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Holistic Financial Wellness Principles: Principle #3 – Due Diligence

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In my essay earlier this month about Holistic Financial Wellness Principle #1 I talked about the need to adapt to changes in your own financial or life situation to make sure the financial decisions you make are consistent with who you are and how you are situated in the world around you. In that essay, I talked about how the wildfire that destroyed my home last year and changed the way I now look at the decisions I make around money and the things I buy with it.

Today I want to talk about a different kind of change that is happening in the world around us and how it impacts the application of Holistic Financial Wellness Principle #3. That principle continues to be valid, but I believe that the way it should be applied, as I describe in Money Mountaineering, needs be expanded somewhat to accommodate the way the Economic/Investment/Advisor environment has changed in the last few years. The changes I speak to are not directly related to the pandemic, but have been emerging over the last few years, and, in my opinion, have recently become too important to ignore.

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The importance of due diligence in an imperfect world

“ You know something is happening here but you don’t know what it is . Do you Mr. Jones?” – Bob Dylan  from “Ballad of a Thin Man

Like many others, my year of COVID isolation included getting to know (via Zoom) a lot of interesting people I would not have met otherwise, and Anthony was one of the more interesting. Anthony is a mortgage broker who makes his living from the commissions he collects on helping his clients obtain loans on the properties they own or are trying to purchase. On paper, he is exactly the kind of person, HFW#3 counsels being cautious of since it is pretty clear that his compensation is directly a function of the transactions he facilitates, and almost by definition his financial interests will not be completely congruent with those that he advises.

While that general advice is still valid, the significant and largely unseen changes that have occurred in the home loan market since the Financial Crisis and Housing crash a decade ago and a recent conversation with Anthony have caused me to reexamine and see that I need to expand on the last part of HFW#3 which says “…make sure those you hire are 100 percent on your side.”

Anthony is a member of what became a weekly discussion group consisting of myself and a group of mostly tech and finance-oriented individuals scattered across Northern California who a mutual friend organized during the pandemic when we all had time to think, converse, and think again. The topics we discussed each week were wide ranging and often quite personal. Throughout the Spring, Summer, and Fall of 2020 we got to know each other quite well, and though we no longer meet regularly, we have all come away with a better appreciation of the wider world of finance and technology that we each operate in.

The focus of our weekly discussions tended to move from person to person (there were 6 of us) and a few months after we started, I sent my new friends a near final draft of my book manuscript to help them to get to know me better and to collect their feedback which I knew would be both honest and helpful. I was not disappointed, as the feedback I received from all 5 helped make Money Mountaineering a better book. But while the others in the group validated and fully endorsed my 6 principles, Anthony told me that he thought HFW Principle #3 was wrong – at least when it comes to getting a mortgage for your home.

Not used to being told I was wrong, I got very curious. What exactly did I miss? He was happy to explain, and I wanted to very much know where he felt I’d made a mistake, but first I wanted to hear more of his professional story.

Anthony told me that in 1995, after a few false starts working for large commercial real estate firms he decided to sign up for a seminar given by Suze Orman, who was still personally conducting all the workshops on financial literacy that she designed and was beginning to write books about.

In Money Mountaineering, I tell Suze’s story, and it is a complicated one. While I believe that Ms. Orman’s books, and pronouncements today are likely to cause more harm than good, back in the mid 90s Suze Orman was teaching a lot of people how the world of money worked, and from everything I know about her, she was a good and caring person who truly wanted to help people do better with what they had. For Anthony, learning the fundamentals about how the world of money works by attending Suze’s seminar was a turning point in his career.

Shortly after completing the workshop, Anthony became a mortgage broker, and knowing too well the suffering that too much debt can cause, he steered his clients into loans that were responsible, prudent and designed to help his clients achieve their home ownership goals without putting their financial futures in peril.

From 1997 through the housing crash of 2008-9 and until today, Anthony has been guiding his clients on this path, never letting them get overleveraged, focusing on “education and trust” believing that a client who understands the debt he/she is assuming and can trust the expertise of the broker who is facilitating the loan, will make better decisions and will be happier for it.

What Anthony took issue with when he read my book was my contention that when it comes to mortgages, the compensation of the expert that we each must use to get our house financed is the most important factor for someone to consider. One of the recommendations I give in Money Mountaineering is that individuals should consider moving their retirement savings (IRA’s, etc.) to a big Bank that use a “relationship model” where they will have access to experts when they need them and in particular, can use loan officers who are paid a salary and do not receive commissions based on the loans they place.

Anthony pointed out that while that may have been true in the immediate aftermath of the Financial Crisis when Banks needed to restore trust in both their solvency and the people who provided financial services to their customers, it is not nearly as prevalent today as in the last several years. Many big banks have changed their business model and have become much more “transactional” in their approach to making loans and accumulating assets and liabilities for the firm’s balance sheet.

In addition, Anthony suggested that the “proprietary products” that the big banks offer their “premiere customers” (another recommendation in Money Mountaineering) are not necessarily that much better than the best loan that can be obtained from the wide array of lenders that a good independent mortgage broker like Anthony can find.

I think Anthony makes a very good point about the changing nature of how big banks do business, though at least in my experience, the best loans I have been able to attain for myself were still those given by my banks to their “premiere customers” and though that competitive advantage may disappear over time, it hasn’t yet.

On the other hand, I think Anthony’s experience and observations highlight a much more important aspect of how our world has changed. Specifically, in order to apply HFW#3 when it comes to finding an expert who will be compensated for the help they provide, you need to do your due diligence.

It’s Not Just Mortgages

One of the joys of being a writer is the opportunity to meet other writers and thinkers in your field who write good books. The first of my favorites is “A Capitalist’s Lament” by Leland Faust

and the second one is “The Big Investment Lie” by Michael Edesess

Leland is a top-notch tax lawyer and Michael is a serious mathematician, but both have worked behind the curtain for firms that provided investment advisory services. Then they both wrote books pulling the curtain back and letting their readers know exactly how Wall Street deals with the individual investor. They are not whistleblowers, but they are both truth tellers and that is something very valuable these days.

The truth about what goes on behind the scenes when we try to invest our money in a prudent way is sobering.

The sad fact is that the business models of almost all financial service firms seems to be getting opaquer and it is becoming increasingly more difficult for a consumer to understand what they are paying to whom and for what. Forget all the noise around Robin Hood, just consider the “zero commission” investment brokerage services that some giant well-established firms now use to lure investors to move their money. Here is a promise from Charles Schwab that you will be able to invest your money for “free” and yet still receive the benefits of the expertise and help a giant firm like Schwab can provide: schwab.com/pricing.

I have not taken the time to dig into exactly how Charles Schwab makes money on these “no fee” accounts, but I think it is almost a sure bet that Schwab is not doing this simply to provide the public with service that does not financially benefit them in some unseen way.

So, when you apply Holistic Financial Wellness Principe #3, make sure you do your due diligence.

It is not enough to just look at compensation structure of the experts from whom you seek help. These days it is too hard to “follow the money”. In the mortgage business the distinction between a commission and a “performance-based bonus” is getting too blurred for an outsider to discern without a great deal of analysis that almost no one has time for, and if you are dealing with an investment firm on the asset side of your balance sheet, following the money is exponentially more difficult.

On the other hand, the expert that you will need to turn to for help is, at least today, a human being and so, more important than the alignment of their compensation, it is the good will of the person(s) providing the help that you need to discern to know, not just whether an expert is 100% on your side, but to the extent they are not (and many times they are not), what of their interest you are competing with.

These days it is getting harder and harder to know what is happening behind the scenes in all areas of life, but at least transactions with money (and debt) are still executed by people, and therefore it is important to understand and learn as much as you can about the motivation, the expertise, and the good will of the people you will need to help you manage your financial life.

Many times, you will find that it is not all about the money, and as confusing and impenetrable as the wilderness is, it is still possible to find trail guides like Anthony who you can trust to guide you through the woods.

Before we ended our last conversation on the mortgage business, Anthony told me that he ascribes much of his success to the fact that he always took the time to get to know his clients as individuals– not just their financial situations, but who they were as people and what their goals, desires and fears were about the home they were about to purchase. He is not alone in wanting to get to know his clients as almost all financial services firms want to know as much as they can about the person who seeks their help, but I believe that due diligence works both ways and even if it wasn’t a part of HFW Principle #3, I think you will get better help and have fewer problems if you get to know the person who you have let into your financial life. 

Specifically, after you have determined that you actually need help, by all means try and find an expert whose financial interests align with yours and who you believe is on your side, but then try and go further. Get to know the person who you are going to for help, listen to their story of why they want to help you and try to understand what their real agenda is. Ask personal questions and make sure you listen carefully to the answers they give. In a perfect world we would be able to hire experts who are clearly and unequivocally on your side, but unfortunately the world is not perfect and getting less so every day.

Holistic Financial Wellness Principles: Intro and Principle #1

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Introduction to Essay Series

In Money Mountaineering I describe 6 Foundational Principles that I believe everyone should keep in mind as we all strive for  financial well-being. This essay is the first of a series that explores each of these principles in greater depth.

Some of these principles may seem counterintuitive, and I hope that by reading my book you will become convinced that they are both sound and can be helpful. The first of these principles does run counter to conventional financial planning wisdom which is full of general rules and recommendations for what you should do with your money. I believe this is wrong, and that, to paraphrase the words of my good friend and brilliant actuary Charlie Commander –“if you have seen one financial plan, you have seen one financial plan” .

In this first essay, we talk not just about how individualized our circumstances and goals and plans should be but how important it is to stay aware of how all the factors that are relevant to your plan can change—either because you change or the world around you does.

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Holistic Financial Wellness Principle#1 – Adapting to Change

“Everything changes a little as it should. Good ain’t forever, and bad ain’t for good” –  Roger Miller from “Lou’s got the Flu”

I learned a lot from my mathematician father and as many lectures as he gave me growing up, there was almost always music playing in our house. Roger Miller’s songs formed the soundtrack to many of my childhood Sunday afternoons.

I always listened to the words of the songs and from the men and women who sang them I learned even more. As rigid and clear as my father’s views and teachings usually were,  he was always open and curious about the world around us and how it can change – in unpredictable ways that can render one’s normal survival strategies a recipe for suffering.

As a precocious child in the 1930s and 1940s, my dad watched as the world run by the grown-ups got turned inside out and upside down for reasons that people still argue over. Geography must have been a particular challenge for his elementary school teachers. World maps, only recently revised to reflect the geopolitical shifts caused by World War I, became a moving target.  Whole fields of study had to be modified on the fly to keep up with events, while only the oldest and most solid of academic subjects remained the same. And this not even considering the socio economic and geopolitical changes that were occurring in real time disrupting normal life outside of school.

The list of academic subjects unaffected by World War II was relatively short.  Astronomy and science where new discoveries come more slowly could be considered one. Ancient history and Classic literature were perhaps two others with the long lead time between the writing and the recognition of a work’s value, but the most unchanging of all fields was and  always has been mathematics.  That is a very good thing since it is through mathematics and mathematical thinking that we can understand the changes themselves.

We are not in a time of war, but whatever changes this country is going through now, they seem as dramatic to me as any I have seen in my 64 years on earth, and I feel grateful to my father for having passed on to me the wherewithal to use a mathematical lens to consider what is happening around us.

I am an actuary and not a mathematician and so, haven’t used the gifts he gave me in the same way as he did. Rather than attempt to climb the highest peaks of mathematical abstraction as he and his colleagues have, I chose to concern myself with the more mundane world of Money. It is an area where I can use the skills he taught me to separate the signal from the noise, and it is an area where I think some of my insights can help others.

In Money Mountaineering I lay out 6 Foundational Principles of Holistic Financial Wellness. The first is:

HFW Principle #1: Every person’s values, objectives, and financial situation are unique and multi-dimensional. Therefore, make every financial decision consistent with who you are, considering the totality of your own specific financial picture.

Putting aside whether “who you are” is changing as the world changes around you, to apply this principle effectively, it is critical to understand and be clear on your “values, objectives and financial situation”. Reading Money Mountaineering won’t help you determine whether and how your values have changed – but the tools I provide might help you better understand how your financial situation and its relationship to the financial world in general has changed, and by understanding that, you can, if warranted, take a fresh look at your objectives – where you want to hike, climb or camp in the financial wilderness.

In Money Mountaineering I described in some detail my own financial situation and the complicated set of investments and income generating ventures I was involved with, but things change – and sometimes, as Roger Miller says, “everything changes”.  In my case it was almost everything and the changes were far from “little”.

For me, losing my home and everything in it in a wildfire that raced through my part of the world 9 months ago was just the beginning. Now, instead of living on 8.5 acres in the relative solitude of backcountry Sonoma County,  I live near downtown Santa Rosa in a rented house that I have filled with a mix of new rental furniture (provided by my insurance company) and well made, used furniture that I purchased from local merchants or received as gifts from friends and neighbors. I have also begun to replace all the books and technology (phones, appliances, etc.) in my life so I can be more engaged with the larger world around me.

That process has been both transformative and educational as I have developed connections with dozens of local merchants and neighbors who are now an essential part of my new situation.  I am the same person I was before the fire, but my network of friends is different as well as the community that I am a part of. And those changes have had a large impact on not just my financial objectives but what my hopes, dreams and fears are about the future.

On top of that, I see the economic and the financial markets undergoing dramatic change as well. These kinds of changes are much more familiar to me as I have been watching markets evolve and change continuously for over 40 years. Not that the environment is exactly like anything I have seen before, but the forces at work are, at least to my eyes, the same as they’ve been for decades.

So what does that mean for the financial steps I plan to take in the near future? Well, the first thing I am doing is placing a higher value on real assets than I have in the past. Much of the furniture I purchased (or was given to me) is old and not only useful, but in many cases is better made and more durable than what I can get new. Not only that, but with inflation apparently increasing (perhaps as a result of the Fed’s heroic efforts to avert a financial collapse by flooding the economy with trillions of dollars) I believe that my new acquisitions are likely to increase in value rather than depreciate as most new things often do. In terms of my invested assets, I am therefore shifting some financial assets into collectibles that I like having around like comic books, coins and old books.

More generally, I am now recognizing that the relationships I have with my community in Santa Rosa are among the most precious components of my life that exist.  I am learning how to nurture and grow those relationships and one of the best ways I have discovered for doing that is through giving and receiving gifts. In Chapter 15 of my book I make a case for the “gift economy” and now for the first time in my life I am getting an opportunity to participate in one that is growing here in my new neighborhood in a way that may bear some surface similarities to the parking lot of a Grateful Dead concert (the gift economy I am most familiar with) but is on a larger scale and potentially more sustainable and permanent than a caravan of buses following a band from town to town. Whether a gift economy can take root and grow in something as large as a city or a county is a question that I don’t know the answer to, but right now I am simply adjusting my financial plan to the realities in my environment and the new financial situation I find myself in.

I hope this essay will give my readers a fuller understanding of HFW Principle #1. In particular, it is important to know that using this principle is not a “set it and forget about it” proposition, but rather a step that once undertaken must be reviewed periodically as you and the world around you change.  In future essays we will take a deeper look at the other 5 principles, but consider this as me sharing my first step back towards holistic financial wellness. I am glad to have you along for the journey.