Friday, July 26, 2013

My Scary Meeting with a Financial Advisor

In my pursuit of learning more about possible new professions, I recently met with a financial advisor at an investment firm that I applied to work at. I wanted to get a ground’s eye view of how the firm trains their financial advisors, if advisors at this firm are encouraged to peddle certain investments/products and take in a sales pitch from the viewpoint of a potential customer.

What I learned is that even for a specialty investment firm, that there sure is a lot of generic and scary financial advice out there. As a starter I handed the financial advisor my entire financial playbook. Our savings, brokerage and retirement accounts, as well as my partial real estate holdings were front and center along with our monthly cash flow (aka our budget) and I sought for the advisor to inform me of what I was doing right and what holes, from his perspective, exist in my game plan.

On the positive side he said that I am ahead of the game when it comes to others in my age range. He informed me to keep doing what I’ve been doing and continue to funnel money for retirement through our 401ks and our Roth IRAs. He liked our insurance setup and reiterated that we keep doing what we’ve been doing.

On the negative side (from his perspective), there were some interesting points in which I will happily refute right here and now:

**Please note that quotes from the financial advisor are loosely paraphrased for comedic effect, he was actually very cordial and professional during our meeting. Na├»ve in buying into “sophisticated” investing myths, but cordial and professional**

“You are a wildly aggressive kind of investing strategy guy.”

The advisor pretty much conveyed that my investing strategy, spreading evenly across 4 types of mutual funds, was the equivalent of parachuting out of an airplane without a parachute. He was a little too eager to recommend a mix of bonds, commodities and alternative investments into my portfolio. No sir, I will happily keep those types of investments out of my portfolio for as long as I live. I’ve said it before and I’ll say it probably until the day I die, I spread my investment across aggressive, growth, growth & income and international mutual funds. I only invest in mutual funds that have been around for at least 10 years and have average annualized returns of at least 12% since inception. Every share of a mutual fund that I buy I plan to hold for at least 5 years. In doing this I am buying historically proven and time tested mutual funds with fund managers that have a clue about what they are doing and I am maximizing growth over long periods of time. Bonds at their best do a little better than inflation. I invest to keep ahead of inflation, not keep pace with it. In my point of view why would I hold a bond for ten years while it earns 6%, when that money could have been in a good growth stock mutual fund making 12%.

And as for commodities and alternative investments, internally when he was presenting I just shook my head. There’s a lot of smart ways to have a diverse portfolio, and there are a lot of stupid ways to have a diverse portfolio. Wheat, oil and foreign currencies in the name of stable diversification is just plain stupid. Look at gold for instance. At its height over ten years ago following 9/11 it traded at $1,920 an ounce. Today, following a decade of our country being at war in the Middle East, the dot com bubble bursting and the 2008 market drop, gold is trading at around $1,320 an ounce. Ouch!

“You’re too susceptible to big market drops.”

No dude, I’m not. I’m debt free, have an emergency fund and my cost of living stands in the low twenty thousands per year. I have long term disability and term life insurance. If disaster were to strike our household we would not need to touch our investments and between our emergency fund, disability payouts or term life payout, could maintain our lifestyle.

And the short sightedness of this argument also really grinded my gears. A scenario of the 2008 market drop was painted and the advisor relayed that with my investing style that I would lose all of my money. I did inform him that I would only lose my money if I sold. He awkwardly paused for about a minute. But I can’t entirely blame him. He’s on the front lines and in a position where his clients need to be talked off building ledges during market drops. I believe with everything within me that when money is invested consistently and often in proven and stress tested places, that 5, 10 and 15+ year periods of time will make money. So no I didn’t care about the drop in ’08. If anything I saw it as an opportunity to buy even more awesome mutual funds at incredible prices. Seriously, why would I care about a 50% market drop in one year when after 30 years my mutual fund returns an average annualized return of 12%? It’s all about perspective and unfortunately, this financial advisor was really short sighted in reacting to day to day market conditions.

“We can save you fees if you switch brokers.”

In all honesty I really enjoy the service, attention and selection that my current broker offers. There’s a mountain full of load and no load mutual funds that meet my investing criteria. And whenever I have questions, EVERY single time I phone my broker the customer service rep. that takes my call is always courteous, sounding genuinely happy to be doing their job and a pleasure to speak with. Now with all of that going for them, why the flip would I care about shaving a percent or two off fees to jeopardize my current business relationship and its smooth operation? I have one mutual fund that is earning close to 40% average annualized returns, and switching brokers to shave a point or two truly doesn’t interest me because of the quality of service and selection that I currently get.

“You can make even more money in your brokerage account by borrowing out of it.”

There are a lot of really stupid things you can do with your investments, and this little “tactic” is called a margin loan, and it’s one of the dumbest things one can do with an investment account. A margin loan basically works like this. Say you hold securities that value $100,000. You can have the option to borrow up to ½ of that value to either invest more in securities or buy real estate. But beware, because if the market turns, literally within days, within a certain negative range, the broker will call your note right then and there and redeem your holdings to pay the balance. So with this “tactic” you pay interest, leave yourself susceptible to sharp downturns which would result in having your shares sold as the market heads downward. This is not a recipe for success and if ANYONE suggests to you that you do this, you have every right to toss (their business) right out the door.


I will add that during our meeting I nodded along and was not belligerent. When prompted I told the advisor that I understood the points he was making. The way I viewed it was that I walked into his “home,” to get the honest outside perspective of my financial health. And my conclusion is that it is scary out there to hear the perspectives and viewpoints of advisors at well-respected firms whom at the end of the day are managing other people’s money. I walked away with the reinforcement that it is so important for us to be intentional and make all of our investment decisions for ourselves. Yes it’s ok, even biblical, to gather counsel but never give your keys to someone in a slick suit using $20 words to describe a 20 cent concept.

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