Your Advisor Told You What?
March 28, 2012I told you last week about a caller who was still unsure about her financial capacity to retire despite having $1.5 million in her nest egg. The purpose of her call was to get a second opinion on how her retirement nest egg should be invested. A financial advisor wanted her to roll the money over to an IRA and invest it in a moderate balanced portfolio so that she would not run out of money but she wasn’t sure if that was the right thing to do. I’m glad she called because we discovered a few interesting facts during our conversation:
#1 – Her 401(k) offered appropriate options.
The advisor wanted her to roll over the funds to an IRA so that they could be invested in a “balanced” portfolio but when we looked at the investment options that were available in the 401(k), we could see that she already had asset allocation funds that were just as appropriate. There really was no reason for her to roll the money over when she could legitimately get the same thing where she was.
#2 – There was no reason for her to take more risk than necessary.
In addition to rolling the funds to an IRA, the advisor suggested using a portfolio with a “moderate” level of risk but when we did an analysis of what rate of return she would actually need from her account to enjoy the lifestyle she wanted to lead, it came to less than 1 percent. Investing in a portfolio with a moderate level of risk would certainly be expected to produce a rate of return greater than 1 percent but so would a conservative portfolio so why take the unnecessary risk?
#3 – Her company offered a pension purchase option.
No matter how conservative she invests, there is always the possibility that she could run out of money. To protect against this, she could purchase an annuity from an insurance company or better yet, her employer offered the option of rolling 401(k) money into the pension plan. The benefit of rolling money into the pension plan is that she receives a guaranteed income for life AND she gets a better income than if she were to purchase the annuity through a private insurer.
So the bigger question is this: why would the advisor recommend what they did when all of the above was true? Well, I’m sure you already know the answer to that question. Most financial advisors are paid for selling investment products and/or managing assets, which means they have little incentive to tell someone to leave their assets in their 401(k). Also, equity assets generally receive higher fees so again there is less of an incentive to recommend conservative portfolios. For these reasons, employees such as this particular caller appreciate their employer for offering the opportunity for them to speak with an unbiased financial expert – unbiased in the sense that I don’t sell any products or services and therefore my only incentive is to fully inform them of ALL their options, including the option to work with a financial advisor.
I don’t disparage the advisor for recommending what they did. I used to be an advisor and I may have made the same recommendation when my paycheck depended on such things but as you can see, I now have a greater advantage to help someone because such pressure is off of me. Because this caller knows I am able to offer a second opinion without such a conflict of interest, she felt more comfortable about the decision she ultimately made. I’ll let you guess what it was.