Wednesday, February 3, 2021

Financial Advisors

Finding a good financial advisor - like Diogenes looking for the last honest man!

Diogenes - livin' in a barrel, hanging out with dogs - musta been a financial advisor took his every last cent!

A reader writes that the complexities of claiming Social Security and structuring your retirement are such that a good financial advisor is necessary.  I agree with him and offered to hire him on the spot. I have not heard back from him yet. Problem is, financial advisors don't work for free, which is a problem if you are of limited means.  It is possible to find one to work for a fixed fee, but don't expect it to be cheap - even an hour of their time is going go cost you money, but may be less costly in the long run.

Most financial advisors - particularly those working for investment firms, insurance companies, and banks - charge a percentage of the money invested as their fee. In a way, this is like how architects work - charging a percentage of the overall project as their fee.  Maybe if you are hiring Frank Lloyd Wright to design your office building this makes sense.  But for the rest of us plebes, well, getting a plan from a plan book makes a lot more sense - you pay $X for the blueprints and are done.

I was going to build a structure once and talked to an architect - the fees they wanted were astounding.  They were used to doing custom high-end homes for Cornell college professors who had more money that God.  I was just looking to build a barn.  But it was educational.  Seems like an odd arrangement, if you ask me, as the architect has no incentive to reduce the cost of the building, and in fact, is motivated to make it as expensive as possible, as that would increase his fees.  But it illustrates that what works for the big boys doesn't always translate to us little people.

My first experience with a financial advisor was with my Father.   When he lost his job, he became a "financial advisor" which isn't hard to do - he contacted a company that sold investment plans, and after a little training, he was "hired" which is to say, he was given the starter kit and sent out on his own to sell retirement plans.  He sold a few, I guess, to friends and contacts he had in business.  He sold a retirement plan to a small company and got a small paycheck from that - and continuing checks, down the road, for many years - at least that was what he told me.

He also set up an IRA for me, which I put a paltry $500 or so into.  It was in American Funds, which I later learned had a very high load and expense ratio.   So he took a "taste" of my own retirement as well.  No love lost there.  It would not be my last experience with American Funds, however.

My next experience was with Life Insurance salesmen.  And that's all these folks are, is salesmen. My Dad called himself a "Financial Advisor" but in reality, he was a salesman, paid on commission for every investment he sold.  It would be akin to calling a car salesman a "car consultant" - which some dealers have tried to do.  But other than the ill-fated Saturn, most car salesmen are on commissions, so their "advice" is usually "buy this car" just as the "advice" you get from a "financial advisor" is "buy this fund!"

I was contacted by a Northwestern Mutual agent, that I think my boss sic'ed on me.   That's how the salesman's gig works - you're constantly looking for "leads" and get them anyway you can - friends, family, referrals from clients (until they go sour) and so on and so forth.  He was a good salesman and sold me a whole life policy, a term life policy, an adjustable life policy, and a variable life policy.  You know, I shouldn't have gotten that tattoo on my forehead.  You know, the one that says, "SUCKER"!

Seriously, though, we're all adults here - he was a salesman, and I was a prospect.  He was selling, I bought, and there is no one to "blame" but myself for buying.  And while the money would have been better spent in a Roth IRA or my 401(k) or even paying down debt, the policies did exactly what they claimed they would do, down to the letter of the contract, and while not a great "investment" they today pay dividends and go up in cash value every year, so I will hang on to them.

But what was annoying to me was other than "buy more policies" I could not get any financial advice from my financial advisor as he wasn't really a financial advisor but a salesman.  Early on, he would prepare these very detailed reports for me, which were somewhat helpful. Once I stopped buying polices from him, these reports dried up.

He also set us up with a SIMPLE IRA plan for my business - and once again, I was lured into the world of American Funds.  I suspect he took the same "course" as my Father did and was anointed as a salesman for them.  Hmmmm.... I wonder if Northwestern approved of that.  So once again, I was in a high-load and high expense ratio fund, and as I recall, I asked him point blank about loads and he said there were none or "don't worry about that" or whatever. This ended up being a pattern with all investment advisors - when you ask them how they get paid they get evasive, quickly.

Speaking of which, I did have an experience with another life insurance salesman.  I was working for a small firm, and they brought in these two guys - like a scene from Glen Garry, Glen Ross - to sell us a retirement plan.  I kind of screwed up the deal for them by asking a lot of pointed questions and they admitted that they were insurance salesmen and the plans they were selling were actually life insurance policies, not a traditional investment account.  I suspect it was a variable or adjustable whole life policy. When the only tool you have is a hammer, every problem looks like a nail, right?   We noped out of that.

What irked me was that Northwestern Mutual Life Insurance re-branded itself as the "Northwestern Mutual Financial Network" and started pitching itself as a financial investment firm - with "advisors" helping you.  But my "advisor" disappeared off the face of the earth when I stopped buying policies, and no one at Northwestern has been able to give me any concrete advice as to what to do with my policies as I approach retirement - do I cash them in?  Let them be?  Roll them over into an annuity? What?

The only good "advice" I got was from someone at the home office, who encouraged me to convert my expensive adjustable and variable policies to "paid-up life" policies, which turned what was a $1000-a-month expense into a small  (tiny) cash-generating machine.  Of course, I doubt I came out ahead in that deal, either, as they no doubt got a commission on that.   My "agent" never suggested such a thing and at that point, wasn't returning my calls. Years later, I looked at his Facebook page, and under "favorite things" he had listed "Fox News" - it is all starting to come together, ain't it?

When I closed my shop, I moved my retirement accounts over to Fidelity, which Mark's Father swore by.  Mark's 401(k) was rolled-over into Fidelity funds, and once the balance crept up a bit, we got a call from an "advisor" who had been "assigned" to us in Jacksonville.  They had a fancy office in a glass cube with marble countertops and free coffee.  We went to visit and he suggested "adjusting" our portfolio by selling some funds and buying others.  Again, I asked him about fees and how he got paid and he got very, very vague.  His main piece of advice was that I take my funds from other accounts, such as E*TRADE and put them into Fidelity.   No doubt he got a taste of that, but I will never know.

After several visits over a period of a couple of years, he stopped calling us.  He wanted us to mortgage our house and then give him the proceeds to "invest" for us.  We should live in debt and then invest!  I explained to him how that all went wrong - for so many people - back in 2008, when investments tanked and housing prices dropped - but those mortgage balances stubbornly refused to go away.  I wasn't about to take that risk after seeing it end so badly for so many.  Plus, where would I get the money to pay this mortgage?  I was retiring at that point.

So, once he realized that we were "tapped out" in terms of new money to invest, he stopped calling us.  And you would think I would be catching on to the game by now, even after I had that tattoo removed.  But I am particularly dense and beat my head against the wall a lot - which if you read my blog, you would appreciate.

Turns out, the guy was a salesman - duh!  He wanted me to roll over funds to Fidelity, and when I did, well that was the end of the game.  Since I was retiring and didn't have an income stream he could tap, well, I was of no use to him. These guys are so friendly when you are buying, they drop you like a hot potato when you stop buying.

A few years later, I rolled my Fidelity funds into Merrill Edge, as they were actually offering cash bonuses to get me to move my funds there.  Did I come out ahead in that deal?  Beats me - while there was no line-item demarcation as to where they make their money (as there are no trading fees) I am sure they are making money somewhere.  No one works for free, certainly not Bank of America/Merrill.

But that was not the end of it, and actually this is out of order.  Before we tried the Fidelity "advisor" we got a call from a State Farm agent on rich people's island. She was offering financial consulting services and we could come in for a free analysis!   I figured any advice is helpful so we went.  We had used State Farm in the past for car insurance, homeowners insurance, boat insurance, RV insurance, umbrella liability, and insurance on our rental properties and office building - quite a lot of insurance!  We even had a small whole life policy for Mr. See (and still do, and it goes up in value by more than the premiums, every year).   The Agent was a nice lady in Old Town and one day she up and quit with little notice.  Seemed odd.

But it turns out that a lot of Agents quit about that time, as they were being pressured (apparently) to become Financial Advisors as part of something called "State Farm Bank" (stop me if this sounds familiar) - as like Northwestern and even the local convenience store, everyone wants to get in on this "Financial Advisor" thing.  So she noped out of that and our new agent in Virginia wanted to have us come in for a financial overhaul.  Well, at that point, we had left State Farm, or should I say, they left us.

They refused to write homeowner's polices anywhere near water, so we had trouble getting insurance on our condos in Florida and on the house in Jekyll.   State Farm forced us to shop around on insurance and we did - and realized that State Farm is probably only second to Allstate in terms of cost.  We switched our car insurance to GEICO and never looked back.  Today, we still have the condo policy and Mark's life policy.  That's it.  From a dozen policies to two, and all because State Farm dropped the ball.

But getting back to the Financial Analysis, we drove over to rich people's island and the agent was there - Karen, I think her name was - along with Mitch from Downtown.  Mitch made the pitch that we should take all of our investments from various sources, including our life insurance policies, and transfer them to State Farm Bank.  I mentioned this to someone else and they said, "Let me guess, they wanted you to cash in your life insurance and put it into a Phoenix policy?"  Yup

Mark was ready to leave at that point. I asked some pointed questions and the agent admitted that the cost of all of this was a 5% commission for her.  "Why would I want to cash in all these investments and right off the bat lose 5% of my savings?"  I asked.  "Convenience!" she replied.   We left. 

You see the pattern here - these folks are not so much "Financial Advisors" as they are salesmen and salesmen work on commission.  Coffee is for closers!

Sadly, this seems to be the norm, and if there is an honest Financial Consultant out there - who clearly tells you how he is getting paid out of these deals, or charges a flat fee, I haven't me him, yet.   And the business is booming.  I have referred to, in the past, a certain chain of "Financial Advisors" or "Wealth Managers" who operate out of storefronts all over America.  They have a name that sort of sounds like the name of a major investment house - or that company that makes Gene Rayburn's suits.   They don't work for free either, and again, caveat emptor.

Now, some folks have proposed changing all of this.  Those evil Demon-crats, you know, the Socialists, like Elizabeth Warren, have proposed this radical idea that a Financial Advisor should be governed by the Law of Agency.  What is the Law of Agency, you ask?  It is a very simple concept in Commercial Law, that if you act as an Agent for someone, you are supposed to act in their best interests.  Thus, for example, if someone makes you their Agent, you can't just steal their moneyRepublicans - those guardians of Truth and Faith and the Constitution - argue that such a law would be onerous and an "unnecessary regulation" on business and cost "jobs" which it is the government's obligation to provide.  I mean, you know how hard it is to not steal from people, don't you?  So if Elizabeth Warren had her way, it would put honest, Fox-News-Watching Republicans (i.e., "the good guys") out of business for good.

They actually instituted this regulation in the waning days of the Obama Administration.   Fortunately for Financial Advisors, Trump quickly reversed course, as he knows, firsthand, how hard it is not to steal.  I mean, people just leave piles of money laying around and you're not supposed to take some?  What do they think we are, Superman?

So that is the problem in a nutshell.   The Law of Agency doesn't apply to salesmen, that is what most Financial Advisors are - salesmen.  If you hire a Real Estate Agent, they are bound by the Laws of Agency and can be sued if they act in their own interest and not yours.  For example, I know of one agent who thought she was "doing a favor" for a client by purchasing their house from them, when a sale fell through.  She flipped the house within a couple of weeks for a tidy $50,000 profit.  Under the Laws of Agency, she could have been forced to "disgorge" (literally 'throw up') those profits to her client.  She could also lose her license over shenanigans like that.

Of course, Real Estate Agents are also salespeople and yes, they work on a commission - 6%, which is not far off what some Financial Advisors want.  So they will try to sell you a house, and yes, some of them are quite unscrupulous even with the Laws of Agency in place.  A friend of mine went to one Real Estate Agent, who showed them three houses - none of which were in the neighborhood they wanted, the price range they could afford, or in good condition.  "I showed you three houses - which one are you going to buy, because I'm busy!" she said.  Or the agent who sent us some printouts of listings and told us to "go look at them and tell me when you are serious!"  Two years later, when the market had tanked, she got around to calling us and when we told her we already bought a house through another agent who actually wanted to show us houses, she screamed into the phone that she was "owed" a commission on the sale as she was "our agent" - a woman who I never met and who I had only one, ten-minute phone call with.  That's the sort of crap you deal with, even with the Law of Agency in place.

Are there honest Financial Advisors out there?  Probably, but I have yet to meet one.  And I am sure that 99% of Financial Advisors consider themselves "honest" too - they are just helping people out, right?  And the reason they are against the Laws of Agency being applied to their profession are legit - it would create all sorts of additional expenses and difficulties and not accomplish much for their "clients" - right?   No one considers themselves to be a crook, even the head of a drug cartel or the guy on death row who was a serial killer. Our prisons are full of "innocent" people - I saw it on Netflix!

A true "Financial Advisor" would charge you a flat fee to review your financial situation and prepare some sort of report with recommendations as to how to proceed - and those recommendations not being tied to commission-generating sales.   Maybe such people exist, like I said, I have yet to meet one.   The problem is, of course, that no one would pay for such advice, as the guy across the street - the aforementioned store-front investment house - is offering "free" advice.  Heck, one of these fellows sends me postcards offering not only "free" investment advice, but a free meal at a local restaurant!  Why would I pay for advice when I can get paid to get it!  That's the mentality, anyway - which is why the Timeshare people offer a "free barbecue cooker" if you come to their seminar.  Savvy savers know how to score on freebies!

Sadly, so few of us understand investing very well.  I started this blog because I realized I was a babe-in-the-woods and knew little, even though I was smart enough to get both Engineering and Law degrees.  An education does not equate with smarts - particularly in fields you are not familiar with. Over the years, I have learned a lot - often from my readers, who share their experiences.  You have to wonder, when so many "smart" people can't figure this out, how others get along.

And sadly, there are so many websites and discussion groups and social media sites and blogs offering "free" financial advice, much of it unconventional advice which often promotes consumerism. And yea, sometimes these folks have financial interests diametrically opposed to yours.

For example, consider a friend of mine (or many friends of mine) who are elderly and not quite senile, but nice folks with a basic education.  The "nice man" at the investment house calls them every few months to recommend "re-balancing" their portfolio.  Is he doing them a favor, or churning their account for fees?  We have no way of knowing.

We are so addicted to "free" things in this world, we fail to ask the pointed questions.  How are they paying for all of this?  How does an investment house offer "free trades" if there are concrete expenses involved in buying and selling stocks, if nothing more to operate the computers that make these trades?  And the answer probably is, they hope to scrape a little in the margins, as although the nice computer reports you get show that you "own" so many shares of a stock or fund, the actual shares are not sitting in the Scrooge McDuck Money Vault with your name on them.

Funny how people still believe in the Scrooge McDuck Money Vault. I had to disabuse Mark of the notion that his Social Security was in an "account" somewhere with his name on it, as he was concerned that if he took a Spousal benefit (or vice-versa) it would somehow drain "his" account, which has all the money he paid in Social Security taxes in it, stacked in neat piles, with the combination being his Social Security Number.  The money vault does not exist.

So, even if there was a Financial Advisor who would charge me a flat fee to analyze my entire retirement portfolio - including investments, insurance, Social Security, Medicare, health insurance, real estate, etc. - as well as my life expenses - I suspect it would be a pretty costly fee to so do.  Maybe there is software package out there that does this, but it would not be cheap, either.  A "free" on-line analysis? Probably a pitch for selling an investment plan.

Maybe that is the only thing I have learned over the last decade with this blog - nearly 5,000 postings later:  Stop being a chump.   It is not that other people are being evil or "greedy" by looking out for their best interests, only that everyone should do so, including myself.  And understanding other people, for example, is to understand their motivations and realize they are acting in what they consider to be their own best interests as well.

A reader writes:
Problem is, the truly independent advisors (Registered Investment Advisors or RIAs, searchable here usually only work with clients with a minimum of 100-250k in investable wealth. These are the people with CFPs (searchable here, CPAs and CFAs.  Everyone else gets salesmen.

That's part of the reason why the younger crowd is so into DIY finance and Reddit forums; a real financial advisor wouldn't touch them with their minimal wealth. Luckily some 'robo advisors' have come up, which are essentially online calculators that put you into index funds.

I used to work for [name redacted], so we sold mutual funds wholesale to advisors. It was like a Vanguard, but we didn't work with retail investors.

Good information to know and some good insight. Like I said, when I first started out, most advisors were like "Well, get $5000 together and then call me!" and I didn't have $5 much less $5000. For the investor starting out, the 401(k) is the best deal - it allows you to invest, tax-deferred, a little bit at a time, taken out of each paycheck. And back in the day, some employers would match funds. 100% return on your investment - immediately. You can't beat that, not even on wall_street_bets!

Sadly, today, not many companies match 401(k) contributions.

UPDATE: More readers write:

Here is a fee-only national network of advisors -
I’ve never used them, but their mission statement seems right.

Personally I use Evanson Asset Management to manage my portfolio, (and give me access to DFA funds, though the advantages of that are hotly debated.) Evanson charges a flat fee quarterly . If I want analysis of social security strategy or other financial planning they will charge a flat hourly fee. $175/hour. They claim most plans cost $600 -$800 to do and are usually a one time thing only.

If you want to read good books on investing I like William Bernstein’s books. The Four Pillars of Investing is very good. He has a brief pamphlet available for free online mostly for young people, but its fun and a quick informative read. If You Can: How Millennials Can Get Rich Slowly.

Get rich slowly - sounds like what I have been preaching. Or at least become comfortably middle-class. The folks who try to get-rich-quick usually end up broke.

The big problem I have with financial planners and advisors is the same conundrum with these scam artists who purport to sell you a "sure fire money system!" If you had the goose that laid the golden egg or the secret to wealth, why would you tell anyone?

So when someone tells me they have a secret to wealth, either it isn't a secret, or it isn't a way to wealth.

If financial advisors were so smart, they would not be advising me, but making big bucks for themselves. Most are merely salesmen, selling mutual funds or retirement plans. Understand that going in, and you'll be fine. I didn't understand that at the time.