When it comes to investing, your financial advisor is not your friend. It may sound cliché, and maybe you have heard it a hundred times, but nobody cares more about your money than you do – not even your friends. And if time is money, then nobody cares more about your time than you do. And momma I know how valuable your time is and how it feels like there is never enough.
Between the laundry, cooking, working and playing with the kids there is no time to even think about your money. But I’m here to tell you that a little bit of time to learn now can save you hours and thousands of dollars later.
I learned this lesson the hard way
When hubby and I bought our first home we quickly realized that we needed life insurance. I knew that if anything happened to either of us, the other one would not be able to afford our home on their own.
So instead of getting mortgage insurance (which in my opinion is a terrible idea), we opted to get life insurance. We were young at the time and this seemed like a very grown-up thing to do.
Although we didn’t yet have any dependents, a benefit to life insurance was the younger you purchase coverage, the cheaper the premiums are.
On top of needing life insurance, we also thought we needed a financial advisor. It just seemed like the thing adults did and a smart money move. We were good at saving money, but now that we had bought our home, we didn’t really have a plan for what came next.
After talking about our needs (life insurance and financial advisor) with some coworkers, one of them stated that his wife could help us out. I knew his wife and thought that this would be a good fit because surely if she was a friend then she would look out for our interests.
I didn’t do any research into credentials or the different professions. It was lazy of me to just accept the first suggestion I heard. Or maybe it wasn’t lazy, I just didn’t prioritize my finances (or my future really). I had always been good at saving money so what more did I need? We had a problem and now had a “friend” that could provide the solution.
We thought we were set. Nobody had ever told us that your financial advisor is not your friend.
At the time I knew nothing about investing or fiduciary responsibility. I had never given any thought to how someone in my “friend’s” position would be getting paid.
What is fiduciary responsibility?
A fiduciary is someone who holds a legal or ethical relationship of trust. They are someone who has a legal obligation to act in the best interest of their clients. Someone with a fiduciary responsibility must act in the best interest of the client even if that’s not in the best interest of the company.
In relation to money, not all financial advisors or planners have a fiduciary responsibility. Someone without a fiduciary responsibility can act in their own best interest as opposed to the best interest of the client.
What we eventually learned (the hard way) was that our new-found financial advisor did not have a fiduciary responsibility to us.
One evening after dinner our new financial advisor/friend came over to our home to meet with us to discuss our needs. This was many years ago but even now thinking back on it, I don’t remember us ever talking about our long term goals. This should have been a red flag, but we were young and naïve – still no excuse.
We were quickly sold into million-dollar life insurance policies. For some reason mine was a 35-year term policy and hubby’s was a hybrid term/universal life policy. He had $200,000 in a universal life policy and $800,000 in a 10-year term policy.
The “plan” was to convert another $200,000 into a universal life policy after 10 years and then continuing to roll this over. It seemed like a reasonable idea at the time. This lady was our “friend” so we thought that her advice was in our best interest. Never mind the ridiculously high premiums this would eventually bring; that was a problem for another day.
The Investment Strategy
Over subsequent meetings, we were also advised to invest in segregated-funds (also known as seg-funds). We were told that they had a “guaranteed return” and that we could never lose our principal investment. This was just after the 2008 crash so being highly influenced by media headlines we locked into a “sure thing”.
Again, there were never any conversations about fees or payment. This seemed great, look at how well our “friend” was setting us up financially and she wasn’t charging us a thing. She truly was a great “friend.” This was another missed opportunity to learn that in fact, your financial advisor is not your friend.
We were never told about the management expense ratio (MER) on what we were investing in. Seg-funds have a relatively high MER compared to most other investments. It was never discussed how seg-funds are heavily insured and that insurance eats away at your returns. We were “guaranteed” a 6% return. Too bad we weren’t smart enough to know that at the time the market eventually had double-digit returns.
I don’t blame our “friend” for the advice she was providing us. She was just doing her job. We were the naïve ones. The ones who didn’t know better. All the blame rested on our shoulders for not knowing that our financial advisor was not our friend.
We (very wrongly) assumed that someone else would care about our money as much as we did. We conflated our “friendship” with a business relationship with a financial advisor. There was never any research done on our part, we just blindly trusted someone we knew.
At the time, we didn’t know or understand how financial advisors were paid (or that there were different fee structures). And we also didn’t pay attention to the fact that the investments we were being sold were not necessarily ones that were in our best interest but rather ones that paid the highest commission.
Prioritizing our Finances
Years later (yes that’s how long it took us to prioritize our money) we started to take the time to educate ourselves financially. We learned that seg-funds and universal life insurance were not the right products for us. And both products came with high fees.
Because our plan is to achieve financial independence, we will one day be self-insured therefore no longer requiring life insurance. With our goals, a term life insurance product is all we need.
We have since transferred out of all of our seg-funds. These accounts are still actively managed (we are a work in progress) but the MER is only 1% which is much better than the more than 2% we were previously paying. And we were well aware of the MER when we invested in these funds.
At first, when we transferred our accounts I was a bit apprehensive. Not that I was unsure we were making the right decision, more so that it would be awkward once our “friend” realized what we were doing. I was feeling guilty for making a money decision that was in the best interest of my family.
What was wrong with me?
Thankfully this person was someone who we no longer associated with socially (for different reasons than our finances). All the transfers were done automatically behind the scenes so we never had to confess or admit to her what we were doing (and why).
Ending the Insurance Relationship
When hubby’s 10-year term life insurance came due, it was a different story. We knew it was coming due so in preparation we bought him a new 20-year term life plan with another company.
Our “friend” contacted us to let us know hubby’s policy was coming due. The premium was more than doubling.
It was now time to put on my big girl pants and stand up for my money.
We told her we planned on not renewing and that we wanted to cancel the universal life portion of the plan as well.
Her response was that we could keep the $200,000 universal life policy as a good option to have money in our estate to offset any taxes owing at death. Oh, and the cost to keep this policy was only 50% more than we were paying for hubby’s million-dollar term policy.
We were now armed with education and confidence and respectfully declined her offer. Once again realizing that she did not have our interest in mind, only her own. By this point, we had thankfully learned that your financial advisor is not your friend.
When we did cancel the universal life policy there was over $4500 of investment accrual in the policy. This money had essentially just been sitting there, not growing, just sitting. We received a refund cheque for the amount and promptly put it towards our current mortgage pay down strategy.
How to Avoid Being Taken Advantage of by a Friendly Financial Advisor
Our story is a cautionary tale to all the other mommas out there. I know how busy life can be and how easy it is to just want to jump at the first solution to a problem. But sometimes the first or quickest solution isn’t the best.
Here are 5 Ways to Avoid Being taken advantage of by a Financial Advisor
- Ask questions
- Especially how the financial advisor is being compensated
- Don’t feel like you need to make a decision on the spot. Gather the information and then wait at least 24 hours before deciding how you want to proceed
- High-pressure sales have no place in personal finance and are often a red flag
- Don’t be afraid to say no
- If you are working with an acquaintance, focus on separating the relationship from the business interaction. It is okay to say no and make decisions in the best interest of your family
- Avoid working with friends
- Find someone else to work with, get recommendations from friends, and seek an independent fee-only financial advisor. Or better yet, educate yourself and take control of your own finances. There is a growing movement of DIY investors.
- If you don’t understand the product, don’t invest in it.
- If someone is explaining an investment to you in a complicated manner, then it might not be the best fit for you. You should be able to understand all of your investments, whether you opt to work with a financial advisor or not.
I have made a lot of money mistakes so far on my journey to financial independence, but not realizing that my financial advisor is not my friend may have been the biggest one. I wouldn’t even know where to start in calculating the opportunity cost of this poor decision.
Now as a momma I have begun to appreciate the value of my money and time. I wish I knew then what I know now. But I’m not going to dwell on the past, just move on and learn from it.
I am not against financial advisors. We are now working with a new financial advisor who helps us focus on our short term and long term goals. Not once have we ever felt taken advantage of by him.
If there is one message I want to leave you with, I think it’s the most important one. Do you research and always remember that your financial advisor is not your friend.