Trapped in Complexity: How a Boutique Firm Turned Simple Finances into a Lifetime of Fees

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.

One man I knew inherited from his parents their entire and sizable estate, which was put in trust; and there was a trustee named by the last surviving parent to settle the debts of the estate, sell some real property, and pay a set amount of money per month for life to the trust beneficiary.

Zero. ($0). No monthly payments happened. A month, three, six, a year passed. My friend was ultimately told the decedent’s debts exceeded the trust assets, and there were no funds left in the trust. Debts included substantial fees for financial advisors, the trustee, and lien(s?) on property my friend had no way of knowing even existed.

I said, “get a lawyer. Now!”

Nobody would take the case. My faith was totally ruined and I now do not have the belief that it is a good idea to appoint anyone as a financial advisor, least of all anyone working in banks as financial advisors or as trustees. Even with a scrupulous outside and unaffiliated CPA accountant, and regular financial reports by that objective third party CPA, there is no way to understand if a financial advisor or trustee is or will be faithful, because most heirs and beneficiaries don’t even know how to understand even simple financial reports. It seems to me that trusts as a means of conveying property after death just make trustees and lawyers wealthy at the expense of bereaved people who are the rightful heirs.

The sizeable estate my friend was to inherit was somehow mysteriously bled dry. I figure the best thing to do if you are wealthy is to give your money away while you are alive to those you wish would have it after your death. There is too much opportunity for uncheckeable theft, otherwise. Heirs and beneficiaries are not as financially savvy as financial advisors, and are vulnerable prey.

I once had a person come to me who was very disgruntled with their current financial advisor. They had lost more money than they’d wanted to and really didn’t understand what they had. When I had a chance to take a look at their mutual fund portfolio, I noticed that all they had were B-Share mutual funds.

For those of you who don’t know, B-Shares, for the most part, are now non-existent. Although I can’t be certain why, my hunch is that they aren’t around anymore because too many advisors abused them. If they could still sell them, the advisor could make a handsome commission, and the client would never know.

Now, it’s not the commission on the B-Share that makes them so bad; it’s the fact that most of them had a six- to seven-year surrender period. That means if you buy the fund, you’re going to have to hold it for at least six or seven years before you can liquidate it without a penalty.

The client in my office had no idea what a B-Share was, and most importantly, had no idea that she had a surrender charge attached to it. So here she is—stuck in investments that had lost more money for her than she had wanted, and she can’t do anything about it. If she did sell it, she’d have to pay a surrender charge on top of her losses. Talk about a slap in the face.

Lesson learned: Read all the fine print and make sure you understand if your investment product has any type of surrender charge attached to it.