Image credit: Author, Retired in Italy

Having spent almost four decades in the financial services industry: first as an insurance salesperson, then as a licensed Registered Representative, then a Certified Financial Planner^®, then a licensed supervisor, and winding up as an independent broker of financial products, I loved what I did.  At times I managed over $100,000,000.00. I enjoy investing!

I learned that there are three primary things to consider:

1. The risk you take.
2. The cost or price of the investment.
3. The return you get for the cost and the risk.

But what I learned over the last decade of working changed my perception of the industry as a whole.

Why? Because I got to see everything from a different perspective: retirement! That perspective changed everything! I admit that my attitude changed along the way, as I realized what was happening to the industry.

Advertising

LIE #1: When you look at the advertising of financial firms they tell you, that you need to use their products, to solve your problem of not having saved enough money! Not having saved enough is your fault and they are there to rescue you if you are smart enough to listen to them! 

LIE #2: When you talk to an advisor most of the time, they ultimately need to sell you something that is in your best interests to buy so that you can secure your future!

When you look at your statements most of the time you will see the gains you had or how much your values grew!  Very seldom will you see:

• This is your deposit.
  • Plus or minus any new deposits or withdrawals
  • Less your increased (or decrease cost of living)
  • Less the charge for your investments
  • Less my charge (your FA)
  • Plus, the gain or loss of (the market) your investment
  • This is your result (true gain or loss after all expenses and deposits)
• Often it is.
  • Here is where you were Jan 1
  • Here is where you are today
  • Here is what the index did
  • SEE, you are up!

Bonus Hunting

Let me tell you a story about my search to change brokerages having heard that they were offering large bonuses for joining. 

I interviewed with three well-known Brokerage Houses – about 20 years ago.  With each one I showed them the size and scope of my book and we sat down to talk. I expressed an interest in two things: one was learning more about investment management, (working to become an investment manager) and the second was working with seasoned professionals who could mentor me and teach me about the investment business. I was told: “Well you don’t need to worry about investment management, we have professionals who do that.” In short, I was not smart enough to learn or that was a different career path in any case they were not going to help me. Scratch potential Employer (ER) #1.

At potential ER #2 I was told: “I see you are a CFP^®, we could not put that on your card, as that is too much risk for us. We wouldn’t want anyone to know you are a CFP^®.”

At potential ER #3, I asked the VP of Hiring to explain the compensation system (30 pages of small print). His explanation involved lower compensation – haircuts – for sales of products not sponsored by that company on multiple levels depending upon how much “outside” products vs “inside” products I sold. And when I questioned parts of the explanation he said, “Well, we are working on the compensation system now as it is hard to understand.”

This points up three especially important and extremely basic issues:

• First, that financial services companies are strictly structured. One side brings in the money and the other manages it. Never the twain shall meet. I needed to know what was happening to my client’s money! Scratch one nice six figure bonus.
• Second, financial services companies constantly evaluate the risk they are taking in the amount of knowledge their FAs have. As a CFP^® who is a licensed Fiduciary my recommendations carried more weight, (even if they were within the company guidelines) than the lawyers were willing to accept. Scratch another nice six figure bonus.
• Finally, I need to accept a financial incentive to sell specific products that the company created for themselves or get paid less in a structure that even the guy hiring me could not understand. Bye-bye incredibly high six figure bonus.

I am very curious, and I want to learn and to understand how to invest intelligently, and to do what is truly best for the client. (I already knew by that time that Mutual Funds were not a good choice.) I have a great love for my clients who trusted me with their well-being. “Trust” is the reason I needed to understand exactly what I purchased when I bought an investment. I needed to “trust” what I used for my clients as they “trusted” me. That is only fair.

How FAs are taught

Most of us are taught to sell product to survive. We were not taught to invest. Advisors are given courses in Fiduciary action and understanding, KYC, (Know Your Client) and in the workings of a product before you are allowed to sell it. The hard part is looking at it from the “Client First Perspective,” which is exactly what every company says they do. This too is a lie, (Lie #3). Why? When something is sold, (as opposed to bought), an FA is taught to give all the facts. The explanation regardless of how thorough seldom is from the clients’ point of view.

Where does “client first” begin and where does “client first” end?

Let’s look at a variable annuity (VA) of which I am not a fan, except in specific circumstances, as an extreme example.

We are told to “pay yourself first” but with a VA who gets paid and when? (Cost can easily be over 2% annually.)

1. The insurance company in whose name the VA is sold, gets paid first.
2. The agent who sold the VA – second.
3. The investment managers who manage the investment inside the VA – third.
4. Finally, the last guy at the table is the guy who bought the VA- What you will get is unknown. What everyone else earns is fixed and constant.

Is the client first here?

Next let’s look at the basic staple of the industry: a Mutual Fund (MF). (Costs can run from .5% to 2.25% annually.)

1. The MF company gets paid.
2. The seller (if not a “no load” MF gets paid) if it is a no-load fund the seller gets his/her fee
3. The buyer pays the costs inside the no-load MF.
4. There are with some MFs a 12b-1 fee for advertising or distribution (.25%) that the seller collects in addition to their fee. This is often “overlooked.”

The real problem is that 70% to 80% of funds under-perform their indexes. (Dalbar and Associates studies. Returns of MF 2011 – 2015) I have been reading Dalbar and Associates studies since the 1990’s. This is one of the reasons I stopped selling mutual funds in most circumstances by 1999.

Again, is the client first in line or the last in line?

Finally, let us look at the newly popular, and with good reason, EFT or Exchange Traded Fund or Index fund.  (Some are true index funds, mirroring or copying an index, and some are not.) There are now “actively managed” ETFs whose charges are once again in line with the MF.  The cost of managing a true index fund is generally lower from 0.0% on some in some structures, to .05% in others to .75% on the high end.

The problem here is less obvious but still as important to the investor.  But to get to my point please allow me to digress.

When I was looking for that “never to be found” bonus. I was told in that managing stocks was too hard for me to understand. It takes a professional.

That is the message of mutual funds and of virtually every financial product out there. The basic building block of the industry is too difficult for the average person to manage. Lie #4.  Simple, value, dividend paying stocks are not too difficult for you to understand.  Buying good stock is not difficult.

I read among others a newsletter – contrarian in nature- from a guy who says, “If you can color inside the lines of a coloring book you can buy good stocks.” Believe me it’s true. Four steps. I teach it! It isn’t that hard particularly not for the style of investments a retiree needs!  The cost of buying shares of stock today- $0.00. The cost of holding a stock- $0.00. I have digressed long enough.

So, why is what you invest in so important to the potential retiree or the currently retired person? Because in a world where we are told repeatedly, “You haven’t saved enough!” “You need to buy our product to solve the problem:”

• You are not paying yourself first, with the products they sell,
• you are paying them first.
• You are paying them for under-performance,
• you are paying them for extra risk,
• and you are taking all the risk yourself for unknown results. “Splain dat to me Lucy.” Please excuse the Desi Arnez, Lucille Ball reference, I could not resist, even though it dates me!

But you say “So what, the cost is only about 1%!

1% makes a gigantic difference that we ignore!

Supposing you would save 1% a year on the cost of your investments? Let’s do the numbers together in a retirement account that had $350,000 in it.

1% of $350,000 is $3,500.

$3,500 at 5% compound interest (invested in defensive stocks that pay a dividend) over 20 years, with less risk than the S&P500, is over $115,000.

Would $115,000 help you in retirement?

That extra $115,000 could help you retire years earlier, or at a much better lifestyle. You shouldn’t ignore the importance of paying yourself first!

Finally, a short word: Banks and Investment Houses are there to make money for their shareholders or owners. They don’t give a fig about you unless you are a major stockholder, or they can make money from you. They need you much more than you need them. It just wouldn’t sell if they explained it that way! If you think I am wrong refer to the results of the 2008 Crash. The banks and Investment Houses caused it, (books and movies were made of it) and almost all were bailed out. Not one person, not one, was prosecuted for the big Lie (#5) they created.

It is like going to a Med School that is supported by scholarship money from a pharmaceutical company that allowed your Dr. to get his/her education. What kind of a slant do you think that doctor’s education will have? 

I love my business. It’s the culture I detest. There are some excellent FA’s out there who think like I do. You must look extremely hard to find them. The hard thing for me was that it took until 2000 to 2007 to begin to understand what I was really doing. (In 2008 my average client lost 10.8% and had it all back the next year.) My learning was accelerated again, when I began investigating what I need to do to retire successfully. It was then that I realized that most of what I was taught was wrong and most of what I believed was wrong too.

1. Saving too much pre-tax favors paying more tax in retirement, not less. Tax rates will rise.
2. Dividends are safer and more consistent than growth and, in the long run, often produce more in returns. (If you want proof, email me.)
3. Most investor errors are curable with a bit of instruction.
4. Your taxes from dividends of US domiciled companies will be in a lower bracket than most of you are in now and they are lower risk!
5. Investing with dividend paying stocks is easy. (4 simple steps.)

I will leave you with a quote from Investopedia.com in the definition of “Defensive stocks.” (Those with less risk that often pay dividends.)

“Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. Defensive stocks as a group have a higher Sharpe Ratio… {the return you get for the risk taken}…than the stock market as a whole. That is a strong argument that defensive stocks are objectively better investments than other stocks.”   

We support an industry born out of the idea that we aren’t smart enough to do it ourselves. It is that basic untruth that costs each of us thousands of dollars.

I teach a course that teaches you how to invest, how to save, and how to create a successful retirement. All backed up by the knowledge of forty years!

A.W. Chip Stites, Retired CFP^®
Writer, Retirement & Financial Counselor
thelaughingretirement.com

*We are taught by advertising and Wall Street and hordes of Financial Advisors that the most important part of retiring is how much money we have, as though money makes life work. Not true. My experience has been quite the opposite: The more planning one does about how, where, and why one wants to live and how they want to create value, the less important money is.  The “money” seems to fall into place when everything else is correct!  For example, we moved to Central Italy because we wanted to travel, and we did not have the money. We live in Italy on less than half the cost of living in the US. We travel for a tenth of the average price of visiting Europe.  Many people do not want to move, and that is fine. Usually, there are enough possibilities available to create the life you want, where you want! It would be best to explore them and have an experienced ‘coach’ who has already done it.