Seven Deadly Sins
MANY FINANCIAL advisors are allowed to recommend investments that are great moneymakers for their own retirement—but not so good for those who buy them.
These salespeople are incentivized to push clients into investments that pay the highest commissions. It’s a system that jeopardizes the retirement of millions of Americans. Billions are spent annually on unnecessary fees. While the industry has many decent people, the sinners outnumber the saints. Here are just seven of their transgressions:
- Variable annuities in retirement accounts. This is the investment equivalent of wearing both a belt and suspenders. Retirement savers end up paying high fund fees for tax deferral that their retirement accounts are already giving them for free.
- Loaded mutual funds. With so many low or even zero commission options available, why pay a dime to enter or leave an investment? Upfront class A sales charges are brutal for small investors in retirement accounts. Until certain breakpoints are reached, the little guy often ends up losing 5% from each contribution, plus paying ongoing fund fees that are frequently above 1%. We have seen this time and time again in 403(b) plans. Advisor-sold 529 college savings plans are another fertile ground for this unethical practice.
- Free lunch and dinner seminars. This age-old trick is a lure to sell unnecessary, high-fee products. Attendees feel they owe their hosts something. Go to one of these seminars and you could end up consuming the planet’s most expensive chicken marsala.
- Hidden fees. Unlike most other industries, investors seldom receive a bill from their advisors. Fees are silently subtracted and often difficult to detect, creating ample opportunity to overcharge and deceive clients—unless those clients are willing to read a 500-page prospectus. Some scoundrels even use this deception to claim investments are “free.”
- Pushing yield. Many conservative investors demand investment income. Unsavory advisors satisfy this desire by finding them risky bonds, master limited partnerships and stocks with high dividend payments. Often, clients end up buying individual low-quality bonds at high markups that put their money at great risk. Losing 40% of principal, while earning 10% income, isn’t a sustainable strategy.
- Questionable certifications. There are more than 160 different investment advisor designations. Aside from a few, like the Certified Financial Planner and Chartered Financial Analyst designations, most aren’t worth the paper they’re printed on. This doesn’t stop the unscrupulous from marketing them as if they’re impressive credentials.
- Selling illusions. Watch out for things like private REITs and equity-indexed annuities. “It’s like a CD, but you earn the returns of the stock market” is often the catchphrase. Without FDIC insurance, this couldn’t be further from the truth. Risk doesn’t disappear just because you can’t get a daily price quote.
Tony Isola’s previous article was 403 Beware. 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. Follow Tony on Twitter @ATeachMoment.
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