Wall Street scams never cease to amaze me. I'm not talking about the really brilliant ones, the multilayered market-manipulation attempts that would make a fine premise for a mystery novel. I'm talking about the dumb ones, where professionals who surely know better make wild and unrealistic promises to unsophisticated investors.
Don't they have any foresight? I mean, if you sell someone on the idea of early retirement on the premise that the market is going to go up every year, do you think you won't hear from them when the market fails to perform as you promised?
Back in June, the NASD hit Citigroup's
Of course, they neglected to note that those 12% investments were just a little riskier than the employees' pensions, and they also seem to have forgotten to disclose that they'd be taking a 2%-3% fee off the top. Now, in the annals of whoppers, it's not a big deal to say that a stock investment is likely to return 12% on average over an extended period, given that the market's average has been a shade over 10% a year over time. But 12% after fees, when those fees might be 3%? That's entering whopper territory.
And every year? Anyone who has followed the markets for more than a few years knows that that 10% average is just that -- a very-long-term average. Some years you get 10%, some years you get 30%, and some years you lose 20%. Stocks are volatile, plain and simple, which is why most responsible advisors will tell you that any money you think you'll need in the next five to seven years should be in bonds or cash.
These guys forgot to mention that, though. Unfortunately for them, that earned them some big fines.
Beware the early retirement pitch
Citigroup's rogue brokers aren't the only ones who have gotten in trouble for this scam -- telling people in their late 50s that if they cashed out their pensions and 401(k)s and invested with a broker, they could make enough to replace their incomes and retire early. About a year ago, the NASD hit Securities America -- a unit of Ameriprise Financial
Retiring early is a great goal. If your financial advisor is committed to helping you retire early and is giving you solid investment advice at a reasonable fee, then I wish you every success. But if you've been invited to a "free seminar" where you were encouraged to cash out your pension and 401(k) and invest in load funds in some broker's IRA, be careful. Be especially careful if:
- The broker promised you a certain level of returns every year. (Be doubly careful if that level was over 8% or so -- most firms' compliance departments won't allow brokers to use a higher number than that in sales literature.)
- The broker is encouraging you to abandon your workplace savings plans in favor of high-fee products like Class B or Class C mutual fund shares or annuities, or ETFs that come with huge per-trade commissions.
- The broker is telling you that you can withdraw more than 5% of your nest egg every year. (Some would say that even 5% is too much, and 4% is the largest reasonable number.)
If you think you're hearing promises that are too good to be true, you probably are. Check out this NASD Alert for more details on these scams, and if in doubt, head over to the Fool's Financial Products and Services discussion board and ask for a sanity check.
Empty promises won't help you succeed, but good, impartial advice can. The Fool's Rule Your Retirement newsletter aims to help all of its readers have a successful retirement. Take a free look at Rule Your Retirement's commentary, discussions, and analysis for 30 days.