Think you're getting iffy financial advice? These red flags might be flying
Q: My financial advisor wants me to buy some “private” real estate investment trusts that are not listed in the paper. Is that something to be worried about?
I’d say yes. You should be so worried that you should consider advice from someone else. Nontraded REITs are notorious for paying several layers of high commissions to promoters and broker/salesmen. The investments stay opaque for years and many investors do not receive all their initial investment back, much less any return on their investment.
When we take on a new family for financial planning and investment management, we look for and often find many “red flags” in their portfolios — just like your nontraded REITS.
Another red flag is if your advisor has placed you in dozens of stocks all at once. This makes for a large fat monthly statement and becomes impossible to understand (on purpose). We know from many studies that once you own perhaps 20 different stocks, that you could own simple inexpensive mutual funds or exchanged traded funds that will accomplish the same goal (or better). This is even more true if you see regular “trading” (buying and selling) of the holdings on a frequent basis.
If you see mostly mutual funds from one company — especially if it the company that custodies your money — you are usually being poorly served with having been sold crummy expensive funds that on one else would buy on the open market. This may not be true if your fund company is known to have generally low costs such as Vanguard.
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Annuities inside IRAs: I see this all the time. Primary benefits of variable annuities include asset protection and tax deferral. Guess what — IRAs offer exactly the same benefit but without the 2% to 5% a year internal costs (and frequent up front commission) of the annuity product. I can’t think of any reason to have an annuity inside your IRA other than as a benefit to your “advisor.”
Annuities in general: There is certainly a role for deferred annuities in the investment world. But it is a much smaller set of opportunities than how they are currently used. I have yet to find someone who was sold one of these products with a decent understanding of how they work and how much they cost. We not uncommonly see annuities sold with “guaranteed” returns of as low a 1% a year, with large surrender charges that can go on for a decade or more. For most of us, these annuities “sold” to us are wealth destroyers.
Whole life insurance is often a wealth destroyer as well. This is due to huge commissions paid to the salesmen and high internal costs that make it just about impossible to do well. Insurance should be simple term for all but a very special few individuals.
Advisors that push cryptocurrency investments for your lifetime savings are acting irresponsibly at this time. The same with advisers pushing you to buy new companies at their initial public offering price.
If you have any of these red flags with your portfolio or advisor, beware — just beware.
Steven Podnos is a fee-only financial planner in Central Florida. He can be reached at Steven@wealthcarellc.com and at www.WealthCareLLC.com.
This article originally appeared on Florida Today: Beware of red flags that could be flying in your portfolio
