The “Telling the Truth is Optional” Advisor
I had a client who was retiring, and we were in the process of rolling over his 401(k) and pension. In our conversations, I learned that he had purchased a fixed annuity at his local bank a couple of years prior.
Since they wanted to consolidate all of their investments, they were more than comfortable transferring everything to me – but I knew that they had just taken out the fixed annuity a couple of years prior.
My inclination was that there was probably some type of surrender charge attached to it. I inquired about this to the client, and they were under the impression that there was not a surrender charge and that they could take their money; principal and interest, and walk away at any time.
Why did they believe that you ask? Because that’s what the advisor had told them. The advisor had told them they could take out the investment, take their guaranteed interest at any time, and walk away with everything without penalty. Now, once I heard that, as much as I wanted to believe them, I knew something sounded fishy. I had them call the bank and talk to the advisor to clarify how it actually worked. As it turns out, it wasn’t that way at all.
Yes, they could walk away with the principal, but all the interest that they accrued would be forfeited, and in their case, it was approximately $7,000 that they’d be leaving on the table.
Obviously, we weren’t about to give up a big chunk of money just for the sake of consolidating, so we left it as-is to revisit when the surrender period expired- which was four years away! Lesson Learned:Just because the advisor tells you something doesn’t necessarily mean it’s true. If something sounds too good to be true, ask for it in writing.
Related Horror Stories
The “My Products Don’t Have Fees” Advisor
This is the kind of guy that I don’t actually want to punch in the face; I’d rather just have a good chuckle with him. One time, I was competing with another advisor who was offering a fixed annuity as their only investment solution. They were a pure insurance agent, and apparently, that was all he could offer.
When the client chose me as their advisor over the insurance agent, they were not happy, to say the least. They were so disappointed in my client’s decision that they felt compelled to tell them (in a condescending tone) that their products had no fees, whereas mine did, and that they (my clients) were making a horrible decision.
No fees, huh? Well, yes, if you buy a fixed annuity that guarantees you 3%, you do get 3%. But for someone to use the argument that their products have no fees is ridiculous. There’s a fee for everything; there is no such thing as a free lunch.
Lesson learned: If your advisor tells you that their products have no fees, I would suggest you first prevent yourself from bursting into laughter. Then, kindly remove yourself and sprint out of their office.
Keep the case!
The 1% Trap: How a Small Fee Can Cost You 32% of Your Investment Returns Over Time
Using the compound interest calculator at investor.gov, a $10,000 initial investment compounded at 7% annually will be worth $149,744 after 40 years; at 6% (representing a fee of 1%), it's worth only $102,857. The 1% fee ate up 32% of the return.
"Safe investments"
Just filed my taxes and I’m looking more closely at my finances. I’m pretty good with the basics but feel completely out of my depth with investments.
In 2021 I started a Morgan Stanley investment account with the financial advisor who has been managing my parents’ money for many years.
I invested $67,000 in 2021 and let the advisor choose the stocks/bonds/funds/etc, telling them that I’m extremely risk adverse and I needed safe investments. On Jan 1, 2022, the value was $71,950. On Dec 31, 2022, the value was $58,587. In 2022, I paid $1,025 in trade commissions and $984 in service/advising fees. So basically I paid my advisor $2,000 for her to lose me $13,363 over the course of 2022.
Is this normal? Every time I ask my parents or advisor they tell me “the market is down for everyone.” But my parent love their advisor and thinks the sun shines out her butt and my advisor has a financial incentive to keep me.
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