Avoid Gouging

For a quarter century I had a stock broker/ "financial advisor" who was folksy, funny, took me to breakfast every six months, invested my money for me ....

And took two percent off the top. I was reminded of this happy time when I read Rick Ferri's think piece on Forbes.com:

Your advisor is a really nice person, and the office manager of the financial firm you do business with is really nice also, and those mutual funds you were sold by your advisor are also managed by really nice people. But this isn't a reason to give these people $1 million extra over your lifetime. ...

Assume a young man and woman get married and enter the workforce at age 22. Their starting pay in the workforce is $40,000 each per year. Every year each gets a 5% raise and both work until age 65. The couple religiously saves 10% of their salaries every year in a retirement account. How much does the couple have for retirement at age 65?

Their nest egg will depend on their rate of investment return. Here are [two] possibilities:

--Five percent return grows to $2.67 million. ...

--Six-and-a-half percent return grows to $3.65 million. ...

So how do you increase your return by a million bucks? The first order of business is to not have somebody taking 1.5% (or 2%) of your investment money as you go along.

It took me two decades to figure this minor detail out, but it finally registered that I could do as well as most financial advisors out there if I A) did some independent research, and B) had the gumption to set up my own asset allocation plan and stick to it. What I've learned over time is:

1) There is no ideal asset allocation, but only calculated guesstimates based on market histories that may or may not be replicated.

2) Every investor has his own capacity for risk, and threshhold for financial pain. And each investor knows it better than some detached financial advisor with his or her own agenda.

3) Financial advisors have their uses, but are used best on a fee-based rather than a commission basis.

(As for me, my jovial investment counselor and I parted company twelve years ago when I did some back-of-the-envelope calculations and realized that he was giving me lower returns, year by year, than an S & P 500 Index Fund. Although I miss the fun breakfasts we used to have, I don't miss giving the guy 2% of my money.)

And here's yet another article that might convince you that stock brokers and their cousins might not have your best interests at heart.

Upcoming 401(k) Meetings

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