Maybe I just watch too much TV, or maybe my eyes open wide whenever I hear questionable financial promises (Ponzi-dar?). Whatever the reason, I can't seem to escape the latest multi-million dollar ad campaign by one of America's largest financial services companies.
The ad starts with a dismal scenario visited upon a baby boomer: relocate or lose your job. Fortunately for the boomer, a brief consultation with a financial expert using sophisticated modeling software showed how early retirement was entirely doable. Goodbye cubicle, I'm going fly fishing, or whatever other boomer financial fantasy (retirement porn) is being used to hustle investment advice.
Not only did the brilliant financial services professional solve this person's dilemma, but, as the advertisement goes on to say, the early retiring boomer's boss called the same professional, wondering if he could retire early too.
The likely problem with the early retirement scenario? It's based on modeling using optimistic investment returns.
In a recent Wall Street Journal article about early retirement, an eerily similar scenario to the one teased in the advertisement is highlighted. Only the real world example uses real world market returns.:
Between 1994 and 2002, brokers from the Charlotte, N.C., branch of Citigroup Global Markets held more than 40 seminars and hundreds of individual meetings with BellSouth workers to show them how they could take early retirement. Central to the brokers' pitch was that the employees could expect to earn 12% a year from their investments and could withdraw about 9% a year from their accounts, according to the NASD complaint.
"You should be able to expect 12%," one broker told a couple, according to the NASD. "That is not guaranteed....We may do 15, may do 18 or 20. But good times, bad times, I think that we would do 12%."
What the workers were not told about was the risk they were taking by cashing out of their pensions, which provided guaranteed payouts, and putting the money in the stock market, where returns would fluctuate. The brokers' materials didn't mention that 12% returns were above the stock market's average returns over the long term -- 10.7% a year over the last 50 years, according to Standard & Poor's.
In addition, NASD said brokers didn't adequately disclose that customers would pay annual fees of 2% to 3% -- and as a result, workers would actually have to earn 14% to 15% on their investments to hit the promises made by the brokers.
When the stock market turned south, the brokers held a series of conference calls to try to hold onto accounts opened by BellSouth early retirees, the NASD said. During these calls, the brokers made various predictions that the markets would soon rebound. One prediction: the Dow Jones Industrial Average would rise to 20000 or 21000 by 2006. (The Dow is now around 13400.) In the end, more than 200 BellSouth employees saw their original investments decline by about $12.2 million, according to the NASD."
These early retirement clients may be fly fishing - but it may be because they can't afford to buy food.
We tend to take the opposite approach as those selling financial services - expect a below historical market return on your investments to make sure you're not broke at 75. If the market in fact delivers double digit returns, great, buy a boat. In the meantime, plan on working and saving more.
Of course, that doesn't make for much of an ad campaign: "I talked to my financial advisor. He said scrap the beach house idea and take a part-time job."
Maybe I just watch too much TV, or maybe my eyes open wide whenever I hear questionable financial promises (Ponzi-dar?). Whatever the reason, I can't seem to escape the latest multi-million dollar ad campaign by one of America's largest financial services companies.
The ad starts with a dismal scenario visited upon a baby boomer: relocate or lose your job. Fortunately for the boomer, a brief consultation with a financial expert using sophisticated modeling software showed how early retirement was entirely doable. Goodbye cubicle, I'm going fly fishing, or whatever other boomer financial fantasy (retirement porn) is being used to hustle investment advice.
Not only did the brilliant financial services professional solve this person's dilemma, but, as the advertisement goes on to say, the early retiring boomer's boss called the same professional, wondering if he could retire early too.
The likely problem with the early retirement scenario? It's based on modeling using optimistic investment returns.
In a recent Wall Street Journal article about early retirement, an eerily similar scenario to the one teased in the advertisement is highlighted. Only the real world example uses real world market returns.:
Between 1994 and 2002, brokers from the Charlotte, N.C., branch of Citigroup Global Markets held more than 40 seminars and hundreds of individual meetings with BellSouth workers to show them how they could take early retirement. Central to the brokers' pitch was that the employees could expect to earn 12% a year from their investments and could withdraw about 9% a year from their accounts, according to the NASD complaint.
"You should be able to expect 12%," one broker told a couple, according to the NASD. "That is not guaranteed....We may do 15, may do 18 or 20. But good times, bad times, I think that we would do 12%."
What the workers were not told about was the risk they were taking by cashing out of their pensions, which provided guaranteed payouts, and putting the money in the stock market, where returns would fluctuate. The brokers' materials didn't mention that 12% returns were above the stock market's average returns over the long term -- 10.7% a year over the last 50 years, according to Standard & Poor's.
In addition, NASD said brokers didn't adequately disclose that customers would pay annual fees of 2% to 3% -- and as a result, workers would actually have to earn 14% to 15% on their investments to hit the promises made by the brokers.
When the stock market turned south, the brokers held a series of conference calls to try to hold onto accounts opened by BellSouth early retirees, the NASD said. During these calls, the brokers made various predictions that the markets would soon rebound. One prediction: the Dow Jones Industrial Average would rise to 20000 or 21000 by 2006. (The Dow is now around 13400.) In the end, more than 200 BellSouth employees saw their original investments decline by about $12.2 million, according to the NASD."
These early retirement clients may be fly fishing - but it may be because they can't afford to buy food.
We tend to take the opposite approach as those selling financial services - expect a below historical market return on your investments to make sure you're not broke at 75. If the market in fact delivers double digit returns, great, buy a boat. In the meantime, plan on working and saving more.
Of course, that doesn't make for much of an ad campaign: "I talked to my financial advisor. He said scrap the beach house idea and take a part-time job."
LINK