New Year’s Resolution: Master Your Finances and Focus on Strategic Growth Over Quick Gains
As we step into the New Year, many of us are setting goals for better health, stronger relationships, and smarter finances. But as the harrowing account of what happened to Richard Whitacre (as covered by the Wall Street Journal) reminds us: Make financial choices with careful consideration and due diligence.
Here is a summary of Mr. Whitacre’s unfortunate story. In 2023, Whitacre, a hardworking industrial mechanic, faced immense personal and financial challenges. After losing his job and being diagnosed with colon cancer, he believed he had found a lifeline in an investment opportunity through a firm called Yield Wealth, promising "guaranteed" returns of 15.25%. Tempted by these lofty claims, Whitacre withdrew his entire 401(k)—more than $763,000—and placed it into an IRA managed by Yield, only to find himself entangled in a web of fraud and uncertainty.
Whitacre’s experience, shared by hundreds of other investors who collectively lost over $50 million, underscores the critical importance of thoroughly vetting financial advisors and investment opportunities. To help you avoid similar mistakes, here are some actionable resolutions as you consider how best to manage your investment assets.
1. Set Realistic Expectations for Portfolio Returns
One key takeaway from Whitacre’s story is the importance of understanding what realistic investment returns look like. While promises of double-digit, “risk-free” returns can be tempting, the truth is that most portfolios should aim for reasonable growth aligned with market performance and risk tolerance.
Speak to your advisor about the historical performance of similar portfolios and the risks associated with higher returns. A trustworthy advisor will help you understand that slow and steady growth often leads to financial independence.
2. Steer Clear of "Guaranteed" High Returns
In investing, the adage holds true: if it sounds too good to be true, it probably is. Fraudsters often lure investors with promises of "guaranteed" returns. As demonstrated in Richard Whitacre’s case, such guarantees are rarely, if ever, legitimate. Real investments carry some degree of risk, and reputable advisors will be upfront about this.
3. Educate Yourself About Taxes and Rollover Risks
When you rollover a retirement account (e.g., 401(k), 403(b)) into another retirement account, that rollover must be accomplished within 60 days or the Internal Revenue Service will treat the transfer as a withdrawal, which is subject to ordinary income taxes (unless it is a Roth retirement account) or even penalties. In the case of Mr. Whitacre, he may now face a massive tax liability, as other custodians may not accept this type of asset to be held in their custodianship. Further, the IRS could classify these as early withdrawals, subjecting them to taxes and penalties.
Before moving funds, consult a tax professional or certified financial planner. Ensure you understand the tax implications of any rollover or investment.
4. Don’t Overlook Custodial Protections
One of the major failings in the Yield Wealth fiasco was the lack of reputable custodianship for investors’ funds. This left investors like Whitacre without access to their funds, creating additional tax complications. Custodians should also offer their own protections against theft, in addition to those available via SIPC (Securities Investors Protection Corp.) and FDIC (Federal Depositor Insurance Corp.).
Ensure your investments are held with a reputable third-party custodian, like Fidelity or Charles Schwab, for example. Custodians act as safeguards, ensuring your funds are safe from brokerage failures and theft.
5. Avoid Emotional Decisions
Financial stress, like job loss, market volatility or the loss of a family member, can lead people to make imprudent decisions; for example, people may consider highly risky investments to be appealing. However, major decisions made under emotional duress often lead to regret. Consult multiple sources, and give yourself time to evaluate all options before acting.
6. Choose a Fiduciary
In this story about Richard Whitacre, the advisor and his team, as uncovered later, made exaggerated claims about their credentials and sidestepped regulations. The advisors pitched investments without the proper securities licenses, which is a direct violation of federal and state laws.
A true fiduciary is legally required to act in your best interest. Ask your advisor if they operate under a fiduciary standard and confirm their qualifications with certifying organizations. Be wary of anyone unwilling to provide proof of their credentials. We’ve always believed that “Investing is about putting the odds in your favor”. Similarly, working with a fee-only fiduciary advisor as opposed to others, also “puts the odds in your favor” for a better financial outcome. To be clear, there still is no guarantee with either type of advisor, but we believe your chances of success are better with an independent, fee-only fiduciary advisor. Two simple questions to ask any advisor, “Is your primary obligation to me (the client) or to someone else (and who is that someone else)? And how can you make me feel confident that your recommendations and advice are truly in my best interest and not the result of what your employer/supervisor/parent firm is requiring you to do(sell)?
7. Research the Advisor's Background
Make it a priority to vet any advisor you’re considering. Check their credentials and professional history. Public databases like FINRA’s Broker Check (https://brokercheck.finra.org/) or the SEC’s Investment Adviser Public Disclosure (https://adviserinfo.sec.gov/) can reveal red flags such as disciplinary actions or employment history that suggests instability. Advisors with frequent job changes or histories of financial infractions are clear warning signs. All Mr Whitacre needed to do first was check these databases to prevent such an unfortunate experience for himself. Look for an advisor with longevity with one firm and zero disclosures! In this day and age where complaints are numerous in any industry, if you can find an advisor with a long history of zero disclosures, chances are (again, no guarantees anywhere!) you are dealing with a trustworthy person.
8. Request Transparent Fee Structures
Ask advisors how they are compensated. Fee-only advisors may be better able to avoid conflicts of interest since they’re paid directly by clients, not through commissions or sales incentives. Be wary of hidden fees or advisors reluctant to disclose how they derive their income.
Conclusion
As you embrace 2024, let these resolutions guide your journey to financial security. A trustworthy advisor can be an invaluable partner in achieving financial independence, but finding the right one requires vigilance. Remember, your financial future is worth the effort. Make this the year you invest in due diligence—and peace of mind.
Here’s to a prosperous and secure New Year!
Disclosures: This is not an offer or solicitation for the purchase or sale of any security or asset. While the information presented herein is believed to be reliable, no representation or warranty is made concerning its accuracy. The views expressed are those of NCM Capital Management, LLC and are subject to change at any time based on market and other conditions and NCM does not undertake to update or supplement its newsletter or any of the information contained therein. Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable. There is no guarantee that the investment strategies discussed above will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Investment advisory services are offered through NCM Capital Management, LLC, an SEC-registered wealth advisory firm domiciled in New Jersey. This communication is not to be construed or interpreted as a solicitation or offer to sell investment advisory services. For additional information about NCM Capital Management, LLC, you may request a copy of our disclosure statement as set forth on Form ADV. Readers are encouraged to consult with their own professional advisers, including investment advisers and tax/legal advisors. NCM Capital Management, LLC does not provide legal or tax advice. NCM Capital Management, LLC can assist in determining a suitable investing approach for individuals, which may or may not resemble the strategies outlined herein.