Pressure Tactics and Poor Advice

One man I knew inherited from his parents their entire and sizable estate, which was put in trust; and there was a trustee named by the last surviving parent to settle the debts of the estate, sell some real property, and pay a set amount of money per month for life to the trust beneficiary.

Zero. ($0). No monthly payments happened. A month, three, six, a year passed. My friend was ultimately told the decedent’s debts exceeded the trust assets, and there were no funds left in the trust. Debts included substantial fees for financial advisors, the trustee, and lien(s?) on property my friend had no way of knowing even existed.

I said, “get a lawyer. Now!”

Nobody would take the case. My faith was totally ruined and I now do not have the belief that it is a good idea to appoint anyone as a financial advisor, least of all anyone working in banks as financial advisors or as trustees. Even with a scrupulous outside and unaffiliated CPA accountant, and regular financial reports by that objective third party CPA, there is no way to understand if a financial advisor or trustee is or will be faithful, because most heirs and beneficiaries don’t even know how to understand even simple financial reports. It seems to me that trusts as a means of conveying property after death just make trustees and lawyers wealthy at the expense of bereaved people who are the rightful heirs.

The sizeable estate my friend was to inherit was somehow mysteriously bled dry. I figure the best thing to do if you are wealthy is to give your money away while you are alive to those you wish would have it after your death. There is too much opportunity for uncheckeable theft, otherwise. Heirs and beneficiaries are not as financially savvy as financial advisors, and are vulnerable prey.

I'm a tax attorney, so I see a lot of other people's finances.

The ones I see that work with a financial advisor are, without exception, paying at least 1% of AUM in fees to be in higher-costs funds that underperform the index funds in the long run. To make matters worse, the financial advisors choose tax-inefficient funds and take their fees in the most tax-inefficient way possible. I have also found that many do not understand the nuances of self employed retirement plans or the backdoor Roth.

In my view, there are a few problems with the industry. First, most financial firms hire salespeople and then teach them finance, instead of hiring people who already know finance. I know a LOT of morons working in Edward Jones shops and the like, who are charming but ultimately don't understand the back end of the products they sell. My ex worked for two of the large regional banks in my area, and she had a degree in communications.

She knew (and knows) nothing about finance, but instead was hired because her family is wealthy and gets referral business from old neighbors and classmates. She couldn't even pass the Series 7, but the banks thought she could work in trust management. I talk to clients and financial advisors all the time who don't understand the difference in tax efficiency between mutual funds and ETFs, or the mechanics and reasons of a 1031 exchange, or what the tax incentives actually look like in various types of accounts, or the merits of a solo 401k vs a SEP IRA.

When you only have a hammer, everything starts to look like a nail. Second, the incentives are rarely aligned in the middle of the market or below. Helping a 24 year old set up and fund their Roth IRA is probably not worth your time on the front end unless you're getting an outsized commissions, which ultimately cost the client more money than needed for someone with a small account.

My husband’s family has used a boutique firm of financial advisors for years, and honestly, they are probably the best of the best. Independent, fee-for-service—they are very good at what they do. However, I still have some massive issues with them.

Essentially, they have overcomplicated everyone’s finances to a point where the family is now reliant on them for everything. They could probably never extract themselves from their services even if they wanted to. I think this is their ultimate business model. My in-laws have a highly complex portfolio of 30-40 investments (shares, managed funds, etc.), and yet their fund grows less than my simple VAS/VGS portfolio. They pay these guys something insane like $30K per year in fees.

The same firm took on my sister as a client, despite her having extremely simple and minimal finances, charging her $5K per year for insurance and tax advice and complicating her super and other things to the point that now she can’t manage it by herself. I think they honestly should have told her she didn’t need a financial advisor.

Prior to learning about finances and “going it alone,” they had my husband involved in several managed funds that were charging him 1.5% per year and making around 5-6% before fees. Way worse than a simple ETF. I worked out that his money grew about half the amount it would have if we had just been using ETFs from the beginning. And yet, when we mentioned our change of plan, they still recommended we didn’t go with ETFs and stayed with the managed fund. It didn’t make sense.

Again, my theory is simply that they don’t charge commissions on these things, but by having them manage our money and invest into funds for us, they can charge us fees for service and keep things sufficiently complex so we need to keep using them year after year. I think it’s all a bit of a rort, really.