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Wall Street Steward Blog

Case Study: At Your (Secret) Service

My job is to be a good steward of my clients’ assets. Whether that means encouraging them to make a decision or exhorting them NOT to make a decision, it is all part of the gig.

However, another part of being a steward is protecting them from other advisors/investments/ideas that would be harmful to them.  This is a true case study that occurred recently.

“I had a man stop by my house the other day and try to sell me a <insert product>”

“Hmm, tell me about it.”

“Well, I can’t lose any money in it, and I can make some money if the stock market goes up. Although, I have to hold it for 15 years.  Also, it pays me 10% up front.”

“Run the other way.”


I went on to ask for the specific name of the investment and proceeded to research it.  Here are the details.

  1. principal protection (“cannot lose money” was true)
  2. 5 year surrender charge (will charge a hefty penalty if withdrawn in first 15 years)
  3. has appreciation potential of 0-2.9% per year (yes, the maximum they could make in a year was 2.9%)
  4. pays 10% up front to the account holder
  5. pays a commission of 15% to the agent

The salesperson told the client ALMOST everything, but the devil is in the details.  Here’s why – assume the client buys this investment and it grows the MAXIMUM amount every single year for 15 years.  BTW, the odds of that happening are about the same as you hitting the PowerBall lottery, but lets not let the facts get in the way of a good story.  If it maxes out for all 15 years, here is how the account would grow:

$100,000 invested
+10% up front = $110,000 beginning balance
Year 1: +2.9% = $113,190
Year 2: +2.9% = $116,473
Year 3: +2.9% = $119,850
Year 4: +2.9% = $123,326
Year 5: +2.9% = $126,902
Year 6: +2.9% = $130,582
Year 7: +2.9% = $134,369
Year 8: +2.9% = $138,266
Year 9: +2.9% = $142,276
Year 10: +2.9% = $146,402
Year 11: +2.9% = $150,647
Year 12: +2.9% = $155,016
Year 13: +2.9% = $159,512
Year 14: +2.9% = $164,138
Year 15: +2.9% = $168,899

A few observations:

  1. They never had a negative year
  2. Their money grew every single year
  3. They made $68,899

Then, WHY would I tell them this is not a good investment.  Simple – they invested $100k and it grew to $168,899 over 15 years, which is an average annual rate of return of 3.56% per year.  Inflation has averaged 3.1% per year over the past 100 years and 4.1% per year over the last 50 years.  Said another way, the $100k they invested could have bought them $100k worth of stuff on day one, but to buy that same stuff after 15 years takes $182,709.

They only have $168,899.  Their money did not even keep up with inflation.  The purchasing power was literally eaten away, and they would have paid some salesperson a 15% commission to sell them this.  Ask yourself: would you pay someone a 15 thousand dollar commission to invest your money into something that will not even keep up with inflation?

Didn’t think so.  But hundreds of thousands of people do this every day.  They do not know any better, and it sounds so good at the time.  "You can’t lose money, the stock market is at all time highs, lock in all gains and avoid all losses……"  They let the force of “peace of mind” cloud their judgement enough that they make a financial mistake.

Not my clients.  Not if they ask me.

Choose a trusted advisor that will truly STEWARD your money, and not just sell you stuff.  Then, once you find that person, ask them about EVERY financial decision in your life.  They can help you avoid potholes like this one.

That is part of what you pay them for.