A Bad Day for the Cable Guy
He never knew what hit him, and in hindsight, I feel a bit bad about that. He was just doing his job, after all. It probably wasn’t his “dream job,” either. This twenty-something man set up a little booth in the aisles of local retail establishments and tried to convince strangers to change their cable and internet service providers. He was probably rather adept at handling tricky conversations, but in one 48-hour stretch, he had the misfortune of running into me…twice.
Friday night was at Best Buy. He approached my wife and me with a smile and asked who we currently used for cable and internet service. I told him. He asked what we were paying. I told him. He began telling us about the deal that his company was offering to new customers. I told him that I wasn’t interested and we went about our holiday shopping. I always have mixed feelings about my interactions with young salespeople. I paid my way through college with jobs like this, so I always try to give them their fair chance at winning me over before I shut them down.
The very next evening, we were shopping at a nearby wholesale club, when I saw him again. I felt I’d already given him his shot the previous day, so I changed my route around the store to avoid his pop-up booth. I had clearly underestimated his level of ambition as, a few moments later, he headed me off as I exited the next aisle over. Here we go again.
As he started asking me the same questions from the day before, I interrupted him to explain that we had just had this conversation 24 hours prior. I guess he had forgotten. Understandable, since I’m sure he had countless nearly identical chats every worknight. I decided to make this one a little harder to forget. “Let me ask you a question,” I proposed.
“Please do,” he replied. He was happy to engage with me. Hope springs eternal when you are paid on commission.
I asked, “Is there a contract that I agree to, in order to get this special pricing?”
“Yes. It’s two years.”
“Why?”
He half-shrugged and explained, “Everyone does it.”
I hit him with a few more questions. “If you are offering me a worthwhile service at a fair price, shouldn’t I want to keep paying you every month? Shouldn’t it be an easy decision for me to pay my bill and continue this mutually beneficial relationship with your company? If I was a happy customer, why would you need to lock me in with a two-year contract? Are you anticipating that I won’t be a happy customer?
Not only did this line of questioning abruptly end our conversation, but I suspect I may have witnessed his brain short-circuit right before my eyes. Not only that, but for the remainder of that holiday season, he actively avoided me, If we happened to be in the aisles of the same store.
This all happened almost ten years ago in Denver, but I found myself thinking about it over a thousand miles away and a decade later. The reason is that I keep coming across investors who have found themselves desperately trying to get rid of illiquid assets. These come in a few forms. One is a product like an annuity that has a surrender schedule. These may last as long as ten years (in some extreme examples it may be 15). During that period, if someone wants to be rid of the product, they will not receive the full value for it. During the surrender period, someone can receive the value of the investment minus a surrender charge. In the early years of some annuity products, this type of charge can cost someone as much as 10% of the value that someone can expect to receive upon surrender of the product. The reason for this is two-fold. The first reason is that the insurance companies that issue annuities hate to lose money. The second is that the people who sold the contract may have received sizeable upfront payouts from that insurance company. This may include the broker who sold it to the end client as well as the wholesaler who brought it to the broker. If a client were to surrender the product with no penalty, the insurance company would have to accept losing all of that compensation to the salespeople. These payouts could be higher than 8% of the amount invested!
Unfortunately, there is a class of investment products where someone could feel even more stuck than a person with a long surrender schedule. Some investments, like some non-traded Real Estate Investment Trusts (REITs) or Direct Placement Programs (DPPs) typically have a set duration and oftentimes have limited liquidity. This means that you may NOT be able to sell it at all when you want to, since they are not actively traded on any exchanges. An owner could be stuck holding this investment until the program terminates or there is some specific “exit event.” The timing of either of these would be up to the issuer of the investment and beyond the control of the end investor.
Much like with the cable companies, I believe that it should be the prerogative of the investor to decide when they are no longer receiving a good value from any investment or, for that matter, any investment professional. This is why we are committed to strategies built around actively traded investments that can be bought and sold on any given business day. Furthermore, we don’t collect compensation in advance, choosing instead to bill for our services after the end of the period when they were provided. After all, we work to make it an easy decision for investors to continue their relationship with us. We anticipate happy customers, so we don’t need to take payment in advance or lock anyone into a long-term contract. We are both grateful for and humbled by, the number of people who give us the privilege of their confidence and trust.
My recommendation to our readers is to ask a few simple questions when entering an investment strategy or purchasing an investment product.
Is this investment daily liquid? Is there an active market for it?
Will I incur a penalty if I decide I don’t want this investment anymore in the next year?
How much is the investment profession compensated in the first year that I am invested?
If you ask someone these questions and get answers that you don’t like or don’t understand, please do not hesitate to let someone at Upleft know. We would be happy to review the information and help you make a better decision.
It is my sincere hope that knowing and asking these can help a few people avoid finding themselves in an unfortunate position. After all, I don’t believe that anyone should be forced to continue to pay for something that they no longer want.