INTRODUCTION:
Have you ever caught yourself wishing you could go back in time and either save more money, invest differently, or avoid a devistating financial decision? I caught myself doing this very thing and found that there is in fact not a time machine yet… come on Musk 😉
My goal here is to share with you my experience that I wish I could have avoided. My hope is you find it insightful and are able to avoid the need of a time machine (for financial purposes at least).
The Beginning:
I was a couple years out of college when my professional career and personal life really started to take off. I had been on the grind with my job for a while, and I was just starting to see the fruits of my labor. I was also about to propose to my girlfriend, Megan, in the house we had just purchased.
With everything happening at once, we felt we couldn’t keep the cash we were earning in our hands very long. We knew we needed a better strategy, so we decided to respond to one of the numerous financial advisors that wouldn’t stop calling all of a sudden.
We sat through a bunch of dog and pony shows with a variety of companies. To me, they all seemed exactly the same. At the end of the day, we decided to pursue the process with a friend of mine that I knew well from college. He happened to work at Northwestern Mutual, which was a name we recognized that gave us even more confidence.
After we sat through all of the upside down illustrations of various buckets getting filled with imaginary future dollars, we were told the recommendation would be for each of us to purchase our own whole-life insurance policy.
We were handed a book the size of my kitchen table, which included more small print than you can possibly imagine. But we were assured we were in great hands. Our spending problem would be resolved by sending Northwestern $1,500 a month. Now we just had to do what we did best, make the money, and leave the financial stuff up to them. We trusted him, and he was an expert.
The Next Chapter:
Years went by, and we slowly started to become more interested in understanding what we were actually investing in. In that time, I have grown by leaps and bounds in my financial knowledge.
Several years of helping to grow the family business, then eventually selling it to a local competitor was eye opening. I found there was a huge gap in the financial advice industry.
We needed good advice, and I was amazed how each advisor seemed to be looking out for themselves. I would soon learn that there are actually financial professionals who are LEGALLY obligated to act 100% in our best interests, they are just very difficult to find.
Every advisor we met seemed to have some sort of conflict of interest; it was clear as day that they had a financial interest in the direction they were advising we go. When we eventually found the pure advice we were looking for, I felt a strong pull to focus my career in that direction. The rest of the story led me to where I am today.
Revisiting Northwestern Mutual:
Last year my business partner and I took a deep dive into my investments with Northwestern Mutual. What we found was unfortunately what I expected, but had hoped wouldn’t have been so true.
- The whole-life insurance policies we were sold were not a great fit for us. Not even close.
- The investment returns were dismal due to fees and other product features.
- The net opportunity cost was over $250,000 figured over the next 30 years.
Why will it cost us this much? We were working with a sales rep, NOT a Fiduciary Financial Advisor.
- We were sold an expensive insurance policy rather than a comprehensive financial plan.
- The product we bought could have made some sense for someone needing advanced estate planning, but we were far from that.
What SHOULD we have done if we had met with a Fiduciary Advisor?
- Maxed out my 401(k). Reduce my total W2 income through maxing out my 401(k), making me eligible for a Roth IRA contribution.
- Maxed out my Roth IRA, giving me tax-free growth.
- Invested the surplus cash into low-cost, liquid investments in a diversified portfolio.
Conclusion:
Total cost of the lost Roth IRA opportunity, market growth over the last five years, and tax free growth comes close to $250,000 over 30 years.
It was not my friend’s fault though. He was simply a sales rep trying to give financial advice who happened to work for a company that had quotas and incentives to sell certain products. He did not have the education or wherewithal to accomplish what we needed, nor did he have a legal obligation to do so.
The bottom line: Make sure you are sitting across the table from someone who has the LEGAL obligation to act in your best interest.
