I've been preoccupied for a few weeks now about money. And it's not even MY money. Long-ish, number-crunching-ish story follows:
My grandmother died in 2003, a couple years after my grandfather, and they had a decent amount of money saved, which got divided among their 3 children, one of whom was my mom. She inherited a decent amount of money; she also inherited the investment advisor guy who had been managing the money. Over the years, I never really thought about it much; I knew she had those investments lying around that she occasionally drew some money out of for big purchases, but I never paid any attention to the investments themselves. Until recently.
I'm not a financial professional or anything, but I've taught myself a lot about personal investing. I can sum it all up for you in 2 words: Index Funds. Specifically Vanguard index funds, because they tend to have the lowest cost. But as long as you can stick your money in a decent index fund and leave it alone, you'll be fine. This is pretty much the opinion of everyone who knows what they're doing and who has no financial stake in things that compete with index funds. So, I assumed my mom's financial advisor (who pretty much made all the buying and selling decisions) was competent enough to at least match the broad market (i.e. do what an index fund does), before subtracting his 1.5% annual advisory fee. Boy, was I wrong.
It's impossible to know exactly what her overall annual return has been since 2003, since I don't have access to the records that far back. Plus, she sometimes withdrew money, and I don't have the exact numbers on those. But I do have solid records starting from late 2013, and my mom remembers the highest balance her account ever got up to, before the market crashed in 2008. I was able to evaluate things based on that. From late 2013 to the end of 2016, the return on her portfolio was about 2.5% annually (that factors in the advisor's 1.5% fee.) For comparison purposes, an index fund portfolio of 65% stock/35% bonds over the same period had an annual return of 7.1%. Basically, the advisor underperformed the market by a full 3% and then had the audacity to charge my mom thousands of dollars for doing it.
It gets worse if we go back to just before the 2008 market crash. I ran a simulation of what would've happened if she had the same amount of money, but invested it in the 65/35 index fund portfolio. I also factored in withdrawals of $15,000 every year (not sure what the exact withdrawals have been, but almost certainly they've averaged less than $15k/year.)
Results: She would've gone through the crash like everyone else. Her account would've lost 33% of its value by the time the market bottomed out. But then it would've started going back up. It would've climbed back to its pre-crash value by August 2012 (that factors in $75,000+ in withdrawals over 5 years.) Its ending value for 2016 would've been $200,000 above the 2007 pre-crash value. Now, let's compare that to where it actually was at the end of 2016 under the guidance of an "expert": $120,000 LESS than it was in late 2007. Seriously, dude? WTF???
Obviously, once I ran all these numbers and saw how much money this so-called advisor had actually cost my mom, I was horrified. And what's really killing me now is that I told my mom about all these numbers, and she wasn't especially horrified. She was mildly concerned, but she isn't ready to immediately yank all her money away from this allegedly financial professional, who would biologically be classified as a parasite. And while I don't agree with her keeping her money with the guy, I can sort of understand her thought process. Finances and investing can seem incredibly complicated, and it's a perfectly natural instinct to want to let someone else handle it. Especially if that person is a professional, licensed by whatever agency licenses those people. And if you don't pay close attention, it's easy not to notice that your portfolio isn't going up as fast as the rest of the market. Your account was up tens of thousands of dollars this year, so you don't pay much attention to the percentages. And maybe your account is worth less now than it was 10 years ago, but it's because you've taken a lot of money out--not because this nice, licensed investment professional doesn't actually know what he's doing--or worse, DOES know what he's doing, and what he's doing is putting your money into mutual funds that kick a commission back to him, regardless of whether they're good mutual funds for you to be in. (Disclaimer: I don't know that my mom's advisor actual did that. But it would not surprise me.)
I'm gonna keep trying to convince my mom to dump this guy. And not even because this is money that I could theoretically inherit some day. I'm just pissed right now, at the entire investment industry. Because ultimately they take your money and add NO value to anything. Even if I knew I was never going to get a single dime of that money, I would STILL try to get her to move her money to index funds, because that asshole is still getting his 1.5% for his bad advice, and that's just an imbalance in the universe that needs to be fixed....
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