Riley: Investment Fee Abuse in Rhode Island Public & Private Investments
Tuesday, December 06, 2016
Does this kind of high fee abuse occur in the private sector?
Oh, yeah it happens. In fact, it is quite common. Recently Barron’s wrote about the thousands of elderly investors being ripped off in various ways not only by scammers but also family and friends. Barron’s called it an epidemic.
Many Rhode Islanders think that by hiring professional money managers, like the big banks who would never charge their clients too much, are insulated from abuse in portfolio advice and management fees.
You might be surprised.
The average investor and High Net Worth investor pays between 1% and 2% of the value of their account to their adviser so they can select appropriate funds for clients and, in addition, the funds selected by your advisor will also charge management fees. Those fees range from .50 % to 1.4% AUM (Assets Under Management). Altogether, the total fee cost to the client is between 1.5% to 3.4%. That is just the “average cost” of individuals using an advisor to professionally manage your investments. Larger accounts can and do negotiate lower fees.
Be very careful and hire someone you trust
Upon closer inspection, I’ve found that fee abuses are rampant and tend to appear or occur upon the death of a family member when one spouse inherits a portfolio for example. We have also seen fee abuse that lasts for years and goes unnoticed. We have Rhode Island clients who formerly had their money managed by wealth management firms affiliated with well-known Big Banks and Brokers.
We reviewed the accounts and found the following abuses in Providence Rhode Island:
- Beware “programs" that charge extra fees. We found one Bank in Providence that charges an advisory fee of 2.5% to be split with a “wealth advisor”. In addition to the 2.5% advisor fee, the investor pays a fund fee of 1% to the mutual funds that are also managed by the bank. That’s 3.5%!!!
- From a bank “Class P shares held through the xxxx Select Advisors Program are subject to a maximum Program fee of 2.50%, which, if included, would have reduced performance. Class P shares held through other advisory programs also may be subject to a program fee, which, if included, would have reduced performance. Please refer to each Fund's prospectus for further information on the eligibility to purchase Class P shares.” November 2016
- You should demand disclosure of your “year to date fees." Amazingly, in one case, It took us days to figure out the fees on an investor statement. Ask your advisor how much did he get paid in fees last year from your account? Ask him where he can find that in the statement. If he can’t then fire him.
- Lost Stock certificates- sometimes clients find out that their spouse owns stock certificates and kept them in a safety deposit box or in a safe or an individual has money due from a lost and inactive account that subsequently went to the State. Beware some services are hired by the company (example IBM) who issued the shares or even hired by some States to find the proper owner. That’s all well and good, but they will charge you up to 30% to sell your shares or to properly register them. So, you should just ask your broker or Advisor to do the research for you.
- In Rhode Island, there are remedies and RI investors should thoroughly review this page.
We can all agree that investors in the private sector are usually protected by a broker or Adviser Fiduciary, but not always. I recommend you immediately review your account statements today, if you cannot tell how much you are being charged, just ask your broker or advisor and then get it in writing. If you need more info, ask us or any other Registered Investment Adviser.
Related Slideshow: Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement http://www.golocalprov.com/news/new-chafee-issues-statement-supporting-pension-negotiations/">here.
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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