The American Way!
By day, I’m a mild mannered engineer working at a large corporation which houses bunches of other less financially minded employees who give all sorts of crazy financial advice. I mind my own business and let his colleagues make peculiar cash choices. By night I put on the Cash Rebel mask and wield posts of financial truth, freedom, and the American Way!
I almost never mix up these two personas, but a fellow employee of mine gave me an intriguing opportunity the other day.
My Arch Nemesis: A Slick Financial Adviser
At first, when he offered to set me up with his financial adviser pal, I chuckled a Ron-Swanson style chuckle (only on the inside) and politely declined. After pondering it for a few moments, I changed my mind and set up a meeting (I mean, what the hell… I’ve always wanted to see what these guys actually do). Although I was pretty sure that most financial advisers are just corrupt sales guys looking to make money by skimming cash off the top of your investments, I felt compelled to see what they had to offer.
So the day of my meeting arrived, and the adviser I’d set up my meeting with informed me that it would be himself and his colleague. When I met them in the lobby, it was clear from the get-go who was in charge. The guy who’d set it up said one word at the beginning, and a few sentences at the end. He was clearly the junior member of the team delegated to setting up meetings and reaching out for new clients. It felt a little odd that he never offered his point of view, but I guess you’ve got to start somewhere.
They other guy, clearly a seasoned salesman, started off with some classic small talk and eventually got down to business. I’m good with small talk, but it creeps me out a little when I know somebody’s just getting to know me so they can make money off of me.
The Personal Finance Audit
So then he started in with his “audit” of my lifestyle, my finances, and my hopes and dreams. I don’t know what I was expecting, but I felt a little strange opening up to a complete stranger about my life goals. It was even stranger because we don’t exactly share the same financial reality.
He started out by asking about short term, medium term, and long term goals. My answers were all pretty abstract, but what do you expect, I’ve only been in the work force for two years! Then he asked when I’d like to retire. Not wanting to freak him out with my actual goal of age 35 (11 years from now), I wen with a more conservative answer.
“How about by 40?”
Chuckles from both advisers… “we can only run the model for retiring at age 60 or 65, so which one will it be”
I guess I’m glad I didn’t tell them 35, it might have broken their model…
From that point on, I tried to conceal my extreme frugality and early retirement dream as best I could. Though it was a little difficult once I told them that my net worth was about $50K after earning about that much for just 2 years. You could tell they were trying to do the math in their heads and couldn’t quite figure out where I’d gotten my money…
So the whole financial review took about 40 minutes, and just as we were about to finish, we got onto the topic of passive investing vs active investing. I knew this was coming because that’s what financial advisers do. They actively manage your money and promise that they will beat the market because they have “market intelligence”.
Beating The Market
Eventually he mentioned that my passive index fund investing was a pretty smart way to go, but if it would probably make sense to buy his funds and have him actively manage my money so I could earn greater returns. At this point I had to turn away so he didn’t see my smirk. I just could take his delusion of grandeur seriously because I know the facts about actively traded funds. 79% of money managers lose to the index. It really is that simple, and he makes a living by convincing people that this isn’t the case. It just doesn’t sit well with me.
I don’t get how there is still confusion about this topic. After reading a few books on investing and statistics, no one in their right mind would expect better returns from actively managed funds. Like these well researched books point out, a money manager might be able to beat the market one year, but the chance of doing it 5 years in a row is about .041%. It just doesn’t happen because it’s essentially all based on luck (or insider trading I suppose).
Another weird point he brought up was that he was 100% sure that social security would not be there at all when I retired. I know that social security has problems, but I’m pretty sure that it’s solvency is an open question. It’s not like everyone has decided that we are no longer going to support old people after 2041. As far as I know, we’ll just have to reduce benefits. Please, correct me if I’m wrong, because this financial adviser jumped all over me when I mentioned I thought there was a chance it’d be around in some form…
So What’s Next?
Well, he’s going to go back to his office and run the numbers and build me a handy dandy model to explain why I should invest with him. Based on the research I’ve done and the thousands of blog posts I’ve read, I really don’t see an advantage to giving him my money. But I’m going to try to keep an open mind. I’ll tell you all about it in Part II when he comes back to show me my money model.
Do you use an financial adviser Does yours feel shady? I’m I to arrogant to admit that he’s smarter than I am?
Very interesting story. I’ve thought about meeting with a “free financial advisor” through our auto insurance but figured it would be a waste of time for both of us. I don’t think I would have concealed my real spending and goals from them. If I were you I also would have been out of there when they told me their model was only good for retiring at 60 or 65! Just let them be confused and amazed by you!
As for social security, I don’t think anyone should say they’re 100% sure about what the status of any law will be in 40 years. I think it’s reasonable to say that you should plan for the worst – having to pay into it forever and never seeing the benefits.
Thanks for taking the time to create and share this experience!
Emily,
Well I was honest with them about my spending and saving, they just told me I couldn’t retire before 60. I’m wondering what their model will say once they input how much I’m saving each month… I’m thinking that the model will assume a crazy amount of lifestyle inflation, but we’ll have to see once I get their report at write part II.
Yea, I talked to some knowledgeable people and no one is 100% sure SS wont be here. That’s why I had them assume that I’d be paid SS at a 30% level. It’s not much, but it seems like a reasonably conservative approach. I’m hoping that I wont need SS when I’m 65 anyway.
We have access to quarterly 1-1 meetings with a fee-only financial planner at my office, and at our first meeting I mentioned that we wanted to retire early without giving a time. Then at the next meeting when we were getting more into nitty gritty details, he was like – what’s your goal for early retirement, 50? I was like, “let’s call it 40″ – but in my head I think we can make it 35 or 36.
The advisor was so pleased. He said, “It’s going to be a professional thrill to watch you retire in 10 years!” So they’re not all sleaze buckets with bad models. =)
Wow, that sounds like a great adviser! I’m thinking that I’d just need to talk to someone who I can trust. If they were open and honest to me about index funds vs actively managed funds, I’d be open an honest with them about retiring at 35. Has your adviser bought in to your plan?
Whenever I tell someone that I’m going to retire by age 35 they laugh and say “good luck”. I love that people don’t understand this concept, because they live in their self-induced-expensive lifestyles, burning cash and putting investing off for tomorrow.
I have 1 actively managed fund. It did way way better than my index funds in 2012, but now, just like you said, it’s leveling off and it’s gains are minimal at best.
I try not to share my goals with many folks just because they seem to get defensive and try to convince me that I can’t do it…
That’s awesome that the actively managed fund beat the market. Looking at it from a statistical perspective, I’d sell that fund and buy index funds/something else so you can lock in those gains because chances are it wont happen again. But life’s no fun if you ONLY look at it from a statistical perspective…
Good post! We do not use an advisor, but have a number of friends that are. I think amidst all of the “sales” type ones out there, there really are some good ones out there who do truly care about their clients. I would hesitate to say that many need to use one, but should be for those that either have no time to manage their investments or have absolutely no knowledge in regards to investing. This also assumes that they have the type of money that would make it worthwhile for them.
John, that’s an interesting perspective. I would hope that there are a whole bunch of trustworthy financial advisers out there. It’s absolutely a needed profession. Not everyone can learn about everything. I really enjoy math, so I find personal finance fun, but it’s totally valid to pay someone to create your financial plan if that’s not what you want to learn. I’d just say that you’ve got to make sure they’re not the sneaky “sales” type.
My parents use one and it seems to work for them, but they were very thorough in finding one that looks out for their interest and not just his own. When I bounce ideas off of my parents and in turn they ask him, he gives his candid advice for free so I think that someone like that is trustworthy. I think if there were any shady people, it’s brokers based on my friends’ experiences. It’ll be interesting to read what he comes up with for you.
Anna, It sounds like they made a wise choice. I imagine there are a ton of really helpful and thoughtful advisers out there. The fee-only advisers as opposed to the commission type advisers seems to make sense to me. I’m just really excited to see what this “sales” dude suggests I do with my money! I’ll let you know.
Maybe he can beat the market…. I mean it has been done before, maybe he is the next Peter Lynch or Bill Miller…. Odds are he is not and is just a salesman. I had a friend who wanted to be my financial advisor so I sat down with him. He gave me the plan and all the fees for what he wanted to do. I can back the next day with a series of Vanguard funds and asked why I shouldn’t just invest in those since they performed the same or better and cost much much less. He couldn’t answer that….
That’s a good story, are you guys still friends? I’ve got to say that I was astounded how easy investing got once I understood why Vanguard index funds were superior to basically everything else.
Yeah we are still really good friends. He knew I had a lot of experience investing and took it for what it was, a learning experience. He has since moved on to being a mortgage broker which he is much better at.
Great story! I love that his model only allowed for retiring at 60 or 65! I’m so with you on 35. I’ve somehow never been caught by a financial adviser and my parents’ actually even suggested I invest with Vanguard when I was actually asking him some questions.
Stories like yours are why I switched back to doing my own taxes…I feel really creepy with a real, live person knowing exactly to the penny how much money I make and made on my investments. Sure, my manager knows how much money I make at work, but he/she doesn’t know how much money I put into my 401(k) or into other investments. I couldn’t imagine even going to see a financial adviser at our age (24) with my net worth approaching $250k in another couple of months and my income approaching $200k and not wanting to buy a new car! Thankfully I have the internet.
Haha, well said. I don’t know how people retired early before the internet! It might be interesting to see what a FA would have to say if you did go see a fee only one, but that being said, I don’t think you need any help… I wonder what they’d think about your 5 yr condo payoff plan.
They’d probably tell me that I’m silly to do that when it means giving up the mortgage interest tax deduction. As if a tax deduction is better than paying nothing at all! The CPA I used the last couple of years told me I should buy a house because that was the only way remaining to cut down on my taxes.
“pretty sure that most financial advisers are just corrupt sales guys looking to make money” Pretty sure that sums up most of them.
I like Mrs. Pop’s idea of a fee only advisor. My portfolio is too small to bother but it would make sense if I had money to manage.
Yea, I agree. Fee only seems like the only reasonable way to go. Do fee only advisers care that you have a small portfolio? It wouldn’t really affect them, right?
I am sure any financial advisor would be happy to take my money but I can handle the allocation of my work pension ($3,000), my $2,000 bank RRSP and my 3 stocks in my TFSA (3,000) until the distant future when it gets complicated and I have to think about the best way to withdraw without tax consequences.
I see GIC ladders in my future.
Yea, it sounds like you are on top of it for now. I don’t know what you mean by GIC ladders? Is that a Canadian thing?
A GIC is guaranteed investment certificate held with a Canadian bank or credit union. I think it is similiar to an American CD. The money held in the GIC is protected under our banking protection.
The banks encourage you to lock your money in for a longer period of time by offering increased interest rates for each year you invest.
This is an example of a GIC interest rate ladder that is currently available at my bank.
Year 1 1.00%
Year 2 1.25%
Year 3 1.50%
Year 4 1.75%
Year 5 4.00%
Effective Annual
Yield 1.894%
It is a very conservative investment for people who can’t afford to risk losing even a penny.
Speak of the devil…
The popular Canadian Finance Blog just posted this much better explanation than I have provided.
http://canadianfinanceblog.com/build-a-guaranteed-investment-certificate-gic-ladder/
[...] few weeks back, I shared with you Part I of my meeting with a commission style financial adviser. I had taken the meeting because it sounded like I might get an interesting blog post out it by [...]