Keep Momma Away from This Financial Adviser

“Mr. Beaver, my 79-year-old mother has trouble saying no to relatives and is being soft-pressured by her grandson, “Mario,” to let him become her financial adviser.

“He is 29 and was just hired by an investment house after bouncing from job to job for many years. He lacks any of the professional certificates that show some degree of training beyond obtaining his license to sell investments.

“Realistically, I do not think she needs or should be in the stock market, given her age, and as she is very well off financially (with a net worth of $8 million in liquid assets, plus rental income of $100,000 a year and no debt!). She has a simple lifestyle that does not require a great deal of money to support. However, Mario has been telling her that inflation will eat up much of her savings and that he can deliver a 25% rate of return annually on investments that seem to be gobbledygook to me!

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“When I ask him to explain, he gives incomprehensible answers and implies that I could never understand these concepts. Mom just sits there and is afraid to say a word so as to not look stupid. But more than that, he is obviously a close relative and I sense a conflict of interest.

“Mom loves your column, and I am sure your advice will have a positive influence on her decision. Thanks, ‘Danny.’”

I ran Danny’s question by two friends of this column, retired university business and finance professors Lyle Sussman, Ph.D., and David Dubofsky, Ph.D., whose new book, Your Total Wealth: The Heart and Soul of Financial Literacy, I reviewed recently.

Mom Could Wind Up Getting Badly Burned

Each of these experts has strong feelings about how dangerous a situation this appears for Danny’s mother, or anyone else with significant financial resources and relatives who want their investment business. They outlined the road to getting badly burned by saying “yes” to family hungry for your portfolio.

Sussman: Using nepotism – favoring relatives – as a reason to select a financial adviser, especially where the client is elderly and the adviser stands to inherit from them, is an obvious conflict of interest. It could potentially be seen as financial elder abuse if things were to go south in a big way.

Surgeons do not operate on family members for the same reason that a family member should not be your financial adviser: Emotional attachment distorts objectivity and judgment.

Regardless of training and credentials – noble intent aside – nepotism places both the adviser and the “client” in a difficult and unnecessary situation.

Nepotism is an even greater problem if the adviser is a potential heir. Here’s the test: “Do you honestly believe that a financial adviser who is a potential heir, directly or indirectly through marriage, can be totally objective in managing your hard earned money?”

Reluctance to Ask Questions Spells Trouble

Aside from the obvious nepotism problem, this situation has another huge red flag: the fact that Mario discourages questions and answers them in an incomprehensible way.

Dubofsky: Being afraid of looking stupid can cost you dearly. And whenever an adviser promises a high rate of return when investing in stocks or makes promises of a specific profit, RUN!

A corollary warning: If an adviser actually produces a consistently high rate of return year after year, with little variation, regardless of how the overall market has been doing, it may be a Ponzi scheme. If you are told this, RUN! Bernie Madoff did this.

No one can guarantee that you will make a consistent rate of return, with the exception of the yield offered by United States Treasuries and/or insured bank CDs.

The easiest way of being stupid is the fear of looking stupid. The key is in asking questions of the adviser. If, after your meeting, you can’t explain to a 10th-grader what that person is doing to make you money, then shame on you! You are putting your financial dreams at risk without even understanding the risk.

Never forget that you are paying not only for advice, but also for the logic underlying that advice, explained in terms you understand.

So, ask questions, seek clarification and reduce uncertainty. The financial world is a world of jargon. Being stupid is not asking questions. If your adviser can’t or won’t answer your questions without making you feel embarrassed or intellectually inferior, fire that adviser.

Sussman concluded our interview with a direct question to Mom: “Ask yourself, with my net worth, no debt and a substantial income stream, how much should I risk in the stock market?”

“Not everyone needs to be in the stock market. Inflation is a risk we all face, and if inflation is high, it will have an impact on daily life. But losing a substantial amount of money in risky stocks will also impact her daily life. Recognizing risk and appropriately investing require careful consideration of risks and rewards.

“So go out, buy a new pair of running shoes, and run like crazy away from your grandson!”