The recent PBS Frontline documentary “The Retirement Gamble” has brought to the forefront the myriad ways in which the financial industry fails to act in your best interests. Instead of acting as nurturing caretakers of your retirement nest egg, some advisors are more concerned with padding their own retirement accounts at your expense.
However, there are ways to protect yourself from many of their most egregious practices. Perhaps the single most important thing that you can do is to seek the counsel of a fee-only financial planner. A fee-only financial planner not only looks out for your best interests, he or she can also offer you a wealth of benefits and services, including:
Financial giants like Goldman Sachs and Wells Fargo don’t pay out billions in bonuses every year by selling simple index funds with expense ratios of 0.10% or less. The real profits come from actively managed mutual funds that hold out the promise of above-market returns. Of course, the higher returns are often illusory, but the higher fees are very much real. So how do they manage to hawk their wares year after year? They get an army of financial “advisers” — otherwise known as salespeople — to do their bidding for them. In return, these wolves in sheep’s clothing get a kickback from the investment companies that create these inferior products.
It’s bad enough that these advisers engage in “revenue sharing arrangements” — a phrase that would make Orwell turn in his grave — with the companies whose products they sell, but they also have the audacity to charge you commissions on every transaction they make on your behalf. This produces some truly disturbing incentives for commissioned-based financial advisers. Despite all the evidence suggesting that the best strategy for an investor is to buy and hold the market through broad-based index funds, advisers who charge commissions will want to churn your account to boost their own fees. It’s a racket that would make even Bernie Madoff blush.
The financial industry thrives on complexity and obfuscation. Have you ever tried reading a mutual fund prospectus cover to cover? Economist Robert Hiltonsmith tried reviewing his own investment portfolio but couldn’t make heads or tails of it. Diving into the prospectuses, Hiltonsmith found more than a dozen different fees, most of which were described with seemingly innocuous terms like “12b-1” fees. You may not worry about a 0.25% fee here and a 0.50% fee there, but they add up quickly. As Vanguard founder John Bogle demonstrated, a 2% annual fee could destroy two-thirds of your investment gains over a 50-year time period. Fee-only financial advisers understand that simplicity is your friend, especially when it comes to expenses: There should be few of them, and they should be easy to understand.
Complexity is not the only way that unscrupulous financial advisers can take advantage of you. Although they may be somewhat subtler than Vin Diesel in “Boiler Room,” advisers can also play on your basest human emotions — fear and greed — to induce action that mainly benefits them. High-pressure sales tactics are designed to force quick decisions that are based on those emotions without reasoned consideration of their long-term ramifications. This makes people susceptible to insurance-investment hybrids with high expense ratios and considerable surrender fees, all in the name of safety (fear). Alternatively, they can be lured by the siren song of huge profits (greed) to buy exotic investment products that may not be appropriate for your specific situation. Whenever you feel pressure by a financial adviser to buy a certain type of investment product, grasp your wallet tightly and don’t let go.
One of the most shocking facts revealed in “The Retirement Gamble” is that approximately 85% of all financial advisers have no fiduciary responsibility whatsoever to their clients. In other words, most financial advisers are under no legal obligation to act in your best interests. Given the incentives that currently exist in the financial industry, this is a recipe for disaster. When you search for someone to protect and grow the assets that you have worked so hard to accumulate, make sure that they are a Registered Investment Advisor (RIA) and they have signed a fiduciary oath to always act in your best interest.
When it comes to your investments, hiring the right financial adviser may be the most important decision that you will make. So you have to ask any prospective adviser the right kinds of questions. How are they compensated? What kinds of products do they offer? Do they have any relationships with certain investment companies? Have they signed a fiduciary oath to act in your best interest? Once you find an adviser that give you satisfactory answers to these questions, you will be able to make your own retirement planning a little bit less of a gamble.
For more information or to set up a free consultation, contact Pathway Financial Planning at 248-567-2160 or email firstname.lastname@example.org.