GUEST BLOG: The Invisibly Vulnerable Pre-Retirees by Aegis Frumento

October 11, 2018

The Invisibly Vulnerable Pre-Retirees

Hindus and Buddhists believe in reincarnation because they know one lifetime is not enough.

Most of us members of the post-World War II baby boom are feeling a microscopic example of that fundamental truth. As time digests us like rats through a snake, we are learning to our cost that our lives will have been too short to enjoy both comfort while we worked and security when we can't.

Conventional wisdom says our retirement income be about 70% of our pre-retirement income. More recent research suggests that, with increasing health costs and all of us living longer, we need at least 130%. When I was working with wealth advisers at a big wire house, we thought "The Number" -- the net worth needed to fund an affluent retirement -- was about $4 million. With social security benefits included, and even at today's abysmally low interest rates, that still seems like it would maintain a $150,000 pre-retirement income lifestyle for about 30 years. The median pre-retirement income of the middle-middle-class is less, about $65,000, and to maintain that lifestyle over a 30-year retirement requires about $1.5 million.

They don't have it. Recent reports show that pre-retirees only have an average of $120,000 in financial assets. Some perhaps have a house, real estate or a business whose value augments that, but those are the very lucky few. The plain fact is that most of us who are not in the top 5% do not have the assets we'd need to retire in the manner in which we have become accustomed. Something will have to give. There are only three options.

We can severely ratchet down our lifestyles. There is a FIRE ("financial independence, retire early") movement going on amongst millennials who, jumping off their parents' hamster wheel, are retiring in their 30s and 40s. By living on about $40,000 a year in the less-flamboyant nooks and crannies of the country, these radical retirees claim they can make $1.5 million stretch forever. They may be optimistic, but empty-nesters with no kids and no colleges to fund can take a lesson from their kids and grandkids pursuing that course. But of course, they'd have to have the $1.5 million, and, again, most don't.

Or we can work older, and so both save and reduce the retirement years we need to fund at the same time. That's fine, if you love your work and have the freedom never to be forced from it. That'll be me, and for inspiration I look to my newest hero, Anthony Mancinelli of New Windsor, New York, still a full-time barber at 107.  Most others, however, will, if they can, work longer than they would like only because, sadly, they will still need to earn a living. See

Both those two unpalatable solutions are realistic ways to make the retirement math work as long as it can. The troubles arise when, denying reality, pre-retirees choose a third path. Remembering a time in their youth when interest rates were triple what they are today, some will try to squeeze better returns from their portfolios than the measly 2-3% of the current treasury yield curves. That delusory goal is the seed that sprouts exploitation by brokers.

I'm not talking about crooked brokers who sell annuities to 90-year-olds, or who, more efficiently, just embezzle their accounts. Those are rare cases, and there's no accounting for them. Nor about brokers/advisers who don't act quickly or smartly enough when they see a physically or cognitively impaired customer exploited by relatives and caretakers. That broker is really an innocent bystander catching a stray bullet.

But what about the pre-retiree who, finally looking at the math, concludes he must grow his nest egg faster in the few years left before retirement? That customer is not senile. Far from it, he is in his late 50s or early 60s and knows exactly what he wants and why. His retirement funds seem like a lot of money -- several hundred thousand dollars -- but they will not last and he knows it. In a last-ditch effort to increase his stake, he looks for rates of return that are inherently speculative. He has a list of hot stocks to buy, or he asks you to generate one for him. Or he wants strategies involving margin, short sales, options, private equity, commodities futures -- anything that will get his nest egg where he now figures it needs to be.

That customer needs a counselor more than a broker.

We all know how this story ends. That customer will lose money. The broker who facilitates that customer's losing trades will be accused of having "recommended" an unsuitable investment to an elderly person on the verge of retirement. Even if the customer acted on a tip from his barber, his "trusted" broker will still be on the hook for not properly advising him against the investment.

It won't help to give the customer full disclosures of risks, analysis of the investment, and so on. It won't help to have followed some fiduciary rule or Best Interest protocol. Maybe the broker will eventually win an arbitration. More likely there will be a settlement, meaning, of course, that the customer will get some money and the broker will get a mark on her license. Maybe the broker will not be asked to contribute to the settlement. And maybe, even, the broker's CRD will eventually be expunged. Even so, will those customer trades have been worth all the troubles trailing them?

The only way to win this game is not to play. Doctors and lawyers do not put their professional reputations at risk to satisfy the unrealistic whims of their patients and clients (most of the time). For years stockbrokers have been trading on the notion that they are professionals instead of salesmen. The looming retirement debacle will test if they can walk that talk.

The salesman will exploit the opportunity to do the desperate pre-retiree's bidding. The reports of arbitrations against brokers for portfolio losses are over-stuffed with the consequences of such exploitations. Those do not show up as "elder abuse" cases; they are logged as just plain customer cases. And yet, brokers do as much harm by enabling pre-retirees to play and lose at the market's gaming tables as by stealing their money later when they are too deep in dementia to know it.

A professional, on the other hand, will tell the customer the unpleasant truth: that no investment will return what he needs without more risk than he can bear in the short time he has left. A professional would decline the customer's orders.

This would be a harsh thing to say to a customer, and the customer may just go to a less scrupulous broker and lose it all anyway. But I'm thinking of the industry more than the customer. Middle-class pre-retirees are vulnerable to exploitation even if no one sees them as such. With no time left to start again, they desperately seek financial redemption from a spin of the wheel. Time will waste them, and their heedless brokers with them.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento has also represented clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents. 

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP. 

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.

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