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.

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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