Only the Paranoid Teachers Survive

Friends do not sell friends overpriced investment products or  expensive insurance that they do not need. Unfortunately, too many teachers equate “nice guys” with being a good financial advisor. Using this as the sole criteria for choosing someone to manage your finances is a recipe for disaster.

After reviewing dozens of horrendously expensive, ill-constructed, and completely inappropriate investment portfolios, I have found one commonality. Pretty much all of my teacher-clients expressed shock and disbelief that such a “swell guy” would do this to them!

Little did these teachers know that this “nice guy” is an expertly trained financial ninja. He is specifically versed in the art of persuasion and often possesses a masters degree in psychological warfare.

He is able to pounce at a moment’s notice on the cognitive defects we all possess.His knowledge of your human frailties will strike a devastating blow to your financial security, if you let him.

Getting people to like you is one of the strongest ways to persuade people. Compliments, jokes, and kinship are often methods insurance salespeople use to disarm teachers. Many teachers are unable to separate the charms of the salesperson from the merits of an expensive and inappropriate investment, like a variable annuity inside a 403(b) account.

I once encountered a salesman in the hallway before homeroom when I was still teaching. He came up to me like we were best friends and insisted that I had met him before and I had expressed interest in the junk he was peddling.

Fortunately, I did not let my inner Rick Grimes from The Walking Dead take over and respond “Do you have any idea who are talking to?”. I resisted the urge to go medieval on his ass and calmly excused myself.

I alerted my principal (who I had previously rescued from a  similar predator) and we escorted him out of the building with the explicit threat of legal action if he ever returned.

Larry Swedroe employs data from The Journal of Finance to  further reinforce this concept. Many teachers are persuaded by their peers about the “great guy” who manages their money. This innocent recommendation becomes the seed of our current national 403(b) calamity.

The data is very clear on two points: first, investment decisions are positively correlated with your co-workers recommendations; more important, this does not improve the quality of those choices.

In other words, the smooth talking annuity salesperson will compound their profit from deception. They will leverage the likability factor many times over. They have access to this same research.

They fully realize the powerful persuasive ability of co-workers on investment decisions. It is no wonder the horrors of the 403(b) world have swelled to epic proportions!

In addition, financial salespeople often capitalize on what is called “pluralistic ignorance.” We often follow traditions because we think others like them even though we may not agree with them.  

I myself am I victim of this. I despise Thanksgiving turkey, mashed potatoes, turnips, etc. I would love to replace this with linguini and clams or something to that effect.  Many family members feel the same way but we prepare and eat the same food each year disregarding our true feelings.

Instinctively, most moms know this. “Just because your friends are jumping off a building,  doesn’t mean you should.” Unfortunately we do not follow our mother’s advice when choosing investments. Many teachers know something might be “off” with their 403(b) but continue to participate because their colleagues are jumping off the same “secure“ retirement building.

Finally, these “nice guys” may offer “free” doughnuts, coffee or other chatskis. Do not be fooled by their kindness. They are also well-trained in the law of reciprocity. This means many teachers feel obligated to return their “favors” by signing their retirement savings away to low returns and high fees.

This concept is explored in detail by Psychologist Robert Cialdini in his book Influence: The Psychology of Persuasion.

Those “free doughnuts and coffee” may turn out to be the most expensive purchases of your life. The most expensive latte and biscotti purchased daily from the local Starbucks will not come close to costing you hundreds of thousands of dollars in investment fees and expenses over a thirty-year time period!

So what should a teacher do? It is not wise or healthy to go through life being a paranoid lunatic thinking everyone is out to get you. Nor do you want to be seduced by a devil in sheep’s clothing.

Despite the ominous title of this post, there exists a simple solution. Separate the “nice” salesperson from the investment. Judge each by its own merits. Be very careful not to merge the two. If you can do this you will have accomplished the holy grail of investing. Never combine your emotions with your investment decisions.

Go ahead, eat a doughnut, drink some coffee, smile, and be friendly to those around you. Just always remember, people selling you expensive commission-laden investment products may not have the same good intentions or motivation as yourself.

Like the old saying goes regarding combining “best pals” and investments. “If you want a friend, buy a dog.” This will end up being a lot cheaper in the long run.