Seeing Retirement with a Financial Planner

On the surface, financial planning has remained the same. You are looking for a path to retirement that will provide you with a secure future, a worry-free post-work life. And financial planners offer you their service as a guide on that journey. But choosing the right one seems to have become more difficult as the industry has converted itself into what they think is more user friendly. How do you chose? 

There was time in the not-too-distant past when financial planners were catering to only the elite investor, one who is already versed in the concept of spending money to keep money. These richer clients understood that making money was the easy part; keeping it on the other hand was tougher. The sort of planners these folks hired were asset-based. This means that if you had wealth, for a percentage of those assets, they would invest to keep it.

They had an interest, albeit conflicted, in keeping your money in motion. Not only would they get a portion of your returns, they might also receive pay from the very products they were suggesting you use. Beyond these conflicts, which have obvious pluses and minuses, their interest was in the growth of your portfolio. They did attempt to cultivate a long-term relationship and the way they constructed their business with ease of access to conversations. And they knew that if they did a good job, they wouldn't hear from you until you stumbled across some idea on your own. They might at the point weigh the option against their own self-interest: less money to manage because, for instance you thought a life insurance policy was a good idea for your estate, would be less of a percentage of the total wealth under management.

Until, of course, things go awry. When the markets nose-dived in 2008, not only did economists and financial students miss the event, but so did financial planners. This exposed to some of these wealthy clients the fallibility of their skills. Paying as much as 2% of the net worth of their portfolios and at the same time, losing value the same as someone who didn't pay anyone for advice, brought the industry to rethink their approach.

Enter the flat-fee financial planner. This seemed like the logical choice for those with not a lot of money but the same needs as those who had much more: they wanted to keep it. The question is, without the incentive to make more based on the strength of the portfolio, it seemed as if this was simply window-dressing planning - they charged a flat fee for people who didn't need a lot of ongoing advice and they didn't offer more than was needed.

Storefront financial planners popped up everywhere. They would take your plan, reconstruct it and channel you into other products, some you might not need. They might suggest refinancing (and they could help). They might restructure your life insurance needs (and they could help). They might steer you towards an annuity (and they could help there as well).

And once that was done and you seemed set, they made money on the commissions these product brought in and did so under the guise that it was all in your best interest. Sometimes it was. The problem was that this yearly or twice yearly visit could cost upwards of $1,000. This might be a good investment for those who are in relatively stable shape. But for many who sought this sort of advice, the money might have been better spent elsewhere.

The next phase of advice giving came as a result of the downturn. While many people lost a great deal of investable net worth, some had un-investable assets. the may have had muh of their net worth tied up in their business for instance, an asset but not one that would be considered liquid. These assets, while seemingly under management would be considered when any advice was given. The concept of protection although came at a cost that sometimes is twice that of the fee-based planner.

The advent of the hourly based financial planner seemed to be a good solution. Much like the service provided by lawyers, the concept of the clock-running seemed to be a good idea for some people. They paid for what they received. The relationship was even more important here than in many of the other types of planning scenarios: planners were paid by the hour so they kept that meter running. Call with a question: and the meter clocked the time. Stop by with a concern: and the meter clocked the visit even as they chatted up your personal life.

Removing the asset-based incentive will keep your financial planner working longer on your plan with results that aren't often eventful. None of this suggests that this group isn't without merit. Far too many people equate the time they spend making money as more fruitful than time spent keeping it. They could, in almost every instance, find the same solutions on their own. Ironically, they could save money by investing some of their own time.

Evan Esar, American humorist who once quipped: "The mint makes it first; it's up to you to make it last." Keep in mind, credentials play a role. Start with the certified financial planner designation and move towards the references. Even if someone you know recommends a planner, do your own background check. Ironically, once you satisfied your inner skeptic, calculate the amount of hours you did and the amount of hours after-the-fact that you questioned your decision.

On today's Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Dave Ng we discuss the role financial planners can play in your retirement planning. Even as the industry surrounding advice has shifted to a more consumer friendly format, it has become more difficult to chose the right financial planner for the task.

Listen to internet radio with

Paul Petillo of Target2025.com/BlueCollarDollar.com

and Dave Kittredge and Dave Ng

of FinancialFootprint.com

on

The Financial Impact Factor

at Blog Talk Radio

Retirement Planning: What the Financial Planners are Thinking

We have a multi-dimensional problem when it comes to retirement thinking. We want to pinpoint numerous factors in our retirement plan, when in fact, the effort might be wasted. Much like the physicist who wants to measure a particle, quantum mechanics explains that it cannot be done, in part because it would change the particle by trying to stop it. Making a retirement plan pause gives you no measurable assurance that where you are right now is going to be the right move somewhere down the road.

These financial planners, their opinion which many will still turn to even if their advice led us down this road in the first place, are still called upon to give direction. I have neighbors who fret over the fate of their retirement accounts yet as soon as a son or daughter wants to make a financial decision, the first step is to set up an appointment with a financial planner.

Now these planners are looking for a way to regain your trust - many still have your business but largely feel uncomfortable with the disappointed looks on your faces. To address this, they have begun offering some suggestions, which although not new, they are a shift from too much risk to finding a way to eliminate what they see as unnecessary risk.

In a recent article to financial planners, The Investment News offers some suggestions that will no doubt be taken by their lobby group to Washington. They think that Social Security will remain a part of a retirement plan. They do concede that fixing this program will require not only a cut in benefits but an increase in taxes. Not very imaginative but keep in mind, this group is not likely to waste too many braincells on a program that produces no profits.

Instead, they are focusing on readjusting their client's portfolio from (age-appropriate) risk to vanilla risk (read that as a long-term relationship with folks who seek a way to get ahead by taking a much slower vehicle). This could add as many as ten years to your working life.

The net effect of working longer - besides working longer - is a more fully funded plan. But that funding will not have realized its full potential without a certain amount of risk. Many planners, as they restructure your plan for you will move your money into more costly types of investments that, on the surface, offer less risk.

Not all index funds are created equally and the shift into target dated funds does not come cheap and in some cases, are not a proven way to soften risk. Index funds can suffer from what is known as style drift, a way to enhance the return of the index by taking on an actively managed methodology.

Target dated funds are still suspect. There is no proof they do what they promise and do it for less cost. I have had problems with fund companies selling these funds as the risk free, cost effective ways to save the retirement community. And planners have become one of the forward sales makers for this product.

Adding to the list of products this group is looking to sell to lawmakers is the right to annuitize retirement income at age fifty. The thinking here is so simple, it is almost backward thinking. They are suggesting that the investor in a defined contribution plan take their money and essentially take it off the table, guaranteeing it will be there when they retire. This would allow folks who were unsure about the future to "buy" an annuity, with its high fees and suspect growth aspect instead of switching to a lower risk platform.

The suggestion that employers begin a retirement plan for all employees that have failed to do so and docking pay to fund it, seems, at least on the surface, to be a good idea. A bit Orwellian but the strategy is worth looking at for all workers before something like this becomes law. After that, the employer may pick the plan and in doing so, may not fully understand their fiduciary responsibility. But then, they would probably hire a planner.

Retirement Planning and the Advice of Professional Money and Investment Planners

In a recent column in the San Diego Union Tribune, a financial planner was enlisted to offer a reader a financial make-over. The goal was to retire at 55, after a divorce, after a recent home purchase, and after racking up a five figure debt with credit cards.

The planner suggested:

"Use emergency savings to pay off debt.

"Decrease monthly retirement contributions from $500 to $300; use the extra $200 to rebuild emergency fund.

"To retire at 55, work part time for 10 years (with a minimum salary of $20,000) and consider selling home and buying a smaller property outright to eliminate a mortgage during retirement.

"Establish a budget to manage current spending habits.

"Revise W-4 form with employer to account for mortgage and property tax deductions; doing so will increase income by $400.

"Take on more risk and diversify asset allocations to maximize returns for the next few years before retirement.

"Look into the purchase of a $1 million umbrella policy as well as disability insurance.

"Have a coordinated will and trust drawn up along with applicable medical directives and powers of attorney."

And because the article allowed for comments, I added the following: "Sounds like her planner needs to suggest the harsh realities. Let's start with her inability to come up with or budget for those property taxes. With a current liability (mortgage payment, which seems to me was adjusted at some point) and a $5,000 a year property tax bill (something that is guaranteed never to decline), Ms. Ventura will not even come close to enough to live on with her pension. If she were to retire right now, with the assets she has, she would have about $300 a week for all of her other incidentals.

"Her planner," I wrote, "wants her to decrease her retirement contribution by 30%, add more insurance, not really retire (work part-time for earning least $20,000 a year - doing what?) and rearrange her asset allocation to get 10.68% a year return (even without the use of index funds, no short term or intermediate bond investment coupled with large-cap and international exposure could hope to get those kinds of returns which so far over the last ten-years hasn't and projecting even optimistically out over the next ten years will).

"And after all of that, he wants her to sell her home.

Why not just keep working until she is 65, put away the credit cards (while continuing to pay them down - which if she took her current personal savings to do would allow her to redirect that $450 to rebuilding that account - which would still have, according to the numbers listed above, well over $13,000 in checking and savings) and budget in another $300 towards the mortgage payments bringing the overall life of the loan down to around fifteen years. This will leave her living tight - like the rest of us - but will also increase the chance that she will have her home when she retires (meaning when she stops working) and might be able to pay for the taxes on the property.

I see no mention of health insurance in Mr. Phelps plan short of a disability policy or an employer sponsored long-term care arrangement. That 403(b) and 457 plan will begin to cover that but if a recent estimate by Fidelity suggests, her savings for insurance in a post-work life will fall short by $850,000.

True, Ms. Ventura is doing better than most but she is going to need to rethink those post-divorce goals. And this is true for many of us.

When we calculate how much we will need, we tend to gloss over numerous factors in an attempt to tailor our dreams to fit. Her financial make-over would have cost her $1,200 and she would not really be any closer to the truth about her future than had she just faced the facts.

One: Divorce changes the whole retirement picture. Ms. Ventura is no exception, she will have to recover much more financially than had she remained married.

Two: The cost of retirement is rising every day, just like everything else. Plan on a 15% increase in those costs, year-over-year. Can she handle that and still retire at 55? Not likely.

Three: There are no guarantees. That employer sponsored pension may falter. Those investments may weaken. That house may be worth less as the taxes on it rise.

The best base calculation she can make: Can she live on half of what she is making now? Because that, for an increasing number of us, is the reality of retirement.

Retirement Planning and the Financial Professional

What do you do when, according to a recent post by Harriet Brackey of the Sun-Sentinel Tribune, professional advisers gather and one “thinks he can pick outstanding companies and beat the market” while another, “uses many studies to show that no one beats the market for long and so he favors index investments” and another offers an, “in the middle, putting the bulk of his clients’ money into an index-like investment, yet playing around the edges with active stock or bond picking, hoping to goose up the overall return of the portfolio”?

Why does this confusion seem shocking yet at the same time, not so much?

It seems that this group of professionals does not have a unified game plan for their clients for three good reasons.

There is money to made in confusion. If you can keep the theories shifting, the folks who pay for these services believe that they are doing better than their peers - and that brings me to my second point.

We spend far too much time creating benchmarks based on another person's idea of successful investing and retirement planning. Financial planners know this and try to "tailor" your investments accordingly, making them seem so personal.

The guy who suggests his client index should do exactly that. Perhaps a growth index (mid-cap or small-cap) a value index (large-cap) and emerging market and an international index would suit just about every investor's needs. Which makes the financial planner obsolete. Not only will that client save money in fees for the financial planner, they will also be paying less for the funds.