We’ll just say it. Most financial advisors – or brokers, or agents, or wealth managers, or whatever they call themselves – are either crooks, incompetent, or both. After over thirty combined years of doing this, we’ve seen it all, from advisors who don’t understand basic investment theory, to outright fraud. Luckily, there are very few Bernie Madoffs. The majority of offenses are subtle, usually go unnoticed by the client, and are detrimental over the long term – when it becomes too late to fix it. And the subtlety extends to both incompetence and crookedness. If we all gathered around the campfire to hear our stories of all the offenses we’ve seen, we’d burn out about fifty campfires. But allow us to share just one, as exhibit A to our opening statement.
Let’s call him “Jim”, for anonymity. He’s our newest client as of Tuesday, who came to us after meeting with another advisor.
Jim met the other advisor at a “dinner seminar”, believing that he would learn about social security issues, as advertised. What ensued was a 45 minute sales pitch for equity indexed annuities. If you don’t know what those are, know this: they are one of, if not the, worst investment vehicles. The returns are awful, and the costs are high…but they pay hefty commissions to whomever cons you into one.
And Jim got conned. The advisor told him that mutual funds are dangerous and can go to zero. Yes, he really said that. (Note: they cannot). The advisor showed him a chart that led Jim to believe that this annuity produced higher returns than the S&P 500. How? The chart showed the S&P without dividends, which accounted for a third of the return over the time period shown. That is not just misleading; it’s an outright lie.
Jim is in retirement, and no investment should be made without a thorough knowledge of one’s budget and income needs, both of which determine the time horizon and risk level for an investment – in other words, a detailed distribution plan. Of course, the advisor made no such effort.
Both incompetence and crookedness were on display – a rare feat, as it’s usually one or the other. Luckily for Jim, we were able to unwind what that advisor had done, without the loss of even one penny. Had we not fixed this, it would’ve cost Jim about two million dollars over the next twenty years.
Make no mistake, this story represents the norm, not the exception. This happens every day, all day. But staying out of the storybook is simple: find an advisor who is 1/ independent, 2/ fee-only, 3/a fiduciary, and 4/follows the “evidence-based” investment approach.
And buy your own dinner. It’s much cheaper than the two million dollar dinner at the seminar.
John & Bill