Today, we delve into a crucial topic that concerns many of us with aging parents and their financial well-being. Daniel Wrenne here, and in this episode, we’re sharing a real-life case study that uncovers potential pitfalls in managing a family’s wealth, especially when cognitive decline becomes a factor.
In this eye-opening episode, we discuss the story of Josh and Mary (not their real names), a couple with substantial assets managed by an advisor. As Josh’s parents age, he becomes increasingly concerned about the transparency and efficiency of their financial strategy. The situation takes a turn for the worse after the passing of Josh’s mother, leaving his father to manage their complex financial portfolio.
Join us as we dissect the red flags and inefficiencies we discovered in their financial setup. From excessive cash in an IRA to high advisory fees on non-performing assets, we uncover the hidden costs that could be draining your parents’ wealth without their knowledge.
Full Episode Transcript:
Daniel: Hey guys, hope you’re having a great day. We were talking last time, actually the last couple of shows about some of the questions that come up and in particular, I shared some of the questions people often bring up, about existing advisors and getting second opinions. and how some of the different arrangements look.
And so today I wanted to provide like an example from those that we’ve, we’ve come across quite a bit. And so this ties into, actually some of the families that we work with and their parents advisor. so I think, You know, a lot of you guys probably listening have parents that are, you know, pretty well off and maybe already work with advisors.
And so, especially as they start to age, a lot of times that’s a big concern is like, I want to make sure like my parents are not like getting taken advantage of or something like that. So we have started to see this question come up a lot with the families that we work with. Their parents are getting older.
And so they’re starting to. Wonder that if whether or not their, parents’ advisor is, taking advantage of them. So I’m gonna share an example and hopefully give you some ammo to, to kind of keep a lookout for your parents as well. So, I’ll use like generic, Or anonymous information. and I’m kind of thinking about a specific case.
but like I said, it happened, it’s happened quite a few times where this has come up. so, I’ll keep it general just to not reveal personal, any personal information. but, we’ll call the clients Josh and Mary. So, Josh’s parents are getting older. And he’s, you know, like I was saying, he’s starting to get a little concerned about them.
they work with an advisor. They’ve done really well. They have plenty of assets. The concern is not like whether or not they have enough. The concern is actually for him, at least, you know, whether or not they’re getting taken advantage of. And so, um, his mom, unfortunately, was not doing too well, and passed away.
And ended up that his dad also started to have some memory issues and I mean like not necessarily like full on, dementia or, you know, complete, you know, loss of, cognitive ability, but like just some kind of questionable whether or not he’s able to manage his own affairs, they have come up and also he’s now, you know, responsible for everything.
and it’s all got a little more complicated because his wife passed away recently. So, so they felt like, you know, it was a probably worthwhile time to like take a look at all of, his stuff. So his dad’s stuff. And so they talked to us about it and we’re like, okay, yeah, I mean, we for sure advocate that.
And so here’s some, so we gave them some, some pointers of stuff to ask for. So what we suggested, So was, getting, you know, like a, a balance sheet. So kind of a summary of all the assets and all the debts. this example, they didn’t have any debts, so it was just all assets. So just start there. Like let’s just start there and get an ad, a list of all the.
assets and, kind of like what it actually is. And so we got that back and it was, so they had collectively, they had 15 million of assets. So quite a bit of assets. like I was saying before, plenty to last their entire lifetime. And then some, they had, 5 million of those assets were in like, properties and stuff like that.
Illiquid stuff. And then 10 million of it was invested in like some retirement accounts and then some, uh, non retirement accounts. so we saw that and we’re like, okay, yeah, we probably ought to. It’d probably be a good idea to look at the 10 million a little closer, just to see like where it’s invested or how it’s invested or, you know, what, what’s going on with those.
So, so they got together some, um, some information on. On the 10 million and how it was set up. So, this is, so we got that report back and this is where we started to up to this point, we’re like, pretty normal, like they have plenty of assets, but like, there’s nothing concerning. but we got the information on the investments themselves, and this is where the first red flags started to pop up.
So first red flag, we see, okay, well, they have some IRAs, which is pretty normal, um, but one of the IRAs has a ton of cash in it, Like 2 million in cash, is, that’s a huge amount of cash. for, especially for an IRA, cause most of the time you’re not taking out huge amounts out of IRAs cash.
You, you typically hold cash when you need it liquid, like you need to get to it. So it’s extremely rare that somebody. needs to take out that high of an amount from an IRA. And even if you did, that’s going to trigger a ton of tax. It’s probably not a good move. so that was like a red flag. It’s like, why in the world is there that much, like multiple millions of cash in an IRA?
That’s weird. and then on top of that, like, Even worse is that that big pool of cash, like, you know, a couple million, roughly maybe two or 3 million. It was a lot. It was over 2 million. was in like, um, in like the brokerage, generic cash account. They call it a sweep account, but it’s like basically like no interest or very, very low interest cash bearing account.
So it’s in a basically 0 percent interest. inside an IRA. And that’s, pretty terrible. guess there could be some circumstance. reason for holding that much cash. So, you know, there’s a possibility that there’s some reasoning behind that, but I can’t come up with any reason for having it be in, that low interest bearing option.
it’s just like throwing away money. And then on top of that, like if that wasn’t bad enough on top of all that, they’re paying advisory fees. the cash balance. That’s terrible. It’s like terrible, inefficient investment. It’s not even an investment. It’s just cash. But like they’re paying someone a percentage based fee on that balance, to basically like do nothing.
so that’s a, that’s a huge deal that alone. so on top of all that, like that’s bad, but on top of all that, the remainder, so like, call it like, seven or 8 million of remaining assets was invested, pretty high expense into pretty high expense mutual funds and had decently high, especially for 10 million or, you know, total of 10, I guess, 10 million had pretty high percentage of advisory fees.
So, at least, In my view, or in my opinion, so the advisory fee, like the average for the collective, so I already mentioned like they’re charging on the 2 million, two or so million dollars cash. They’re also charging on the rest of it. So basically they’re charging on the entire 10 million, 10 million.
and that’s, it’s like 1. 25 percent is the average across all of it. So that’s 100, that’s like 125, 000 a year of advisor. Yeah. These, and that doesn’t even count the high expense mutual funds. That’s too much. Like don’t know a ton about like these are parents of clients. So we typically don’t know a ton about their circumstances.
Like they’re going to have their own circumstances and planning considerations, but like, it’s not going to take, it’s not 125, 000 a year type situation. Like they’re just kind of like millionaire next door such a situation. so that’s a super high, for fees in my opinion, and should be, could be way less, add that to the cash inefficiencies that I’ve, I’ve already talked about, like that’s an even bigger cost.
So if you have 2 million and it’s, it should be like in today’s world, at least earning 5 percent and it’s. Earning nothing. So that’s like 100, 000 a year on top of the advisory fees of like waste. And really, I would argue that it should be, invested probably. And so, I’m not gonna go into the opportunity cost of not investing, but that’s additional percentages on top of what I just, talked about.
and then, like, I guess the icing on the cake. No, that’s, it’s not icing. This is like You know, garbage, I guess the worst of all, adding insult to injury. there was like a pool of the investments that were in super high expense annuities. so like, probably these are really complicated products and very difficult to, we didn’t even take the time to dig into the details ’cause we knew it was like overall, like there’s a ton of red flags, like they needed to change.
But, anyway, it was, it probably averaged like 3 percent a year expenses on like, you know, probably a little under a million. So we’ll say a million of, assets. So that’s, that’s like an extra 30, 000 a year of like, just kind of extra expenses that are built into it. So we’re talking, so all in, we’re talking multiple hundreds of thousands of like, extra expenses and inefficiencies that are happening for like just a couple like a relatively normal couple that’s done pretty well i mean like they have quite a bit of assets but it’s not like i don’t think they’re like ultra unique or you know mega wealth You know, that’s probably on the high end for physician families.
Like, that’s probably on the mid to high end of where you would end up in today’s world if you had saved what you needed to save. So it’s not like a, that’s not an insanely high number for a physician family to get to when they’re like in your peak wealth years. Like, say, like, you know, right around the time when you’re retiring or maybe even later in retirement if you have more than enough.
So it’s not an insanely high number. And there’s just multiple hundreds of thousands a year of inefficiencies. So, we suggested to the client, we’re like, you know, they for sure have to, need to get like, we would suggest to you to have them get, uh, second opinions, and, you know, get, get a second set of eyes on this.
Or, you know, a formal second opinion, like from another advisor. So, takeaway there, like the moral of the story is like, Don’t trust advisors. I mean, there’s good guys and bad guys. That’s how it is in any, any profession. But, you got to look out for your parents, especially if they start to, have some, cognitive decline or as health issues come up.
you want to, if you have that relationship with them where you can Kind of get a, keep, take a look at it. Like it’s worthwhile to take a look at it. I gave some, I gave the example today. Those are common things to look out for, like look out for super high expense products, look out for high expenses, advisory expenses, or high expenses on the, investments, look out for stuff that’s like ultra complicated.
Like if it’s ultra complicated, that’s typically, you know, it’s not always a problem that can be a problem. Look out for like really high cash balances. Like those are all like classic warning signs and, would be worth digging in a little deeper. So also if you have, uh, questions or scenarios, I like talking about scenarios or questions.
So I’m happy to, poke holes scenarios or questions that you have. we’d love to do that in another show as always good catching up and, uh, we’ll talk next time.
