I am going to lay out a scenario. You tell me what you think.
Cool Grandma is almost 80 years old. Cool Grandma has $59,000 in an IRA at MegaBank Corp. and it is pretty much her entire nest egg. Cool Grandma is pulling about $400 each month to help supplement Social Security. Cool Grandma likes FDIC insurance and wants to take no risk with her money. MegaBank Corp. shorts Cool Grandma’s distribution by $146 in January like they do each year. Cool Grandma marches down to the local MegaBank Corp. branch to get this straightened out. MegaBank Corp. representative suggests Cool Grandma put her IRA money into a managed account that would assess a fee of 1.5% annually. The managed account is not FDIC insured and invests in a portfolio of stocks and bonds that can fluctuate significantly in value. MegaBank Corp. makes this suggestion before getting the $146 deal fixed.
So, what do you think? By the way, this scenario is real. It just happened. Twenty-two minutes ago.
A friend was at a local bank branch with his mother trying to get a $146 error straightened out like they do every year and were directed toward a managed account. He messaged me wanting to know if it was a good idea for his mom.
I asked a few clarifying questions. Poked around for a few more details. Tried to get a better feel for the situation. I told him I wouldn’t recommend it for my mom if she was in that situation. Then I told him to fire his bank.
First of all, his mom didn’t want volatility in her account. But volatility is exactly what you’re going to get in an account of stocks and bonds. Sometimes volatility can be an acceptable evil in the trade-off for a higher rate of return in the long-run. But not in Cool Grandma’s case. Nothing outside of luck is going to be able to overcome an 8%-and-climbing withdrawal rate.
Second, Cool Grandma really, really likes FDIC insurance. Ain’t no FDIC insurance on a pool of stocks and bonds.
Third, is the impact of the fee. Don’t get me wrong: On a list of people who like charging fees, put me at the top. But the fee must enhance the client outcome, not detract from it. There is no way, outside of blind luck, that paying that fee was going to make that account last longer or give her more stability and security.
Lastly is this little thing called fiduciary standard. Legally, a financial professional that makes investment recommendations inside an IRA must be able to demonstrate that the recommendations are in the best interest of the client. Megabank Corp. did not meet this standard.
Should your mom fire her bank? Probably not, but it is a discussion I am always happy to have. If you would like a Second Opinion, feel free to reach out to me (ppeeler@intfingroup.com) or Jenn Acosta (jacosta@intfingroup.com) to set up a time to talk.
And you can even leave your $146 at home.
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC