Thursday, May 17, 2018

Investment Advisers

Investment advisers get paid - and the money that pays them comes from you.

In a recent article in MarketWatch, early retiree Chis Mamula recounts the worst investment advice he ever got.  He claims to be retired at age 41, after making an awful lot of money and investing it wisely, but points out that due to excess fees from investment advisers, as well as poor investment choices and tax problems, he could have easily socked away a million dollars more.

Let me just point out here that while I admire Mr. Mamula for retiring at age 41, I think he's one of this new generation of people who claim to be retired, when they really are not.  As long as you're engaged in a money-making venture for profit, you're not really retired.  If a person claims to be "retired" and yet to runs a website or a podcast or whatever (usually hyping early retirement!), particularly one that is monetized, it's not really being retired.  They're just working in a different line of work.

But I digress.

What interesting about the article is at the author came to the same conclusion I did many years ago. Namely that investment advisers can be a double-edged sword.  They can provide you with some good advice, but they also want to be paid for that advice.  Nothing in life is free.  Relying on recommendations from family or friends for an investment adviser is probably short-sighted at best.

Yet when I talk to most people here on retirement island, or my friends down in The Villages, they all say they don't know much about investing, and just hand over all their money to "The Guy" - who invests it for them.  And without exception they all love "The Guy" that they use for their investments, and say he's doing great things for them.  But in many cases they have no idea a load or no-load fund is, or what expense ratios areThey're not really sure how "The Guy" gets paid, as it is not really itemized on financial statements.

And quite frankly, when I started this blog, I had no clue, either.  Today, I have half a clue, which is still a half-clue short of where I need to be.   The 401(k) and IRA have forced us to become investors, and few of us have the skills to do it.   I have stumbled along - like the author of the Marketwatch article, making expensive mistakes along the way.  By the time I am dead, I will have it all figured out - by then it will be too late to use this knowledge.

My first experience with an investment adviser was when I was very young.  I called an investment adviser and ask him how to start an IRA.  He said "get together $5,000 and we can talk."  But of course I didn't have $5,000.  And I realized right there that investment advisers earn commissions on the money that is invested, and therefore they want to see a certain sizable amount of money before they'll even talk to you.

My second experience was with a family recommendation - namely my father.  When my father was forced into early retirement age 55 he dabbled a bit as a financial adviser.  It is a pretty lucrative racket.  You set up a retirement plan for a company and you get commission checks for the rest of your life - as he did.  Not big checks, but checks, nevertheless.   I wanted to invest some money and he set me up with American funds which I didn't realize had huge 5% upfront load -  which he got a taste of.  My own dad basically fucked me on a retirement account!

Of course, all is fair in love and war, and I've certainly had cost him far more to raise me as a child than he managed to scrape from my pitiful IRA account.   So we're more than even, I think.   Although, how much a price do you put on emotional cruelty?   Just kidding!  Parents aren't perfect, to be sure.  Just grow up, move away, and move on with life.   There is a happily ever after, really!

My next experience was with Northwestern Mutual.  My Northwestern agent was very good at selling me policies and investments because he got a commission on each one of these.  He put me into some funds, which I could have sworn he said didn't have loads but later on I found had very high loads and expense ratios. Yes, American Funds, once again. When I stopped buying new products from him,  he stopped returning my calls.  What I wanted was advice, and I never seemed to get that.  In fact that's a common denominator among financial advisers I've talked to - you ask them how much money you need for retirement and they say, "that depends" and then try to sell you another product.

My next experience was with State Farm.  State Farm decided to become a bank and handle people's investments, which is a very lucrative deal.  The local agent and invited me over and I showed her my entire portfolio.  She suggested I cash in everything including my life insurance and hand it over to her for which she would get a 5% commission.  I wasn't ready to hand her a payday of $50,000 just for "the sake of convenience" as she put it, and we walked away.

We had a number of funds with Fidelity, again based on a family recommendation - this time Mark's father.  Mark's dad always put everything in to Fidelity because "The Guy" he went to at Fidelity was so smart and gave him good returns on his investment.  And he did pretty well with Fidelity and we've done pretty well with it as well.  But once our portfolio reached a certain amount, we had phone calls for them asking us to come in and talk with an adviser.  And I'm not sure what the adviser did other than "rebalance" our portfolio.  And it was never clear to me whether he was getting a commission on this or not.

Here's a clue: people don't work for free. Those fancy offices with the glass walls and the marble countertops aren't donated.  A recent article about Fidelity reports that some Fidelity advisers were abusing the reimbursement program for home computers.  They would buy a computer for home office use, and then return the computer to the store and get a refund after submitting the paperwork to Fidelity to be reimbursed for up to $10,000.

That's an awful lot of money - can you guess where it came from?  Yes it was paid for by the customers of Fidelity, indirectly. I'm not taking a particular piss on Fidelity here, all of these brokerage houses are about the same.  They invest your money - billions and billions of dollars - and take a tiny percentage off the top, which is how they earn their living.  How much they take varies depending on the brokerage house involved.  As I noted, the American Funds my dad (and my Northwestern Mutual adviser) put me into, had very high load fees.  Fidelity was somewhere in the middle to low-end, and other companies like Vanguard have very very low fees.

Some places charged me $20 a trade to buy stocks, which dropped to $9.99, then $7.99 and today, free, at least with Merrill Edge.   Free trades makes it possible to create your own "mutual fund" of stocks, with few fees.  Note that if you buy some mutual funds through Merrill, there are some fees involved, if the funds are managed by another company (Fidelity, Vanguard). 

The problem is it took me more than 30 years to learn all of this, and there were a lot of painful lessons involved.  The author of the MarketWatch article says about the same thing.  He was making a lot of money and investing it, but had no clue about what was going on.  He had to educate himself about investments - and realized it really wasn't all that difficult.  In fact, given the seriousness of the subject matter and how vital it is to your basic survival, it is someone ironic that people take such a laissez-faire attitude towards something so important in their lives.

The few people that do try to take control of their finances often do disastrous things.  These are the folks who invest in Bitcoin or gold or whatever get-rich-quick scheme comes down the pike. They are convinced that the people putting their money into mutual funds are a bunch of chumps - and they are going to beat the system by investing in some scam or con, instead.  Usually, they lose their shirts, become bitter, and say it's the government's fault.

There is however, a happy medium.  You can educate yourself about finances and make more rational choices. You can also accept that you're going to make some bad decisions and lose some money - that's the nature of the investment game.  And some of those poor choices are going to be paying too many fees to investment advisers.

What should you look for in an investment adviser?  It's a tough call.  If you have a 401(k) through your company and are invested in one or more of a number of mutual funds they offer, you probably don't need an investment adviser until you approach retirement, or rollover your 401(k) into an IRA.

There are plenty of investment advisers and banks out there who will encourage you to rollover your 401(k) into an IRA.  And I'm not saying it's a bad idea - I've done it every time myself when it left a job.   The idea of leaving my money with people who I used to work for - who may not be happy with me leaving - didn't strike me as a good idea.   These investment advisers want people to roll over the money to their company, so they can take a little taste of it as it passes through their hands.

The thing to do is educate yourself about loads, both front-end and back-end, as well as expense ratios. You can look all this stuff up on the internet as I illustrated before in this blog (often thanks to helpful readers!).  When somebody suggests a fund to invest in, you can research this information online.  It is like buying a car - you'd go online to see what a reasonable price is, before sitting down at the dealer and signing on the dotted line, right?  Same is true for investments.  Do the research, do the math.

Also, ask direct an honest questions of the adviser as to how he's being paid for this. Most will give you elusive answers - I've never gotten a straight answer myself - but if you push the matter they should tell you.  Walk away from someone who's deceptive - even the tiniest bit of deception, as we know, is a telltale of what is to come.

And never, never ever, give a financial adviser or broker trading authority on your account.  If you are investing for the long-term there should be no reason for you to trade funds or stocks more than a few times a year at most.  Anything else is just gambling.  And investment advisers and brokers get paid on how many trades they make and it's been shown in the past that some crooked brokers will trade an account down to zero, collecting fees for each trade.  Some unscrupulous Brokers have ripped off old people off, buying and selling the same stocks multiple times in one day, just to generate trading fees.

And beware of any broker from Madison County, New York - my hometown.

The author of the MarketWatch article doesn't say it exactly how he get ripped off.  He does mention paying excessive fees, which over time can add up to a lot of money.  He also mentions having undesirable tax consequences, which sort of had me puzzled.  I can only guess that perhaps his investment adviser sold some stocks and created huge capital gains problems for him during the year which he did not anticipate.

But overall even though the author is vague as to exactly how he lost money (which would have educated all of us as to how to avoid these pitfalls) he does make a good point.  Going with someone based on family recommendations, or  recommendations from your doctor, is probably a bad idea.  It's a better idea to educate yourself about finances. The more you learn, and the more you know the better off you'll be.

It's like owning a car.  Even if you never turn a wrench on a car, the more you understand how it works, the better off you'll be when you go to see the mechanic.  Because you'll be able to spot when he's bullshiting you and when he's telling you the truth - and be able to tell a good mechanic from a bad one.

As I noted earlier post, there was an article online where a woman gigglingly complained that her car needed "A new evaporative emission canister, whatever that is!" as if being ignorant of this was some sort of badge of honor.  Indeed, many people wear ignorance as a badge of honor, thinking that actually knowing things is somehow plebeian.  I guess this starts in grade school, where you get mocked for raising your hand and having the right answers.  But, actually the opposite is true -ignorant people usually end up poor and worse off than people who bothered to learn things.  And for the life of me, I've never heard of an evaporative emissions canister wearing out on the car so I think she did get ripped off.

It's not like this stuff is hard to learn - we have this thing called the internet.  You can Google things and learn a lot, provided you can filter out the bullshit from the truth.  And of course in the financial field the bullshit will be the get-rich-quick schemes and discussion groups exhorting you invest in Bitcoin or dot-com stocks, or IPOs or gold or whatever shiny things coming down the pike.

But there are a lot of other financial sites and give you a treasure trove of data, although they are not as sexy and stimulating as he get rich-quick-scheme sites. But then again, that's probably life in general - anything that seems like cotton candy fluff is appealing, but it's probably bad for you. Broccoli and the other hand might make you regular but is really less sexy - unless you covered it with cheese.