Whole life insurance as an investment vehicle

This is the type of advisor that deserves more than just a punch—maybe an eye gouge, a knee to the groin, or even a "people’s elbow" from The Rock.

I had a client whose mother was doing business with another advisor a couple of towns over. The daughter had a funny feeling about the advisor, so she urged her mom to transfer to me. When her mom brought in her account statements, I couldn’t believe what I saw. I had asked both the daughter and the mother what the intent of their investments was, and both agreed that the safety of the principal was a major concern.

The mom had living expenses to meet, and she was going to need to cash in some of the investments in the not-too-distant future. When I hear an 80-year-old widow tell me that she’s worried about her principal and needs access to the money in a short amount of time, I immediately think of CDs, money market accounts, or a savings account.

Well, not this advisor. No, this advisor put most of her money into different preferred stocks and long-term bonds. One of the preferred stocks had a maturity date of 2040. Now, for those of you who don’t understand how preferred stocks work, they resemble a hybrid of a stock and a bond. So, they can fluctuate like a stock and pay interest like a bond.

Well, when the time came that the mother needed the money, interest rates were fluctuating, and in just a few months' time, she saw a 30% drop in principal on those preferred stocks. When she needed to cash out those investments to generate some cash, she was taking a huge loss in principal. Sure, her investments were paying a very high dividend at the time, but that was of little comfort after taking such a huge hit on her money.

Lesson learned: If you think you need to access the money in your investments short term, don’t let an advisor con you into buying anything other than a CD.

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.

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.