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Watch Your Wallet

Joe Kesler

AS A BANKER, I got a ringside seat from which to watch the many ways that people are separated from their hard-earned money. Some are illegal. Some are legal, but unethical. And many, while legal and ethical, would be unnecessary with a little more knowledge about managing money.

For me, the most disturbing experiences were when scammers extracted money from the naïve and innocent. I’ve seen the pain of customers who found out that their elderly mother had given her life savings to a manipulative TV preacher. Unfortunately, there isn’t a lot that can be done in such situations.

Even sadder are the lonely people who develop an online romance with someone overseas. To come to the U.S., somebody convinced one of my customers to wire funds, so he could get a passport and airline ticket. But that wasn’t enough. Just send a little more, he told her numerous times. Finally, the lightbulb came on that this might be a scam.

Have you heard of the Nigerian prince scam? I didn’t believe any sophisticated person would fall for such a crazy scheme. But a customer of mine got a fax from a “prince” trapped in Nigeria. The fax promised that if my customer, an accountant no less, would wire $20,000, it would allow the prince to wire my customer millions. Unfortunately, my customer bought it and lost not only his money, but also his reputation.

Rather than absorb the loss and move on, my customer decided to fly to Nigeria to “get his money back.” He didn’t get his money back, but at least he came back alive.

Today, many scams are high tech. It’s become common for computer hackers to demand ransom in return for unlocking vital computer systems. I’ve talked to businesses that have had to pay the ransom in bitcoin—or risk seeing their business fail.

Selling fear. One of the earliest books I read on investing was How to Prosper During the Coming Bad Years, published in 1979.  It scared me that we were on the brink of destruction. I didn’t have much money, but I bought goldmining stocks in countries I couldn’t even find on a map. I later learned that fear sells books and newsletters. But it doesn’t lead to clear thinking or prosperity.

Today’s marketers still seek to get your money through fear tactics. I recently saw an economist’s newsletter that included an impressive array of charts, all showing how the stock market is in a bubble. His pitch? The future doesn’t belong to passive low-cost index investors like me. Rather, I should turn my money over to him, because he’s going to be an expert stock picker as the markets crash.

As I look back over the past 10 years, I find headlines every year suggesting the market might be in a bubble—and yet there was no devastating market collapse. Here’s a sample:

Whenever you find yourself making a decision out of fear, ask yourself if you’re being manipulated by somebody’s sales strategy. Someday, the markets will go down. But don’t let a fearmonger sell you something by playing on that concern. Instead, structure your portfolio so you’re confident you can weather a market downturn.

Promising performance. One of my favorite quotes about money is from Upton Sinclair, who said, “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

I saw this firsthand a few years ago. At the time, I was a regional president for a large bank. The bank gave me sales goals for referring business to the trust department. I was able to help a trust department money manager secure a pension fund overseeing tens of millions of dollars. It was a good account.

Each year, the money manager would bring a host of colorful charts to the trustees of the pension plan and explain how well he had managed their money. In truth, the plan underperformed the broad market. But he was smooth. By the end of the meeting, he had the trustees convinced he had done a great job and that they were smart fiduciaries for hiring him.

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After one of these meetings, I commented to the money manager that the pension plan could eliminate his high six-figure fee and have better results by investing in low-cost index funds. He didn’t appreciate the comment. I realized one of the reasons he was such a good salesman was that he believed his own spin. As Sinclair noted, his fee depended on him not understanding the powerful argument for low-cost index-fund investing.

Paying dearly. There may be good reasons people outsource the managing of their money. Some may have no knowledge of financial markets or are too busy to manage their own investments. If you decide to let someone manage your money, make it a point to understand the fees. It can be eye-opening.

I did a little research earlier this year on the fee schedules of two trust companies. My wife and I are getting around to updating our estate plan. I wanted to see the cost, should something happen to me, of letting a trust department handle financial matters for my wife.

I’ll use $500,000 to illustrate. I already know the cost to keep our money in a diversified fund like Vanguard Total Stock Market ETF. The cost would be 0.03% of the total invested, or $150 a year on $500,000.

On the other hand, a Montana bank trust department would charge $6,000 a year, which would be in addition to money management fees. Total fees could easily run $8,500 annually for the trust department to manage $500,000.

A national brokerage firm’s trust department was similar. Its fee would run $7,500, not including the cost of the funds bought. Total fees could easily be $10,000 a year or more, depending on the fees assessed by the mutual funds and other investments purchased.

I’m just a banker, not a rocket scientist, but I can calculate the difference between $150 and $10,000 pretty easily. Would my wife get a better return from active managers than I get by keeping our money at Vanguard Group? Maybe. But if the past decade is a fair indicator, those active managers will probably lag behind a passive, low-cost approach—and they’ll do so consistently.

Joe Kesler is the author of Smart Money with Purpose and the founder of a website with the same name, which is where a version of this article first appeared. He spent 40 years in community banking, assisting small businesses and consumers. Joe served as chief executive of banks in Illinois and Montana. He currently lives with his wife in Missoula, Montana, spending his time writing on personal finance, serving on two bank boards and hiking in the Rocky Mountains. Check out Joe’s previous articles.

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Steve Spinella
Steve Spinella
7 months ago

Someone else will be making decisions when I’m gone, that’s for sure. My resolve, at the moment, is to influence them while I’m here, but not to tie their hands after I’m gone. I do have a document that outlines four good approaches to investing and which one we’re currently following. Perhaps that will be useful later, but it’s just as likely it will not even be part of the discussion soon after I’m gone. Fortunately I think my unpaid family has a “$6000” advantage over any paid advisers, but they might give that up someday. I am committed to letting them decide.

Langston Holland
Langston Holland
7 months ago

Personally, I find all the bubble talk comforting. If it was all FOMO I’d be worried.

In other news, I think Sinclair was soft-peddling – it’s impossible to get someone to understand something when they are paid not to. It’s impossible to get people to listen if they play golf with their broker. It’s impossible to get a financially illiterate executor of a trust to consider a low cost alternative over bleeding it to death through a golf buddy or a glossy brochure. As a matter of fact, Mark Twain was soft-peddling when he said golf was nothing but a good walk spoiled! The pool halls aren’t the problem – it’s golf! 🙂

medhat
medhat
7 months ago

Insightful and relevant to my personal situation. As part of an inheritance, I have money set aside for myself and my children, all in managed accounts, that by any objective measure significantly underperform assets that are under my own management (IRAs, 401ks, investment accounts). So while it pains me to see this on an annual (I try not to check) basis, my current counterargument is that it’s a form of diversification, as they do have some exposure in underperforming markets I don’t have a stake in. I’m 3 years into this experiment, and will likely reassess at 5, but agree that there are some situations where an actively managed account, even one that “underperforms”, may have some utility in one’s portfolio.

MarkP
MarkP
7 months ago

If not a trust department to assist your wife, then what?

Joe Kesler
Joe Kesler
7 months ago
Reply to  MarkP

Mark, my plan is to purchase enough in low cost annuity income so that along with social security my wife would have her fixed expenses covered if I’m not around. Rather than go the trust department route to manage what’s left, I’ve got two financial advisors my wife and I have gotten to know over the years in a variety of circumstances. In other words, they have earned our trust. I’m thinking about leaving directions to have them manage the money with low cost investments. I’m getting comfortable with the amount they would charge for the needed service my wife would need. Finally, I’m happy a couple of my kids are reading good investment books and would be available to assist their mother. That’s in a nutshell where I’m at in the process. Thanks for the question.

greglee
greglee
7 months ago
Reply to  MarkP

Answering your question: To take her money.

UofODuck
UofODuck
7 months ago
Reply to  MarkP

That is indeed the question. Mr. Kesler is able to manage his own investments, but his plan B for his wife raises a few questions. “Low cost” annuities are seldom low cost and I doubt the financial advisors he has befriended will work for free. Its also nice that some of his children are becoming better versed in money management, but unless they actually work in the industry, this option may or may not be effective.

Like Mr. Kesler, I worked in the financial services industry, managing money for clients for 40+ years. I also agree that trust dept. ad valorem fees of 1.0%+, plus embedded fund fees, can be expensive. And, I am also a big believer in low cost funds and ETF’s, which I use exclusively in my personal investments.

So-called “robo” investment platforms can be a cheaper alternative, but in some instances, where there is no good Plan B for a surviving spouse, the services of a traditional trust department, which include far more than just money management, may be worth the cost. There is simply no one size fits all solution. If you can manage your own money, you can significantly reduce the fees you will pay. If not, you can expect to pay 0.50% to 1.50% to have someone provide this service.

Joe Kesler
Joe Kesler
7 months ago
Reply to  UofODuck

Thanks for pointing out the complexity of the problem UofODuck. The only thing I’d quibble with you on is your argument against low cost annuities. There are certainly some very high cost ones out there, but the plain vanilla immediate annuities I think can be very low cost.

But, yes, the best solution for the least cost is to not die and continue to manage it myself. I just haven’t found the immortality pill yet! Thanks for the contribution to the topic.

greglee
greglee
7 months ago
Reply to  UofODuck

It’s puzzled me why so many people think they need financial advisors. My wife and I, both 79, have been investing since the 70s of the last century, and we have never had an FA — never felt the need for one. We get quite decent returns from 13 mutual funds from TR Price. I decided that trading investments was a bad idea, also holding bonds, so there is really nothing we need to do to maintain our investments. We incur no fees other than the ER of the funds. When I die, my wife won’t need to do anything about the investments. If she wants more income, though I doubt she will, she can simply call up TRP and ask them to arrange to sell fund shares periodically and deposit the money to our/her checking account.

HannahKatz
HannahKatz
7 months ago

Some of these money “experts” have predicted at least ten of the last three recessions.

Joe Kesler
Joe Kesler
7 months ago
Reply to  HannahKatz

Great point Hannah. And yet they continue to get the airtime on business channels to weigh in on where the market or economy are going.

SanLouisKid
SanLouisKid
7 months ago

Another quote I like is, “Whose bread I eat, his song I sing.”

greglee
greglee
7 months ago

For a recent example of bubble-talk, you don’t need to go far. Look at Grossman’s article on this very blog dated March 7, “Coping with Crazy”.

SCao
SCao
7 months ago

Thanks for sharing. Nice article. Acquiring personal finance knowldege and enhance finance interacy are critical life skill both for ourselves and to pass on to our kids.

Joe Kesler
Joe Kesler
7 months ago
Reply to  SCao

Well said SCao.

booch221
booch221
7 months ago

Every time I log into my Vanguard account I get a pop-up nag screen trying to get me to sign up for their Personal Advisor Services. They charge 0.3% annually to rebalance your portfolio and hold your hand during market volatility. For me that would amount to nearly $6,000 a year. I have a very simple portfolio of 50% stocks and 50% bonds mostly in index funds. It’s very easy to manage this portfolio myself. I figure I’ve saved at least $40K over the years by saying no to PAS.

Roboticus Aquarius
Roboticus Aquarius
7 months ago
Reply to  booch221

Yup. I was thinking of PAS too as I read the post. The advantage of PAS down the road might be for your wife or heirs to use it (one reason many of us simplify our portfolio in retirement… I know I will.) I think PAS advice has been ok from what I’ve heard.

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