We hope you had a Happy Halloween! This Halloween was an eye opening experience for me in many ways as both a financial life planner and father to a first-time trick-or-treater. It left me with some profound insight that will illuminate your financial pumpkins when it comes to your relationship (or future relationship) with a financial advisor. In this newsletter we will fill your financially intelligent candy bucket with the following:
Does Your Financial Advisor Wear A Mask?
“They says truth is hidden behind their masks, but I believe truth comes out when they are masked!” – Twinkle (Sugandha) Varshney
This past week I went trick or treating for the first time in many years with my 2 1/2 year old son. There was lots of excitement but plenty of scares with the many different masks he saw people wearing. This Halloween experience got me thinking about all the different masks that “financial advisors” put on in the financial services industry towards investors. Most of these masks are meant to put you at ease, but when you truly see the mask for what it is, it can be downright frightening when it comes to your financial security.
I’d like to share with you a true story of a young, professional couple that reached out to me.
The husband is in medical equipment sales, the wife in law. They’re both in their mid 30’s.
They have a “good” friend who calls himself a financial consultant but works at an insurance company.
This hard working couple trusted their friend with their money and their financial life. After all he is their friend, right? And he’ll take care of them and do the right thing, right?
So they hire him to handle their financial planning and investments.
It turns out the friend was really just an insurance agent.
After all was said and done, they left a meeting with no clear answers to their most pressing financial life questions. How much should we have in an emergency fund? Is there a good strategy to handle our law school loans? Do both of us need to keep working – can we live on one income? We want to buy our dream home – how much can we afford? How much should we be saving for our kid’s education and should we be doing that right now? What amount should we be saving for retirement? How do we minimize our taxes? How should we maximize the benefits we get through work?
Instead of answers, they were sold four whole life policies – one for the husband, one for the wife, and one for each kid. Their were told that these policies will handle their retirement planning, college planning and life insurance needs all in one fell swoop.
Can you even imagine the commissions their “friend” raked in?
Oh, but it gets worse.
All their money that they needed for their emergency fund was now going towards their whole life policies. All the money needed for the down payment on their dream home was now going towards their whole life policies. They left with having no idea how much they should be saving for retirement and what is the most tax-efficient and lowest cost method for them to be investing their money. Not to mention, they still aren’t even contributing to their 401(k) enough to get the company match.
Beyond that, have you ever tried to read and understand the illustrations of these policies and how it may impact your financial future? Do they use those rosy 8% return columns to illustrate the best case scenario? Try getting them to illustrate 4%. Talk about a real pain in the toosh digesting that.
Anyways, the really bad news was that if they wanted to get out of these insurance policies they’d only be able to recoup $20,000 of the $50,000 they have put in so far – that means $30,000 less than they contributed over the past 2 years!
That’s just plain crazy. I would be furious, wouldn’t you?
So what’s the point of all this?
Well, the insurance agent was masking as a financial planner but in reality he was just a salesman peddling expensive financial products.
I’ve found that insurance agents who mask themselves as investment advisors like growing professionals including attorneys, doctors as well as IT & medical sales professionals because they’ve likely started to earn a good living and are in the early stages of a growing family. Not to mention, many of these professionals unfortunately are just too naive to understand any of this stuff.
For those who want real advice, you need someone who doesn’t wear a mask. This is with a financial advisor that is held to a fiduciary standard. The fiduciary standard legally obligates the advisor to act at all times for the sole benefit and interest of the client.
Many financial industry representatives who wear masks are NOT required to act in your best interests. Their mask could be in the title of registered representative, financial consultant or financial representative amongst others. They could work at a brokerage firm, insurance firm, bank or other institution. Even many who call themselves “independent” can give you the false impression that they are doing what’s best for you.
You need to make absolutely sure that your financial advisor adheres to a fiduciary standard. People who adhere to the fiduciary standard are called registered investment advisors, or RIAs.
Financial lesson of the day: if you’ve hired a financial advisor who is wearing the mask of a financial advisor but is not a fiduciary, be prepared for some scary surprises.
As Barry Ritholz recently said: “When seeking out advice, do yourself this favor: Find an adviser who is legally obligated to put your interests first. When you are retired and living comfortably off of your investments, you will thank me.”
Your Action Item:
Review your current financial advisory relationship. Make sure they are a Registered Investment Advisor (RIA) who is legally required to put your best interests first. Make sure the fee he charges you is completely transparent.
Make your advisor (or whatever you call them) sign a fiduciary oath stating that he/she will always act in your best interest and put YOU first, not himself.
Have your advisor list ALL the fees that go to him if you become a client. You should be getting an invoice from your advisor periodically, typically every three months. Ask your advisor outright if he is paid any money from any mutual fund companies, insurance companies, banks, brokerage firms, or other entities when providing advice to you.
If your advisor is not a fiduciary, not an RIA, not legally required to put your interests first, not transparent about fees and how he is paid, or if they are simply not 100% straightforward when answering your questions, then you should start looking elsewhere. It’s your money and your financial future.
Illumination’s Media Spotlight
Here’s our monthly compilation of interesting articles and videos designed to keep you informed and engaged in the areas of personal finance, the economy and life. We hope you enjoy this month’s edition. Please send us your thoughts on this month’s articles and suggestions for future posts.
New York Times: Living Your True Wealth
Bloomberg: Mr. Risk’s Rules of Enrichment
Star Tribune: Levin-Trick or treating and financial planning
John C. Maxwell: 5 Reasons Why Dreams Don’t Take Flight
Great Videos, Podcasts & TED Talks
Bloomberg: Masters in Business: Larry Swedroe
Here is the market scoreboard for October 2014
What started off as a very spooky month for global stock markets turned out pretty well, especially for U.S. stock markets. The S&P 500, an index representing the 500 largest U.S. public companies closed the month up just short of 2.5%. International Stocks, on par, declined slightly for the month while the emerging market segment of global markets gained nearly 1.4%.
At the midway point of October, the numbers were much different. U.S. stocks were down 5.5% by October 15th and their International Stock brethren were down 5.6%. In dramatic fashion, global stocks came roaring back after a crescendo of financial fear in the investing community – from both institutional investors as well as mom & pop investors alike. Bonds were once again a safe haven, rallying in excess of 1% on the aggregate with yields falling. During the month, this created another refinancing opportunity for those on the short list that can qualify.
Take note of this: the S&P 500 rallied nearly 10% in 10 days. In recent history, these dramatic rallies right off the market lows have become commonplace. According to Dana Lyons, “v-shaped bounces” occurred once every 1.6 years from 1950 to 2012; since then, they have occurred every 2 months. The complexion of the market place has changed and doing the unprecedented. This has typically only happened after multi-year bear markets, but just occurred after a mild, four week decline. It’s incredible and completely unexpected.
We are now entering a historically very positive seasonal period and after the past few weeks, traders seem to be expecting similar outcomes for the rest of the year. November through January are regarded as the strongest three month period of the year. Not only that, retail investors are now very positive again after being frightened mightily 2 short weeks ago. This early optimism may serve to dampen the seasonality as everyone may have already gotten back in to the investing pool so to speak.
On the economic front, there are some very interesting points to consider. 3rd quarter GDP rose 3.5% vs. expectations of 3.1%. This shows a stronger economy than people expected but it does represent the past and has nothing to do with the future. In even bigger news, the Fed officially ended QE (aka Quantitative Easing) yet the market held it’s own and then some. QE was the Federal Reserves money printing system. Despite the “end” it’s probably more temporary than anything as this was the 3rd such bout of it. The markets have struggled during the previous “ends” of QE1 & QE2 but anything can happen with the money printing press open for business across the globe.
There is no better way to gauge your risk tolerance than what your investing behavior was during the last bear market. For younger investors, this may be moot as there wasn’t much investing going on for them during the great recession. However, if this past month of volatility was a challenge for you, the biggest suggestion is to err on the conservative side of your asset allocation since we haven’t had a meaningful (15% plus) market decline in a long time. It’s far better to give up a little return and be less aggressive than be overly aggressive and bail out in a bear market. This happens quite frequently as this is one of the major causes for the strikingly poor performance of the average investor.
In my opinion, I think people scared by short term market volatility are simply paying too much attention to something they shouldn’t be paying attention to. If you are investing money you don’t need for 20 or 30 years, why look at it every month, much less every day, especially when you know you are in a bear market? Make a plan now to survive the next bear market or even typically market pullback. Just because you don’t know when it’s coming doesn’t mean it isn’t.
Illumination’s Community Shine
Congrats to our friend Steve Solberg on the launch of his new venture, Outdoor Movement – a personal guide to outdoor fitness classes.
We hope everyone has a wonderful holiday season and enjoyed this issue of our newsletter. See you in December!
All the Best,
Matt & The Illumination Wealth Team
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The opinions and forecasts expressed are those of Matt Rinkey, President of Illumination Wealth Management (IWM) and may not actually come to pass. Mr. Rinkey’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations of any specific security or Illumination Wealth services. No part of this material is intended as an investment recommendation. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any of IWM’s services. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that investment objectives outlined will actually come to pass. Investors should consult an Investment Professional before investing in any investment program. Neither Mr. Rinkey or Illumination Wealth nor any of their employees shall have any liability for any loss sustained by anyone who has relied on the information contained herein. Entities including, but not limited to IWM, its officers, directors, employees, customers and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. The analysis contained is based on both technical and fundamental research. Although the information contain is derived from sources which are believed to be reliable, they cannot be guaranteed. Past performance is never a guarantee of future results.