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Opinion: This is the worst investment advice you can get

MarketWatch logo MarketWatch 4 days ago Chris Mamula

Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.

My financial story creates an interesting juxtaposition, as I recently shared with Steve Chen on the NewRetirement Podcast. On one hand, my wife and I did many things well with our money. We achieved financial independence quickly, allowing me to retire last fall at 41 years old. 

On the other hand, we made investing mistakes that in retrospect could only be described as pure stupidity.

The good

My wife and I are reasonably intelligent, hard-working people. Both of us are first-generation college graduates from working-class families. We each earned three college degrees and had professional success.

We were financially savvy enough to get out of debt quickly, pay off our mortgage in seven years, and save approximately half our income throughout our careers. Throughout the accumulation phase, we managed to maintain our high savings rate while living lives filled with adventure, travel and amazing experiences while we were earning normal professional salaries.

The bad

We began investing with a financial adviser who we blindly trusted, handing him large sums of our hard-earned money. We later learned we paid approximately eight times more in hidden fees than we thought we were, costing us thousands of dollars each year. Following horrible advice led to costly tax planning blunders that cost thousands more annually. This combination of excessive fees and unnecessary taxes cost us nearly $20,000 in just the last year we used his services.

The ugly

We weren’t ignorant just once. We willingly followed this advice for nearly a decade. Considering lost compounding over decades, this was a million-dollar mistake.

How did this happen to us? It was a direct result of following what I now consider the worst investing advice you can get. Unfortunately, I hear and see it often.

The worst investing advice

Conventional wisdom says investing is difficult and most people can’t manage their own investments without the help of a financial adviser. Even well-known financial pundits, who encourage taking control of other aspects of your financial life, suggest you punt when it comes to investing. See Dave Ramsey’s advice as the pre-eminent example.

I disagree that investing is complicated and requires professional help, but that’s only the precursor to the worst investing advice.

The worst advice, which I read and hear frequently, is that you should find a good financial adviser by seeking the recommendation of someone you trust.

Why is this such horrible advice?

Our society is financially illiterate

On average, we save little to nothing. Even people like my wife and I, who are good at earning and saving money, often don’t know how to invest it. That’s why we thought we needed a financial adviser. Those who do save and invest consistently underperform market benchmarks by several percentage points a year.

The odds of your childhood best friend, the person in the cubicle next to you, or your Uncle Bob referring you to a good financial adviser are slim. It’s the blind leading the blind.

Unfortunately, people don’t know what they don’t know. With good intentions, people want to help. You will have friends, colleagues, and family who are happy to refer you to “their guy.” This is how we found “our guy.” We in turn referred others before realizing our errors.

Letting down your guard

Because you are being referred by someone you know, like and trust, you go into the relationship with the financial adviser with your guard down. We handed over large sums of money without doing any investment due diligence.

As bad as our outcome was, it could have been worse. We weren’t scammed out of our money. We willingly went along with horrible advice that is pretty common for many investors.

Our decision process

We found our financial adviser by asking my parents how they invested. They used this financial adviser and his company for years. My wife and I knew our household income was substantially more than my parents’. They did well enough to fund my and my brother’s college tuition while being on pace for their own secure retirement. I assumed they were getting good advice at a fair price.

Years later, after I began writing about investing and retirement planning, I shared what I had learned with my parents. They eventually asked me to sit down and decipher their portfolio for them. I explained what they were invested in, the associated risks, the conflicted advice they were receiving, and showed them an itemized list of expenses they were paying.

From this new perspective, they realized they accomplished their financial goals in spite of, not because of, the advice and services they received. They left the financial adviser as well.

Read: Stay away from these 3 types of financial advisers (and that’s coming from an industry insider)

The lightbulb moment

The idea that investing is complicated was deeply entrenched in my own psyche. Despite our awful experience, my wife and I still didn’t want to manage our own investments initially. We assumed we just needed to find a better financial adviser. I asked a co-worker, who I believed had an income and money philosophy similar to mine, how he invested.

He used a financial adviser because he didn’t feel confident investing on his own. I inquired as to how he selected his financial adviser. He told me that Dr. “X” and Dr. “Y” both invested with her. He assumed that if the adviser was good enough for them, she was good enough for him because, “they make way more money than me.”

At that moment it hit me. How crazy is this idea that we should seek a referral to a financial adviser?

How do the skills that enable a surgeon to command a hefty salary translate into knowing how to save and grow that money or evaluate the financial adviser doing it for them? They don’t!

What skills that enable someone to sew together a torn rotator cuff or replace an arthritic hip translate into the ability to select an appropriate asset allocation, evaluate tax efficiency of investment options, or determine the need for an annuity. None!

Odds are that although they have your best interests in mind, your friend or family member’s judgment and knowledge don’t bode well for you either.

My alternative advice

There is no substitute to self-education. Those unwilling to learn are destined to repeat these same mistakes. The financial-advice industry is too rife with conflicts of interest for you to enter without equipping yourself with knowledge.

Maybe the best summation is by Dr. James M. Dahle in his book “The White Coat Investor.” He says: “The main difficulty with choosing an investment adviser is that by the time you know enough to choose a good one, you probably know enough to do your financial planning and asset management on your own.”

You can find extensive information here to help you become a DIY investor. There are plenty of others dedicated to demystifying the process of investing as well.

Take time and educate yourself. Then, if you still think you still need help with your investments and financial planning, go out armed with knowledge and find a financial adviser that fits your needs.

Related video: How to pick the perfect financial adviser (provided by Money Talks News)

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Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. This was first published on the blog site Can I Retire Yet?

Also from Chris Mamula: You can retire early without adopting Mr. Money Mustache’s extreme frugality

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