The Tale of a Baby Boomer’s Nest Egg Revisited

Baby Boomers Retirement Nest Egg Saga

Here is a review of a friend’s retirement nest egg worth over $1.2Mn AUD, held in one of the largest Fund Managers in Australia. It is a sad saga of a good sales pitch with a bad outcome for my friend. After over four years, his funds are still in the hole.

His Financial Planner visited him on 1st February 2011 to review the Fund’s Performance. He minuted what happened and with his permission I am going to share it with you today.

I am not going to name the Fund Manager as I am not prepared to be attacked for simply reporting the minutes of a meeting. The meeting is an indictment of all that is wrong with many Fund Managers and their financial planners. Please note I said many, not all financial planners.

Recap of Retirment Nest Egg as at July 2008

In July 2008 I wrote a post about a friend of mine who had sent me details of his retirement fund’s performance for the year ending June 2008. You can read that post, “A Tale of a Baby Boomer’s Retirement Nest Egg” if you would like to refresh you mind on it.

I reviewed it again with this post, “Reality Check – Update on my Friend’s Retirement Fund Real Returns”. Here are the main figures for comparison: The figures compare the returns to June 2008 with those to 12th December 2008. The Figures in brackets are for February 2011. As you can see;

  • Property losses have increased from -34.68% to -61.53%. (–49.39%)
  • Australian Share losses have increased from -17.64% to -43.04%. (-26.57%)
  • International Share losses were saved by the rise in the US dollar against the Aussie Dollar but still managed to increase from -23.56% to -31.83%. (-28.47%)
  • Overall losses on risk-based assets increased from -22.80% to -43.33%. (-31.28)

The bottom line was his nest egg was down 10.5% overall, which wasn’t too bad. However the risk-based assets such as equities were 23% down. As I said then it is is these assets that must do the heavy lifting to return the retirement fund to supposed long-term trend to fund my friend’s retirement.

Looking at the US stock market the stocks have rallied significantly but Australia’s stock market not so much, but 43% at the time of the meeting was not too bad. So how is it going now?

Unfortunately though the Australian Stock market has lost 2.2% for the year 2009-2010 whilst the Dow Jones has gone up 11%. Most of that gain however was offset by the Aussie Dollar increasing by 13.3% again the US Dollar. He can’t take a trick Sick smile

Bottom Line on How is His Retirement Fund Performing Now?

He took out over $600K in the fixed interest funds and left the risk-based equity funds in the fund with instructions NOT to rebalance the portfolio. Otherwise they would realise some of the losses he was trying to avoid.

So the figures only take into account the risk-based funds. However my main point in my original email was that these investments were down 23% (US, International and Australian Equities plus property combined) is July 2008. See the table below

Nest Egg Results

My friend prepared the table above showing the performance of the various parts of his portfolio still with the fund manager as at 1st February 2011.

The bottom line is his risk-based funds are still down 31.28% apart from the US stocks which were up 12.3%.

I noticed my friend had included the December 2009 figures in the annualised 2010 figures to December 2010. However excluding them would make his returns vs. the fees and charges only worse. So I left them in his report.

Fund Manager Made More Money Than My Friend Did from his Nest Egg!

The really interesting bit and the part that will make you weep is the Fees and Charges vs. His Returns. His Return for the year was $4,010.69, 0.9% whilstimaget his fund paid itself $4,833.98 or 1.1%. So his fund made more money than he did on his money.  How can that happen? This should not be so, no matter what the situation.

By the way, on the $600K he removed and which was invested in a Term deposit (He managed to get a Macquarie Bank Term Deposit paying 8.8%. It was set at that rate as it was something to do with the Chinese hosting the Olympics and “888” is lucky. It was for him as he realised $36,000 interest over the year.

So the professional managers working hard were able to get him a return of $4K on risk-based assets that have recovered significantly since the financial crash. Yet he has earned $36,000 in a passive investment like a term deposit. And we are paying these funds to manage our money?Steaming mad

Response to His Email to His Financial Planner

All this was written in an email to the financial planner just after the meeting. They constitute the minutes of that meeting. The content and the response is yet another indictment of all that is wrong with many financial planners in these large funds.

The email may have been written a little more diplomatically. However the Financial Planner knew my friend was very upset after the meeting, and so should not take offense but should have handled the situation. This was not the case….

Here is the email verbatim:

(I have highlighted in yellow the things I believe are important)

Hi XXX,

Thanks for the meeting of 1st February 2011.

Here is my minutes of that meetings.

Please advise me of anything that you feel is incorrect or needs adjusting.

Meeting started just before 11am.

The Financial Planner presented an upbeat view of current market.

He advised that there have been fantastic gains since March 2009. (ASX200 approx 43% gain). He used his ‘Line of best fit” to show the current trend is very good. (When starting at March 2009).This trend has been predicted to continue for 2 years, with ASX reaching 5000 by mid June 2011.

The Financial Planner suggested that 2 of my funds were not performing and should be swapped. These are:-

Fund #1    $33,890 Loss (31.16% loss)

Fund #2    $47,193 Loss (61.53% loss)

(Total Losses of $81,083)

My Friend asked the following questions:-

1) How old is portfolio    – 4 years (Dec 2006)

2) What is long Term    – Financial Planner advises his definition of long term is 5 years

3) How is portfolio performing in 2010 –Planner advises that they are going ok – Australian and International markets are positive.

4) How do individual funds compare to ‘Average Funds’ – Planner to advise

5) Is my portfolio performing to plan – Planner advises it is performing to plan.

6) What are the average distributions from funds – Planner advises 4% – 5% distributions

7) What can be done to improve performance – Planner advise is to swap out 2 funds (above)

8) Why is ‘Realised Capital Losses’ Bad – Planner advises that they are ok if swapping funds in same asset class

9) Are there any examples of ‘Failed’ financial plans – Planner advises that he has never seen a failed plan in his 8 years of experience

My Friend then produced a spread sheet of the last 12 months performance of his portfolio. (See above)

As my friend is in the ‘Pension Phase’ he cannot see the portfolio ever reaching the starting point, and thus the losses are permanent.

Planner Suggested that “Time in the Market” is the key.

My friend suggested that “Market Timing” is everything. (Whether planned or accidental).    (His believed his timing of market entry was Very Unlucky and will affect his portfolio performance permanently).

At this point the discussion became a bit heated with the Planner advising my friend that “You are Too Negative”

In Summary:-

Portfolio Gained 0.9% ($4010) from Dec09 – Dec10 (Using Fund Manager quarterly report figures)

Fees Paid ($4,833) were greater that gains in portfolio

Distributions were only about 1.7% (much less than 4-5% predicted)

Aust share funds performed worse than the ASX200

International Shares performed worse than the Dow Jones, probably due to the A$

Overall Portfolio Losses are :- $195,942 (-31.3%)

Thus to return Portfolio to starting point by December 2011 (5 years) (assuming 6% cash rate of return), A Gain of $380k is required or +53%

What Has Happened Since the Meeting?

My friend sent the email that day and has got no response. The Planner was to get back to him on some things but has not bothered to do so. My friend has emailed again and called to talk with him but his assistance said he was busy so could she take a message.

In addition at the meeting the Financial Planner did not know the returns on the funds under his management were only 0.9%.

My friend is still waiting for a response to his email with questions about his nest egg. There is no excuse for that.Sick smile

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