Daylight Robbery

Tony Isola

WANT TO SEE THE VERY worst of human nature? Look no further than financial salespeople—and the way they exploit their clients.

Incentives drive their behavior. High commissions make brokers and insurance agents do unconscionable things. The worst products contain the highest payouts. Result? Consider seven real-life examples. Names are withheld to protect the innocent and, unfortunately, also the guilty.

  1. A widowed nurse inherited her husband’s $1 million IRA. An unscrupulous insurance salesperson convinced her to put the funds into a high-cost variable annuity. He collected over $80,000 in commissions for this dastardly deed. When a friend tried to undo this transaction, it was too late. The advisor could not be reached because he was on a European vacation with his family.
  2. We helped an investor who had 45 different mutual funds in his portfolio. Every quarter, they were all sold and replaced with new products as part of some insane investment strategy. It turns out the advisor was receiving lots of soft dollar perks from his broker-dealer, such as free technology. He repaid the favor by generating thousands of dollars of unnecessary commissions from his client’s portfolio.
  3. An investor in his early 40s had several expensive and complicated index annuities in his rollover IRA. These products are sold with claims that they’ll deliver market returns with downside protection. The client explained to us that, in truth, market volatility didn’t rattle him in the least. Paying for things you don’t need is a common theme.
  4. We are currently working with a client who is trying to escape from nine different annuities. Many are from the same company. For salespeople, having clients constantly buy and sell annuities keeps the commissions flowing, while also opening up opportunities to place funds in even more expensive products.
  5. We saw a 401(k) account that consisted of dozens of master limited partnerships, as well as exchanged-traded funds (ETFs) and notes (ETNs) that owned many of the same securities. For good measure, the portfolio also held some shares of Panera Bread, which was then publicly traded, and a South Korean ETF. Sometimes, people are screwed by their advisor’s incompetence, rather than dishonesty.
  6. We spoke to a teacher who pays 4.75% for every paycheck contribution to a 403(b) plan and almost 2% in fund fees annually. Add it up and that’s almost 7% in annual fees on every new dollar invested.
  7. A couple in their 30s, with two small children, were sold an expensive whole life insurance policy. The policy would have barely replaced one year’s worth of the couple’s income. For less money, they could have purchased a 20-year term insurance policy that would have paid out millions of dollars. It’s the same old story: The salesperson was chasing the high commission of the whole life policy, instead of looking out for the clients’ best interests.

Tony Isola’s previous articles were 403 Beware and Seven Deadly Sins. Tony works at Ritholtz Wealth Management, specializing in helping educators reach their financial goals using a fiduciary model. To learn more, visit his blog,  A Teachable Moment, or follow him on Twitter @ATeachMoment.

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Thomas Taylor
Thomas Taylor
4 years ago

I’m glad you were able to help and convince these clients they could do better. I have a friend who has a “managed” account at a large and reputable financial institution. I have prepared his taxes for years and every spring I tried to convince him he could do better simply by getting rid of the managed structure and invest in some total market index funds . They charge him on average about 1.25% to manage the funds they buy and sell plus the expenses of the underlying funds. The funds they offer are good, but the managed fee structure is ridiculous. My advice has fallen on deaf ears every year.

4 years ago
Reply to  Thomas Taylor

Exactly. The less the drained, the more the retained. As soon as one realizes this, they start doing better for themselves.

Deana Bray
Deana Bray
3 years ago

How do I get out of my 403b and convert to a roth IRA? I do not even know what fees I’m paying. Can i pay my surrender fees out of the account? So many questions.

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