FinancialAdvisor #RetirementPlanning #Annuities #InvestmentAdvice
Understanding the Situation
Your concern about your parents’ financial advisor taking advantage of them is valid. With over $4 million in retirement accounts, it’s essential to ensure that their hard-earned savings are being managed effectively and in their best interest.
Identifying Red Flags
- High Fees: The financial advisor’s 1% management fee on your parents’ funds may seem reasonable, but it’s crucial to understand if there are any hidden fees or commissions.
- Annuities Push: The continuous push towards annuities, despite not aligning with your parents’ financial needs, raises a red flag. Annuities often come with high commissions for advisors.
- Lack of Transparency: Your parents’ reluctance to inquire about the advisor’s compensation structure or explore other compensation options indicates a lack of transparency.
Questioning the Motives
Before assuming any wrongdoing on the financial advisor’s part, it’s essential to consider if annuities could genuinely benefit your parents’ financial situation. While annuities provide a steady income stream, they may not be the most suitable option for individuals with sufficient retirement savings.
Approaching the Concerns
- Open Conversation: Engage your parents in a calm and open conversation about your concerns. Express your worries about potential conflicts of interest and emphasize the importance of transparency in financial planning.
- Educate Yourself: Research annuities and other investment options to have well-informed discussions with your parents and the financial advisor.
- Seek Second Opinions: Encourage your parents to seek a second opinion from a different financial advisor or consult with a fee-only advisor who doesn’t earn commissions on product sales.
Conclusion
In conclusion, your suspicions regarding your parents’ financial advisor are valid, given the circumstances. It’s crucial to address your concerns with your parents and explore alternative options to ensure their financial well-being. By approaching the situation with care, education, and open communication, you can protect your parents’ interests and secure their financial future.
You can’t force your help upon them, nor can you take control of their finances. The best approach might be to 1) ask them if they’d like to talk finances with you, and 2) ask them to explain why they’re going with annuities, and possibly give you an opportunity to understand or counter.
You can also read up on fiduciaries in the wiki and see if you can explain that concept to your folks.
Yes, the “salesperson” (not an advisor) will make a very large commission. On 2M that commission might be approaching 200k. Of course it is a horrible idea. Why do your parents need any advice at all? If income greatly exceeds expenses stick the funds in an S&P 500 fund and be done with it. No need to pay more than 0.03%
Finance nerd here – this is a fairly typical situation, especially when people are as old as your parents are. They want assurance that the value of their money won’t go down (I’m assuming this is a fixed annuity situation, probably a fixed immediate annuity if I had to guess, judging from the large sum of money).
They also want to make sure they don’t outlive that money, and an annuity makes that unlikely, and in some cases, impossible.
**I will say that unless your parents are big spenders, a $4M annuity is fairly large amount, and it is definitely possible that the advisor pushed them for a larger amount for the higher commission, because it absolutely is true advisors receive larger commissions for annuities when compared to securities products.**
It sounds like an annuity is a terrible idea for them. Could you get them to agree to talk to someone else for a 2nd opinion – get the details on the annuity and take it to a financial advisor who works on fee only? See what they have to say about it. He or she could probably explain exactly what your parents are paying in commission, fees, etc. Good luck. I hope they listen to you.
Fire the advisor, stat. His commission-hungry advice is bleeding your parents dry.
There are too many ifs here to say anything for certain. A 1% fee for AUM is very common for a financial advisor—that’s not a “scam”, per se. Doesn’t mean it’s necessary, but most financial advisors would charge a similar fee.
The annuity part is more questionable, but it is also not an unreasonable strategy, nor is it evidence of any wrongdoing. With an estate the size of theirs, a case can be made for taking a portion of it and locking it into a product that will provide a guaranteed income for life and is not subject to the uncertainty of the market. Yes, there are high fees involved, but it is also a common practice, and an annuity can play a role in an overall estate plan.
I have no plans to do it now, but I have considered an annuity at some point. That is because my wife will likely outlive me by 15-20 years and she sucks at money management. She would do much better with a regular monthly payment than having to manage a portfolio. I am just using that as an example.
It sounds like there are two questions: are they being taken advantage of by an unscrupulous advisor, or are they being given recommendations/making decisions that you disagree with?
You haven’t presented any evidence that strongly suggests intentional wrongdoing by the advisor. (Doesn’t prove the opposite either, but what have described are conventional practices).
Whether they are good ideas is another question. It’s fair for you to be concerned and to ask questions—I know you are concerned about their wellbeing. But you also haven’t presented any qualifications that you have in financial management or estate planning.
You say they don’t want to discuss this with you, so that makes it challenging. But maybe it’s because you are approaching them more from a point of criticism?
I don’t know—I’m just trying to present some general alternate explanations that might provide different perspectives, and which may or may not be relevant.
Find out more information about the exact annuity they are getting themselves into. Absolutely there are some awful annuities out there wouldn’t make sense in their situation. Many variable annuities cost upwards of 2 even 3% a year.
There are some annuities that might work though. If it’s a multi year guaranteed annuity, that’s essentially a CD through an insurance company rather than a bank. 3, 5, and 7 year rates are smoking CDs right now. At the end of the term they get their money back just like a CD. Advisor probably makes roughly .5% a year up front- so less in total comp.
A structured annuity might be another thing he’s pushing. These are essentially index investing with a downside buffer. No fees typically but they won’t collect a dividend in the index. At the end of the term they get their money back. This is probably less likely, as 50% of their assets in index equities is a stretch but it’s another possibility.
Basically, all annuities aren’t bad. They cater to conservative investors and could be exactly what your parents want.
>Could annuities actually be a good fit for my parents situation?
No
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>Is there any better way to approach my parents about my concerns they are being taken advantage of?
Not really. There’s the adage, you can lead a horse to water, but you can’t make him drink. They don’t see it as a problem, why would they listen to the solution?
And because they’re your parents, they think they’ll always know better than you. Speaking from experience. As someone whose dad loves buying fake rolexes, doesn’t matter how many times I tell him they’re fake, nobody’s selling real rolexes at the prices his friends are offering him. But everytime I go visit, there he is with another one.
At the end of the day, it’s their money, and as much as you want what’s best for them, it’s ultimately their choice to make.
I agree with others, there’s absolutely no reason that they need an annuity with the pension and SS covering all of their usual expenses. And the ~~advisor~~ salesman is definitely making absolute bank on commissions and assets under management. They should absolutely part ways with the salesman and cancel the plans for the annuity if able at this point. Unfortunately, it seems like they are not willing to listen to your concerns about this and you need to make a relationship decision as far as how aggressively you are willing to push this conversation and risk upsetting family.
The approach I would try to take is to run the numbers yourself on what their portfolio would be worth if they were in a conservative mix of stocks and bonds for their age and just see if they are willing to look at the performance of their assets less fees of the “advisor”. I wouldn’t try to speak in the abstract, ie, “you could buy municipal bonds” or in future terms “this portfolio is projected to return x”–I would speak in past terms, “this is what a conservative portfolio would have done, this is what an all bonds portfolio would have done, this is what the portfolio your advisor put together has already cost you, why would you trust him going forward?”. I think if they see results like their portfolio is lagging a 50-50 stock-bond portfolio by 30% or more over 10 years they may be willing to make a change going forward. If you speak in the abstract or in future terms, you are asking them to trust you or the advisor to make projections and are less likely to be successful in your arguments.
Edit to add: I have a coworker who gives the impression of being financially proficient who is happy to pay the crazy high fees of Edward Jones because he believes the performance is worth it. I don’t think he ever actually compares his performance to any indexes, he just sees things like, oh, my portfolio is up 10%, never considering that the index may be up 25% or more. Your parents may well be in this same boat: even if they are aware that the fees are high, they may believe it’s worth it if they are never comparing performance to indexes or reasonable self managed portfolios.
They all are. They are incentivized to sell you risky financial products. Then they get a cut for doing so. They do not care much about performance, they just care about AUM, Assets Under Management. They are basically just sales people
The first thing you need to have them clarify with the “advisor” is whether the advisor is acting in a fiduciary capacity. Based on the annuity recommendation, the answer is likely no. From there you can discuss with your parents why they need someone acting in a fiduciary capacity that has their best interests legally prioritized.
A 1% AUM is not terribly unusual though high for when the amount is $4M.
>Every time my parents meet with their financial advisor he is always pushing them toward annuities.
Yes at $2M of $4M he is giving them bad advice. They are set even if they have a pretty high spend using treasuries alone. Sounds like an insurance salesman and not even a fiduciary advisor. With $4M in their 70s your parents do not need to be trading off returns for perceived security.
Your parents seem to want to remain “investor illiterate” and hand over their wealth to someone else to worry about so they can forget about it. Someone they apparently haven’t vetted very well. This rarely ends well.
I feel your pain. I am in the same boat. My parents enlisted Edward Jones to make them a CD ladder, which my sister and I could have done. He left them very little money for an emergency….
It’s your parents’ money. It’s their decision if they want to hire a financial advisor and their decision if they want to purchase an annuity.
>I have also read and told my parents that annuities typically offer very high commissions to advisors.
And what did they say? Are they actually asking for your advice?