Archive for the ‘Prudence & Fiduciary Duty’ Category
This article was forwarded to me by a client of mine. It was written by Mr. David Karp, who asked seven questions regarding one’s relationship with their advisor. These are excellent questions! I will repost Mr. Karp’s questions and responses, along with my own answers in red and bold.
Besides our family members and close friends, few relationships in life are as important as that of client and wealth advisor … and long lasting. After all, your wealth advisor is trusted with the financial well-being of you and your family, hopefully for generations to come. A good wealth advisor does much more than just manage your investments. He or she will get to know you and your family, your hopes and dreams and the legacy you want to leave. It’s a holistic approach that should be wholly based on the best interests of you and your family.
So how do you evaluate a wealth advisor to ensure you partner with someone who can provide the comprehensive, yet highly individualized set of solutions you need and deserve? Below are seven questions to ask prospective wealth advisors:
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If your Financial Advisor has Conflicts of Interest: Three Quick Ways to Determine
Posted on: September 6, 2024
In my last newsletter, I wrote about finding $50k+ worth of hidden costs due to conflicts of interest, and a reader asked me if there is a quick way to check if her financial advisor has such conflicts. Her question inspired my article today.
Before we dive into that, I must first give you a quick overview of the legal environment in which financial advisors operate. There is the Securities Exchange Act that regulates brokers and does NOT require them to act in the best interest of their clients, and there is the Investment Adviser Act that regulates RIAs (registered investment advisors) which does require them to act in the best interest of their clients.
Your financial advisor can be a broker, an RIA, or even dually registered. Those dually-registered ones can be especially deceptive. Here is an actual example – the last few lines of a financial advisory firm’s website:
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This morning, I did a portfolio review for a 2nd Opinion Review customer. It is a portfolio worth just under $4mm and I found $56k of hidden costs per year.
Load is the least hidden of all hidden costs, it is a one-time charge that happens when the broker (“financial advisor”) puts your money in a mutual fund. The mutual fund immediately takes a percentage of your money and gives it to the broker as commission. Since this is too obvious, few brokers are that blatant these days.
Expense ratio is the percentage the fund deducts from your investment, and part of this deduction is given to the broker as a kickback. It is even more costly since it occurs every year. It creates an adverse incentive, since the broker is more inclined to put your money in funds that give them a higher kickback. The gold standard of expense ratio is 0.05%. Note that many funds in this analysis have an expense ratio over 1%, over twenty times more expensive than the gold standard.
Turnover measures how frequently the fund manager churns your investments. The more frequent the churn, the more money you lose and the more money the brokerage that handles the trades makes. The gold standard of turnover is less than 10%. If a fund has more than 100% turnover, it belongs in the category of horrible, since 100% equates about 1.2% loss of return.
See below the result of the portfolio review. Numbers in yellow are bad, numbers in red are outright horrible. Compare these numbers to the numbers in green, which is our gold standard.
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I was invited to a dinner by a client couple of mine. Their youngest daughter has been accepted to three universities and they are having a hard time picking the right one and they wanted my help.
Universities A and B are both out-of-state Ivy League universities that cost more than $60k a year in tuition. University C is an in-state university that costs only $15k. I listened to their reasoning as to why it is so hard to make a decision. They really want to give the best to their daughter and besides, an Ivy League university would give them a lot of face (there you know they are a Chinese American family) since their peer families all brag about their children’s academic achievements and they feel pressured to keep up.
Before I said anything, I forewarned them that the choice of university is a very personal one for them and their child so they should take my words only as my observations and not as my professional advice.
First, since universities A and B are four times as expensive as university C, do they provide four times more value? By this I mean, would their child acquire four times as much knowledge or earn four times as much after graduation? (I will get to this point later.) If not, they would be paying the extra just for the bragging rights.
Second, what financial values do they want to impart on their children? That they should borrow money to pay for something they can’t afford just for vanity? Would such a value system not lead to financial ruin for their children down the road?
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How My Mom Was Scammed
Posted on: June 20, 2023
This article is a sequel to my last article about how my mom was introduced to a “great” investment opportunity by someone she trusted in her church. If you have not read that one, read it first. At the end of the article, I asked my readers to guess how much money my mom got back.
Here is the answer: she lost more than 90% of her money.
In the first three months after she “invested”, she did receive the promised 3% monthly interest on time. No doubt she shared her good experiences with others and may have even encouraged others to “invest.” She was then persuaded to reinvest all her interest income to make her money grow even faster. After a few months, the so-called brother in Christ stopped coming to church and seemed to drop off the face of the earth. In the end, my mom got just 9% back out of about $50k she invested. My mom is not uneducated, she was an OBGYN doctor. She still fell for the scam. So today I want to discuss the telltale signs of judgment manipulation by scam artists.
Trust shortcut
Trust is extremely hard to build. It takes years to earn a stranger’s trust. But scammers are experts at winning trust. Here are some of the trust triggers they like to pull:
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Yesterday, a young tech worker from the West Coast signed up for my 2nd opinion review. He just had a very successful exit from an IPO, and is now sitting on $20mm worth of company stock, much of it capital gains. Morgan Stanley is pushing strongly for him to put his money into a QOF, and he wanted my view on that.
I happened to have just written a paper on this topic for a Oxford Private Equity class assignment, so I have done some pretty in-depth research. Mindful that most people don’t have the patience to read a long essay like that, I will summarize my findings as succinctly as possible here.
What is a Qualified Opportunity Zone (QOZ)?A QOZ is an economically depressed area that can’t attract investments on its own. The Tax Cut and Jobs Act of 2017 established this designation and certain tax benefits for investments into these areas.
What is a Qualified Opportunity Fund (QOF)?A QOZ is a private investment vehicle (in the form of a partnership or LLC) that invests in QOZs.
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Can Doctors Die Poor?
Posted on: October 20, 2020
This is the opening story of my book “Physician Wealth Management Made Easy” published nearly three years ago. It was briefly the Amazon Bestseller in the physician category.
Twelve years ago, I got a call from my internist. “Michael, I am afraid I can’t be your doctor any more,” he said, right after hello. It was an odd opening, and his voice sounded strained. Doc Johnson and I had always been on friendly terms. Had I done something wrong to offend him?
“What’s going on, Doc?” I replied. “Is it .. is it my insurance?”
“No, Michael,” he said and took a deep breath. “I’ve been diagnosed with pancreatic cancer. And …” he paused again. “I have only a few months to live.”“Wow, that’s terrible, Doc.” I didn’t quite know how to go on and ask, “OK, but why did you call me? I am no doctor. What can I do about it?” So I just waited on the line.
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This happened over the past weekend. A reader of my newsletter signed up for my free 2nd opinion financial review.
As I went over his 401k investments, I saw that he had invested the entire balance in a target-date fund which normally is a good choice. Upon closer examination, I realized that the target-date fund has an expense ratio of 0.8%. That’s high. I went through the list of available investment options since most 401k plans limit them. I found an S&P 500 index fund, an international stock index fund, and a bond index fund, all with an expense ratio of only 0.05%. I constructed a portfolio made up of these three funds, saving him 0.75% a year. The entire exercise took me around 15 minutes.
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This is actually a response to a client who asked to know what I do regularly that might benefit him. There are many things I could suggest, but I’d like to highlight just three.
Follow academic research
Those of you who have followed me for a while know that I am disdainful of financial news. I liken it to highway noise and I think that listening to it won’t get you anywhere. I am, however, an avid reader of peer-reviewed journals like the Journal of Finance, Review of Financial Studies, etc. These journals contain the best and most rigorous research on the subjects of finance and investment. That’s why I can confidently tell my clients, whatever I do with their money, that I can back up my actions with rigorous peer-reviewed research from the best minds of the world.
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Shortly after I sent out the last newsletter, my father-in-law told me that his lost money was credited back to his BOA account. This just shows how powerful my newsletter is!
OK, I was kidding. Here is what really happened.
After BOA denied his claim twice based on the 60-day excuse, even though the police had already identified the fraudster’s bank account at another bank, my father-in-law filed a claim with CFPB and OCC. (Pop quiz: what are they?) He then wrote a long email to Holly O’Neal, Head of Consumer Client Services of BOA in which he admonished and implored the bank:
Bank of America’s lack of ordinary due diligence in detecting fraud and failing to perform its fiduciary duty resulted in my lost retirement funds. It is disappointing, deplorable and shameful that a global company like Bank of America is dismissive and choosing not to investigate this type of crime, and, instead, closed the fraud claim fast, without offering support or common courtesy to a loyal customer. It is an inhumane treatment of a consumer.
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Your Bank May Lose All Your Money
Posted on: May 3, 2019
My father-in-law traveled to Taiwan for a few months. When he came back, he went to Bank of America where he maintains a money market account and a checking account to get some money. To his shock, his money market balance which was over $100k before he left was wiped clean, there was not a single dime left.
It turns out someone had forged his signature in order to create an Electronic Fund Transfer. The forgery is pretty lousy; it does not look like my father-in-law’s signature at all. But that didn’t matter, BOA set up the EFT and proceeded to transfer out all the money, down to the last dime.
He got absolutely no notifications when this was taking place .
You would think that BOA would take responsibility for their oversight. They won’t. They claim that since my father-in-law failed to report the fraudulent transactions within 60 days of their occurrence, they are not responsible for them. Never mind that he was out of the country while his account was being plundered.
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A few days ago, I was approached by an employee of Nvidia regarding his $5mm worth of NVDA stock. A Morgan Stanley broker had pitched him the idea of using exchange funds to diversify his holdings and he wanted my second opinion.
If you are an employee of any of those high flying tech companies like Amazon, Facebook, Google, Apple, Microsoft, Netflix, and etc., you are likely to have been pitched such an idea. Talk to me before you execute anything.
So what exactly are exchange funds? Exchange funds are unregistered private-placement limited partnerships or LLCs designed specially for investors with concentrated positions in highly appreciated stocks to help them diversify without triggering taxes.
How do they work? Investors transfer shares of their concentrated stocks to the fund in exchange for an equal value of units of the fund. These transfers are not taxable since they are considered partnership capital contributions under the tax law. There are a few caveats to the law though: investors have to stay in the fund for a minimum of seven years and the fund must invest 20% of its capital in illiquid assets.
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One day two years ago, I got an email from a client of mine. In a very concise manner, he told me he was in Singapore for a business deal and he needed to wire $500k from his investment account to a bank account in Singapore.
To raise the money, I would need to sell some of his highly appreciated investments. I didn’t want him to be surprised by capital gain taxes, so I replied with an explanation of the tax implications.
After that, I was ready to wire the money, so I sent him a short message: “You know our standard procedure, any time a client wants to move more than $10k, he needs to call me to tell me in his own voice.” I totally expected my phone would ring right away.
Instead, I got another email: “I am in Singapore, I don’t have a phone with me, take this email as my authorization to wire the money.”
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When Going Gets Tough
Posted on: July 19, 2016
Recently, I had a Review and Discovery meeting with a physician in her late 50s. When I first saw her, she looked burnt out and stressed. Who can blame her? She has been dealt a very bad hand in life.
- One of her children suffers from down syndrome and requires lifelong care.
- Her husband, also a physician, passed away several years ago, leaving behind a financial mess
- The financial professionals who were supposed to help her, led her to make disastrous investments. She lost her house and had to declare personal bankruptcy.
- Her father recently passed away, also leaving behind a financial mess.
- Her mother is so dependent on her now that she cannot continue her medical practice.
She told me she almost wanted to pull her hair out when thinking about her responsibility to her patients, her children, her mother and yet she can’t even sort out her own personal finances.
I did not mince words in telling her how dire her financial situation is. When I told her how much she needs to retire, she almost fell off her chair.
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Recently Department of Labor issued a fiduciary rule that requires that financial advisors who manage retirement accounts must act in clients’ best interests.
Here is the quote from a Wall Street Journal report …
About $14 trillion in retirement savings could be affected by the rule, which requires stockbrokers providing retirement advice to act as “fiduciaries” who will serve their clients’ “best interest.” That is stricter than the current standard, which only says they need to offer “suitable” recommendations, a standard that critics say has encouraged some advisers to charge excessive fees or favor investments that offer hidden commissions.
Still, reflecting intense lobbying from the financial industry, which has fought the regulation since it was first proposed six years ago, the final version includes a number of modifications.
This might come as a surprise to many people that financial advisors do not need to act in clients’ best interests up until this day.
Alas, as I explained in this article, there are really two types of financial advisors: Read the rest of this entry »
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Recently, a doctor nearing retirement age approached me with the question of how to maximize his social security income. He is 62, and his wife is 4 years his junior. He made substantially more money than his wife, and as a result, his PIA is $2400, and his wife’s PIA is only $1000.
PIA, or primary insured amount, is the monthly amount a retiree would get if he or she retires at the normal retirement age, currently 66. For every year earlier (or later) that one retires, one would get 8% less (or more). The youngest one may retire is 62 and the oldest is 70.
I’ve found over the years that many people give very little thought to maximizing their social security income, and they jump at the first opportunity when they turn 62 to claim their benefits. But in so doing, they could be leaving nearly half a million dollars on the table. Read the rest of this entry »
The Investment Scientist 