By: Mickey Ellison
In 1999 I entered a field of work that I knew very little about. Wall Street was just something on television and retiring on a beach was only a dream. Before studying for the exams to become licensed, I did not know what a mutual fund was, much less about annuities, structured products, or real estate investment trusts. In this writing I will attempt to tell what I learned, some misconceptions, and how you may be able to prevent yourself from becoming a “victim” of your own ignorance.
For those of you old enough, you remember the Dot.com bubble that burst starting in 2000. If you aren’t old enough to remember, ask someone that is. As I stated in the first paragraph, I started in the financial industry in 1999, becoming fully licensed by November of 1999. Over the next few years, from 2000 until October of 2002, people would lose significant amounts of money that they had planned to use for retirement. They went from planning to retire at age 55 to not knowing if they would be able to retire at all. Companies disappeared and while some didn’t, many lost 90-95% of their value.
The first lesson I learned is that disaster brings on opportunity, and while my timing to get into the business seems unfortunate, it was actually perfect timing. When the markets are doing well, as they are today, people are less likely to move their money unless we get to an extreme where they become greedy because they didn’t make as good of a return as their neighbor. The business is like a carousel. When markets are good, most will tell you how great “their guy” is and when the markets are bad, that same “great guy” now doesn’t know what he is doing. There is this misconception that “their guy” knows when the market is going to go up and when it is going to go down, and when “their guy” fails at knowing that, they move on to the next.
Here’s what happens most of the time. The market goes up and “their guy” is great. So great that they tell all of their friends about him. When the market goes down, “their guy” no longer knows what he is doing and some will go so far as to call “their guy” a crook. So, after losing for a while, they find another “their guy”. Inevitably, they have simply moved their money at the bottom of the market, and the “new their guy” looks like a genius. Sometimes he is a genius for 4 or 5 years, and sometime he is a genius for longer, say from 2009 to the present. Their “new guy” was good from 2003-until sometime in 2008. Somewhere in 2008 or 2009 he became bad and they moved from the “new their guy” to the “newer their guy” when if they had stayed with the original “their guy”, the results probably would have been the same.
Another lesson that I learned is that some of the people that I worked with were good Godly Christians until they lost money. The business was very difficult on me. My wife even made the comment once, “you can’t win.” She saw the angst I felt when people lost money and she saw the vitriol that came from people who didn’t make as much as they could have because you actually did what they asked you to do. “Don’t lose my money!”
Here is some food for thought. We are taught that the stock market returns about on average about 10% annually long. That is true when you take a long enough timeline, but it isn’t true in 10-20 year time frames. There is some luck that comes into play if you are to stay invested in the stock market, and if you don’t stay invested in the stock market, you will not keep up with inflation. (Inflation and why we have it is another topic for another time) What happened to the person that retired in 1999 versus another person that retired in 2010 and in each case, they remained invested in the stock market and needed that money for income. The time frame that is being quoted is a little over 100 years and they have no idea what the next year will bring much less 10 years. That sounds like a long time, but when you consider the history of mankind, you realize just how insignificant 100 years is.
That gets me to another point. In my 18 years in the business, we were taught what is a reasonable withdrawal rate to last a lifetime and adjust for inflation. When I started in 1999, the withdrawal rates I saw were as high as 8%. At that time, the assumed rate of return was 12%. Since that time, I have read publications that suggested 6%, 5%, 4%, 3%, and some as low as 2%. What was the correct amount to tell someone? There is no way to know until a few years pass. If the market went up when you started taking income, you will probably be okay. If it went down, you may be out of luck. It’s gambling with better odds than Vegas, but consequences that could last the rest of your life.
In this section, I will write briefly on some misconceptions. Briefly because the most important section of this writing will be the last section, titled “Clients”.
One misconception is that financial planners charge too much in fees and they often are more concerned about their income than the clients that they serve. In my 18 years as a planner, most of the people I met in the business genuinely care about the people they worked for. That being said, I do believe there is difference between an investment adviser and a planner. The planner is someone that I see as more of a coach and if their income is dependent on selling you something to get paid, there is risk. An investment adviser on the other hand should be compensated on results according to how, you the client, told them to invest and not in comparison to someone that is invested aggressively when you asked for conservative.
Another misconception is that your adviser knows when the market will go up or down. Yes, they have access to research, but that research doesn’t make them a market prophet. What caused the market to go down? What caused it to go up? In most cases, they don’t know until it after it happens, and my personal belief is that most of what they learn are symptoms and the real cause may be something that gets very little attention and most people are unaware of, central banks. There are many conspiracies regarding central banks, but one thing is for sure, they wield power that probably should never be in the hands of anyone but God. Power that has very little if any concern for you and I as individuals and families.
We often read and hear about victims of investment fraud. Unfortunately there are those that prey on ignorance and that leads us to our final section.
In my 18 years as a planner, I saw some really bad investment products, but I also saw willful ignorance on the part of the clients. One question I always had is, “How can you invest $500,000 and not know what you are investing in, nor do you know what you are paying in fees?” Every single product that I sold had a book that came with it and in that book was every fee that was charged or could be charged and what risk the client was taking. Amazingly, I saw hundreds of people, invest hundreds of thousands of dollars and not read that book. They only read the glossy sales material.
Many have said, “Well I don’t understand it anyway, so what’s the point?” The point is if you don’t understand it, find someone that does, and until you do understand, don’t do it. We are often victims of our own apathy and laziness. Below I will list some things that you should do before you do any investment.
- Do not sign the forms on your first visit. In fact, if you are being offered a product on the first appointment, you should be wary. In most of those cases, the person has already decided what it is that they want to sell before they met you or know what your needs are.
- Take the time to read the prospectus. The risks are disclosed as well as the fees.
- Don’t be as concerned about what the planner is making rather be more concerned about how much you are paying in fees. Fees are not bad if you know what they are. Being surprised by how much you are paying two years from now is ultimately your fault because the fees are required to be disclosed.
- Ask your adviser how much your fees will be. All of them, not just what they are getting paid. In most cases, I got paid 1%, but the total fees could be upwards of 4-5% and in some cases I saw 12%. Put that in dollars, if you invested $100,000, I made $1000, but you may have paid $5000. This may explain why your return is lower than you expect. It may also be that the fee is necessary to give you what it is you asked for. You might even be surprised to find out that your adviser doesn’t know all the fees that you are paying.
- If you are told that there are no fees, your antennae should go up. The person you are working with is getting paid something. I’ve seen products that claim that there is no fee, yet my compensation could be as high as 10-12%. Put another way, I sell you something for $100,000 and I get paid $10,000. That money is coming from somewhere!
- Separate you investment adviser from your coach. Your coach is someone that can help you focus on your goals and can possibly help you when it comes to picking an investment adviser. Take me as an example. Most of the products offered, I have seen, and I’ve read those disclosure books and I understand them. Understanding what it is that you are investing in and how much you are paying upfront will prevent you from a surprise 5-10 years down the road when it’s too late.
- Take responsibility and do not become a victim especially because you were willfully ignorant. Put another way, lazy.
Most of these things to do are for those with higher amounts of money to invest. For those that are just getting started in investing, there are some definite warning signs for you as well. In fact, with some education, you might be able to do most of it on your own. Life insurance is a must for young couples, especially with children, but the type of life insurance that you are offered may be your sign to go somewhere else. This is especially true if you have a limited amount of money to invest. Email me or comment if you have questions.