2887: The Day I Failed as a Financial Advisor by Jeff Rose of Good Financial Cents on Investing Advice

[00:00:00] This is Optimal Finance Daily. The Day I Failed as a Financial Advisor by Jeff Rose of Good Financial Cents.com

[00:00:09] And I'm your host and personal finance enthusiast, Diana Merriam.

[00:00:13] We're gonna get right to it as we optimize your life.

[00:00:21] The Day I Failed as a Financial Advisor by Jeff Rose of Good Financial Cents.com

[00:00:28] If there's one thing that you maybe haven't noticed about most financial advisors, it's that we are arrogant pricks.

[00:00:37] Please note that I said we are, not they are, as I include myself in that statement.

[00:00:43] We all have firms that provide the most superior customer service.

[00:00:48] We all have investment strategies that either outpace the market or have the lowest internal expense.

[00:00:55] Face it, as financial advisors, we have this attitude that we can't do wrong.

[00:01:00] And if we do something wrong, it's easy to cast the blame and point our finger at the stock market.

[00:01:07] I'm here to tell you that I'm not perfect.

[00:01:10] While I wish I could sit here and tell you I provide all of my clients with exceptional customer service

[00:01:16] and that my investment strategies mirror Wall Street's investment gurus,

[00:01:21] the truth is I'm far from it.

[00:01:24] There have been many times I've failed as a financial advisor,

[00:01:28] but there is one instance that still haunts me to this day.

[00:01:32] An unexpected referral.

[00:01:35] It was 2007 and my dad, who typically wasn't one for finding me new clients,

[00:01:41] stumbled across a gentleman who was just laid off.

[00:01:44] He was a factory worker and when his employer's plant closed down,

[00:01:48] he now had access to a pension and a small 401k that he could roll over.

[00:01:54] He was still five years away from reaching retirement at his determined retirement age,

[00:02:00] so he wanted to invest the money and let it grow.

[00:02:03] He didn't have much experience with the market other than his 401k that he had been in for about seven years.

[00:02:11] After walking him through various investment strategies,

[00:02:14] we decided upon a portfolio of roughly 55% stocks and 45% bonds,

[00:02:21] mostly invested in mutual funds.

[00:02:24] For the first year and a half, things worked out great.

[00:02:27] In his mind, he was making a little bit of money

[00:02:29] and from my side I had a client that was content with the gains he saw.

[00:02:35] October hits.

[00:02:37] Everything seemed fine until October of 2008.

[00:02:41] For those of you who had money invested in the market at that time,

[00:02:44] I'm sure I don't need to rehash old wounds and remind you of how bad that time was.

[00:02:51] For my client, it was worse than any flashbacks from Vietnam.

[00:02:55] He didn't know what hit him and frankly, like most other financial advisors,

[00:03:00] I was a bit shell-shocked myself.

[00:03:03] I like to say that thankfully we're only 55% in the stock market

[00:03:08] and we had only lost a certain percentage.

[00:03:12] And yes, it could have been worse.

[00:03:14] But try telling that to someone who had never been through such a steep market decline.

[00:03:19] Even though everyone else was going through the same situation,

[00:03:23] there was little comfort for my client

[00:03:25] that he wasn't alone in losing a large percentage of his investments.

[00:03:30] He confided in me and trusted me and asked me for my advice.

[00:03:35] Like I did for many other clients, I echoed the advice.

[00:03:39] We've got to stick it out.

[00:03:41] I explained that he couldn't sell now because if he did,

[00:03:45] he'll never get the money back,

[00:03:47] especially if he took the proceeds and transferred it to the bank

[00:03:51] and put it into a CD.

[00:03:53] I can't remember the exact percentage,

[00:03:55] but I'm fairly certain we were down about 25% from the high

[00:03:59] and about 20% down from his initial investment.

[00:04:03] At the time, banks were paying between 2 and 3%,

[00:04:07] so it would take him many years to get his money back.

[00:04:11] Depending on my advice, he stayed put.

[00:04:14] Into the new year, we saw some improvement

[00:04:16] and many of us hoped that the market was on its road to recovery.

[00:04:21] But like any big wave,

[00:04:22] the down current was just getting ready to suck us all back in.

[00:04:27] Bad market round two.

[00:04:30] Enter March of 2009.

[00:04:32] I'll never forget the day.

[00:04:34] The Dow was down again,

[00:04:36] having dropped over 1,700 points since the beginning of February.

[00:04:40] It finally hit the bottom on March 9th, 2009,

[00:04:44] but obviously no one knew that.

[00:04:47] What I do remember about that day is because my client called me

[00:04:50] and he had had enough.

[00:04:53] He was ready to cash out completely.

[00:04:56] I tried one last attempt to encourage him to stay put,

[00:04:59] but he wasn't having it.

[00:05:01] As I did with all of my clients, I said,

[00:05:04] I feel like I'm letting you down by letting you cash out.

[00:05:07] But at the end of the day, it's your money and you're in charge

[00:05:11] and I'll do what you want me to do.

[00:05:13] He didn't take much time to think about it

[00:05:15] and he gave me the instructions to liquidate.

[00:05:18] I can't tell you what it feels like knowing that in your heart

[00:05:22] a person is doing the wrong thing.

[00:05:24] And no matter what you say or any information or research

[00:05:28] that you provide to support your reasoning,

[00:05:30] they're still going to act upon that wrong decision.

[00:05:34] That day, I felt like a failure.

[00:05:37] That day, I was a failure.

[00:05:40] With hindsight and 2020,

[00:05:42] we all know now that the market has recovered

[00:05:45] and had the client left the money right where it was,

[00:05:48] he would have been made whole and then some by now.

[00:05:52] What adds insult to injury is that the very next day,

[00:05:56] literally the day after he cashed out,

[00:05:58] the market was up big.

[00:06:01] And over the next seven days,

[00:06:02] he would have recouped just under 11% of what he lost.

[00:06:07] And yes, I know that 11% would not have recovered all of his losses,

[00:06:12] but it would still have put several thousand dollars back into his pocket.

[00:06:16] I hate losing my clients' money.

[00:06:19] I could take my retirement, cash it out,

[00:06:22] bet it on black at a roulette table and lose it all at a casino

[00:06:26] and it wouldn't stress me out as much as watching someone do what this guy did.

[00:06:31] This isn't a newsflash for most of you.

[00:06:34] Financial advisors are not perfect,

[00:06:36] but let me maybe be one of the first to admit it.

[00:06:40] I'm definitely far from it.

[00:06:46] You just listened to the post titled the day I failed as a financial advisor by

[00:06:51] Jeff Rose of goodfinancialcents.com.

[00:06:54] And I'll be right back with my commentary.

[00:06:57] Buy low, sell high, buy low, sell high.

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[00:07:59] I think this story is a great example of why we cannot outsource our financial

[00:08:05] literacy. As much as Jeff blames himself for his client panic selling,

[00:08:11] the reality is you can't teach someone something they aren't willing to learn.

[00:08:16] When we invest our money,

[00:08:18] we need to understand that we're doing it for the longterm and that it will be a

[00:08:23] roller coaster.

[00:08:24] 15% drops in a major index like the S and P 500 are quite common.

[00:08:31] Expect one to two,

[00:08:32] 15% or more declines in most five year periods and a drop of 30% or more.

[00:08:39] You can probably expect that once in your lifetime,

[00:08:44] but remember that you didn't lose any money.

[00:08:48] You are seeing a paper loss and you only lock that in as a real loss.

[00:08:54] If you sell,

[00:08:56] you still own the same amount of shares and if you stay the course,

[00:09:00] you will eventually recover.

[00:09:03] Now keep in mind that these statements apply to passive index fund investing.

[00:09:07] If you're stock picking and you aren't well diversified,

[00:09:10] you're likely taking on more risk.

[00:09:13] If you feel insecure about investing your own money and you think outsourcing to

[00:09:18] a financial advisor is the answer,

[00:09:21] let today's article be a cautionary tale.

[00:09:24] In certain situations an advisor can be helpful,

[00:09:28] but by the time you educate yourself enough to fully understand their

[00:09:32] recommendations,

[00:09:34] you'll probably find that you don't need the advisor,

[00:09:38] but that'll do it for today and another installment of Optimal Finance Daily.

[00:09:42] Have a happy Thursday.

[00:09:44] Thank you for being here every day and listening,

[00:09:47] and I'll see you tomorrow where optimal life awaits.