For most, the transition to retirement is a time of anticipation and excitement. It’s also a time to be on the lookout for unscrupulous brokers.
That was the message from a recent Bloomberg report, which detailed client complaints that brokers “lured them into rolling over their 401(k) nest eggs into unsuitable IRA investments.”
The article details behaviors by these sales people that, to an ethical advisor, represent clear red flags. They include recommending investments that appear far too aggressive for a retirement portfolio, and reaping enormous sales commissions–and even prizes–as a result of their efforts.
As the story points out, the United States is in the midst of a retirement rollover boom: Participants in 401(k)-type plans rolled $321 billion into individual retirement accounts in 2012, and IRAs now hold more assets than do workplace retirement accounts. Amid the boom, financial advisors of all stripes are offering to help retiring employees roll over their money and then manage it for them.
In the right hands, IRA assets can be allocated in a way that is clearly in the client’s best interests. Unfortunately, the rollover process also gives unprincipled brokers the opportunity to recommend a slate of investments to their clients that are, to put it politely, questionable. And as the Bloomberg story notes, this can result in huge losses for the investors.
The investments detailed in the article included Puerto Rico municipal bond funds. Not only were the bonds in these funds extremely risky because of Puerto Rico’s budget crisis, but the funds carried a 3% upfront sales fee on top of 1% annual expenses.
Another investment that raised our eyebrows: non-traded real estate investment trusts. These REITs are risky because they can’t easily be sold—meaning you can’t easily cut your losses if they go downhill. One brokerage team cited in the story received commissions totaling 6% to 7% of the REIT investment, sharing that huge slice of their clients’ nest eggs with their brokerage company.
Then there are variable annuities, which are tax-advantaged vehicles and, as such, tend to carry extra costs. These investments generally don’t belong in an IRA because investors are then paying for redundant tax-deferral benefits. The brokerage team recommended that clients put 60% to 70% of their IRA assets in variable annuities–and the rest in non-traded REITs!
The team interviewed in the story typically received sales commissions of 6% or 7% on the money clients invested in variable annuities. What’s more, the mutual funds within those variable annuities charged customers 2% to 3% per year in additional fees.
As the article notes, clients can and do file lawsuits against brokers whom they believe recommended unsuitable investments. Of course, suing your broker to recover huge losses from your retirement savings is not anyone’s idea of how to spend their retirement. As rewards for their high sales, the brokers profiled in the Bloomberg article won trips to resorts in the Bahamas, Florida and elsewhere.
Some of the most important financial decisions you make in your life occur at the time of retirement. To avoid being ripped off, it’s essential to avoid the smooth talkers and work with an advisor you trust—preferably one you have a longstanding relationship with.
Retirement investing should involve a well-planned, diversified portfolio of investments that are carefully tailored to your goals, time horizon and level of tolerance for risk.
If you would like to learn more about building an investment portfolio that meets your retirement needs, please don’t hesitate to contact us.
