This week I received an email brochure offering for sale a beautiful Cessna Citation Jet. Of course I am not now nor will I ever be in the market for a jet, but they are fun to look at. The brochure showed a gorgeous 1999 model and the asking price was just a fraction of what it sold for originally. In fact, this beautiful jet could be picked up for less than the cost of many single engine piston airplanes.
I showed the brochure to Launa and jokingly asked if she was ready to move up to a jet. She was in disbelief at the low price and wondered what the reason might be. I explained to her what all pilots and plane owners know about planes, and jets in particular, especially 18-year-old ones. It isn’t about the cost to buy, it’s about the cost to own. As jets age, the cost to maintain them grows dramatically until the point where it simply is more cost effective to buy a new one. Airplane magazines are riddled with beautiful older jets that are basically being given away because the owners can no longer justify the maintenance costs. An unsuspecting owner who is taken in by the cheap price tag may be in for a very expensive surprise.
I recently worked with a client who had purchased an investment years ago from an advisor who made a point of emphasizing the low acquisition cost. Unfortunately, the ongoing high cost of ownership had been a serious drag on performance. This individual had failed to account for, or not been properly advised on, these high long term costs.
Investments have costs associated with them. Sometimes these costs come in the form of upfront commissions and sometimes they are charged by the advisor as annual management fees. Many wonder which method of paying for services is better for the client. With each situation I encourage people to consider the overall cost of ownership, and the expectations of the advisor involvement. If an investment is long term and requires little management, an upfront commission may be the most cost effective option. If you are going to want ongoing management and advice, it may be better to consider a fee-based structure that encourages an active relationship with your advisor.
Far too many investors have made the mistake of trying to save a few bucks up front in exchange for getting themselves into a situation with higher ongoing costs. Like the beautiful Cessna Citation in the brochure, the initial price seems very attractive, but failing to take into account the long term high operating costs could doom an unsuspecting buyer. In airplanes and investing, we must always consider not only the cost to buy, but maybe the even more important issue, the long term cost to own.
A great mentor taught me, “Be careful of your environment because humans adapt to survive.” This lesson was driven home years ago on a family vacation. When we arrived at our destination we realized the motel we had booked was far less than hoped for, a true roach motel you might say. My first response was to find another location, but due to the circumstances, no other options existed. I remember that creepy first night avoiding touching anything and walking around only with my shoes on.
The next morning, I couldn’t wait to get outside and begin our visits to the tourist sites in the area. As it turned out, the vacation ended up being quite a memorable trip. Oddly though, despite our wonderful activities, what still stands out most in my mind was the moment I was getting ready for bed on the last night. I stood at the sink brushing my teeth, in my bare feet, completely oblivious to all the horrible thoughts I had about that motel just a few days earlier. The cracks, the stains, the smells, even the bugs, had disappeared to me. All of my disgust just a couple days prior for this “roach motel” had been forgotten as I had truly “adapted” to my environment.
I discussed this experience with Launa many times since. I have used it in parenting moments with my kids, teaching them to avoid unsavory people, or improper situations, lest they quickly adapt and begin to accept the once unacceptable.
The ability to adapt allows humans to make the best of their situation and survive. It is a valuable trait, but one that also presents danger. How many have gone down a dark path in life, slowly accepting and then embracing what was once unthinkable? The same trait has cost the fortunes of many investors. Years ago a lady who had been a victim of investment fraud said to me, “I don’t know how I allowed this to happen. It should have been so obvious.”
She had gotten involved in an investment that she felt uncomfortable with from the start, but she allowed herself to justify investing a mere $5,000. As time passed she quickly adapted to her new financial surroundings, becoming more comfortable with individuals and situations that once caused her concern. Uneasy feelings faded into acceptance of the new norm. As she adapted, her small investment grew to include her entire portfolio, nearly a million dollars. She had allowed herself to spend a few nights in that financial roach motel, to which she quickly adapted. In the end, she lost everything.
Like a bad motel, bad investments are often most apparent when we first confront them. If you find yourself in such a situation, the best and easiest time to get out is right now. If you stick around for just a bit, you may one day find yourself living in your own financial roach motel, and feeling eerily comfortable with it.
The Department of Labor (DOL) Fiduciary ruling that was finalized in 2016 began to be implemented this month. The ruling requires all financial advisors of retirement accounts to act as a fiduciary, acting in the best interests of their clients. It sounds like a great idea, but as government often does in its effort to protect the people, it has gone, in the opinion of many including myself, way too far.
The rule is confusing, with one result likely being fewer investment options in retirement accounts. Since the DOL only claims authority over retirement accounts, the rules as to what you can and cannot invest in as per your individual advisory firm will likely not apply to your non-retirement funds. I compare it to a government prohibiting the drinking of alcohol but only on Monday, Wednesday and Friday. Only a regulator can find logic in that type of approach.
As the rule is implemented over time you can expect phone calls from your advisor informing you of the required changes. Many investments previously available to you will no longer be allowed, (although you can still buy them in your non-retirement accounts). The rule also requires investment firms to evaluate the way the client is charged for services, so changes can be expected. Imagine for a moment that you go to the store to buy a gallon of milk for $3. You already know that included in that price is an amount for dozens of individuals in the production and distribution chain from cow to market, but you just pay the grocer three bucks. Now suppose that a regulator decided that the $.15 cents earned by the person who sold the milk to the grocer, and the $.20 cents charged by the pasteurizing firm had to be separated out and charged to you separately. You can imagine the slowdown at the checkstand and the added cost to the grocer for having to take these extra steps. Some stores might decide to stop selling milk altogether, or others might require larger purchases to justify the cost and hassle. At the very least you could expect to be paying more for milk.
Good or bad, some results of the new DOL rule will be, and already have been, increased costs to deliver financial products, fewer investment options, and for many firms a decision to cease or reduce service to smaller clients. This is why our particular firm began our Nextgen program to assist these folks who often need the most help because they cannot afford to hire their own investment advisory team.
Many in congress are working to correct the problems caused by the DOL rule but as is often the case in government, once the freight train gets moving it can be difficult to stop. In the meantime, financial firms are working frantically to comply with a rule that is expensive, restrictive, confusing, and may still go through many changes. When your financial advisor calls to discuss required changes to your account, try not to shoot the messenger.
We hear a lot about the “entitled generation” of Americans, who seem to think they have a “right,” to just about everything. They claim a right to healthcare, housing, education, cellphones, internet service and so on. My purpose is not to open a political debate but to consider how this attitude could have negative effects on investor behavior and outcomes.
As a young child when I considered starting my popsicle sales business, my Dad gave me encouragement and great advice. One thing he made clear was that if he loaned me $5 to buy my first order of popsicles, I would be on the hook to pay it back even if all those popsicles went unsold and melted. He taught that starting my business came with the potential for success, as well as the real possibility of failure. I ran many small businesses in my youth and found his counsel to be sound. Sometimes I walked away with a wad of cash and sometimes I dumped out gallons of lemonade when a rainstorm came. I learned from the latter to always check the weather reports.
Americans celebrate our constitutional Bill of Rights, which by my understanding basically says that we have the right to be left alone to pursue our lives as we choose, and if we find ourselves in legal trouble, we have the right to be treated fairly. What the bill of rights does not say, but is clearly implied by its absence, is that we also have the right to fail. Some have lost sight of that right and quite honestly, fail to see the blessing that can come from failure.
I heard a national commercial on the radio from a debt relief firm. The commercial said, “You have the right to settle your debt for a mere fraction of what you owe.” So I guess we can now add the right to not be held accountable for our financial decisions to our American rights. I wonder what our children are learning when they hear stuff like this.
I have seen investors afraid to make a move for fear of failing. They watch opportunity pass them by because they don’t want to risk having to wade through the occasional financial rain. They beat themselves up over past investment mistakes, rather than taking advantage of learning from their mistakes and making better decisions going forward. I often remind them that in investing, it’s OK to fail sometimes. I joke that mathematically you only need to be right 51% of the time to generate a positive return. No one is right all the time.
Investors should do all they can to get it right, but accept the fact that you will not always be right, nor do you need to be. As you learn from your mistakes you will learn to get things right more often. We have many wonderful rights as Americans and one of them is the right to be wrong sometimes, and to learn from it.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
This communication is strictly intended for individuals residing in the states of AZ,CA,CO,DC,FL,ID,IL,KS,KY,MA,MI,MN,MO,MT,NE,NM,NV,OH,OR,PA,SD,TN,TX,UT,VA,WA,WY. No offers may be made or accepted from any resident outside these states due to various state regulations and registration requirements regarding investment products and services.