The “I Know You’re 80 and Should be in a CD, But Let’s Put You in a Risky Investment” Advisor

Just filed my taxes and I’m looking more closely at my finances. I’m pretty good with the basics but feel completely out of my depth with investments.

In 2021 I started a Morgan Stanley investment account with the financial advisor who has been managing my parents’ money for many years.

I invested $67,000 in 2021 and let the advisor choose the stocks/bonds/funds/etc, telling them that I’m extremely risk adverse and I needed safe investments. On Jan 1, 2022, the value was $71,950. On Dec 31, 2022, the value was $58,587. In 2022, I paid $1,025 in trade commissions and $984 in service/advising fees. So basically I paid my advisor $2,000 for her to lose me $13,363 over the course of 2022.

Is this normal? Every time I ask my parents or advisor they tell me “the market is down for everyone.” But my parent love their advisor and thinks the sun shines out her butt and my advisor has a financial incentive to keep me.

This is the type of advisor that deserves more than just a punch—maybe an eye gouge, a knee to the groin, or even a "people’s elbow" from The Rock.

I had a client whose mother was doing business with another advisor a couple of towns over. The daughter had a funny feeling about the advisor, so she urged her mom to transfer to me. When her mom brought in her account statements, I couldn’t believe what I saw. I had asked both the daughter and the mother what the intent of their investments was, and both agreed that the safety of the principal was a major concern.

The mom had living expenses to meet, and she was going to need to cash in some of the investments in the not-too-distant future. When I hear an 80-year-old widow tell me that she’s worried about her principal and needs access to the money in a short amount of time, I immediately think of CDs, money market accounts, or a savings account.

Well, not this advisor. No, this advisor put most of her money into different preferred stocks and long-term bonds. One of the preferred stocks had a maturity date of 2040. Now, for those of you who don’t understand how preferred stocks work, they resemble a hybrid of a stock and a bond. So, they can fluctuate like a stock and pay interest like a bond.

Well, when the time came that the mother needed the money, interest rates were fluctuating, and in just a few months' time, she saw a 30% drop in principal on those preferred stocks. When she needed to cash out those investments to generate some cash, she was taking a huge loss in principal. Sure, her investments were paying a very high dividend at the time, but that was of little comfort after taking such a huge hit on her money.

Lesson learned: If you think you need to access the money in your investments short term, don’t let an advisor con you into buying anything other than a CD.

In the fall of the year 2005 and when the real estate market was going crazy and all kinds of real estate investors were giving speeches and masquerading as advisors, I attended a local seminar about real estate investing.

I already had my rural land property/investment business model developed and most of my current advisors in place. A mortgage broker was speaking about loans for real estate.

These so called mortgage financial advisors were recommending people take interest only loans to fund their real estate purchases because the rates were low and it cash flows easily. There are many problems with this dumb advice.

Here are some:

• Debt at some point has to be paid back. Anybody who has done any investing and used debt with real estate, stocks, or a business knows this. Delaying indefinitely paying off a debt is foolish.
• Even if an interest only loan for any type of investment cash flows today, it might not tomorrow, next month, or next year. The investment might quit paying. For example:
• The tenant lost his/her job. The property flip did not work as the foundation crack was not discovered during the euphoria when the property was bought. Funds (from more debt) were needed to fix the crack when an engineer who looked at the property to buy it discovered it.