Top 10 Mistakes When Planning for Retirement
#4 The Menace of Bad Financial Advice
by David D. Holland
Bad advice can occur when an adviser recommends a product, investment or strategy that is unsuitable for the client. I will give you an example. “Hank” told me that he would need $20,000 each year from his $400,000 portfolio, whether it performed well or not. At the age of 70, Hank was mostly concerned about outliving his money. He didn’t want to take a lot of risks, and leaving a large inheritance wasn’t a priority. Hank’s adviser, however, had invested his entire portfolio in just 75 individual stocks. A repeat of the 2008 stock market crash could easily wreck Hank’s chances of a reliable income stream.
Why would an adviser tell a 70-year-old, who is in need of income, to put his entire portfolio into stocks? I only see three possible explanations:
- Inexperience/Ignorance – Getting an insurance or securities license and offering financial advice doesn’t make someone an expert. Some advisers haven’t been through a bear market, or simply don’t understand the dire consequences of drawing income from a hemorrhaging portfolio.
- Restricted – When an adviser can only recommend one company or just one type of product or service, his motivation can be selling instead of advising.
- Biased – When we met, Hank’s account had been invested by a firm that only manages investors’ funds using individual stocks and securities. The firm is very biased toward their approach with little consideration of safer alternatives that might be more appropriate for investors like Hank.
How to Avoid Bad Advice
- Find an experienced adviser with respected credentials.
- Determine how much latitude the adviser has when making product
recommendations.
- Ask if he is acting as a fiduciary (the answer should be yes or no).
- Ask the adviser to show you how his recommendations respond under
both favorable and unfavorable market conditions.
If I do say so myself, that is some very GOOD advice! Next week, we will look at The Consequences of High Investment Fees.
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