On Advice

Taking a lump-sum pension payment? Watch out for bad boy brokers

A pension buyout comes with risks

Oct 8, 2019 @ 4:07 pm

By Bruce Kelly

The 100,000 former employees of General Electric who are being offered a pension buyout in the form of a lump-sum payment should keep a tight grip on their wallets if they decide to shop around for a financial adviser for guidance and help.

GE is trying to shore up its pension plans, which are underfunded by the staggering amount of $27 billion. Offering lump-sum pension payments allows the company to clean up its liabilities and pension deficits quickly.

But the pension buyouts can also put workers, many of whom have little or no experience with investments or financial planning, at a great degree of financial risk, particularly as they approach their so-called golden years of retirement.

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Such a lump-sum buyout can be a boon for the working man or woman. But while one side of the financial advice industry is filled with stalwarts, the other side, unfortunately, is teeming with advisers who will take advantage of potential clients like the GE workers contemplating a lump-sum pension payment.

Indeed, it is highly likely that a broker, financial adviser or insurance agent lacking scruples and toting a bag of expensive, illiquid products already has some of these workers in his sights.

He's whispering in their ears, "Take the money now, take the money now. I can invest it and beat the rate of return those pencil-pushing, pension fund math geeks are promising."

"Investors having control of their own retirement or pension money is a dangerous position to be in," said Brandon Reif, an industry attorney. "It creates opportunity for predation by an unscrupulous adviser."

Sadly, such risks are for real.

In August, InvestmentNews reported that FSC Securities Corp., a broker-dealer in the Advisor Group network, was facing a potential multimillion-dollar arbitration claim involving 13 investors who alleged that three brokers at the firm made unsuitable recommendations by loading up their portfolios with high-commission, illiquid alternative investments.

Many of the investors making the claim, which was filed over the summer with the arbitration arm of the Financial Industry Regulatory Authority Inc., were employees of AT&T who had received lump-sum payouts in the range of $300,000 to $600,000.

The advisers, who are based in the New Orleans area, allegedly loaded the clients up on the toxic mix of nontraded real estate investment trusts and variable annuities. Those products pay steep commissions to brokers.

To be fair, the FSC brokers were not named as respondents in the Finra arbitration claim, and they denied all wrongdoing, their attorney, Alan Wolper, said at the time the article was published.

Then there was the case of David McFadden, an ex-Securities America broker who was barred from the securities industry in 2006 and sentenced to five years in prison in 2010.

Based in Baton Rouge, La., Mr. McFadden targeted and held seminars aimed at longtime Exxon Mobil employees, advising them to make early withdrawals from their retirement accounts and deposit the money into stock accounts.

He generated commissions on the sales of highly volatile securities that weren't appropriate for his clients. His securities fraud scheme resulted in more than 150 clients losing tens of millions of dollars after they retired.

In 2010, one of his victims told the Associated Press that Mr. McFadden induced him and others to retire years before they could reasonably have afforded to leave their steady jobs at Exxon. Adding insult to injury, many of the victims later had to take jobs that paid far less than what they earned at Exxon.

"When a worker or employee has a pension, it's managed and controlled by the employer who has every motivation to make it last through retirement," said Mr. Reif. "If an independent adviser takes control of that money, they have to maintain, protect and preserve the assets as if the employer was doing it."

"When there is an IRA rollover or lump-sum option, advisers have to protect that money to make sure it's there for the client's lifetime without taking needless risks," he added.

These GE workers could see their golden years turn to brass pretty quickly if they don't watch out.

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