Dear Moneyist,
My 93-year-old mother has dementia. She has used a broker that she and my father basically inherited when their prior broker left the firm. She liked him very much and, not being that smart financially, I trusted him as well.
She thankfully has sufficient funds to support her, as my father passed away 10 years ago. Now that I have finally started reviewing her portfolio overseen by this one broker, I see he started buying very long term corporate bonds, some not expiring for another 20 years from now in very large amounts (10,000 shares to 20,000 shares).
‘I have no clue what these long-term bonds are doing in this portfolio. Was this a poor decision, which will definitely result in losses if we sell the bonds before the end of the coupon date?’
I live in another state, and think this broker got her in these bonds with the lure of a good rate (around 4.5%), but his paperwork shows nothing about commissions either. My sister — who lives with my mom — also trusts this man and never questioned what he was doing.
My sister is on disability, so eventually we will need to sell my mother’s assets to give her money to live on. Once my mom’s dementia got worse, I did become a co-trustee with financial power of attorney.
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I have no clue what these long-term bonds are doing in this portfolio. Was this a poor decision, which will definitely result in losses if we sell the bonds before the end of the coupon date? Everything is set up as a trust, with shares to be divided equally between my sister and I upon my mother’s passing, with a percentage distributed to my children.
I am in my 60s and I plan to work 10 more years. But I also want to find out what this man was thinking. The corporate bonds make up about 50% of this portfolio. He also put her in funds with a front-end load, something I know my father would never have approved of, kept her cash in low-paying money market funds, and added unit investment trusts.
I would appreciate your input on this. I am looking at doing a like-kind transfer of her holdings to a large discount broker, which my sister agrees with. If he was taking advantage of the situation, do we contact a particular government branch re: financial fraud? Even before dementia, my mother was not a well-informed investor, and I am regretting not following her investments closer.
Concerned Son
Dear Concerned,
Talk to the broker.
That’s your first port of call. Go through your mother’s investments and ask him, “What was your thinking behind this decision?” Bring a third party as a witness if you have to. Make up for lost time and open the lines of communication today. Allow him to explain each investment before you take any further action. Your first priority should be to make the wisest investments possible and plan for your futures. Your second priority should be to take any action you deem necessary.
The best way for me to get insight into his thinking is to ask another adviser. “It seems out of line — or, maybe, not the most prudent thing to do — to invest in 20-year bonds for a woman in her 90s,” says Joe McLean, managing partner of Intersect Capital in San Ramon, Calif. “One possible answer is that the adviser thought the investments would roll to the beneficiaries and the bonds would not have to be sold. I would think this would involve a discussion with the beneficiaries.”
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He was operating with very little oversight, except for the input from your 93-year-old mother. It smacks more of inexperience and incompetence than fraud.
McLean says even 5- to 10-year notes for a 93-year-old woman would take some explanation. “Twenty-year bonds with a client at 93 years old doesn’t seem like a prudent thing to do, if the adviser knows the bonds may have to be sold before maturity,” he adds. “With interest rates so low a few years ago, and prices only to go down as rates begin to rise, selling the bonds could incur some losses. The same is true with bond funds, as interest rates rise, bond prices go down.”
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Fraud might be overstating the facts. There are many alternatives to front-end loads and, McLean says, unit investment trusts were likely used to provide your mother with income. He was operating with very little oversight, except for the input from your 93-year-old mother. Any adviser in his position — with your mother’s permission — should have at least suggested discussing his plans with the family. It smacks more of inexperience and incompetence than fraud. Still, follow the paper trail with an accountant, if you have to.
Financial advisers registered with state regulators or the Securities and Exchange Commission owe clients “a duty of undivided loyalty and utmost good faith.” You should ask this adviser and any future adviser, “Are you a fiduciary?” See if he is registered. Check the National Association of Personal Financial Advisors and CFP Board to see if your choice was ever disciplined. This could be a public Letter of Admonition, a temporary suspension of the individual’s CFP certification or its permanent revocation, depending on the severity and circumstances.
I wish you the best taking care of your mother in her final years, and making sure those years are free of financial worries and comfortable.
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