SENIORS BEWARE: Protecting Your Retirement Nest Egg

We are told that investing in the stock market will help us get to our retirement dreams and let us live a comfortable life.  Once we retire, we feel that we should be taken care of and should have no worries.  The reality is much different.  With the tech “bubble” bursting in 2000 and the unfortunate events of September 11th 2001, the equity markets took a huge spiral downward.  From this we know equity markets are volatile, but there are safeguards that your broker could have instilled to prevent your portfolio from these unfortunate events.

In this time period if you are living off of you retirement investments and the value is depleting, you don’t know what you should do.  If you feel like a victim of your broker and brokerage firm, there is relief to get these losses back.

Did your broker promise you an average 10-24% return?  It is generally inappropriate to guarantee or promise any particular percentage of return.  Brokers will sometimes use this as a ploy.  If you want a large annual rate of return on your investments you will have to be aggressively invested.  By tricking the customer into agreeing to a large annual return, the broker is justified in placing the customer in overly aggressive and risky positions. 

Did your broker use readily available retirement calculators to show you the correct investment style?  It is standard practice for a broker to use a retirement calculator when advising a client on investment strategy.  Such calculators allow you to factor in your age, desired withdrawals, desired rate of return and so forth.  This way you receive a sound investment strategy.  A broker who does not do this is negligent.

Did your broker tell you all the risks with this type of investment style?  A broker handling a customer’s account has a duty to explain forthrightly the practical impact and the potential risks of the of the recommended investments.  Lieb v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 461 F.Supp. 951, 953 (E.D.Mich. 1978).  Failure to do this is a breach of fiduciary duty.  Hempel v. Blunt Ellis, 123 F.R.D. 313, 316 (E.D.Wis. 1988).

Did your broker review diversification with you?  Diversification is simply the spreading of investments among different companies in different industries and market sectors in order to reduce risk.  “It is important to have in one’s portfolio stocks that do not all depend on the same economic variables, such as consumer spending, business investment, housing construction, and so forth.”  Burton Malkiel & William Baumol, Redundant Regulation of Foreign Security Trading and U.S. Competitiveness, in Kenneth Lehn & Kamphuis (Eds.), Modernizing U.S. Securities Regulation 45 (Irwin, 1992.  Studies show that diversification is not possible with less than 25-30 positions. 

Did your broker review asset allocation with you?  Asset Allocation is the selection of a portfolio of investments where each component is an asset class (usually stocks, bonds, cash) rather than an individual security.  It is widely known that 90% of any portfolio’s performance depends solely upon the allocation between classes of investments (fixed vs. equities), and that most of the rest depends upon proper diversification within each asset class (e.g., US stocks; foreign stocks; different industry segments: consumer financial, industrial, technology; and among equities and U.S. treasuries, corporate bonds, foreign bonds, etc.).  See Brinson Singer and Beebower, Determinants of Portfolio Performance II: An Update, Financial Analysts Journal (May/June 1991).  See, Modern Portfolio Theory, Ibbotson Associates.

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