The Investment Scientist

Government Retirees Beware: Your Financial Advisor May Not Be Your Friend

Posted on: January 14, 2012

I have a client (Let’s call him John) who retired 12 years ago from the government. He had a pension, and he had the option of taking out a lump sum of about $800k or drawing a monthly check of more than $4,400 per month until death.

Lost Retirement Money?

John took his options to his financial advisor from Smith Barney (now absorbed into Morgan Stanley Smith Barney.) Guess what the advisor recommended? He recommended that John take out the lump sum and let him manage it instead.

By the time John came to me for a second opinion financial review four years ago, his retirement account had only $265k left. John decided to become my client, and I have been able to restore some of his money, but not all.

Recently, I met a group of government employees who are on the cusp of retirement. All of them are looking for some help, and naturally they look to those whose names they hear a lot – namely, Wall Street firms that have huge advertising budgets.

I shared John’s story with them because I want them to learn two things:

  • Don’t ever give away your government pension. You have the full faith and credit of the US government standing behind your retirement, and you are getting 6% to 7% return on your money. There are no other investments out there that are better than this.
  • Don’t ever trust a Wall Street firm. Their financial advisors have only one goal in mind: to separate you from your money. If you need help, go find an independent fee-only advisor.

Here is how I help John. I manage his money prudently with a 40/60 portfolio. I meet with him every quarter to make sure his spending is balanced with what he has now. I also discussed with him using single premium immediate annuity to stretch his wealth.

As for John, he finally has peace of mine that someone putting his interest first is watching over his retirement security.

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3 Responses to "Government Retirees Beware: Your Financial Advisor May Not Be Your Friend"

Many of those big name guys have a product of the month. The big firms package IPOs, second issues, and other in house products, then management has a sale on those items. It’s not as bad as Bernie Madoff, but it is still designed to sell the shares, raise the money for the public offering, and if the small investor’s portfolio goes down (which often happens with IPOs and re-issues)…that’s the price of progress. The company is flush with cash, the brokerage met it’s goal for the client company, the sales staff is good, and guess what? The little guy is holding the bag. He may have many more shares but he must wait for the market to decide if he is successful.

I don’t know the specific details of Michael’s example, but from 2007 through 2009 you could easily lose 50% of your portfolio without the help of a salesman. All you had to do was “stay the course” and the market tide would wash you away. If someone starts grasping at straws at that point, looking for that one thing to save him, that’s a calamity waiting to happen.

I’ve haven’t had much success with products or investments recommended by the big boys. Usually, they have an agenda of their own and that may not be in my interest. My humble successes have happened because of doing my homework and finding things that have the ability to succeed and a trend wave to ride. I also like to buy things that I like.

I traded my savings bonds for gold in 2003. Bonds sucked, in an unstable political world gold should go up. I have sold all the gold now. When every other ad on TV is for gold, it’s probably time to sell. If it were really going to double again the gold broker would be better off to hold than to sell for a 5% fee.

I started buying F in late 2008. I don’t think we or the world will ever go back to walking and Ford is positioned to move ahead while other American makers have government considerations beyond CAFE standards.

In the last 2 years I have purchased distressed real estate, fixed the problems and rented the homes. The principle is protected by the intrinsic value of the property, and unlike gold, the residents send a check every month. If poeple ever go back to work in big numbers inflation should make for some very heady LT capital gains.

I also have the IRAs and 401Ks that most of us acquire. Those are either institutionally managed or I have a finacial planner that manages one account. Because of the structure of those investments, they don’t do as well as my stocks, gold, and real estate have done. I leave it there anyway. I could have a bad day.

They say off shore is where all the profits are. Maybe, but with exchange rates, rules on foriegn sales, timeliness of execution, and other complications it seems too hard to understand to me. So, I stay domestic and look for something poised for success. And, I don’t play with all the chips on the table. Even in a game you understand there are still surprises and too much money on any one thing is bad strategy.

My advise? If you don’t want to learn about your finances, hire someone. Underline hire. The guy with the big company has an agenda. The % of the pie guy does too. He would like us to live on social security while he keeps making the pie grow. The bigger the pie the bigger his slice. What’s the need for wealth if all you’re allowed to use is social security? Hire someone with specialized knowledge to manage those affairs.

Ron,

I can agree with most of what you said. If you spend one hour each month on your personal finances, either to learn something or to take care of your own finances, you will be twice as wealthy as otherwise. That’s according to Thomas Stanley, author of Millionaire Next Door. However, for many folks who have no interest, that’s one hour too many to spent on finances.

As for hiring a financial advisor, alignment of interests is extremely important. And on that, you can be sure a FA from a major Wall Street firm will not have an aligned interest with you. Their bonuses are dependent on them making money off you, not for you.

Michael

25 years ago, I didn’t know what I know now. If you had this blog back then and the internet was this good back then, it would have saved me a lot of time learning. We should be thankful to have the tools we have today.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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