When a Broker is Your Retirement Nightmare

We at Align Wealth Management have long preached the importance of choosing to work with a "fiduciary" advisor—one who is legally bound to act in your best interests.

Now, it doesn't take a genius to understand that taking financial advice from someone with a conflict of interest is a bad idea. But a recent Bloomberg report made clear just how great the damage can be when conflicted advisors "help" clients invest their retirement savings.

The multiple brokers referenced in the article allegedly talked clients into "rolling over their 401(k) nest eggs into unsuitable IRA investments." Those brokers persuaded clients to buy investments that arguably don't belong in any retirement portfolio—and they pocketed jaw-dropping sales commissions in the process.

Now, there's certainly nothing wrong with IRAs. In many situations, they're a fine vehicle for retirement saving and investing. Unfortunately, too many unscrupulous brokers persuade new retirees to set up an IRA and fill it with investments that are dubious if not downright unsuitable.

What sorts of bad investment recommendations were peddled to new retirees? Examples from the Bloomberg article include Puerto Rico municipal bond funds, which are extremely risky due to Puerto Rico's shaky finances. Another highly questionable investment: non-traded real estate investment trusts, which are especially risky because of their illiquidity. And then there were variable annuities: Because annuities are tax-advantaged to begin with, placing them in an IRA is typically redundant and unnecessarily costly. Incredibly, one brokerage team referenced in the article advised clients to allocate up to 70% of their IRA to variable annuities, with the balance made up by non-traded REITs.

To be sure, these brokers made a bundle on the sales of these investments: The Puerto Rico bond funds carried a 3% up-front sales fee in addition to a 1% annual management fee. The team that sold the non-traded REITs pocketed commissions of up to 7% of the total assets invested. Clients who bought the variable annuities paid similar commission rates–in addition an annual charge of up to 3% for the mutual funds within those variable annuities. To add insult to injury, brokers' parent companies can and do reward their highest sellers with prizes and trips.

As detailed in the Bloomberg story, poor results and high fees resulted in the sort of losses that can completely derail an investor's retirement plans.

Now let's do back to the importance of working with a fiduciary advisor. There are two standards for financial advisors. The "suitability standard" is the looser of the two: It simply requires investments to be generally suitable for clients. And advisors operating under the suitability standard don't have to disclose their conflicts of interest.

Then there's the fiduciary standard. It requires advisors to put their clients' interests ahead of their own. Not only must fiduciaries recommend the right investments, they must recommend the least expensive version of the right investment. When advisors recommend risky investments that involve fat sales commissions, you know they're probably operating under the suitability standard and not the fiduciary standard.
The cases cited in the Bloomberg story are a timely reminder to insist on a fiduciary relationship with any advisor. And get their fiduciary pledge in writing.

To be even more confident, choose a fee-only registered investment advisor. Respected professional credentials such as Certified Financial Planner and Certified Public Accountant, can also help you to separate the salespeople from the professionals whose first priority is your success.