The issue of investment fees and expenses for investors today has become a hot topic in both the media and in the financial industry. I have no doubts that we will see more gnashing of teeth as the current season of market volatility continues. Nevermind the fact that the market has been climbing for several years now—No, all that will matter for some investors is what’s going on right here and right now.
In my opinion, it’s times like these where people may begin to pay the most expensive fees for advice. If you find yourself allowing your limbic system to take over and fear rule the day, here’s a list of some of the advisors you should avoid….unless you like paying a hefty price tag.
1) Nate the Neighbor
Nate is a great guy. When I was in college, my fraternity brothers and I would refer to Nate as a G-squared, which stands for “Good Guy”. This was our way of saying, “He’s a cool guy. I could hang out with him and be ok with it.” You and Nate have probably lived beside each other for several years now, attended your fair share of neighborhood cookouts, and you both are fortunate to have great jobs. Since you can only talk about college football for so long these days, the conversations lately have moved to the recent market volatility. Nate, of course, has it all figured out because he’s been calling his own shots since the crash of 2008. He believes that it’s all his hard-earned money anyway, so no one is going to work harder than him to protect it. Naturally, he’s a big fan the investment shows on TV, and he subscribes to at least one investment newsletter. After talking with Nate for a few minutes, he’s been able to convince you that the sky is falling and you need to act…RIGHT NOW.
Caution: Nate may have some nice talking points, but since he’s about to become your financial advisor, let’s consider his credentials. Does Nate earn a living giving investment advice? What is Nate’s historical performance? Does Nate believe in investing according to a plan, with considerations given for specific time horizons of investments? OR, is Nate just telling you what he thinks? Hiring Nate as your investment advisor may seem like a great idea in the backyard over burgers and hot dogs, but how does his advice work into the context of a plan? Or–maybe you’re stuck to getting an a la carte advisory service from Nate the Neighbor? The cost of doing business with Nate could be high and may lead to market timing, chasing returns, recency bias, and overconfidence. Proceed carefully.
2) Allen the Annuity Man
You met Allen once at a local networking event where he was telling everyone that he was a “Financial Cartographer”. Of course, you remembered from 7th grade that cartography involved drawing maps, so you quickly figured out that he was some sort of advisor. Both of you exchanged pleasantries, and you agreed to keep in touch. You did agree to receive periodic emails from Allen if he thought you’d find the content useful. When you agreed, however, you didn’t realize that he’d find something useful for you every 3-4 weeks!
Nevertheless, Allen has always been passive and not overly aggressive in his sales pitches….but there are always the veiled talking points about market volatility and losing your savings to market risk. Today, you arrived in your office to discover a voicemail from Allen, saying that he’s got something great to share and that he only needs a few minutes of your time. It’s been some time since you and Allen have seen each other, and since you just learned that your 10:30 appointment needed to reschedule, you think “why not?”.
Allen comes in around 10:25 am (he’s always punctual), and after a brief hello, he goes right for the jugular:
“How are you feeling about all this market volatility?” Somehow he just knew that you’ve been starting to get a little anxious about everything!!
“Have you been thinking about how you might recover from this latest downturn?” (Allen is good.)
You try to shrug it off, but he can tell that you are nervous about what’s going on. You chat a little more, and Allen goes in for the kill. He begins to discuss all the features of his fixed annuity products and how they can protect your principal from market losses. Sure, there’s the fact that they will most likely not keep pace with the market returns, but they will prevent you from losing your hard earned money!
Caution: There is no doubt that there are some annuities out there that, when used correctly, can enhance a client’s financial plan. However, what Allen is offering you isn’t a plan—he’s offering you a product so you will feel better. Moreover, he’s talking to you right at a point when you’ve been watching your investment accounts yo-yo back and forth because of some market volatility. Doing business with Allen may feel good in the moment, but how does it fit in the context of a plan? Can Allen also give investment advice or provide comprehensive financial planning? Or, does his area of expertise only involve insurance products? Doing business with Allen may lead to buyer’s remorse, opportunity costs, and a fragmented financial plan.
3) Wanda the Co-worker
Ah, Wanda…she’s so awesome. Wanda has been in your department at the office for about 2 years now, but that’s not your main relationship with her. No, you see Wanda every Sunday at church with her husband Walter. Walter and Wanda are such a bright couple, and you enjoy weekly water cooler chats with her as you discuss what’s going on in the world. Lately, though, the water cooler chats have been frightening because the world just seems to be falling apart!
You and Wanda rarely discuss financial matters, but today is a little different. Wanda begins to confide in you that she and Walter have decided that they are terribly afraid of the direction that the country is going, and they just don’t know what the future will hold. Since they are determined that it’s only a matter of time until the US faces major financial problems, they have decided to buy gold. “Gold is a real asset, and it’s a great hedge against inflation,” she says. After a few more minutes of hearing about the Federal Reserve’s monetary policy, the poor leadership in our country, and the unsteady stock market, Wanda decides it’s time for her to get back to work…but she’s done her good deed for the day in warning you of the coming collapse.
Caution: Does Wanda know anything substantial about precious metals and how they interact with the markets? What’s her plan of using her gold once the sky falls? Perhaps she just say the same infomercial so many times that it became gospel. Hiring Wanda to be your advisor could result in you losing your shirt to one of the most volatile asset classes we have–precious metals.
I could probably keep going, but hopefully, the point has been made. I tried very hard to have a light-hearted tone while discussing something very important—the source of your financial advice. Market volatility can be painful; that’s no secret to anyone. However, it’s times like this when you need to remember your investment principles and rely on those principles to guide you.
If you are not working with someone who can give you comprehensive financial planning advice, I strongly encourage you to seek someone who can. Having specialists that can advise on certain areas of your financial life is perfectly ok, but you must remember that their advice will likely be limited to the areas that they can discuss with competence. Having a quarterback who can discuss all facets of your financial plan is a tremendous asset. Yes, there may be some financial investment in hiring an expert, but consider all the ways they protect you from potentially paying the higher fees to people like Nate, Allen, and Wanda.