What Your Financial Advisor Isn't Telling You: The 10 Essential Truths You Need to Know About Your Money

First Mariner Books edition 2017

Copyright © 2016 by Liz Davidson

All rights reserved

This book presents the ideas of its author. It is not intended to be a substitute for consultation with a financial professional. The publisher and the author disclaim liability for any adverse effects resulting directly or indirectly from information contained in this book.

Please note that several of the names and personal details in the book have been changed in order to protect people’s identities.

For information about permission to reproduce selections from this book, write to [email protected] or to Permissions, Houghton Mifflin Harcourt Publishing Company, 3 Park Avenue, 19th Floor, New York, New York 10016.

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Library of Congress Cataloging-in-Publication Data

Davidson, Liz

What your financial advisor isn’t telling you: the 10 essential truths you need to know about your money / Liz Davidson.

pages cm

ISBN 978-0-544-60230-4 (hardback)

ISBN 978-0-544-81193-5 (pbk.)

ISBN 978-0-544-63334-6 (ebook)

1. Finance, Personal. I. Title.

HG173. D335 2016

332.024—dc23

2015015902

Cover design © Houghton Mifflin Harcourt

v2.0117

The chart on page 63 is courtesy of the Investment Company Institute. 2015. 2015 Investment Company Fact Book: A Review of Trends and Activity in the Investment Company Industry. Washington, DC: Investment Company Institute. Available at www.icifactbook.org. All other graphs and diagrams throughout the book are courtesy of the author, including the DebtBlaster chart, which was developed using software licensed from Highsoft AS, Norway.

For mom.

Your courage has been the greatest lesson of my life.

Author’s Note

Before you read any further, please know this: I am not a financial advisor. I have zero investments, insurance, or mutual funds to sell you. I couldn’t legally sell them to you even if you asked, because I’m not licensed to sell securities. I don’t have a pitch, an ulterior motive, or a quota to reach. And that’s precisely why I am the author of this book.

As the founder and CEO of Financial Finesse, I run a company that provides people with entirely unbiased financial guidance, no strings attached, and this book is an extension of that practice. While the mission of this book is to shed light on the limitations of the financial advisor industry and to offer education, support, and insider knowledge that you are unlikely to receive in a typical advisor-client relationship, What Your Financial Advisor Isn’t Telling You is not intended—in tone or in content—to be an exposé of financial planners or the financial services industry as a whole.

Rather, the purpose of this book is to educate you about the vitally important questions you need to ask about your long-range financial future, whether or not you choose to have a financial advisor. Many millions of Americans put their faith and trust in their advisors, and that’s fine. But you really owe it to yourself to know the right questions to ask your advisor. After all, if you can’t have a truly open dialogue with your advisor about your money, you may never get on the same page. Furthermore, it is important to bear in mind that if you don’t ask, your advisor is not always going to volunteer certain information.

As the employer of a team of elite CERTIFIED FINANCIAL PLANNER™ professionals who work exclusively as full-time financial educators, I know what a unique and valuable opportunity it is to work with exceptional financial planners. These professionals have the extensive training and experience to help people in all areas of their financial lives and a deep commitment to helping others become more financially secure.

The problem with financial advisors does not lie with them as people; the problem is that they work in an industry that is typically not incentivized to operate in the consumer’s best interest. Back when the CERTIFIED FINANCIAL PLANNER™ professionals at Financial Finesse were employed at large financial institutions, making a living by selling financial products and services, they were generally limited to working with people who could afford to purchase high-priced financial products and services. They entered the profession to help all people, but the current system didn’t always make that financially feasible.

In today’s financial services industry, those who most need serious financial help are the least likely to get it, and those who can afford it too often receive sales pitches rather than the unbiased guidance they’re looking for. As you will learn in the introduction to this book, this is what inspired me to open the doors of Financial Finesse in the first place—the strong belief and personal conviction that everyone is entitled to the benefits of unbiased financial education. By writing this book, my staff and I now have the opportunity on a broader scale to share financial knowledge that will better equip you to be in control of your money.

This book is being released at a time when the financial industry is moving toward more transparency, which is good news. The even better news is that this book is the tool that will help you capitalize on this new transparency.

Introduction

DAN AND MARGIE’S STORY

After Dan and Margie sold their mortgage-free home and moved to Florida, they were $500,000 richer in cash. While transferring their account from their branch in New York, the Florida-based bank teller suggested that they meet with the bank’s investment brokers, so they did. After discussions and an evaluation, the broker sold them a variable annuity, in which they invested about $350,000. The plan was for the annuity to generate lifetime income payments to pay for their regular monthly expenses in retirement.

What Dan and Margie didn’t realize was that the variable annuity was invested primarily in stocks. When the market took a downturn, their annuity income did too. This meant that Dan and Margie would eventually have to start drawing down their retirement nest egg to supplement the dwindled annuity income in order to cover their regular monthly expenses. In an effort to protect their retirement income, they unintentionally put themselves at risk of running out of money with a product that was too aggressive for their needs.

REGINA AND MARC’S STORY

Regina and Marc waited a long time to have a baby, and when they did they made three important phone calls: the first two went to their respective parents, and the third went to a financial advisor who had advertised on one of Regina’s favorite baby websites. They didn’t want to waste any time before setting up a college fund for their new bundle of joy.

Marc, a high school teacher at the most respected private school in the community, knew all too well the financial trouble that many families found themselves in when it was time to apply to college. As a teacher, Marc was passionate about the value of education and adamant that his son would not have to make compromises when it came to going to the college or university of his choice. He was determined to do whatever it took to make sure he and his wife saved enough to fully pay for his son’s education.

Marc and Regina’s financial advisor explained to them the benefits of a 529 plan: the tax savings, the prepaid option offered by some states, and the comfort of knowing that, when the time came, their son would be able to attend college without taking out student loans. The planner estimated that with a 7 percent increase in college costs per year, they would need to save about $240,000 by the time their son was 18 and going off to school. To reach that goal, the advisor recommended that Regina and Marc sock away close to $550 a month. The problem was that the advisor was only planning for what they specifically asked him—how to save for college—and had asked no other questions.

The next month, when Regina went to pay her credit card bill online, she remembered that she had been planning to use that $550 a month to pay down her hefty $10,000 balance, which she had accrued before she met Marc; she had used her credit card to sustain herself when she was unexpectedly laid off from her job. Since that amount was now being allocated to the baby’s future, she clicked to pay the minimum monthly payment and her payment was satisfied for the billing cycle.

When Regina and Marc called our financial helpline in 2009, they had nearly $30,000 of credit card debt. Even worse, after a significant loss due to the stock market downturn, they had only a little more than $20,000 in a 529 plan for college. At the same time, Marc was worried about his own job security in the face of the recession.

We worked with Regina and Marc to find a practical solution to pay off their debt and preserve their college savings, but in the process their lives were turned upside down. They had to temporarily stop saving for college in order to free up funds to pay off their credit card debt, which broke their hearts, especially as they watched the stock market rebound. Marc had to pick up extra duties at his school to generate more income, and he also took odd jobs during the summer. Regina, who had wanted to dedicate her time to staying home and raising her son, was forced to ask her mom to care for him while she accepted a job outside her chosen field. Ultimately, Regina and Marc were both able to develop a strong financial foundation and return to their normal lives, but for several years life was much tougher than they ever expected—all because they didn’t pay off their debt when they had the chance.

TAMARA’S STORY

In her early forties, stay-at-home mom Tamara hadn’t contributed to a 401(k) or any retirement plan since she left her last job a decade earlier. In fact, she had been meaning to roll over her savings from her old company’s plan into some sort of other account, but she really had no idea what.

Tamara had a firefighter friend who was moonlighting as a financial advisor to keep his own family’s head above water, and he suggested that she invest in stocks. He loved the market and followed it like his favorite sports team, he told her. Forecasting that the S&P 500 was going to go above 2,000 that year (it was 2007), he said it was a really good time to get in the game. Tamara signed on the dotted line, thinking that it would be fun to have a friend be her financial advisor.

Did she consider how well her new advisor had been doing with his own investments? Had it occurred to her how odd it was that he needed to pick up a second job as an advisor in the first place? Unfortunately, because they were such good friends, it didn’t even dawn on her to ask.

Lo and behold, his prediction about the S&P 500 did not come true, and her account balance dipped below its original value. Panicked, Tamara asked her financial advisor if he would take her out of the market; she had learned that she was pretty risk-averse and wanted him to place her money somewhere more stable. He obliged and put the little bit of retirement money Tamara had left into bonds from the safest company he could think of—General Motors.

Fast-forward just a few years: those bonds were practically worthless. Ironically, had Tamara’s financial advisor discouraged her from selling when the market dropped in 2008, she would have ended up with a significant gain by 2014. Instead, she lost a substantial portion of her life savings in his well-intentioned effort to keep her money safe.

SCOTT’S STORY

Scott, a factory supervisor, was anxious to make some quick money so he could support himself as he made the transition from managing a production facility to driving a race car for a living—his lifelong dream and something he’d been doing as a hobby for more than a decade. He inherited a $200,000 IRA after his great-aunt passed away, and he decided this was the perfect opportunity to build the small fortune he would need to make the transition.

The market had just recovered, and his brother-in-law, who was a broker, convinced him it was time to invest in growth stocks. He was right, and within a couple of years Scott had what he thought was enough to pursue his dream, so he quit his full-time job and dedicated himself to perfecting his racing skills.

By the time we talked with Scott, he’d had to give up his dream and go back to work to help pay the federal and state income taxes on the IRA distributions—something that was never discussed when he started investing. His brother-in-law, who had been a financial professional for 20 years, simply assumed that Scott knew the tax bill was coming and never thought to bring it up.

NOBODY CARES MORE ABOUT YOUR MONEY THAN YOU DO

These stories have a moral to them: nobody cares more about your money than you do. Not the man who sits behind a desk at the bank, not the ex–college buddy with the fancy title Financial Advisor on his business card, and not the famous TV personality who professes to know the next hot stocks. But none of these people will tell you that.

How do I know? I didn’t always know. I once believed, like everyone else, that if you have money, the financial services industry will take the best care of it for you, and that if you don’t have money, well, the same industry can help you make some. When I went to business school, I rubbed elbows with a lot of future financial service providers—I even became one myself, graduating and running a hedge fund with a partner. That’s when my education really began.

It was the dot-com boom—1999—and people were willing to invest in just about anything. At the hedge fund, it was my job to gather capital by meeting with high-worth investors, talking to them about why our fund was superior, speaking at conferences, and generally promoting our fund along with our particular investment strategy. My partner’s role was to do the investing.

Hedge fund investors, by and large, are very smart and interesting people. Back when we ran our fund in the late ’90s, the Securities and Exchange Comission (SEC) required that hedge funds be sold only to investors who made $250,000 a year or more or had at least $1 million in net worth. Hedge fund investors came from a range of backgrounds, but were generally highly successful and considered to be sophisticated investors by the SEC. Among this elite group were doctors, lawyers, business owners, serial entrepreneurs, and financial people themselves. All of them were clearly intelligent and knowledgeable about a great many things—as long as those things had nothing to do with their money.

What do I mean? Most of them simply didn’t understand the principles of investing. And many of the finance industry people thought they knew so much that they attempted to beat the market, usually with not much success.

During this era, when people were becoming overnight millionaires by investing in dot-coms being run out of someone’s basement or garage, it became challenging to keep our clients in the fund.

We managed to avoid a mass exodus, but I felt like I was seeing a car crash in slow motion. I watched many of our investors begin to get involved in the dot-com boom—investing large amounts of their portfolio in highly risky tech investments without thinking through the consequences. Some of the people we talked to were even getting into day trading. As a value-oriented fund, we were more conservative than most and a bit of a hedge against the other investments these people were making, but I began to question whether I was really operating in the best interest of our investors. They needed financial planning guidance and I was selling them yet another hedge fund option, which didn’t fully protect them against their more risky investments. I was a salesperson, with one product to sell, when they really needed someone who could help them navigate what appeared to be an increasingly dangerous stock market bubble.

These people need to be diversified! I said to myself. How can such successful people not know this?

They didn’t seem to understand that they were playing with fire and that our fund, while conservatively invested, was not sufficient to fully hedge their bets when the market collapsed. Moreover, why were these supposedly intelligent people overspending, taking on high-interest debt, and borrowing to exercise stock options that were in no way guaranteed to ever make any money? How could they believe that the dot-com era wasn’t a bubble? Why were they not preparing for the fallout?

Then my imagination really began to run wild. If these kinds of basic mistakes are being made by people who have enough money to rebuild their portfolios in the event of a catastrophe and who can afford to hire accountants and brokers and their own financial advisors, then what about the average person? What about people who have little, if any, savings and no access to expert advice? If something happens to them, who helps them get out of the hole and reset? Who helps them not get in a hole in the first place?

I wanted to scream at my clients, whom I realized didn’t know any better how to manage their money, You need a real financial plan! This is not the right way! But if I did, my partner would have deemed me insane. We would have gone out of business.

So I kept doing my job and did it well, while I found a way to do penance and ease my conscience. I started conducting free workshops with a financial planner so that regular, hardworking people could receive an education about their financial health without being required to buy something in return. In fact, I wasn’t getting anything from the workshops, at least not financially. Because the attendees didn’t meet the criteria, none of them were allowed by law to invest in my hedge fund, so I couldn’t use the workshops as a marketing tool to lead capital to the fund. As a result, I was able to make my workshops completely unbiased and keep them focused on the bigger financial picture—the one beyond just investing.

I didn’t know it then, but these workshops were the precursor to my company Financial Finesse, which opened in 1999 as the first unbiased financial education firm of its kind in the country. In short, I quit the hedge fund business and got into the business of helping people manage their personal financial situations holistically. Since its inception, Financial Finesse has partnered with Fortune 500 companies and other businesses, large and small, to provide free, unbiased financial training to their employees as a part of their employee benefits package. We do not work with individuals because we don’t want them to pay out of pocket for individual financial planning. By working on the corporate level, Financial Finesse can ensure that employees get the help they need with the cost completely absorbed by their employer. With this book in hand, you now have access to the same lessons, guidance, and wisdom that we offer daily at Financial Finesse through our workshops, one-on-one consultations, and financial helpline.

I wrote this book to be an extension of my passion for education and to shed some light on how the financial services industry is set up to operate. By its very nature, that industry can lead unknowing people into financial binds, as it did for Dan and Margie, Regina and Marc, Tamara, and Scott. What were their financial advisors not telling them? A lot, as you’ll discover in this book.

Just as it would not necessarily have been in the best interest of my hedge fund had I deterred clients from choosing to invest their money in the fund, today’s financial planners and advisors face the same conundrum. They’re not necessarily unethical, unscrupulous, or overly greedy (though, of course, there are always a few rotten apples in every barrel). Because their livelihood depends on what they can earn from your money, however, there are some things that your financial advisor just isn’t telling you.

HOW TO USE THIS BOOK

Everybody approaches a new book in his or her own way. Some read the back cover first, while others go through the table of contents. Some jump right in and start to read. Others flip to the last chapter and start there.

It’s the same regarding personal finances. I am pretty sure that one person’s financial picture looks nothing at all like someone else’s. Everybody has his or her own style of managing his or her money, and rightly so.

That’s why I have written this book in a way that I hope will be accessible and customizable to your personal financial questions, needs, and goals. Each of the 10 chapters is dedicated to one essential truth about finances that your financial advisor isn’t telling you. Each chapter then provides what Financial Finesse is known for: anecdotal, research-based, and, most important, unbiased guidance in incorporating this essential truth into your own financial life. It is this new financial knowledge and guidance that I hope will change your outlook and help you finish this book with a renewed commitment to take control of your finances.

Building and operating Financial Finesse for going on two decades now, I have witnessed the power of continual support, holistic education, heartfelt encouragement, and goodwill, especially when working with people who have become somewhat cynical and distrustful and are desperate for the truth about their finances. Therefore, the tone of this book is meant to be not only inspirational and informative but also, and most importantly, empowering. Just as we don’t blame our doctors if we end up with type 2 diabetes, develop cancer, or have a heart attack, I want to empower you to look at yourself objectively—your habits, behaviors, and lifestyle—as a first step toward financial wellness.

Doctors diagnose our illnesses and treat or manage them, but no doctor can actually make us healthy. The same thing is true regarding financial health. No financial advisor can make you financially secure. The right advisor certainly can help, but it’s your decisions, day in and day out, that ultimately determine your financial health. And most of those decisions have nothing to do with what a financial advisor focuses on—a truth that is the crux of this book.

What Your Financial Advisor Isn’t Telling You demystifies the actions and advice of many financial advisors while also revealing 10 essential truths about how to build and secure wealth. Here are just a few examples of what you’ll find on the following pages:

Access to the DebtBlaster Strategy—a unique way to cut down your debt faster than you think and save significant money at the same time

The reasons why the best-performing mutual funds typically make for the worst investments

The three things to do to maximize your chances of