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The 7 Deadly Retirement Sins, Part 7


        Not working with an independent, objective advisor who is a CFP®


       Perhaps the biggest mistake that a retiree will make is not working with an objective, fee-only Certified Financial Planner™.  It is not uncommon for a retiree to try to take on the task of planning for their retirement alone, without any help.  Just as common a mistake as taking on this task alone is taking the advice of an unqualified salesman who holds themselves out as a “financial advisor”.  Let’s tackle each of these problems separately.


Working Alone


Imagine you had a five million dollar net worth.  Would you purchase a template Last Will & Testament online or from Staples and fill it in yourself?  I hope not.  For a high net worth individual, it is vital that they have an estate plan prepared and monitored by an expert, such as an estate planning attorney.  One minor oversight or mistake could cost you 100 times what you would pay for your estate plan.  A solid financial plan for a retiree is just as, and perhaps even more, critical.  You must not be penny wise and pound foolish.


Avoiding a single error  with the assistance of a good financial planner can save you 20 years worth of his fee.  It is not uncommon for a retiree to use poor judgment based on a lack of knowledge and make a decision that negatively impacts his lifestyle for years.  A good financial planner will more than pay for himself by providing you with advice that will protect your portfolio from rookie mistakes at a time when  mistakes cannot be made up for.


As I mentioned previously, a reasonably priced investment advisor charges around 1% of assets.  If that advisor is carefully monitoring your additional expenses, such as maintenance fees and transaction costs, you would have an additional .25% in fees and expenses.  This creates a total out of pocket cost of 1.25%.  The average actively managed mutual fund alone charges about 1.5%.  This is just the maintenance fee the mutual fund charges.  This is what you pay for the “privilege” of investing in their fund.  This fee does not include the advice of any expert, a financial plan, Social Security planning, etc.  I think the point here is obvious.  A good, objective and fairly priced financial planner can more than pay for himself with just a few smart strategies.

Taking the Advice of an Unqualified Salesman Who Calls Himself an “Advisor”

It does not take much for an individual to hold themselves out as an “Investment advisor”.  In fact, it doesn’t take anything more than a few bucks for business cards.  There are no requirements, laws, or designations that are required for someone to call themselves an investment advisor.  Many individuals who are in business to sell insurance or financial products can and often do hold themselves out as investment advisors.  In my opinion, that is the equivalent of a used car dealer calling himself an “Automobile Advisor”.  It creates tremendous conflicts of interest.  What exactly makes a life insurance salesman competent to make recommendations on investments, estate planning, or tax planning?  I think we know their solution in all of these areas; “Purchase an annuity from me”. 

Taking advice from a salesman or even someone new in the field who does not understand all the aspects of your financial life (and often doesn’t care to as long as they make the sale) is what leads to the negative feelings that often surround the term “financial advisor”.  Most of these so-called experts are no better at building a portfolio and are often more emotional during market volatility than you are.  Thus, they make the same mistakes you would.  The only difference is you are paying them to make those mistakes. 

            Solution:  It is vital that as you approach retirement and throughout your golden years, you work with a professional.  However, you will do more harm than good by working with the wrong type of professional.  How do you know what type of professional is the right type?  The answer is simple:  find a fee-only Certified Financial Planner™ (CFP®).  

            A Certified Financial Planner™ (CFP®) is a financial professional that has met the rigorous qualifications of the CFP® Board of Standards.  This means that they have taken classes in six fields: the financial planning process, insurance, investments, retirement planning, tax planning, and estate planning.  Once they have completed this coursework, which typically takes a minimum of two years, they are then given a rigorous 10 hour exam covering each of these disciplines.  Once the CFP® candidate passes the exam, they must maintain an ethics oath and fulfill 3 years of experience requirements.  Only then are they able to use the CFP® mark.  In order to maintain the certification, they must take 30 hours of continuing education classes every two years to keep up to date with the constantly evolving laws and products.

The CFP® is the gold standard in our industry.  This individual has the knowledge and experience to help you in all aspects of your finances and can look at the big picture and where it is that you want to go.  However, just because an individual is a CFP® doesn’t mean they are looking out for your best interest.  There are many CFP®’s that sell investment products and insurance.  This creates a conflict of interest between doing what is right for them or what is a right for their client.  This is why it is so important that you find a fee-only advisor. 

            Financial advisors are paid in three ways: commission-based, fee-based, or fee-only.  Let’s look at each:

             Commission-based:  A commission-based advisor is a salesman.  They give you advice on your finances and encourage you to purchase one of their products to fill your financial need.  Their product may be annuities, insurance, mutual funds, etc.   The problem with commissioned-based brokers is that they have an incentive to sell you something that may cost you more but is a higher profit for them.  In fact, it is often the case that a commissioned-based advisor will sell you something that you do not need. Handling your finances in this way leaves room for numerous problems.


             Fee-based:  Fee-based is a broker who earns commissions on the products he sells you, but also earns a small fee from you, the client.  The purpose of this system is to tie more of the advisors income to the client.  The assumption is that the broker will worry less about the commissions they earn from the products since some of the revenue is coming from the client, thus keeping the client happy will be paramount.  Although it is certainly a step in the right direction, I don’t think it is difficult to see the flaw in this system.  The advisor still has incentive to promote specific products.  Thus, the conflict is not eliminated.


            Fee-only:  A fee-only advisor is someone who is paid by the client alone.  They do not receive commissions, kick backs, or revenue of any kind on any financial product they recommend.   100% of the revenue they generate comes from the client, thus, the advisor is not beholden to any one product or mutual fund company.  They continue to do what is in the best interest of the client in order to keep the client happy.  A happy client continues to pay their fee.  There are almost no conflicts and the advisor ceases to try to sell the client anything once they are hired. 


Obviously, in order to get the best of both worlds, a fee-only CFP® who’s sole incentive is to look out for you is the best case scenario.  A competent advisor who is not trying to sell you anything will keep you on the right track to ensure that what you have will be there to provide for you all throughout your retirement years.

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