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"In the investment business, you go to school every day, but never graduate." - Don Hodges

Beware of Brokers Bearing Gifts

by Hodges Private Client Team, on Dec 3, 2021

A Seat at a Table That You Might Not Want

This is a must read for anyone who would categorize themselves as highly affluent (the industry term for this is “high net-worth”). If you have liquid investible assets of $5,000,000 or more, you probably amassed that amount of money by being quite gifted in your respected occupation. Perhaps you sold a business and recognized a windfall, or perhaps you inherited the money from your family or the proverbial “rich uncle”.

Regardless of how you attained that many zeroes, often times there are a whole set of emotions that come along with that. Some might feel euphoria. Others might feel an overwhelming burden of how to deal with it, or what to do with all of it? When you’ve amassed that tidy sum, you’ll have plenty of options presented to you. Heck, at times it might even seem like opportunities are coming out of the woodwork and mysteriously finding you?

Perhaps you now feel the need to find a financial advisor. So, you do some on-line searches, call some friends, and maybe even your lawyer or accountant. You then whittle down the long list to about 3-5 firms and go hear their pitches. After hearing them, they all kind of sound the same, but for that one advisory group who talked about the special position that you are now in. You’ve made it to this magical and elite club, and there is a seat at the table for you that is not available to most. With your new level of wealth, you should be shown only certain types of investments for special people like yourself. You’ll hear words like “private equity” or “venture capital”, for it is in these vehicles where the affluent can not only get rich, but really rich! You will also be told that these types of investments are not correlated to the equity markets (highly debatable). All I can say is be careful what you wish for.

In no way am I shedding any negative light on private equity or venture capital investments. These serve a purpose, and in the case of venture capital, it’s one of the cornerstones of our capitalist society. They might be just a fine proposal for a client who previously had extensive knowledge with these types of situations. Perhaps you retired from investment banking or another endeavor where you’re able to make a better assessment of the risk/reward trade-off? However, for the average person with limited investing knowledge, just because you’re a freshly minted multi-millionaire, does not necessarily qualify you as a candidate. Why? Because with a quick Google search, one might be able to find some articles warning about these types of investments for the investing public. The crazy fees they generated, the returns they forecast, versus what they actually delivered. You might even find articles about brokers who sold these investments to clients wishing that they had never done so.1

So, what’s the allure you might ask? Advisors all need a way to differentiate themselves, and to the newly ultra-wealthy, this seems like an enticing bait. It also makes for far more interesting chatter at a cocktail party amongst your peers. You’d have far more people bending their ears to hear about all the accolades of a special alternative investment. Whereas a discussion around a diversified portfolio of stocks just doesn’t have the same excitement as the aforementioned topic now does it?

Now let’s take a step back for a moment and not make any hasty decisions. You are now in possession of a life-changing amount of money, and you’re never going to get a second chance with this one. There are no “do overs” for this situation. So perhaps a well-constructed portfolio of stocks, professionally managed by a group of analysts who know a thing or two, is just what you need in this instance. Think about all the positive attributes of handling your affairs this way. You’ll have daily liquidity in everything you own (some alternative investments have multi-year lockups), you can make gifts of cash or stock to your heirs, if you own dividend paying stocks, you can take the income stream to live your life.

In these instances, I like to reflect back on the story of the Tortoise and the Hare. If you are reading this, and you do end up in an enviable financial position like I described, perhaps giving that story a quick read might be the best place to start.

If you ever make millions of dollars, don’t try to get rich. -Wayne Cleveland


Hodges Private Client is a program offered through Hodges Capital Management, Inc. (“HCM”). HCM is an Investment Advisory Firm registered with the Securities and Exchange Commission (“SEC”), is a wholly owned subsidiary of Hodges Capital Holdings and serves as investment advisor to the Hodges Funds. HCM is affiliated with First Dallas Securities, Inc, a broker-dealer and investment advisor registered with the SEC.

This discussion is not intended to be a forecast of future events and should not be considered a recommendation to buy or sell any security. Past performance is not indicative of future results. Investing involves risk. Principal loss is possible. Investing in smaller companies involves additional risks such as limited liquidity and greater volatility. No current or prospective client should assume that information referenced in this communication is a recommendation to buy or sell any security or is a substitute for personalized investment advice from your individual advisor. HCM does not provide tax or legal advice. Consult your tax or legal advisor for any related questions.

All information referenced herein is from sources believed to be reliable and is provided as general market commentary and does not constitute investment advice. This material was created for informational purposes only and the opinions expressed are solely those of HCM. HCM shall not in any way be liable for claims and makes no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information. The data and information are provided as of the date referenced and are subject to change without notice.

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