Pete the Planner: How to help dad overcome inappropriate investments

Dear Pete,

I’ve started to look through some of my elderly father’s investments, and I’m finding myself in shock over some of the products he has been sold. Between high investment management fees, long surrender periods on annuities and inappropriate levels of risk, my head is spinning. What do I do? Do I file a complaint against his adviser? Do I confront his adviser? I’m not even sure how to talk to my dad about it without really upsetting him. Any advice you can give would be really helpful.

Stephen, Fishers

Learning that a loved one received anything but the best financial advice can be a gutting feeling. If you feel like I felt when I first experienced this, you feel angry, sad, resolved and even a little bit guilty. The challenge then becomes staying as objective as possible, so you can take corrective actions and not over-corrective actions.

You raise three specific issues in your email, but I think there’s a fourth unspoken issue that lies at the heart of the entire situation. Let’s examine your discoveries in the order you listed them, and then I’ll share my bonus concern with you.

No one likes being charged more than necessary for anything, never mind investment management. A few different factors impact the appropriateness of an investment fee. Typically, but now always, if a person has less than $1 million to manage, the investment fee will be equal to at least 1% of assets annually. The fee then generally decreases to 0.75% for asset totals between $1 million and $5 million. And typically, anything over $5 million is subject to a 0.5% management fee. By no means is this gospel, but it is a very common fee schedule.

I have a gut feeling your dad is being charged in excess of 1.5% annually, based on the other information you shared. For me, it’s pattern recognition. When I consider your three complaints together, I just know his adviser is charging him at least 1.5%.

As for the long surrender charges on his annuities, you need to consider what he received in return for those long surrender charges. A surrender charge is a fee levied to discourage an investor from withdrawing the entirety of his or her investment before the issuing company (insurance company) recoups whatever costs it incurred during the sales process. This includes commissions to the salesperson as well as potential bonus deposits to the investor.

Generally speaking, when the surrender charges are less than five years, the agent didn’t get that high of a commission and the investor likely didn’t receive significant deposit bonuses. When there’s a long surrender period, the salesperson received a relatively high commission, and/or the buyer received a bonus deposit as part of the buying process.

Your third complaint is as scary as any of them. When a person holds investments that don’t match his risk tolerance, chaos almost always ensues. That being said, the only way you can really be sure your father is invested incorrectly is to give him a simple risk-tolerance assessment. However, depending on the savvy and sophistication of the investor, he might not even know his own risk tolerance is inappropriate. It’s a cruel reality, and more people are subject to it than you might think.

I try not to critically judge the fees an adviser charges unless specific core needs aren’t being met. Based on everything you’ve shared, I highly doubt your dad’s investment needs are being met. If the adviser sold an annuity with a long surrender period and is getting annual fees to manage your father’s investments, you should encourage your dad to find a new adviser. The adviser likely made in excess of 5% commission when he sold your dad the annuity, and if he’s also making 1% or more annually to have your dad in an inappropriate investment, he’s lost his chance to add value. Which gets us to my bonus concern—your adviser is likely double-dipping by getting significant annuity commission, as well as higher-than-market annual fees.

But I don’t feel as though you need to file a formal complaint against the adviser. As far as I can tell, he didn’t do anything illegal. Whether what he did was ethical is certainly up for debate. If what you have gathered is accurate, I do believe the adviser isn’t currently acting in your father’s best interest.

That’s the oddest part of this whole situation. It’s entirely possible the adviser was giving your dad great guidance at some point, but then as time passed, the quality of guidance might not have met the moment.

Do your best to operate clinically going forward. If too much emotion gets in the way, it will cloud your ability to make things right for your dad.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.