Humans are motivated by many different things: money, prizes, power, praise, recognition, prestige, ego, time off, sex, and much more.

But on a more basic level our motivations can be broken into two categories – intrinsic and extrinsic – and this distinction is critical according to Dan Pink in his new book, Drive.

Extrinsic is the old carrot-and-stick approach – the hope of gain and the fear of loss. This includes payroll and bonuses.

Intrinsic motivators are more powerful and can be broken down into 3 categories:

1. Autonomy – Control over your own work and destiny.
2. Mastery – Continual improvement.
3. Purpose – Honor personal values and be part of something bigger than just yourself.

In a throwback to Maslow’s hierarchy of needs, Pink points out that when a worker feels fairly compensated then intrinsic motivators may have a more powerful influence than traditional extrinsic motivators (more money). When your basic needs are taken care of then self-actualization and esteem become a higher priority than additional financial compensation.

My own life experience and working with so many money coaching clients supports this theory. In addition, workplace research corroborates this finding with studies showing monetary rewards designed to increase performance may have the opposite effect. This is particularly true for autonomous workers in jobs requiring innovation and problem solving but less true for workers completing repetitive tasks.

Why “Drive” Is Essential Reading…

The “New Retirement” is a huge issue in today’s workforce.

The crux of the new retirement is that lifespans have increased 30 years in the last 100 making the old retirement financially difficult to obtain and not very fulfilling. Most people can’t save enough to support 30-40 years of leisure and even fewer define happiness as working like a dog for 40 years so you can do nothing of substance for the last 30 years while health declines.

Instead, the new retirement is following Pink’s prescription to perfection.

Once workers satisfy their basic need they become less motivated by money and more motivated by intrinsic factors. This causes early departure from traditional careers into part-time work and encore careers.

Employers would be wise to wake up. Employees are moving on when their basic needs are met and it is needlessly costing companies a fortune. Life is short and employees want fulfillment during their brief journey on this earth.

The Pursuit Of Fulfillment Above Maximum Wealth

The call for fulfillment usually occurs around the time a prospective client is marginally financially independent. They are typically a little short of obvious financial freedom but close enough to be driven by intrinsic motivation to make the call. They are restless and don’t understand why. They’ve worked a good career, built a solid nest egg, and now something is different but they don’t know how to put all the pieces together.

Sound familiar? Many of you can probably relate. I know that was my experience in my early 30′s.

It was a very confusing time because I “had it made” by everyone’s standard – except my own. I was making good money yet there was something missing… something more. I knew I wanted to change careers but couldn’t sort the issues out. If it was about maximum wealth I would have happily stayed in the investment management business. Blogging and coaching has always been driven more by fulfillment than making money.

Unfortunately, Pink’s book didn’t exist back when I sorted these issues out. It could have helped me understand what was going on and maybe saved me a lot of trial and error. It took me years to work through the issues because there was nobody to show me the ropes. I fumbled through by intuition alone.

I recommend the book. It is a smarter, more efficient path to the knowledge.

What This Means To You…

In a nutshell, if you are financially successful (which all my readers will eventually become, of course ) then you will transition from extrinsic motivation to intrinsic motivation. It is as inevitable as night and day.

You may not realize it now, but when your basic needs are met for the lifestyle you feel comfortable in then the issues discussed in this book will raise their heads and demand attention… whether you like it or not.

Get Pink’s new book, Drive, and it will help provide a basic understanding of the landscape.

I hope you get good value from this resource, and I welcome your thoughts in the comments below…

I’ve purchased pure gold for less than $20 and spent thousands for highly marketed trash. Unfortunately, I’m not alone in this experience.

The financial education business has more than its share of scams and rip-offs. P.T. Barnum was right when he claimed, “There’s a sucker born every minute.” I would add to that, “…and there’s a huckster born every minute to serve them.”

My readers are different. You are learning “Financial Freedom For Smart People”, and a new resource for that journey is my FREE ebook ( for subscribers only – that’s you!) teaching the “7 Rules For Buying Financial Education That Pays You More Than It Costs.” It is my tell-all guide explaining how to get the best value for your money in coaching, books, courses, seminars, and much more. It puts P.T. Barnum’s ghost to rest.

While this book is titled “The Smart Consumer’s Guide To Money Coaching & Financial Education” much of the content is applicable to anyone interested in building wealth (even if you have no interest in coaching).

In this ebook you will learn…

• How to build wealth faster.
• How to avoid rip-off scams.
• How to get the best value for your money when growing your financial intelligence.

This book provides a consumer oriented perspective by revealing what educational services you should avoid and how to prioritize your spending. It will save you time and money when growing your financial intelligence.

You can download your free copy now by clicking on the link below (only available for 3 days)…

The Smart Consumer’s Guide To Money Coaching & Financial Education (link removed after 3 days – please subscribe to get the book for free… thanks.)

Make sure you get your copy now because I’m tearing the link down in 3 days since the book is only for subscribers and I don’t want people to find it by just reading this blog post. I want them to opt-in as a subscriber and become part of my community.

Similarly, if you are going to spread the word about this resource by tweeting, linking, or liking please make sure to use ONLY the following URL http://financialmentor.com/financial-coaching. This is where your followers and friends can easily opt-in to get their own copy. (This is important because the book link will be dead in three days; whereas, the above link to the financial coaching page is where they can get the book permanently by opting in.) Thanks!

Anyway, I hope you enjoy the ebook. Now onto the next order of business…

True Confessions – Last Week’s Blunder

Okay, I’m human. I make mistakes.

Last week’s update The Minimalist Guide To Financial Planning went live before it was fully written.

Embarrassing… but true.

I wrote the first few paragraphs on inspiration, did no editing, forward dated it so that I had time to complete it later, and then I got busy with the ebooks I’ve been sending you. Imagine my surprise when I woke up one day last week and it was published. I scrambled to complete the writing but it was too late because many of you had already read it.

So if last week’s post left you wondering why Todd’s writing had taken a nosedive please give it a second chance. The few people who have seen the full version are commenting that it’s one of my best articles yet (very frustrating considering so few readers ever saw it). In addition, it was good enough to be picked up by several big-name financial blogs so please give it a second chance. The quick link to find it is below…

The Minimalist Guide To Financial Planning

I hope you like both of these resources (the post above and the new ebook).

Happy reading, and please tell me your thoughts in the comments below…

You Might Also Like…

• Ten Commandments Of Investment Strategy: Find out how your investment strategy measures up to proven success principles and learn what you can do to increase your financial security.
• How Anyone Can Retire In 10 Years (or less!): A scientific, provable, easily repeatable system to reach your retirement goal in just 10 years… seriously!
• 6 Reasons Why It Pays To Be Your Own Financial Expert: Reveals the conflicts of interest hiding behind most financial advice so that you can make smarter, more profitable investment decisions.
• Warning! Why Most Wealth Building Programs Are Expensive Half-Truths: Learn the cause and effect chain that leads to true wealth, and discover which broken link in the chain has held you back from financial success… until now.

In this ebook I tell you what I did right, what I did wrong, and I reveal the essential lessons learned the hard way so you can avoid making the same mistakes in your own journey.

I wrote this ebook to provide a valuable bonus incentive for new subscribers to opt-in to my newsletter. However, you are already subscribed so it only makes sense to treat you even better by hand delivering it to your inbox. The link is here…

(Link has been removed. Please subscribe to get your free copy.)

This is a PDF ebook so you can print it and read at your leisure or save it to your hard drive for future reference.

IMPORTANT! I will be removing this link in three days since the objective is to only give this book away to existing and future subscribers. Make sure to download it now because it is going away.

Similarly, I encourage you to tweet, link, and like this resource; however, I ask that all links and tweets point to the financial coaching page located at…

http://financialmentor.com/financial-coaching

…instead of this blog post or the ebook link because it is a permanent way to access the book that won’t be changed in 3 days.

In other words, I appreciate you telling others about this valuable educational resource – the more, the better. I just ask you to respect my goal to increase subscribers by sending people to the financial coaching page (see link above) where they can easily sign up and receive all the other cool bonuses I will be adding over the next few months.

BTW, I will send you the second bonus ebook link – “The Smart Consumer’s Guide To Money Coaching And Financial Education” -  in the next regular update… but it’s only for subscribers. It is the first of many great educational resources you will get throughout the spring and summer.

I hope you enjoy the reading and would appreciate your taking a minute to share your favorite insights about the book in the comments below…

For example, let’s say you want to drive from Los Angeles to New York and you’re given the choice between two cars: a basic Toyota Camry or a one-of-a-kind, custom race car using the latest, coolest, whiz-bang technology.

Logic says to choose the basic Camry every time. It is the proven, reliable path to achieving the goal. However, the sleek, beautiful race car just reeks of sex-appeal and seduces us into the driver’s seat for a more-better-different adventure.

Don’t get me wrong. I love adventure as much as the next person – probably a lot more. But there is a time and place for everything.

The financial game is about getting results – not having an adventure.

If you want to produce reliable results then use proven technology… even if it is boring.

How We Are Hardwired To Make Mistakes

The human mind has a character flaw that can destroy your financial success if you don’t control it with discipline. We are attracted to shiny, bright solutions that appear cutting-edge over perfectly suitable, proven alternatives that are boring but well within our grasp.

As a financial educator I’m faced with this fact every time I write to you. New, cool, and different is what sells. My articles must have an innovative twist or nobody cares. Nobody tweets, links, or likes the same old thing. It’s not interesting enough.

…Even if it works and is the exact message someone needs to get the results they claim they want.

For example, every year I go on a tirade about goal setting in January. Every research study shows it is one of the most effective practices you can adopt to increase success. It has worked wonders for me, it works for my coaching clients, and it costs nothing to implement. Not surprisingly, the research studies also show very few people do it properly. I write about it because additional education appears necessary – yet nobody cares.

Great tool – simple to use – no cost – proven results… nobody cares. It makes no sense.

So it is with great trepidation that I educate you today about the necessity of using accountability as a tool to build wealth.

“Yuck,” you say? Well, it is a fuel efficient, reliable Camry that will get you from Los Angeles to New York. Do you want the result or don’t you?

You can either be smart and choose this solution over all the emergencies, new ideas, and other sexy distractions competing for you time right now, today, at this moment – or you can move onto something more exciting.

My challenge to you is simple – do want to build wealth or not?

Why Accountability Is Necessary

“No-one can cheat you out of ultimate success but yourself.” (Ralph Waldo Emerson)

Everybody wants a “more-better-different” lifestyle but most people only get more-of-the-same.

The problem is good intentions don’t magically produce good results unless they translate into persistent action. No action equals no results.

Most people know what they need to do – spend less, save more, invest wisely – you just don’t execute well.

You get busy, distracted, and lose track of your goals. Life gets in the way.

Emergencies and fires erupt that divert your attention from the most important tasks that will produce the greatest outcome.

In short, you get in your own way. As Emerson said above, you cheat yourself out of success due to your lack of focus.

However, there is one tool that works better than any other at fixing this problem so that you produce all the results you are capable of… accountability.

How Accountability Works

Very few people can just pick up a musical instrument and learn how to play it on their own.

Instead, you go to an instructor on a weekly basis where s/he shows you…

• Tricks and tips for how to play better.
• Weekly assignments providing the next logical step in your learning process.
• Instruction on what you are doing right and wrong to correct errors and reinforce learning.

As long as you continue working with the instructor you make regular, incremental progress toward your goal. Every week you practice and every week your musical ability improves.

What happens when you stop going to the instructor?

You stop practicing because there is no accountability and no next step. It requires too much personal initiative and too much self-discipline to stay focused. Other issues interrupt progress. Your accountability structure is broken. Progress is stalemated. The entropy of life takes over.

The instructor never did the practicing for you. He wasn’t there looking over your shoulder to make sure you did what was necessary to progress. Yet, you did it anyway. The structure and weekly meeting held you accountable and kept you focused.

That is the amazing power of an educational process that includes accountability. It provides you with clear next steps and a structure to follow through. It isn’t sexy, but it is a proven process that just plain works.

It always has – it always will.

The only questions is, “Will you use it?”

7 Keys To Maximizing Accountability Effectiveness

1. Design A Plan: In the music example above the instructor provided the plan. In my financial coaching the plan is produced during the first step of the 7 Steps To 7 Figures process because each plan must be uniquely formulated to fit the client. This is the critical first step because your actions should always be grounded in an overall plan to produce the intended result. It creates the context for everything that follows. It is the required starting point.
2. Convert Your Plan Into Action Steps: A plan is just a dream until it is converted into specific action steps that you can be accountable for achieving. For example, the music instructor gives specific songs to learn that teach specific musical skills. This is essential because goals and plans are just ideas, but when you convert the goal into specific actions steps there is accountability that eliminates any question about your progress.
3. Create A Way To Measure Results: You can only improve that which you can measure. This is critical. Your daily actions must result in a clear, unambiguous measurement criteria. When your progress is measured then performance improves.
4. Schedule Regular Accountability: Once you have a goal with a strategy to achieve the goal, and you’ve converted that strategy into daily actions steps with clear measurement criteria, the next step is to set a regular schedule with your accountability partner where you agree to provide a status report that reveals your progress. Review your goals each session. Celebrate the wins and uncover the causes of failure so they don’t repeat. This must occur regularly (weekly or bi-weekly) to insure consistent progress. There cannot be a lapse or there is no accountability.
5. Invoke the Competitive Spirit: Can you beat your goal? Can you outperform expectations? Sometimes it is fun to let your competitive juices flow and see what is possible. One fun strategy is to choose an accountability partner that shares the same goal so that you can compete with each other and super-charge results.
6. Build A Support System To Pull You Forward: Setbacks are inevitable. Everybody experiences them. The difference is successful people get back on their feet faster and don’t waste time or energy by wallowing in the problem. Life is hard, and it’s also beautiful. Acknowledge your loss, control the damage, and refocus yourself to start winning again. The key is to create a support system that literally pulls you forward. Coaching, masterminds, professional organizations and accountability partners are all excellent examples of support systems that help you refocus when the going gets rough.
7. Be Honest: Accountability only works when combined with integrity. If you lie about your results then you only deceive yourself. If your accountability partner doesn’t have the intestinal fortitude to call you to the carpet when appropriate then it won’t work. The process will lack backbone. You don’t need a cheerleader. You need someone that can speak the truth when necessary to get you back on track. If your accountability partner accepts excuses then s/he really isn’t holding you accountable at all.

Choosing An Accountability Partner

A lot of people ignore the accountability process because it’s not sexy. Its a Camry – a practical solution that just works. The rest avoid accountability because they don’t want to answer to someone else – avoidance.

Accountability is one of those things like goal setting – you know it works but you don’t do it.

The question is, “Do you want results or not?“

Accountability will help you build wealth, but you need the right partner to make it work.

Find someone who is willing to ask the hard questions, challenge you, and will check in regularly to remind you about your goals… particularly when you don’t want to hear them. This person must hold you responsible for explaining why you didn’t complete a task even when it feels uncomfortable.

Many people employ friends, family, and co-workers as accountability partners. It can work but be careful. The problem is true accountability can be antithetical to friendship and uncomfortable for a personal relationship. Tough stances must be taken that are contrary to how friends and family normally communicate. It can be dangerous if the person is not skilled at the process.

If you want professional accountability along with instructional wealth building education then my financial coaching services are an obvious fit. You will learn (1) the exact things to do (2) the simplest, most effective way to do them (3) and the correct order in which to do them. On top of that, you get a professional accountability partner to ensure regular progress along with process coaching to overcome all the obstacles you will inevitably run into.

For the right client the process produces more value than it costs. Click here to learn more and schedule your free strategy session.

Accountability Done Right Produces A Result No Matter What

My experience is that accountability relationships usually go one of two ways:

1. You either produce the results you want because you can’t stand hearing your own excuses.
2. …Or you end the process and drop the goal because you can’t stand hearing your own excuses.

Either way, something important is revealed. You breakthrough your barriers and produce amazing results, or you own up to the fact that your goal really isn’t a priority in your life so you drop the whole thing.

The point is you win either way. You get the goal or you overcome your personal self-deception and get on with your life knowing the truth. Even when you fail you actually win because you learn something valuable about yourself and move to the next level in your life.

As my friend Brian Klemmer shared with me, “Judge by results – often harsh, but always fair.” With accountability you always judge by results. They always tell the truth.

So if you’re ready to get results then accountability is a necessary tool. You have the knowledge and resources you need to put this tool to work right now and start building wealth.

The ball is in your court. You can either read this, think “whatever”, and move on to your next task… or you can do something meaningful with it.

This decision will make the difference between “more of the same” and “more-better-different”.

Which will you choose?

You Might Also Like…

• Warning! Why Most Wealth Building Programs Are Expensive Half-Truths: Learn the cause and effect chain that leads to true wealth, and discover which broken link in the chain has held you back from financial success… until now.
• Step By Step Goal Setting To Achieve True Wealth: Learn Todd Tresidder’s personal goal setting process that helped him retire early and wealthy… so that you can do the same.
• The Naked Truth About Multiple Streams Of Income… Revealed! How to avoid the inherent pitfalls lurking behind multiple streams of income so that you can profit from the benefits.
• How Does Your Wealth Building Skill Rank? Take This Test: Find out if you are on track or behind schedule and learn how you can make your money grow faster.

I continue to build out the Financial Coaching section of the site with new content to complete the vision I’ve always had for it. As part of that process I’ve recently added 4 new articles that you might find interesting…

• What Is Financial Coaching? Learn how financial coaching bridges the gap between knowledge and effective action by providing the missing ingredient holding you back from greater success…
• How Money Coaching Gets Results: Explains how money coaching provides three essential tools – a wealth plan, accountability and personal transformation – to overcome the three primary hurdles that keep most people from succeeding financially – no plan, no follow-through, and self-imposed limits.
• What Should I Expect From Financial Coaching? Discover how achieving financial freedom is about much more than just making money so that you know what to expect from the wealth building process.
• Frequently Asked Questions: Answers to the questions prospective clients frequently ask about money coaching…

For anyone considering a financial coaching relationship or is interested in building wealth these new articles should provide informative reading. Please let me know your thoughts in the comments section below…

]]> http://financialmentor.com/financial-coaching/new-financial-coaching-articles-added/4520/feed 2 http://financialmentor.com/financial-coaching/how-a-money-coach-is-like-the-plumbers-wife/4376 http://financialmentor.com/financial-coaching/how-a-money-coach-is-like-the-plumbers-wife/4376#comments Wed, 27 Oct 2010 10:35:22 +0000 Todd Tresidder http://financialmentor.com/?p=4376 I have a confession to make…

I work as a money coach and have been developing this web site for 2 years to promote my practice… but I’ve never built out the financial coaching section of the site.

Kind of funny, eh? Sort of like the plumber’s wife who can’t get her clogged sink drain fixed. Oops!

Yes, it’s true. I’ve added over 30 financial calculators and retirement calculators here, and I’ve provided over 1,000 printed pages of educational content on investment advice, wealth building and retirement planning in the Top 50 Articles section here, and I’ve even written 2 ebooks (with more coming shortly) here… but my poor little financial coaching section of the web site has remained ignored like the ugly stepchild who lives in the closet under the stairs (sniff, sniff, cry).

But all that is changing now…

I’ve spent the last couple of weeks reorganizing the existing Financial Coaching content, rewriting some articles, and adding what I call “A Smart Consumer’s Guide To Money Coaching And Financial Education.” It is a group of 4 articles that explain the lessons I’ve learned from working on both sides of the fence – both as a consumer and seller of financial education. I’ve learned how to build my financial intelligence without wasting a dime by getting the best value for my money when I purchase education, and I reveal all those insights to you in the following 4 articles – for free…

• 7 Rules For Buying Financial Education That Pays You More Than It Costs: A financial coach’s tell-all guide explaining how to get the best value for your money in books, seminars, coaching and more. (Important!! This article is very relevant to all my readers… even if you have no interest in financial coaching. It explains how to grow your financial intelligence in the most cost effective way by being a smart consumer of financial education products. Make sure you read this one if nothing else…)
• 3 Steps To Choosing The Right Money Coach: Provides step-by-step instructions complete with checklists explaining how to select the best coach to fit your needs.
• Beware of The Dream Merchants – 12 Warning Signs That You Chose The Wrong Coaching And Mentoring Service: Reveals the tell-tale symptoms that show your financial coaching company may be more dangerous than beneficial.
• Individual versus Group Financial Coaching – Which Is Best For You? Learn the benefits and drawbacks to each coaching product so that you can choose the one that best fits your needs. More expensive is not necessarily better…

These four new articles comprise the backbone of what will eventually become my Smart Consumer’s Guide To Coaching and Mentoring. I will be adding more articles over the next several weeks as I finally build out the financial coaching section of this web site.

No more plumber’s wife!

My goal is to help my readers (you) make smart choices about the financial education they consume. There is a science to the process of growing your financial intelligence that can save you a lot of money and heartache when you understand how to do it right. Do it wrong and the lessons are expensive.

Please give me feedback on these new articles in the comments section below. I really want to know what insights you get, what is missing, and any other thoughts you might add since this is all in the development stage. I need your feedback to know what works and what doesn’t.

I’m particularly excited about the first article on the list and hope you find it worthy of tweeting, liking and linking so we can spread the word and help others. I think it can save a lot of your friends serious money from all the rip-off seminar and coaching programs out there.

Tell me your thoughts in the comments below…

This story comes from a client who is a very successful trial attorney and was embroiled in a bitter legal battle. His case involved late nights and loss of sleep because of tight deadlines, a contentious judge, and other difficulties that won’t be mentioned to protect the guilty. In short, the stakes were high and the war raged with full intensity.

If you’ve never worked with trial attorneys it is worth noting how difficult their business really is. These people are warriors who fight big-stakes battles. The process is emotional and contentious – not exactly a process where concepts like balance and fulfillment enter the equation. It is full out war that results in victory or defeat. Period.

Anyway, this story is about the client turning to me in the depths of battle and asking for some perspective that could bring peace and balance to this process. Not an easy task, but below I share with you a highly edited version (to save you time) of that discussion.

Now you may be asking what does a trial attorney’s life have to do with me? The truth is we are all warriors whether entrepreneurs, investors… or trial attorneys. We are all fighting our battles to win and this message is relevant for all warriors in pursuit of success – which probably includes you.

I hope you find it helpful…

————————————

Step 1: Playing for victory…

You are a warrior and this is war. The key to victory is strategy. In every battle the outcome is determined by one or two key strategic moves. Your job as the general is to figure out what the key strategic moves are that will lead to victory and focus primarily on those. Do not let the hype and intensity of the moment distract you with superfluous, energy wasting nonsense. Focus on what is critical to victory. Determine those elements and focus for the win.

The other thing about a warrior is he fights to the death. Commitment and persistence are as important to victory as is strategy and training. Burn the ships in the harbor and leave no viable escape route so that victory remains the only acceptable solution. I have won many a battle through persistence alone against superior foes. Persistence rules the day in grueling battles such as this. Fight full-out all the way to the last breath.

Step 2: Life Perspective…

With that said, let’s be real – this is just a ‘game’ you are playing. It isn’t life. When you are 65 and holding your grandson in your arms this battle will mean nothing. From the perspective of your death this battle is about as significant as a gnat on the African continent. You are much bigger than your success or the games you play. Keep perspective.

Step 3: Putting it All Together…

Play to win because that is what you are there to do. Play smart and play full out or don’t bother playing at all. But also play with the perspective and healthy distance that this particular battle does not define your life or who you are. This battle is important and worthy of a full-out fight and you will do your best to win; yet, a healthy irreverence may bring just the confidence and distance necessary to turn the tide and assure victory.

Like all things in life the key is balance. The warrior lives in the present moment and is completely enraptured in the game. He plays full out because that is how games should be played. Yet, wisdom tells you it is exactly that… just a game. The world will go on. You are bigger than the games you play. Never forget that – in victory and defeat.

Play to win, but play with perspective.

———————————————-

Let me know your thoughts in the comments below…

For example, a financial coaching client became interested in a closed-end fund claiming to duplicate the performance of the Dow Jones Industrial Average while paying a 10% annual dividend. The problem is the claim of stock market-like returns with dramatically higher yields doesn’t smell right. You can’t get something for nothing so there has to be more to the story. The very characteristic meant to lure you in (high yields with stock market-like returns) should make you extremely cautious.

In this post I want to share with you the investment principles I taught my client when examining this investment as part of a new series highlighting coaching client success stories…

To begin, the first thing you want to notice about this investment is the attempt to offer above market returns. This is a classic sales strategy you will run across frequently that should always be a warning sign. Investment reality in a competitive marketplace dictates there can only be three ways to achieve above market returns...

1. A competitive trading advantage that captures exploitable market inefficiencies in excess of transaction and administration costs (this is the only good reason – all the remaining reasons are bad).
2. Taking above market risk (which provides no long-term advantage unless #1 above is valid ).
3. Investment fraud where the promoters are simply lying and misrepresenting in an attempt to dupe you.

This particular investment was an exchange traded fund offered by a big-name investment firm. This means the investment has passed the regulatory scrutiny of both the banking regulators and the securities laws. For these reasons, it is highly unlikely to be outright investment fraud but more likely a case of slick salesmanship.

Why? Because there is a huge market right now for any investment offering high yields because interest rates are artificially low so that retirees can’t make ends meet with normal yields. Many investors are desperate for higher returns and are taking inappropriate risks to earn adequate income from their portfolio.

So if it’s not outright fraud (#3 above) then let’s consider the odds that above market returns are the result of a competitive advantage (#1 above). The fact that it’s offered by a big-name, retail investment house and the portfolio is filled with the most popular and widely researched 30 stocks in the U.S. reduces the odds of a competitive advantage sufficient to produce a gross yield advantage of 10% (transaction and administrative costs must be factored in to give a net) down to basically nothing… zero-zilch-nada. There simply aren’t a lot of market inefficiencies in the most widely held stocks, and certainly there aren’t enough exploitable inefficiencies to produce an extra 10% annual yield.

That leaves us with principle #2 – risk profile – as the most probable explanation. I believe this investment has a risk profile that not one investor in 100 will figure out or understand. The organizers are using complicated options and derivative contract strategies to produce the excess yield. The end result is likely what is called a “fat-tail risk” – which means in layman’s terms that everything goes fine 95% or more of the time but blows up during times when the markets have extreme price moves thus eliminating any long-term advantage.

Again, this can be very complicated stuff when you get into these esoteric investment products using derivatives. The salesman will over-simplify the situation by claiming stock market returns with safe, high yields because a confused investor will not buy. He has to make it sound simple to get the sale; however, you know better because there is no free lunch on Wall Street. There is always a reason. Unfortunately, the salesman will get away with his claims because so few investors have the statistical and investment background to ferret out the implications (or financial advisers, for that matter)  or understand the legal disclosures and risk profile.

And if the fat-tail risk isn’t the problem then another place to look would be in “correlation risk”. In other words, the marketing materials claim the investment will perform “similar” to the Dow Jones Industrial Average but what exactly does that mean? There is going to be “basis risk” or tracking error where the performance won’t be identical to just owning the 30 stocks outright. How much that basis risk costs you in the future cannot ever be known with confidence due to the fat-tail risk cited above, but you can at least check historical performance very closely to discern how well it tracked in the past. Watch carefully for the consistency of the tracking and where it fails. The failures will provide important clues.

These are just two of the most obvious risks that I wanted to mention, but there may be others as well.

In summary, the first thing to learn whenever an investment is sold with above market returns is that you must check further by performing thorough due diligence. Claims for above market returns is always a warning sign to dig deeper. When examining this particular investment we saw the above market return is not likely explained by outright investment fraud or competitive advantage due to its specific characteristics. That leaves a poorly understood risk profile as the likely culprit necessitating more thorough due diligence to resolve.

Anyways, I hope this line of reasoning proves as helpful for you when considering some of the esoteric investment alternatives produced by the financial services industry today as it did for my coaching client. As he builds his portfolio he will be much better prepared to analyze these types of investments in the future as a result of this education. Similarly, you will run into this stuff as you build your wealth so I thought it was important to share these principles with you as well. I hope it helps.

Please let me know your thoughts in the comments area below…

You Might Also Like…

• Deadly Dozen Investment Mistakes To Avoid: Reveals the 12 most dangerous investment mistakes that keep you from financial success.
• Five “Must Ask” Due Diligence Questions: Learn the five due diligence questions that can help you avoid losing investments before they cost you money.
• Top 26 Warning Signs Of Investment Fraud: How to uncover even the best disguised investment fraud before it costs you money.
• How To Find Financial Advice You Can Trust: Learn 12 essential questions that can separate good financial advice from bad.

In a newly published article titled “Financial Coaching vs. Financial Advice” I explain in detail how each profession operates and what you can reasonably expect from each service. In a nutshell, financial advice seeks to sell you a fish so you can eat for the day; whereas, financial coaching teaches you how to fish so you can independently get all the fish you want for the rest of your life.

In this new article on financial coaching I show you how:

• Traditional financial advice has failed to serve consumers adequately.
• Financial coaching is focused on your education; whereas, financial advice is focused on investment product sales.
• Traditional financial advice has an inherent conflict of interest that biases the information you receive; whereas, financial coaching has no such conflict of interest.
• and much more…

In fact, I provide a table detailing 14 key differences between financial coaching and financial advice. This table has been copied on other web sites and cited in magazines (it came from my old web site years ago) so you may want to check it out. In one glance you can become clear on the differences between financial advice and financial coaching so that you can decide how to best utilize each service.

I hope this helps, and please let me know your thoughts by leaving a comment below.