Do you remember that old movie Network? About the only thing I remember is that the main character, a TV newscaster, gets fed up one night on the air. He starts screaming, "I'm mad as hell, and I'm not going to take it anymore." He works his viewers into a frenzy, encouraging them to repeat after him. Soon, people all over the country are leaning out their windows and screaming into the streets: "I'm mad as hell, and I'm not going to take it anymore!" (I decided to use the milder version, since my father may be reading this.)
What's making me so mad? I'm mad at the people in my business who sully my reputation with their questionable and, sometimes, unethical practices. I'm mad about the people, older ones in particular, who are being led down the primrose path by greedy brokers and advisors.
And I'm mad at the people who base their selection of an advisor on the subjective, "But he seemed like such a nice man." I'd be nice too if you were lining my pockets! It's not always easy to tell if you're getting good advice, but there are some red flags.
Portfolios full of limited partnerships and unit investment trusts
While these MAY be appropriate for some clients in small doses, they are not good for the entire portfolio or even the bulk of it. Both securities are fairly illiquid. You can't convert them to cash easily, at least not without a sizable loss. Typically, you put money in these. They pay an income, and you have to wait for all properties to dissolve or all securities to mature before you can get your principal back.
While the income part may seem enticing to older people, consider the need to tap into principal should an emergency health situation occur. You'll be stuck with an investment you can't get your hands on. And depending on the underlying securities, you may be getting into something fairly risky.
I don't use or recommend either of these investments. There are too many alternatives with greater flexibility and less risk. But I do know why I see them in client accounts. The are high commission payers, so beware.
Little old ladies with annuities and annuities within IRAs
Annuities were designed to avoid taxes. They are good vehicles for people in high tax brackets who are still trying to sock away money for retirement but have used up their IRA or retirement contributions for the year.
Most little old ladies don't have a tax problem. And they're not interested in retirement funds. They are already there! Since most annuities have high expenses and surrender charges lasting anywhere from six to nine years, these are quite unsuitable for your grandmother (or your mother). There are other investments out there that will give them safe, solid returns with the flexibility they need at this age.
And, NEVER, EVER use an annuity for your IRA. An IRA, by Congressional order, is tax-deferred already. Using an annuity for an IRA is like a bald man buying a blow dryer. It's an accessory he doesn't need. So, why pay extra for something you won't use?
And why am I seeing people with annuities who don't need them or shouldn't be in them? Well, they are, typically, high commission payers. Hmm... I think I said that before. Fixed annuities are about the only investment-type product that many insurance people are licensed to sell. Buyer beware!
High turnover rates in portfolios
This means you are constantly buying and selling within the account. For many investments, the buy and hold strategy is the best. Too much turnover simply costs you in transaction costs and commissions. Make sure the changes you make in your portfolio put you in a better position.
When this practice gets out of hand, it's illegal and it's called churning. I recently saw a small account with 10 funds in it. The size of the account warranted three at most. In less than a year's time, all 10 funds were sold and switched to 10 other funds of the same type. The broker got a commission when the first 10 were purchased and another commission when the second 10 were bought. Because the account was spread over 10 investments, it was hard for the client to detect the commission deductions.
Which leads me to my final point. Most abuses occur because somebody is getting greedy. The most important question you can ask when you hire a broker or advisor is, "How do you make your money?" If you deal with a commission person, know the commission schedules of all recommended investments before making a decision. Check your statements for other expenses. Whether you choose a fee-only person or a commission person, the key is full disclosure.
Now, everybody go to your windows, stick your head out, and yell, "I'm mad as (a. hell, b. heck, c. a wet hen) and I'm not going to take it anymore!"
--Nancy Lottridge Anderson, Ph.D., CFA, Mississippi Business Journal, June 2, 1997