What is "Financial Sludge"?

By Financial Advisor Hans Smith

"Financial Sludge" can be defined as the following:

Insurance and financial companies deliberately making the process of transferring outbound funds as time consuming and uncomfortable as possible.

By making the transfer process difficult, the company losing the assets hopes the client will give up. Instead of competing based on quality of product, service, or price, they protect their high-fee business models by using friction, also known as financial sludge.

These are some "financial sludge" tactics that we see:

*Note: not all of these tactics are seen in every account.

  • Requiring paperwork that is confusing and difficult to fill out correctly.
  • Utilizing forms that are exceedingly long.
  • Failing to provide an easy way to obtain, submit, and track the transfer paperwork.
  • Requiring notarization, medallion signature guarantees, or a "spousal waiver."
  • Misleading clients about what they have been paying in fees (in particular, failing to mention revenue sharing/commissions going on behind the scenes).
  • Tacking on various "lines of credit" to brokerage accounts - preventing the seamless transfer of assets without talking to your broker and filling out additional forms first.
  • Employing phone representatives that have a habit of providing incorrect forms, giving misleading statements, sending broken web links to withdrawal forms, and creating a high level of confusion.
  • Forcing clients, many of whom are at work and have limited time, through a long process of "save the client" sales pitches.
  • Forcing clients to call multiple times for the exit process to move forward - dropping the ball on the exit process in a way that is almost never done when a client is inbound.
  • Spooking clients into thinking there will be taxable implications if they transfer their funds out. Although an important consideration, this is often not the case.
  • Misnaming the registration on accounts and then refusing to release the account without copious paperwork.
  • Creating cross-ownership of accounts that is difficult to unwind.
  • Failing to provide clear account numbers and other identifying information, such as clear information regarding what firm actually holds the money (the custodian).
  • Taking months to process paperwork, often times rejecting it at the last minute due to an error created by unclear paperwork.
  • Imposing surrender charges related to annuities.
  • Imposing exit fees on accounts.

It can be frustrating and difficult to escape your high-fee firm. At One Day In July, we help clients fight through the financial sludge and move their assets into a low-cost diversified indexing strategy.

We hope this would not come to pass, but if you ever wanted to leave One Day In July, we would politely help you. It's your money and we respect it as such. If we cannot compete on our product, price, and service, we shouldn't be in business.

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