Continuing this week’s series focusing on teacher finances, I wanted to warn about how the pizza in the faculty lounge could be the most expensive one on Earth and why teachers are at great risk for buying it. To explain why this food is so dangerous for your financial health, I need to explain how people in the financial advice industry are paid and why teachers make great targets for folks not legally obligated to act in the best interest of their clients. Hold onto your rulers and apples because this could literally save you several years worth of salary.
The Pizza in the Faculty Lounge Is the Bait in the Trap
If you’ve worked for any length of time at a public school, you’ve probably seen a nice looking businessperson set up with a booth in the teachers’ lounge at your school. They come bringing gifts, trinkets, and often food. From what I’ve been told by some of my teacher friends, their most popular lure is free pizza.
All they want in return is a meeting where they are going to discuss your finances and set you up with more income in retirement that won’t be subjected to the turmoil of the scary stock market. After a few minutes of talking with this nice, earnest person, you agree to an appointment and enjoy the couple slices of pizza given to you.
You show up to the meeting and the advisor keeps talking about guaranteed returns. You even get promises from the company that you will always get out what you initially invest. Furthermore, the account his company offers is different from the stock market. While stocks go up and down, the product he pitches can’t ever lose money. That sounds great! It’s capped at 6% returns a year, but with the $20,000 you have in your savings account yielding less than 1% that doesn’t sound unreasonable. Excited to take action to improve your financial future, you sign up for the advisor’s program and agree that you will contribute $5000 as an IRA contribution each year.
The only cost to you for this great set up where you’ll have more money in retirement was that awesome free pizza you ate right? We’ll discover later how expensive that pizza truly was.
The Salesman in a Professional’s Clothing
Teachers don’t profit off their students, so they aren’t used to dealing with people whose primary motivation is making as much money as possible. Teachers are highly educated professionals who try to help children develop intellectually and would never knowingly tell a kid misleading information. Unfortunately, in the cutthroat world of finance there is no such standard of professionalism. The agent you received free pizza from will tell you anything he needs to tell you to close the sale. As long as a financial product INDIRECTLY takes your money in the form of high fees and doesn’t steal your money outright, the government allows it.
There are lots of “advisors” out there who are really salespeople. The key test is if they have a fiduciary duty to you as their client. Ask them the question “Do you have a fiduciary duty to me?” If their answer is no, then they are a salesman and you should know they will be offering you their company’s products at the exclusion of others that cost less and could provide higher returns. These salesmen make money by selling fancy sounding insurance products and high fee mutual funds to you. Their reward is a commission that amounts to 5-10% of your initial investment.
There worst products they pitch are called variable annuities and equity linked index deferred annuities (the more complicated sounding the name, the worse it is for you as a general rule). While there are a few very narrow cases where these products could make sense, most of them are made to be sold not bought. They are highly complex and carry tons of rules and charges. The person selling you this annuity is not going to understand all the intricacies and charges, but he doesn’t need to because what counts is the sale, not due diligence. A typical commission on one of these products is usually between 7-12%. The folks that sell these products hold themselves out as financial advisors but are akin to used car salesmen. There are good ones out there but there’s also a lot of them that will tell you anything to get you to buy the car so they can move on to the next sale.
So when you see a financial professional in the faculty lounge, he or she is probably a salesperson and not a true professional with a legal dedication to the well being of their clients. That’s the first thing you should know.
Why Teachers are Such Attractive Targets
Most fee based advisors who offer ongoing financial planning and investment management have high minimums to take you on as a client. A lot of these advisors have that fiduciary duty to put your interests first. Their minimum is typically $100,000, which most teachers are not going to have. Advisors want to get paid too and when you aren’t able to provide them with enough revenue they won’t serve you. There are plenty of fee based advisors out there that charge way too much for what they provide, but at least their interests are aligned with yours. Always ask the question “do you have a fiduciary duty?” to make sure. If you get wealthier over long periods of time, they make more money. If you become impoverished, they lose money. That’s a good alignment to have with a financial professional. However, what’s an underpaid teacher to do when she can’t get access to an advisor bound by that fiduciary duty I mentioned earlier?
High fee product based financial advisors have filled that void for many decades. If they get 1 time commissions from teachers with $10,000 to invest, they can still get $1,000 paydays! Meanwhile, the fee based advisor charging a 1% portfolio management fee is looking at $100 in potential revenue. So the high quality advisors won’t compete for your business as a teacher. The high fee financial product salesmen know this, so they go to schools where a couple $10,000 clients could be a solid week’s paycheck. Because the commission is a one time deal, the financial product salesmen don’t have an incentive to provide ongoing planning and advice on your financial needs. To be honest, they probably don’t have the knowledge to do this either. Remember they are salesmen not advisors.
So if you were an agent selling an inferior product to a group of people not familiar with financial terminology, how would you get them to talk to you? You bring free pizza, because everyone loves free pizza. While the potential customer is eating, you invite them to set up a meeting. Since the teacher is a polite person and feels like she might owe you something after eating the free pizza, she agrees. At the meeting he aggressively pitches financial products but never mentions the fees. If you sign up for the service, it will cost you at least 2% a year taken off the top from your portfolio. In some cases, the fee could even approach 4%, EACH YEAR!
How Much Does Signing Up with One of These Salesmen Advisors Cost You Long Term?
Let’s assume you put $5000 a year with one of these faculty lounge advisors for 30 years. I’m going to compare the result to hiring a low cost investment advisor like Wealthfront, Betterment, or Vanguard where you’ll lose maybe 0.3% on average to trading costs, advisor costs, and fund costs combined. I’m going to take the low end of the high fee advisor spectrum and assume your advisor only costs you 2% a a year in fees. I’m assuming a 6% before fee return.
|Year||Low Cost Advisor Portfolio||Faculty Lounge Advisor Portfolio|
|Cost of that free pizza over 30 years: Over $100,000!!!|
To be clear, the difference in portfolio size is coming from the fact that the low cost advisor is delivering a net return of 5.7% a year and the high fee advisor you met in the faculty lounge is delivering a net return of 4% a year. That small difference compounded over time amounts to a huge result.
I looked up the average weight of a pizza, and it came out to about 20 ounces. The price of gold is a little over $1300, so a golden pizza would cost around $26,000. The difference in wealth over 30 years between the low cost advisor and the high cost advisor is almost FOUR GOLDEN PIZZAS!
Is $100,000 worth a couple slices of pizza? I hope not, or else that better be some darn good pizza. You could be looking at $100,000 or more in extra fees after 30 years if you use one of these high fee advisors who somehow gains entry into the faculty lounge. Action steps for teachers include never talking to these folks, hiring a low cost advisor, and using low fee index funds in their portfolios. If you can’t resist taking a free slice of their pizza, do not agree to a meeting unless they tell you that they have a fiduciary duty to put their clients interests before their own. Use that lack of fiduciary duty as the excuse why you won’t meet with them if they press you. Better yet, warn your friend about these salesmen before they give up thousands of their hard earned dollars.
What’s the worst teacher ripoff you’ve ever heard of? Do you see financial advisors setting up shop in your faculty lounge? Any questions about the stuff above? Comment below!