People almost universally hate their banks. Stockbrokers — surprise! — often can’t be trusted. Wealth managers can be straight-up charlatans. It often feels like everyone is out to get your money, probably because most of them are. Which leads to the obvious question: Who can you trust with your money? Your partner? Your accountant? That handy space under your mattress?
In the name of not getting conned, we turned to finance professor Tom Warschauer — who studies and teaches investing and wealth management at San Diego State University — for some advice.
Finding an Adviser
According to Warschauer, the people hired by most financial industries do at least have some kind of clue. “The insurance, banking and securities industries have reasonably high standards for having people that know what they’re talking about,” he says.
Of course, whether you trust them or not is a different matter.
For all of us who didn’t major in finance, Warschauer recommends looking for investment advice from someone with a fiduciary designation — i.e., someone who’s legally obligated to provide advice that’s in your (the customer’s) best interest. If someone at a financial institution says they’re a fiduciary — and you can ask them if you’re not sure, as they’re required to put it in writing for your peace of mind — you will at least have legal recourse to go about recovering anything lost if it turns out the advice wasn’t in your interest after all. This won’t protect you from stock market crashes and the like, but on a day-to-day level, you can be sure that this person is putting your best interests ahead of their company’s.
But here’s the thing: That friendly bro in the suit at your local bank branch offering free financial advice is probably not a fiduciary. Far from it, in fact. Remember the Wells Fargo scandal? Those employees creating fake accounts of unsuspecting customers definitely weren’t acting in their customer’s best interest. Unfortunately, there isn’t a handy designation or a name tag that says someone is a fiduciary. Nor is the alphabet soup of financial-industry designations much help, either — some require their holders to act as a fiduciary; others don’t.
So the best advice is just to ask, “Are you a fiduciary?” In fact, it should be the first thing out of your mouth. The next step is to make sure it’s in writing if you take their advice. As Warschauer says, taking a chance on such people “presumes that you can tell the difference between sales-incentivized advice and good advice” — something that most of us aren’t qualified to do.
Finding an Investment
Once you’ve found your adviser, you need to reach an agreement with them on the safest ways to get the most out of your cash. “The most misunderstood aspect of safe versus risky investing is what we call the ‘time horizon’ of how long you’re going to invest,” Warschauer says. “In other words, what’s a safe investment for 10 years is different from what’s a safe investment for a year or less.”
To put this in familiar terms, Warschauer says the stock market is a much better investment over the course of 10 years than putting your money into bank accounts or money market accounts (which are essentially savings accounts with higher interest rates, but which limit your monthly transfers) for the same amount of time, due to the relatively puny interest rates these pay out. If you’re only investing your money for a year, by contrast, the probability of the stock market earning you more than those bank accounts is only 50/50, so the biggest question in the short-term is simply whether or not you’ll need easy access to your cash throughout that year.
As for stuffing your cash under your mattress, in completely unshocking news, Warschauer says this is a terrible idea. “As miserable as the rate of return in the banks are, the rate of return in the mattress is zero,” he says. “So I don’t think that’s really an option.”
The other bonus is that, unlike your mattress, the FDIC and NCUA will ensure you get your money back if your bank or credit union goes bust. Really, there’s no risk with putting your money in the bank — unless the world goes to hell, in which case we’ll all have much bigger problems to worry about.