Dear Mr. Berko: Eighteen years ago, when my wife and I were 50, we sold our business for $4 million after taxes. We took $1.7 million in cash plus $110,000 a year for 20 years. Our intent was to live on the $110,000 each year and then sign up for Social Security at age 70 and begin taking dividends and principal from the money invested in stocks. So in 2000, we gave the $1.7 million to a very nice 28-year-old stockbroker, who is the son of friends of ours. He is attentive to us and sends us birthday, anniversary and holiday cards. We trusted this nice man and never paid attention to what he was doing because he was our trusted friends’ son. But it’s been 18 long years, and despite the fact that we haven’t removed a penny, our account is worth only $2.6 million. He’s bought good names, such as General Electric, Mattel, SCANA, Advance Auto Parts and AllianceBernstein. I’ve enclosed the five most recent year-end reports. He is a Phi Beta Kappa and has enormous knowledge about stocks and economics. He’s even writing a book. He’s brilliant, but we know our account should do better. Because he’s our friends’ son, it’s difficult for us to disagree with him. Could you talk to him about our account? What can we do?
— TS, Port Charlotte, Fla.
Dear TS: No! During the past 18 years, you’ve paid this fellow an average of $38,000 a year. You’ve given him $684,000, while you’ve earned $900,000. I won’t talk to your broker; that would insult him — though his performance is insulting. There’s a lesson here: Don’t do business with relatives, friends or the children of relatives and friends. Oftentimes, they’re as sweet as saints and financially nurturing. And sometimes these friends or relatives are prominent in community activities or their churches. A few, such as your lad, may be genuinely brilliant. But sadly, many smart guys couldn’t pick a winner if it bit them in the bum. They remind me of Slinkys; they’re not really good for anything, though I can’t help but smile when watching a Slinky tumbling down a stairway. By the way, brilliant fellows also send innumerable small gifts and cards for birthdays and anniversaries. Would a quotation by Virgil — “Beware of geeks bearing gifts” — be apropos? That your broker is a brilliant and good fellow doesn’t make him a good professional.
This 18-year performance represents a 2.24 percent average annual total return since 2000. My two Maine coons, Franklin and Roosevelt, can pick stocks better than that with their left eyes bandaged. This nice fellow is charging you 1.75 percent to manage $2.6 million, which is thoroughly turnpike thievery. The cost to manage this account should be no more than 1 percent — preferably 0.75 percent. That $1.7 million, assuming a 7 percent average annual total return (the S&P 500 has averaged over 9 percent), should have grown to $4.8 million in those 18 years. It’s time to bite the bullet, take the bull by the horns, look it in the eye and say, “With these words, I divorce thee!”
You must — and I stress MUST — employ a wise, knowledgeable and experienced professional with whom you can easily communicate. Stay away from the young bucks; many of them are excellent stock pickers and are aggressive in their styles but burn out after 18 months. Most of these younger lads live far from your station of life and can’t identify with your objectives, goals and fears. Find a professional who’s closer to your age so together you can share commonalities. And this adviser will want to know as much about your financial health as a physician would your medical health. And frankly, it doesn’t matter whether your professional is located in Texas, California, Montana, New York, North Carolina or Paris. The mutual funds you own are home-ported thousands of miles from you, and the common stocks in your portfolio are headquartered in Texas and Ohio. You even own shares of a bank in Australia and oil assets in the North Atlantic.
