Jim’s behalf.  All Jim wanted was advice on anything related to his personal finances. He just wanted help. The industry isn’t designed like that Jim. You have to buy something, or invest something to get that kind of help, and then likely you won’t get it anyway because industry professionals don’t spend time learning things that aren’t core drivers to their business revenue. They can’t spend time doing that. Their business model doesn’t allow for it.  

If you consider yourself a Jim, and have just been looking for plain ol’ fashioned help, advice and counsel in an unbiased way, we may be the right place for you. If you’re Sally or your main concerns are prudent investment management, retirement income planning and legacy planning for the next generation, our other firm Parkside Wealth Solutions may be a great fit. We can also recommend world class financial advisors outside of our company if desired.  It all comes down to hiring the right professional for your specific needs.