She’s an intelligent woman, apparently well to do and living in a high rise condo in Florida. Retired, active way of life, involved in many activities with her friends, giving of herself to her church, community, and local charities. She did everything right, at least appropriate for her creation, time and place in her life.
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She was the loving wife of an automobile company executive. She kept a gorgeous house, entertained lavishly, and hosted parties for her husband and his business colleagues. She was always there for the kids, active in the community, simply speaking, she lived the American dream. But under the surface was fear, uncertainty, and pain. What’s happening here, how did it occur, and can she save herself? Why is she now living a nightmare, through no fault of her own?
There are various reasons, for her life was and is complex. But high on the list is that she relied entirely on her husband to create all of the financial decisions during their years together. After all, he was an MBA and a financial wizard. He ran the provider’s financial division and had a very successful career. But he did something neither depended on, nor intended for.
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He died but left her with a sizeable pool of investment resources, life insurance, and a nice residence, apparently more than sufficient for her to keep a comfortable way of life. But there were two crucial things she lacked. She didn’t have a high financial I.Q, and she didn’t have a trusted financial adviser. Having one of those two could have protected her, but sadly having neither contributed to some of unwise decisions, which finally resulted in severe financial difficulties later.
After the death of her husband she moved to Florida, purchased an upscale condominium, and developed new friends and activities. Because her pool of resources was ample she managed to draw income from it to support her lifestyle. Her financial adviser, whom she had kept because of her husbands relationship, shortly advised her to make changes in her portfolio, changes he stated could be beneficial for her. With her agreement, but also with lack of comprehension, her investment portfolio soon started to resemble the flying NASDAQ and technologies indices of the late 1990’s.
Provided that the economy was going up, everything seemed fine. She had been making substantial monthly withdrawals from her portfolio, and her balances continued to grow. But then, things started to go badly. The market started to swoon in 2000 and her accounts started to decline precipitously. She started to worry but her adviser said, “Oh, do not worry honey, the industry always comes back in the long term. I’ll keep a close eye on it for you.” And every now and then during the next few years, the market did bounce back, at least temporarily.
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But it did not return to its previous level. She chose to trust her adviser, and her balances continued to drop value. Over the next three decades, with continued withdrawals and market declines, she dropped over 50 percent of her money! By the time I met her in late 2002 she was a nervous wreck, and did not know where to turn. Due to her new found distrust of financial consultants, she brought her son along to our meeting. After a lengthy discussion I agreed to examine her situation and at another meeting, provide a complete written report, including recommendations to help turn things around.
Upon careful evaluation two glaring details jumped out at me. First and most obvious, her investment portfolio was completely unsuitable for her needs and life situation. Her major objectives were security of funds and supplemental monthly earnings, but her portfolio consisted chiefly of telecommunications and technology stocks and mutual funds. But there was more. The expenses of her portfolio were egregious! The financial adviser, and I use the term loosely in this instance, had “diversified” her portfolio across six distinct front end load (commission) mutual fund companies, although each company had tons of its own branded funds.
This had the unfortunate result of costing her much higher commissions than necessary. You see, load fund companies have what are known as breakpoints at different investment levels. For instance, the load could be 5% on the first $25,000 spent, 3% on the next $75,000, and just 1% over $100,000. By spreading her account over so many finance companies she did not obtain the full advantages of these reduced loads from some of the companies. Therefore her overall commission costs were much higher than otherwise would have been the case. Naturally, her adviser profited from these higher loads because his commissions were tied directly to them. As promised I returned to the customer with my account and recommended course of action, which included extreme modification of her portfolio to satisfy her needs for income and substantially lower risk. I introduced our fee-based asset management program alternatively, based on it’s goals of security of principal and income generation. At this time her son interjected and announced another financial adviser was unnecessary and rather, he would help her.