Q&A: Stung by misleading advice

Question: Some years ago I changed jobs and contacted a local representative of a major insurance company for advice regarding combining my various pensions into one that I would have control over.

The one condition or requirement we had, in view of the fact that these were our pension funds, was that whatever we chose, the principal would never be placed in jeopardy.

The representative advised us towards certain funds that would do ‘much’ better than leaving our funds with the pension holder and that our principal would never be in jeopardy; in fact, every year the investment would be analyzed and the principal amount ‘could’ be raised by up to 10 per cent, resulting in a new principal amount that could never go down.

Based on this advice, we moved our pension funds to this company. Soon after this the market went down and so did our principal amount. The local representative had by then moved on to other things and the new representative told us that the previous representative had been talking about a death benefit, not an ongoing investment practice. I then requested a meeting with all three parties, the old, the new, and myself. The old representative show up at the meeting appearing quite innocent of any knowledge of our discussions. He finally informally agreed that he ‘may’ have misrepresented the facts and if there was anything he could do, now that he was no longer in this business, please let him know.

At that point I decided I needed some time to calm down and assess the entire matter. Now, a few years later, our investments have almost moved back up to the principal amount we invested in the first place, and I am very reluctant to do anything except leave it alone. I don’t want to spend hours per day trying to learn how the market works, or what we could do to squeeze a percentage point out of the market.

Do you know have any suggestions for us? I realize that you cannot accept any culpability for any advice you give. It is possible that some generic, non-specific advice from a non-stakeholder will be more valuable to us than any we might get locally. – R.K.

Gordon Pape answers: There are several lessons to be learned from your experience. Let’s start with the most basic one: if something seems too good to be true, it probably is and you should be suspicious. In this case, the suggestion that your principal would be guaranteed and still could grow at a rate of 10 per cent annually was too good to be true. That hasn’t been possible since the high interest rate era of the early 1980s when GICs and government bonds were offering yields of 10 per cent plus. If you want an absolute guarantee of principal these days, you are going to have to accept a low yield. That’s the reality.

Hindsight is wonderful, but not very helpful. What counts is where you go from here. Now that you are back to break-even after several years, what next?

Here’s the second lesson. You say you are inclined to leave the money where it is and add that you don’t want to take the time to learn about investment strategies. Well, I have some bad news for you. Since your money is not being professionally managed, you are going to have to make that effort or risk seeing the same thing happen again.

For example, you say that the money is in mutual funds. What kind of funds? Are you overweighted in equity funds? I suspect you probably are, since you have recovered most of your losses. But is that really where you want to be going forward? You said yourself that this is your pension money and equity funds entail a lot of risk.

One of the contributing editors to my Income Investor newsletter, Tom Slee, managed pension money in the insurance industry for many years. Tom is a very wise man and one point he has repeatedly stressed to our readers is that an RRSP should be managed just like a pension plan, because that is, in fact, what it is. This means keeping risk low and placing an emphasis on fixed-income securities. Is your plan structured that way?

I suggest that it is time for a meeting with your current insurance representative. Ask him to be prepared with a summary of one of the pension plans run by his company. He doesn’t have to give you the client’s name, just a break-down of the holdings by asset class.

See what the asset allocation is and how it compares to your own RRSP. If there is a major difference, tell your rep that you want your own plan restructured so as to reflect the plan created by his company’s own professionals. It would be pretty difficult for him to argue against that.

By the way, if you are within a few years of retirement your own plan might be even more conservative than that of the insurance company and you should start to build in some income components.

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