Wednesday, March 4, 2015

Shocker! IRA Advisors Suck (and why you're better off investing in your own financial education)

I came across this NYT article today, and I was pretty disappointed (but not in the least surprised) at this factoid:
"On average, a typical working family in the anteroom of retirement — headed by somebody 55 to 64 years old — has only about $104,000 in retirement savings, according to the Federal Reserve’s Survey of Consumer Finances."
Now that's a stone cold bummer.

What a waste. But you might be wasting even more by blindly following the advice of someone whose interests are anything but aligned with you. (Image Credit)
The rest of the article is not about how little Americans have saved up for retirement, but rather the policies that help or inhibit their efforts to save better. One of the big pieces of that puzzle was about how personal investment "advisors" (or advisers; I don't discriminate) don't always act in their clients' best interests. In particular, this reminded me of my earliest memories dealing with finance and investing. So what better way to kick off my inaugural blog post than share my story about how I got started with finance?

When I was around ten years old, my mother began giving more thought to her retirement savings. We had only arrived in the States a few years before, so my parents didn't really have much to put away before then. Our credit union had a built-in financial advisor office, in the same way as you'd find independent optometrists at Sears or Costco. It was easily accessible, and my mother was in dire need of retirement planning advice, so she began having consultations with the advisor. The best move she made (and one for which I'm eternally grateful) was taking me along for almost every office visit.

I still remember sitting in our advisor's office for the very first time. Through my young eyes, she (let's call her Mrs. G) had a professionally-managed hairdo, wore power suits, and possessed the biggest diamond ring I had borne witness to up until that point in time. Mrs. G was horribly nice to me, and just I loved how she said the word "fiduciary" in a flawless California standard (not that I had a clue what the word meant). She got along very well with my mother, and answered all of my mother's questions about what an IRA was, differences between Traditional and Roth, and how she should invest her savings.

Naturally, it wasn't long before my mother got started with a retirement account. Mrs. G had set up investment accounts for both my parents, with herself as the designated advisor, and plotted out a number of different investment strategies in the form of mutual funds. We dropped by a couple times every year to talk to Mrs. G about how the accounts were progressing (or not) and to cut a new check for additional contributions.

It took a couple of years for me to fully digest what was going on with my parents' IRAs. First, performance was quite mediocre. In fact, it sucked. Second, I realized that every time we dropped off a contribution check, Mrs. G was pocketing 5% of it! This wasn't illegal, but to a 12-year old's sense of moral justice, it might as well have been. While I have no doubt Mrs. G disclosed the fact that all of the funds she recommended for our investment plan were "front-load" funds, it was certainly not something she drew extra attention to. Also unclear to us at the time was that we had a choice to say no, or ask for reduced load funds, or even to invest directly with a mutual fund manager. But hey, what did we know back then?

Looking back, my folks' IRA investments didn't really do very poorly. They didn't lose money on those funds, but you can be sure that a big chunk of the subpar performance was the fact that 5% got chewed off before a single dollar had been invested. To put that into perspective, ask yourself how much your savings interest rate is? Even at that time, it would have been over two years' worth of savings interest! I carried from that experience a sense of betrayal. Mrs. G was so very nice; but all this time, she was putting her own interests ahead of ours. Why?

IRA Advisors should always act in the best interests of their clients. But they don't have to

It all came down to my favorite word, "fiduciary". You see, one of the biggest debates (and the reason for that NYT article) was around how IRA advisors ought to act? It seems dead simple that if IRA advisors have clients, and if they are in the business of advising people on money matters, that they should always act in the best interests of their clients. But they don't have to. And even if they were, how well could you tell (or prove) if they were not acting in your best interest? Mrs. G never had to act as our fiduciary. She was never legally compelled to act in our interest.

We kept the accounts as they were for many years thereafter, but the consultations eventually came to a stop, and so did a few years' worth of IRA contributions. That's how scarred we were by that experience. It turned my entire family off to the possibility that we could entrust our financial security to another professional whose interests were seemingly so misaligned with our own. Lacking adequate finance and investing skills, my parents almost lost faith in investing for retirement.


My parents invested in me instead

And my new hobby starting from the sixth grade, stockpicking (I'll save that story for another day). Born from the frustration with seeking help from others, I decided that the best only way going forward was to help myself.

Today, I was reminded by the current push for policy changes surrounding financial advisors that we were far from alone. While not exactly fraud, these people have been nickel and diming unsuspecting savers for so, so long. The only way to solve this from a saver's point of view is to level up your knowledge of investing. If you have a great and trustworthy IRA advisor, then I'm truly happy for you and hope that it continues to work out. But if you have any doubt, then you are better off investing instead in your own financial future.


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