Date: November 29, 2021

The One Mistake Jack Made that Ruined his Retirement

They say we learn from our mistakes, but when it comes to retirement, the lesson may come too late to be of any value! With that in mind, here’s an opportunity to learn from someone else’s – a cautionary tale about the importance of a second opinion and switching financial advisors.

An investor, who I’ll call “Jack,” was a mid-level manager at a large Fortune 500 company. He liked his company but admitted that it didn’t offer much advice on how to navigate important decisions about his personal finance.

Jack instead relied on a financial advisor recommended by a group of his coworkers. That advisor worked for an investment firm that managed client accounts. Unfortunately, the financial advisor was more interested in lining his own pockets than in serving Jack’s best interest. Unaware of the situation, Jack never thought about switching financial advisors, and unfortunately, the results were catastrophic to him and his family.

Even more unfortunate, stories like Jack’s happen all the time!


The Situation

Jack was in his early 60s and faced some important decisions about Social Security, his 401(k), and other financial matters. He was still working and didn’t plan to retire until age 68. His financial advisor made a series of recommendations that cost Jack greatly, including:

  1. Rolling over the current balance of his 401(k) to an IRA that compensated the financial advisor’s firm for bringing in new business. The IRA paid the financial advisor a commission and other ongoing compensation. For example, the advisor was compensated for the amount of Jack’s money invested in the IRA, regardless of whether it was best for Jack or not.
  1. Taking Jack’s Social Security benefits early at age 62 and funneling the money directly into a managed investment account with a random, third-party firm that just paid Jack’s advisor an ongoing fee. Jack never met the firm nor had any ongoing contact. The manager made all the buy and sell decisions for the account, without consultation or explanation.
  1. Enrolling Jack in a series of variable annuities that featured high fees and high surrender charges. It seemed like every year or so, the financial advisor would switch Jack to a different annuity, resulting in a number of fees.
  1. Convincing Jack, with his wife’s consent, to name a trust as his sole beneficiary. The trust would inherit Jack’s estate, including the death benefit from his life insurance policy. The trust was quite complicated, and Jack later admitted that he didn’t really understand its provisions. The financial advisor was the trustee and had sole discretion over the fund’s administration.

The problems are obvious now, but as Jack was to subsequently discover, his financial advisor was feeding him bad advice, and at the time, he had no reason to question his advisor and never thought about getting a second opinion, something every investor should do.

To start with, the advisor was constantly churning Jack’s high-commission investments without regard to Jack’s best interests. As Jack came to realize, he was spending far more on commissions than he was earning in investment return. His financial advisor never gave specific reasons for his advice, either orally or on paper. Jack, whose job put unusual demands on his time and energy, just assumed that the advisor had everything in hand. Assumptions can be very dangerous.


Schedule a no-sales conversation with the team at Heritage Capital and get the second opinion you deserve!


The Problem

Like a lot of investors, Jack didn’t understand the value of having an independent, fee-only, fiduciary financial advisor to act in his best interests. At Heritage Capital, our team of fiduciary financial advisors has a legal obligation to:

  • Act in our clients’ best interests.
  • Receive only reasonable compensation.
  • Seek to ensure that all transactions receive best execution.
  • Refrain from making materially misleading statements.

These responsibilities are about to get even tougher with regard to ERISA and IRA plans, after the Department of Labor’s latest guidance on fiduciary conduct.


The Lesson

Unfortunately, Jack passed away at age 67. His wealth had decreased by 40 percent in his last five years. To make matters worse, his financial advisor has not released any trust assets to Jack’s widow or their children.

What Jack needed was a second opinion from an independent financial advisor who adhered to best practices on behalf of clients. Had I been Jack’s financial advisor, I would have taken certain steps to protect him, including:

  • Providing written acknowledgment of my fiduciary role under ERISA and IRS Code rules.
  • Providing a written disclosure explaining why a retirement plan rollover is in the client’s best interests.
  • Refraining from churning Jack’s accounts.
  • Refraining from setting up a trust that was not in the best interests of Jack and his family.
  • Scrupulously giving Jack advice that was honest and complete, not self-serving.
  • Avoiding conflicts of interest.

I would not have recommended investments with high fees when low-fee alternatives were available.

I would have carefully reviewed with Jack the pros and cons of annuities and avoid those that had ridiculously high fees. I certainly would not churn Jack’s annuities.

I would have avoided any trusts that did not serve the best interests of Jack and his beneficiaries. Trusts can be complicated and require a thorough explanation of the how they work, why they are beneficial, and how much they’ll cost.

I would have reviewed with Jack how best to use his Social Security benefits. In his particular case, I can see no reason for him to start receiving his benefits at age 62, since he didn’t need the money and it sentenced him to minimal payouts for the remainder of his life. Certainly, using his Social Security benefits to fund a separate account under the financial advisor’s control is a huge decision that requires the strictest safeguards.

Jack’s is just one story, but it illustrates the importance of using a financial advisor who truly works for the benefit of his or her clients. If you are not completely satisfied with your present advisor, I urge you to get a second opinion. Best case scenario, a second opinion can validate you’re on the right track. On the other hand, it can help you identify if switching financial advisors is necessary. Not sure how to switch financial advisors? Check out our new guide.

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Paul Schatz, President, Heritage Capital