Guiding your life’s biggest financial moments

Personal Finance

Keep mom away from this financial advisor

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“Mr. Beaver, my 79-year-old mother finds it difficult to say no to those close to her and is under mild pressure from her grandson, ‘Mario’, to become her financial advisor.

“He is 29 years old and has just been hired by an investment firm after jumping from job to job for many years. He does not have any professional certificates that show some degree of training beyond obtaining his license to sell investments.

“Actually, I don’t think she needs or should be on the stock market, given her age, and being very well off financially (with a net worth of $ 8 million in cash, plus a rental income of $ 100,000 per year and no debt!). She has a simple lifestyle that doesn’t require a lot of money to support herself. However, Mario told him that inflation would eat away at a large chunk of his savings and that he could offer a 25% annual rate of return on investments that strike me as gibberish!

“When I ask him to explain himself, he gives incomprehensible answers and suggests that I could never understand these concepts. Mom just sits there and is afraid to say a word so she doesn’t sound stupid. But more than that, he’s obviously a close relative and I sense a conflict of interest.

“Mom loves your column and I’m sure your advice will have a positive influence on her decision. Thanks, ‘Danny.’ “

I answered Danny’s question by two friends in this column, retired business and finance professors Lyle Sussman, Ph.D., and David Dubofsky, Ph.D., whose new book, Your Total Wealth: The Heart and Soul of Financial Literacy, I reviewed recently.

Each of these experts is very sensitive to the dangerousness of this situation for Danny’s mother, or anyone with significant financial resources and members of his family who wish to invest in their business. They outlined the way to get badly burned by saying “yes” to a family hungry for your wallet.

Sussman: Use nepotism – favor relatives – as a reason for choosing a financial advisor, above all when the client is elderly and the advisor inherits from them, there is a clear conflict of interest. It could potentially be seen as financial abuse of seniors if things were to go wrong.

Surgeons don’t operate on family members for the same reason that a family member shouldn’t be your financial advisor: emotional attachment distorts objectivity and judgment.

Regardless of training and referrals – noble intention aside – nepotism places both counselor and “client” in a difficult and unnecessary situation.

Nepotism is an even bigger problem if the advisor is a potential heir. Here’s the test: “Do you honestly believe that a financial advisor who is a potential heir, directly or indirectly by marriage, can be completely objective in handling your hard-earned money?” “

Aside from the obvious nepotism problem, this situation has another huge red flag: the fact that Mario discourages questions and answers them in an incomprehensible way.

Dubofsky: Being afraid of looking stupid can cost you money. And whenever an advisor promises a high rate of return when they invest in stocks or promise a specific profit, RUN!

A corollary warning: if an advisor actually produces a consistently high rate of return year after year with little variation no matter how the market as a whole goes, it may be a Ponzi scheme. If you are told, RUN! Bernie Madoff did that.

No one can guarantee that you will get a constant rate of return, except for the return offered by US Treasury Bills and / or insured bank CDs.

The easiest way to be stupid is to be afraid of looking stupid. The key is to ask the counselor questions. If after your meeting you can’t explain to a Grade 10 student what that person does to make you money, then shame on you! You put your financial dreams at risk without even understanding the risk.

Always remember that you are paying not only for advice, but also for the logic behind that advice, explained in terms you understand.

So ask questions, seek clarification, and reduce uncertainty. The financial world is a world of jargon. To be stupid is not to ask questions. If your advisor can’t or won’t answer your questions without making you feel embarrassed or intellectually inferior, fire them.

Sussman ended our interview with a direct question to Mom: “Ask yourself, with my net worth, no debt, and substantial income, how much should I risk on the stock market?” “

“Not everyone needs to be on the stock market. Inflation is a risk we all face, and if inflation is high, it will have an impact on daily life. But losing a substantial amount of money in risky stocks will also have an impact on his daily life. Recognizing risk and investing appropriately requires careful consideration of the risks and rewards.

“So get out there, buy a new pair of running shoes and run like crazy from your grandson!” “

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