Financial Advice From Mutual Fund and Annuity Firms is Often Bad Advice

Recently I was able to review an investment and financial plan delivered to a client by a mutual fund company. I’ve written here at Forbes about how these services are like being charged by a Ford dealer for advice on what car you should buy. Below you can see why advice from an investment provider can be harmful to the rest of your financial plan.

In reviewing this “plan” and the investment implementation, I found several costly errors that are fairly basic in terms of planning complexity. The couple in this scenario is mid to late 40’s, earns a low six figure income, has accumulated investment accounts of ~$600,000, but has withdrawn between $25,000 and $40,000 annually the last several years on the increasing costs of rental properties.

The financial plan. The plan was basically a simple projection of the clients current accounts into the future; a simple future value calculation. However, it did not include the fact this family is withdrawing between 4-6.5% of the account value, which is unsustainable. It did not include the real estate, primarily financed by ARMs, which may lead to higher withdrawal amounts in the future.

There was clearly no review of taxes as there were many costly mistakes. They included:

  • This couple could be sheltering part of their taxable accounts in Roth IRAs.

  • They have an Inherited IRA account that once moved to the mutual fund company the mandatory withdrawals stopped occurring; the penalty on missed mandatory withdrawals is 50% of the amount that should have been taken.

  • The taxable account was placed into an investment advisory account which was rebalanced just months after the client started, generating ~$25,000 of short-term taxable gains (adding ~25% of taxable income).

There were other missed tax deductions related to the investments, and the portfolio was not set-up in any tax-efficient manner, which is the result of the investment plan.

The investment plan. As is often the case, the mutual fund firm in this case appears to view your relationship with them on an account level rather than as an overall relationship. If you have the minimum to be put into a high cost advisory account, that is what will be sold. There were multiple advisory accounts, and additional accounts held in the same registration a mishmash of A share, B share, and C share funds. Why these funds were not included in the advisory program, it is hard to say, though some companies have minimum sales quotas on products, and so there may be a difference in the advice received, the salesperson you happen to speak with, and the time of the month you visit.

There are plenty of issues with this account based mentality. Not the least of which is that once you are in the account, the broker is often in set-it-and-forget-it mode. There’s little reason to review your accounts once you are set, as the broker is being paid whether or not you open a small Roth IRA. Instead of having an investment plan that utilized the advantages of their various accounts for tax-efficiency, their plan was set more for simplicity – with each account receiving an entire portfolio of mutual funds.

Add in the high cost of these investment programs (~1.5% advisory fees plus mutual fund expenses), and there is just no excusing the lack of personal advice and the unnecessary costs. The above are simple observations that any qualified financial advisor would find in a quick overview. For that reason I strongly recommend that most individuals find a second opinion on any investment plan from a fee-only or NAPFA advisor before taking for granted that investment services from well-known mutual fund companies is in your best interest.

The preceding blog was originally published by Forbes. To view the original blog please visit our blog at Forbes.


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