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
How My Financial Advisor Profited More Than I Did
No horror story, they just made more money out of me than I made out of them, so in a way they taught me a useful lesson. This was back in the 90s, when we were all simpler folk.
My financial advisor isn't listening to me
I hired my FA for one thing—to manage my retirement investments. Outside of retirement I have a plan for how I manage my cash flow that fits with my personal lifestyle choices, but I feel my FA wants me to change to fit an investment plan he has picked for me.
We have been saving for retirement about 30 years. One day he called us into his office so he could model our retirement expenses. He asked a number of questions but ignored my answers. Then he came up with a model based on a lavish lifestyle that showed my 30 years of savings would be gone in just one year if I retired early.
I should have fired him on the spot. Apart from not listening to my answers, it’s demoralizing to feel like I have worked a lifetime to support myself for just one year. I felt angry and discouraged.
His plan must have been to convince me to maximize my retirement contributions. I was not ready to do that, and I had told him why. When I was younger I had done that, but got badly burned when my finances went sour and I had no emergency funds—everything I had was locked into an untouchable retirement.
Since then I shifted my finances into six parts:
- Money I need to live today, month-to-month
- A decent rainy-day savings for major purchases or emergencies
- Aggressively paying down all debt, including mortgage debt
- Helping my three children as young adults, buying their first car, providing their college education
- Saving a little in a (matching) 401k
- Enjoying life at middle-age, spending time with family and friends
The last point in particular I am not willing to compromise on. I don’t want a lavish lifestyle but I should be able to travel and enjoy activities. I have minimized personal expenses and nearly eliminated all debt. Today we could live comfortably on $3,000 a month. I am not willing to see my children take on further student loan debt, as I consider 5% interest rates criminal for an investment in our future.
We are not maximizing our tax-deferred contributions today. We did when much younger, but accumulated debt in doing so, and became “house poor”. I’ve learned from our mistakes.And there’s no shame in paying taxes. Part of the point of increasing retirement contributions is to lower my tax burden, I get it. But unless I am also debt free I am losing the game—I would lose far more to interest payments than I would ever pay in taxes.
I need to find a financial advisor who is on board with my plan and will work to maximize the return on my retirement investments and my savings funds. I lack the time to figure this all out for myself. But I don’t need an FA who is set on changing my ideals.
Paying for Underperformance
I was paying an advisor $8k per year. He never beat the market and often underperformed. Lovely guy, but once I had enough time to look into it all (the lack of time is WHY I got an advisor in the first place), I realised I was being utterly reamed given the size of my portfolio.
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