If you have an investment advisor, you want to make maximum use of them as trusted members of your financial team. A fee based investment advisor is held to a fiduciary standard, meaning they must put your best interests first. This should mean that they can serve as a sounding board for your financial decisions. Unfortunately, some people trying to sell you financial solutions are not held to this high a standard. Worst case, they may be selling you what is best for them rather than what is best for you.
We periodically see clients who make uninformed decisions without consulting us or other members of their team. As is human nature, they then put on blindfolds rather than trying to examine and correct the situation they have gotten themselves into. Let us look at the perils of such a situation a bit.
Joy Jones was actually not our client, but the spouse of a client whose retirement account we managed. In a divorce, Joy was awarded the retirement account. This was far and away her largest asset. At age 55 and without a significant work history on which to draw, to say she faced an uncertain financial future is an understatement.
A friend of hers was an insurance agent who had done her property insurance for many years. She had recently begun offering investments and convinced her to place all of her money into a single financial product which had a variety of potential problems. First and foremost, as a new divorcee she had no idea of her financial situation going forward and was therefore best served by keeping her options open until she was more settled. Instead, she allowed herself to be talked into a financial product that tied her money up for 16 years! Did Joy have any idea what opportunities she might have or what needs that might arise over the next 16 years? Think about your own life and the changes you have experienced over the past 16 years. Sixteen years ago we were still in the formative stages of what would become the “tech bubble”. Salespeople were selling financial solutions in 1998 that would help capture the 25 per cent returns that were then considered the new normal of the bull market in technology. That would have worked out terribly for her over the years (the tech market has still not recovered all its value). Still, the sales person made a handsome commission back then and has moved on to other endeavors in life.
The financial solution she was sold had very little potential advantage as opposed to simply buying US Treasury bonds. However, the solution did offer a very large commission to the person who sold it. The person selling the product may have not even had the knowledge to properly evaluate Joy’s situation or other investments. The old saying that when all you have is a hammer everything starts to look like a nail comes to mind.
We did not try to press Joy to become our client versus trying to fulfill our desire for her to carefully consider and understand her options. We suggested that she meet with another woman advisor in her area that we knew and trusted so she could have an objective set of eyes on her situation. She considered this, but unfortunately did not follow through, preferring to trust her friendly insurance agent. We don’t know how her decision will work out, but we do believe that she has not picked an appropriate solution given her time frame and potential needs. Putting all of her eggs into one basket that she must own for 16 years is not a commitment she should make at this time.
She did not know us prior to this incident. However, we see some of our own clients making similar financial decisions without consulting us. Next time we will explore such a case, but…learn to take your time and consider your financial decisions carefully. When people are in a hurry to have you make up your mind, consider that a giant red flag. If what they are offering will stand up to scrutiny and consideration, they don’t need you to hurry your decision.
By Ted Schwartz, CFP©