24 yr old son helping mother with Investments

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Soccerman
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Joined: Sun May 12, 2013 2:13 am

24 yr old son helping mother with Investments

Post by Soccerman »

First time poster here, long time lurker. Appreciate all the thoughtful insight. I am a boglehead indexer, however, my mom believes that her advisor has her in investment vehicles that are much better.

She is 57 now and currently still is working and has a very nice retirement sum already in place. Her whole portfolio is with this advisor who charges the 1% net asset standard fee She has a MetLife Variable Annuity Series L through the advisor. She was convinced by her advisor that this was a great purchase because she told him that she wanted guaranteed income in retirement.

I have done a bit of research on this type of annuity but it seems very difficult to decipher any sort of real answers. For example, all of the current fees, why/how they can guarantee a 5% annual increase (hypothetical value), ability to cash out, commission the advisor took when sold, expense ratios on the funds (I know one of the funds he put her in is the Invesco balanced risk allocation Class C, which I believe has a fee around 1.99!!!!), surrender period, etc.

This Variable annuity accounts for nearly half of her portfolio (low six figures)

The other half (low six figures) is invested in private REITs that he said rarely come around (bought in mid 2009) and are close to coming due I believe. In looking at the paperwork it shows that the returns on them annually have been 18% plus with some hitting 22-24%. I told my mom who is very risk averse that in order to have earned that return she had to have taken high risk(basic principle) seeing that the market is smarter and more efficient than us all. She is still convinced by this advisor that he was correct, even though I attribute that success to luck.

I will be meeting with this advisor and my mother, because I hopefully convinced her that she is being attacked by all kinds of fees eating up returns and she is taking unnecessary risks through an advisor who does not have her best interest. I would then move her to Vanguard where we could easily set up a nice portfolio that she is comfortable with.

What questions should I ask this advisor?

Any other thoughts or concerns are greatly appreciated.
ieee488
Posts: 1989
Joined: Thu Dec 10, 2009 7:57 am

Re: 24 yr old son helping mother with Investments

Post by ieee488 »

Do you have annual statements from her holdings?

If so, you can compare her returns against the Vanguard Total Stock Market Index VTSMX for the same period of time.
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Snow Boarder
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Re: 24 yr old son helping mother with Investments

Post by Snow Boarder »

I am by no means an expert when it comes to annuities. They sure do come with a lot of fees though.
Your post was lost at the bottom so I thought I would bump you to the top to get some expert advice from the forum. 8-)
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Watty
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Re: 24 yr old son helping mother with Investments

Post by Watty »

What questions should I ask this advisor?

If you want see the advisor squirm ask if they have a "fiduciary responsibility" (Google this) to do what is in your Mom's best interests.

There problem is that there are real paid advisors that do have a "fiduciary responsibility" to their clients and they would never have put your mom in those investments. Unfortunately the laws allow sales people to pretend to be advisors and put people into terrible investments.
For example, all of the current fees, why/how they can guarantee a 5% annual increase (hypothetical value),
It is not impossible that you mom got lucky and bought the annuity long enough ago that the falling interest rates will have helped her come out OK since seven or eight years ago most insurance companies would not have anticipated that CD's would be earning 0.00001% today.

The problem with figuring this out is that intentionally make the annuities hard to understand and it is often not clear just what they are talking about when they say 5%.
WHL
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Re: 24 yr old son helping mother with Investments

Post by WHL »

I'm doing the exact same thing with my parents. It's so far been about three months of discussions, getting her to read here, oblivious investor, Boglehead books, etc. but I think they're about ready to switch everything to Vanguard.

They're at EJ and their high 6 figures account is 75% in variable annuities and 25% actively managed mutual funds. They're getting freaking devoured in fees :(
pkcrafter
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Re: 24 yr old son helping mother with Investments

Post by pkcrafter »

Soccerman, I think you're going to have a very tough time with this advisor. These guys are trained to dodge tough questions, and your mom seems to have confidence in him. That being said, the portfolio is very high risk, at least the half in REITS. We normally recommend about 15% of equity in REITs, and liquid REITs at that. The annuity is a separate problem, and we don't know how that's invested, but that is the first thing you can ask.

The best you can do is figure out how to get your mom to listen to you and to see another advisor.


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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Watty
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Re: 24 yr old son helping mother with Investments

Post by Watty »

The best you can do is figure out how to get your mom to listen to you and to see another advisor.
By advisor I am sure that is meant to be one that she is paying by the hour that is willing to give a clear written statement that they are not getting any other compensation.
indexmeasap
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Re: 24 yr old son helping mother with Investments

Post by indexmeasap »

I am in a similar boat. See my earlier thread.

http://www.bogleheads.org/forum/viewtop ... 2&t=105535

As far as deciphering any sort of real answers, your mom "should of" had everything disclosed to her by the adviser (I am assuming nothing was). Get the policy number, and contact MetLife along side with your mom. A very smart (you have to be in order to understand annuities) MetLife rep will explain the the fees (M&E, income rider, sub account fees), surrender period and charges and how the "guaranteed 5%" works. The 100 plus pg. prospectus should be available on MetLife's website as well.

Ask if you can withdraw free amounts each year? (you might be able to surrender around 10% of the original contract value penalty free, ask about tax consequences - if mom is in high tax bracket you could 1035 exchange the free amounts to a cheaper annuity)
Ask if you can eliminate the rider charge (if you have one)?

Annuities are not held to fiduciary standards, which apply to registered investment advisors (RIA). I am guessing when the advisor sold your mom the annuity, he was acting as a broker/dealer (i.e. salesman) NOT as a RIA. Broker/dealers are held to a much lower standard of "Suitability" - see link on federal rules governing annuities, check your state rules to see how they specifically apply.

http://www.naic.org/documents/committee ... idance.pdf

Questions to Ask the advisor:
1. (as mentioned earlier) Were you acting as fiduciary or broker/dealer when you sold my mom the annuity? Please explain this to my mom and I and why this important.
2. What was your commission on the sale of the annuity?
3. What would have been you commission if you sold my mom low cost, broad base index mutual funds instead?
4. Ask your mom in front of the adviser " Mom, have you been reasonably informed of various features of the annuity, such as the potential surrender period and surrender charge, potential tax penalty if the consumer sells, exchanges, surrenders or annuitizes the annuity, mortality and expense fees, investment advisory fees, potential charges for and features of riders, limitations on interest returns, insurance and investment components and market risk?"
5. If Mom says no, ask the advisor if he informed your mom of the features (yes/no)? (don't let him dance out of the yes or no question, get him to acknowledge that he did not)
6. Did you obtain the following Suitability information about my mom: annual income, financial situation, financial experience, financial objectives, intend use of annuity, financial time horizon, existing assets, liquidity needs, liquid net worth, risk tolerance and tax status? Ask to see a written copy of this information that should of been made prior to the sale in 2009.
7. How do you ensure that you and are in compliance with NAIC Suitability in Annuity Transactions rules?

If the advisor failed to inform your mom about the various features of the annuity or failed to obtain her suitability information, you might have case against the advisor. Ask to speak with advisor's manager - you might be able to get out of the policy without paying a surrender fee. If nothing else, these questions should reveal the advisor's true intention, which will hopefully empower your mom to switch to a low cost custodial (with your guidance). It might help to record the meeting, take your smartphone with you.

Good Luck
pkcrafter
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Re: 24 yr old son helping mother with Investments

Post by pkcrafter »

Watty wrote:
The best you can do is figure out how to get your mom to listen to you and to see another advisor.
By advisor I am sure that is meant to be one that she is paying by the hour that is willing to give a clear written statement that they are not getting any other compensation.
Yes, you're right, I should have been more specific. There are advisors and then there are good advisors.

Choosing an advisor--

http://investingroadmap.wordpress.com/2 ... n-advisor/

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
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