Hey friend—where’s your money?

Last night, my school had its parent/teacher evening where teachers met with groups of parents for 10 minutes to discuss their educational philosophies and the courses being taught.

At one point, during a break from the revolving door of parents into classrooms, I got a mild-mannered visitor. His son was in my English 9 class, and he saw that I wasn’t busy, so he came in to ask me some basic questions. His biggest one was, “How can I encourage my son to read?”

 We chatted for a few moments, and he told me that he gave his son a book by Michael Lewis, the author of Liar’s Poker and The Big Short: Inside the Doomsday Machine.

They’re fabulous books, spelling out the corruption and ineptitude of the financial service industry at the highest levels.

“What do you do?” I asked.
 
“I’m in high net worth management,” he said, “For clients with hundreds of millions of dollars”

“Oh,” I responded with a smile,”for clients who make their fortune somewhere else and then hand it over to you to manage it?”

“That’s it,” he smiled.

 Then I gave my 2 cents about money management.

Perhaps I shouldn’t have done it, but it was more out of fascination than anything.

“You know,” I said, “It’s such a funny industry—so laden with fees, and after fees, taxes and survivorship bias, hardly anyone has a chance of beating a diversified portfolio of stock and bond indexes. “

Did I blow it?  Did I ruin a potential friendship–albeit, a professional one?  It wouldn’t be the first time.

I once met a Singaporean guy named Sampson at the Berkshire Hathaway general meeting, and he came over to my place for lunch because we enjoyed the shared “geekdom” of finance talk.

 He ran a Hedge Fund in Singapore, and when he went on marvelously about how brilliant the “2 and 20 system” was, I asked, “How can you sleep at night with an arrangement like that?”

In case you didn’t know, most Hedge Funds charge 2% on assets every year, and a further 20% on any investor profits.  That’s why it’s called the “2 and 20”.

And according to a study done by Wharton professor, Jeremy Siegel, more than 70% of Hedge Funds disappear (due to lousy performance) within the first 10 years of their existence.

Well, after giving Sampson my views on his admiration for what I deemed to be an unfair system, he didn’t come over to play anymore.

This brings me back to the parent I met last night—the one working with high net worth individuals.  Did I blow that relationship too, when my comments could be interpreted as an insinuation that he didn’t add value to the people he served?

Thankfully, with a smile, he said, “That’s what I tell my close friends.  Keep costs low and diversify.”

We had a bit of a chuckle, and off he went.

If you were to guess where he had his money—where do you think it would be?






Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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17 Responses

  1. DIY Investor says:

    Interesting. I have to say that it doesn't bother me as much when it comes to real high net worth. High net worth people like to have a high profile advisor (how many people bragged they had money managed by Bernie Madoff or even Long Term Capital Management back in '98?) and are willing to pay a lot. In fact, I would guess that if you asked executives at S&P 500 companies exactly what they are paying their advisors and what they are getting for it they would have no idea and really wouldn't want to be bothered looking into it.

    I was glad to see that your advisor knew that low fee investing is the way to go.

    What bothers me are all the people who work really hard for many years and are good savers who take part in the tax advantaged vehicles and yet still are in a precarious situation when it comes to their retirement. Even worse, and we've all seen them, are the elderly who are ripe for exploitation. They are scared and looking for guidance but are taken advantage of. An elderly lady in my area took the proceeds of her house sale and put them in an account her accountant opened up in his name. Needless to say he lived large until the law caught up with him.

  2. I agree with DIY Investor. The ones most at risk of exploitation are those that are less knowledgeable and believe anything that their financial advisor will tell them. Education and awareness is the key, here, as well as swift punishment of those that cross the line over into fraud, like that accountant.

  3. At least the guy was honest with you, guess he has some integrity. It fascinates me to hear stories of pro athletes who've earned tens of million if not hundreds of millions in their careers go bankrupt because they don't understand money and turn their earnings over to people who rob them blind when all they had to was plop it some index funds split 60/40 between stocks and bonds and they'd be set for life. Whether people are rich or poor, it always irks me when they are bilked out of their savings. Con men exist everywhere, whether they are legal like hedge fund managers or illegal like a Madoff. Trying to juice returns or turning the keys to your financial kingdom to a trusted third party usually has a bad, but very avoidable ending.

  4. DIY Investor says:

    The Grouch's comments brought to mind a story a buddy of mine, who managed commodity futures, tells. He was in a car a few years back with a well known basketball player who had recently been drafted by the Washington Wizards – 22 years old and a multimillionaire (the b-ball player – not my friend). They were on their way to New York to meet with a small group to look into the basketball player putting out a rap record – something he knew nothing about. In New York, according to my friend the table was peopled with big time hustlers talking about financing the recording, who was going to get what, how it was to be promoted etc. He said the basketball player was totally clueless on what was going on. All the others at the table wanted to know what my friend (they didn't exactly refer to him in a cordial way) was doing there.

    I just throw this out because I think it is difficult for us to put ourselves in the shoes of someone who overnight, at a young age, goes from low income to extreme wealth and is surrounded by sharks who are expert at getting every piece of meat off the bone.

    I may be wrong but today, I believe, the player's union fends off a lot of fly by night schemes that bilk athletes and that get by agents.

    Still, for those of us bothered by the basic financial services industry ways of doing things with average people the world of pro athletes is something completely different.

    Thanks Grouch for bringing to mind a story that always got me to laugh. If you guys could hear my friend tell the story you'd be rolling on the ground laughing.

  5. @DIY Investor

    Hey Robert,

    That's a nutty story about the NBA pro. I read once that 60% of NBA basketball players declare bankruptcy within 5 years of their retirement. I wonder if that statistic will improve.

  6. @Kevin@InvestItWisely

    I agree with the "swift punishment" aspect Kevin. I do wonder about one thing though: when Americans have robbed someone of money (Madoff etc) they seem to get more significant punishments than someone committing physical harm—other than perhaps first degree murder. What do you guys think?

  7. @The Biz of Life

    Hey Biz,

    You're so right about con men. In a way, they're fascinating characters though, don't you think? I mean, so many of them lack any kind of moral compass. And that fascinates me big time. I could probably watch "con man" biographies all night long. I don't think I've ever watched one, but I sure would get a kick out of it.

  8. @Andrew Hallam

    Well, it would take a loooooooong time for Madoff to pay back everything he bilked. 😛

  9. @Andrew Hallam

    Somehow they remind me of the hyenas from Lion King… trying to get any licks they can, and completely unscrupulous about doing it.

  10. @Kevin@InvestItWisely

    I think about Madoff a lot Kevin. I wondered whether he could give back to the American people, rather than bleeding their tax system while he's perpetually fed and housed at the expense of the American taxpayers.

    I wonder how much it would cost to assign him a "job" that he could do in prison, where he could intelligently help small investors. He'd be given a crash course on the realities of money, debt management etc. And then he'd play Suze Orman with real people, while under guidance. I know that he's a smart guy. He could learn to advise people practically.

    Imagine if he had a blog! How many fascinated people would check it out? And the proceeds would be huge–and linked to some kind of charity.

    OK—maybe it's not realistic. But a way of allowing him to use his brains to help people gives more value to his life, going forward, as well as value to others, perhaps.

  11. @Andrew Hallam

    I was thinking of that, actually. What a waste to spend money to keep the guy locked up when there's much better forms of "punishment"! Maybe it's not that realistic, but I was thinking along the same lines as you!

    Madoff shares "interesting" company. Among his companions, a member of this crew: http://en.wikipedia.org/wiki/DeMeo_crew

  12. BadCaleb says:

    Were you able to help his son with his reading?

  13. @BadCaleb

    It's going to take time, but I'll be doing my best.

  14. BadCaleb says:

    I don't remember too much of my reading material from Grade 9 other than Animal Farm, In the Heat of the Night, and plenty of comic books but I can say safely say it was not books on finance and the economy. Good luck with your student. And for that matter, thanks for sharing your financial world as this site is a great learning environment for me as well.

  15. @BadCaleb

    BadCaleb,

    I'm glad it is. We can all learn from each other. Where are you from?

    Cheers,

    Andrew

  16. BadCaleb says:

    I'm in Vancouver but after reading your posts about living in Singapore maybe that could be a destination in my future. I think I can use food as a selling point to the wife, she's a big fan of Laksa.

  17. Hey BadCaleb,

    Singapore's a great place–especially considering what a springboard it is for some exotic travel locales. If you come to SE Asia for a visit, let me know. I'll take you and your wife out for….laksa if you like.

    Cheers

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