Beware Early Retirement Promises
The Motley Fool, August 29th, 2007
Wall Street scams never cease to amaze me. I'm not talking about the
really brilliant ones, the multilayered market-manipulation attempts
that would make a fine premise for a mystery novel. I'm talking about
the dumb ones, where professionals who surely know better make wild and
unrealistic promises to unsophisticated investors.
Don't they have any foresight? I mean, if you sell someone on the
idea of early retirement on the premise that the market is going to go
up every year, do you think you won't hear from them when the market
fails to perform as you promised?
Back in June, the NASD hit Citigroup's (NYSE: C)
Global Markets unit with a whopping $3 million fine and ordered them to
pay $12.2 million in restitution in exactly this kind of case. What
happened? A group of Citi brokers -- acting without authorization from
the home office, of course -- made a series of presentations to
BellSouth employees, telling the employees that if they cashed out
their pensions and 401(k)s and invested with the brokers, they could
expect to make 12% a year. That may not seem totally outrageous ...
until you find out that they were telling the employees they could
retire early, withdraw 9% a year, and still see capital accumulation
over time.
Of course, they neglected to note that those 12% investments were
just a little riskier than the employees' pensions, and they also seem
to have forgotten to disclose that they'd be taking a 2%-3% fee off the
top. Now, in the annals of whoppers, it's not a big deal to say that a
stock investment is likely to return 12% on average over an extended
period, given that the market's average has been a shade over 10% a
year over time. But 12% after fees, when those fees might be 3%? That's
entering whopper territory.
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