Problems With Retirement Accounts

Retiring individuals are often targets of brokers. Money managers frequently use "retirement seminars" as tools to attract new clients. While nominally educating investors, the brokers were also soliciting business.

In many cases, these seminars resulted in retirees losing a substantial part of their savings because their brokers put their money into inappropriate investments.

Many broker seminars recommended that retirees take their benefit as a lump sum. The brokers then invested these large lump sums in financial instruments that would generate fixed income. Often these were annuities or more exotic financial products like unit trusts. Also popular were proprietary discretionary funds where the broker picks the stocks for the investors.

Wrap accounts are favored by many brokers when the client has a large amount of investment assets. While traditionally brokers make money from commissions on buying and selling stocks, wrap accounts allow them to act as money manager and pocket a 1% (typically) annual management fee. While these can be appropriate for some clients, they are typically not appropriate for many investors. Yet brokers often pushed them because of the potential to generate fees.

Aside from generating commissions for the brokers, these investments often proved wrong for retirees, as their money was shifting to a more aggressive investing style at a point in their lives when they should have been going more conservative.

Even retirees who were knowledgeable about investments were often fooled. They thought that putting their money into annuities would ensure a steady stream of income. They didn't realize that variable annuities did not guarantee a steady income and were closer to investing in stocks, only with higher management fees. Many also signed over discretionary authority for their investments without knowing it.

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