I read a really sad story this week about Kevyn Ogawa, a young grocery store clerk who won the lottery in 2009. He is now suing his financial advisors for selling him $100 million in life insurance policies, despite having no spouse, no children, no siblings and no clear need for the death benefit. To make things even worse, the policies were placed in a trust and he wasn’t even the beneficiary. So, the policies were essentially worthless to him. Kevyn claimed these advisors, who were also attorneys and insurance agents, were paid $1 million in commissions, while he had to surrender the policies after paying almost $2 million in premiums.
Really bad financial advice is all too common.
Choose Financial Advisors Wisely
Novice investors often have no idea how financial advisors get paid and how it affects the investments the advisor recommends. Financial advice isn’t free and investors have to pay for that advice, usually in the form of higher fees.
Most financial advisors are honest, hard-working professionals. But, they are incentivized to sell investment products that have higher fees, because they pay higher commissions. If your boss came to you an asked if you would rather make $30K or $100K, which would you choose? It’s no different for financial advisors. They have to make a living from providing financial advice and also bring in revenue for the company. Their goals, and the goals of their firm, are often in direct conflict with the best interests of the investor.
If you were choosing your own investments, you would most likely choose the ones with the lowest fees and best performance. It’s not that hard to pick a good no-load mutual fund and skip the advisor fees. The same thing can happen when you hire a fee-only advisor to pick your investments. You pay them directly, instead of the companies selling the investments. They are incentivized to pick the best performing investments for their customers, so they can get more appointments and referrals.
The advice you receive is often influenced by the size of the commission.
Be Wary of Financial Firms
Financial firms provide many valuable services, such as creating mutual funds, providing brokerage accounts, underwriting IPOs and managing wealth. They employ thousands of professionals to provide guidance, analysis and advice to customers. Just remember they have a vested interest in capturing the maximum amount of revenue for the firm and most of that revenue comes directly from their customers. It’s a conflict of interest that is difficult to ignore.
Some of the most prestigious firms and investment banks have recently gotten into a lot of trouble for some of their shenanigans. One bank was caught comingling billions of dollars from their customer accounts with their own. Another bank was caught advising customers to take a position on a trade and then took the opposing position to profit. They often take unreasonable risks with leveraged trades and one bank recently lost billions on a single massive position. A major derivatives broker used customer funds to cover their own losses then went bankrupt, losing the customers deposits. Financial firms can provide a full array of valuable services. But, these services can come at a steep cost to their customers.
Consider investing with a discount brokerage and no-load mutual funds.
Avoid Insurance Investment Products
Whole/Universal Life Insurance – There is a multi-billion dollar insurance industry with huge staffs of salespeople dedicated to selling whole life insurance. It is a very high yielding product for insurance companies, but one of the worst possible products for investors. I could write an entire post on why you should avoid whole life insurance, but I will try to make it quick and easy.
- First, the performance is terrible. The first year of premiums are usually confiscated for the sales commission and the insurance company keeps the lion’s share after that. If you keep the policy for many years, you will have only a small fraction of your premiums paid in the cash value.
- Second, the fees and return are rarely disclosed. If you read the brochure from cover-to-cover, you will probably not see the fees and return listed. Whole life insurance is sold like this on purpose, because nobody would buy it if they knew how bad the fees and return really are.
- Third, you lose complete control of your money the instant you pay the premium. If you don’t like the company, the product or the performance, you have little recourse. You can take the cash value (if you have any) and stop paying on the policy, which becomes close to a total loss.
Variable Annuities – I am seeing a lot of commercials for annuities on television right now, because they are very lucrative for insurance companies. The golden promise of an annuity is a payout for as long as the beneficiary lives. It sounds like a dream investment to a retiree, because their biggest fear is outliving their money. The problem I have with annuities is the exact same problem I have with whole life insurance. Annuities are designed to enrich the insurance companies at the expense of the investor. They take control of your money and wind up keeping most of it, unless you live for a very long time. If you die young, your investment goes to the insurance company and your heirs get none of it.
Buy insurance only for protection and invest your money elsewhere.
Control your Assets & Investments
So, what makes for a really good investment? In my opinion, it is something that you own and control. Whether you invest in stocks, bonds, mutual funds, precious metals, CDs or real estate, always keep the accounts in your name and assets under your control. Avoid any investment that requires you to give up control of your money to an advisor, investment firm or insurance company. Here are three really important reasons why you need to control your own investments:
- The market conditions, investment types, asset performance and your personal needs will change throughout your lifetime and you may need to move your money around. Being locked in never benefits you.
- If you let a bank, investment firm or insurance company control your investments, they will get rich off your hard-earned savings and you will get the crumbs that are left over. You need that return for your future.
- There is a lot of fraud in the financial services industry, both from individual advisors and from large firms. Investors rarely recover their deposits and the fraudsters often avoid going to jail. You can’t afford to lose your life savings investing with the next Madoff, Stanford or Corzine.
Don’t give up control of your assets or investments to anyone.
The Bottom Line
The bottom line is that you are the only one you can really count on to have your best interests in mind. The best way to keep from receiving bad financial advice is to learn about investing yourself or to pay for this valuable advice directly.
“I believe that through knowledge and discipline, financial peace is possible for all of us.”