Personal finance ignorance among the otherwise intelligent

[Markola]

Last night, we had dinner with a friend, whose father was a Goldman Sachs bond trader in Manhattan for 32 years. She grew up with limousines and even helicopters on demand. I know that her privileged upbringing causes less sympathy but she is a hard-working attorney and fully responsible person, whom we love as an amazingly good friend. We always assumed our friend would inherit many millions someday, and she might have assumed that, too. It turns out, she learned last week that her father was essentially wiped out through a margin call last year when the Covid recession struck. Beyond that, she doesn’t know how he was invested. He’s developed depression and other maladies and his remaining assets are being spent down so that he can go on Medicaid! We were shocked and saddened by her story.

This was in the same week that my 81 y.o. DF, thankfully, reached out to me before liquidating his brokerage account with Bankers Life to buy some exotic whole life policy that his Bankers Life agent was trying to pimp him. In that process, I discovered this agent has my dad invested 100% in a single high fee growth tech stock mutual fund. Apparently, this agent works the modest-income retirement community my DF lives in. As gently as I could, I explained the risks of this portfolio and he agreed to ask his agent if Bankers Life carries target date or retirement income funds. Sickening.

My dad is an engineer who has worked his entire life, and even continues part time employment at 81. He is good with numbers but could never be bothered to read a basic book on personal finance. He does seem to have avoided debt, thankfully, and he owns his little condo outright. He once had an IRA, which he liquidated 30 years ago to buy a cabin, which is now long gone.

Sadly, no matter how I slice the numbers he’s finally provided me, he’s looking at a 50% lifestyle reduction once he finally stops working. I’m just slack-jawed by these two examples of financial irresponsibility. Serenity Prayer time, I guess.

 

[mystang52]

Over the years I've had quite a few friends and acquaintances who are likewise less than smart when it comes to personal finance. Most would appear to be otherwise smart, with good to great income. I'm not a psychiatrist, so I just presume the first and foremost reason is a near-sighted desire to enjoy current income.

 

[Chuckanut]

This was in the same week that my 81 y.o. DF, thankfully, reached out to me before liquidating his brokerage account with Bankers Life to buy some exotic whole life policy that his Bankers Life agent was trying to pimp him. In that process, I discovered this agent has my dad invested 100% in a single high fee growth tech stock mutual fund. Apparently, this agent works the modest-income retirement community my DF lives in. As gently as I could, I explained the risks of this portfolio and he agreed to ask his agent if Bankers Life carries target date or retirement income funds. Sickening.

Emphasis added.

I may be wrong but doesn't this violate some rule or law about appropriate investments?

 

[brett]

I am not certain why we would presume someone is competent with personal finance simply because the person has a good education and/or a good income.

I worked with a number of educated high earners who were in debt up to their eyeballs. When I retired at 58 more than one confessed that they would never be able to retire before 65, if then.

The other downfall was dealing with a 'friend', relative, or neighbor for investment advice and direction. That, IMHO, is a recipe for disaster and a great way to loose a friend or alienate a relative or neighbor. This is what fuels affinity ponzi schemes.

 

[Dtail]

Just another example of at the very least, more personal finance classes should be taught at least at the high schools.

 

[OldShooter]

... I may be wrong but doesn't this violate some rule or law about appropriate investments?

Breach of fiduciary duty. Financial abuse of an elder. Depends on the state what laws apply.

But given the recent market the victim may not have been damaged by owning the fund. So what can he claim in civil court?

 

[aja8888]

A friend of mine (in our ROMEO group that meets daily for coffee) recently mentioned casually that his wife has just reviewed her "account" that she inherited from her parents when they passed and saw that it only gained 2% over the last two years. I asked what she was invested in......he said "some insurance company fund". I stopped there. No need to ask about details that they have no knowledge of.

It's more common than you think, I guess.

 

[RetiredHappy]

Earlier this year, we became friends with a couple who moved into our community. He is a very smart bloke and has made his entire career around bond trading. For a while he owned his firm and invested with his money. As the years went by, he sold his firm and stopped using his money for bond trading. He now works for a firm, still specializing in bond trading but not with his money. He also gets significant profit sharing at the end of the year. He is very wealthy with a lovely wife and and 3 kids whose youngest is now off to college.

My cousin-in-law was the Asia-Pacific regional head of a top investment firm and had also held other top positions in several other investment firms. He retired at about 50 without catastrophic event that impacted his personal wealth. His mantra has always been keep the market emotion separate from his personal portfolio.

Separation of one's own money and the job of a trader / fund manager is definitely the key
here. The other lesson learned is do not use margin loan. It wiped out $500K of my money during the dot com bust.

 

[pacergal]

Markola--such a sad story, so sorry that has happened to your friends father.

 

[Markola]

Breach of fiduciary duty. Financial abuse of an elder. Depends on the state what laws apply.

But given the recent market the victim may not have been damaged by owning the fund. So what can he claim in civil court?

Oh, yeah. That tech fund is way up. The agent probably provided a list of their mutual funds and my dad picked the highest returning one on the list, blissfully unaware of the many risks and without resistance or counsel by this insurance agent.

 

[Markola]

Markola--such a sad story, so sorry that has happened to your friends father.

Thank you. It’s remarkable how her childhood seemed blessed by a lucky star but her adulthood has been one disaster after another. There’s no rhyme or reason.

 

[ivinsfan]

Markola--such a sad story, so sorry that has happened to your friends father.

Kind of, but you know live by the sword die by the sword.. a goldman sachs market guy with that kind of margin exposure? Guessing he thought he was smarter then the little guy. How many little guys have GS squashed like a bug while laughing all the way to the bank?

 

[MarieIG]

Last night, we had dinner with a friend, whose father was a Goldman Sachs bond trader in Manhattan for 32 years. She grew up with limousines and even helicopters on demand. I know that her privileged upbringing causes less sympathy but she is a hard-working attorney and fully responsible person, whom we love as an amazingly good friend. We always assumed our friend would inherit many millions someday, and she might have assumed that, too. It turns out, she learned last week that her father was essentially wiped out through a margin call last year when the Covid recession struck. Beyond that, she doesn’t know how he was invested. He’s developed depression and other maladies and his remaining assets are being spent down so that he can go on Medicaid! We were shocked and saddened by her story.

This was in the same week that my 81 y.o. DF, thankfully, reached out to me before liquidating his brokerage account with Bankers Life to buy some exotic whole life policy that his Bankers Life agent was trying to pimp him. In that process, I discovered this agent has my dad invested 100% in a single high fee growth tech stock mutual fund. Apparently, this agent works the modest-income retirement community my DF lives in. As gently as I could, I explained the risks of this portfolio and he agreed to ask his agent if Bankers Life carries target date or retirement income funds. Sickening.

My dad is an engineer who has worked his entire life, and even continues part time employment at 81. He is good with numbers but could never be bothered to read a basic book on personal finance. He does seem to have avoided debt, thankfully, and he owns his little condo outright. He once had an IRA, which he liquidated 30 years ago to buy a cabin, which is now long gone.

Sadly, no matter how I slice the numbers he’s finally provided me, he’s looking at a 50% lifestyle reduction once he finally stops working. I’m just slack-jawed by these two examples of financial irresponsibility. Serenity Prayer time, I guess.

With your friend's father - is he also in his 80s - and retired? He may have done something at this age in life, which he would not have done in his 50s. It is my understanding that the ability of some to handle their finances declines with age. (I am trying to take this into consideration by having some income on auto pilot as we age.)

Some, never had the ability to handle finances in the first place, i.e. they could have spent a great deal of time fostering their careers without giving their retirement assets/ income adequate thought.

With your Dad, I hope he postponed SS? Can that cover his basic expenses? You may be able to supplement him with little treats w/n your budget from time to time. (i.e. taking him out to lunch once a week), buy him some high end groceries, if his dishwasher blows, replace it . . .

 

[Nick12]

Fresh out of high school , they start getting solicitation from credit cards to build up credit. Many don't have a clue on financial responsibility and are on the road to being a slave to debt which continues to fuel our economy. Debt free is like a foreign language to many I know.

 

[TheWizard]

Fresh out of high school , they start getting solicitation from credit cards to build up credit. Many don't have a clue on financial responsibility and are on the road to being a slave to debt which continues to fuel our economy. Debt free is like a foreign language to many I know.

Right. One of my offspring was like this, probably still is.

And somebody else mentioned Financial Literacy classes in high school. I'm not sure that's going to work either.
People need to have a full-time job with an income to manage first. And there's a vast difference between a minimum wage job and a professional job, two totally different situations...

 

[Midpack]

That's been my experience too. Obviously there are exceptions, but doctors are notorious for being oblivious to personal finance.

My Dad was an ortho surgeon who saved a lot and lived below his means after growing up in Chicago and watching his parents survive the Great Depression. My Dad had very little in equities, and he was 100% cash from about 2005 until he passed away at 96 yo in 2018 (Mom passed in 2015) with almost $2M leftover. I didn't talk investing with him, as he was so risk averse it would have been pointless.

One of my best sailing buddies, now retired, was also an ortho surgeon married to an anesthesiologist, they're both brilliant and well read, but totally clueless about anything to do with money. They've always had their money managed for them by professionals, and I am sure they live well within their means, but I assume they're paying outrageous % of AUM fees. Interesting while they're great medical professionals they're also hopelessly lost when it comes to new technology - they are both completely lost using computers or even their smartphones, they can barely make calls and texts despite having the latest greatest iPhones.

 

[Dtail]

Another reason why I took over managing my parents investments since 2018, as they are 91 and 88 y.o.

 

[rodi]

Some people are convinced that managing their investments is too hard. My sister falls in this group. She and I are both at Schwab, she has chosen the managed portfolio solution... I DIY. She pays 0.3% AUM. Which isn't bad. We've talked about it and she likes that she knows she won't panic and sell since there is sometimes in charge if her investments. The fees are low enough to make this a good solution for her.

Lots of my former co-workers (engineers) had high fee advisors because they were convinced it was too hard to invest. I preached the lazy portfolio mantra to them and got blank stares. These are people who understood complex math systems...

Same with other financial stuff. 529s... Blank stares. Expense ratios of funds in the 401k? Blank stares. The idea that pulling cash out in a refi *and* rolling in the refi fees increases the debt, even if you have a lower payment... Puzzled looks.

 

[Nick12]

Some people are convinced that managing their investments is too hard. My sister falls in this group. She and I are both at Schwab, she has chosen the managed portfolio solution... I DIY. She pays 0.3% AUM. Which isn't bad. We've talked about it and she likes that she knows she won't panic and sell since there is sometimes in charge if her investments. The fees are low enough to make this a good solution for her.

Lots of my former co-workers (engineers) had high fee advisors because they were convinced it was too hard to invest. I preached the lazy portfolio mantra to them and got blank stares. These are people who understood complex math systems...

Same with other financial stuff. 529s... Blank stares. Expense ratios of funds in the 401k? Blank stares. The idea that pulling cash out in a refi *and* rolling in the refi fees increases the debt, even if you have a lower payment... Puzzled looks.

Some of my younger former peers at MegaCorp went to me for financial advice . I used to go to my younger peers when I got my new company iPhone to learn the tips and tricks. Now I go to YouTube for " how to do things " .

 

[braumeister]

They've always had their money managed for them by professionals, and I am sure they live well within their means, but I assume they're paying outrageous % of AUM fees. Interesting while they're great medical professionals they're also hopelessly lost when it comes to new technology - they are both completely lost using computers or even their smartphones, they can barely make calls and texts despite having the latest greatest iPhones.

Apparently that's more common than I would have expected. My former primary doc was exactly the same. "Oh, I don't have time to deal with that stuff; I have a guy who handles it for me."

 

[38Chevy454]

It is sad how people can be taken advantage of, when they should know better based on their intelligence. I think some professionals may be blinded by their own expertise to the point they believe specialized financial advisor is needed. Of course the FA folks are more than happy to let people believe that personal finance is a complex thing you can't do on your own.
In general personal finance knowledge is very low. At all income levels.

 

[Major Tom]

That's been my experience too. Obviously there are exceptions, but doctors are notorious for being oblivious to personal finance.

I seem to remember we had a doctor/surgeon who was an active member of this board for a few years, who had saved a lot, but was very risk averse. All of his money was in very safe low-yielding investments. He never seemed to quite grasp the idea that inflation was going to do a number on his savings, but was happy with that, as the price paid for not having to deal with volatility. It also seemed likely that he would be working for many years to come, and would have the opportunity to save even more. IIRC, he had already saved a fairly substantial sum.

I'm fine with people being invested solely in very safe low-yielding investments, as long as they are aware of what will happen to the spending power of their stash over time.

Some people are convinced that managing their investments is too hard.

Isn't that the oddest thing? I think most of us, when we were kids, thought that "grown-ups" were actually grown-up. Then, on becoming older, we noticed that a lot of adults seemed to behave in much the same way as children. It took me much longer to realize that many otherwise functional and mature adults, have minimal control over their financial lives. That was an eye-opener for me.

I guess it just comes down to the fact that we all have abilities in different areas. Still, I wish I could get through to some folk, how easy managing your own retirement finances can be.

 

[Nick12]

For many years I was held accountable and managed million dollar budgets. My compensation and further going up the food chain was based on exceeding expectations and managing under budget. I used this type of mindset in disciplined diversified long term investing. A number of my peers were incredible in their work and their ability to add much value to MegaCorp. When it came to managing and investing their personal net worth, some had no clue how to do it and entrusted this to others.

 

[Dtail]

Some people are convinced that managing their investments is too hard. My sister falls in this group. She and I are both at Schwab, she has chosen the managed portfolio solution... I DIY. She pays 0.3% AUM. Which isn't bad. We've talked about it and she likes that she knows she won't panic and sell since there is sometimes in charge if her investments. The fees are low enough to make this a good solution for her.

Lots of my former co-workers (engineers) had high fee advisors because they were convinced it was too hard to invest. I preached the lazy portfolio mantra to them and got blank stares. These are people who understood complex math systems...

Same with other financial stuff. 529s... Blank stares. Expense ratios of funds in the 401k? Blank stares. The idea that pulling cash out in a refi *and* rolling in the refi fees increases the debt, even if you have a lower payment... Puzzled looks.

I think it is the concept that one can't imagine that one can do as well as a professional. Was not really possible many years ago.
For example, one can watch youtube all you want, but can't take out an appendix like a doctor. The same thought process is incorrectly applied to investing.

 

[marko]

Just another example of at the very least, more personal finance classes should be taught at least at the high schools.

I'm sure I'm the outlier here but in 1st grade a lady from the local bank came by and had us open a savings account (likely illegal now...forcing kids to deal with one bank); she also came by each week to collect our nickels to add to our account. (Hi Miss McMahon!)

In 6th grade we were taught how to balance a checkbook. In 7th grade we were taught about compound interest.

In high school we had some guy come in every month or so from an investment house and explain the basics of the stock market (I must have been asleep a lot; witness my questions on this forum!), how to read a balance sheet, inflation, the differences between bonds and stocks etc. We even had an investment club where we played with fake money/investments.

Of course this was a private school.