Retirement Income Blog

After the dot-com bust, the 10 largest securities firms paid a $1.4 billion fine to the SEC for inappropriately recommending stocks to investors.  But the public still had faith and the big firms seemed to be little harmed as to their reputation.  In 2008, we have some of those same big financial asset management firms going under or being merged: Bear Stearns, Lehman, Merrill Lynch (more to follow  in 2009).  This time, the employees, specifically the brokers, have lost faith and are leaving to start their own financial asset management firms.

As employees of these larger companies, the brokers often work on a commission basis.  When they leave, they obtain a Registered Investment Advisor certificate from the SEC to set up shop on their own.  They can no longer charge commissions but rather, operate on a fee basis (e.g. charge a 1% fee to manage your stock portfolio).  It’s estimated that there are 1,000 of these independent financial asset management shops being set up annually.  Can you trust an individual with no “big firm” backing?

How much trust you have in a big firm is up to you.  Understand however that if an individual broker becomes an independent financial asset manager, your portfolio is still maintained at a large firm such as Charles Schwab, TD Ameritrade, E-trade, Fidelity, etc. So you are trusting the intellectual capacity, integrity and advice of your financial advisor but your assets are actual on deposit with a large well known custodian. 

It appears that affluent investors, the typcial clients of independent financial asset managers, have embraced the services of these independent providers. Charles Schwab’s semi-annual “Independent Advisor Outlook Study” for 2008 reports affluent investors turning to independent financial asset managers and away from full-service financial asset management firms. Mutual fund manager, Rydex, found the average registered investment advisor was already doing well before the recent turmoil and had increased their client base by 7 percent in 2007.

Michael Weiss, founder of Frontier Financial Advisors says, “Investors are moving their accounts from the
large brokerage firms and banks to boutique financial asset management firms….For the first time in years, the small boutique asset management firms are better positioned than the larger firms to serve the individual investor.”

For you as the investor, you need to decide if your comfort comes from the individual that you deal with and your relationship with that financial advisor or if you feel batter about your financial asset management being handled by a big name.

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Typically, when you see the phrase ”retirement plan services,”, these are services developed for companies in helping their employees save for retirement. These services may include several as follows.

Retirement Plan Design
Management of many companies don’t know if it’s better to have a 401k, a profit sharing, a defined contributions plan and how to design the plan.  Management may be faced with such options as whether the retirement plan should have a vesting schedule, which employees should be included (i.e. based on age or hours worked), should there be a loan feature, etc. Retirement consultants experienced in providing retirement plan services will ask for a census of the employee population and based on age, longevity of employment, distribution of salaries, and management’s objectives for having a retirement plan, will design the right plan.

Retirement Plan Administration
Administration includes maintaining records for each employee’s account, preparing tax filings, holding enrollment meeting to explain the retirement plan features to employees, maintaining a staff to answer employee questions, and making changes to the plan design in reaction to changes in the tax code.  The rule of thumb is that this retirement plan service costs $25 per employee per year.

Distribution Processing
As employees retire or leave the company, distributions must be made in accordance with IRS rules.  An experienced provider or retirement plan services have systems established for efficiently helping these employees complete a IRA rollover or explain other retirement options.

ACP/ADP and Cross Testing
The Department Of Labor requires that retirement plans not discriminate in favor of highly paid employees.  Therefore, plans need to pass several tests to show that there is a uniform participation in the plan.  In such cases were the plan becomes biased in favor of the highly compensated, the company may be required to make contributions into the accounts of those with lower pay or the higher paid people may be barred from contributing to the plan (in case of a 401).  This type of compliance monitoring is a critical item on any menu of retirement plan services.

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Know what you need when you seek a retirement planning consultant.  Make a list of questions you want answered.  Some retirement planning consultants have a psychology and therapy background and deal with the issues of transition of working to not working.  They address such retirement planning issues as:

Leaving the friendships and social interaction of work
How to use your time so that you feel productive
How to adjust other elements of your lifestyle—exercise, eating, when you wake

If you are concerned about these types of issues than the retirement planning consultant you seek will typically have a PhD in psychology or counseling.  On the other hand, many people seek help with financial planning for retirement.  Such people would seek a retirement planning consultant  with a financial background.  They need answers to questions such as:

Do I have enough money to retire
How do I handle my 401k rollover
How do i set up my portfolio for a consistent monthly income to cover my needs
What do I need to do estate planning?
Where should I live?

If your questions and concern are in the financial arena, you want a retirement planning consultant that has  a financial background and may have the CFP(r) or ChFC credential.  You may find that you need both types of retirement plan consultant—one that has a background in the psychological aspects of retirement and one with the financial background.  There are more and more professionals that have both. 

Some psychologists have supplemented their knowledge by gaining a CFP(r) credential and gaining the experience to assist you in both realms.  Additionally, some professionals from the financial arena have focused on life coaching, an emerging field for financial advisors.  They have obtained training through The Financial Life Planning Institute or the Kinder Institute of Life Planning.  Here is a synopsis of what a retirement planning consultant learns:

“Within the profession of Financial Planning and advising, a new approach has emerged from a core group founded in the USA by George Kinder and Richard Wagner.  Shifting the emphasis of the planning relationship to assisting clients in formulating their “life of choice” first, advisers then establish the financial decisions that will support the unfolding life plan and its financial requirements.”

Start your search with appropriate keywords and it won’t take very long to find the right retirement planning consultant in your area.

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Typically, a professional that calls themselves a retirement financial advisor helps you prepare for retirement and may not be much value to you if you are already retired (yes, there are big difference in managing assets and providing advice for someone still working as opposed to an investor now living off their assets).  Their clientele will typically be age 45 to 65 and their focus will be on growth of assets and portfolio management.  The services and advice provided by retirement investment advisors comprise:
*Investment design and management using stocks, bonds, mutual funds, exchange-traded funds, real estate investment trusts, certificates of deposits and many other possible choices. Most retirement  advisors make money by managing your investments.  Typically, they are fee-based advisors and charge 1% of the portfolio value annually for making specific investment choices, monitoring the portfolio and making changes when needed.

*Insurance planning using annuities, disability insurance, life insurance, long term care insurance and health insurance. The other side of financial security is making sure that your risks don;t destrpoy your assets o having the right insurance and protreciton is cricial.  Most retirement  advisors have training and experience in risk management tools or will refer you to a colleague who is a specialist.

*Tax planning is the focus on minimizing taxes and advice will usually focus on maximizing the use of 401ks or other tax sheltered ways to grow you assets. 

*Financial planning is the activity that encompasses all of the above and it typically an analysis of your current a and provides a road map, a financial plan, or activities that will help you get to your financial destination. In preparing your plan, a fair amount of analysis is done and retirement financial advisors will typically make use of various software such as fixed annuity calculators, retirement income calculators, IRA distribution projections and portfolio allocation software.

In other sections of the site, we cover how to select a retirement consultants for those who are already retired.

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If you’re retired, you want a retirement planning consultant who is skilled and knowledgeable in the financial issues of retirees. Many retirement planning consultants won’t do because most financial advisors are trained to help investors accumulate assets. But if you are retired, then your interest is motivated to preserve and distribute financial assets. Here are five things that can go wrong if you select an improperly trained advisor:

The advisor takes too much risk with your assets as he has an accumulation orientation from working with mostly younger clients. Your portfolio becomes too volatile and you are consistently nervous.

The retirement planning consultant takes too little risk. Some retirement advisors that deal with mostly younger people are under the misconception that once retired, your financial assets should be mostly in bonds and fixed annuities. In fact, research shows that retirees should maintain 50% of their financial assets in equities to last a lifetime.

The retirement planing consultant may have a biased education or orientation either toward insurance or investments. If your advisor started in the business at Merrill Lynch, you likely have an investment-oriented advisor how is light on insurance knowledge and how to protect your net worth. Alternatively, if your advisor started out at New York Life, he may be oriented toward insurance products, thinking these will work in place of investments. You want a balanced advisor who does not have a bias.

Does your retirement advisor have knowledge in areas where he won’t make any money from you: understanding Social Security, Medicare coverage and Medicaid eligibility? If they don’t have knowledge about these social programs, you cannot get a well crafted plan that accounts for these sources of income or protection.

Does your retirement planning consultant employ sensitivity analysis? Tools like Monte Carlo simulation or other ways to consider various scenarios or outcomes are critical. To create a plan based on a static assumption (e.g. you will earn 7.5% annually) can be disastrous when the single assumption does not pan out.
Learn more and view our list of eight certified retirement planner qualifying questions you should ask to properly screen financial planning candidates.

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