Another advisor horror story

[JustCurious]

My mother in law is 75 years old and retired, and she lives off of SS and a military survivor pension. She also has some money in an IRA which she has invested with the local Edward Jones guy in her area. I was looking at her investments, and he put her IRA funds into various funds including Putnam funds with front end loads (average 5 percent), and expense ratios averaging around 1.5 percent. For example, the money market fund has an expense ratio of 1.3 percent!! (this compares to Vanguard's MM exp ratio of .29 percent)

Also, she received a modest 5 figure inheritence a couple of years ago, and he put that into a Variable Annuity!! She also has some money invested in college funds for her grandkids with front end loads and high expense ratios.

I tried to talk to her and explain that she was being charged to much and she could do a lot better investing with Vanguard, and she responded "but I only pay him $30" referring to his advisor fee, and I tried to explain that his advisor fee was very small in comparison to how much they were skimming off the top of her money in expense ratios and load fees, etc, but she again cut me off and said "I like him, he is nice....." and that was the end of the conversation. I tried to push it a bit more, but she started to get annoyed, so I backed off and decided it wasn't worth hurting my relationship to save her from herself.

I know I am preaching to the converted on this board, but I wanted to vent a bit. Has anyone else experienced similar issues with uneducated....gullible....stubborn family members?

 

[Nords]

Has anyone else experienced similar issues with uneducated....gullible....stubborn family members?

Yes. Not that I have any ideas what to do about it.

But these crazy kids are going to have to figure out their own solutions to their problems, if indeed they even realize there's a problem. They're certainly not seeking our help!

 

[frayne]

I have two college educated sisters that refuse to look objectively at the data and are more concerned with the advisor being nice. Are they gullible, no, just mentally lazy. I gave up a long time ago trying to get them to see the light.

 

[LOL!]

Has anybody had any success turning a relative away from such a high fee advisor? If so, what was the trick? "Hey Mom, you are so nice to give your advisor 2% (or half your withdrawal) of your money every year. Can I be your advisor?"

It seems to me you have to catch them before they invest with such nice folks.

 

[2B]

My FIL (now in assisted living with Alzheimers) only had high fee, load funds plus a few very low interest annuities. He had multiple accounts with many different financial institutions. None of them were very large.

In many ways I'm probably lucky I didn't know how bad his personal finances were. I couldn't have helped myself trying to get him to do it half way decently.

 

[FinanceDude]

There are a couple ways to get them to see the light......I don't have time to post now, but will give you some ideas tomorrow........

One big problem is that most people are more open about their finances to strangers than their own family.........and hence, not like ly to let you advise them...........

 

[samclem]

Might a simple written illustration serve the purpose? Maybe a short pre-amble ( . . . Mom, I was thinking about what you told me about your fiancila advisor, and I crunched some numbers in a spreadsheet . . .). Then, just do the excell spreadsheet and graph showing how much the fees will cost over the years, compared to direct investing with a no-load account.

The advantage of paper is that it partially overcomes the immediate defensive reaction of the person whose assumptions are being challenged. He/she doesn't need to immediately come back with a response or tune you out--they can re-read the page a few times and mull things over.

Of course, if Mom s convinced that the FA has some type of amazing stock-picking talent or is more knowledgeabe about MF selection than you are, it will be a much harder case to make. Many are drawn to the flickering lights . . .

Frankly, I haven't had much luck in either convincing folks to save or convincing them to change investment approaches. It is a subject rife with potential to offend, and I generally steer clear of the subject unless specifially asked about it, and stop transmitting when they stop listening. The closer the relationship, the less I am likely to say.

It would be very good to find another, different "nice guy:" a fee-based financial advisor that Mom could sit down with. She'd still get the handholding, but at much lower overall cost (and less risk to your relationship).

 

[MooreBonds]

I know I am preaching to the converted on this board, but I wanted to vent a bit. Has anyone else experienced similar issues with uneducated....gullible....stubborn family members?

I haven't tried this (and it may be too late for some of the impact, due to front-loaded fees), but offer to PAY YOUR MIL $x,000 per year to manage her money for her. Then, just put the money in Vanguard funds, and explain to her that you get to keep any excess money that Vanguard makes over and above what her putzputnam funds would have made her.

 

[F M All]

I think one of the key things here is not to make your senior feel stupid. My mother was mis-sold investments at age 85 because she was too proud to take advice from her children (50 year old kids!!!) or admit to the financial salesperson (only pure fee-based operators deserve to be called advisors) that she did not really understand what they were doing. I think her fear of appearing to be deteriorating mentally was acute.

 

[HFWR]

I think "selling" loaded funds and variable annuities and such to an 85-yo is a reprehensible action that should be considered unethical and an illegal dereliction of fiduciary responsibility on the part of the FP...

How do these crooks sleep at night?

 

[brewer12345]

I think I have an easier time because I have letters after my name and none of my relatives can understand what I am saying when it comes to money. But I managed to get three relatives to come over from the dark side:

- Mom & Dad came over after Dad walked into a bank in 1999 and opened an IRA. The salescritter put him in a high load, high fee mutual fund loaded with tech. After it blew up, they saw the light.

- DW's Mom was an easy sale. She asked me to crunch numbers as to whether buying extra years in her pension was a good idea. It was, by at least low six figures' worth. After that, it was easy to convince her to toss the overprice advisor.

DW's Dad was a harder sale. He had a rental house that he was looking to sell and he asked for advice on the proceeds. I told him I would be happy to help. Since he still has a (mostly equities) account with an advisor (not bad choices, but expensive), I phelped him put the money in stuff that would balance out the equities: bonds, REITs, commodities. I suspect that at some point he will fire the advisor, but I am not holding my breath.

In each case, it took years.

 

[FinanceDude]

I think "selling" loaded funds and variable annuities and such to an 85-yo is a reprehensible action that should be considered unethical and an illegal dereliction of fiduciary responsibility on the part of the FP...
How do these crooks sleep at night?

I agree with you 100%.............

 

[Nords]

I agree with you 100%.............

It's a good thing we know you so well, FD, because otherwise we could gain the impression that you're complaining about losing sleep!

But on a serious note, isn't there something in a national association's ethics code or SEC guidelines (I know, those are both oxymoronic) that discourages this elder abuse? How can it be presumed to be in compliance with "fiduciary person" or "fiduciary investor"?

 

[FinanceDude]

Ok...........I'll put my 2 cents in as an advisor who runs a fee-based practice.

Most likely, the Ed Jones rep paid a personal visit to her house, or she got him as a referral. In their generation, if you like somebody, you trust them.........I guess it was a simpler time when they were our ages, and people did what they said, etc.

You have to be careful not to embarass them or question their decision-making, as they are very sensitive to that. Also, keep in mind theirs is a generation of pride, and even if they're not sure if they are doing the right thing, you are still "kids" to them, and being a SIL, they are going to be more guarded than if their own daughter talked to them about it. Here's what I would do:

1)Have DW talk to her. See if DW can convince her to trust you with financial decisions by telling her how your own finances have gone well because you BOTH have worked on it, etc...........kind of a "mom schmooze" that daughters know how to do.

2)If that doesn't work, offer to pay for an hour consultation with a local CFP. You can find them through referral or at www.fpa.net. They charge from $75-$250 an hour most areas. Offer to have DW come along, or both of you.

3)Find an advisor that will manage her accounts on a fee basis that you are comfortable with. I have had numerous discussions with the kids of my clients, as a matter off fact I now make it a requirement that any new client I take on, that I either meet in person or have a phone interview with the benficiaries/children to introduce myself and give them my background, etc. This has worked well, particularly where the kids have input into Mom and Dad's finances.

Not sure of the fee structure where you are, here's what I charge on a basic scale:

$150,000 or less: 1% a year
$150,001 to $250,000: .75% a year
$250,001 to $500,000: .50% a year
$500,001 to $1,000,000: .40% a year
>$1,000,000 .35% a year (lowest my BD allows me to charge)

If you have any other questions, you may PM me..........

Finance Dude

 

[TromboneAl]

Has anyone else experienced similar issues with uneducated....gullible....stubborn family members?

Yes, I've had exactly the same experience with sisters. My conclusion: spend some time then give up.

Here's an email to my sister that tried to make the point. I think she understood, but ended up staying with the advisor.

That was a fun visit. Just two more comments about financial expenses, then I'll butt out.

1. If you continue to use that advisor, and your 89,000 grows at, say, a 5% annual rate, over the next 10 years you will have paid that advisor $16,791. If I used your advisor, I'd have to pay him over $200,000 during that period.

2. That magic 4% SWR ("Safe Withdrawal Rate") that we talked about includes expenses. So, if you are paying the advisor 1.5% and your average annual fund expenses are 1%, then you can only withdraw 2.5% of your total each year. My average annual expense ratio of .18%, so I can withdraw 3.82% of my total each year.

Hope that helps.

Love,

Al

 

[FinanceDude]

It's a good thing we know you so well, FD, because otherwise we could gain the impression that you're complaining about losing sleep!

I'm not fearful of losing clients, I only lost two in the last bear market.........most of my clients accuse me of being TOO conservative...........

But on a serious note, isn't there something in a national association's ethics code or SEC guidelines (I know, those are both oxymoronic) that discourages this elder abuse? How can it be presumed to be in compliance with "fiduciary person" or "fiduciary investor"?

The SEC and NASD's guidelines are about as vague as you can get. Yes, there is the overused "know your client" rules and such, but with the current arbitration environment as it is, the client is at a disadvantage.........kind of an unspoken "buyer's beware" mantra. Quite honestly, my job would be much easier if the rules were more concise and the penalties more severe.

Ed Jones is one of the laxest firms on Compliance because of their structure. Their brokers are in little towns across the country with no real local oversight. In other words, very little monitoring of the broker.

When I worked at Robert W. Baird, our Compliance Department was one of the strictest on the Street. We all had to sign an internal Baird Code of Ethics, and it was kept in our personnel file. I can recall of two instances where it was used to fire individuals for non-compliance regarding elder clients.

In addition, we had a Senior Client Acknowledgement Form that was our own internal form. Every client over 60 had to fill one out when they opened an account. It was definitely a CYA for Baird, but it also had the ability to carry some weight with the regulators, as it stated things the fact the acoounts were not guaranteed against loss, that they understood there are charges to invest, etc. Not a perfect form, but it worked. And most of all, the Compliance folks scared the hell out of us in our meetings.............

If there was one area that could really use some solid regulation, it is here. Folks over 65 control roughly 90% of the nation's wealth, so they are a natural target.........

 

[FinanceDude]

Yes, I've had exactly the same experience with sisters. My conclusion: spend some time then give up.

Here's an email to my sister that tried to make the point. I think she understood, but ended up staying with the advisor.

That was a fun visit. Just two more comments about financial expenses, then I'll butt out.

1. If you continue to use that advisor, and your 89,000 grows at, say, a 5% annual rate, over the next 10 years you will have paid that advisor $16,791. If I used your advisor, I'd have to pay him over $200,000 during that period.

2. That magic 4% SWR ("Safe Withdrawal Rate") that we talked about includes expenses. So, if you are paying the advisor 1.5% and your average annual fund expenses are 1%, then you can only withdraw 2.5% of your total each year. My average annual expense ratio of .18%, so I can withdraw 3.82% of my total each year.

Hope that helps.

Love,

Al

Great note.........you went about it the right way...........

 

[TromboneAl]

Also, remember this: Let's say you are successful in turning on the light in their head, they move their money to Vanguard, and then the market has a major downturn.

It's a dangerous thing, this advice giving.

 

[FinanceDude]

Also, remember this: Let's say you are successful in turning on the light in their head, they move their money to Vanguard, and then the market has a major downturn.

It's a dangerous thing, this advice giving.

Seems a lot easier since Octiber 2002...........

Look at it another way, do you think people want to pay me a fee to LOSE them money?? Not exactly............

 

[Bob_Smith]

I have a fair number of people who ask for input. Four "rules" I follow:

1) First I make sure anyone requesting help understands the importance of self-education and the high costs and risks associated with using investment professionals.
2) I refuse to make investment decisions for anyone except our aging parents (and only if they request it).
3) I won't discuss investments with anyone who isn't willing to read at least two good investment related books. That eliminates 95% right there.
4) I insist that the person requesting "advice" get a decent grasp on historical returns and inflation by examining the Stocks, Bonds, Bills, and Inflation series.

I can count on one hand the number of people willing to jump those hurdles. Most just want someone to tell them what to do... they believe in "gurus" who can get them into investments that only go up, and I refuse to play that game. Off-hand I can recall only five who got to the point where we discussed specific investments - my MIL, my daughter, my secretary, one co-worker, and my father. This approach has prevented a lot of wheel spinning and wasted time.

 

[FinanceDude]

I have a fair number of people who ask for input. Four "rules" I follow:

1) First I make sure anyone requesting help understands the importance of self-education and the high costs and risks associated with using investment professionals.
2) I refuse to make investment decisions for anyone except our aging parents (and only if they request it).
3) I won't discuss investments with anyone who isn't willing to read at least two good investment related books. That eliminates 95% right there.
4) I insist that the person requesting "advice" get a decent grasp on historical returns and inflation by examining the Stocks, Bonds, Bills, and Inflation series.

I can count on one hand the number of people willing to jump those hurdles. Most just want someone to tell them what to do... they believe in "gurus" who can get them into investments that only go up, and I refuse to play that game. Off-hand I can recall only five who got to the point where we discussed specific investments - my MIL, my daughter, my secretary, one co-worker, and my father. This approach has prevented a lot of wheel spinning and wasted time.

Cost depends on the advisor.............

 

[Bob_Smith]

Cost depends on the advisor.............

That's right, they don't all charge the same; most are high cost, and most of the rest are even higher. And I don't send friends and family looking for needles in haystacks.

 

[JustCurious]

I think "selling" loaded funds and variable annuities and such to an 85-yo is a reprehensible action that should be considered unethical and an illegal dereliction of fiduciary responsibility on the part of the FP...

How do these crooks sleep at night?

With their head on a pillow.

 

[JustCurious]

1)Have DW talk to her. See if DW can convince her to trust you with financial decisions by telling her how your own finances have gone well because you BOTH have worked on it, etc...........kind of a "mom schmooze" that daughters know how to do.

2)If that doesn't work, offer to pay for an hour consultation with a local CFP. You can find them through referral or at www.fpa.net. They charge from $75-$250 an hour most areas. Offer to have DW come along, or both of you.

3)Find an advisor that will manage her accounts on a fee basis that you are comfortable with. I have had numerous discussions with the kids of my clients, as a matter off fact I now make it a requirement that any new client I take on, that I either meet in person or have a phone interview with the benficiaries/children to introduce myself and give them my background, etc. This has worked well, particularly where the kids have input into Mom and Dad's finances.

Finance Dude

Finance Dude, thanks for providing some very good suggestions. However, in this case, my MIL is very stubborn and doesn't want to offend her "very nice" advisor, and looks at me as just a kid (even though I have an advanced degree and I am approaching 40), and so she doesn't want to rely on me for such important matters, since her "very nice" advisor from a very large national firm obviously knows more than her "kid" son in law. I think a part of it is also her clinging to a sense of independence in terms of making her own decisions.

Finance Dude, in reference the comments about this practice as being potentially unethical, correct me if I am wrong .... but isn't it an accepted practice by most of the major financial firms to use load funds, annuities, high expense funds, and other high priced products?? If the practice is accepted and common in the industry, how can it be unethical? Don't misunderstand my point.... I do think the financial industry abuses high priced financial products to make excess profits, especially on the elderly and the less educated (although certainly not limited to those categories). For example, I do think it is unethical to put someone in a 5 percent front end load fund when a low cost no load fund serves the same or better purpose. The point of my comments is to suggest that the financial industry is like the proverbial fox guarding the henhouse....there is too much money being made at the expense of a largely ignorant public by too many large institutional players for the industry to stop it.

 

[HFWR]

Actually, it was I complaining... Finance Dude is one of THEM!

Sorry, just because you CAN do something, doesn't mean you SHOULD...