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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.

Matters of the Heart

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I learned, at a fairly young age, that life can change as quickly as it takes a heart to beat.

It was the day before Thanksgiving, 1973, when my father suffered a heart attack.  He was 56 and I was 8. As the sole breadwinner, I am sure all the worries he had about caring for his wife and seven kids (four of whom were minors) were pinging in his head, keeping time with his rapid pulse rate.

Thankfully, after several weeks in the hospital, he was allowed to come home in time for Christmas.  It was a gift; but frankly, the anxiety over his health issues would haunt me throughout his lifetime.  Fortunately, he lived into his late eighties; but having no way of knowing that he would be blessed with longevity, I began the egg-shell walk that would span decades.

It took me well into my adulthood before my fears eased up a bit.  Perhaps experiencing milestones that I worried might never come, like having my father walk me down the aisle, allowed me to exhale.

And now, at the age of 51, I think I have finally figured out a few things about that experience and how it shaped me and how it affects my interactions with clients.

I guess I’m a slow learner.

Discovering the up-side to this down-side has become most apparent in my profession.  It has influenced how I relate to others.  When clients come to me with their fears – real or imagined; likely or unlikely – their discomfort pulses in my stomach and I want to help them make it stop.

Though it has taken me some time to realize this, I fall into the pattern that my father had silently taught me.

He set about eliminating known threats and stresses that could undo him.  He did it without so much as an eye-blink.  He was methodical and the message was powerful:  Control what you can; prepare in advance for what you can and then do your best not to dwell.  Pay attention to new information that can change a situation and adjust accordingly, but don’t fixate.

Financial plans are all about that.  It gives me great comfort to take someone’s worries and systematically address what changes need to be made – save more, work longer, spend less, down size, work part time, start a small business … the list goes on.  I like giving them options – it puts the control back in their hands.

Even when the news isn’t as ideal as I would like, there is a sense of relief that comes from taking an honest look at a difficult situation and then making a plan.  Clients always feel better.

Sometimes, though, there is no “better” to a situation.  Over the years, I have helped clients get their affairs in order as the end of life approached.  I have ensured that heirs quickly received proceeds from IRA accounts; I have even brought paperwork to wakes and funerals so that out of town family members could sign what they needed to and I could explain things in person.  No amount of apologizing could ever make me feel like anything less than the grim reaper.

Eleven years after my father’s death, my mother passed away.  The job I had performed for many clients now fell in my lap.  There was no “me” to make it all go away.  I moved slowly, though I knew what I was doing.  It was as if dividing my mother’s assets was the final burial that I simply wasn’t ready for.

Thankfully, my siblings showed great understanding and realized that I was struggling with this morbid task.  They were more patient with me than I was with myself.

No matter how many times I have walked into a situation like this for a client, I am affected.  I can feel their sadness and uncertainty; and I think they know it.  Never once have I been met with anything but relief; they don’t want to have to worry about one more thing.

After years of doing this for others,  I finally see the gift I am able to give is more valuable than any inheritance: it is peace of mind that they are free to focus where they need to  —  on the more pressing matters of the heart.

 

 

 

 

 

 

Ignorance is Bliss … for Your Sales Guy

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Before my children understood what a lollipop was, it was very easy to swap it out with an apple slice. I was looking after their best interests, after all. But what if I wasn’t a concerned mother? What if I were a manipulative saleswoman needing to hit a certain commission level on apples that month to stay employed; or worse, to win a crystal paperweight and bragging rights among my very competitive colleagues?

My example may seem strange, but if we apply this to personal finance, and not apples, the sad truth is this is how the brokerage world operates; and it may as well be rotten apples they are selling.

Perpetuating confusion is easy when you have created your own terminology. Most adults feel very childlike in the presence of polished and seasoned salespersons who throw around terms that are never explained. It is not uncommon for investors to sign on the dotted line, heads bobbing while thinking, “How embarrassing! I feel so stupid.  How do I not understand this?”

The answer: You’re not supposed to.

Early in my career, I managed to get a full-time gig writing at an investment firm when I understood very little about that world. The one thing I did know is I didn’t speak the language. And, language is everything, if you expect to understand the world you’re in.

It wasn’t until I felt confident in the land of “financial speak” that I asked the head of Marketing why we couldn’t just write these brochures using plain English. His reply explained exactly why the terminology was intentionally so foreign: There is money in confusion.

“I don’t know anything about cars,” he said. “And, when I see an ad talking about torque and turbo charge, I know I need to speak with a professional who can explain this to me. We want the investor to realize he can’t do this on his own so that he goes to his broker.” Good for the company. Good for the broker. But, good for the investor? Not so much.

Let’s see. If you didn’t know that a Class A share mutual fund carries a sales charge that can reduce your initial investment by as much as 8.5% before it even buys one share, you have a problem.

If you didn’t realize that a Class B share will deduct a sales charge if you sell shares before a set period of time, you have a problem.

If you didn’t realize that Class C and Class D shares will carry high annual fees (because they are not charging an up-front sales charge, like the Class A share; or a back-end/deferred sales charge, like the Class B share), you have a problem.

And, if you didn’t realize that all funds can carry a myriad of fees (sales loads, redemption fees, exchange fees, account fees, purchase fees, management fees, distribution/service (12b-1) fees, “other expenses” – and that there are options with no sales charges and low management fees – you are easy to fleece.

A great source of information on fees is the U.S. Securities and Exchange Commission website.

According to the S.E.C., “Fees and expenses are an important consideration in selecting a mutual fund because these charges lower your returns. Many investors find it helpful to compare the fees and expenses of different mutual funds before they invest.”

FINRA, the Financial Industry Regulatory Authority finds this topic important enough that they have a Fund Analyzer on its site so that investors can compare the costs of funds, which is very helpful.

Clearly, these agencies are aware that investors are typically ignorant and are not fluent in the language of sales charges and fees.  I knew this already from the many investors my husband and I meet with.

“Nothing. I don’t think I pay anything.” We are often told this before we review the prospective investors’ existing portfolios. Clearly, if they really believed that everything was copacetic; they wouldn’t be looking to change advisors, would they?

Without too much effort, we can scan a statement and give a pretty good idea just how much they are paying; I can assure you, it isn’t “nothing”. In fact, it’s usually egregious – like 3% a year, not counting the sales charges.

Ironically, the do-it yourself investors who realize that their portfolios are in need of more professional management have come to us having inflicted little damage to themselves. In being suspicious of the brokerage industry, they did themselves a favor and opted to invest directly in no-load, low-cost mutual funds, and didn’t blow themselves up. Of course, these fund families tend to adopt a user-friendly, “plain English” philosophy because they do not have sales people to convince an investor to buy shares. These investors may not have sophisticated portfolios that balance the risks they are taking with their time frame, goals and returns; but the most important base is covered. They are not being bamboozled.

Not speaking the language is as good as wearing a “Kick Me” sign. Make sure that you work with someone who wants to explain everything to you before you invest and avoids confusing you or distracting you with jargon. Then you will know that you have chosen the apple slice because it was good for you, not because someone was paid to trick you.

 

 

 

 

Politics, Investing and Propaganda

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I used to look forward to voting when I was younger as I was certain of what I was doing. My lack of sophistication and naiveté made me see things in very simple terms and it was easier to choose between the “right” candidates and the “wrong” candidates. Now, I am jaded, and I realize that everyone has an agenda and some have better propaganda machines. An advertising budget can do wonders in painting either a shiny, albeit inaccurate picture; or a scathing and unfair one. Many investors fall prey to such manipulation, as well, as their “friendly financial consultant” portrays competence, polish and compassion – often times they are simply charismatic and not much else. I know this from experience. In a past life, I worked near these types; and, in my current life, I get to unravel the damage they have done at the hands of their once trusting (and now former) clients.

While not all brokers are incompetent or misleading, the truth is that their business model is. As long as they act as salespeople – fronting for product, and not for their advice, there is a conflict of interest. When a salesperson is paid by a third party (e.g., mutual fund company or insurance company) to recommend a product to their client, there is temptation to make the investor’s needs subordinate to the salesperson’s need of putting bread on the table. The only products a salesperson will likely recommend are ones that carry high sales charges, because a portion of these charges come back to the broker in the form of commissions (mutual funds that have letters, like A, B, C, etc. after their names carry these higher fees). If the fee is low, there is nothing to compensate the broker with. So even though the low-cost fund is a better choice, it will not be recommended to the investor. And, let’s face it, if an investor purchases something that basically tracks the S&P 500 returns, then the fund that deducts 0.15% of a fee will always beat its counterpart with 1.5% -3% fees. It’s an absolute, basic, numeric truth, plain and simple.
Often times the very established brokerage houses have their own mutual funds and insurance products that compensate their salesforce a little extra. Branch managers are enticed to rev up their sales team to make this a higher percentage of the office’s business. This is how bonuses are shaped – which is no small chunk of change. Again, I speak from experience here as I witnessed this firsthand. Branch managers who let their team sell what they want won’t do that for long when a big bonus is at stake. At best, its coercion; at worst, it’s blackmail. So even if a broker or a manager wants to “do the right thing” they are penalized. The only way to get around this is to break out and become independent – which can be daunting for those entrenched in this system.

Most investors have no idea that mutual fund and insurance companies pay money to have their investment products listed on the brokers’ “preferred list,” or included as a 403b option; everyday trusting investors operate under the false assumption that “preferred “means superior when it simply means deep pockets. Again, this model compromises the broker’s judgment. The investor is blissfully unaware often times, and thinks the broker is making the best possible recommendation, when there is another agenda in the fold. While the investor blindly thinks the broker “knows best” the truth is sales pitches are provided and practiced on how to sell the product and how to overcome investor objections. Again, I know this firsthand as I have witnessed sales training sessions; I have written the sales tips to help them sell; I have promoted the sales contests that give a sales rep a crystal paperweight for besting the sales of the other hungry brokers. I have done this all in a past life I feel compelled to redeem myself from. The truth is, I thought that’s how the business worked with no other options – I had no idea at the time of another (less popular, and less advertised) approach.

In the act of full and fair disclosure, I mention that my husband and I work for a fee-only Registered Investment Advisory firm, Ritholtz Wealth Management (that means we do not accept commissions, and our clients receive a straight-forward bill from us every quarter). This design was intentional – as we guided my Mother in the aftermath of my Father’s debilitating illness and found lots of hungry salespeople licking their chops at getting a piece. We weren’t even in business at the time; I was in my “past life” where I helped brokers hock products, actually. I didn’t want her to fall victim to this model. There was too much riding on this; namely my Father’s medical care and my Mother’s future financial stability. At the end of this project we realized that we could deliver this to the masses; that this service is truly needed; that we can remain true to investors’ goals; and, that we can save them from being someone else’s prey. It is not as profitable to conduct business this way, but it is good for everyone involved; first and foremost, our clients.

Not too long ago, when my husband and I had our own independent firm,  I was approached by an insurance agent who asked me how we handle clients with insurance needs. I mentioned that we advise clients on what type of insurance they need to get, and the amount. He asked me if I had considered getting my insurance license, which I hadn’t. He informed me that if I had that license and didn’t want to sell insurance I could refer all my clients to him, for which I would get a piece of the commission. He estimated he could make me an additional $50,000-$60,000 per year with this arrangement. I know he thought my emphatic “Not interested,” was a Pollyanna response – but we want no part of putting our personal interests ahead of our clients’ needs.
If you are wondering whose side your financial professional is on, go to your statements. The tell-tale signs are easy to spot:

  • Funds with A, B, C, etc. after their names carry higher fees which does not benefit you in any way.
  • Owning annuities in an IRA or other tax-deferred account, such as a 401k or 403b means that you have paid a high expense to have a tax-deferred product in an account that gives you tax-deferral at no charge (think, paying extra to have a belt, when you’re wearing suspenders).
  • Annuities, in general, are very expensive and rarely have I seen this benefit an investor. Occasionally a work-sponsored annuity is paying a very high guaranteed rate – but this is a rare exception.
  • The broker who works for XYZ Company has sold you mainly XYZ funds. Or, the college savings plan (529) you were sold has ties to XYZ in some way.

Investing is like the political campaign process – it’s hard to know what to believe, or what to argue against when you feel like no one is telling the whole story. Unless you are prepared to research and get to the bottom of the issues that are important to you, you will easily be swayed by whoever speaks with more authority on the subject than they may actually possess (your friends, your union, your colleagues, etc.). Until you truly examine the motivation of the person feeding you the information (pride; ego; or worse, profit), it is easy to swing in the breeze while others collect from manipulating you. Now that you have been warned, it is up to you to decide how you want this to end, and who wins your business. Choose wisely.