READING OVER COMMENTS from my editor, I noticed a question buried within the text: “Does he really pay this much for a life insurance policy? That seems like too much.”
The question was about my then boyfriend, now husband, Peach. At the time, he was paying around $50 per month on his $50,000 life insurance policy. This was something I didn’t know about until I wrote an article detailing why it’s important for people with cosigned private student loan debt to carry life insurance. (Answer: because if your lender doesn’t discharge the debt upon death, the cosigner will suddenly need to pay it off and may not have the funds to do so.)
I’d told Peach a few months prior that he really should have a life insurance policy, since his parents had cosigned on some of his student loan debt. It wasn’t a long conversation by any means, and I didn’t even know he’d been proactive about getting himself a policy until a few months later, when he mentioned paying for it. I didn’t ask any questions about where he’d gone or the type of policy he’d picked.
Smash-cut back to me reading my editor’s comment.
I started mulling over his point. Why was a twenty-five-year-old with no health issues paying $50 per month for a simple life insurance policy?
So, I asked Peach. “Hey, what kind of life insurance policy do you have?”
Then I got the answer I feared: whole life.
“Oh, how come you picked whole life insurance?”
“I don’t know,” he said. “I googled ‘How to get a life insurance policy’ and ended up on the insurance company’s website. When I called and explained my situation, the woman on the phone told me that a whole-life insurance policy would be best because some of the money is invested and I get the cash value back. With term life, she said I’d never get money back except if I died, and then my parents would get the payout.”
He’s right. It is a good sales pitch. It makes sense that lots of people get pushed into a product like whole-life insurance, even when it’s not the best fit. For Peach, a whole-life policy made no sense. He didn’t have any dependents, wasn’t worried about sheltering money from estate taxes, and just wanted some basic coverage in case he died young and his parents were forced to pay off his student loans. A term life insurance policy would’ve been the perfect fit, about $25 a month cheaper with a larger payout. That’s an extra $25 a month that could’ve been going toward paying off his student loans faster. The problem was that the insurance company rep on the other end of the call probably received a commission when he signed up for a whole-life insurance policy, which means she was incentivized to push him toward one.
After I explained these points, Peach ended up switching his life insurance policy. He nearly tripled his coverage, to $150,000 for a seventy-year term, and saved $25 a month, which meant putting about $300 a year back into his budget. That’s an extra student loan payment!
Now, was he scammed? Not exactly. But he also wasn’t encouraged to get the financial product that fit him best.
UNFORTUNATELY, a big part of investing is being cautious and developing an excellent bullshit detector. There will always be scams in the marketplace, so let’s overview ways to detect a scam, using more than just a gut instinct, and how to properly vet potential investments and advisors.
With the exception of my first foray into investing (when I called up an advisor at my bank and was sold a particular mutual fund), I’ve pretty much spent the bulk of my DIY strategy vetting products myself and focusing on low-cost index funds. I’ve only once purchased an individual stock for the purpose of playing around and learning more about stock picking. I do my best to block out the noise of the hot new stock tip or latest buzzy trend while still keeping myself in the know for the sake of my work and my investing plan.
But I’m human. Of course I’m susceptible to wondering if I should’ve invested a little money in Bitcoin back when I first started hearing about it, or listened to my gut and bought Netflix stock back at the end of 2011, when shares plummeted, since I was pretty sure the company would stick around. (Yeah, I still kick myself over that one—but I wasn’t in a financial position to invest yet.)
I asked the experts for recommendations on how to sniff out a scam in the investing world and for tips on how to realize that a particular company or investment isn’t the right fit.
“There are a lot of people who buy stuff because it’s sold to them,” explains Jill Schlesinger, CFP®, CBS News business analyst and author of The Dumb Things Smart People Do with Their Money. “They don’t buy it because they understand it. I had a fabulous professor once. He was teaching a big class on options to us young commodities traders, who were trading derivatives. On the blackboard, he wrote in huge letters, ‘KISS.’ And I thought it was going to be some massive theory about [the] Black-Scholes model, and he’s like, ‘Keep It Simple, Stupid.’ And that’s not a bad way to think about your own financial life. If you can’t very clearly explain what you just bought, then don’t buy it. And look, you know when you’re being sold and you know you’ve got a sixth sense. If there are yellow flags that you’re feeling, then don’t do it.”
“Well, gut check, I think, is a good word,” says Maria Bruno, CFP®, a senior investment analyst for Vanguard Investment Strategy Group. “If it seems too good to be true, then it probably is. So, be careful of gimmicks or strategies that are meant to make quick money, because those are often probably not realistic or just riddled with a lot of shady investment activity.”
“Do your homework on investment providers,” says Bruno. “Look at tenured investment firms. Make sure that how that company invests is aligned with your values. You know, a lot of people spend a lot of time thinking about a car and all the work that goes into purchasing the right car. Well, do we as investors spend that much time thinking about what fund we’re going to pick? Maybe not, but think it through and understand what you’re getting, what you’re paying, the tenure of the firm, and the money manager.”
“Take a look at the asset management companies out there,” advises Douglas Boneparth, CFP®, founder of Bone Fide Wealth. “These are big names with trillions of dollars. Your BlackRocks, your Vanguards, your Oppenheimers, your Goldman Sachs[es]—they sell mutual funds or ETFs. Because the space is so commoditized, you’re going to be hard pressed to find yourself in a Bernie Madoff situation. You’re well covered, the industry is well regulated—you’re not going to have a ‘burn ’em, cheat ’em, and run’ mutual fund or ETF.
“You’re going to find products at large institutions that run the gamut from conservative money market funds to relatively risky emerging markets. You’ll find funds that are investing in cryptocurrency and private equity companies. We’re going well beyond the spectrum of your large US companies.
“But where should you be concerned about sniffing out someone? [Not from the mutual funds or ETFs that the established and regulated asset management companies are offering.] When your buddy comes up to you with a wild idea and wants your cash.
“Financial institutions come to the table with well-regulated products. The consideration is where does that product fall on the risk spectrum, not that you’re going to get robbed.”
“I don’t research the next big tech company,” says Ashley Fox, a financial education specialist who started her career working for a Wall Street investment bank. “If I use it, I own it. That’s how I invest. I don’t go looking for investments. I just buy more of what I own and continue to use. I understand how each company I invest in operates and makes money and what they do.”
“There should be an immediate red flag when someone tells you about an investment and you ask questions about it and you’re not satisfied with the answer,” says Jennifer Barrett, chief education officer for Acorns. “You still don’t feel like you understand it. That’s my gut check.”
“Even with cryptocurrency, I really researched it for quite a long time before I invested in it,” says Barrett. “My personal gut check is I cannot invest in anything unless I at least understand the basic mechanics behind it. With crypto, that means understanding that it’s largely a speculative investment and you’re betting that someone else is willing to pay more than you. So, how comfortable am I putting money into an investment that has no real intrinsic value, solely on the hope that someone else will pay more? My answer was: I’ve been watching this for long enough that I can put a little money in, that I’m okay losing with the idea that I might win big. But if I lost everything I invested in it, would it fundamentally affect our ability to reach our goals? How would I feel? Would I be okay if that money just disappeared?”
There are a number of resources out there to help you sort out whether an advisor is sketchy.
BROKER CHECK: The Financial Industry Regulatory Authority (FINRA) offers an online tool that allows you to vet a potential broker/investment advisor. Broker Check allows you to look up a financial advisor by name, Central Registration Depository number, or firm name. This free tool will tell you the number of years the advisor has been active, which exams he or she passed, and the states in which he or she is registered. Most important, it will let you know about any customer complaints, regulatory actions, arbitrations, bankruptcy filings, and criminal or civil judicial proceedings. If your potential (or current) investment advisor or broker isn’t registered, it could mean he or she isn’t legally allowed to sell securities or offer investment advice.
Find the tool at https://brokercheck.finra.org/.
INVESTMENT ADVISOR PUBLIC DISCLOSURE: The Securities and Exchange Commission (SEC) also provides a free tool for vetting investment advisors. It works in a similar way to FINRA’s Broker Check, and also pulls in information from Broker Check. You’ll receive details about any disciplinary actions taken against an advisor as well as his or her credentials.
Find the tool at https://www.adviserinfo.sec.gov/.
VERIFY A CFP: The certified financial planner (CFP) designation is the gold standard for financial planners. While financial planners and investment advisors are not always one and the same, you can seek out a CFP who also specializes in investments and estate planning. Should you want to work directly with a CFP, whether for general financial planning or for your investments, you can verify potential candidates through the CFP Board. The tool will tell you if the CFP is indeed certified, whether he or she has a history of disciplinary actions from the CFP Board, and any bankruptcy disclosures in the last decade.
Find the tool at https://www.cfp.net/utility/verify-an-individual-s-cfp-certification-and-background (or type “verify CFP” into a search engine and look for the landing page associated with the CFP Board).
You should take the time to ask a potential investment advisor questions before doing business.
What are your experience, certifications, and credentials?
There are plenty of certifications and credentials, so the ones you’re looking for depend largely on what you want out of an advisor. You’ll hear brokers and investment advisors refer to exams such as the Series 7 or Series 63. These licenses are required in order to be able to sell different types of securities. You can learn more about each one on FINRA’s website (http://www.finra.org/industry/qualification-exams).
Do you uphold the fiduciary standard?
The fiduciary standard means the advisor acts in your best interest. Suitability standard means the advisor just has to do only what is suitable for you.
How do you get paid?
As mentioned in chapter 6, commissions, a fee for assets under management, and a flat-rate fee are all ways in which your advisor may get paid. If he or she gets paid a commission, you should know exactly what that means for you and the products in your portfolio.
How often should I expect to hear from you?
At a bare minimum, you should have an annual meeting about your portfolio and goals, but maybe you’d prefer to meet once a quarter or get weekly newsletters or be able to get a response if you’re panicking about a market correction. You should be comfortable with the means and frequency of communication that you get from your advisor.
Will I be working directly with you or also with other people in the firm?
It’s a bummer to feel as though you have a rapport with someone only to find out that’s the pitch person to get your business, and you’ll really be dealing with intern Jim down the hall.
You can ask your investment advisor these questions directly, or you can ask them of yourself before you decide to invest in a new product.
How does this investment work and make me money?
What is my goal with this investment?
Is this aligned with my risk tolerance and values?
How is this helping me reach my (short/medium/long-term) goals?
Will I be okay if I lose all this money tomorrow?
First, you should always do your due diligence on any investment, no matter how “safe” it seems.
Second, before you skim this list, it’s important for you to understand something. The products you see listed here are not necessarily scams or nefarious products. Some of them make sense for a niche group of people at a particular phase in their lives.
However, many of the products listed below have the potential to be sold to you as smart investments because they pass the suitability test but not the fiduciary one. Some of these investments come with well-crafted sales pitches to make it sound like you’d be a fool to not get in now. You need to do your own research and see if an investment really does fit in your portfolio or if someone is trying to make a commission off you.
“Bitcoin is gambling. If you want to gamble, that’s fine,” says Sallie Krawcheck, CEO of Ellevest. “Whatever money you put aside to go to Las Vegas, you can use to play around in Bitcoin. At some point, it may become a true asset class, but it is not there yet.”
Active management, Krawcheck explains, is “the idea of buying and selling funds or stocks through a financial advisor or a broker, or on your own, with the promise of outperforming the market. The research tells us that despite the fact that this has been the value proposition in the industry for the longest period of time, the percent of active managers who consistently outperform over a five-year period is a single-digit percent. By some estimates, it’s less than 1 percent. This is a loser’s game. This continues in the industry because it makes so very much money from it and because the concept of outperforming is so tantalizing and so compelling.”
“Buy term, and invest the difference,” advises Krawcheck. Whole life comes with steep premiums and fees. If you’re unable to pay those premiums, then you could lose some or all of that initial deposited sum. The returns on the invested funds probably aren’t great compared to putting the same money in a low-fee index fund. Plus, whole life is just frickin’ confusing, and as all the experts have recommended, only buy what you can understand.
Term life is simple, with lower prices, so you get the coverage you need and can invest the difference. Plenty of life insurance agents are happy to sell you a whole-life insurance product, and in fact will probably give you a hard pitch to take it—even if it’s not the ideal fit.
Generally, whole-life insurance is recommended for high-net-worth individuals doing everything they can to minimize the impact of estate taxes. For the average Broke Millennial, it’s not a fit.
“I adore the concept, because if I describe an annuity to anybody, they always say, ‘That sounds amazing.’ You know, what if [you] could put money in, earn a return, and not outlive your money,” says Krawcheck. “Unfortunately, the industry has so overcharged for annuities that [they’ve] gotten a bad name.”
Annuities are one of those products that are easy to build a strong sales pitch for, but that doesn’t mean they’re a good fit for your financial life and goals. Don’t be wowed by a flashy presentation until after you’ve looked under the hood and investigated the fees and restrictions, and then see if an annuity still fits into your plan.
☐ After asking all your questions, do you understand what the investment does and how it earns money?
☐ If it’s a speculative investment, are you financially and emotionally prepared to lose all the money you invest?
☐ Do you feel like you’re being given a sales pitch or does this product make sense with your portfolio’s overall goals?
☐ Did you properly vet a broker/financial advisor/investment advisor by asking all the necessary questions and checking the SEC and FINRA databases?
☐ It’s cliché, but what’s your gut telling you?