Financial Professionals Never Make Mistakes…Not!! (S3 E9)

Transcript

One of the main reasons to hire a financial professional to help with your taxes, investments, insurance, quite frankly any financial matter is because they create peace of mind. You assume they know more than you do about whatever the situation is and they will handle it for you. I mean, what is the point of hiring someone to do something for you if you have to double check their work? Well, this episode will remind you that even advisors with a wealth of knowledge, and every intention to act in your best interest, can still make mistakes.

Welcome to the third season of Invested Poorly: Sad Tales of FInancial Fails, now part of the Bold Departure Network. Invested Poorly is a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.

Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with the show.

Maybe not all of them, but my experience suggests that many financial professionals have an ego. Rarely do they respond well to second-guessing or recommendations alternative to their own. Look, I’m going to throw my hands up in the air and say I’m guilty of this as well. It was always frustrating to speak with clients who had just met with another financial professional about their investments.

The fact is, this industry is filled with sharks who will tell potential clients anything they want to hear for the chance to pick them up as a client. When it comes to investments, it is easy to play Monday morning quarterback and tell someone all the right investment moves they should have made over the past year or two.

I remember getting a few of these “second-guessing” inquiries over the years. My most memorable one was when I did something the other advisor—the one who was trying to steal my client away from me—definitely wasn’t expecting. My client set up a call with me to discuss what this other advisor had commented on about the way we were managing his money. Everything he mentioned was the typical “hindsight is 20/20” type of comments where he pointed out all the things we could have done to make higher returns.

I know I was pretty heated after this one because without even thinking, I impulsively asked my client to go back and ask the other advisor if he would provide a copy of investment statements of one of his long-term clients, so I could offer my comments on how I thought he was doing. I’m dead serious, this really happened and shockingly my client thought it sounded like a good idea. So, he actually called the other advisor back to ask if he would be willing to do it.

As you can probably guess, I did not get a copy of what the other advisor was doing, but the funny thing is, this event improved the relationship I had with my client. And I really think it was because he needed this experience to realize the other advisor was just telling him what he wanted to hear.

The point I’m trying to make here is you should never second guess your advisor, or double check their work because they will always be right.... Yeah, that moment of silence was intentional because I wanted to make sure you were listening and picked up on my sarcasm. I merely mentioned the previous story more as a plea to at least give your current financial professional the benefit of the doubt before jumping to conclusions when you seek out a second opinion. But, now I want to transition the discussion to why total trust in your financial advisor may not be a good strategy either.

As a financial advisor, one service we offered to our clients was to review their tax return to make sure the investment components were accurately reflected on the return. This is not a very difficult process when you know exactly what you are looking for. In reality, the tax return reviews rarely led to anything that needed to be pointed out, but I have no doubt knowing another financial professional reviewed the return provided valuable peace of mind to our clients. Of course, when you catch something big, that value goes through the roof.

The most memorable tax return error I caught involved income and capital gain distributions from some mutual funds a client owned. I was flipping through the return when I got to the page that listed all of their investment income. There was over six figures of income from mutual funds listed on the return that I knew were ones we had purchased. But the thing was, these were funds that we only used in retirement plan accounts, so I immediately thought we had totally messed up and invested a taxable brokerage account incorrectly. Fortunately, that was not the case.

What happened was the client had sent his tax advisor all the information he received from the brokerage firm where his accounts were custodied. This is standard procedure. But what was a bit odd in this situation was the brokerage firm had also sent him what I think they called a summary statement for his 401k plan. It was just an FYI document with all kinds of information about cash flows, dividends, trades, etc. It was not something he needed for his taxes at all. I have no idea why the tax advisor thought it was necessary because it clearly stated it was for informational purposes only and that the information pertained to his 401k, but regardless, his tax advisor put all the income on the tax return.

We are all human and as my mischievous little nephew likes to say, “things just happen,” but this was a big error. After pointing this out to the tax advisor, he immediately took ownership, fixed the error, and actually gave me a huge endorsement. Needless to say, this client never forgot the value I provided to him in that situation.

Another common error I used to spot on tax returns is tied to a financial planning strategy called the Backdoor Roth IRA. The strategy usually involves rolling over all of your deductible IRA assets to a company-sponsored retirement plan and then converting all of your non-deductible IRA contributions to a Roth IRA, tax-free. If done correctly, little to no income will show up on your tax return as a result.

The strategy is now widely used, and most tax advisors are very familiar with it. But in the early days when it was just starting to be implemented, it was embarrassing how often it was reported incorrectly. We didn’t keep actual stats, but the first year the Backdoor Roth IRA strategy became available, I’m guessing almost half of the tax returns I reviewed were incorrect. Most of the available tax reporting software at the time didn’t know how to account for it, and since it was a strategy that probably less than 10% of a tax advisors’ clients might even be eligible for, it was not on their radar. I can’t begin to tell you how much goodwill I created with clients by catching these tax return errors.

Another story related to the Backdoor Roth IRA involved a friend of mine who asked for some help with his investments. He owned a small business with a couple employees and had a Simple IRA. He mentioned that his advisor had just done a Backdoor Roth IRA for him and my eyes got real wide in a hurry. I remember asking him if he still had a Simple IRA at his office and he said yes. I shook my head and said, well if that’s the case, you are not eligible for a Backdoor Roth IRA.

He let me review his statements and what his advisor had done, and right away I knew it was not correct. I told him he needed to contact his advisor immediately and get it reversed. Fortunately, a reversal was still an option at the time it occurred, and his advisory firm did the right thing and got everything fixed.

I guess now might be a good time to mention I discuss the Backdoor Roth IRA in a little more detail in Episode 2 of Season 3, so check that out if you are unfamiliar with the strategy. It’s a great one for high-income earners.

Okay, so to end this episode I’m going to show a little humility and tell you about a bad recommendation I once made. Another friend who asked me about his finances had been unemployed for several months due to some health issues and he probably wouldn’t be able to go back to work for at least another three to six months. Immediately, I told him that he could take advantage of this situation by converting a portion of his traditional IRA to a Roth IRA. Since his income was going to drop to almost zero for an entire year, he could benefit from this by paying little to no tax on the conversion.

However, the question I failed to ask him was whether or not he was receiving any other benefits due to his abnormally low income. The answer was yes; he was on Medicaid. His health-related issue had him on a prescription drug that was really expensive without insurance.

So, I’m throwing myself under the bus here. The thought never even crossed my mind when I made the initial recommendation because Medicaid was not something any of my clients qualified for. Fortunately, we were able to get this fixed and we still converted a small portion of his IRA, but only enough to keep him under the Medicaid income threshold. This story illustrates why it is so important for you, and your advisor, to have a full understanding of your specific financial situation before ever taking action.

So the punchline of this episode regarding financial advice is trust, but verify. I think most financial professionals are doing their best to provide sound advice, but no one knows everything about everything. Educating yourself around the specifics of your finances and investments can help you or your financial professionals avoid costly errors. You don’t need to be the expert, but you should know enough to ask the right questions and understand what they are doing to make sure there isn’t anything either of you might have overlooked.

I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.

Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen!” So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.

I’m your host, Jeff Harrell. Thanks for listening.

Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.

This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.