By Zape @ Adobe Stock
When you make money slowly and invest it over a lifetime, you give yourself a front-row seat to how brutal markets can be. You have an opportunity to educate yourself on the perils that lurk behind every corner where so-called trusted advisors look to you as the product. They look at you as their piggy bank. They are not fiduciaries held to the highest standard in the industry. They’re not required to make the best, not just suitable, investing decisions for you.
When you invest over a lifetime in preparation for your retirement life, you learn what it feels like to invest in tough markets. You develop a coat of armor to help weather the tough times—and they are tough—when minutes feel like hours, like being stuck in the fog. When time stands still, as Vanguard founder Jack Bogle advised, that’s when you “don’t just do something, stand there.”
But what about making money quickly? Like winning the lottery? Becoming rich beyond your dreams literally overnight. We all see the headlines and the pictures of the giant check. Then, years later, we learn how it was all lost. It’s sad. You know how the story goes. How so-called trusted advisors acted in their own interests at the expense of the ill-informed. The new money doesn’t know what it doesn’t know.
In The Wall Street Journal, Jason Zweig tells the story of Paul and Sue Rosenau, who won $180.1 million from the Powerball lottery, and how it all went wrong. He writes:
In spring 2008, Paul Rosenau, a construction supervisor and heavy-equipment operator in Waseca, Minn., bought a Powerball ticket—and hit a $59.6 million after-tax jackpot.
Rosenau, a devout Lutheran and the son of a pastor, recalls with a tremor in his voice how he and his wife, Sue Rosenau, felt when they woke up the next morning.
They realized their granddaughter Makayla had died exactly five years earlier. She had Krabbe disease—a rare neurodegenerative illness that strikes infants and usually kills them in less than four years. Makayla died at the age of two.
“We were very sure [the Powerball jackpot] was divine intervention,” Rosenau recalls, “and we were very sure what we were supposed to do with it.”
What they hadn’t counted on, though, was that human intervention can be destructive. What happened next is a heartbreaking tale that shows how powerfully fees and commissions can pervert financial advisers’ judgment and crush their clients’ wealth.
It’s also why I think investors should welcome regulations that require advisers, brokers and insurance agents to act in their customers’ best interests.
The Rosenaus promptly used $26.4 million of their winnings to fund a nonprofit, now known as the Rosenau Family Research Foundation. Its mission is to seek treatments for, and support the families of, children with Krabbe disease.
Having almost no investment experience themselves, the couple hired John Priebe, a local financial adviser and insurance agent, to manage the family’s and the foundation’s money.
Priebe worked for Principal Securities, the brokerage and investment-advisory arm of Principal Financial Group PFG -2.42%decrease; red down pointing triangle, the Des Moines-based retirement, asset-management and insurance giant. He claimed to be putting his new clients’ best interests ahead of his own, but that’s not what the evidence suggests.
Last month, an arbitration panel run by the Financial Industry Regulatory Authority instructed Principal Securities to pay $7.3 million in compensatory damages to the Rosenau foundation.
Principal Securities has until July 15 to bring a motion in court to vacate the award, according to Donald McNeil of Heley, Duncan & Melander in Minneapolis, an attorney for the Rosenaus.
During the arbitration proceeding, the firm denied the allegations, which included the selection of unsuitable investments, failure to supervise Priebe and failure to disclose fees and expenses. Principal declined my requests for comment.
Only weeks after their Powerball score, the Rosenaus were flown on a private plane with Priebe to Principal’s headquarters, where they met with senior management and “everybody but the janitor,” recalls Rosenau. The executives, he says, assured them that Principal had “the expertise” to keep the money safe and make it grow. (In legal filings, Principal subsidiaries have denied the details of the meeting.)
According to evidence submitted at the arbitration hearings, Priebe started by buying $18.9 million of variable annuities for the foundation, earning an estimated $1.2 million in commissions.
Those insurance assets generally have all the market risks of mutual funds—at vastly higher costs. Mutual funds, exchange-traded funds and other types of investments typically don’t carry commissions and charge annual fees that can be 0.1% or less.
Instead, the variable annuities picked by Priebe charged the foundation annual fees of up to 2% or more and carried commissions that could exceed 6%.
By the end of 2011, Priebe had allocated almost 93% of the nonprofit’s total assets to variable annuities from Principal and several other issuers.
In April 2017, Rosenau emailed Priebe, asking him for “a statement disclosing all fees, commissions, charges, transfer fees, etc. of any kind that will be charged for the purchase of any investment device you are planning on using.” Priebe emailed back, “There is no fee’s on this Product” [sic].
Meanwhile, Priebe had been repeatedly selling some of the variable annuities and buying others, earning fresh commissions along the way.
All told, he had the foundation buy more than $47 million in variable annuities, according to evidence at the arbitration hearing, generating an estimated $3.3 million in commissions.
In theory, those products provide some tax and other benefits. But a foundation isn’t taxable, and it requires steady growth of its assets and ready liquidity to ensure it can meet its annual spending needs. So the limited advantages of variable annuities aren’t useful to a foundation, while their high costs and low liquidity are detrimental.
By year-end 2011, Priebe had sunk $28.3 million of the foundation’s assets into variable annuities. Six years later, that pool had shrunk to $26.3 million—even though the stock market had more than doubled over the period.
I estimate the foundation could have earned $12 million to $25 million more between 2011 and 2017, when it finally pulled its money away from Priebe and Principal, if it had invested instead in a simple balanced index fund with 60% in stocks and 40% in bonds.
Action Line: When you hear the word variable annuity, run. You need to shield yourself with heavy armor against those who want to take advantage of you. When you’re ready to talk about your family’s wealth and how to handle it over a lifetime, let’s talk. But only if you’re serious. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter.
E.J. Smith - Your Survival Guy
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