[FOUNDER'S NOTE FROM DR. JIM DAHLE: I love the passion in this submitted guest post so we're going to run it mostly as written with minimal clarifications of terms and a few tiny notes from me. There have been times when I have felt just as angry at the financial services industry as our guest today. That anger, in fact, was probably the catalyst that launched this blog many years ago. In this piece, retired police officer Richard Webb rails against out-of-control fees, bad fee structures, actively managed funds, indexed annuities, and whole life insurance. He advocates for a do-it-yourself, index fund-based portfolio. I mostly agree with him, although I think there is probably a little more subtlety to interacting with the financial services industry than many “newly converted Boglehead-types” realize. My mantra when it comes to the financial services industry is “good advice at a fair price.” Like many of us, Richard didn't get that, but luckily he figured it out on his own and still managed to find financial success. DIY or even an hourly advisory fee-only advisor might not be the approach for every person at every point in their life, but everyone deserves a “fair shake” on Wall Street. This indictment of the industry shows that cops may have just as hard of a time getting that fair shake as doctors.]

 
By Richard Webb, Guest Writer

I was a police officer for 35 years in a large law enforcement agency. Every officer I knew was concerned with and refined their “officer survival” strategies. We practiced tactics and proficiency with our equipment to enhance our survival skills. We always watched our backs. But there is another threat out there to “officer survival.” In this case, it is “financial survival.” Sometimes that threat even comes from those you would think are merely there to help you due to their title of “financial advisor.” Few officers that I know are concerned about or even recognize their real financial threats, including salespeople masquerading as advisors.

Most officers go on to receive a well-deserved retirement. Unlike “white coats,” most police officers (and our first responder brothers and sisters, firefighters) have pensions. Because of those pensions, police officers are often better financially situated at retirement than many physicians. Police officers start their careers and start earning money much earlier than physicians. Many officers dutifully contribute to their agency’s (or city's or county's) “deferred compensation” program such as a 457(b) plan. Some jurisdictions offer a Deferred Retired Option Plan (DROP), which allows an officer to retire “on paper” and have their pension payments go into a tax-deferred account on their behalf for a set number of years; meanwhile, the officer continues to work for the agency, receiving a full salary and benefits. It does not take much effort to retire with $1 million or more in a 457 plan and DROP funds. Add to that a nice pension.

White coats only wish they had it so good!

People in the asset management industry know full well about the money that officers accrue, particularly if the agency has a DROP program. And as we say when prosecuting financial crimes, “follow the money.” Or as notorious bank robber Willie Sutton once reportedly explained why he robbed banks: “Because that’s where the money is.” Some “advisors” know where the money is and follow it straight to you.

Union newspapers and trade magazines are full of so-called advisors who advertise they can help you “do more with your Deferred Compensation Plan.” Some have logos that resemble badges to show you they are “part of the team.” In addition, credit unions whose memberships are primarily comprised of police officers often have financial investment arms that offer investment advice, mutual fund sales, annuities, life insurance, and more . . . all for a price. How convenient to have a one-stop shop!

 

AUM Fees Are Destructive for Police Officers and Docs

Many financial advisors charge you a percentage, sometimes 1% or more, of your total portfolio each year under an “asset under management (AUM)” fee. If that is all they charge you, they are known as a fee-only advisor. The problem is that there are also “fee-based” advisors, who charge you fees AND commissions. Someone who sells multiple financial and insurance products based on commissions has an inherent conflict between your best interest and their bottom line. Even by themselves, the damage that excessive AUM fees can have on your bottom line long-term may be quite substantial.

Just like many doctors, most cops have no idea that this is the case. Financial literacy is not as common in these service professions.

Warren Buffett, perhaps the most successful investor of all time, says that much of his financial success has been due to compounding earnings. He likens compounding to a snowball rolling down a hill where it picks up more and more snow as it rolls. You make money (or growth in value) on that money. The next year, you make a little more money, and you earn earnings on earnings (or interest on interest) as well. As you can imagine, earnings on earnings over 30 years can grow quite high. It is indeed a miracle. But it is also math.

Here’s the problem. The miracle of compounding can also work against you and in favor of an AUM advisor. Fees compound just like earnings do. AUM advisors who charge 1% or more of your assets do so every year, regardless of whether the market goes up or down. I guarantee that you will never get a call from an AUM charging advisor who says, “Well, Bob, the market went down dramatically this year and your account value is $100,000 less than it was a year ago, so I am not going to charge you anything because I should have predicted this downturn and gotten you out of stocks.”

[FOUNDER'S NOTE FROM DR. JIM DAHLE: Performance-based fees are actually possible for some accredited investors and asset managers. They're probably not as good of an idea as one might initially think as they incentivize excessive risk-taking, but there is no doubt that most asset managers get paid whether your portfolio goes up, goes down, beats the market, or doesn't.]

Advisors cannot successfully time the market any more than you can. The only thing they expertly time are the deductions from your account to ensure they receive their 1%. And AUM advisors let you, the client, take the risks in the stock market while they have relatively little risk. That 1% taken off the top of your account every year (or quarter) may not sound like much, but the same compounding math that works in your favor for earnings also works against you when paying an AUM advisor. Every dollar you pay in fees to an advisor is a dollar not invested on your behalf to grow and get that magical compounding earnings. The negative impact on your finances is dramatic.

More information here:

What Do Good Financial Advisors Cost in 2024?

Are Financial Advisors Worth It? Should I Use a Financial Advisor or Do It Myself?

 

Impact of AUM on a Portfolio

Let us imagine for a moment that Officer Glutz has $100,000 invested in mutual funds in his 457(b) account (or IRA). He leaves that $100,000 in the account for 30 years without making any other contributions. Each year, his AUM advisor takes a mere 1% of the portfolio to do the magic that he does to get Glutz a 6.0% net return on the money, on average, per year. If Officer Glutz did not pay the advisor the measly 1% fee, he would have $574,349 at the end of 30 years. Instead, by paying 1% to the AUM advisor, he now has only $424,846. That 1% cost him about $150,000 or 26% of his portfolio gain. Officer Glutz paid the advisor about $70,000 over 30 years, and he would have made an additional $80,000 on that $70,000 had the money been invested on behalf of Officer Glutz rather than paid to the advisor. The sneaky thing is Officer Glutz did not pay the advisor directly every month or every year. Instead, the advisor quietly deducted the money from Officer Glutz’s account, so Glutz did not feel the pain of writing a check.

Does anyone really think that an AUM advisor is worth $150,000 when it has been proven, repeatedly, they cannot beat the market? Not me.

[FOUNDER'S NOTE FROM DR. JIM DAHLE: I've seen many situations where paying $150,000 to an asset manager who merely matched the market would have been much preferable to the stupidity the investor came up with, even though I agree with the general sentiment.]

You might say that an advisor told you they can beat the stock market or do other wonderful things for you. They tell you about their wizardry of “researching” a suitable asset allocation of stocks vs. bonds and throw out words such as “tax-loss harvesting” or value or small cap tilts or some such thing. They may offer unique and exotic financial products not available to the general public. I’ve had friends tell me their advisor has “done well for them!” But what does that mean? The US stock market went up something like 40% since January 2023. Given that most stock mutual funds closely track the overall stock market, a third-grader could have selected a stock mutual fund and “did well.” Did well compared to what?

The problem is that an AUM advisor earning 1% in commissions needs to beat the market by 1% every year to make good on their promise and to justify their existence in your life. There is ample research that they cannot consistently do this. The market is too unpredictable in the short term. Some advisors can beat the market for a few years, but eventually, the odds overcome them. In the financial world, that is called a “headwind.” If an advisor could beat the market consistently, do you think they would be hustling up business by selling products to police officers by placing ads in a union newspaper, or would they be making billions on Wall Street?

[FOUNDER'S NOTE FROM DR. JIM DAHLE: To be fair, if your purpose in hiring an asset manager is to beat the market, you're highly likely to be disappointed. But that advisor doesn't have to keep you from doing something stupid very often to justify pretty substantial fees. Many of us DIY investors get angry about how much financial advice and service costs, but don't forget the key to successful DIY financial planning and asset management: there is no savings in cutting out the professional unless you can competently do it on your own. It's not that hard, but I've seen plenty of people who have screwed up their own financial planning and a DIY investing approach enough that they would have been better off paying a fair price for good advice.]

 

It's Not Just the AUM Fees Either

There are additional “headwinds” when you get advice. Sometimes you don't get good advice. Very often “advisors” place your money into “actively managed” mutual funds, meaning there are numerous analysts and economists hired by the mutual fund company who research ways to beat the market. That means the fund managers are constantly buying and selling stocks. These funds create capital gains that you pay taxes on, further reducing your returns. Ever get an unexpected surprise in January that you owe more taxes due to capital gains?

All mutual fund companies charge you fees to support their operations. That charge or fee is a percentage of each dollar you have invested with them, known as an expense ratio. The funds with a large staff have significant overhead costs. They need to charge you more for using their product. Some of the more expensive funds charge 0.90% or more. So, if an AUM advisor places you in one of those funds, you are paying your AUM manager 1% and the fund is taking another 0.90%.

Sometimes fees can become even more ridiculous. There is even more chicanery in the financial field, such as mutual fund “loads” where the client pays 5% or so up front for the privilege of handing over money to a mutual fund company to purchase the fund. Then, the client (you) still pays the “fee-based” advisor 1% to manage the portfolio and another 1% a year to the mutual fund manager. In Officer Glutz’s case, he would have handed over $100,000 to his AUM advisor, and the mutual fund company would have kept $5,000 and invested the rest on behalf of Officer Glutz. Then, he may have paid another $20,000 a year in asset management fees and expense ratios. Officer Glutz’s portfolio would be less an additional $20,000 in the example above. Compounding works both ways.

I spoke to an advisor whose fees started at 1.3% for someone with less than $250,000. The effort to manage a simple $250,000 portfolio can be a single hour a year. Should a person beginning their investing life pay someone more than $3,000 an hour to manage their money AND not be able to beat the market?

One fee-based advisor, during an online presentation that I was watching, told the audience he provided customers, mostly police officers, with products to allow customers to participate in the “upside” of the market but not lose money on the downside of the market . . . meaning an indexed annuity. Indexed annuities are insurance products that often pay advisors a commission of 5% or more upfront for selling you this product. The insurance companies also want part of the benefit of the up years of a market, and they use your money to do it. Ongoing fees on annuities are often above 2% a year. Just try getting your money back if you change your mind within five or 10 years. Early surrender fees can be in the 10% range.

Most indexed annuities have disclosures that are hundreds of pages long with terms few people understand. The problem here? Few police officers need an annuity, particularly an indexed annuity, because they already have a steady stream of income from their pensions. And many pensions have cost of living adjustments included in the pension program. Annuities generally do not have cost of living increases. A pension is a beautiful thing to have.

The same advisor may also whole life policies which are often sold as an “investment.” Most officers need substantial amounts of life insurance while they are on the job to protect the loss of income their family may suffer if they die prematurely. Like a doctor, officers probably need a few million dollars in life insurance (even though in many jurisdictions, the family of an officer who is killed in the line of duty would continue to receive his or her salary tax-free). Most people do not need life insurance in retirement years if they save properly. They need it when they are in their earnings years and if they have children and other obligations that would be in jeopardy should they die prematurely.

The only way to affordably get the insurance you need when you need it is to get term life insurance, meaning you simply pay for insurance should you die. Nothing more. Whole life is sold as an insurance policy and an investment vehicle. Term life is cheaper and you can get a higher coverage policy, which your family needs for protection.

All these financial products sold by “advisors” add up to more than a headwind. Their clients are sailing against a gale force of 2% or more right from the start and often do not have the protection and financial security they need.

I had an AUM advisor for several years. I didn’t know better, and I was fearful of venturing out on my own in the financial world. Plus, I thought I was too busy to handle my own financial matters. Every year on my birthday, he’d call me and give me a verbal report, maybe move a small percentage of money from one fund to another. He offered up the great prognostication of their research team on how the markets were going to behave in the future. Toward the end of our relationship, I asked his staff to come up with a more tax-efficient portfolio. Their recommendation? A morass of 15 funds that were no better than the ones where I was already invested. When I did an analysis of those funds’ performance over time, I learned I would have been better suited with a simple three fund portfolio. Over just 10 years, I would have made $185,000 more with a simple do-it-yourself portfolio rather than their complex one. And that did not include paying unnecessary taxes.

Looking back, I realized I was being played. Moving 2% of money from one fund to another would not move the needle much at all. He placed me in tax-inefficient funds which caused me a lot of grief on April 15, and he could not keep up with the market. His expenses were too high, and he purposely made things way more complicated than they had to be to make sure I had to keep his services. But the periodic free lunches were great, and I appreciated him remembering my birthday. Given the fact I paid him enough to buy a new car or two, he should have at least offered me one!

More information here:

Is Whole Life Insurance a Scam?

Should You Keep Whole Life Insurance Policy and How to Cancel

 

Financial Advice for Cops and Docs

So, what to do? Officers have an incredibly challenging, dynamic, chaotic, and demanding job. As we all know, some life-or-death decisions must be made in the blink of an eye. They always have to watch their six. And unlike many professions, your life may hang in the balance. If you can operate effectively in that environment, you can learn enough to safely invest with just a little bit of study. It’s not that difficult so long as you create a plan and stick to it.

I am betting that, at the end of your career, you will have saved far more money than Officer Glutz. If so, instead of forfeiting $150,000 or more—possibly lots more—to an AUM advisor, do a few hours of study and learn to manage your own finances.

Let’s assume you would have paid an advisor (and lost investment opportunity of that money) about $300,000 over your career. If you spend 30 cumulative hours studying the basics of personal finance, you will have paid yourself $1,000 an hour if you fire your advisor and manage your money yourself. That is a great off-duty job. And not as dangerous as your current one!

As John Bogle, founder of Vanguard, famously said, “You get what you don’t pay for.” The lower your investment expenses, the more money you get to keep. Mr. Bogle also said not to attempt to buy a needle in the haystack (meaning that one big stock winner); instead buy the haystack (meaning the entire stock market). Instead of trying to invest to “beat the market,” you only need to invest to keep up with the market. And it is easy to do so.

Companies such as Vanguard, Fidelity, and most likely your 457(b) custodian offer low-cost index funds that invest in the entire stock market. The stock market goes up 10%, your stock market mutual fund goes up 10%. The market goes down 10%, the fund goes down 10%. There is no “buying and selling” within the fund to try to beat the market. Because of this, the fund company does not require a large team of Ivy League researchers trying to figure out how to beat the market.

For instance, Fidelity sells a total stock market index fund that charges 0.015%. Index fund managers identify all the stocks in the market and purchase those stocks in proportion to the size of the company, and that is it. So, when you buy one share of this mutual fund, you are buying Microsoft, Apple, Tesla, Nvidia, and about 4,000 other companies. More importantly, math is on your side. You will do better over the long haul than your partners who have their money with an AUM advisor charging fees and with a mutual fund charging large expense ratio fees. The substantial headwinds you once experienced with expensive funds and an expensive “advisor” are gone. Those winds are now a nice following breeze taking you toward your financial freedom.

 

You Get What You Don’t Pay For

Of course, not many people just invest in the stock market. Stock market funds are invested for the “long term.” Most of us invest in bonds as well. Bonds tend to be more stable, so a mixture of stocks and bonds makes sense. Bonds traditionally smooth out the ups and downs of your portfolio but still allow the portfolio to go up over time. That mixture between stocks and bonds is called an asset allocation. Just like the total stock market index fund, there is a total bond market fund. Your asset allocation will then be a mixture of these two and possibly a total international stock market fund as well. This is where the three fund portfolio comes into play.

Once you understand that you really should have only a few funds within your 457 plan (or IRA or 401(k)), you simply choose an asset allocation you are comfortable with—such as 80% stocks (with 60% US and 20% international) and 20% bonds if you’re young and aggressive or 60-40 if you’re less aggressive—and purchase the low cost funds and leave it alone.

The “research” of an asset allocation that your AUM advisor was going to do? There’s no research involved. They will simply talk to you and come up with an asset allocation in their head and invest accordingly.

Say that you are young and just starting out in your career. They rightly figure you have a long time to live and can withstand the ups and downs of the market, so they recommend a very aggressive (mostly stocks) portfolio. The same goes if you are near retirement and need to protect your money. You are older and cannot withstand the ups and downs of the stock market, so they use a more conservative portfolio, meaning more bonds than stocks. Vanguard has an excellent free website that can help you determine an asset allocation. It’s not difficult to do. That third-grader who was picking stock mutual funds and doing as well as most advisors could also easily do the math on an asset allocation.

Using the example from Officer Glutz who was making 6% a year, he could have made an average of 8.8% per year by placing his funds into the tried and true 60% stocks and 40% bonds portfolio and not touching the funds for 30 years. I suspect this is because he would not have been paying an advisor 1% and not paying high expense ratios for his funds. Glutz’s portfolio is tax-efficient, and he had the discipline to not sell funds during downturns in the markets. Assuming Officer Glutz came on the job in 1994 and put his $100,000 into a 60-40 portfolio and never touched it again until the day he retired, he would have had a little more than $880,000. Imagine if he added more to his savings plan!

There are a few other financial concepts you need to understand. Although it is geared toward physicians, Dr. Jim Dahle’s book, The White Coat Investor, is remarkably applicable to police officers and a very good place to start. I had to laugh when Dr. Dahle warned physicians to avoid buying expensive cars early in their careers and try to choose only one spouse for a lifetime! Sound familiar? The differences are that police officers did not have to deal with the lengthy training and education physicians did, and most doctors do not have pensions. White coats and any other person without a pension must save money and determine a safe withdrawal rate for their savings when they retire. The concern, of course, is running out of money. For police officers with a pension, their withdrawal rate will be substantially less than non-pensioners, which is why a pension is a safety net.

Believe me when I say that you can do this. The time to start the road to financial independence is now. Remember the miracle of compounding. It takes years for the impact of compounding to really have an impact on your bottom line. Getting your finances in order early in your career will mean success when retirement does finally happen.

More information here:

How PAs and NPs Can Make Doctor Money

Life and Financial Lessons from a ‘Bad Ass’ Nurse

 

Financial Resources

Read or listen to Dr. Dahle’s book. I suggest you join the free Bogleheads.com website and read the “wikis” which help you get started. If you are fearful of venturing out onto your own or you are the kind to panic every time the market drops (hint . . . don’t), you can hire a consultant, called an hourly fee-only advisor, to help you. They do not sell anything other than advice. There are no conflicts of interest. There are vetted fee-only hourly advisors listed on this website.

If you simply do not want to study and learn even a little bit about finances or are totally frozen in fear about how to manage your finances or you ignore the advice of an hourly advisor and panic by selling low and buying high, then you'll need an ongoing advisor that will charge an annual subscription or, more likely, an AUM fee. Just realize that advice comes with a substantial cost to your bottom line. At least consider shopping around or negotiating for a better AUM rate and be wary that you're not also paying commissions on unnecessary products to this person.

Pay close attention to being placed into expensive (high expense ratio) funds or products that you do not understand. Ignore advisors who make lofty promises. If an advisor only offers a small number of high price funds, avoid that advisor. If the fund is exotic and you cannot accurately describe the product to someone else, forget it. I know what index funds are and can recite a quick summary of that investment. I do not know what a private interval fund is, what it pays, how liquid it is, how I buy it, or when I can sell it. Why would I buy it? Never do business with an “advisor” who also sells insurance, annuities, or other products. They have an inherent conflict of interest—your bottom line vs. theirs.

The average motivated cop can go it alone. Once you understand and apply the basics of personal finance, you will never look back. Managing your own finances requires a bit of study and discipline. In doing so, you will not be paying a salesperson who calls themselves an advisor to manage your money, make less than you can on your own, or sell products that you do not need. The beauty of a simplified portfolio is that you “set it and forget it,” and you will most likely come out ahead of someone who invested with an AUM advisor.

The biggest downside to not having an AUM advisor is that you will not get that free lunch or a call on your birthday. But you will have saved tens, if not hundreds, of thousands of dollars more in your portfolio to pay for your own nice lunch, perhaps in Paris, and have money left over.

As always, be safe. Wear your vest, be competent with your tools, and watch your six (in the field and with your money).

Do cops and doctors have more in common financially than you might have thought? What other advice do you have for an officer or a doctor early in their career? Is there some value in having an AUM advisor?

[EDITOR'S NOTE: Richard Webb is a retired police officer and is committed to encouraging police officers to find financial independence and security. This article was submitted and approved according to our Guest Post Policy. We have no financial relationship.]