I’m not sure if this is more appropriate for r/personalfinance or r/investing, so I’m posting to both. Sorry for the length, I broke it up into sections if you want to skip down to the investment question part.
Backstory
Late last year, my grandfather passed away, and as a result my mother inherited a bit of money. She’s not been the best at saving for retirement, mostly due to ignorance. For instance, a few years ago, she was complaining that her 401k wasn’t making any money. I took a look and she was 100% invested in money market accounts and gold. She saw the words “cash” and “gold” and thought those would be good investments because they were money terms she understood, even though she was earning >1% a year on those investments.
She knew that I know a bit about investing, so she asked me to help her invest this money. I opened a Roth IRA for her and put $13,000 (maxing both 2017 and 2018) into a Vanguard Target Retirement Fund. She had more to invest, but I told her I wanted to do some research before telling her how to invest in the after-tax account.
This was about three weeks ago.
Current issue
My brother works for a large regional bank where my mother has an account. He told her that she can speak with a financial advisor for free since she’s a customer. My brother works with the guy she met with, and he trusts him. I’m not as convinced because I feel like he’s getting jerked around by the people at his work about financing for a home, but that’s another post for another day.
After meeting with the advisor she said that he recommended a CD, and I told her “absolutely not.” She asked me to go with her to meet the advisor because she doesn’t understand this stuff and wants someone with her who does. So I went yesterday (Friday). I listened to what the guy said, and he was recommending an asset I’d never heard of before.
Investment question
The financial advisor wanted to put all her money into index or market-tied CD(s). He explained them to me, and I feel like it’s too good to be true. Here are some of the features of the index CDs he was pushing.
- They have a 7-year term
- The principal is guaranteed and FDIC insured, so you’ll always, at worst, get principal back
- The returns are based on the performance of an underlying asset
- There’s no cap on the earnings (after doing some research, some of these have an earnings cap)
- There’s no early-termination fee or any other fees
- They’re based on the issuing bank trading options
- If you hold the CD to term, they’ll multiply your earnings. The 7-year ones had a 2.25 multiplier, meaning if the investment made $1,000, you’d get $2,250.
He showed us these charts showing how the return since 2010 has been between 83% and 135%, but I don’t know how that compares to an S&P index fund.
This sounds too good to be true, but I couldn’t find the rub. I told my mom it seemed interesting, and she can always move her money if she didn't like it (since there's no early termination fee).
Financial Advisor Issue
My mom didn’t tell me beforehand, but after agreeing to the index CD, she transferred all her Roth assets (including the IRA I’d set up in January), as well as an additional $60,000 for this. I did not know she was going to invest all of it.
After I left, I started getting a bad feeling in my gut. I didn’t like that he is going to liquidate her Vanguard Roth that had just been set up. My brother ended up telling me he doesn’t actually work for the bank, but is contracted from another firm. He gets commissions off selling these (not fee-based in other words). And I didn’t like the way he answered my questions. For example, I asked him how the bank makes money off these, he just told me “Trust me, they’re making their money. It’s not charity.” Okay, but how?
Again, sorry for the length.
TL;DR Mother got inheritance and invested a lot of money in index or market-tied CDs. They sound too good to be true. Also, I think the financial advisor may not have been completely above board and convinced her to roll her IRAs as well as $60,000 into these CDs.
Submitted February 10, 2018 at 01:26PM by BunchOAtoms http://ift.tt/2nSM3qk
