Big conference rooms & "diworsification"
Both of my parents saved their money with one of the giants in this field (as tempting as it is, I will not name them). When you visit their offices, there is lots of polished wood, hushed tones, and big conference rooms as they very seriously do their job of turning the assets entrusted to them into more money.
I was executor for both of my parents' estates (they were divorced), so I got an up-close-and-personal look at what the investing company was doing, but only after the fact. My father thought of himself as a savvy investor, so he managed his money himself. He was, in reality, the epitome of the “Poor Dad” and couldn’t find a good investment with a flashlight, a compass, and someone pointing him right at it.
My mother was the polar opposite; she totally trusted this investment company. Over more than 50 years, they both managed their retirement assets this way. While my mother “won” this race because she had more money when she passed, the fact is that if you look at how much money she handed over to them and how little they actually did with it, it’s just sad.
When it was time to unwind her accounts, she was diversified to the point of “diworsification." There was no rhyme or reason for what she was invested in. It was as if the plan was to see if there was a possibility to buy a little bit of everything. She was in every high-load mutual institutional fund you could possibly find, and a smattering of international institutional funds as well. What a mess.
They wanted to hand this over to the heirs as-is and not sell any of it. I insisted they cash all of this mess out and only transfer the money to the heirs. They did this for everything except her IRA, which they transferred as-is. I received $13,000 (give or take) worth of 20 different mutual funds. That’s just nuts.
So, don’t be swayed by the big conference rooms and the fancy offices with their name on the top of the building. These folks are totally in it for themselves, and if they make you some money, it was by accident.
Related Horror Stories
Dodging Disaster: The Terrible Mortgage Advice That Almost Led Me Into the 2008 Crash
Some idiot financial advisor came to my workplace circa 2006 advising everyone to take zero-downpayment, interest-only mortgages, which were widely available at the time and were what fueled the housing bubble.
Then use the proceeds to buy life insurance as an investment.
I recall asking him, what happens when the interest-only period expires and you're required to start paying principal? "Oh, don't worry, you can always refinance into another interest-only loan. "Obviously I did not follow his advice, and we all know how the real estate market ended up after the 2008 crash. (I ended up buying my house in 2012.)
The “I Can Use Anything, I Just Happen to Use My Own Company’s Mutual Fund” Advisor
I had just met with some folks who had recently moved in-state from the East Coast. They were referred to me because they were unhappy with the advisor that they’d been with. The advisor had worked for one of those big insurance companies that also have their own proprietary mutual funds.
The advisor had always made the claim to them that he could use any type of investment that he wanted. What I found funny about that statement was when you actually looked at their account holdings, over 80% of all their investments were with that company’s mutual funds; their own proprietary product.
What was even more a bunch of crap, was the actual funds themselves were horrible.
Their track records were bad, their fees were high, and their performance resembled that of a 16-year-old trying to make it in the NFL; it just wasn’t cutting it. Lesson learned: If you’re using an advisor who works for a big company, be on the lookout if they always recommend their own company’s funds.
Mortgage financial advisors pushing risky loans
In the fall of the year 2005 and when the real estate market was going crazy and all kinds of real estate investors were giving speeches and masquerading as advisors, I attended a local seminar about real estate investing.
I already had my rural land property/investment business model developed and most of my current advisors in place. A mortgage broker was speaking about loans for real estate.
These so called mortgage financial advisors were recommending people take interest only loans to fund their real estate purchases because the rates were low and it cash flows easily. There are many problems with this dumb advice.
Here are some:
- Debt at some point has to be paid back. Anybody who has done any investing and used debt with real estate, stocks, or a business knows this. Delaying indefinitely paying off a debt is foolish.
- Even if an interest only loan for any type of investment cash flows today, it might not tomorrow, next month, or next year. The investment might quit paying. For example:
- The tenant lost his/her job. The property flip did not work as the foundation crack was not discovered during the euphoria when the property was bought. Funds (from more debt) were needed to fix the crack when an engineer who looked at the property to buy it discovered it.
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