The Trouble With Personal Finance

I stepped foot into the financial service industry in December, 2003. Since that time I've seen a frenzied real estate market, the collapse of Lehman Brothers, gold crash and burn from a high of $1,895 ($1,090 today), and a total return of 142% (11.8% annualized) in the stock market.

I've worked for three different companies, passed 5 different licensure exams, suffered through two master's level designation credentialing programs (almost done with the 2nd), spent over $11,000 of my own money on advanced advisor training programs, gave up a quarter million dollars to start my own firm, been fired for refusing to buy illiquid penny stocks for a client, and at one point serviced (not very well) 546 clients.

Throughout my journey, I've met some of the most upstanding people on earth. I've also been bamboozled more than once by a few real scumbags. To say my industry experience hasn't yielded a few meaningful insights would be an understatement.

I've been meaning to write down the following observations for a while. Morgan Housel of The Motley Fool helped me put things in perspective. He deserves a decent chunk of the credit for the commentary below.

Ignorance Around Costs. You probably know what your cable bill is down to the penny. Do you know how much you compensated your financial advisor last quarter? At your next social function, could you explain the difference between an expense ratio, an A-share sales load, advisory fee, custodial commission, or tax cost ratio? Hmmmmm.

Earlier this year I sat down with a prospective new client. He had just rolled his $260,000 401(k) over to an insurance based financial advisor. This "advisor" sold him an annuity with total annual fees hovering at 3%. He's stuck with this product (and the massive expenses) for the next 7 years until the surrender schedule ends. Compared to a sensible portfolio of index funds, his investment fees will cost him an extra $80,000 over the next 7 years. If he keeps the annuity all the way through retirement, he kisses more than a quarter million dollars goodbye. By the way the salesperson received a commission of nearly $19,000 for sticking him with this product. Who benefit more from this transaction?

In What Other Industry Can A Professional Do So Much Harm? A London taxi cab driver must pass a test that can take years of practice. If I want to be a firefighter I need extensive and supervised training. If I want to manage the firefighter's retirement fund I need a nice suit and a snazzy sales pitch.

With the exception of politics, no other industry can do so much harm (re-read annuity horror story above) to society while demanding so little in proven expertise.

Where Else Do Results Matter So Little? Maybe tee-ball where every 5 year old earns a celebratory pizza party for never even making contact with the ball. They just thwak the rubber post and the ball drops staight down. RUN RUN RUN!!!

In October, 2012, a CNBC article featuring perennial bear market pundit Peter Schiff claimed gold would hit $5,000 by 2015 (in 2012 gold was trading around $1,800 per ounce). If you were one of the tens of thousands that tunes into this clown's radio show and acted on his advice, this would have been your experience:

The truth is that finance is filled with people who remain in business despite awful track records. Take the Hussman Strategic Growth Fund. Near the end of 2014, this fund had underperformed its 10 year benchmark by 150% and finished dead last or next to dead last compared to its peers over the 10 year, 5 year, 3 year, 1 year, and YTD time frames. This fund somehow still manages in excess of $1 billion dollars. WTF....

What Other Topic Is So Poorly Taught In School? Ok, maybe sex ed. Even though somehow I managed to expand the human race by 2, this one will probably elude me for the rest of my life. Damn you 7th grade required education!

Finance is overwhelmingly taught with math, not everyone's favorite subject. Beta, alpha, and standard deviation are calculated by hand, and students can dissect balance sheets in their sleep. In the real world, finance is mostly psychology based, where the best investors control their emotions. This kind of practical education is rarely taught and never emphasized. Many of the world's best investors have no formal academic training.

Finance Is So Important, Yet Few Care About It. Everyone's well being depends on mastering the fundamentals of savings, debt, insurance, and investing. This isn't calculus or organic chemistry. Basic finance isn't rocket science! All it takes is a bit of sensible guidance from real advisors not trying to rip you off.

When people say "I don't like finance" or they ignore it altogether, the message they're really communicating is I don't like security, stability, comfort, or taking care of my family. And that's a bunch of garbage.

There's really nothing else like finance!

Thanks for reading this post. I had a lot of fun researching and writing it. If you want to pass it on, click any of the social media icons below.