Did you (or your spouse) get screwed last year? Would you even know, and would you even care?

 Imagine you walk out to the parking lot after a long day of teaching and notice your car is gone. Would you just shrug your shoulders and start walking home?  Hell no!  You would call the police, file a police report, review the school’s security video, talk to your co-workers, and be mad as hell. Yes? Why? Because your car is probably worth 25k and you worked damn hard to earn that money, you're not going to just give it away!  In fact, you are probably going to do everything in your power to find it and make sure it never happens again. Yes?

So why don’t we do the same thing with our investments?  I can already tell you that you DON’T. You DON’T even know how to check and I’m not even sure if you care.  But if someone steals your car, well, that’s different...I have a few ideas why you don’t care about your investments like you care about your car.

1.    You can’t really see money like you can see a car.  It’s just a bunch of numbers typed on a page.  Your investments serve no functional purpose, yet.

2.    You don’t know how to check to see if someone has “stolen” your investments.

3.    You don’t know how to do the math to determine if something is missing.

4.    You're just too damn tired and you are going to trust your financial advisor salesman to take care of you.

5.    Who would steal your investments anyway? After all, your advisor is taking care of you, right?

Okay, so here’s the backstory to this post.  Just like I hoped, teachers are beginning to pay attention now. They realize the stakes are too high.  Today, a good friend of mine (she gave me permission to share this) approached me with her 2019 year end statement and asked what I thought. When I saw the Franklin Templeton logo in the upper right hand corner, the warning flags went off.  Next, I see the name of the Financial Advisor.  More flags!  Then I see funds like European Fund Class A. Bigger flags!  But how would I expect my friend to know there’s a problem?  After all, she is using a financial advisor.

Sadly, my friend may have lost over $25,000 in gains last year.  Here’s how I figured it out.

The statement didn’t include the annualized return.  So, I needed to calculate that.  The math is simple enough for a 5th grader.

(End Value - Beginning Value)/Beginning Value

(156k-141k)/141k=10.6%

So, my friend made over 10%.  Normally, this would be an excellent year. Many of my friends bragged about how well their financial advisor performed for them last year.  Well, guess what, the S&P500 increased by 30%.  My friend's 10% doesn’t sound so great anymore, does it?

However, this might not be completely fair. Maybe she asked for those low returns from her financial advisor. However, my friend told me that she’s not risk averse at all. I’m assuming she told her financial advisor the same thing, if he even asked.

Just for fun, let’s see how her 10.6% compares to the performance of some Vanguard funds.

1.    Vanguard Total US Index: 30.6% - She would have made $28,200 more than she did but this is all stock and a bit risky.

2.    Vanguard Wellington: 22.5% - She would have made $16,779 more than she did.  Wellington is 60% stock and 40% bonds. Not bad for a person who is not averse to risk.

3.    Vanguard Balanced Fund: 21.8% - She would have made $15,792 more than she did. Vanguard is also 60% stock and 40% bonds. Again, not bad for someone not averse to risk.
4. Vanguard 2035 Target Date Fund: 22.4% - She would have made $16,694 more than she did. This would have certainly been appropriate for my friend's age.

(Her financial advisor had her in 38% bonds. This is an after tax account. In most situations, it does not make sense to have bonds in a taxable account.  Further, the actively managed funds that the advisor has selected, are incredibly tax inefficient. From a tax perspective, it is always more efficient to keep index funds or ETFs in an after tax account.  This financial advisor is not very bright.)

Bottom line, my friend gave up a lot of money last year and it’s been happening for several years.  So where did the money go?  Studying the statement gives us some clues.  Franklin Templeton certainly took a cut and the financial advisor ended up with a big chunk.  Why? His selection did terrible compared to all of the examples above. Many of the funds were labeled Class C.  This means those funds come with a “level load” fee that is charged to the investor throughout the year.  Others were labeled with Class A, usually a 5% load fee that is paid to the advisor when the fund is purchased.  These things can all be found with a quick Google search.  Better yet, visit Bogleheads.org and ask on the forum.  Finally, a quick visit to Morningstar revealed the high expense ratio of each fund the advisor put my friend into. Most had ERs of around 1.5%.  The ERs on the Vanguard funds, above, are a fraction of that.

Back to the car.  My friend could have bought a new car with the money that she gave up last year.  Yes, it’s awful.  Lessons we should learn.

1.    Do not trust financial advisors. This one was awful at his job and a crook! People should know that there is NO education or experience required to be a financial advisor. Use an hourly CFP (certified financial planner) that signs a fiduciary statement.

2.    Do the math! Figuring out your annual stock return is a simple calculation and usually included on the statement.  It wasn’t on this one and that should have been a clue.  Compare your number to the percentage that a target date fund, matching your retirement date, made. If it is a lot less, there may be a problem. You could be in the wrong funds, or you could be getting fleeced.

3.    Ask questions on Bogleheads.org.  These are smart people that want to help you and don’t stand to gain anything from you.

4.    Educate yourself!  Read one of the Boglehead books or TheMillionaire Teacher.  Nobody but YOU has YOUR best interest in mind.

Please don’t get screwed.  Use your PERA401(k). Target Date Funds are a prudent choice (as shown in the example above).  Use a low cost brokerage such as Vanguard or Fidelity for Roth IRAs and after tax investing.

Nothing presented is to be construed as investment advice. Investment advice can be secured from a vetted Certified Financial Planner (CFP®).

When working with a CFP®, it is recommended that s/he sign a Fiduciary Pledge. More information, including questions to ask a planner and a downloadable Fiduciary Pledge, can be found here: https://403bwise.org/education/professional