3112: The Worst Investment Advice I Ever Heard-Everywhere by Chris Mamula of Can I Retire Yet

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[00:01:18] My financial story creates an interesting juxtaposition. On one hand, my wife and I did many things well with our money. We achieved financial independence quickly, allowing me to retire last fall at 41 years old. On the other hand, we followed bad investment advice that in retrospect could only be described as pure stupidity. The Good

[00:01:45] My wife and I are reasonably intelligent, hardworking people. Both of us are first-generation college graduates from working-class families. We each earned three college degrees and had professional success. We were financially savvy enough to get out of debt quickly, pay off our mortgage in seven years, and save approximately half our income throughout our careers.

[00:02:11] Throughout the accumulation phase, we managed to maintain our high savings rate while living lives filled with adventure, travel, and amazing experiences while we were earning normal professional salaries. The Bad We began investing with a financial advisor who we blindly trusted, handing him large sums of our hard-earned money.

[00:02:38] We later learned that we paid approximately eight times more in hidden fees than we thought we were by following his investment advice, costing us thousands of dollars each year. Following horrible advice led to costly tax planning blunders that cost thousands more annually.

[00:02:59] This combination of excessive fees and unnecessary taxes cost us nearly $20,000 in just the last year we used his services. The Ugly We weren't ignorant just once. We willingly followed this investment advice for nearly a decade. Considering lost compounding over decades, this was a million-dollar mistake. How did this happen to us?

[00:03:28] It was a direct result of following what I now consider the worst investing advice you can get. Unfortunately, I hear and see it often. The worst investment advice. Conventional wisdom says investing is difficult and most people can't manage their own investments without the help of a financial advisor.

[00:03:50] Even well-known financial pundits who encourage taking control of other aspects of your financial life suggest you punt when it comes to investing. See Dave Ramsey's investment advice as the preeminent example. I disagree that investing is complicated and requires professional help. But that's only the precursor to the worst investing advice.

[00:04:16] The worst advice, which I read and hear frequently, is that you should find a good financial advisor by seeking the recommendation of someone you trust. Why is this such horrible advice? Our society is financially illiterate. On average, we save little to nothing. Even people like my wife and I, who are good at earning and saving money, often don't know how to invest it.

[00:04:45] That's why we thought we needed a financial advisor. Those who do save and invest consistently underperform market benchmarks by several percentage points a year. However, the odds of your childhood best friend, the person in the cubicle next to you, or your uncle Bob referring you to a good financial advisor are slim. It's the blind leading the blind. Unfortunately, people don't know what they don't know.

[00:05:15] With good intentions, people want to help. You'll have friends, colleagues, and family who are happy to refer you to their guy. This is how we found our guy. We, in turn, referred others before realizing our errors. Letting down your guard. Because you're being referred by someone you know, like, and trust, you go into the relationship with the financial advisor with your guard down.

[00:05:43] We handed over large sums of money without doing any investment due diligence. As bad as our outcome was, it could have been worse. We weren't scammed out of our money. We willingly went along with horrible advice that is pretty common for many investors. Our decision process. We found our financial advisor by asking my parents how they invested. They used this financial advisor and his company for years.

[00:06:12] My wife and I knew our household income was substantially more than my parents. They did well enough to fund my and my brother's college tuition while being on pace for their own secure retirement. I assumed they were getting good advice at a fair price. Years later, after I began writing about investing and retirement planning, I shared what I had learned with my parents. They eventually asked me to sit down and decipher their portfolio for them.

[00:06:41] I explained what they were invested in, the associated risks, the conflicted advice they were receiving, and showed them an itemized list of expenses they were paying. From this new perspective, they realized they accomplished their financial goals in spite of, not because of, the advice and services they received. They left the financial advisor as well. Light bulb moment.

[00:07:06] The idea that investing is complicated was deeply entrenched in my own psyche. Despite our awful experience, my wife and I still didn't want to manage our own investments initially. We assumed we just needed to find a better financial advisor. I asked a coworker, who I believe had an income and money philosophy similar to mine, how he invested. He used a financial advisor because he didn't feel confident investing on his own.

[00:07:36] I inquired as to how he selected his financial advisor. He told me that Dr. X and Dr. Y both invested with her. He assumed that if the advisor was good enough for them, she was good enough for him because they make way more money than me. At that moment, it hit me. How crazy is this idea that we should seek a referral to a financial advisor?

[00:08:01] How do the skills that enable a surgeon to command a hefty salary translate into knowing how to save and grow that money or evaluate the financial advisor doing it for them? They don't. What skills that enable someone to sew together a torn rotator cuff or replace an arthritic hip translate into the ability to select an appropriate asset allocation,

[00:08:28] evaluate tax efficiency of investment options, or determine the need for an annuity? None. Odds are that although they have your best interests in mind, your friend or family member's judgment and knowledge don't bode well for you either. My alternative investment advice. There's no substitute to self-education. Those unwilling to learn are destined to repeat these same mistakes.

[00:08:57] The financial advice industry is too rife with conflicts of interest for you to enter without equipping yourself with knowledge. Maybe the best summation is by James M. Daly, M.D., in his book The White Coat Investor. He says, quote, The main difficulty with choosing an investment advisor is that by the time you know enough to choose a good one,

[00:09:23] you probably know enough to do your financial planning and asset management on your own. End quote. You can find extensive information in our archives to help you become a DIY investor. There are plenty of others dedicated to demystifying the process of investing as well. Take time and educate yourself. Then, if you still think you need help with your investments and financial planning,

[00:09:51] go out armed with knowledge and find a financial advisor that fits your needs. You just listened to the post titled, The Worst Investment Advice I Ever Heard Everywhere, by Chris Mamula of CanIRetireYet.com. And now, a word from our sponsors at Betterment. When investing your money starts to feel like a second job, Betterment steps in with a little work-life balance.

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[00:12:15] Shopify.com slash OFD. Unfortunately, this isn't an uncommon story. Almost everyone I know who once used a financial advisor was mortified once they discovered how much they were paying in fees or how suboptimal their returns ended up being over time. A close friend of mine recently asked me to look at her portfolio, which is currently managed by an advisor.

[00:12:45] She's 38 years old with about $200,000 in investments. But her advisor only manages her Roth IRA and after-tax brokerage, as the simple IRA that she receives through her employer is managed through a different bank. When I asked her how much she was investing, she said that she was contributing 3% to her simple IRA to get the match.

[00:13:08] She was fully funding her Roth IRA, and her advisor encouraged her to invest an additional $1,000 per month in an after-tax brokerage that he would manage. At first glance, it doesn't seem too problematic. But I asked her why she wasn't fully funding her simple IRA at $13,500 a year.

[00:13:31] It usually makes the most sense to fully fund your tax-advantaged retirement vehicles before you start contributing to an after-tax brokerage account. The reason was because her advisor never pointed out to her that this would be more beneficial. And why would he? That isn't an account that he manages. So if she invests more money there, that's less assets under management fees for him.

[00:13:58] He was also holding about 2% of her assets in cash, which didn't make sense to me, until I realized that this was likely the easiest way for him to pull out his fees. Which, by the way, it was nearly impossible for us to figure out how much she was paying in fees based on her statements. They did a really nice job burying this information. Finally, we looked at how her money was invested.

[00:14:26] He chose a simple collection of index funds. Nothing that she couldn't have done on her own. I completely agree with Chris in this article. There is no substitute for self-education. The more you dig into investing, the more you'll realize that this isn't hard. And you can absolutely learn how to do it yourself. And that will do it for today. Have a great day and start to your weekend. Thank you for listening.

[00:14:56] And I'll be back here reading to you tomorrow where your optimal life awaits.