How to avoid money management companies that want to sucker you

My conservative SWAG is that ~95% of the financial ‘services’ being provided to your average investor are legalized theft, and actively doing harm to consumers as opposed to helping them retire, send their kids to college, live within their means, etc. As an (independent, commission-free) person in the financial services industry, let me be the first to tell you that you should be extremely skeptical and selective about whom you go to for investment advice, insurance, and investment services & products.

Trust no one. Except me; I’m one of the few good guys (but test me anyway just to show you’re paying attention!)

You can guess which kind are Good and which are Bad or Ugly… (For spaghetti Western nerds: you want to invest in the grave next to Arch Stanton’s, not his.)

There is really only one investment firm I recommend to keep your investments at, and that’s Vanguard, because of the unique way the company is structured.

However, there are TONS of firms I hate, and I’m happy to tell you by name whom they are. I already talked about sh***y banks, so let’s turn to financial ‘services’ firms aka money managers. The MO of all of these firms is straightforward and, in my opinion, should be criminalized because of the billions in harm they do to consumers each year:

They spend a lot on salespeople and advertising and get you to invest with them in the guise of looking out for your interests, and then…

… they sell you high-commission-generating or otherwise high-fee products that secretly steal your money without you really being aware of it. This can happen through commissions that they get but you don’t directly pay, through high expense ratio mutual funds that you pay straight from your account balance without noticing, or in other similar ways. They compound the evil by getting all their money up front through high ‘sales loads’ or commissions at the time of sale (vs annually in an expense ratio or annual fee, although they do that too, the bastards.) Commonly, even after you’ve figured out that you’ve been hoodwinked, getting out of the product doesn’t help much because most of the damage has already been done to you.

You end up MUCH MUCH poorer because of all the fees being siphoned off, and these guys laugh all the way to the bank, with the lower-level grunts maybe not even realizing what an evil they’re perpetrating. Read the anecdote about “the customers yachts“.

The evil firms in the money management space that I see most frequently taking advantage of average investors are:

Ameriprise: they sell you expensive, illiquid products like cash value life insurance and non-tradable REITs and get exorbitant kick-backs– politely called ‘revenue sharing’ or just ‘commissions’– from the folks who’s high-fee products they sell you (or they cut out the middleman and sell you their own high-fee products.) When you try to get out of these products, you find you’ve already paid a huge upfront commission, might have MORE fees to pay for the privilege of taking your own money back, and/or would have to sell at a big loss in a secondary market (*cough* time shares and non-traded REITs!)

Ameriprise has paid up at least twice in multimillion-dollar class-action lawsuits, which is amazing considering how much leeway they already have to legally steal from people. But hey, when you’re greedy and shady and have investors to please, why stop at just the legal ways of separating investors from their hard-earned money?

Edward Jones: same thing as Ameriprise, but often with high-fee mutual funds that they get their kick-backs from.

Raymond James: same business model as the other two scoundrels.

I don’t see UBS, Merril Lynch, Bank of America, Wells Fargo and the other big ‘wealth management’ guys picking on the small investors as much, but avoid them too. I think they tend to fleece wealthier folks through high investment management fees, but I suspect they also use commissions too to juice their egregious takings.

Instead, manage your own money with the only two investments you need instead. If you need help, read this blog and DIY if you have the time, acumen and energy, or reach out to a fee-only (= no commissions!) financial advisor like me, or these guys. I recommend paying only for one-time financial planning or incidental on-going advice, but NOT for as advisor to manage your assets via Assets Under Management (AUM) fees.

If you really think you need ongoing investment management services AND the fee is well under 1%, you could consider it. Vanguard charges 0.3% AUM for this service, which is reasonable, but I still think you’re better off keeping that 0.3% and doing it yourself.

Instead, ask your fee-only advisor for their investment recommendations and implement them yourself, or better yet, 98% of you can probably go with my ‘two investments’ guidance and be done with it (and the other 2% would still do fine if they took the same advice.)

How to identify the other bad guys

The above wasn’t an exhaustive list of the bad guys– like bacteria, they are too numerous to count,– so here’s a few helpful tips for deciding whether the financial person you’re dealing with is going to rip you off. (I don’t care how neatly pressed his suit is, how well it fits, or how shiny his shoes are!) If the answer is ‘yes’ to any of these questions, grip your wallet tighly and run the other way:

  1. Are they recommending cash value/whole/universal/variable life insurance to you? If you ever hear the word life insurance in a sales context, unless it’s immediately preceded by the word ‘term’, you know the person is a scoundrel.
  2. Are they recommending an annuity? Annuities, like cash value life insurance, are notoriously high-fee and inflexible. AVOID!
  3. Do the mutual funds they recommend take any ‘front loads’ (upfront fees)? If so, RUN! Good mutual funds generally have no loads, back or front, and very low annual expense ratios (under 0.5%; Vanguard’s core index funds average around 0.1%.)
  4. Are they recommending any mutual funds with expense ratios > 0.5%? Don’t pay a guy in a suit to underperform the market. Get the market return using a low-fee index fund and leave those other suckers investors in the dust.
  5. Are they offering to ‘manage’ your money by buying and selling individual stocks? Very few people can beat the market, and no one that can is going to spend much time tracking you down, because they’ll be too busy making money hand-over-fist to let you in on their secrets.
  6. Are they selling any product that sounds sexy or complicated like REITs, private equity, oil and gas partnerships, some hot new industry/sector of the market, stock or IPO that you should get in on? You don’t need any of that complicating garbage. It’ll only hurt you on average with fees, taxes, and illiquidity.
  7. Are they selling timeshares, or real estate as an ‘investment’? Real estate, and timeshares specifically, have super high fees and liquidity problems. Let your personal residence be the extent of your real estate ‘portfolio’, and leave the rest of the real estate game to the pros. Real estate brokers get paid to sell you real estate, so ignore them when they tell you how wonderful it is (“it’s ALWAYS a good time to buy!”), and read my skepticism instead.

There you go. Avoid these guys selling these products and you will make me very happy and make yourself much richer. I hate seeing people who should have so much more money than they currently do because they’ve fallen victim to the folks above. And, sadly, many people I see have, including many of my clients, friends, and family members. That puts the personal in personal finance, let me tell you!

Don’t be one of the bad guys’ victims, and if you have been, fix the situation by getting your money away from them and out of whatever bad product it’s been put into as carefully and costlessly as you can. I can help if you need it.

To financial service professionals employed by one of these firms

I should note too that this isn’t a dig at any particular person working at these companies. If you’re one of them, I’m sure you believe and try to do right by your customers, but you’re ‘paid not to understand’ how bad the incentives are at your employer and how self-serving the products you’re encouraged to sell are.

Good people + bad incentive systems = bad behavior by otherwise good people, often with the perpetrators not even realizing that they are doing something bad for their clients, or rationalizing it away. “Well, they’d just go to some other big firm that’ll rip them off in the same way!” “But I need these commissions to live. My family’s gotta eat too!”

All of these are lies you tell yourself to feel better about hurting people because it’s good for your bottom line.

To you I make this plea: If you’re a financial services provider working at one these companies, get out of a corrupt system and make money in a more honorable way if you can. I’m happy to chat about how I decided to run my business the way I do in case you’re interested in leaving the Dark Side of personal finance.

Hear the great Charlie Munger speak at the 2021 Daily Journal Corp shareholder’s meeting

Munger and the Daily Journal Corp CEO hold forth of Gamestop and Robinhood, bankers, Wells Fargo, Costco vs Amazon, and much more! Munger is Warren Buffett’s right hand man at Berkshire Hathaway, and a wise old man!

Watch the full meeting here on Yahoo Finance: https://www.yahoo.com/now/charlie-munger-speaks-daily-journal-162005167.html

How to retire way earlier in 10 minutes

This is the first post in a series of easy steps I’m writing for the New Year that will dramatically improve your financial security in 15 minutes or less.

Retire way earlier by boosting your retirement contributions in 10 minutes

Log into your employer’s retirement plan (e.g.: 401k/403b) and increase your contribution to 20%. Or, just put in the full IRS-allowed max of $19,500 for 2021. Divide $19,500 into your base salary to get a percentage.

Contributing 20% will only reduce your take-home by 15%-ish, depending on your tax bracket, because of the taxes you’ll save. If you were already contributing 10% to your 401k, an extra 10% will only cost you 7-8%. You can live off 93% of your old spending without even noticing, I promise!

If 20% is more than you can stomach to do right now based on your current spending, just log on and boost your contributions by 2-3% instead, which you definitely not miss since that’s a mere 1.5 – 2.5% of your take-home. After upping your contribution, set a goal of getting to 20% eventually, and use the automatic increase function that most providers offer to boost your savings annually by 2% until you get to 20% (or the max contribution limit.)

No matter how much you decide to contribute, definitely put in enough to get all of any employer matching your company offers. That’s free money you can’t afford to pass up.

Why boost your retirement contributions?

In addition to saving thousands a year in taxes, boosting your 401k contribution from 10% to 15% per year means you will have 50% more money at retirement.

Yes, that’s right, for the price of only a ~3.5% decrease in stuff-you-could-buy-that-you-didn’t-need-anyway, your income in your golden years will go up by 50%! Even a mere 2% boost from 10 to 12% ups your retirement income by 20%, so at least do that much.

I’d take this deal any day; wouldn’t you…? If you’re still not convinced that saving for your future is something you must do now, picture yourself in your 60s or 70s: grey hair– or white, if yours is already grey–, (more) wrinkles, a slower step, and someone wiser, quieter, but a little more lonely and less lively than you are now. Don’t you want that person– you— to be financially comfortable, maybe even relatively wealthy, even if it means a small sacrifice on the younger you?

Do it right now, before you read any further!

Log into your workplace’s retirement account, which for most people is either a 401k or 403b plan. Search your company’s benefits site if you don’t know where to go, or if you know they use Vanguard or Fidelity, head straight there and login (create an online login if you’ve never logged in before.)

Click on your 401k or 403b account if you have multiple accounts, and then look for something that says ‘contributions’ like ‘change my contributions’. Click that, and find your current contribution, usually expressed as a percentage of your base salary. Enter the new number that you decided upon above, and save your work. You should get some kind of confirmation screen.

Great work! Keep reading. You need to do one more thing while you’re logged in.

Optimize your investments with a few more button clicks

Switch both your current investments as well as your future contributions to a low-fee Target Retirement fund like those offered by Vanguard or the Fidelity Freedom funds. Choose the year closest to your 75th birthday (e.g.: if you were born in 1980, choose the 2065 fund.) You should see some option like ‘change investments’ and might have to do this once for future contributions and once for the money already invested in your account.

For bonus points, double-check your ‘beneficiaries’, or set them up if you haven’t before. You want to make sure your assets are sent to the people or charities you want to get them if something untimely happened to you.

Don’t have an employer retirement account? Use an IRA instead

If your employer doesn’t have a retirement account, or you freelance and don’t want to set up a self-employed IRA, open a Roth IRA at Vanguard instead, then set up automatic monthly deposits with this link after you’re logged in. The maximum yearly contribution if you’re under 50 is $6,000/year, and $7,000 if you’re 50+. Max out if you can.

I’m assuming a Roth is best for you since I’m predicting you’re at or under the 22% tax bracket (i.e.: you make less than $100,000 single, or your family makes less than $200,000 if married.) If your marginal rate is 24% or more and would rather save on taxes now, use the Traditional IRA instead.

You’re now retiring earlier, or more luxuriously, or both!

Boom! You just secured your age 60+ retirement in the time it takes to make a cup of coffee. Pat your self on the back, take a lap and hit the showers.

Next up, make this simple change to you direct deposit and never worry about spending too much again.

If you want to retire earlier than that, read this too.

Share in the comments how much you bumped up your contribution, and whether you changed your investments or beneficiaries!

Shareholder letters from great investors and businessmen: Buffett, Munger, and Bezos

I like reading letters to shareholder from CEOs that like to educate as much as they like to invest and run businesses. Below are links to the collected letters from investing giants including Warren Buffett & Charlie Munger of Berkshire Hathaway, and Amazon CEO and founder Jeff Bezos. This is the kind of education that I recommend those interested in investing read.

Warren Buffett, superinvestor and Berkshire CEO and chairman

Berkshire Hathaway’s letters to shareholders can be found here individually on Berkshire’s website. (I have yet to find a free, updated, complete collection, but post a link in the comments if you find one!) You can find some edited versions, collections, and other Buffett writings here.

I highly recommend both Buffett’s partnership letters collected & edited in this book, as well as his Berkshire letters edited in this book. Really you’ll learn a lot more, more quickly from those two books than diving through each letter one after the other like I did after reading both those books. I just can’t get enough Buffett!

Charlie Munger, Wesco chairman and Buffett’s right-hand man at Berkshire

David Hoang has kindly collected Charlie Munger’s Wesco letters from 1983 to 2009 (the last letter available.)

Jeff Bezos, Amazon founder, CEO, chairman, and operational business genius

I’ve put together an (ongoing) collection of the Amazon CEO’s letters to shareholders here from 1997 to the present.

Feel free to bug me if you notice that I haven’t updated the PDF for the past fiscal year. The 2020 letter will come out in 2021, for example.

What other investing or business guru deserves to have their shareholder letters listed here? Let me know in the comments, and post a link to their letters if you have one!