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IN JANUARY 1987, I was an unmarried junior Coast Guard officer just beginning the flight stage of U.S. Navy flying training. I decided to see a financial advisor who’d been recommended by friends.
This wasn’t just any advisor, but rather a retired Air Force lieutenant colonel and fighter pilot. He worked for a firm whose advisors were comprised mostly of retired military officers, and they marketed their services primarily to military officers. If there was anyone I could trust, I thought, it was this man and this firm. With a Distinguished Flying Cross on the wall awarded for combat in Vietnam—something I deeply respected—I had no doubt his recommendations would be in my best interest.
I was wrong.
His firm mainly offered two products: front-end loaded mutual funds and whole-life insurance. Because I had virtually no knowledge of these products, his sales pitch seemed sensible to me. There are, after all, certain advantages to whole-life insurance and, as he explained, the front-end loaded fees would average out, over many years, to a normal cost structure. Wasn’t I in this for the long run? Unbeknownst to me at the time, I fell for the sunk cost fallacy.
About six years later, I canceled the life insurance policy, cashed out of the mutual funds, bought a term life policy—I now had a wife and children—and began dollar-cost averaging into solid no-load stock funds. I’ve often reflected on that time not so much with regret, because it taught me a great deal, but rather wondering why I was so easily fooled. As the pandemic unfolded, I became even more curious about why so many people believed what to me was obvious misinformation—and which, in some cases, cost them their life.
In his book, Talking to Strangers, Malcolm Gladwell explains why it’s so difficult to determine who to trust. When faced with a decision regarding whether to trust another person, we often “default to truth” and presume the person is trustworthy. Why? Because it’s much more likely than not that an established “expert” is the real thing, because it would take a great deal of hard-to-find evidence to overcome any doubts to the contrary, and because it’s often unimaginable that the person would be lying.
It never occurred to me that this particular financial advisor would mislead me or sell me anything not in my best interest. I defaulted to truth. But I was lucky. Think about all the people who invested their life’s savings with Bernie Madoff. Surely this former chair of the NASDAQ and pillar of the Wall Street community could not be running a Ponzi scheme? Even the SEC, after two cursory investigations of his investment advisory business, “defaulted to truth.”
More recently, how could a floppy-haired billionaire, Sam Bankman-Fried, the erstwhile SBF, be running an alleged fraud? Several famous billionaire investors trusted SBF and were fooled. Heck, even Jim Cramer, during an appearance on CNBC, called SBF the new J.P. Morgan.
Social proof also plays a huge role in fooling ourselves. This involves following the actions of others we trust and relying on experts, because we believe they may know more than we do. Rather than do the hard work ourselves, we assume experts have it figured out and have done the appropriate due diligence, so we’re tempted to simply mimic the “smart money.”
We often forget the lesson that intelligence, by itself, does not ensure sound decision-making, whether we’re dealing with investments or many other aspects of life. Even Isaac Newton got caught up in the South Sea Bubble. Over the long term, it’s our behavior—not our intelligence—that will determine our success in so many of our life’s endeavors. I’ve learned that mistakes of omission are much less costly than mistakes of commission. At age 61, I’ll take an opportunity cost over a cash cost any day.
It’s a jungle out there, so be careful who you listen to, where you get your information, and understand the motives behind those persons or organizations who may be trying to influence you. We live in an age with few shared truths, and that’s rife with disinformation and fraud. Be patient, be skeptical, think critically and remember—when faced with doubt or ambiguity regarding some course of action—doing nothing often works out just fine.
Patrick Brennan is a retired Coast Guard officer and aviator currently residing with his wife of 34 years in Mobile, Alabama. He earned a bachelor’s degree in government studies from the U.S. Coast Guard Academy and an MBA from Spring Hill College. Besides an interest in finance, Pat enjoys traveling to visit family and friends, and especially enjoys visiting our National Parks.
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As an AF Captain nav in the early 80s, I almost fell for a pilot Lt Col’s pitch for some kind of an inventory pre-pay for companies that were temporarily cash strapped. (Don’t remember the exact phrase.) Sounded a little too good to be true so I demurred. Several years later I read in Forbes about the criminal charges brought against that Utah company. I’ve had a jaundiced eye ever since.
A “financial advisor” put my sister into American Funds funds with a 5.75% load and a 0.60% annual expense! Fortunately, it was just her non-retirement savings. When she retired I convinced her to roll over her 401 to Vanguard index funds. This advisor also sold her a $200K long-term care policy that she probably doesn’t need. She has a million dollar portfolio at Vanguard plus $400K equity in her house. This “advisor” is acting in his own interest, not hers.
I suffered the same fate as a green USMC officer in 2000, probably with the same company. Early mistakes turned out to be less costly and a good lessons learned. It was not until much later that I learned about behavioral psychology and investment history. Better late than never.
I too went to the steak dinner hosted by this company shortly after completing USAF pilot training. I was embarrassed at my lack of knowledge about investing, and the up-front load for the mutual fund made me very uneasy. That weekend I went to the library and checked out several books with the hope I could learn enough to get comfortable with the ideas pitched at the dinner. One of the books was A Random Walk Down Wall Street-Burton Malkiel. Another was The Only Investment Guide You’ll Ever Need-Andrew Tobias. Those two books saved me from making a big mistake and started me on a simple, but effective path of investing.
You are SMART! I would have just gone along with what the sales man recommenced. In fact, I did invest $2,000 in a limited partnership IRA, which was very illiquid. After 25 years I got back $2,500! Fortunately, my work 401 had better options with much lower costs and over time I learned about investing in low-cost index funds.
Bob, very smart move. Glad it worked out well for you.
The way loaded mutual funds worked in the 80’s and 90’s and even to some extent today is the sales charge was 5.75% on class A shares. 5% of that might go to the broker dealer. The 75 basis points was kept by the product vendor. (Let’s say the advisor recommended Investment company of America…Capital group or more commonly known as American Funds)The advisor would get 40% of the 5%. So 50k transaction meant $1000 in the pocket of the advisor, who may have just had lunch with the rep from that company…that’s how mutual funds were sold.
I would like to say in fairness to the advisors that’s how they made a living. Today it’s fees. Many moons ago it was commissions.
And as far as a company like American Funds….they are truly a world class investment manager.
American Funds are a scam! They don’t perform any better than index funds that cost 0.05%. Only a novice would invest in a mutual fund with a 5.75% load and a 0.60% annual expense ratio.
Run a comparison of Investment Company of America to the SP500 from its peak of 1300.68 on August 28th taking a 4% withdrawal. It’s what you keep that matters.
during volatile time periods American Funds hands down destroys the SP500
My first experience was similar. I invested in some pretty strange stuff that wsa “sold” to me. I remember how one investment was paying large “dividends” that were non-taxable. It took me quite a while to wrestle the fact that these “dividends” were nothing more than return of capital (my own!). I guess that was standard practice in the whole life insurance market back in the 80’s. That experience really made me redouble my education and I consider it a valuable lesson.
“It’s a jungle out there.” I just heard the theme song to the TV show Monk in my head… (smile) My wife and I are fans of the TV show American Greed. It’s amazing how much chicanery is going on out there. Thank you for a great article and reminder of the Sgt. Phil Esterhaus close of roll call message on Hill Street Blues, “Be careful out there.”
I invested and bought insurance from the same company when I was a second lieutenant. I’m glad they got me as early as they did, as they caused me to pay myself first from an early age and keep doing it. (The steak dinner wasn’t bad either.)
A few years after being with them, I asked my agent/advisor if there wasn’t somewhere to earn a bit more interest on the savings leg of my stool. He didn’t have any ideas so handed me a Fidelity brochure he had for some reason. Big mistake – all my investments soon ended up at Fidelity. I took the pay myself first lesson with me too.
Glad it turned out well for you. I ended up at Vanguard and Fidelity myself.
Very nice article Patrick. I’ve got several examples of my learning opportunities but, instead, I have a little quip to share.
I worked with a fellow who would ask for advice, and then argue about the answer he received. He was known for doing this and one time, just one I told him this.
“If you ask a person for information, you are giving control of yourself over to them. They can tell you anything they want and you probably aren’t any better off afterwords”
My dad sold insurance and that included whole life insurance. He was a great man but not great at math and he honestly believed it was a good product for his customers. He even gave my whole family prepaid policies which we’ve kept for sentimental reasons. I figured out early on they were a horrible deal and always used term life policies for the period I wasn’t self insured. I’m just saying this in defense of insurance agents everywhere. I believe they are generally honest and have just been served the company Koolaid. It is easy for people to trust what their employer tells them, especially back in the day, just as you trusted a very impressive person. Wonderful cautionary tale!
Great insights Pat!
Unfortunately many people are unprepared to deal with finances and do not understand the basics so it is easy to get fooled. It starts with financially illiterate parents and schools that do not teach young people about money and how to hold on to it and invest it. The person that taught me the most was my mother who only finished 6th grade but was very good at teaching her children about saving money and saving it over time.
I had the same experience with the same company – a retired Naval aviator was the “adviser” in my case. In retrospect, the front-loaded fund did reasonably well. And I will say that the experience got me in the habit of saving a fixed amount every month. (I didn’t buy the whole life). But, I would have been far ahead of the game if the same amount had gone into a no-load S&P 500 index fund. (This was a long time ago so Total Market index funds didn’t exist yet). Even after leaving the company you refer to, it took me several more years to hop on the index bandwagon but I’m 100% sold on that approach now. The lesson cost me a few bucks but was worth it.
(USN, RET)
Thanks John. Like you, the experience did get me started dollar cost averaging, and because I started in early 1987 I had the benefit of the dip and recovery from the 1987 crash. That all taught me some very good lessons. I ended up using Navy Mutual Aid Association for all my life insurance needs and they are a fantastic organization.
I was the IT Director for a large organization. Many sales reps called upon me selling their products and services. I told my management team that I assumed they all were lying until they proved otherwise. That troubled some that I was so cynical. It troubled me that they were so naive.
Years ago Woody Guthrie wrote “Some men rob you with a six-gun, others rob you with a fountain pen”.
Update it a bit for the modern era, but it’s pretty clear the latter accounts for a ridiculously greater number of thefts as well as an infinitely great total dollar amount.
Some may be readily apparent, but as these examples note others remain under the cloud of obfuscation for years.
as Dr Jim Dahle from White Coat Investor says, ” If you are smart enough to know if your advisor is f=good or bad, you are more than competent to be a DIY investor. Only a small % of advisors are CFPs and not all of them are as ethical as they should be. Be leary of paying anyone AUM fees; that’s the financial advisor’s industry standard of compensation which hopefully should become obsolete. 1% of 1M=10k!! Ouch
PS-great website Jonathan
In addition, no RIA should charge you more than 0.25% to 0.30% per annum unless they are providing financial planning, tax advice and estate planning advice (sans estate plan Attorney costs) in their annual fee. Oh, and they must provide their invest advice in a non-discretionary manner. That is, they must seek your approval before investing your money. Not many of those around, they all want discretionary control of YOUR money.
It ain’t their money and I have cussed out a few of them and told them they should be ashamed of themselves. Out of fifteen firms that I called/emailed in 2016, when I retired, including everyone’s dear old Vanguard, 14 wanted discretionary control. One offered (and still does) both non-discretionary and discretionary control (your choice)… RIA Advisors in Houston, TX. Only two were honest enough to state that I, with my background below, should invest my own money and not pay anyone for investment management.
But heck I’m biased, being an old Stockbroker, Banker, Financial Analyst, Cash Manager and Contract Negotiator with an MS in Finance over a 45 year career. I manage our six accounts @Fidelity (DIY) or my wife will kill me. LOL
You make some excellent points.
I’m struggling with any type of Advisory fee. Sure they can do Social security analysis and run Monte Carlo simulations…etc.
Those astute on tax implications and other planning strategies are probably worthy of 50 basis points for AUM. I agree about discretionary accounts.
some add value with their stock picking skills. A non discretionary account where you can do stocks,individual bonds,ETF’ s and have input for 50 basis points may be the better way to go…I don’t know. For now I do my own
It’s unfortunate that this happened to you, but you worked your way out of it. I’ve learned the hard way to ask experts to dumb down. Wasn’t it Peter Lynch who said before we invest in anything, we should be able to explain it to a five-year-old?
As Andrew Tobias says “Trust No One”. The best steward of your investments is yourself. There is no one that could not learn easily how to invest in the stock and bond markets; ie the three fund portfolio as a starter
Beware of advisors that use their religion as a trusting point.
Even those on radio shows who (seemingly) shill everything under the sun? Say it ain’t so!
“We live in an age with few shared truths, and that’s rife with disinformation and fraud”.
The scammers, or even just the profit seekers know that people want to truly believe a positive message, whether it involves wealth management, pain management, salvation, or achieving erections.
I worked for the broker dealer being discussed. I left after two years of selling clients that contractual mutual funds that charge 50% commission of the first year’s deposit are good for you. These funds were discontinued years later, but the military officers who dollar cost averaged into them during the prolonged bull market from 1982 until 2000, reaped some benefit.
Whole life insurance, with no war clause, is cheap at a young officer’s age, and if bought in high dollar benefit amount, is an excellent retirement cash value nest egg and estate planning tool.
The program suited career officers who did not want to develop their own financial plan. The military officer who founded this broker dealer thought he was doing the best for officers risking their life in the military and who had a guaranteed steady income.
https://www.whitecoatinvestor.com/debunking-the-myths-of-whole-life-insurance/
Very interesting Kenneth. You may remember then that back in late 2004 the company in question, which had already changed their name to protect the guilty, paid a $12 million fine with the SEC. Here’s what the SEC said in part, “…targeted members of our armed forces with investment sales pitches and comparative information that didn’t tell the full story.” It was the false sales pitches that the SEC was primarily concerned about.
An article I just read had a study of more than 1000 advisors.Only 2% are hourly fee based. Why would anyone pay a fee(AUM) based on their wealth. No other profession does so. The AUM fee needs to be buried
The idea under the AUM fee is that the advisor’s goals are aligned with yours. The more you make, the more they make. As the asset level gets higher, there is a decrease in basis points charged, owing to the fact that there are only so many services that can be performed for those additional fees. I assume the hourly fee will be better for some, the AUM for others. (Disclosure: I work for a firm that has an investment advisory division, but I am not an advisor myself, nor do I work in that department.)
If you pay 1% on one million for twenty years you will be out $200,000, not counting lost compounding. Are you seriously suggesting that an advisor will deliver that much over and above what could be made in low cost index funds??
It depends who you are investing for… maybe a deceased spouse with limited knowledge could be well served by an RIA who is a Fiduciary
A surviving (lol) spouse would be well served by a simple portfolio of low cost index funds and an occasional checkup with a fee-for-service advisor. Of course, he might decide to become more knowledgeable when left on his own.
Maybe not if deceased….
Nice article. Thank you for your service.
Ohh, I know exactly the funds and insurance you are talking about. We had a similar close call at our first USAF flying assignment. Then years later my Mom, who was helping my 80+-year-old Grandfather go over brokerage statements, discovers his broker (big firm!) was taking advantage of my Grandfather’s blindness by churning his stocks to generate commissions. Yet another reason why the philosophy at Humble Dollar is so sound.
In 1987 I would venture to say that all broker dealers dealt in loaded front end mutual funds. That was the complete norm. So in his defense, that’s probably how he was trained. Many fine companies like American Funds (Capital Group in California) only offered their funds thru broker dealers. They carried 5.75% front end loads.
Now the industry is dominated by fee based advisors that focus on financial planning and many are fiduciaries, so things have improved..
As I recall, there were far fewer no-load funds back then. What made this firm’s load so pernicious was you paid half your investment as commission the first year, then the load dropped to about 3.75%. In my view, only the sunk cost fallacy, which was working hard, would keep people in the investment.
Is the industry really dominated by fee based advisors?
Lots of wisdom in this article for money matters and much more. I’ve basically lived my life on the assumption that I can usually trust strangers and I’ve rarely had cause to regret it. In my experience and observation the trouble is most often not with strangers but with people in positions that make it hard to question their motives or hold them accountable. I’d far rather trust a stranger where a matter of money is concerned, for example, than my own employer. That said, if I’m ever in a real scrape I’m sure there’s precisely one agency I would want and trust to save my butt, and that’s the US Coast Guard.