The Investment Scientist

Lessons Learned From Three Prospective Clients

Posted on: April 29, 2013

Retirement Nest EggI met with three prospective clients on my trip to Los Angeles last week. I did a quick financial review with each one of them and gathered some lessons learned as well.

Prospective client A is a physician in his late 60s. He has already reached retirement age but he needs to keep working since he has less than $1mm saved for his retirement.

All that money is in tax deferred accounts, meaning far less than $1mm is available for his retirement. This is NOT retirement security.

Client A is not an extravagant person, so why is he in such dire straits?

It turns out he owns an extravagant house – 10,000 square feet with marble floors, multiple bedrooms and bathrooms – all for just himself and his wife. He still has a $2mm mortgage on the house and he has been paying $8,000 per month in mortgage payments for decades. God knows how much he spends on maintenance and utilities.

Lesson 1: If you buy more house than you need with a mortgage, you are transferring wealth from yourself to the bank.

Prospective client B is also a physician in his early 50. He is in a family practice that does not make a lot of money, but he has already saved more than $2mm. The big difference with Client A; he lives in a modest house and he dutifully puts aside $200k into savings every year.

Financially, he is in good shape. However, he has a financial advisor from a major Wall Street firm. Part of his money is in stocks, part in funds, and part in life insurance and annuities. The stock portion is churned frequently, and the fund portion is invested in funds with high expense ratios. By my estimate, the investment cost is about 2.5%  a year.

After I informed him of these facts, Client B told me that he is more and less aware of the cost, but he can’t cut it off because the financial advisor is a good friend. This friendship is quite costly, to the tune of $50k a year.

Lesson 2: Never mix money with friendship. 

Prospective client C is a retired salesman. He is not yet 60, but he already has more than $4mm in his portfolio. Needless to say, he made a lot of money. But that’s not the key to his wealth accumulation.

He told me that, early on in his career, he put away 20% of what he made and invested it automatically. Not only that, he always spends time studying finances and he makes sure his portfolio is well diversified. Upon hearing that, I told him: “You don’t need me.”

Lesson 3: Getting wealthy is really not that complicated, but it takes time and discipline.

Get my white paper: The Informed Investor: 5 Key Concepts for Financial Success.

2 Responses to "Lessons Learned From Three Prospective Clients"

Dollar cost averaging, through the ups and downs does something that seems counter intuitive. And minding your own business. Spending time learning what your financial situation is and is capable of. #3 turns out to be financially wise.

One of the things I have struggled with is dollar cost averaging after retirement. The markets are still going to fluctuate and there will never be a time when we won’t need more money. So continuing a regular investment plans seems neccesary. For me the answer was to grow my real estate investment business a little larger, then use that additional income stream to invest regularly.

Nice post. People give away a nice retirement to the real estate broker, the car dealer, high priced colleges and general lack of financial literacy. It’s all about choices. Meeting with an advisor early on is an opportunity to have this spelled out.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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