Financial advisor scores another victim

[samclem]

My friend Bill, who works where I used to work, told me yesterday that he'd just been to see his new financial advisor and that they news was good--he'd be able to retire now (at age 64) rather than having to stay longer as he'd been planning. Bill and have never talked in depth about money issues, but he'd mentioned that he hadn't been saving much. He's counting on SS, some funds from the civil service DB plan, and funds from his savings.

The financial advisor is a real wizard. "He's projecting that our savings will grow at 10-14% per year. Now, he said it would go up and down, so we shouldn't count on 14% every year, but 10% is probably as low as it will go. If I just take out 10% each year, then in the years we get 14% it will help the balance grow." I mentioned that many folks would be uncomfortable with planning for growth rates this high, but it turns out that "this guy is really good. He'll buy staocks that are going up, and place an automatic sel order so if they go down, I won't lose money. He just keeps ratcheting things up as the stocks rise. Plus, he only gets a commission on the amount I gain every year--if my account doesn't go up, he gets nothing." Obviously, the guy is going to set him up with some highly aggressive stocks (if they go up he wins big, if they go down he loses nothing). Obviously, Bill is going to be eaten alive by commissions, whipsawed when these stocks dip temporarily, and at the very least experience incredible volatility.

This is sad. Bill is a great guy, has done a lot for me, and I can see he's going to lose a lot of money to this shark. I'm fairly sure nothing I could say can break the spell at this point-- he thinks he's found a guy who can beat the market, and he wants to believe it.

PT Barnum was right.

 

[macdaddy]

If he's this clueless at 64, something tells me you're not going to be able to change his mind. Wait until he asks for help and then spill your guts.

 

[Scrooge]

I'm fairly sure nothing I could say can break the spell at this point

he thinks he's found a guy who can beat the market, and he wants to believe it.

So how did the shark financial advisor convince him that he can beat the market? Just "trust me, I can do it!" or did he show him 10 years worth of returns for some carefuly selected funds and stocks?

 

[samclem]

So how did the shark financial advisor convince him that he can beat the market? Just "trust me, I can do it!" or did he show him 10 years worth of returns for some carefuly selected funds and stocks?

It sounds like he did a couple of things:
-- Track record: Bill has had an account with the guy for a year. When he went for his review, the results weren't stellar. The rationale: an unrepresentative reporting period. "For the last year, your stocks are up just 6%. Now, this is just a matter of when we are looking at them. I built this chart to show you how these stocks have been doing--as you can see, if you'd come in for this review last December, we'd be up over 10%. That's in the low range--momentum is on the rise with these issues, I expect next year we'l be well rewarded."
-- The stop-loss mechanism: Bill likes the idea that his stocks have unlimited upside potential, but can only fall a few percent before they are automaticaly sold (by the way--generating commissions, possibly a taxable event, and more commissions as the advisor buys the next rising star).

I can think of several lines of reasoning to use in discussing this with Bil:
-- If this guy really had the skill to get a 10-14% return year ofter year, he wouldn't need to be drumming up business with small retail investors, he'd be in high demand everywhere. Heck, he could get a HELOC and make himself rich with his own money in a few years.
-- Let's see the results of all clients who've been with him for more than 5 years.

Anyway, Bill thinks he's got a way to get a SWR of 10% per year. Maybe he knows deep down that this is not realistic. Maybe the "advisor" really believes he can do it. Regardless, I anticipate he will not want to hear from me about prudent asset allocation, the benefits of some bonds, and the long-term survival rate of a withdrawal rates exceeding 3 to 5%. "Hey, you--put down that hot fudge sundae and come look at this bowl of broccoli I have here." But, broccoli beats Alpo.

 

[Siv]

Hmm...that's sad. There are tons of information out there, learning process takes a long time and one needs to practice, learn from mistake since they're young. I started investing since 25 and still quite stupid, there's so much I don't understand and yes, I paid my dues because I was clueless then. Thought stocks only go up, never can lose money, I will have the guts to sell when need to, short when I see opportunities, bla...bla..... oh well, now I'm into index funds, CDs rental properties, work and save my butt off, doing everything I can to accummulate. Still 35 years to retirement, not that I want to retire...enjoy the work pace and able to find balance between work, rest, exercise, relax but like the idea of accummulating wealth because I know when the time comes, we can only depend on ourselves.

My sister started late into the market game and did so when things are going up, up. I had told her and other siblings to only invest with long term purpose....did anyone listen? of course not until they experience pain...she particularly is down probably 12-15K. Luckily both her and husband are dentist so they should be ok. It's difficult to steer someone against what they believe in at the moment...you can only wish it will all be ok. I also very much wish I could share with them what little I know and I do from time to time although not sure if it will be heard.