“Guy puts a fancy guarantee on a box ‘cause he wants you to feel all warm and toasty inside.” -Tommy Boy
There will always be people promising the moon. It’s our job to find the reality in the message. We seek the truth. We want the truth. We decipher fact from fiction. It’s easy to be seduced by the carrot of a promise. Wisdom requires us to square the promise with reality.
In all professions, there are exaggerated messages and characters who sell them to us. Another name for them would be warning signs, red flags. There are many of these in the field of personal financial advisory. Here are quite possibly the worst three. Proceed with caution.
#1 – Any use (especially over-use) of the term GUARANTEE. Let’s cut to the chase here. There are no such things as guarantees. Only a person can try to offer a guarantee. And since a person cannot guarantee that a comet won’t destroy the earth tomorrow, there are zero guarantees. If someone is promising a guarantee, they are desperate to make a sale to you. In financial planning, often the guarantee comes in the form of some type of product or solution (annuities, insurance, returns on an investment, etc.). Again, these guarantees at best are paper thin and easily exposed by an average educated expert. At worse, they are illegal (i.e. against the law to say or put in writing).
LESSON #1 – DON’T BE SEDUCED BY THE FALSE COMFORT OF THE WORD GUARANTEE.
#2 – Any investment discussion promising high(ish) returns with no (or minimal) downside risk. This is the classic “if it’s too good to be true, it is.” How many people in our society have to be swindled, defrauded, and basically robbed of their hard-earned savings before people will finally use this cliché in real life? If someone wants more return, they have to take on more risk of loss. If they want to sacrifice returns, then they can drastically reduce their risk of investment losses. There is no magic formula. There is no magical advisor. There is no secret recipe that if we just find that person or that information, the key to financial bliss awaits. This doesn’t exist. It never has and it never will. Make a commitment to stop doing it. That is a key step to financial success.
LESSON #2 – DON’T BE SOLD ON HIGH RETURNS WITH DOWNSIDE PROTECTION. (Would you like to meet Bernie Madoff?)
#3 – A dishonest discussion of how you pay for financial planning and how much it costs. This comes primarily in two forms. Form #1. Quoting you some ridiculously low cost for the service/product or worse, telling you it’s free. It’s not free and it’s not as low cost as they tell you. If they tell you it’s free, it’s an outright lie. How would they be in business if it were free? You must ask yourself this question. If it sounds remarkably low, it is 99.99% likely that they only told you about a portion of the fee you pay, but represented it to you as if it were the entire fee. The rest gets buried in the fine print. Insist on full disclosure. Form #2. This usually comes with some type of “you don’t pay me, the (insert “highly rated” product company name here) pays me.” Let’s do a quick analogy. You walk up to a McDonald’s counter to place your order. You order your meal. You ask “how much do I owe you?” The worker replies, “Oh, it’s free. The bun and meat suppliers decided to pay for your meal for you.” You would never accept this. It makes no sense. If you are the only one coming to the counter for something, why would they pay you to eat their product? It is similar with the financial products. You are paying. They are simply going to syphon it from your account. It’s hidden. Worse yet, ask yourself, is this advisor’s loyalty to you (the client) or to them (the product supplier)? Who is paying them? Accept the truth. It is not wise to bury your head in the sand.
LESSON #3 – GET INFORMED ON VALUE AND HOW IT RELATES TO WHAT YOU PAY. DON’T FALL FOR EITHER OF THESE PLOYS.
These are red flags. They should be viewed this way. The hope is to never encounter them. The way to combat them is with knowledge and education, if you get one of them thrown at you. If you get two or all three, best method…….RUN. Don’t look back. You’re being fished.
“Light is the symbol of truth.” -James Russell Lowell
