My biggest money woe is the reason why I got into personal finance - I blindly trusted a former co-worker with my money and my future, and it could have ended horribly.
You see, I used to work with a financial advisor who I considered a friend. So after years of investing with my bank, I jumped at the opportunity to move my portfolio over to his investment firm.
I figured my bank was just treating me like a number, whereas my friend would look out for me and my best interests. Oh, how naïve I was. But, there was a happy ending, thankfully.
I had no idea what his investment strategy meant
To be honest, things started alright. My advisor – let’s call him Rick – met with me, and we discussed my goals. I told him I planned on getting engaged soon and would likely need to pay for a wedding and probably a home within the next five years.
He came up with a plan and gave it to me in writing. His strategy was to invest my money in a few different mutual funds with modest- to aggressive-risk. At the time, I had no idea what this investment strategy meant, but I liked the fact that he said I would only pay him a fraction of a percentage point based on my investments.
Every few months, Rick would reach out to me so we could meet and he could give me an update on my portfolio and the markets. Usually, there was nothing substantial to report, but this was way better service than I ever got from my bank. I couldn’t have been happier with him, so I recommended him to everyone.
I was on the hook for massive fees if I decided to pull out
I used to frequent a message board that had a thread on personal finance. And I just so happened to come across a post, inquiring if anyone ever used Rick’s firm. Naturally, I replied, This firm provides excellent customer service! I’m paying next-to-no fees! Why doesn’t everyone use them?
A couple of hours later, I received a private message on the board from a complete stranger who saw my reply. The stranger informed me that I was definitely paying my advisor in the form of a management expense ratio (MER). He also claimed I was with a firm that is famous for deferred sales charges, and that if I needed to withdraw that money in the next few years, I would likely have to pay a huge fee.
Understandably, I was shocked. I never heard of an MER. Though technically speaking, Rick didn’t lie when he said he got paid a fraction of a percentage of my portfolio. He just failed to mention the MER that I was paying for every fund was about 2.5%.
And then there was the matter of these supposed deferred sales charges. Rick knew that I needed that money relatively soon. There was no way he put my money in one of those funds, right?
I did my due diligence, and as it turned out, the stranger was right about everything. But when I called and emailed Rick about it, I got no response.
He went ghost on me for about a month, and when he finally replied, he said he could put my money in higher-risk funds if I wasn’t happy with the returns. But that answer had nothing to do with my question and was totally unacceptable.
I trusted Rick with my money, and all he did was line his pockets. The funds in which he invested my money ensured he got his commission, while I was on the hook for massive fees if I decided to pull out.
There are plenty of great financial advisors out there. I just recommend that you do your research beforehand
The good thing about Rick’s radio silence was that it gave me time to research. I finally took the time to learn about investing.
Based on what we initially discussed, it made no sense to put me in aggressive- or even moderate-risk funds. Since I needed that money in the somewhat near future, I should have been invested in more conservative funds.
It’s not like Rick didn’t know my intentions, because, like I mentioned earlier, he wrote it out on paper.
Wait… that’s right. He wrote it out on paper.
I searched my records and found the original plan that he wrote. It clearly stated my intentions for the money but based on where he invested it, he clearly did not have that in mind.
I reached out to his supervisor to ask about my situation. He promised to look into it. After about a week, he got back to me and informed me that they were completely behind me in agreement. All fees would now be waived if I wanted to transfer my funds out.
By the time I was ready to withdraw my money, I had enough knowledge to invest on my own. I trusted my advisor blindly, and I swore I would never do that again.
These days, I’m a do-it-yourself investor with no regrets. Don’t get me wrong; there are plenty of great financial advisors out there. I just recommend that you do your research beforehand. Make sure you understand how they plan on investing your money, the fees involved, and how they get paid at the end of the day.
When it comes to your money, no one will care more about it than you, so never hand over your hard-earned cash to just anyone.