A True Sad Story Of Prospect That Ran Out Of Time

Meet Ron

Ron had just turned 80; he lived close to Rockaway, NJ, but spent most of his free time at his lake house in upstate NY. He had two kids with his ex-wife and three stepchildren from his current wife. He was proud of his wife and admired that she was still hard-working; she even mowed the lawn when we first met. At his upstate NY lake house, Ron enjoyed spending most of his time boating and fixing his boats with his sons. Ron was a fun guy to talk to and full of life. He was once the CEO of a very successful company, so he was able to contribute millions to his retirement accounts over the years. He had two investment advisors he was working with, and he even invested on his own.

He didn't like that every few years, he would end up with a new investment advisor, and whenever a new advisor was assigned to him, it happened to be some young, inexperienced agent.

Ron's leading concern was that he was in RMD (Required Minimum Distribution) hell. He was tired of being forced to pay taxes on cash he didn't need. He also was a landlord of several buildings which he was trying to sell because he didn't want his family to deal with the aggravation or have estate disagreements when he passes away. Even though he had used an estate attorney and had a will in place, some of his adult kids didn't agree when it came to finances, so any investment property sales during an estate sale could become a controversial debate.  To mitigate the possibility of family disagreements between his children and stepchildren, he wanted to sell his investment properties but was holding back due to tax concerns.  >>Learn More About Real Estate Tax Shelters

Ron was aggravated by his tax situation and the never-ending change of advisors. He felt he didn't have an experienced ally whom he could depend on for answers. He also didn't have a strict fiduciary to suggest beneficial ideas he overlooked or was completely unaware of.

Ron decided it was time to speak with another advisor.

Ron and I had a conversation

Ron called me up to see if I could help. Ron invited me to review his statements to see if there was anything that I could do for him. He liked that I was an advisor in my mid-40s, a youngling by industry standards. Since I was still young and showed love and a passion for what I do, he could tell that if he liked working with me, he could finally have a lifelong advisor he could count on. I mentioned that his agents were not fee-only fiduciaries >>Learn the difference like me, who can not receive a commission. 

He replied, "Everyone needs to get paid somehow, right? " He had no clue about fees. He handed me his statement with a $0 value under fees. I said, "Ron, the fees are hidden! So many of these products have a 5% or higher embedded fee. That's over five years of working with me!" Once these products were sold, the agents were not of any help to him unless they wanted to make a quick sale. The commissioned agent makes a living selling commissioned products, so why would they bother to show you all of your choices? Many agents are good people or have good intentions; they don't know better. All of their education is from their company that sells commissioned products; at Marc Alan Wealth Management, I got a master's degree in personal financial planning and spent my entire life learning this. >>Learn more. An insurance company does its own research and education to support its product sales; clearly, there is an incentive to sell. 

We discovered that Ron's other advisor was billing him an annual fee exceeding 1%, which increased occasionally over the years. I told him I believed this was a dishonest practice. I prefer to grandfather people in for life. The earlier adopters must be rewarded for their loyalty, not punished. I also showed him that his advisor had regulatory marks against him for customer disputes.

Ron didn't see the value of paying a management fee, and I agree entirely. Based on what I have seen, he has never had the experience of a good advisor. His advisors were not educating him and left him in RMD hell, along with a list of problems. Every time he complained about taxes, instead of coming up with reasonable solutions, they put him in a highly commissioned product that would add to the tax mess of his heirs. The commissioned agents would not show him the non-commissioned alternatives that likely would have been more appropriate.

Ron hated taxes so much that he even bought commissioned municipal bond funds, which he would need to hold for two or more years to offset his upfront commissions. Ron even thought he could outsmart his commissioned agents but yet again paid a substantial amount to fees he was utterly unaware of, which I brought to his attention. Ron had a negative view of advisors from his experience, and based on his wife mowing the lawn instead of attending the in-person meeting at her home, I imagine she did, too. After all, was I an advisor.

Ron discovered that not all advisors are the same. Like many individuals, he thought they were all the same. Grouping advisors together is unfair; unfortunately, the industry can be extremely confusing. For comparison purposes, a substitute science teacher would qualify if we ask for a scientist, but so would a rocket scientist! How do you tell them apart when looking for a scientist? And that is the only term you know. The advisor world is no different; you can cram for a week, take a simple test, and call yourself an advisor. The same advisors go from a career of selling knives to selling investment products, with a background only in sales. What other value do you feel you will receive? And do they care, or are they just trying to make the next sale? They don't know any better and don't even completely understand what they are selling or what it will look like in five or ten years.

Almost enough time

Ron was impressed by what I had discovered and amazed that I could help him avoid paying taxes if one of his investment properties sold. I offered Ron an educational dinner event to show him how to save on taxes if he sells his investment property. If he sells it, he could roll the proceeds into passive real estate, which would mean he owns shares in a trust. If he were to pass away, these shares could have been easily divided among his children and stepchildren according to his wishes. He didn't trust his driving skills, so I even picked him up for the event.  Despite his age, Ron wanted to become a client, but unfortunately, he passed away a few weeks later.

Ron had received poor guidance over many years; he thought he was saving money by not paying taxes during his high-earning savings years. His children were very successful and were in their peak earning years and ended up paying taxes on Ron's IRA at the highest rate. The inherited annuities also forced more ordinary income tax. I imagine Ron's estate sale and forced liquidation of his real estate investments would be an unpleasant taxing experience for his children. Had Ron connected with me earlier, we could have had him sell his properties on his own terms, avoid the taxes, and provide his family with more flexibility.

Had Ron found me in his executive years, we could have grown his wealth to avoid or at least lessen his RMD hell and optimize some tax elimination strategies.

The goal of a retirement account is to pay less taxes, not more.

Ron, you were a good person. I was glad to show you that not all advisors are bad, and I wish we had met sooner to make things easier for your family.

RIP 

Marc Lescarret, CFP

Please note the names and images have been changed to protect the prospect's family privacy.