In the realm of financial advice, the tale of Paul and Sue Rosenau is a cautionary tale about why you should be careful with who you’re entrusting your investment capital to. Their story is a sobering reminder of the dangers of placing trust in self-interested financial advisors, who may not always act in their clients’ best interests.
After winning a $59.6 million Powerball jackpot in 2008, the Rosenaus, who had little investment experience, turned to John Priebe, a local financial advisor. What followed was a nightmare tale of mismanagement, excessive fees, and questionable practices that resulted in significant losses for the charitable foundation they had poured their lottery winnings into—a charitable foundation established to seek treatments for and support the families of children with Krabbe disease, a disease that afflicted their first granddaughter.
The Rosenau case highlights a crucial lesson: when it comes to managing your investments, especially significant sums like lottery winnings or retirement savings, it’s imperative to choose a partner and not an advisor who prioritizes your interests over their own self-interests of generating fees and commissions—self-interested goals that often do not align with your goals. Instead, consider private funds and investment vehicles where the principals have a vested interest in your success and are often only compensated after you have earned a return and where compensation is based on performance.
Beware Self-Interested Financial Advisors and Brokers
Paul and Sue Rosenau’s experience with John Priebe is nothing new. It’s a textbook example of how financial advisors and other Wall Street types, like mutual fund managers and brokers, can prioritize their own financial gains over their clients’ well-being. Priebe’s use of high-cost variable annuities, which generated substantial commissions for himself, ultimately drained millions from the Rosenau Foundation.
Here are just some of the problems with financial advisors and other money managers:
High Fees and Commissions:
One of the most significant issues with self-interested financial advisors is their tendency to recommend products that generate high fees and commissions for themselves. In the Rosenau case, Priebe’s choice of variable annuities was driven by the substantial commissions he earned rather than the best interests of his clients. These annuities had high annual fees and often underperformed compared to other investment options.
Lack of Transparency:
Financial advisors who prioritize their own earnings may not always be transparent about the costs associated with their recommendations. Priebe’s failure to disclose the fees associated with the variable annuities he sold was a clear violation of trust. Transparency is essential when considering who to entrust your money to.
Conflicts of Interest:
Advisors who earn commissions or fees based on the products they sell may have a conflict of interest. Their financial incentives can skew their recommendations towards higher-fee products, which may not necessarily be the best choice for you. This conflict can lead to suboptimal investment decisions that harm your financial health.
The Case for Performance-Based Investment Options
To avoid the pitfalls of self-interested advisors, consider investing in private funds and opportunities that offer more transparency and where the principals have a direct stake in the performance of your investments. Here’s why investing in alternative assets like real estate through private funds is favored by sophisticated investors like the ultra-wealthy:
Alignment of Interests:
Performance-based funds such as private funds and syndications often structure management compensation around the success of the investment. This means that fund managers or principals only earn significant returns if your investment performs well. This alignment of interests ensures that their goals are closely tied to yours, providing an added layer of accountability.
Reduced Conflicts of Interest:
In performance-based arrangements, the focus is on generating positive returns rather than earning commissions. This reduces the potential for conflicts of interest and ensures that the managers are motivated to act in your best interest. For instance, many private funds and syndications offer preferred returns to investors to ensure their investors are paid from profits first before even seeing a dime themselves. This structure incentivizes fund managers to maximize returns.
Transparency and Accountability:
Private funds often provide greater transparency and accountability. With these investments, you can gain a clearer insight into how fees are structured and how the fund’s performance impacts the compensation of its managers. This transparency helps ensure you’re partnering with seasoned and experienced professionals while staying fully informed about how your money is being managed and the costs involved.
Alternatives to Traditional Investment Accounts
Beware of retirement accounts. Brokers and financial advisors aren’t the only Wall Street culprits that engage in self-serving investment tactics. Beware of traditional retirement accounts, such as IRAs and 401(k), that often involve investing in mutual funds or other managed products that can carry high fees and underperform the market.
The Rosenau case serves as a poignant reminder of the risks associated with self-interested financial advisors.
To protect your investments and ensure alignment with your financial goals, seek out performance-based funds and investment options where the principals have a direct stake in your success. By choosing investment vehicles that emphasize transparency, reduced conflicts of interest, and alignment of interests, you can safeguard your wealth and potentially achieve better financial outcomes.
