AS a retiree, imagine that you could spend the better part of your day in a cosy, air-conditioned lounge, with BBC News or CNN on constantly, and free beverages and biscuits – sometimes even hot canapes – on demand. Afterwards, you can, at your leisure, head for the carpark – to your complimentary allocated VIP parking.
All that can be yours, if you have amassed an amount of wealth that wealth managers would have an interest in. The perks vary according to how much of your private stash you are willing to put down as a deposit, or how big the financial instruments you are willing to buy.
The freebies have been enticing enough for many retirees to pull all their money out of their regulated pension plans and sink them into all sorts of other investment vehicles, under the guidance of a financial advisor or wealth manager.
Recently, we were asked to review the portfolio of one such retiree. She had no income other than that coming from her pension. She enlisted our help because she could hardly comprehend what it was exactly that she had invested her hard-earned money in, and as a result was under the impression that she had made money.
What usually happens when a retiree like her decides to invest her pension funds is that the wealth manager will first rate her based on her risk profile.
As a rule of thumb, if a person is young and still employed, he would be seen as being able to tolerate much more risk, since he is still capable of earning. Conversely, a retiree would be seen as being more risk-averse, as his advancing years require that investments made should give him a safe, secure income more desirable than risky, win-or-lose-it-all ventures.
As a client, the reports you receive from your financial advisor or wealth manager should clearly stipulate what exactly you have invested in, the exact day and year of that investment, the fees you paid to make that investment and what your investment position is today.
Such a report should run from the moment you make that investment and then be updated monthly (or quarterly), and annually.
In the case of the retiree whose portfolio we were reviewing, we were startled to read that her report had no definite time periods, so it was difficult even to calculate how well her investment yield was so far. There was no statement of the fees charged per investment product either. On top of that, she was rated as being “highly tolerant of risk”.
Her funds had been invested in structured products, which perhaps some savvy investor would be familiar with. But she was not that savvy an investor; when we tried to understand her knowledge about structured products, she kept saying, “We earn 20% a year on this product.”
The actual investment, however, had lost 47%! Seen in this light, something clearly did not add up.
This retiree’s exposure to the structured products was nearly 17% of her portfolio, and as there were no specified time horizons for her, her investment could have been an even larger portion of the entire portfolio. Now, by any standard, holding a single position of 17% would be considered extremely aggressive.
From the report, it is evident that she is not getting a return of 20% per annum, whatever it is she may have understood initially. When we quizzed her further on her investment, she was not even sure if she had to pay any fees at all. Many products do charge at least 5 cents for every dollar invested, an arrangement which would mean that her starting investment level was 95 cents. She also did not know what her financial advisor or wealth manager’s further yearly management fee was. It is, therefore, not surprising that she had no inkling if she was charged anything should she decide to sell off the investment.
Our survey of industry players shows that the cost of investing in structured products can range anywhere between 5% and 15%. And this does not include the annual fees to be paid to the wealth manager.
What was most mind-boggling about her investment was that, it was in a product that had a shelf life of one month. On maturity, this short-lived product was converted into a listed stock. In short, upon conversion, the terms of her initial investment would expire and she would then be left with only the dividends (if any) from the listed stock.
Casual observers of most bourses know, stocks today yield anywhere between 2% to 5%, not 20%. So, this retiree is now left with a tiny yield on her investment, amid a huge paper loss.
Worst of all, she had paid a huge service fee upfront without even realising that she had done so.
The upshot for her is that, where she once held a month-long, high-risk investment, she now holds something far less promising in the long term.
Looking at her overall portfolio of investments, and remembering that she is a retiree, one can only describe her financial advisor or wealth manager as being completely heartless.
Consider today’s realities: raging inflation and rapid development are sending the cost of living sky-high, leaving many retirees struggling to make their retirement funds last the course. Add this, to the relatively early retirement age in many countries, and the reducing extended family support that used to happen.
In all this, we did not tell you till now that she is 75 years old and a widow. She is now resigned to having to wait out a business cycle before she can even hope to add value to her investment portfolio. But time is not on her side.
Granted, that is a risk that most investors have to take, but could those advising her not have taken into account her most pressing needs and assign an appropriate appetite for risk, given her circumstances?
What’s more, given her very highly rated risk profile, her wealth manager refuses to change her risk rating, otherwise the wealth manager would be forced to sell off her listed stock (which means the portfolio will take a real loss of 47%).
Have wealth managers learnt nothing from the creative derivatives that led to the Global Financial Crisis in 2008? Why are bankers continuing to design, in-house, financial products that they then sell to unsuspecting customers such as retirees who really do not understand what it is they are really investing in.
It is easy to say, “Well, it’s buyer beware”, but we can imagine the all-too-common scenario in which a persuasive financial advisor, who retirees trust and assume they know what is best for them.
What any potential buyer of such creative derivative product should be asking is: How much commission is this persuasive person going to get if I buy what he wants me to buy?
What might really surprise you is that many studies have been conducted on those who dupe others into unsuitable investments. Cases are abound of advisors who suggest that the elderly sink their funds into an aggressive product and, of course, products that pays the advisor high fees.
Is there no solution of finding a way to protect these retiree investors? Should there be, for example, a watchdog to breathe down the necks of these financial advisors?
Suggestions on a postcard, please! The situation now is such that it would be unethical to turn a blind eye to retirees, even if you believe that an individual is fully responsible for how he chooses to invest his money.
© CORSTON-SMITH ASSET MANAGEMENT SDN BHD 2014