Does My Financial Advisor Know Anything?
In 2009, there would likely be a great deal of support for Will Shakespeare’s, “The first thing we do, let's kill all the lawyers." -- today, the idea might be to kill all the “financial experts”. It seems that almost all the financial concepts we have relied upon in recent years have turned out to be nothing more than a conundrum. What is the public to do to obtain financial security? Who and what can be relied upon for help achieving this goal? What assertions should a knowledgeable financial advisor have make to a client?
Myths we now know to discard… Let's start by examining old myths that have been recently destroyed:
Myth A: Risk can be controlled. The 2007-2008 Yearbook of the Securities Industry and Financial Markets Association (SIFMA), in the first ranking is a listing of financial firms ranked from largest to smallest based on capital. Since this listing was compiled barely one year ago, the No. 1 firm, Merrill Lynch, has since sold itself under hardship to Bank of America, and No. 4, Lehman Brothers, and No. 6, Bear Stearns, both failed and went out of business. If these firms, each employing tens of thousands of the best financial minds in the business, could not control their risk enough just to stay in business, how can the average person expect to do so? And, why should the average person rely upon similar firms, their strategies or their advice?
Myth B : Smart management can achieve excellent returns. On page one of the SIFMA Yearbook, in the 35th position is Bernard L. Madoff of Investment Securities LLC. This firm rose to prominence because it was able to consistently deliver above-average returns to its customers, no matter what the economic environment. Its founder and CEO was a very respected figure on Wall Street, a man who could credibly claim to possess the special knowledge required to beat the market. However, we have since learned that it was all a lie -- a Ponzi scheme that lost perhaps $50 billion in investor funds. And note this: The Madoff firm had 147 employees and 54 registered representatives. How could it be that none of them knew the firm's financial statements were a complete fraud? How come the SEC examiners found nothing?
Myth C: Invest regularly in your 401(k) and it will take care of your retirement.
The financial advice that had become almost unquestioned was the idea that an employee who consistently invests in an employer's 401(k) plan over the course of his career, and who chooses a well-balanced portfolio of mostly stock mutual funds
, will achieve a comfortable retirement. However, the stock market losses of the past year have destroyed many retirement plans. Even worse, a report from Boston College's Retirement Research Center, which examined a number of scenarios in which workers had done everything right. In scenarios where a worker contributed 6 percent of their salary to a plan for 40 years invested in a target-date fund, and never touched their savings until retirement, the portion of the pre-retirement income that these savers could replace in retirement varied dramatically depending on when they retired
. Those retiring in 1948 could replace 19 percent, 1999 retirees could replace 51 percent, and 2008 retirees could replace 28 percent. Notice that none of these percentages is anywhere near replacing 100 percent of their pre-retirement income.
Myth. D: Buying a home is always a good idea. … That’s all Folks!... Here comes the Easter Bunny!