According to some estimates, retirement accounts have lost over $2 trillion in value over the last year and there is no question housing values are down. Most recent reports show the U.S. economy contracting in the third quarter of 2008 and many pundits believe the worst is yet to come. Top all of this off with the fact that the first group of baby boomers is about to retire and it’s easy to see why the current economic climate has many Americans worried.
The question for most of us, then, is how to protect our retirement savings and, in the process, maximize income and growth potential. Unfortunately, in casting about for ways to answer that question, there will be many people who are fooled by unethical “financial advisors” - and some who are just plain thieves. This article is a reminder of what not to do when looking to maximize your retirement savings/income.
Frying Pan or fire - where do you want to be?
Too often, reputable financial advisors get the blame for things outside of their control. In the current market downturn, it’s easy to look at your advisor and blame him or her for your losses. Before you jump from your current advisor (if you have one), to another, ask yourself some questions. First: how well has the advisor served you over the years? It’s truly easy to look at the losses you’ve sustained over the past few months and ‘head for the hills’, but what did you start out with years ago? Are you still ahead of the game? If so, maybe your advisor isn’t as bad as you think.
What kind of reputation does your advisor have in the marketplace? Ask your friends, your banker, and even your advisor’s competitors. Most markets are small enough that advisors who have scammed their clients will become well known in a short period of time. An ethical competitor may tell you that he or she is better than your current advisor, but they will not impugn the character of the other advisor without solid backup.
What are your advisor’s credentials? If your advisor is a Certified Financial Planner, you can bet that he or she has been through extensive training and is subject to high ethical standards. More importantly, licensed brokers are subject to oversight by regulatory agencies. One such agency, the Financial Industry Regulatory Authority maintains a database to help you investigate potential advisors; their site BrokerCheck can be an invaluable tool in helping you find a reputable advisor.
The long and short of it is that jumping from one advisor to another can be like jumping from the proverbial frying pan into the fire. At least in the frying pan, you have a little protection from the fire.
Remember that you control your destiny.
Regulatory authorities take the role of financial advisor very seriously and the advisor’s most important role is to help you determine the right investments for you. In fulfilling this responsibility, the advisor is required to look at your age, future financial needs, current assets, risk tolerance and goals. The key point, however, is that the advisor is helping you make the ultimate decision. Make sure that your advisor performs a complete analysis of your current situation and your goals before he or she even thinks about suggesting investments. Don’t hesitate to walk away if the advisor pushes you to purchase risky investments when what you really need to concentrate on is preserving your principal.
There are essentially two types of accounts you can have – discretionary and nondiscretionary. Nondiscretionary accounts require you to sign off on all investment transactions. Discretionary accounts allow the advisor to execute trades in accordance with investment objectives set by you. Should you choose to open a discretionary account, be very specific as to your investment objectives and which vehicles are acceptable to meet your goals.
Always keep good records about any instructions you give your advisor and any representations he or she makes to you.
If something sounds too good to be true, it probably is.
Over the years, equity investments have returned around 12% over the long haul. If a broker or advisor promises you returns over that, be extremely careful. Perhaps there are some investments that can provide such a yield, but they are few and far between. A reputable advisor might tell you that over a five year period, an investment will, on average, give you a 12% return, but he or she is also required to provide information on historical returns of an investment and will absolutely state that there is no assurance that past results will be duplicated in the future.
Are you being offered an investment that will guarantee an unreasonable interest rate? It’s possible you are being sold an annuity that may be unsuitable for you. Annuities, like other retirement planning tools, have their place, but too often retirees are sold products that have high surrender charges or are otherwise not wise investments.
Beware of Ponzi schemes. These schemes typically promise huge returns and deliver nothing. Their success depends on continually getting new victims to “invest.” The money received from the new victims is then used to pay the earlier “investors”; thus giving the appearance that the investment scheme is successful. In the end, the latter investors generally lose all their money.
These are scary times and many people are looking to increase their return on investment just to make ends meet. There is nothing wrong with this, but too often, in their quest to maximize income, investors fall into traps. Be a victor in your quest, not a victim.