I’ve been lucky with mentors. Very lucky.
The mentor I’m most fond of was a guy I’ll call Kenneth. I was just a couple of years into my first corporate job—this was in 1995—and he had twenty years on me. Charming wisecracker type. Smoked cigarettes and wore nice suits. Liked wine, women, and song. And women.
Kenneth, who liked women, thought my fiancée was extremely hot. Didn’t make any bones about it. So when we happened across each other at social events, if she was there he’d mainly hang out with us. But not in a creepy or sexist way…he treated her with extreme courtesy, flattered her in a good-humored way, and gave her sincere respect. (Looking back on it, he was making sure I myself knew how to treat her, but set that aside. Also: watching him with women was like watching a snake hypnotize a bird.)
Anyway, he and started palling around at work. It turned out that he had some influence with the managers of a job I wanted. He pushed for me—“This kid’s going places!”—which ended up being an important reason I got hired.
Well, I’d started my FI/ER plan by then, had a high savings rate, was looking for a place I could stash my money that’d pay more than bank interest. One afternoon I told him so.
He recommended the full-service broker he used. Said the guy—Randall, everybody called him Rand—had made him a train-load of money. A train-load.
So naturally I made an appointment with Rand. To my great surprise, instead of taking me out to lunch he took me fly-fishing and we discussed my situation during the trip. A few days later he got back to me with some recommendations that seemed sensible, so I signed up with him.
Rand taught me just about everything I know about retail investing, and now, twenty-five years later, I still do the majority of my business with Rand’s firm. He’s been retired for a couple of years, but we still bump each each other around town and I always thank him for helping me reach FI/ER.
So here’s the question I alluded to in the title of this post: should I really be thanking Rand for his help, or not? Was he doing me service, or a disservice? I’ll preface by saying that I love this guy…he’s been a good advisor and a good friend.
I’m going to work through both cases, but I’ll withhold my own opinion because I’d VERY much like to hear what you think. So please offer your opinion in the comments section. I really mean it. Having your perspective to ruminate on would be quite helpful.
Things that worked out great between us.
- The biggest pro—bear with me, here—is that Rand got me into managed sector funds to the tune of $500K (a position I’ve since sold down to about $250K.) The managers tracked the S&P and a couple of years beat it handily, but only by performing less poorly than the S&P in losing years. But without these funds I’d never have been able to engage in loss harvesting, so my tax hit would’ve been much higher. Impossible to calculate how much higher, but still…being able to manage my income to near zero has helped my family in several ways with respect to taxation.
- In the early 2000s we also got into Apple (cost basis = $1.64…not a typo) and Berkshire Hathaway B-class (cost basis = $54.32). Most recently—in 2012 and 2014—it’s been Amazon (cost basis = $227.57). Bought it because I’d read The Everything Store and realized Amazon was a company I wanted to own, big-time.
- Rand also got me into Phillip Morris in 2002. PM was a stock I’d never have picked on my own. I legged into the position and today, 15 years later, I own 1,260 shares at a cost basis of $31.48 for a total gain of $102K and change. Plus the dividends…my God, the dividends PM has paid me throughout the years. The quarterly dividend is currently $1.04 a share.
- Rand worked for what was at the time the second-biggest financial services company in the US. This company handled a LOT of dot com IPOs. I participated in so many of them. Most memorable was webMethods. webMethods priced at $35 a day or two before its public offering, got heavily oversubscribed, and when it actually opened on 2/1/2000 it immediately popped 508% to $212.64. Rand had gotten me twenty-five shares, which I immediately dumped. Wham! $4,441 bucks, just like that. Most recently he got me into the Facebook IPO. I no longer own those shares, but I caught a hell of a good move.
- Keeping an account with Rand’s firm has gotten me access to a $600K signature line of credit at 4.25%. Shazam, has that thing come in handy. In 2014 we were living in a cabin way out in the sticks—it’d been our dream home when we ER’d—but as our daughter aged it became apparent that the local school system wasn’t adequate to her needs. Thanks to our LOC we were immediately able to locate an awesome house in the best school district in a nearby mid-sized city, and too boot, only a ten-minute walk away from the main shopping/bar/restaurant/pedestrian district. Found the house, bid on it, got it, closed thirty days later by writing a check. True, we didn’t get a mortgage deduction, but we didn’t carry the loan for that long. Thanks to the LOC we didn’t have to sell our rural house before buying our city house, and as soon as the rural house sold we paid off the LOC.
- An LOC can also be a way to avoid short-term capital gains tax hits. We keep a six-month to one-year rolling cash balance equal to our budget. If I need to sell off some winners to keep that balance current, I can instead choose to temporarily use the LOC until a loss harvesting opportunity opens up.
- And this one’s perhaps most important. Rand’s the guy who talked me out of panic-selling in 2008. That fall I was visiting my in-laws when the markets crashed. My wife and I had just retired in 2005, and I freaked. I was three years out of the job market, my skills were outdated, and I knew, just knew, that I had to sell out of the markets while I still had a chance and I needed to circulate my resume despite it having a grapeshot-sized hole in it. “Don’t be a dumbass,” were, I believe, Rand’s exact words. And sure enough, within two years our net worth had doubled back up to pre-crash levels. Can you imagine where I’d be if I’d sold at the bottom? I can’t.
Things that could’ve gone better.
If getting into managed funds was the biggest pro, it’s also been the biggest con (no pun intended.)
- Here’s the thing that might cause you to question my sanity: each year I pay approximately $6K in fees to these fund managers. Perhaps that washes against the loss harvesting I do, but let’s look at the compounding. I got into these funds in roughly 2007, meaning—using simple annual compounding at 7%—I’ve sacrificed $87K in earnings. A FUCK-TON of money.
- Did Rand and I getting into Apple and Philip Morris and Amazon and Berkshire, etc. outweigh that $87K? Yup, several times over. Would getting into a simple S&P 500 fund have been better than paying $87K for managed funds? Yup, and again I suspect several times over. So do I regret getting into those managed funds? Shit, man…I have no idea. Between the loss harvesting and the winning trades…well, I’ve never tracked that tradeoff, and I should’ve.
- I’m aware, though, that with a net worth of $2.2 million I’m considerably over-concentrated in Apple, Philip Morris, Berkshire Hathaway, and Amazon. I don’t have a solution for apart from A) selling and taking the gains hit, and/or B) buying shit-loads of options (and therefore eating up our cash flow, which would cause me to have to sell and take the gains hit.) For these and other reasons I’ve decided not to sell just now. Among those reasons is that the dividends on Apple and Philip Morris alone makes up ~40% of our annual budget. Sure, they could crash out from under me, but I accept the risk.)
- I spent several paragraphs humblebragging about putting on great trades…well, I also put on some incredibly shitty ones. The dumbest trade I ever made was buying ten grand in Cisco LEAPs (long-term equity anticipation securities, if you’re not familiar—basically multi-year options) roughly twelve months before the peak. Their paper value zoomed to $40K—but, being foolish, I left every cent on the table because I expected the boom to last forever. I even lost the premium.
- So in hindsight I wish Rand and I hadn’t traded options. For a while there, covered calls seemed like a good idea, and sure, it was nice to scoop a few hundred bucks every month, but DAMN, did I leave a lot of money on the table because I wasn’t buying and holding. I was writing Amazon covered calls way way back when, and I wish I still owned every share.
- Rand charged like $150 a round-trip for stock trades. I knew when low-cost online brokers came around I should’ve started moving buy-and-hold money into them—I mean, $20 a round trip sure as hell beats $150—but at the time I felt like Rand’s advice was worth the vig.
So there you have it: at least a partial list of the pros and cons of doing business with a full-service broker.
I’ll say one more thing before getting out of your way so you can leave your comments.
Once you’ve achieved FI/ER your financial situation may reach a level of complexity that keeps you from taking the “optimal” path in every situation. Some of those complications may arise from bad decisions you’ve made early on.
That said, recognizing a bad decision is often a matter of hindsight. However you may feel about my history with a full-service broker, please take it as instructive.
Get to commentin’.