GUEST BLOG: The Invisibly Vulnerable Pre-Retirees by Aegis Frumento
October 11, 2018
Hindus and Buddhists believe in reincarnation because they know one lifetime is not enough.
Most of us members of
the post-World War II baby boom are feeling a microscopic example of that
fundamental truth. As time digests us like rats through a snake, we are
learning to our cost that our lives will have been too short to enjoy both
comfort while we worked and security when we can't.
We can severely
ratchet down our lifestyles. There is a FIRE ("financial independence,
retire early") movement going on amongst millennials who, jumping off their
parents' hamster wheel, are retiring in their 30s and 40s. https://www.nytimes.com/2018/09/01/style/fire-financial-independence-retire-early.html.
By living on about $40,000 a year in the less-flamboyant nooks and crannies of
the country, these radical retirees claim they can make $1.5 million stretch
forever. They may be optimistic, but empty-nesters with no kids and no colleges
to fund can take a lesson from their kids and grandkids pursuing that course.
But of course, they'd have to have the $1.5 million, and, again, most
don't.
Or we can work older,
and so both save and reduce the retirement years we need to fund at the same
time. That's fine, if you love your work and have the freedom never to be
forced from it. That'll be me, and for inspiration I look to my newest hero,
Anthony Mancinelli of New Windsor, New York, still a full-time barber at 107.
https://www.nytimes.com/2018/10/07/nyregion/worlds-oldest-barber-anthony-mancinelli.html?smprod=nytcore-ipad&smid=nytcore-ipad-share.
Most others, however, will, if they can, work longer than they would
like only because, sadly, they will still need to earn a living. See https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/.
Both those two
unpalatable solutions are realistic ways to make the retirement math work as
long as it can. The troubles arise when, denying reality, pre-retirees choose a
third path. Remembering a time in their youth when interest rates were triple
what they are today, some will try to squeeze better returns from their
portfolios than the measly 2-3% of the current treasury yield curves. That
delusory goal is the seed that sprouts exploitation by brokers.
I'm
not talking about crooked brokers who sell annuities to 90-year-olds, or who,
more efficiently, just embezzle their accounts. Those are rare cases, and
there's no accounting for them. Nor about brokers/advisers who don't act
quickly or smartly enough when they see a physically or cognitively impaired
customer exploited by relatives and caretakers. That broker is really an
innocent bystander catching a stray
bullet.
But what about the
pre-retiree who, finally looking at the math, concludes he must grow his nest
egg faster in the few years left before retirement? That customer is not
senile. Far from it, he is in his late 50s or early 60s and knows exactly what
he wants and why. His retirement funds seem like a lot of money -- several
hundred thousand dollars -- but they will not last and he knows it. In a
last-ditch effort to increase his stake, he looks for rates of return that are
inherently speculative. He has a list of hot stocks to buy, or he asks you to
generate one for him. Or he wants strategies involving margin, short sales,
options, private equity, commodities futures -- anything that will get his nest
egg where he now figures it needs to
be.
That customer needs a
counselor more than a broker.
We all know how this
story ends. That customer will lose money. The broker who facilitates that
customer's losing trades will be accused of having "recommended" an unsuitable
investment to an elderly person on the verge of retirement. Even if the
customer acted on a tip from his barber, his "trusted" broker will still be on
the hook for not properly advising him against the investment.
It won't help to give
the customer full disclosures of risks, analysis of the investment, and so on.
It won't help to have followed some fiduciary rule or Best Interest protocol.
Maybe the broker will eventually win an arbitration. More likely there will be
a settlement, meaning, of course, that the customer will get some money and the
broker will get a mark on her license. Maybe the broker will not be asked to
contribute to the settlement. And maybe, even, the broker's CRD will eventually
be expunged. Even so, will those customer trades have been worth all the
troubles trailing them?
The only way to win this
game is not to play. Doctors and lawyers do not put their professional
reputations at risk to satisfy the unrealistic whims of their patients and
clients (most of the time). For years stockbrokers have been trading on the
notion that they are professionals instead of salesmen. The looming retirement
debacle will test if they can walk that talk.
The salesman will
exploit the opportunity to do the desperate pre-retiree's bidding. The reports
of arbitrations against brokers for portfolio losses are over-stuffed with the
consequences of such exploitations. Those do not show up as "elder abuse"
cases; they are logged as just plain customer cases. And yet, brokers do as
much harm by enabling pre-retirees to play and lose at the market's gaming
tables as by stealing their money later when they are too deep in dementia to
know it.
A professional, on the
other hand, will tell the customer the unpleasant truth: that no investment
will return what he needs without more risk than he can bear in the short time
he has left. A professional would decline the customer's
orders.
This would be a harsh
thing to say to a customer, and the customer may just go to a less scrupulous
broker and lose it all anyway. But I'm thinking of the industry more than the
customer. Middle-class pre-retirees are vulnerable to exploitation even if no
one sees them as such. With no time left to start again, they desperately seek
financial redemption from a spin of the wheel. Time will waste them, and their
heedless brokers with
them.
Aegis J. Frumento