{ in·deed·a·bly }

adverb: to competently express interest, surprise, disbelief, or contempt

Dangerously ignorant

There is an app that you can download on your phone. It automatically mines and trades a host of different cryptocurrencies. You contribute just $250 per month, then decide how many hours per day you want it to run for. It then generates cash for you. Far more than you put in.

[Famous entrepreneur] was apparently told about it by one of his trusted friends. He didn’t believe it at first, but after seeing the app in action he has embraced it to create generational wealth that he will pass on to his children.

[Leading breakfast television programme] was supposed to air a segment on it last week, but at the last minute, the CEO of [large retail bank] phoned the television studio and begged them not to run it. The bank would lose too much money if everyone knew how to make money using the app.

What do you think?

I blinked.

Gold fished.

Unsure quite what to make of my elderly mother waxing lyrical about an implausible sounding get rich quick scheme.

She had no idea what cryptocurrency was.

She couldn’t figure out how her phone might help miners, who to her simple mind made a living by digging up rocks.    

A dozen of her peers had signed up for the app. In many cases not because they believed the claims, but because they were afraid of missing out should those claims prove to be true. Buying Amazon or Microsoft shares in the early days had been unpopular too, and look how that turned out!

I challenged some of the more dubious aspects of the story.

If somebody had figured out how to make money from automated trading, why would they share that edge with others?

If the trading was so successful, why were they selling a subscription-based app?

How would people making money from an app financially injure a retail bank? And how could the CEO have known ahead of time what segments were planned to run on a breakfast television programme?

She didn’t have any answers, but batted back my questions with a challenge of her own: if it was a scam, explain the money that her friends had already made from using the app? A “mathematical certainty” they say.

My inner saboteur wryly observed that everyone looks like a genius in a rising market. Those who had been taken in by a con were usually its staunchest defenders until the bitter end.

For most of us, losing face is more painful than losing money.

I agreed, but chose not to voice those thoughts. Instead, I asked her where her friends had heard about the app?

She said it had been promoted in a free wellness newsletter many of the old ladies subscribed to. The staple content was exercise routines and recipes targeted at the over 70s age group.

I advised her to be careful whom she took advice from.

Was a wellness author the best source of financial guidance? Would she trust dentistry advice obtained from a motor mechanic? Or seek a legal opinion from a shop assistant?

If that financial guidance was as poor as it appeared to be, did that not call into question the author’s judgement and competence?

If so, did that not also raise uncomfortable questions about the exercise and nutrition programmes the author similarly promoted?

I suggested that she might consider unsubscribing from the newsletter.

Portfolio complexity

I’m having trouble getting my money out of these unlisted offshore investment funds. They promised returns of 10-12% before tax, but haven’t lived up to expectations. What do you think?

Another week, another conversation.

My father had made some attempt to simplify his financial affairs somewhat before he died, but my mother still inherited a portfolio that what it lacked in size more than made up for in complexity and headaches.

Lots of small positions in a seemingly random collection of individual shares and investment funds.

I asked where he had heard about these illiquid unlisted investment funds?

She said he had read about them in a newsletter that many of the members of his Rotary club subscribed to. The staple content was economic commentary targeted at retirees who self-managed their pensions.

My father had subscribed to numerous investment newsletters, many of them on a paid subscription basis.

Each week or month the “experts” behind those newsletters would sagely proclaim a recommended list of investments. Buy this. Short that. Actionable insights.

Rarely professionally qualified. Usually sponsored. Inconvenient facts that were seldom disclosed.

Sometimes the recommendations were based on dubious marketing science.

Divining meaning from the random patterns on stock price charts.

Inferring causation amongst apparently correlated financial ratios.

Occasionally the claimed “edge” was merely unfounded speculation that as yet undisclosed quarterly results would be contrary to analyst expectations. A guess about a guess.

These recommendations would invariably be surrounded by advertisements and advertorials. Brokerage houses. Investment clubs. Financial planners. Fund managers. Margin lenders. Wealth managers.

The occasional executive coaching service. Personal development programme. The latest soon to launch FinTech app that was destined to make early investors rich.

Their appearance serving as an implicit endorsement. Content running alongside advertisement, largely indistinguishable to the audience.

Rarely did the performance of the author’s previous recommendations receive any coverage. Don’t be distracted by a past you cannot change, focus instead on the latest shiny thing I am promoting.

I advised her to be careful whom she took advice from.

What made the people making these tips any more qualified than herself?

How was the author benefiting from the recommendations they made? Did they receive a referral commission? Did they have an interest in the firm offering the investment? Seek to build an audience, to which they could subsequently sell a book, or course, or other information product?

We were eventually able to extract her money from the unlisted fund. It took more than three months. Fortunate indeed.

I suggested that she might consider unsubscribing from the investment newsletters entirely.

Dangerously ignorant

I’ve received a newsletter from my financial planner advising that two of my investment funds are being absorbed into a new one. The planner says the fund manager has an excellent track record of consistently beating the market.

We’ve invested with them for years, but that hasn’t been our experience.  What do you think?

Another week, another conversation.

An old trick deployed by fund managers when attempting to goose their results is to kill off underperforming funds.

A Darwinian practice that promotes survivorship bias, as the only funds with any sort of historical track record in evidence are the successful ones. Shuffling assets under management between funds in a form of financial shell game.

It is easy for retail investors to run a search on Morningstar to peruse the performance of currently open funds.

One thing that may not be immediately apparent is the relatively short historical track record in evidence for many funds.

Finding data on funds that underperformed and subsequently closed is much harder. Few bother. Preferring to trust the recommendations they receive from their broker, financial planners, media, or newsletters, rather than verifying the pedigree and track record of those who will be doing the managing.

A clear case of “buyer beware”, yet one that traps investors with monotonous regularity.

My mother showed me the paperwork, and we ran some numbers.

She had invested with the fund manager for more than a decade, yet the longest historical track record of their surviving funds was slightly less than five years.

The performance metrics published for that fund were average at best. A closet index tracker that charged the management fees of an actively managed fund. These fees creating a material tracking error when compared with the index it emulated.

Yet the markets had gone up strongly over that time period, allowing the fund manager to boast of performance far exceeding the average market return. The catch here was they were comparing apples to wheelbarrows. “Average” was calculated using historical data going back to the 1930s, while their performance track record only spanned the frothy part of the recent bull market.

When basing the return calculations off my mother’s actual investment cost base, the results were sobering. She would have been better off keeping cash under the mattress.

Over the decade she had invested with the fund manager, her money had been rolled in an out of funds that were subsequently merged several times over. You would never know it from the Morningstar data, but the fund manager had a superpower: they could consistently and reliably turn a reasonable sized investment into a much smaller version. A veritable shrink ray!

I advised her to be careful whom she took advice from.

Her financial planning firm appeared to be either lazy, taken in by the marketing hype, or a self-serving commission chaser. Putting their interests ahead of those they were entrusted to guide. The new fund differed little in terms of approach or fee structure than the two funds that were closing down. A simple reset, truncating the visible evidence of underperformance.

I suggested that she might consider cashing in those investments. She should also consider shopping around for a more conscientious independent financial planner, one who offered a transparent fee structure to ensure their commercial interests aligned with her own.

Trust wisely

Learning whom to listen to and whom to trust is a difficult, and often expensive, lesson.

Learning where to set the boundaries and limitations on that trust is harder still.

We should maintain open minds, but adopt a posture of healthy scepticism. Trust what is being said by all means, but seek to verify it for yourself before acting upon it.

Somebody who is a genius in one field, could well be dangerously ignorant in another.

A best selling finance writer offering powerlifting tips is as unlikely to be any better informed on that topic than a taxi driver offering tips on what stocks to buy.

Yet if you asked that same taxi driver for directions, and you should efficiently find your way to your chosen destination.

--- Tell your friends ---

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  1. Mr RIP 28 September 2020

    This is horrifying.
    Can’t you help her directly, instead of recommending to find a good financial advisor?
    Can’t you set up a set of low cost ETFs for her and handle bi-quarterly rebalance?

    • {in·deed·a·bly} 28 September 2020 — Post author

      Families are complicated, Mr RIP!

      All your suggestions are both sensible and possible.

      Some people value advice more highly when they are paying for it.

      Others mitigate their fears by hiring a professional to confirm what they may already know, deriving comfort from the fact they have someone to blame if things turn out poorly.

      My father used to manage all their household finances and investments. Before he died, my mother had never used internet banking or paid a bill online. This was more conflict avoidance than a lack of ability on her part, there would have been too many cooks in their kitchen had she shown more of an interest.

      We decided it would be better for her independence and confidence to learn how to do these things for herself, while remaining available to answer questions or guidance from half a world away. Generally the way it now works is she will figure out what she thinks she should do, then runs it by one of us before she pulls the trigger. She doesn’t always agree with our views, but to her credit she at least listens to the different perspectives and then makes up her own mind.

      It would have been infinitely easier to simply step into my father’s shoes and carry on. However, my mother lives alone in a distant city. We needed to ensure she would be honest with us about her health and wellbeing, something that experience tells us is far less likely should she be mad at us about losing her money when the markets take a tumble or the taxman changes the rules.

      I’ve worked hard with her over the last couple of years to simplify things, ensuring she has a reliable income stream that more than funds her desired lifestyle. Much of her portfolio is now invested in low cost ETFs, as you suggest. Progress has been tempered somewhat by her lifelong aversion to paying any more tax than she absolutely has to. The simplification has been slowed by her desire to avoid tax bracket creep, offset taxable capital gains with capital loses made elsewhere, and so on. Some of the investment positions my father had taken were illiquid and time bound, so unwinding them has been a bit of a marathon.

      We’re getting there. Slowly.

      • David Andrews 29 September 2020

        Families are indeed complicated. Sometimes parents can perceive advice from their (now grown up) children as unnecessary and impudent. My Father is 79 and has started to declutter his existence in preparation for his (hopefully distant) inevitable demise. He has an up to date will and I’m granted power of attorney in case of any mental or physical incapacity. Discussions about finances have never really been encouraged in our household which I suspect is the case in many others. Each time I visit him I grill him about what he’s paying for his energy / broadband and other utilities as I’m sure he can probably get better deals.

        I’ll continue to offer gentle nudges regarding his financial position but people generally have to make up their own mind. All I can do is provide support and evidence based reasoning.

        • {in·deed·a·bly} 29 September 2020 — Post author

          Thanks David. Sounds like you’re as well prepared as you can be for when the time comes.

          Putting those arrangements in place can certainly make for some awkward conversations, and at times some uncomfortable hypocrisy. We worry about what happens if dementia strikes our parents, yet try really hard not to think about how things would play out should we ourselves get bashed over the head or run over by a bus and left in a similar state. In some respects a sudden death is easier to manage the a long drawn out incapacitation or debilitating illness.

          I’ve learned to pick my battles and not to sweat the small stuff, a delicate balance between her being ripped off versus undermining her confidence in the arrangements she has put in place. To some extent it reminds me of mentoring staff or raising my children, it can be hard but necessary to step back and let them fail in order to learn.

  2. Keith 28 September 2020

    Any particular reason why South African newspapers should feature in the accompanying photo?

    • {in·deed·a·bly} 28 September 2020 — Post author

      You have a keen eye there, Keith.

      No particular reason at all. The photo reminded me of my youth spent delivering newspapers. In hindsight, I probably should had remained a paperboy!

  3. Fire And Wide 28 September 2020

    When I first read this I was struck by the seemingly odd advertising vehicles – then I realised it was both obvious & genius. A way to target people more likely to (a) have money and (b) may struggle to understand what they are signing up for.

    Sad but unsurprising. Not too dissimilar to my Spam email folder, regularly full of amazing opportunities to part me from my money in exchange for……..something glittery…..later…

    I’m glad you managed to help your Mum out, even from afar. I actually have the opposite problem when talking to mine about how there are actually alternative investments to premium bonds. I think they just like the thrill of thinking they’ll win a million each month…ah well. At least they aren’t complicated!

    • {in·deed·a·bly} 28 September 2020 — Post author

      Thanks Fire and Wide.

      The newsletter approach is self-selecting.

      The audience opts into a particular interest, providing a ready made target market for all sorts of products based solely on the inferred curation and endorsement of the newsletter publisher. One of the reasons the internet entrepreneurship evangelists endlessly implore content creators to “build their list“!

      That is a definite strength where the products are relevant to the expertise of the publisher, and genuinely add value to the audience. It can be a curse when the publisher ventures off piste, quickly exceeding their own competence, yet in the eyes of the audience still conveying the same authority.

      We see this in the personal finance blogosphere where it occasionally crosses over into life coaching or wellness. Tangentially related niches, yet being a credible PF voice does not mean a content creator knows what they are talking about when it comes to those alternative domains.

      When one of those voices starts doling out ill-advised advice or uninformed opinions, it is often detrimental to those who eagerly hang on their every word.

  4. Sam 28 September 2020

    so… what’s the app called?

    • {in·deed·a·bly} 28 September 2020 — Post author

      Sorry Sam, my mother did tell me the name but I can’t remember now. I really should pay more attention! ?

      • Quincel 29 September 2020

        Don’t worry, I’m sure there are plenty of other app designers out there happy to fill the gap in the market…

  5. Quincel 29 September 2020

    This is one of my favourite posts of yours in a while, and I say that not to disparage your usual quality! This is just a wonderfully direct (and stark) warning.

    The funds merging/ending trick is a new one to me. Now you illustrate it I recognise it immediately, but I do see how it wouldn’t ring alarm bells in a retail investor. Deceit by omission can hide very effectively. Fortunately my investments aren’t anywhere which would be affected by it, but I’ll keep my eyes open to the danger in future,

    • {in·deed·a·bly} 29 September 2020 — Post author

      Thanks for reading Quincel, glad you found it to your liking.

      Unfortunately the funds management game contains many such hidden traps and pitfalls.

      One I loathe and admire in almost equal measure is the hidden in plain sight OCF charges. We have been conditioned to thinking of these as acceptably low for passive index trackers, due largely because of the extortionately high comparable fees on (often underperforming) active funds.

      Yet how often do we actually stop and think about how much income they actually represent?

      Picking one at random, Vanguard’s FTSE 100 index tracker advertises an OCF charge of “just” 0.08% per year. Yet when you consider there is £2,800,000,000 invested in that fund at the time of writing, that OCF fee earns the fund managers more the £2,240,000 per year.

      Which is a lot when you think about what is actually involved in passively tracking an index containing ~100 (mostly underperforming) stocks.

      0.08% is certainly less than 5%. Yet how often do we ask ourselves whether comparably cheap is the same thing as reasonable? If you’re like me, then probably not often at all!

  6. FullTimeFinance 29 September 2020

    Often times what they do with those unlisted funds when they are a scam is sort of like a Ponzi scheme. They pay out the first investors from new investors up to a point getting them to go in bigger Or add more. Eventually they walk away with the money leaving the rest holding the bag. Pump and dump is also common.

    I’m actually finding the opposite situation with my family. Slowly but surely they are abandoning managing their own funds to me. They are not getting taken advantage of at least, but it is becoming a lot to track as each has a different goal. I’m now managing investment accounts for my family and three other individuals. Perhaps I should open a wealth management business and start my new career lol…

    • {in·deed·a·bly} 29 September 2020 — Post author

      Thanks FullTimeFinance.

      There are certainly a lot of sharks out there! Fortunately in this case the glacial pace seemed to be driven by bureaucratic and convoluted operating processes, rather than dodgy practices.

      Much of the delay turned out to be a compliance impasse. The fund manager wanted to confirm my mother’s bank account details before releasing the funds, while she refused to disclose them over the phone because she feared joining the legions of old people who were fleeced out of their life savings via scam callers. Eventually I was able to find a mutually satisfactory compromise, but in these days of “zero trust” and non-stop phishing attacks, life certainly gets ever more complicated!

      Sounds like you have a successful side hustle lined up there, if you ever tire of this blogging lark! You’ll have to start a family office, maybe a nice post-FIRE gig?

  7. Bob 30 September 2020

    Once again, you have impressively wrinkled the meaty lesson in each story without unnecessary padding. The crypto app sounds like an cyber version of the Black Ink scam. Where punters are offered a “working” currency duplicator.

    Regarding educating your mum. My wife was astonished to discover that for £600 and four months work she could qualify as a pukka finincial advisor.

  8. GentlemansFamilyFinances 4 October 2020

    I enjoyed reading this because it’s a subject that fascinates me.
    In some way, the challenge to persuade deeply conseebaruve / risk adverse people to part with their cash is chilling but also a triumph of psychological salesmanship. Many if those who end up “investing” become the biggest fans of the scams and will deploy the full arsenal of cognitive dissonance to anyone who tells them that they are losing their money.
    It’s a bit like a cult.

    On a separate note, my mum was scammed by “bt engineers” to transfer all if her cash savings (maybe £100k but possibly much more (conservative investments over a lifetime of saving) stopped only by slow bank processes and scamees remorse and a quick call to the bank after funds were sent.
    The call lasted over 3 hours plus untold hours awaiting for the right mark to come along. from a scammers point of view it’s maybe cheaper to use a bit of targeted advertising and accept £250/month – a hunter vs. Gatherer conundrum.

    • {in·deed·a·bly} 4 October 2020 — Post author

      Thanks GFF. Glad to hear your Mum was able to recover her money, that sounds terrifying.

      The psychology of sales is a fascinating study of behaviours, influence, and manipulation. The good ones manage to carry it off without the punter even realising they’ve been sold to.

      The mediocre ones make the sale, but leave the punter feeling like they need to take a shower afterwards (think charity collectors, used car dealers, mobile phones salespeople, “enterprise” software, real estate).

      The bad ones aren’t at it for long, because they can’t close the deal.

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