In my early thirties, I was very new to investing. I knew it was something I was supposed to do, but I didn’t know where to start.
So I often listened to a radio show by a well-known personal finance advisor. He provides a list of Endorsed Local Providers (also known as ELPs) — individuals that the organization vetted and were supposed to have “the heart of a teacher.”
With my own teacher’s endorsement, that’s all I needed to put my full trust in one of his investment broker ELPs.
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I Didn’t Listen to My Wife
During our very first meeting, we talked about our goals. For us, these goals were as follows:
- Investing for our kid’s future college expenses
- Saving up for a down payment on our next home
- Investing for our retirement
After discussing our goals and learning about how our investment broker would support us, I felt very comfortable moving forward. My wife on the other hand, did not feel comfortable with our investment broker starting from day one.
She thought he was more of a salesperson that talked over our heads than someone that was there to really help us learn and grow.
I disagreed with her because I was ready to start investing and this guy sounded really knowledgeable. It was true that I didn’t understand everything he was saying either, but that’s why we were going to work with him. He knew more than us about investing and that was a good thing!
That’s where I was wrong.
I Had Blind Faith in My Investment Broker
Through some persistence and my trust in the books I’d been reading, I convinced my wife that working with this investment broker was a smart move. She begrudgingly agreed and we were ready to start building wealth.
Some of the early money moves we made together were as follows:
- Set up a 529 account for our newborn daughter
- Increased our term life insurance policy from 20 years to 30 years
- Opened a taxable brokerage
I was feeling very good about the progress we were making. As we continued to make more money, we would invest more.
As our relationship rolled on, I earned a $100,000 big commission at work. It was the largest sales commission check I ever received.
We spoke to our broker about our intention to save up for a down payment on our next home.
With this new $100,000 commission, we asked what we should do with it if we want access to it in the next couple of years to buy a house. Our broker recommended investing in some bond mutual funds that would provide modest growth and lower volatility.
With my full trust, I handed the $100,000 check to him at my front door of my house and went on with my day.
I Never Understood How My Broker Was Paid
When I received our next statement from our broker, our $100,000 investment was now below $95,000. I was so upset.
How could the value of our less volatile investments already be down more than $5,000?!
Well, I quickly learned a few things that day:
- Bonds, although a safer investment, can lose value
- If I wanted to use my money in the next 5-7 years, I should keep it out of the stock and bond market
- Each mutual fund I invest in has an expense ratio associated with it and that costs me money
But the main thing I learned that day was how my investment broker gets paid.
There’s something called a “Front End Load Fee” that is an investment fee that has a percentage of the investment (usually 2% to 5%) go directly to the broker. In my case, our front end load fee was on the higher end of that sliding scale.
After realizing this, I felt so foolish.
Who Is to Blame Here?
Although I was incredibly upset with my investment broker (and I let him know so as well), I was more upset with myself.
My wife never felt comfortable with the guy. He talked over our heads. I saw that as intelligence and she saw it as someone who was more interested in selling than teaching. And she was so right.
My blind faith in an “intelligent person” left me vulnerable to future financial mistakes. By asking more questions, I could have learned so much more.
One question I should have asked about was “How are you paid for your service?” That question would have helped me to understand what we were committing to with this multi-year relationship.
And if his answer to my question about how he gets paid was something I didn’t understand, then I shouldn’t have worked with him.
That hard lesson is now something I remember every time I’m considering a new investment. If I don’t understand it, then I don’t invest in it.
Final Thoughts on Investment Fees
Shortly after this major financial error on my part, we decided to leave our investment broker completely. I dove headfirst into managing our investments.
With this new challenge, I vowed to educate myself so this would never happen again. One area that I took a special interest in was investment fees. Depending on who you work with, there can be plenty of them.
Personal Capital offers a free Fee Analyzer tool that helped me analyze and lower my investment fees. This tool opened my eyes to some blind spots in my new solo investing journey.
Since parting with our investment broker, we have fared pretty well. Last year, we crossed over the $1,000,000 net worth mark and are looking at a very comfortable retirement.
Would I partner with an investment broker again? Probably not. However, I would consider partnering with a fiduciary financial advisor.
This would have to be a person that was truly out for my best interest, was clear about their fee structure, and of course, had my wife’s stamp of approval.
Personal Capital compensates Andy Hill for providing the content contained in this blog post. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.