MONEY Financial Planning

The Real Risks of Retirement

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Walker and Walker/Getty Images

Acknowledging all the financial risks you face in retirement can be an empowering experience.

When you’re planning for retirement, you think about how much money you’ll spend, places you’d like to visit, what health care will cost. But do you think about risk? And do you think about the right risks?

By that, I mean, have you considered any risk other than running out of money?

There are other risks to face.

No generation before today, for one, has ever looked at such a long retirement with largely themselves alone to rely on.

And we’ve seen two market crashes in a decade — 2000 and 2008 — only to raise our heads up and go through a global economic slowdown. Thanks a lot. What’s next?

Some risks you can actually control, however.

You can’t predict where the markets will be be six or 12 months from now. But you can tell yourself you’re going to get a handle on the other things that have as much of an impact on your retirement as your portfolio’s performance.

These are non-market risks that often arise within your own household.

Here’s my list of the special risks faced by current and future retirees:

  • Living a very, very, very long life
  • Having too much of your wealth in your house
  • Not saving enough
  • Having to take care of your parents
  • Having to support your adult children
  • Paying oversized college costs
  • Not having control of your budget
  • Forgetting about inflation
  • Persistently low returns in the markets and low interest rates
  • Ultra-volatile market swings just as you stop working

Oh, and, timing. All of these things could happen around the same time.

A silly little step you can take toward addressing these risks is to drop the word “risks” and substitute “issues.” If these are “issues,” maybe someone can do something about them. Maybe that person is you.

I find that some clients don’t realize that they themselves are the ones who determine that their financial plan won’t work. Hoping that your portfolio grows to the sky so it can support you isn’t really much of a defense against overspending. Overspending is something you control.

Or maybe it’s not you. Having your elderly parents to take care of, to worry about, to help financially, is not exactly a choice.

But when you factor something like caring for an elderly parent into your retirement plan, you can start to walk around this issue, take its measure, and begin to see ways to cope. Or begin to see that you can’t cope with this responsibility. You may have to find other resources — speak to other family members, seek out public programs, look for nonprofit groups that help with such things as respite care.

Coping with the issue can mean raising your hand, saying you can’t really handle it all, and asking for help.

Or it can mean that you did your research and you didn’t find a solution for every conundrum. Coping with the issue can mean you realize it’s a pothole and you’re going to hit it.

Okay, so you might live to be 100 or close to it. Did you set a portion of your portfolio aside for very long-term growth? Or did you consider delaying Social Security benefits until age 70 — and by doing that, pump up your check for the rest of your life, no matter how long?

Or, let’s say you figure you will have to live with low returns for a long while. Have you allocated enough to cash or short-term investments to handle your spending needs? Or did you divide your portfolio into buckets for different purposes? And then did you come up with an income strategy for one bucket so that you don’t have to dip into your other buckets?

When you strategize like this in the face of risk, it’s easier to see the actions you can take, even if you can’t make the risk go away.

As financial planners, we don’t often discuss these non-market risks. The one risk we do talk about with clients all the time is market risk, because we know quite a bit about that. Markets are difficult and ever-changing. While that may seem impenetrable to the client, it doesn’t really intimidate us.

But the real risks to the client’s retirement? Many of them lie out there, beyond investments. They may be outside a financial adviser’s perfectly organized financial plan, but they still exist. And clients have to steer around them.

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Harriet J. Brackey, CFP, is the co-chief investment officer of GSK Wealth Advisors, a South Florida registered investment advisory firm that manages more than $330 million. She does financial planning for clients and manages their portfolios. Before going into the financial services industry, she was an award-winning journalist who covered Wall Street. Her background includes stints at Business Week, USA Today, The Miami Herald and Nightly Business Report.

MONEY College

Don’t Be Too Generous With College Money: One Financial Adviser’s Story

When torn between paying for a child's education or saving for retirement, parents should save for themselves. Here's why.

Saving money isn’t as easy — or as straightforward — as it used to be. Often, people find they have to delay retirement and work longer to reach their financial goals. In fact, one of the most common issues parents face these days is how to save for both retirement and a child’s college fund.

Last month, for example, I met with a couple who wanted to open college savings funds for each of their three children. They were already contributing the maximums to their 401(k)s with employer matches. I applauded their financial foresight; it’s great to see people thinking ahead.

Then I gave them my honest, professional opinion: Putting a lot of money into college funds isn’t going to help if their retirement savings suffer as a result. Sure, they’ll have an easier time paying tuition in the short term, but down the road their kids may end up having to support them — right when they should be saving for their own retirement.

The tug-of-war between clients’ retirement and their children’s education can lead to difficult conversations with clients, and difficult conversations between clients and their children. Who wants to deprive their children of their dreams and of their top-choice school?

I try to be matter-of-fact with my clients about this sensitive subject. I start with data: If you have x amount of money and you need to put y amount away for your own retirement, you only have z amount left over for your children’s college.

I also talk a little about my own experience — how my parents were able to write a check for my college tuition. But college was less expensive then, and costs were a much smaller percentage of their salary than they would be today. Times have changed.

As much as we all want to be friends with our children, we have to put that aside. I tell people that if they don’t know whether they should put their money in a 529 account or their retirement account, they should put it in their retirement account. Financial planners commonly point out that you can get a loan for college but you can’t get one for retirement.

I don’t think people realize that. I think that they just want to do right by their children.

After I talk about my own experience, I move on to my recommendation. I tell clients that one way to approach this issue with their children is to make them partners in this venture. Tell them that you’re going to pay a portion of the cost of education. Set a budget for what you can afford, then work with them to find a way to fill in the gaps. Make a commitment, then stick to it.

I explain to my clients that choosing their retirement doesn’t mean that they can’t help your children financially and it doesn’t mean they are being a bad parent or are being selfish. It does mean that they should prioritize saving for retirement.

When clients tell me that they feel guilty for putting their retirement first, I ask them this: “Where is the benefit in saving for your children’s college but not for your own retirement?” Without a substantial nest egg, I tell them, you could end up being a burden on your children when you’re older.

And there’s an added bonus, I tell them: If your kids see you putting your retirement first, it might teach them about the importance of saving for their own retirement. That could end up being the best payoff of all.

Read Next: Don’t Save for College If It Means Wrecking Your Retirement

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Sally Brandon is vice president of client services for Rebalance IRA, a retirement-focused investment advisory firm with almost $250 million of assets under management. In this role, she manages a wide range of retirement investing needs for over 350 clients. Sally earned her BA from UCLA and an MBA from USC.

MONEY Credit

Your Genes Might Affect Your Credit Score

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Jon Boyes—Getty Images

Your credit score isn't controlled by any one cause, but your genes may be a key factor.

There is the standard list of factors that influence your credit score: payment history, outstanding balances, the types of credit that you use and so on. But what you probably don’t realize is that your genes may also play an important role. Yes, your biological wiring might make you more likely to be more risk-seeking and take on more debt, which could lead to a lower FICO score.

I came across this intriguing discovery while researching my book Coined: The Rich Life of Money And How Its History Has Shaped Us. I wrote the book because I was working at a Wall Street investment bank during the credit crisis, and I wanted to know what leads people to make bad decisions with money. I learned that there are many things that guide our financial decisions, including our genes.

To understand how genes could sway our decisions, I asked a neuroeconomist. Neuroeconomics is an emerging and interdisciplinary field in which brain scans and other technologies are used to understand how we make financial decisions. Brian Knutson, a neuroeconomist at Stanford University, explained a study that he conducted with two colleagues, Camelia Kuhnen and Gregory Samanez-Larkin, on the link between our genes, financial decisions and even life outcomes.

They started with the multi-part question, “Do genes influence cognitive abilities, do they shape the way people learn in financial markets, or do they determine risk attitudes?” They concentrated on a gene known as 5-HTTLPR because it had been identified in previous studies as playing a role in how we make financial decisions. Specifically, they wanted to know whether there was causation between people who have a variant of this gene, possessing a short or long allele, and their financial outcome.

In the trial, they selected 60 individuals from San Francisco to participate. The participants shared demographic information such as their age, marital status and ethnicity. They also provided personal financial information such as their occupation, income level and debts. Some participants also disclosed their FICO scores. All participants had their DNA collected via cheek swabs for an analysis of whether they possessed the short or long alleles. Participants were then presented a series of financial decisions like how to allocate $10,000 across stocks, bonds and cash.

It turned out that those with short alleles made more conservative financial decisions than those with long alleles. Participants with short alleles allocated less money in equities and more in low-performing assets like cash. Moreover, in real life these participants had fewer lines of credit than the others. Those with two short alleles had higher FICO scores, some 93 points, than those with a long allele. FICO scores typically range between 300 and 850, so a swing of 93 points, or 17%, is statistically noteworthy.

Before concluding that genes were the reason for the variance in behavior, the researchers considered other possible factors: income, wealth and financial literacy. But they didn’t find that any of these things were meaningful in explaining the outcome of their study. Ultimately, they settled, “Overall, these results indicate that individual variation in the 5-HTTLPR genotype influences financial choice.”

Their conclusion is in line with other academic studies that find there are genetic determinants for financial decisions. For example, researchers compared the investment portfolios of fraternal and identical twins. They found that almost one third of the divergence in asset allocation might be attributable to genetic factors. Indeed, twins that were frequently in touch invested in a similar manner. But identical twins who grew up separately also demonstrated similar financial decisions. The researchers explain, “We attribute the genetic component of asset allocation—the relative amount invested in equities and the portfolio volatility—to genetic variation in risk preferences.”

However, Knutson and his colleagues sound a cautionary note: not all participants acted in accordance with how their genes might predict. Just because several studies reveal that genes appear to play a role in determining the financial decisions, doesn’t mean that they are the only things that matter. Even if someone is biologically wired to be risk-averse, they might demonstrate risk-seeking behavior depending on the situation. For example, say someone in her late 20s who is predisposed to risk aversion is setting up a retirement account. She has also taken two online courses that recommend more aggressive investing early in one’s career, so she decides to be more risk-seeking, and invests more money in stocks than bonds. In this case, knowledge triumphed over genetics.

That genes can influence our credit scores is an intriguing finding of neuroeconomics. Maybe one day, credit reports won’t just outline our borrowing and repayment history but how it deviates from expected behavior based on our genes.

More from Credit.com

This article originally appeared on Credit.com.

MONEY financial advice

What Every Investor Should Know About Schwab’s “Free” New Advice Service

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Paul Sakuma—AP

Robo-Chuck Has Landed! Do you want this free new online service to design your portfolio?

A new group of financial websites has been making investment advice cheaper and cheaper. Now the brokerage and mutual funds giant Charles Schwab is getting into the game, with a new online service called Intelligent Portfolios that can design a portfolio for you without charging any fee at all. You’ll need only $5,000 to open an account. But, as you might well have guessed, there’s an asterisk on that “free” price tag.

We’ll get to the asterisk in a moment. First, here’s why Schwab’s entry into online advice is such a big deal.

Every financial firm in America is fighting to offer investment advice to the middle-class, especially about what to do with their IRAs and rollovers from 401(k) retirement accounts. But the cost of getting a financial pro to sit down and help you design a personalized portfolio of stocks, bonds, and funds is often high—think 1% of assets per year or more—and the minimum required investment can be forbiddingly steep.

New web-based companies like Betterment, Wealthfront, and FutureAdvisor have lately been chipping away at this model. They don’t let you talk to a person. Instead, you go to their sites to answer questions about your age, financial position, and how much risk you are willing to take, and computer models generate a portfolio of stock and bond exchange-traded funds (ETFs). These “robo-advisers” often charge investors razor thin fees of 0.2% to 0.5% of assets per year, with low (or no) minimum investments.

The investment advice robo-advisers give isn’t terribly complicated. But for most people, that’s a good thing. You typically end up in a handful of broadly diversified index funds, which you buy and hold for the long run. This service can be a simple entry point to investing for those who don’t know how or where to get started, and they can automate chores like annual rebalancing and adjusting your mix as you age. And, again, they are cheap.

And yet, Schwab’s new version appears to undercut even the other robo-advisers’ slender fees by charging nothing.

Does that make it a sure winner? Not necessarily. As with all such programs, you have to take a look under the hood.

In addition to whatever investors pay for online financial advice, they also have to pay the fees of the underlying funds. The robo-advisers Schwab will compete with don’t offer their own mutual funds, but instead typically rely on Vanguard and iShares products. Those are very cheap funds that usually charge less than 0.2% of assets per year, so the net cost of investing with an online adviser stays low.

Schwab’s approach looks a little different. While Schwab is offering its investment strategy gratis, the company has said it plans to recommend some of its own funds, as well as third-party funds.

Schwab hasn’t made clear specifically what ETFs it plans to use with Intelligent Portfolios. Schwab spokesman Michael Cianfrocca told MONEY the investment strategies it uses “have nothing to do with generating revenue for the firm.” But a quick glance at the kinds of portfolios it recommends suggests that some of its underlying investment will be relatively costly.

For instance, Schwab appears to make liberal use of “fundamental” index funds. Some investors think this type of index fund, which tends to tilt its weightings toward value-priced stocks, may outperform the market in the long-run. But fundamental index funds are pricier than plain-vanilla stock index funds, which simply hold stocks in proportion to their market value. Schwab’s fundamental large-company stock fund charges investors a fee of 0.32% of invested assets annually compared to just 0.04% for the plain-vanilla index funds the company offers. (A 0.32% fee is still low compared to actively managed funds.)

Schwab also stands to earn money from investors’ cash positions, since they will be held in Schwab cash vehicles, which Schwab makes money on by collecting a spread between what it earns reinvesting the money and what it pays out to Schwab customers. In one scenario, for an investor in his or her 40s with a moderate risk appetite, the Schwab product recommended putting nearly 9% of the money into cash. The Schwab spokesman said that was typical for other types of accounts housed at Schwab. But it’s far more cash than some other investment managers recommend. To take one example: The Vanguard target-date fund designed for a similarly-aged investor would put less than 1% in cash.

In the long run, Schwab’s new product may prove a convenient tool for some investors. But don’t assume you’re getting something for nothing.

MONEY

Keeping Calm When the Market Goes South

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iStock

A financial adviser shares tips for easing anxiety in a rollercoaster market.

“It’s been too good for too long,” my client said.

She had every right to feel suspicious. With the markets appearing to be at an all-time high, she was justified in having that waiting-for-the-other-shoe-to-drop instinct. I understood her desire to tread cautiously.

The majority of baby boomers are at a crossroad in their lives: They want to retire, they should retire, and it’s time to retire. But they are extremely nervous nowadays about the markets’ record-breaking levels.

Over my many years of experience working with clients in this situation — they’re ready to retire, but they can’t quite pull the trigger — I’ve seen how scary it can be to make that potentially irrevocable decision. What if markets go down? Should they have waited? What if this, what if that?

It is human nature to question ourselves at times like these, but then again, times are always a bit uncertain.

I have found that the most important step in keeping clients calm in a volatile market is to have an investment education meeting regarding their risk level and market volatility at the start of our working relationship and routinely thereafter. Our clients are actively involved in assessing their own risk tolerance and choosing a portfolio objective that suits their long-term goals.

We also want to set the right expectation of our management so our clients know that we never sell out of the market just because things are starting to go bad. Market timing has not proven to be a successful growth strategy, which is why we work with our clients upfront to establish a portfolio and game plan they can live with.

Unfortunately, the inevitable will happen: The markets will go south, and clients will panic. How can financial planners ease clients’ anxiety? Here are a few suggestions:

  • Discuss defensive tactics. Show clients the dollar amounts they have in bonds and other fixed income. Translate that into the number of years’ worth of personal spending that is not in the stock market. Have an honest conversation about if that number will be enough over the long-term.
  • Leave emotion out of it. Talk to them about the danger of selling at the wrong time and illustrate how emotional decisions tend to do more harm than good. Remind them of how quickly markets can turn around after a big drop. It’s been known to happen on more than one occasion, so share your knowledge of these experiences. Let them know that you don’t want them to miss the upside.
  • Look at the positives. Reinvesting dividends and capital gains? Are clients making monthly contributions to a 401(k) or other investment accounts? Remind your clients that when markets are down they are buying at lower prices, which can work well for their strategy over the longer term. A down market also often makes investing easier and less frightening to buy, so that might be the time to purchase any equities they once worried were too expensive.

The markets will always have some level of volatility. As an adviser providing regular guidance and support, you want to do everything you can to help clients not overreact to the daily news, hard as it might be. Urge them to continue to think long-term. It may not always be easy to see, but today’s bad news may just be a client’s big buy opportunity, and they won’t want to miss that!

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Marilyn Plum, CFP, is director of portfolio management and co-owner of Ballou Plum Wealth Advisors, a registered investment adviser in Lafayette, Calif. She is also a registered representative with LPL Financial. With over 30 years of experience in the financial advisory business, Plum is well-known for financial planning expertise and client education on wealth preservation, retirement, and portfolio management.

MONEY Aging

Handling Family Finances When Dad Is Losing His Grip

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Sean McDermid/Getty Images

When the person in charge of family finances has dementia or Alzheimer's disease, a difficult transition is required.

A client’s daughter told me recently that she was beginning to notice her father having difficulties with memory and comprehension.

I had known that her father’s health had deteriorated somewhat, but he still seemed relatively sharp mentally up until the last conversation I’d had with him, around Christmas time.

The client’s wife has never been very involved in the family finances, and his son lives out of town. The daughter has been playing caretaker for some time. Now it seemed we needed to have a more in-depth conversation with everyone involved regarding family finances, longevity and what happens after the patriarch has passed away or can’t function as financial head of the household.

The loss of a loved one is unbearable, but far worse is losing a loved one to cognitive conditions such as Alzheimer’s disease or dementia. These decisions may cause personality changes. In some cases, a client may become belligerent or paranoid, especially when dealing with financial issues.

It is always preferable to have a client himself or herself acknowledge that something is wrong, but this may not always be the case. For this reason, financial advisers need to have a plan in place to address situations such as this one.

The first step is to get the family involved. Most of the time, the spouse or children will already be aware of the issue.

In this particular case, I could not discuss financial details with the daughter without a financial power of attorney. Fortunately, we were able to schedule a time for father, mother and daughter to meet and discuss family finances.

What if someone refuses to admit that he is losing his mental acuity? We dealt with this a few years back with another client. He was going through a divorce at the time — a process which may have either contributed to, or resulted from, his mental decline. We ended up being a part of an intervention involving the client, his children, his business partner and his pastor. The pastor referred him to a psychiatrist; luckily, the client pursued treatment that helped.

The key to handling many of these situations is having a ready stable of referable professionals in all aspects of life. In addition to the colleagues we deal with on a regular basis, such as lawyers and accountants, it is helpful to have contacts in the arenas of medicine and psychology.

Solid and consistent documentation is a standard in our industry, but it becomes absolutely imperative when dealing with cognitively questionable clients. Keeping communication records protects everyone involved and can go a long way to explaining client actions to family members if they are unaware of the problem.

Things don’t always go so smoothly. In some situations, you must fire the client. We have had to have these tough conversations in the past. It would be nice to say that we are always able to help facilitate a changing of the guard, but many of these personality issues are beyond our control. When cutting ties, it is important to do it with an in-person meeting. We’re honor-bound to do what’s best for the client, but it is also important to protect our practice. If we are unable to make progress, it may be best for clients to find someone who can better help them.

I’m very thankful the daughter came to me, rather than my having to reach out and have what could have been an unpleasant conversation. At this point we have now gathered financial powers of attorney and reviewed updated wills and trusts, coordinating with the family attorney. The mother and daughter are much more aware of the family financial situation and are not nearly as fearful about the future. I expect the daughter will take a more active role in the management of the family’s finances. We want to make sure that everyone involved is aware of, and on board with, the transition.

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Joe Franklin, CFP, is founder and president of Franklin Wealth Management, a registered investment advisory firm in Hixson, Tenn. A 20-year industry veteran, he also writes the Franklin Backstage Pass blog. Franklin Wealth Management provides innovative advice for business-minded professionals, with a focus on intergenerational planning.

MONEY Financial Planning

Financial Advice Is Good, but Emotional Well-Being Is Better

On the surface, good financial planners help you manage your money. Dig down deeper, though, and they're improving your emotional life.

On the surface, comprehensive financial planners provide advice and services in areas such as investments, retirement, cash flow, and asset protection.

We need to drill deeper, however, to get at a planning firm’s core purpose. After exploring this question over recent months, my staff and I have agreed that our core purpose is to transform the financial and emotional well-being of people. That’s the part of our work that gets us out of bed in the morning.

Here’s a closer look at the three key words of that purpose:

  • Transform: To achieve long-term financial health, people often need to transform their relationship with money by making permanent changes in their attitudes, beliefs, and behaviors. An example of transformation might be someone learning to reframe a money script that has blocked their ability to save for the future.
  • Well-being: This is a multidimensional word that includes financial, emotional, and physical aspects of people’s lives. Our purpose focuses on both the financial and emotional aspects. Since some 90% of all financial decisions are made emotionally, separating financial and emotional well-being is almost impossible.
  • People: By referring to “people” rather than “clients,” we acknowledge that, in order to foster transformation and well-being for our clients, we also need to be concerned about the well-being of all the members of our staff.

Once a firm has defined its core purpose — the “what” — the next step is to create a framework of principles to accomplish that purpose. This is the “how” that guides the operations of the company. The principles might be something like the following:

We…

  • Put clients first.
  • Guide people to reach a destination in an unfamiliar area.
  • Give sound advice and creative solutions.
  • Constantly educate ourselves.
  • Practice what we preach.
  • Are serial innovators.

Finally, behind the “what” and “how” of what a firm does is the “why.” These are the core values, the touchstone that brings everyone in the company together and forms the basis of the company’s culture. These values are non-negotiable. Even though a company’s purpose or principles may change over time, the values will stay the same. Core values might include:

  • Trust. Our work and personal interactions are based on real, unquestionable evidence, reliability, and trustworthiness.
  • Unbiased Advocacy. We are defenders, supporters, and interceders on behalf of our clients and one another.
  • Well-Being. Everything we do is in support of achieving and maintaining, for our clients and one another, a state of being happy, healthy, and prosperous.
  • Continuous Improvement. We focus on improving our processes, our client experience, and ourselves.

In defining the core purpose for a comprehensive financial planning firm, it’s essential to appreciate the importance of both financial health and the well-being it supports. One can’t have well-being without the financial means to support physical health and emotional happiness.

This is why our firm defines its purpose as transforming people’s financial and emotional well-being. This core purpose is based on the belief that comprehensive financial planning goes beyond building financial independence. It also helps clients and staff members change destructive money behaviors, clarify goals, and achieve the dreams that represent happiness to them. In the broadest sense, real financial planning offers investment advice that supports people’s investment in their own well-being.

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Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.

MONEY financial advice

Even a “Fiduciary” Financial Adviser Can Rip You Off If You Don’t Know These 3 Things

man in suit with briefcase stuffed with bills
Roy Hsu—Getty Images

After years of fits and starts, the move to require brokers and other financial advisers to act as fiduciaries—essentially making them put their clients’ interests first—seems to be gaining traction again. Witness President Obama’s recent speech at AARP on the topic. Whether a fiduciary mandate eventually comes to pass or not, here are three things you should know if you’re working with—or thinking of hiring—an adviser bound by the fiduciary standard.

1. Fiduciary status doesn’t guarantee honesty, or competence. The idea behind compelling financial advisers to act in their client’s best interest is that doing so will help eliminate a variety of dubious practices and outright abuses, such as pushing high-cost or otherwise inappropriate investments that do more to boost the adviser’s income than the size of an investor’s nest egg. And perhaps a rule or law requiring advisers to act as fiduciaries when dispensing advice or counseling consumers about investments will achieve that noble aim.

But you would be foolish to count on it. Fact is, no rule or standard can prevent an adviser from taking advantage of clients or, for that matter, prevent an unscrupulous one from using the mantle of fiduciary status to lull clients into a false sense of security. As a registered investment adviser with the Securities and Exchange Commission, Ponzi scheme perpetrator Bernie Madoff had a fiduciary duty to his clients. Clearly, that didn’t stop him from ripping them off.

Fiduciary or no, you should thoroughly vet any adviser before signing on. You should also assure that any money the adviser is investing or overseeing is held by an independent trustee, and stipulate that the adviser himself should not have unrestricted access to your funds.

2. Your interests and an adviser’s never completely align. There’s no way to eliminate all conflicts of interest between you and a financial adviser, even if he’s a fiduciary. If an adviser is compensated through sales commissions, for example, he may be tempted to recommend investments that pay him the most or frequently move your money to generate more commissions. An adviser who eschews commissions in favor of an annual fee—say, 1% or 1.5% of assets under management—might be prone to avoid investments that can reduce the value of assets under his charge, such as immediate annuities. Or, the adviser might charge the same 1% a year as assets increase even if his workload doesn’t.

My advice: Ask the adviser outright how your interests and his may deviate, as well as how he intends to handle conflicts so you’ll be treated fairly. If the adviser says he has no conflicts, move on to one with a more discerning mind.

3. Even with fiduciaries high fees can be an issue. Much of the rationale over the fiduciary mandate centers around protecting investors from bloated investments costs. But don’t assume that just because an adviser is a fiduciary that his fees are a bargain, or that you can’t do better. Advisers can and do charge a wide range of fees for very similar services, and fiduciaries are no exception. So ask for the details—in writing—of the services you’ll receive and exactly what you’ll pay for them. And don’t be shy about negotiating for a lower rate, or taking a proposal to another adviser to see if you can save on fees and expenses.

A fiduciary may have a duty to put your interests first. But that duty doesn’t extend to helping you find a competitor who may offer a better deal. That’s on you.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

More from RealDealRetirement.com:

Should You Claim Social Security Early and Invest It—Or Claim Later For A Higher Benefit?

How To Protect Your Nest Egg From Shifting Government Policies

Your 3 Most Pressing Social Security Questions Answered

MONEY financial advisers

Proposed Retiree Safeguard Is Long Overdue

businessman putting money into his suit jacket pocket
Jan Stromme—Getty Images

The financial-advice regulations pushed by the Obama administration will save retirees, on average, an estimated $12,000.

When you are planning for retirement and ask for advice, whose interest should come first — yours or the financial expert you ask for help?

That is the question at the heart of a Washington debate over the unsexy-sounding term “fiduciary standard.” Simply put, it is a legal responsibility requiring an adviser to put the best interest of a client ahead of all else.

The issue has been kicking around Washington ever since the financial crisis, and it took a dramatic turn on Monday when President Barack Obama gave a very public embrace to an expanded set of fiduciary rules. In a speech at AARP, the president endorsed rules proposed by the Department of Labor that would require everyone giving retirement investment advice to adhere to a fiduciary standard.

The president’s decision to embrace and elevate fiduciary reform into a major policy move is huge.

“The White House knows that this is the most significant action it can take to promote retirement security without legislation,” said Cristina Martin Firvida, director of financial security and consumer affairs at AARP, which has been pushing for adoption of the new fiduciary rules.

Today, financial planning advice comes in two flavors. Registered investment advisors (RIAs) are required to meet a fiduciary standard. Most everyone else you would encounter in this sphere — stockbrokers, broker-dealer representatives and people who sell financial products for banks or insurance companies — adhere to a weaker standard where they are allowed to put themselves first.

“Most people don’t know the difference,” said Christopher Jones, chief investment officer of Financial Engines, a large RIA firm that provides fiduciary financial advice to workers in 401(k) plans.

The difference can be huge for your retirement outcome. A report issued this month by the President’s Council of Economic Advisers found that retirement savers receiving conflicted advice earn about 1 percentage point less in returns, with an aggregate loss of $17 billion annually.

The report pays special attention to the huge market of rollovers from workplace 401(k)s to individual retirement accounts — transfers which often occur when workers retire. Nine of 10 new IRAs are rollovers, according to the Investment Company Institute mutual fund trade group. The CEA report estimates that $300 billion is rolled over annually, and the figures are accelerating along with baby-boom-generation retirements.

The CEA report estimates a worker receiving conflicted advice would lose about 12% of the account’s value over a 30-year period of drawdowns. Since the average IRA rollover for near-retirees is just over $100,000, that translates into a $12,000 loss.

What constitutes conflicted advice? Plan sponsors — employers — have a fiduciary responsibility to act in participants’ best interest. But many small 401(k) plans hire plan recordkeepers and advisers who are not fiduciaries. They are free to pitch expensive mutual funds and annuity products, and industry data consistently shows that small plans have higher cost and lower rates of return than big, well-managed plans.

The rollover market also is rife with abuse, often starting with the advice to roll over in the first place. Participants in well-constructed, low-fee 401(k)s most often would do better leaving their money where it is at retirement; IRA expenses run 0.25 to 0.30 percentage points higher than 401(k)s, according to the U.S. Government Accountability Office. Yet the big mutual fund companies blitz savers with cash come-ons, and, as I wrote recently, very few of their “advisers” ask customers the basic questions that would determine whether a rollover is in order.

The industry makes the Orwellian argument that a fiduciary standard will make it impossible for the industry to offer cost-effective assistance to the middle class. But that argument ignores the innovations in technology and business practices that already are shaking up the industry with low-cost advice options.

How effective will the new rules be? The devil will be in the details. Any changes are still a little far off: TheDepartment of Labor is expected to publish the new rules in a few months — a timetable that already is under attack by industry opponents as lacking a duly deliberative process.

Enough, already. This debate has been kicking around since the financial crisis, and an expanded fiduciary is long overdue.

MONEY financial advice

The Investing Danger That Smart People Face

man sitting in front of a wall of certificates
C.J. Burton—Corbis

You may be brilliant and a giant in your profession, but that can get you into a lot of trouble.

While returning from a business flight last year, I experienced a queasy stomach sensation. Later than night I woke up with searing pain across my abdomen. At my internist the next morning, I asked, “Do I have food poisoning?”

“I would say something more serious,” the doctor replied. “We need to get you a CAT scan.”

Off to the imaging center. The radiologist came out: “You have appendicitis,” he said. “You cannot pass Go, you cannot collect $200. You have to go straight to the emergency room. Take this copy of your images.”

I checked in at the hospital and was triaged. I slumped in a corner, clearing my email and calling the office. Eventually a doctor came out and asked why I was there.

“I have appendicitis,” I replied.

“Really?” he said. “Did you self-diagnose on WebMD?”

“No,” I said. “I went to a radiologist. I have slides! Look at my slides.”

He did, and then he operated on me.

In recovery later that day, I realized my surgeon has the exact same problem I have: “Yeah, doc, I know you have a medical degree and 30 years of experience, but I’ve been reading WebMD and I think…”

Or in my case: “Yeah, Dave, I know you have an MBA and 30 years of investing experience, but I’ve been reading [pick one] Motley Fool/Zero Hedge/CNBC/TheStreet.com, and I think…”

What do I say when clients think they know more than I do?

At my firm, we work with executive families. Our clients are brilliant; many have advanced degrees from top universities. These clients have ascended to the pinnacles of their careers and are accustomed to being the smartest person in the room.

Trouble starts, though, when the clients confuse brilliance with experience. For the most part, the clients let us do our job, but every once in a while, we’ll get an order along the lines of:

  • “Buy Shake Shack in my account.”
  • “Put 50% of my assets in emerging markets.”
  • “Put 100% of my assets in cash! So-and-so says the sky is falling!”
  • “My 14-year-old has ideas for restructuring the portfolio.”

We could say, “That is a stupid idea. We are totally not going to do that.” But that approach leads to resentful clients who may take their resentment, and their account, to another adviser.

I prefer to use these requests as opportunities for education, laced with humor. Several clients asked us about the Shake Shack IPO in January. We showed them a simple metric: stock market capitalization divided by store count. We asked, “If Shake Shack is valued at $26 million per store and McDonald’s is valued at $2.6 million per store, do you think that the Shake Shack burger is ten times better than the McDonald’s burger?” That reality check then led us into a discussion of the risks and rewards of emerging growth stocks versus value stocks.

Clients have told me that picking stocks must be easy.

“Really?” I say. “Do you like to play poker?”

“Love playing poker,” comes the reply. “Every Saturday with my buddies.”

“Really? Do you ever go to Atlantic City and play with the pros?”

“Gosh, no! I’d get my eyeballs ripped out.”

“Really? You don’t have an edge in poker, but you think you do have an edge in stock picking, which is 10,000 times more complicated than poker? Really?”

I started investing at 17, so it’s not out of the question that a 14-year-old might have good ideas (though the same parents who think their child could manage their portfolio never allow that kid to drive their car). If a parent wants to involve a child, we’ll send that child several books on investing and instructions on how to “paper trade.” If the child is willing to paper trade for a year and show me the results, I’m willing to take his or her input. (That conversation hasn’t happened yet, but one day!)

Ultimately, there has to be a line we won’t cross. If a client starts sending daily orders, or even worse, jumping into his or her accounts and making trades without us, we have to fire the client. That is a no-win situation for us: Anything that goes well in the portfolio is because of the client’s brilliance, while anything that goes badly is our stupidity. We’ll set that client free to make room for clients who do respect our expertise.

———-

David Edwards is president of Heron Financial Group | Wealth Advisors, which works closely with individuals and families to provide investment management and financial planning services. Edwards is a graduate of Hamilton College and holds an MBA in General Management from Darden Graduate School of Business-University of Virginia.

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