Retired Couple Living off of Investments Managed Exclusively by Husband, Who Suddenly Suffers a Debilitating Stroke
I know many people who buy only Hondas or Toyotas because these cars are very dependable and, as a result, hold their value for many years. For those who are looking for safe and reliable transportation, this is a very smart decision. Both automakers have managed to consistently produce exceptional products for decades. They’ve earned the trust of consumers. So, for those who put the highest value on reliability, the decision is a no brainer—go with the name brands known for exceptional reliability.
Is the same true in the financial services industry? Emphatically, No! While there are many honorable and trustworthy professionals working at the large household-name brokerage and investment firms, nearly all of them make a significant amount of their income from commissions based on the volume of stocks they buy and sell. These transactions do not have to benefit their clients. The commissions are paid regardless. The goal is to buy and sell, buy and sell. Or to buy products with high upfront commissions and high annual expense ratios, all because it provides them and the firms they work for with great financial rewards.
If you want to know who someone works for, follow the money. If a fund pays your advisor to steer you into investing in that fund, then your advisor doesn’t work for you. He works for the fund that he’s telling you to buy.
I recently had a meeting with a 78-year-old woman who I met through a close friend. She found herself in a situation not uncommon for many women of her generation. She suddenly had to manage the retirement funds she and her husband saved over the decades, but was completely unprepared to do so. Her husband played this role for their entire marriage, but suffered a severe stroke. In addition to dealing with the extreme stress and remorse over her husband’s illness, she had to wade into the foreign waters of money management.
She said that, considering her circumstances and lack of experience, she turned the management of their retirement income over to a very large and well-known brokerage house. One year into this relationship, she already regretted that decision. She asked me to review her statements.
In just 12 months, her portfolio lost half its value! A lifetime of saving and prudent investment vanished by 50% in just one year!
She fell into a classic trap, one that the industry hides very cleverly. The individual “managing” her portfolio was a stock broker. Stock brokers make their money on commissions from buying and selling stocks. They get paid no matter what, regardless if the transactions benefit clients. In this woman’s case, the broker just kept churning her portfolio over in order to generate more commissions.
She lost half her retirement account and her broker was rewarded for this mismanagement! In truth, he never really worked for her. He worked for someone else. If you hire someone to manage your retirement, be sure you know where their loyalties lie.
Come back on Sept. 21, 2015 for the next post in this series: Money is a major trigger for anxiety and, sadly, some advisors know how to take advantage of those fears.
If you would like to comment or have a question, please email me at firstname.lastname@example.org.