The Shift and Confusion

My future, financially, is dependent on this decision, and I’m so confused!

In the late 1970s a benefits consultant named Ted Benna noticed an obscure provision in the tax code, Section 401(k). He recognized it as a way to save for retirement that was tax advantaged.

At the time, if you were fortunate enough to have a retirement plan, it was probably a pension provided by your employer. Today, the 401(k) is common and has taken the place of most employer provided pensions.

With the popularity of the 401(k), the risk of being able to retire has been shifted to the employee and away from the employer. This shift brought an entirely new group of people to Wall Street, main street. As of September 2018 there was over $5.6 trillion in 401(k)s and $29.2 trillion in total retirement assets.

What sprung up from this was a new industry, financial planning. Along with 401(k)s, we now have IRAs, Roth IRAs, 403(b)s and millions of people with very little understanding about investing or the products offered.

There’s stocks, bonds, fixed annuities, variable annuities, mutual funds, exchange traded funds, real estate investment trusts, and a whole host of investments that can be bought. Yet, the average person understands very little about any of them.

To add to the confusion, there is a unique vocabulary used in the industry that makes investing even more confusing. Rather than using the word debt, the word debt is replaced with leverage. Is that because, debt is bad but leverage sounds good? Then there’s the word diversification, which in layman’s terms means, “I have no idea what to put you in, so if I use ten different investments, one is bound to go up.”

Another word is rebalance. The gist of this word is, “I don’t know when to tell you to sell something, so every once in a while, we will sell something and buy something else.” Then they use words that sound like fraternities such as alpha and beta. Plus, there are basis points, standard deviation, etc.

“I’m so confused. You just do it.” These are the exact words that I heard countless times from clients, and they are dangerous.

In 1999 when I started in the business, I was naïve and ignorant, yet well meaning. Then came 2008, and people lost significant amounts of money. In 2009, the markets began to rebound, yet my clients did not. Why?

I began to break down many of the investments that I had sold, and it became very clear why these accounts were not rebounding. All had fees in excess of 2%, and I saw some that were higher than 5%. These are not one time fees! They are annual! There was even a fee in some accounts that was guaranteed to increase in the dollars paid regardless performance.

Miserable, I began to do research, and gathering 22 years worth of data on the S&P 500. My belief was that if I was going to charge clients a percent of money under management, then the least I should do is get them a better return than what they could get from low cost from a Vanguard S&P 500 Index Fund.

In 2013, I introduced a strategy based on that research. And, when I presented it, this is what I said, “We have 22 years of data. Literally the opening and closing price of every day for those 22 years. If I come to the conclusion that you would be better off buying an index fund, I will tell you and find another way to make a living.” September of 2017 was when I walked away.

Today, millions of people walk into financial planning firms and wealth management firms because they are confused and scared, and looking for help. What they need is education and guidance and the cost of that education and guidance should not be dependent on how much money they have.

There is a better way!

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