Blogs & Comment

Horror stories from the financial trenches

Weigh House Investor Servicesspecializes in providing second opinions on investment portfolios. Unsure if you or your advisor are doing it right? Then take your account statements to the firm and get an evaluation.
That means president and CEO Warren MacKenzie sees a lot of portfolios up close.This week he passed on a few of the horror stories that he has come across.
One case involved an 80-year-old person who had 75% of their portfolio allocated to fixed income. Sounds OK, so far, right? Well, MacKenzie looked a little deeper and — as he wrote in his email — saw that most of the bonds matured in 2039!!!!!
But was the person a befuddled do-it-yourself investor? I asked MacKenzie. Nope. That 80 year old is a widow who works with an advisor, he replied.
Another story is about a 64-year-old business man who wanted high income and put about 75% of his capital into a private mortgage fund paying 10%, continued MacKenzie. We suggested there might be a risk in that and we suggested he should be more diversified. When he went to try to liquidate the investment he discovered that there a hold on redemptions. This fund is still paying the high monthly interest payments (and it may work out fine in the end) but investors should understand if one investment is paying a significantly higher return it is because there is significantly higher risk.
But what if the investment is in a RRIF? A certain amount has to be withdrawn every year according to government rules. That investor could be in even more of a pickle, MacKenzie suggested.
He offers a third horror story. Another case is the couple with about $4 million dollars in 80 mutual funds! They came to me because their advisor wrote to them to introduce them to yet another family of mutual funds! (The funds all had deferred sales charges). When anyone has more than 10 mutual funds they are over-diversified and it is pretty well certain that they will always underperform an EFT benchmark by 2%.
Concerning the 2%annual reduction in mutual fund fund returns, the industry gets away with it because the average investor doesn’t realize that if he avoids this underperformance he or she could retire 5 years earlier! His website has a calculatorthat shows by how much a 2% reduction can cut into long-term performance.