Last month, a financial advisor sent Matthew Backus an unusual email. She offered him a free trip for two to the Maldives. The Republic of Maldives comprises more than 1000 coral islands in the Indian Ocean. My wife and I went last year. It has perfect beaches and warm, turquoise waters. Snorkelers can swim with whale sharks and giant turtles. There are more than 2000 species of fish.
It’s on plenty of bucket lists. Matthew and his wife are educators. They live in Dubai. The Maldives would have offered a nice break from their giant urban sandbox. He just needed to introduce the financial advisor to some of his friends. She wanted a list of ten names that included emails and phone numbers.
The offer was real. But Matthew didn’t bite. He manages his own portfolio of low-cost index funds. He thinks others should do the same. But he feared the advisor's Jedi-mind tricks. She might have convinced one of his friends to invest with her. That might not sound so bad– but it would have been horrific.
I’m writing this from Cairo, Egypt. Between January and May, I will have visited 10 different countries. I’m traipsing around the Middle East, Africa and Asia to speak about personal investing at international schools and businesses. I’m talking about the importance of building portfolios of low-cost index funds. It doesn’t sound exciting. But you might be surprised.
At first, I posted my schedule online. I offered to speak for free. Before long, I was speaking every day. Sometimes, the audience was just a dozen people. On other occasions, there were more than seven hundred. The advisors in these regions are usually well dressed Brits. They wear fancy suits and Rolex watches. They earn big commissions. Some might earn more money in a week than a typical U.S. teacher makes in a year.
That’s why they offer concert tickets, hotel stays, iPads or free trips to the Maldives in exchange for phone numbers. For example, if an advisor had convinced Matthew Backus to invest $2000 a month, she would have earned an upfront commission of about $27,000. That’s according to Sam Instone. He’s CEO of the financial services company, AES International. He says the advisor would have netted about $17,000 after giving her brokerage a cut.
Matthew’s annual investment fees would have exceeded 4.5 percent per year. If Matthew tried to redeem his money after a few years, he would have hit a brick wall. He might be locked in for 25 years. If he tried to sell early, he might lose more than 80 percent of his investment proceeds.
Last month, a media network based in Abu Dhabi asked me to speak about these products. They held a roundtable discussion. They invited representatives who sell these things. You can read the report here and see my interview here. The head of one of these firms said, “Andrew, annual investment fees of 5 percent per year are nothing. ” Seeing a pig fly would have surprised me less.
But my talks are making waves. That’s why I no longer post my speaking schedule online. My speaking hosts were starting to get some pretty strange emails.
“I hear that Mr. Hallam is scheduled to speak at your business/school,” they would say. “You need to know that he’s a fraud and a con man.”
I’ve been giving investment talks for years. Most of my friends think I'm crazy because I don’t ask for money. I rarely bring books to sell. But I know that I’m stepping on some diamond-studded toes. Low-cost index funds threaten the folks who give out free trips to the Maldives.
But this isn’t just an exotic tale from a far-flung place. It shows how wrong things can go. The slope can turn wet, then downright slippery. Not long ago, every career public school teacher in the United States earned a defined benefit pension when they retired. In many cases, 403(b) plans have replaced those pensions.
Last year, The New York Times writer Tara Siegel Bernard published, Think Your Retirement Plan Is Bad? Talk To A Teacher. She wrote about variable annuities. They usually charge high hidden fees. They’re ubiquitous in teachers’ retirement plans. They’re like the nasty products that many expats buy.
My mother-in-law is a retired U.S. teacher. She owns one. When I dug into her total fees, I found that she paid more than 3 percent per year. Here’s why she might not make money. On aggregate, investors earn the market’s return, minus the fees they pay. If stocks average a compound annual return of 6 percent per year, and if inflation averages 3 percent, most investors who pay 3 percent or more in fees won’t break even (after inflation).
There has been a long struggle to bring a fiduciary standard to Wall Street. It would ensure that advisors and brokers who build retirement portfolios put their clients’ interests first.
If it were approved as law, advisors might not be able to stuff expensive variable annuities into retirement accounts. But Investment News and other industry publications fear the future of that rule. If a financial advisor ever offers you a free trip to the Maldives, you’ll know the rule is dead and buried.
Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas