Widowed, Ripped Off, and Alone

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She’s an intelligent woman, seemingly well to do and living in a high rise condo in Florida. Retired, active lifestyle, involved in many activities with her friends, giving of herself to her community, church, and local charities. She did everything right, at least right for her generation, place and time in her life.

She was the loving wife of an auto company executive. She kept a beautiful home, entertained lavishly, and hosted parties for her husband and his business colleagues. She was always there for the children, active in the community, in short, she lived the American dream.

But below the surface was fear, uncertainty, and pain. What’s happening here, how did it happen, and can she save herself?

Why is she now living a nightmare, through no fault of her own?

There are many reasons, for her life was and is complex. But high on the list is the fact she relied entirely on her husband to make all the financial decisions throughout their years together. After all, he was an MBA and a financial wizard. He ran the company’s financial division and had an extremely successful career. But he did something neither counted on, nor planned for. He died.

He died but left her with a sizeable pool of investment assets, life insurance, and a fine home, seemingly more than enough for her to continue a comfortable lifestyle. But there were two crucial things she lacked. She did not have a high financial I.Q, and she did not have a trusted financial advisor. Having just one of the two would have protected her, but unfortunately having neither led to a number of unwise decisions, which ultimately led to severe financial difficulties later.

After the death of her husband she moved to Florida, purchased an upscale condo, and developed new friends and activities. Because her pool of assets was ample she was able to draw income from it to support her lifestyle. Her financial advisor, whom she had retained due to her husbands relationship, soon advised her to make changes in her portfolio, changes he said would be beneficial to her.

With her agreement, but also with lack of understanding, her investment portfolio soon began to resemble the high flying NASDAQ and technology indices of the late 1990’s. As long as the market was going up, everything seemed fine. She was making substantial monthly withdrawals from her portfolio, and her accounts continued to grow. Life was good.

But then, things began to go badly. The market began to swoon in 2000 and her account began to decline precipitously. She began to worry but her advisor said, “Oh, don’t worry honey, the market always comes back in the long run. I’ll keep a close eye on it for you.” And every now and then over the next few years, the market did bounce back, at least temporarily. But it didn’t come back to its previous level. She continued to trust her advisor, and her accounts continued to lose value. Over the next three years, with continued withdrawals and market declines, she lost over 50% of her money!

By the time I met her in late 2002 she was a nervous wreck, and didn’t know where to turn. Because of her new found distrust of financial advisors, she brought her son along to our meeting. After a lengthy discussion I agreed to analyze her situation and in a second meeting, provide a full written report, including recommendations to help turn things around.

Upon careful analysis two glaring details jumped out at me. First and most obvious, her investment portfolio was totally unsuitable for her needs and life situation. Her primary objectives were protection of capital and supplemental monthly income, but her portfolio consisted largely of technology and telecommunications stocks and mutual funds.

But there was more. The costs of her portfolio were egregious! The financial advisor, and I use the term loosely in this case, had “diversified” her portfolio across six different front end load (commission) mutual fund companies, even though every company had dozens of its own branded funds. This had the unfortunate consequence of costing her far higher commissions than necessary.

You see, load fund companies have what are called breakpoints at different investment levels. For example, the load might be 5% on the first $25,000 invested, 3% on the next $75,000, and only 1% over $100,000. By spreading her accounts over so many fund companies she did not receive the full benefits of these lower loads from any of the companies. Therefore her total commission costs were much higher than otherwise would have been the case. Of course, her advisor benefited from these higher loads as his commissions were tied directly to them.

As promised I returned to the client with my report and recommended course of action, which included radical adjustment of her portfolio to meet her needs for income and substantially lower risk. I presented our fee-based asset management program as an alternative, based on it’s objectives of protection of principal and income production.

At this point her son interjected and declared another financial advisor was unnecessary and instead, he would help her. (This from an individual who previously stated he had no specific financial expertise and had himself lost over 50% of his investments in the Bear Market).

We parted company on good terms but I could only wonder what would become of this fine woman who had done so many positive things throughout her life but was now dependent on the advice of an incompetent and unethical financial advisor, and a son who was well intentioned but as financially illiterate as she.

 

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