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Late to the Rescue

Brian White

MY FATHER-IN-LAW William retired from Duke University after teaching there for more than 30 years. He had a good pension, which—along with Social Security—covered all his expenses at the continuing care retirement community (CCRC) where he spent most of his retirement. Almost to the end, he was mentally sharp. I saw no need to inquire about his finances. I was mistaken.

In summer 2014, my wife noticed that William, then age 96, had left a large check for a matured life insurance policy on his desk for a couple of months. On investigating further, she saw that there were some bills—things not covered by the CCRC—that he had left unpaid. She spoke with her father, who agreed to grant her power of attorney. Since I’m more interested in financial matters than my wife, she enlisted my help.

First, I organized his records. This took some time, because William saved everything he received from his bank, broker, pension fund and more. Next, I moved most of the money he had at the Duke credit union to the State Employees’ Credit Union, which was then paying about eight times more interest on money market accounts. That made him a couple thousand bucks in a year for very little effort.

Then I started looking through his statements from a large national brokerage firm. There were 32-page monthly reports and eight-page quarterly reports, neither of which provided much useful information. Instead, they appeared to be written to impress the reader with the fine management the company provided, making it seem like the folks there were doing a lot of work for their fees. I found that 92% of William’s portfolio was invested in 14 North Carolina municipal bonds with an average 5% coupon rate.

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The bonds had a market value of $621,027 and, in 2014, paid $25,501 in interest. On William’s account statement, I found an unexplained “other debits” item of $5,450. From his 2014 brokerage tax statement, I learned that the $5,450 was for a “private investors fee.” It turned out William was paying 21% of his bond income toward an unnecessary management fee, since his bonds needed no management.

The other 8% of his portfolio, equal to $57,428, was split between 15 actively managed mutual funds. These had an “MFA fee” of $948 on top of the fund expenses, which averaged 0.92%. In total, William was paying 2.7% annually in fees for his mutual funds.

I immediately wrote a letter for my wife to sign, telling the brokerage firm that we no longer wanted the municipal bonds managed. We also directed the firm to sell all the mutual funds and send a check. There were some capital gains, but those were more than offset by capital losses carried over from the sale of two timeshares that William also owned.

A representative from the brokerage firm called and tried to convince me that we should continue to let the firm manage the municipal bonds. I told him we were happy to leave the bonds where they were and just collect the interest. He said, “Yes, but these are managed,” as if that somehow made them more valuable. I replied that we didn’t need any further management.

Unfortunately, William’s health deteriorated and he died in September 2015 at age 97. My wife was executor of his estate. The changes we’d made to William’s brokerage account and bank account meant the estate—which was split between my wife and her three siblings—was several thousand dollars larger.

My regret: I wish we had looked into his finances earlier, because he was getting bad advice and paying way too much for it. He didn’t need 92% of his holdings in municipal bonds, especially when his fixed expenses were covered by a pension and Social Security. William would have done far better with his money in a small set of low-cost index funds. For financial advice, he could have hired a fee-only financial planner for less than the brokerage firm was charging—and I would have happily advised him for nothing.

Brian White retired from the University of North Carolina, where he worked as a systems programmer and then director of information technology in the computer science department. His previous articles include A Simpler LifeTime to Retire and Limited Selection. Brian likes hiking with his wife in a nearby forest, dancing to rocking blues music, camping with friends and stamp collecting. He also enjoys doing Volunteer Income Tax Assistance (VITA) work at the Chapel Hill senior center.

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R Quinn
R Quinn
9 months ago

You make many excellent points and no doubt his money could have been more efficiently managed and likely he was taken advantage of. But let me play devils advocate. You say, “He didn’t need 92% of his holdings in municipal bonds.” But you also say his pension and SS paid all his expenses.

It appears accumulating more money with higher risk had no added value for him. Perhaps the security of bonds and their income was more important to him even while underperforming the market.

Someone could look at my investments and easily say he could have done better and they would be right, but accumulating more is not my sleep well goal. I too live on my pension and SS, with money to spare each month. My investments growing modestly while having less downward risk and generating tax-free income plus dividends is fine.

On the other hand, it’s possible that my children, especially my son-in-law who is a investment analyst and advisor, will conclude my net worth could have been higher. But if I make it to 97 I’ll be happy or if I don’t, I want to know my wife had a way to supplement her income.

Rick Connor
Rick Connor
9 months ago

Brian, My wife and I had a very similar situation with my wife’s aunt, and then her mother. It took years to figure out and organize their finances. They were also in good shape with pensions and SS. But her aunt had way to many accounts, and had lost upwards of $100K in checking accounts she had forgotten about. The worst was an account with Wells Fargo – she $25K in a non-interest bearing savings account that was charging a $25 monthly fee! What I learned is that it is important to talk to your parents before it gets to the point where they can no longer manage their finances, or have lost interest in managing them. My wife and I are working on a plan on when we would put POAs in place with our sons. We are thinking at 70 or 75 we put the POAs in place regardless of our health. That was they don’t have to do it under stress.

Stan Blue
Stan Blue
9 months ago
Reply to  Rick Connor

I assume that you believe that you can trust your sons and that’s extremely likely.

But you may want to have somebody else monitor how they spend the money using the powers of attorney.

John Yeigh
John Yeigh
9 months ago

In three estates, our family is batting a perfect 3 for 3 on paying high management or investment fees and often having far from ideal investment choices when considering tax and risk implications.

BestBoy
BestBoy
9 months ago

When my wife’s widowed father, at age 84, moved to an assisted living facility near our home (in the early 2000s), we asked him to grant her access to his investment account reports as an interested/trusted third party. So, we didn’t need power of attorney until later when dementia was clearly growing stronger.

One thing I saw immediately was the amount of churning among bonds (not bond funds) that was going on in his account with a large, national retail investment company. Many of these transactions involved exchanging one bond for another at the same interest rate and term, along with a management charge for the privilege. We were lucky that my father-in-law trusted my advice; soon I had him out of that company’s clutches and into a set of index funds.

By the way, he was a brilliant engineering professor during his career and never had any interest in investment strategies, instead just trusting these financial advisors. That said, his TIAA-CREF pension was first rate.

Newsboy
Newsboy
9 months ago
Reply to  BestBoy

I, likewise, uncovered “post-mortem” multiple years of of brokerage account churning when my father passed in 2011. FINRA does what it can to police broker behavior AFTER the fact, but a second set of eyes (with POA powers) is critical as a parent moves into their mid-late 70s (or sooner, based on a family’s particular health history). My dad and mom had 37 grandkids at the time of their passing. There were much better uses for those dollars plundered. My advice to dad in his mid-60s was to move their retirement nest egg into no-load indexed MFs (and purchase some Long-Term Care coverage for himself & mom while they were still healthy). This fell on deaf ears. His brokerage account was managed by “Bob” a trusted college fraternity brother (also now dead). We found the two insurance quotes for LTCI dated 1992 in his important papers pile (after his passing) with a sticky note attached “Important – talk to Bob”. Mom’s cumulative out-of-pocket LTC costs totaled $472,586 in the waning years of her life. Important financial lessons for my generation – learned the hard way.

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