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Living with Money Podcast

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Recently, I had the pleasure of speaking with Tim Mullooly, the host of the Living with Money podcast.

There are plenty of times when I feel like I’m railing against the system, and that the industry is in need of a fire-hose spray down, but when I speak with fellow advisors who are doing right by investors it lifts me in ways I can’t adequately describe.

Such is the case with Tim.

He and his family have their own fee-only registered advisory firm, Mullooly Asset Management.  They built their practice as a family, which certainly puts the personal in personal finance.  They take the time to educate investors through blogs and podcasts.  They are thought-provoking, compassionate and I am inspired by them.

In this podcast, we covered many topics that affect millions of investors – like investor protections (or lack thereof), the importance of working with professionals who want to look out for investors’ well-being and the landmine that is the 403(b) retirement plan for America’s public school teachers.

In the interview, I referenced a blog post I wrote a long time ago: The Devil is in the Detail.

Every bit of this is as relevant today – maybe more so as regulators are blurring the lines between those who act as a fiduciary and those who only want to pose as such.

I hope you’ll give the podcast episode a listen and pass it along to someone who can use some plain-English explanations of personal finance issues.

I also hope you’ll explore Tim’s other podcasts as well as his top blog post links.   Share them with others.  It’s a small step, but maybe it will counterbalance the very conflicted messages that brokerage firms spend billions of advertising dollars on to give investors a false sense of security.

We have to start somewhere and I am happy to have the company of people like Tim and the Mullooly’s who are committed to providing investors with unconflicted information, for the simple fact that it is the right thing to do.

 

 

Simple Questions, Convoluted Answers

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A new client wanted to switch out of an annuity she had bought in her retirement account with a previous adviser.

Needless to say, my antenna goes up when I see annuities in a retirement account because it is both unnecessary and expensive to own these insurance products for their tax-deferral benefits, when this feature is “free” to retirement accounts.

As I waded through her paperwork, I clearly saw that she would be hit with a $3,000 surrender charge to get out —  and I suspected she was unaware of this.  On a $78,000 account, this fee was no small matter – it equated to a 3.8% charge.

The only other investment fees detailed on her statement was a 1.1% charge (or $858).  But, knowing what I know, and having seen what I’ve seen – I knew there was more where that came from.

She was upset, as she was eager to make a clean start and get away from this company.  She needed answers only the annuity company could provide.

I don’t think I have ever found a person enthusiastic about making this call; these interactions tend to be convoluted, confusing and sometimes even condescending. That is why I offered to call the company with her.  With me on the line, we would get the full story and I could call BS on any answer I knew was not the truth, the full truth and nothing but the truth.

In order for her to make a good decision, she needed the answer to two simple questions:

  • When would the surrender charges disappear?
  • What were all the fees she was paying? If she had to pay 3.8% to get out, what would she have to pay annually to stay?

We called and the answer to the first question was very straight-forward; constrictions usually are.   The surrender charge wouldn’t disappear until 2022 – in spite of the fact that she had owned this for many years.  She sat across from me, a look of disgust and disbelief on her face.

Next came the fee question.  Immediately the service rep said the fee was 1.1%.

“That’s it?” I asked.

“Yes, that’s the only fee.”

“What about the fees associated with the investment?” I asked.

“Oh,” a long pause.  “Oh, the subaccount charges 0.95%.”

“That’s it?” I asked.  “Are you sure?”

“That’s it,” he said confidently.

“Sounds thin to me.  What about insurance-related fees?” I pressed.

A very, very long pause followed, with a lot of “ums.”  Finally, he offered to check the prospectus and after putting us on hold for a while, he came back to tell us that there was another 0.99% fee.

So we went from fees of 1.1% to 3.04% in under five minutes.  Her options were very clear now:

  • Pay a one-time $3,000 surrender fee (3.8%); or
  • Pay $2,418 this year and possibly more every year, for the next four years (remember, any account growth or dividends reinvested would make her account balance – and the dollar amount of her 3.1% fee – increase).

The client gladly was willing to pay the $3,000 surrender fee and start fresh.

I told her there was no rush, she could discuss it with her husband, but she wanted out of this predatory relationship yesterday.

She thanked me, realizing that the rep would have told her 1.1% and she may have not pressed him any further.  Even if she had, his initial responses would have indicated there were no other fees and she would have dropped the matter.  She may have decided to keep the assets there, unknowingly paying 3.04% annually.

I have seen this many times.  These companies are always very clear when threatening investors with the surrender fees (after the annuity has been purchased, that is), but when it comes to spelling out the other fees, it chokes in their throats.

So here’s my good deed of the day — a customer service tip:

Talk straight and answer the question without omissions.  Better yet, stop offering grossly expensive products that you have to be ashamed of; that might make the next fee conversation so much easier on you both.

 

 

 

 

Shoot the Inner, Sitting Duck

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My last post, “Nailing Financial Predators,”  may have left some feeling like an easy mark.  But what if we could take our six natural human responses to persuasion and make them work in our favor?  Well, we can.  Here are some ideas on how to proactively take charge and shoot that inner, sitting duck:

1. Authority – If we respond to the perception that someone has expertise or power over us, it’s best to make sure that that reverence is actually warranted before heeding their advice.  Seek out respected authorities on investing, such as Warren Buffett; who keeps his advice simple:

“When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

2. Reciprocity – When someone does a kindness (even with ulterior motives), we are tempted to do something kind in return.  What if the good starts with us?  Seek out a helpful resource, such as Vanguard’s tips for becoming financially responsible and pass it on.  Doesn’t that feel good?

3. Liking – We want to do business with people we like — there is no crime in that.  Just make sure that they can: give objective advice, keep costs low, provide a plan that is thoughtfully personalized, explain everything  – including fees, and not press for an immediate commitment.  If they can make good on that, there truly is a lot to like about this arrangement.

4. Scarcity – Salespeople love to create a sense of urgency so we will be manipulated into prematurely pulling the trigger.  What if we were to make attaining our goals the urgency — and the scarcity is time?  Every day we fail to plan is one more day we lose.  Stop procrastinating, make a plan and get at it already.  The meter is running.  Tools, such as Vanguard’s When Can I Retire? can be a great way to assess the current situation and start the process of goal-setting.

5. Social Proof – Because we tend to look to others to help us make decisions, this can get tricky if we turn to the wrong person.  Luckily, facts have no feelings, nor do they lie.  The Financial Industry Regulatory Authority (FINRA) has helpful resources to protect investors.  BrokerCheck is a great tool to investigate the background of a financial professional and a firm.  Make sure to look at the firm, as well. Why do business with a company that engages in questionable behavior?  Also on FINRA’s site are the very useful Fund Analyzer and 529 College Savings Plan Expense Analyzer, which allow investors to examine the costs associated with different investment options.  Remember Warren Buffett’s advice — keep costs low!  For teachers, understanding the fees associated with their 403(b) plans can be like solving an open-ended riddle.  Two great resources to help cut through the fog of ambiguity are 403bcompare and 403bwise.

6. Commitment and Consistency – Once we commit to something, it makes it uncomfortable to turn back on our word.  Instead of committing to someone else’s agenda, what if we commit to ourselves, our goals, and the financial well-being of our families?  When these become the motivation for our efforts — when we fear disappointing ourselves more than others — we can move in the right direction.  Systematically investing every paycheck, treating investing as a bill that must be paid every single month,  and increasing the amount every year — this consistency will turn commitment into meaningful action.

These six natural responses can be our best friend or worst enemy.  The decision is ours as to whether to sit like a duck and let others take aim, or make our efforts reflect the goals we aim for.  It seems like a pretty easy choice, doesn’t it?

 

Nailing Financial Predators

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“A prize fighter in a corner is told, hit where it hurts.  Silver and gold.”   – U2*

Every time Tony and I have met with prospective clients who have come from traditional brokerage channels (literally, every single time) there is an uncomfortable point in the meeting where they are ashamed at the fact that they received no financial plan; no real coherent diversification strategy to minimize risks; no exit strategy as to when they can jump off the hamster wheel and enjoy the fruits of their labor; and no clear handle on what they are paying.

Instead, we watch as realization spreads across their faces – they were sold something they may not have needed, paid more than was necessary and still have no sense as to whether financially they are on track.

The look we get is always the same — like they just dropped their towel and we saw more than we should have.

I always try to ease their embarrassment, discomfort and anger – because these emotions can be quite damaging and may cause paralysis.  The world seems pretty scary when being talked out of your money was so stupidly simple.  Yet, sitting on the sidelines is another form of self-inflicted punishment.

For those stuck in this zone of not knowing whom to trust, I say trust yourself.  Trust yourself to find credible sources of information.  A good starting point is learning how human nature can make you vulnerable.

In “6 Principles That Predators Will Use Against You,”  (Psychology Today, September 16, 2016)   Katherine Ramsland, Ph.D., highlights six ways people are persuaded.  I’ve taken these examples one step further to show how it plays out with a salesperson trying to get over on you:

  1. Authority – Someone who seems to be an expert and who exudes confidence is more readily trusted, and even obeyed. If technical, complicated concepts are tossed around, it could easily appear that someone knows what they are talking about, when they are really reading from a sales script (I know, I used to write them. Forgive me.) Don’t assume that they are experts in anything other than getting you to buy.
  2. Reciprocity – When someone is nice, we tend to want to do something nice back. So a “free” pizza, box of donuts, lunch or dinner can make someone open an account to do a good turn. Do not partake in a freebie and you won’t feel obligated.
  3. Liking ­– A good salesperson knows how to be likable and goes to great lengths to identify how best to relate to you. This usually involves referring to personal notes made after meeting you, such as: likes golf, has three kids, son plays football for local high school.  Then, these tidbits get woven into conversation so that it appears that he actually cares about what matters to you most.  Do your best to keep conversations strictly business-like to give yourself the inside edge.
  4. Scarcity ­– Imposing a deadline for an offer or making some opportunity seem exclusive creates irrational urgency that can get you into trouble.  Recently a friend of mine asked me whether he should turn over his life savings to an annuity, but he had an hour to decide.  Needless to say, I told him to run like hell.  If someone is pressuring you to make a decision, they are in a rush to get their money (from you).
  5. Social Proof ­–  When there is uncertainty, we look for direction.  “Helpful” sales guys always have the solution and it always benefits them.  I cannot tell you how many times I have seen someone talked out of their low-cost 529 College Savings Plan that involves no commissions, in favor for an inferior product laden with fees and heavy commissions.  I let it be known that NY has a great low-cost plan offered through Vanguard at  NY Saves.   I do this not because I earn a dime from that recommendation, but because it is the right thing to do (it’s where we have our sons’ college funds).  Innocently float out a question about a respected, low-cost option, such as Vanguard or the 529 plan I just mentioned.  If you are being steered elsewhere you need to question if the “advice” you are being given is truly good for you.
  6. Commitment and Consistency ­–  People like to make good on their promises, so when you agree to one small commitment it makes it that much easier to get you to agree to something more.  I have seen this especially with teachers and their retirement plans.  A sales guy who comes in to talk about their 403(b) retirement plan options first sells a horribly expensive annuity or over-priced mutual fund to the unsuspecting victim.  Then a crappy whole life insurance policy gets sold to them, followed by infiltrating the spouse’s accounts and the kid’s college funds.  Ask for all fees and terms in writing, signed and dated.  If that is a problem, you’ve got a problem.

Not sure how to undo the damage?  Find a fee-only fiduciary, who is also a Certified Financial PlannerTM (search for one here).  Just make sure under “compensation method” you look for fee-only – which means the advisor never earns commissions or compensation for recommending certain products.  This keeps the advice objective and serving your best interests.

Now that you know, and possibly recognize what may have been done to you, you only have one choice: hit them where they live – in the wallet.  Pull your accounts and never be prey again.

And, if you want to earn good humanitarian points, pass it along.  Not because you will earn anything from it, but because it’s the right thing to do.

Don’t you wish everyone worked that way?

 

*Source: U2. “Silver and Gold.” Rattle and Hum.  Island, 1988. Compact Disc.