The Cobra Effect in Retirement Investing

Profit is good. Unless, of course, it’s not. Here’s the deal. Everybody responds to incentives, and one of the top incentives is the ability to put a few bucks in your pocket. That’s why you go to work, that’s why people produce products for you to buy, and that’s why mothers still qvell over “my son the doctor/lawyer/internet billionaire”. Unfortunately, that’s also why people try to game the system. One of the more famous examples of incentive based larceny is known as the Cobra Effect. As the story goes, one day the governor of Dehli decided there were too many cobras around. To correct the situation he offered a payment for every cobra captured. And then - voila! – his office began to receive cobras. In fact, they started pouring in. So much so that the numbers way exceeded the initial projections. Further investigation uncovered the source of the surplus. Locals had begun farming the cobras just to collect the bounty. The government responded by immediately stopping the bounty program. So what does a snake farmer do with a whole bunch of snakes that are no longer valuable? He lets them go of course. (Oops.) So what’s the takeaway? Unbeknownst to you, you’re also offering an incentive. When you start looking for a place to invest your retirement funds, you’re holding up a huge arrow that says “Free Money Here.” How do you think people are going to react? Bloomberg recently reported on people who have rolled over their 401(k)s into IRAs of dubious security. These IRAs were often invested in the kinds of high-risk high-commission investments that your mother always warned you about. Of course, high risk is (as the name implies) risky, and many of these accounts lost tons of money. Now the people who sold these rollovers didn’t actually own the assets or funds that they were pushing, and they didn’t profit or lose out based on the funds’ performance. So why did they push them? Simple – they got a quick and immediate commission right out of your money. Those retirement funds offered them a big cash incentive to do whatever was necessary to get at them. In other words, they became cobra farmers. When you read articles like this you feel angry, frustrated, and above all bewildered. Who exactly can you trust to make an honest investment? The sad truth is that the only person you know who has your best interest at heart is you. It’s time to get educated. Find out which funds have the lowest fees, the best track records, and the highest customer satisfaction. If you have a financial advisor, by all means, ask your questions. But keep in mind that not all advisors have your best interest in heart. Some get commissions for pushing certain products. Even the designation “fee only” isn’t always truthful. Obviously the best route would be if you could take control of your investments personally. Not everybody has a self-directed mindset, but for those who do, it can provide that necessary extra peace of mind.