With over 22 years practicing as a CERTIFIED FINANCIAL PLANNER™ Professional, I have seen too many prospective clients come to our office after having been the victim of bad advice. There doesn’t seem to have been any consistent source for the bad advice: some has been the result of a large Wall Street firm, some an insurance agent, and some from regional investment firms. The really sad part is that most of the advisors had been posing as a “financial planner.”
Rather than tell one story, and with a half-nod to David Letterman, I’ve put together a top five list of the worst financial advice I’ve ever seen.
Number 5 - You don’t need a weatherman to know which way the wind blows
A new client came to us from a financial planner with a regional broker/dealer. The client had been sold several products that were not in their best interest, or even suitable for them. They were advised to spend far more than their assets could support. They owned an illiquid private equity REIT and several variable annuities with very high expenses that had seven year redemption fees. However, the worst advice they received was a scheme to use distributions from their annuities to fund a very expensive whole life policy. The annual premium was about 20% of their annual expenses. The advisor described the transaction as a transfer of capital from a tax-deferred investment (variable annuity) to a tax-free investment (whole life insurance).
The hand-written notes were very misleading and blatantly unethical. The couple didn’t need the amount of life insurance that had been sold to them. The client questioned the advisor on the practicality of the strategy. However, the client trusted the advisor and believed he was looking out for their best interest. I can understand where someone with limited knowledge of financial products could be convinced that his diagrams made economic sense. Never confuse life insurance, which is a critically important financial product for survivor income needs, with an investment product.
Number 4 – There is no free lunch
A prospective client met with us to get our opinion about something she had heard while attending a “free lunch” sponsored by a financial planner at a high-end restaurant in her area. The advisor sent a mailing to her community inviting people to a free lunch to hear some tax saving ideas, and how to get stock market returns without any risk of loss. Sounds pretty good, right? For those of us in the industry, we know exactly what product that seminar claim described – Indexed Annuities.
Indexed annuities are known to provide almost no disclosure and are one of the most misrepresented financial products. The advisor offered a free consultation on top of the free lunch. The prospect had the free consultation and was told that her portfolio of Vanguard funds was too risky for her and she should sell everything and put the funds into the “risk-free” investment he recommended. The client would have paid capital gains taxes unnecessarily to sell, the indexed annuity would have paid the advisor about a 6% commission, and then the client would have been locked in an annuity with high fees, and little upside potential for seven years.
Although the advisor never asked her, this woman had stayed her course through the 2008 financial crisis and recovered in less than two years, well within her risk tolerance. We advised her to stay with Vanguard and don’t return his calls. Why would anyone offer an expensive, free lunch to a large group of strangers?
Number 3 - If it sounds too good to be true…it is
A client called me once and told me that a “financial planner” with one of the largest insurance companies in America approached him with a way to convert all his taxable income into tax free income. I must admit I was intrigued. We were advising and managing a profit sharing plan for the client that gave him a deduction of about $50,000 of his income from taxes and grew tax-deferred. He would eventually have to pay those taxes. The client gave me the analysis the agent produced. It was a very detailed illustration showing how the client could take 100% of his annual income (in the mid six figures) and pass it through a whole life insurance policy and then take tax-free loans as distributions and when he passed away the balance would pass to his family tax-free as well. The agent told him that many clients who are doctors were doing this and he could also do it. My client believed that if doctors were doing it, it must be valid.
I knew the scheme was a scam, but the materials looked very convincing. The problem was, there wasn’t any disclosure. I knew there were about five or six variables in the illustration that were wild assumptions. I called a friend who was a legitimate agent in the insurance industry, and he told me it was a sales program that was making it’s way around the insurance industry so agents could sell more insurance. He gave me a life industry trade magazine with a full-page ad on the system the agent used with my client. The bold-text title of the ad claimed that agents would sell millions of dollars of insurance premiums with this system. I sent it to my client and he never asked me about it again.
Number 2 – No one can predict the future
A client of our firm left a few years ago to pursue a relationship with a large Wall Street firm. Having stayed the course after experiencing the 2008 great recession, the client had met about 80% of his expected return over roughly seven years in the diversified portfolio we managed. However, the client was lured into believing the advisor in the Wall Street firm had the ability to predict what to buy in the market and when not to be in the market. I had seen some of the marketing materials from this firm and was familiar with the messaging, which called it “Sector Rotation” and showed back-testing graphs and illustrations. The graphs demonstrated that “if you had been in this then” you would have avoided the 2008 great recession and you would have been in the right sector of the markets at the right time.
Sounds great, right? What they were describing was simply market timing. Market timing has been around for about 100 years and is used by stock market brokers. For decades market timing has been thoroughly tested and reviewed by academic researchers and there has never been any proof that a person or a computer can predict the future. Beware of “greed” and showy representations of the future based on historical examples of the past, which may never happen again.
Number 1 – Beware of wolves in sheep’s clothing
A widow became a client of our firm. She had a very generous pension from her husband who had been a judge. Because of that, her assets were not needed to support her lifestyle. She was with a female advisor who was with a large regional broker/dealer. The client spoke very highly of the previous advisor, who frequently organized free luncheons for her many widow clients. She was very sweet and frequently called her to see how she was doing. Unfortunately, she wasn’t as diligent about her financial advice.
This widow had a portfolio that was largely comprised of expensive variable annuities and illiquid, private equity REITs. The client received several K-1s each year and had no way to know what she had. This widow was almost 80 years old. None of these products were in the client’s best interest or even appropriate for her, but the advisor who sold these to her made very high commissions on the products – between 6% and 8%. When someone is overly solicitous and recommends a financial product you do not understand, say no.
Reed C. Fraasa CFP®, AIF®, RLP® is the managing partner and financial planner at HIGHLAND Financial Advisors, LLC.
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The Worst Financial Advice I've Ever Seen and How to Avoid it