Payroll Protection Program scams are in the news these days, but frauds that target retirees haven’t gone away.

Last week, the Securities and Exchange Commission charged a San Antonio-area businessman and his company with victimizing scores of investors from 2013 to 2019, among them retired San Antonio police officers and other first responders.

Retirees were lured by an offer of returns of 10-12% per year through investments in aircraft engines and other aircraft parts that would be leased to major airlines.

You have to ask yourself this question: What would you have done if you were offered this opportunity?

The SEC alleged that promises made to investors were false, including the seller’s investment experience, the seller’s “competitive advantages, such as an algorithm that supposedly identified profitable leasing opportunities,” and the seller’s representations about securing the investments with the seller’s assets.

Allegedly, no engines were purchased, and only a small portion of investor funds was used to purchase aircraft parts. $14 million was “misspent.”

Amazingly, the alleged fraudster “continued to mislead investors after he learned of the SEC’s investigation, including by using the letterhead from the SEC’s investigative subpoena as ‘proof’ for investors that he was working with the SEC to take [the company] public.”

There was another wrinkle: Retirees made these investments with moneys withdrawn from their retirement accounts and funneled into newly created “self-directed IRAs.”

Your typical IRAs are set up by custodians, such as banks and brokerage firms, usually limiting investments to stocks, bonds, mutual funds, certificates of deposit and other liquid, tradeable investments.

Alternative assets, such as private placement securities, real estate, promissory notes, tax lien certificates, digital assets, initial coin offerings or aircraft parts, can be held in IRAs that are “self-directed.”

It turns out, as you might imagine, that self-directed IRAs can be riskier due to the nature of these holdings. In fact, the SEC’s Office of Investor Education and Advocacy issued an August 2018 investor alert noting that “[I]nvestments in self-directed IRAs raise risks including fraudulent schemes, high fees, and volatile performance.”

Further, the SEC has cautioned that “fraudsters may misrepresent the duties of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. ... Self-directed IRA custodians generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters.”

According to David Peavler, regional director of the SEC’s Fort Worth Office, “Investors should always proceed cautiously whenever someone suggests moving funds from traditional retirement accounts to self-directed IRAs in order to make an investment.”

And, here is the best advice that one can get: “For investment opportunities like alternative assets in self-directed IRAs, investors should consider getting a second opinion from a licensed, unbiased investment professional or an attorney,” said the SEC in the alert. “This is especially important if an investor is opening or creating a new account outside a traditional financial institution or well-recognized broker-dealer.”

From my point of view as someone who started her Wall Street career as a lawyer and who later moved into money management, I wholeheartedly agree. There is no need to go it alone when considering investing hard-earned retirement assets in a too-good-to-be-true venture.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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The song “You Can’t Always Get What You Want” describes how people feel about retirement these days. That’s the song chosen by nearly half of the respondents in a survey released on July 29 by the Alliance for Lifetime Income, a nonprofit educating Americans about protected lifetime income in retirement.

Most people surveyed (7 out of 10) say “the pandemic has made them more pessimistic about their retirement plans” (with 63% being somewhat more pessimistic and 7% much more pessimistic). Now, people are rethinking how much money they will have when they retire (4 out of 10 surveyed).

That’s not surprising, considering the uncertainty caused by COVID-19.

In its “COVID-19 Retirement Reset #3 Tracker Report,” the Alliance identified three economic waves of the pandemic to this point in time (March 6-16; April 13-20; and June 18-22). Unemployment claims, deaths and the stock market all rose from wave 1 through wave 3. (Unemployment: 3 million in March; 33 million in June. COVID-19 deaths: 100 in March; 119,510 in June. Stock market: Dow at around 20,000 in March; around 26,000 in June.)

The majority of respondents (66%) are concerned about the economy and the investing environment impacting their retirement plans. However, that data point was lower than survey results in April (75%). In April, 67% of those who were concerned about the current economy and the investment environment said their investments “declined considerably,” yet that percentage dropped to 46% in June. Those worried about recovering their financial losses stood at 63% in April; in June, that was down to 42%.

A majority (60%) are “worried about future unpredictability as the crisis is taking a widespread emotional toll and eroding confidence.” That is an increase from 54% in April.

One of the bigger issues in retirement is how to support yourself when the paycheck stops. At that time, it’s important to review expenses and to characterize them as discretionary (your wants) and non-discretionary (your needs), as I discuss in my book “The Retirement Survival Guide: How to Make Smart Financial Decisions in Good Times and Bad.”

Sadly, only a third of survey respondents are “very confident they will have the income to cover all of their expenses in retirement.” What is a need vs. a want varies from family to family. Survey results showed that certain expenses “have grown in importance: Internet access, groceries, healthcare and housing costs.”

Most agree (8 in 10) that in retirement, “wants” are important to the quality of life. However, the majority (7 in 10) say they are “less than very confident they will have the money to fund all of their discretionary spending in retirement.”

The secret to successfully managing discretionary spending requires some homework and a timing system. I can offer you a chapter of “The Retirement Survival Guide” that lays out how to do this. (Email me at readers@juliejason.com; include the state you live in.)

Some (22%), according to the survey, want to have “the benefits of protected lifetime income that an annuity or pension" provides. This is an increase from 16% in April. That increase is also understandable, since pension-like income can be valuable for retirees who do not have the interest or skill to invest in the stock market on their own. You do need to evaluate those products of course, which I will cover in a later column.

While the outlook is challenging, there is still some optimism. Nearly a quarter of respondents cited the song “Time Is on My Side” as reflecting how they felt about retirement, while another 22% chose “I’m Free.”

Conducted by Artemis Strategy Group in June, the Alliance survey captured the views of 1,260 U.S. adults age 56 to 75 who had $100,000 or more in investable assets. They were either employed (full or part-time), temporarily laid off or unemployed due to COVID-19, or retired (either fully or working part-time). For more information on the survey, go to tinyurl.com/y6oeaqze.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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I recently had a conversation with a Connecticut reader about balanced mutual funds. The objective of a balanced fund is to “seek” both income and capital appreciation.

We talked about how to do a screen. The first step is to get a sense of the universe.

Using a database such as Steele’s Mutual Fund Expert (steelesystems.com), you can narrow the field to similar funds.

Filter for “balanced” as the “objective,” and “allocation” as the “category.” Objectives are the goals the fund is organized to accomplish. Categories break down funds into peer groups based on their holdings, according to Morningstar, the independent research house. The allocation category invests in multiple asset classes (stocks, bonds and cash).

These filters provide a basic screen, which I ran using Steele’s June 30, 2020 database. The screen yielded 424 funds. Most had equity allocations of 50-70%. Equity allocations tell you how much the fund invests in equities compared to fixed income investments. The higher the equity allocation, the higher the risk -- and the potential return.

To further narrow the list, I filtered by “best-fit index.” The best-fit index provides a more refined measure of how similar a fund is to another (correlation coefficient or r-squared regression of the fund against an index).

The best-fit indexes for the balanced fund list included the S&P 500 Index, the Russell 3000, the ICE BofA US High Yield Index, with the largest representation being “Morningstar Lifetime Mod 2030” (a target-date fund based on a retirement year of 2030). Using the latter narrowed the field to a more manageable list of 72 funds. By adding an additional screen (3 year alpha greater than zero), my list resulted in 29 funds. (You can think of alpha as a measure of success.) By excluding extra share classes of the same fund, I was down to 10 choices, representing seven different managers.

Even though this filtered screen was tight, using only like funds, the ranges of data points diverged quite a bit.

Total operating expenses ranged from a low of 0.09% per year to a high of 2.5%. Yields (12 months) ranged from a low of 0.91% to a high of 2.23%.

During the last down-market cycle reported by Steele (October 2007 to February 2009), the best performer lost 24.4%; the worst lost 37.2%. During the up-market cycle (March 2009 to February 2020), the highest performer returned 249.4%; the lowest returned 161.3%.

Three-year cumulative returns provided another data point. The highest had an 8.25% average annual return; the lowest had a 5.9% average annual return.

What does this say about balanced funds? They are not all alike.

All of this data is backward-looking, meaning it’s historical. The big question for an investor is how current portfolio decisions are being made. As a result, what matters most is the fund’s managers. That is, when you buy a fund, you are buying the style and skill set of the manager.

One of the best ways to get a sense of how managers differ is to “listen” to them.

Before the world “went virtual,” I attended the annual Morningstar Investment Conference in Chicago in person each year to meet and speak with the pros behind the funds. Due to the coronavirus, you can now “meet” portfolio managers from the safety of your home -- something I highly recommend self-directed investors do before choosing a fund manager. One option is Morningstar’s 2020 Digital Conference, which is scheduled for September (tinyurl.com/y2l92293).

Research is only the first step to finding funds that you want to hold. Retirees (and future retirees) will want to build out portfolios for themselves using funds along with other investments in order to meet their personal goals. That takes an understanding of what funds can do for you, which is part of the overall “job” of your personal portfolio manager, whether you yourself are in charge or you delegate that job to a professional.

Julie Jason, JD, LLM, a personal money manager (Jackson, Grant Investment Advisers Inc. of Stamford, Connecticut) and award-winning author, welcomes your questions/comments (readers@juliejason.com). Please visit www.juliejason.com.

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