Do You Have a Third Grade Financial Education?
If you’re a regular reader of Frugal Rules you know that before my blogging days I worked as a stockbroker in the financial industry. On a regular basis, I saw many otherwise highly educated people make ridiculously foolish decisions with their money. They might have had PhDs in other fields but when it came to financial education and investing, they never made it out of grade school.
The most dreaded conversations I had in my former day job were the ones where a simple mistake ending up costing someone tens of thousands of dollars – if not more. Those conversations always began the same way … “But, I thought I could trust that person.” The person they were speaking of was their financial “advisor” who they had hired to manage their investments for retirement.
Notice I used quotes as the person they had used was usually a charlatan looking out solely for their own self-interest and not someone who had the concerns of the client at heart. This is not meant to disparage financial advisors by any means, because I believe the good ones are well worth it and can be incredibly helpful to have.
However, each time the person in question referenced their mistake it always went back to the same thing – education. They weren’t educating themselves as to how investing worked and did not research the advisor they were handing the management of their hard earned money over to. This lack of due diligence cost them dearly and will likely impact what they might be able to do and afford in retirement.
Blood in the Water
I was reading an article at Bloomberg recently that discussed the boom in 401k rollovers. According to Bloomberg, former employees rolled over approximately $312 billion dollars in 2012 from old 401(k) accounts to IRAs. That is a massive chunk of money.
The article highlighted the rise in individuals who have filed suit against former financial advisors for putting them in investments they should not have been in. After reading the article, not to mention my experience seeing this practice done for years, it doesn’t surprise me one bit that this is happening.
Why the blood in the water analogy? As anyone who is familiar with investing knows, advisors make money from managing our investments for us. Right or wrong, that is how it works out. Unfortunately this practice exposes many to relationships with people who are going to sell them products they should not be in. Examples of such products are:
- Variable annuities
- Non-traded REITs
- bonds laden with fees
- Other crazy life insurance-type products (personal addition here)
Many of these products are sold to individuals because it makes advisors a good amount of money. This is not to say that all of these products are bad, per se, but that they’re sold to people because they make money for someone when it makes no sense for you to have them as a part of your retirement or investment strategy.
Having Money Requires Educating Ourselves
As I’ve shared before in various posts on financial literacy, I believe that we have a responsibility to manage our finances wisely. This is a personal finance site, so I know that expectation is a bit on the obvious side. Unless you know everything, which I know isn’t true unless you’re Warren Buffet, then having money means that we need to educate ourselves about how it works. That runs the gambit of knowing how to budget if you’re in debt to beginning saving for retirement if you’re in that place.
This also means that we should not give in to the excuse that we can’t learn about something or don’t have the skills required to complete a certain task. Those can be easy excuses to give into; heck, I’ve done it myself. However, you’re only going to harm yourself in the long run by giving in to those excuses. In the case of investing, there are plenty of resources available online, and many of it is free. If that isn’t an option for you, check into your 401(k) as many plans offer free educational resources to help you make investing decisions.
What if you hire an advisor to manage your investments for you – are you still responsible to educate yourself? I believe in those cases then you’re called to educate yourself even more, not less. Not only do you want to guide your advisor as to what you want and/or what your goals are, you also want to make sure they’re doing what’s truly in your best interest. All of that requires educating yourself as to investing in the stock market and how it should work.
You also want to educate yourself about the background of the advisor himself or herself, by checking out resources like FINRA Broker Check, or the NAPFA Guide to choosing a financial advisor. As one who has seen what a “bad” financial advisor can do please take the time to check yours out thoroughly before handing over your retirement savings.
If you’re more in the do-it-yourself camp when it comes to investing and are simply rolling over an old 401(k), you’re not off the hook either. There are hundreds, if not thousands, of online brokerages available. Educate yourself as to which one fits you best and read the fine print to make sure you know what you’re getting yourself into. You can also use the FINRA Broker Check to research them to make sure they’re on the up and up. Assuming you have big things planned for your money and want to make sure it’s there when you need it, then it benefits you to take the time to do some homework on the brokerages you’re considering investing with.
What is one area of finance that you want to grow your knowledge in? Would you ever consider hiring a financial advisor? What would you be looking for if you hired one?
Photo courtesy of: Lwp Kommunikáció