Choosing a licensed and well-refuted financial advisor to oversee your retirement plan allows you to breathe easily. When you need an understanding of your investment decisions, savings, retirement plan, or pension, it’s best to seek the professional assistance of a financial advisor.
Many people nowadays try to cut corners to save on financial advisor fees. But ultimately, they end up in a complete pickle. They lose their savings, and eventually, they will realize that their pension won’t be enough to cover their basic necessities. At times, retirees can’t even afford to have a roof over their heads.
Such scenarios can happen when you do not manage your retirement well. Unclaimed benefits, inadequate health insurances, unwise investments, and too much spending are only a few of the many reasons why retirees go bankrupt.
A sudden illness can create a massive hole in your pocket if your health insurance doesn’t cover diseases common in old age. According to Independent Age’s analysis, 1.3 million American pensioner households are missing out on pension credit that they should be receiving. In the U.K., 3.5 billion euros of pension credit goes unpaid yearly.
If you need help with understanding the decision and issues associated with retirement, then this article can help you. If you don’t want to outlive your money, it is recommended to take professional advice.
In choosing a financial advisory firm or a retirement plan advisor, consider and ask for their qualifications, fee structure, and registration. You should also inquire about how long they’ve been operating and their additional perks. These should include their accessibility and the optional services they provide.
Also, you must understand “exit fees” and “hidden charges.” These may be applied annually. You could be charged with additional fees if you want to change advisors. Hence, it’s best to ask for a “fee structure” upfront.
Furthermore, you will receive recommendations and advice in writing. Read these papers carefully. If you don’t understand something, ask your advisor or a trusted lawyer or accountant.
Everything must be transparent concerning what is being recommended to you. You must know the tax impact and any risk there is. The top 7 risks to your retirement income are as follows:
- Withdrawal rate risk
- Longevity risk
- Inflation risk
- Investment behavior risk
- Interest rate risk
- Sequence of returns risk
- Market risk
The advisor must be able to explain the risks that you might face in the future, with regard to your retirement plan. He must present ways on how you can counter them with your assets and pension.
For example, pensioners face inflation risk in retirement. Financial advisors often advise their clients to invest in commodities, purchase I-bonds, and invest in dividend-paying equities. Having rental income and tapping into home equity can also help offset inflation concerns.
As part of retirement plans, financial advisors often recommend diversifying. This is an efficient way to manage investment risks. Diversification ensures that your retirement money will not go down the drain in one go.
As a retiree, you may be advised to put your eggs in multiple baskets so that risks are minimized. Good financial advisors will tell you to build a stock portfolio in various industries. Many advisors promote asset allocation.
You may agree to the suggestions and have the advisor manage your assets and savings. This is why fees must be set out clearly. The last thing that you would want is to be bamboozled and have someone make a fortune out of your hard-earned wealth.
Whether it’s your first time hiring a financial advisor or you want to replace your current one, you’ll find the following insights beneficial to your search.
Do You Really Need a Financial Advisor?
Recently, the role of financial consultants has become more and more critical in the insurance industry. This is since insurance, pension protection, mortgage, and investment products have multiplied.
And also, making financial decisions has become complicated. Here are some areas that you may need professional advice from a finance counselor:
- Income protection and life protection
- Financial structuring and planning in assisting the 3 phases of retirement
- Tax planning and investments
- Pension transfers
Regarding a retirement plan like a profit-sharing or 401(k) plan, a financial advisor is hired to implement decisions and processes. These include fiduciary governance, investment selection, record-keeper/TPA search, and retirement plan design.
Financial advisors are divided into two types. They are defined under the Employee Retirement Income Security Act (ERISA) section 3(38) and section 3(21).
1. Independent Finance Advisors (IFAs)
They are unbiased, and also, they can sell and advise on products from any provider in the market.
2. Restricted advisors
Restricted advisors specialize in specific financial products or services. Unlike IFAs, they can only advise on and sell a limited range of services and products from only a handful of firms.
Essentially, a 3(21) financial advisor can serve as a co-fiduciary to the retirement plan. This implies that he can make decisions, and he may manage your assets.
The relationship will be based on legal responsibility, confidence, and trust. He has an ethical and legal obligation to put your interests first: the liability and ultimate decision rest upon your plan sponsor which could be your company or employer.
In contrast, a 3(38) financial advisor engages with the retirement plan as a full fiduciary. He is responsible for making management, financial, and investment decisions. These further protect plan fiduciaries from liability. This insulates the sponsor the highest level of fiduciary protection.
The retirement plan advisor of your choice serving as a fiduciary, will manage your assets. He will be ethically bound to act in your best interests. He will be responsible for tasks that involve finances, including property, retirement plan, and assets management.
In the last five years, the landscape of the 401(k) plan has changed dramatically. The recent increase in retirement plan litigation has emphasized the importance of compliance to fees, plan document notices, and disclosures.
A good retirement plan advisor must be able to understand the nuances of operating a 401(k) plan. Often, record-keepers are the ones who manage an organization’s retirement plan. They also, at times, serve as the retirement plan advisor.
They may be able to process annuities, but they are not retirement plan experts. They won’t be able to execute trades in the market or construct personalized financial plans.
Other than being licensed and trustworthy, your money man should also be able to provide one-on-one financial guidance, must exhibit the following traits, and be able to take the best course of action for you.
What A Good Financial Advisor Will Do
You may have to entrust your properties and life-savings to your retirement plan advisor. Hence, he must be able to select the most appropriate investments for you and be your planning partner.
For example, you desire to retire after 20 years of hard work or send your child to a prestigious university ten years from now. For you to achieve your goals, you may need to avail of the services of a skilled professional with the appropriate licenses. Your plans and dreams can come to fruition with the help of that financial planner.
You and your advisor will have to cover several topics, including the following areas:
- The accounts you and your business need
- The amount of money you should have years from now
- The types of insurance you and your business need, including disability, term life, and long-term care
- Estate and tax planning
It’s also his task to make you understand the things involved in achieving your goals. He must also serve as an educator. He must help you with the financial topics you don’t understand.
For example, he recommends that you should invest in stocks. Yet, you have no idea what they are. Then, it’s also his job to introduce you to stock investing.
At the start, both of you will cover savings and budgeting. As time passes by, he will help you understand tax matters, insurance, and complex investment plans.
First and foremost, he will assess your financial health. This is the state of your financial situation. It has many dimensions, which include income, retirement plan, monthly expenses, and savings.
The advisor will use your financial health to plan for your future. Mostly, he will ask you questions from a detailed questionnaire. Your answers will determine your financial situation, and relevant information will be revealed.
The financial questionnaire helps the advisor to see the complete picture of your expenses, income, liabilities, and assets. He will then indicate possible income sources, future pensions, long-term financial obligations, and retirement needs. The results will be based on your answers.
After that, the advisor should cover subjective topics, like risk capacity and risk tolerance. He will use this to dictate your investment asset allocation.
Aside from the data he gathered, you should also inform him of your investment preferences. Ask him if you can afford them or whether or not they are appropriate to your financial health.
Initial assessments may also include knowing your tax situation, liabilities, and insurance issues. The advisor must be informed of your estate plan or the lack of it.
Once the advisor understands your future projections and financial situation, the two of you will work together to create a plan for your life goals.
In creating the retirement plan, he will combine all of the gathered data to develop a comprehensive financial plan. This will then serve as the road-map for your life after retirement.
The key answers from your questionnaire will be utilized to summarize your financial health. Your working capital, assets, net worth, and liabilities will help in determining the following:
- Long-term care risk
- Estate planning details
- Future financial issues
- Family situation
Based on your income and net worth at retirement, the advisor will present and explain reasonable worst- and best-case scenarios. He will always include situations wherein you have outlived your money.
He will look at possible withdrawal rates during your retirement years. This will be based on your portfolio assets. Also, if you are married, the retirement plan will include survivorship issues and financial scenarios for your partner.
What Questions Should You Ask An Advisor?
In light of the market volatility over the last couple of years and the latest regulatory disclosure requirements, many retirees and middle-aged workers are now recognizing the essentiality of retirement plan programs and financial advisors.
Recently, many people have also reviewed and modified their current retirement plans with the help of regulated financial planners. Thousands of plan sponsors and employees are in need of the services of such professionals today.
You can choose from a myriad of them out there. However, it can be hard to trust someone with your hard-earned money. Although there are lots of trusted money man, there will always be a bad apple in the bunch.
So, aside from ensuring the credibility of a person, you must also get to know him or her personally. The questions below can help you see through the facade of a retirement plan advisor.
The following checklist will enable you to gather meaningful information from a particular candidate. And it will help you compare different financial advisors.
Taking everything into account, all you need to know about a prospective advisor are the following things:
- What services do you provide?
- How do I pay you?
- What are your experiences and qualifications?
- What is your back up plans?
- In writing, do you accept fiduciary responsibility?
- What type of financial advisor are you?
- Are you working under someone? If yes, please provide a comprehensive detail about that firm.
- Do you prepare meeting minutes and agendas for plan sponsor meetings?
The answers to the questions above will provide the information you need from a particular candidate. Also, the checklist can help you meet your responsibilities under the Employee Retirement Income Security Act. The ERISA is the law that regulates retirement plans.
How Financial Advisors Are Paid
Generally, a retirement plan advisor can be compensated through commissions, fees, or a combination of the two. For example, he or she may be compensated in one or more of the following ways:
- A fee for AUM or assets under management, including 1% of the price of the assets managed annually
- A mark-up when the retiree purchase a house
- A mark-down when a property of the client is sold
- A commission, which is also referred to as a “load,” based on the invested amount in a variable annuity or mutual fund
- A flat fee, such as $4,000 per year, for one’s yearly portfolio review, or a $5,000 flat fee for retirement or financial plan
- An hourly fee for the services provided by the retirement plan advisor
As of January 2013, restricted and independent advisors are required to charge a fee for pension and investment advice, instead of accepting a commission.
You may pay upfront for the financial advisor’s time. This method is similar to how you pay a solicitor or an accountant. Both parties involved may also agree to a commission-like fee. This is deducted from money invested in a financial product.
The best course of action to take is to ask him or her upfront. By doing so, you can compare different financial advisors.
What is a Reasonable Fee to Pay a Retirement Plan Advisor
The average fee for the services of a financial advisor is 1.02% of AUM annually for every account of 1 million USD. The average industry fee is 0.99% of AUM. This decreases depending on the size of the client’s account. However, the appropriate fee for high-net-worth individuals is sometimes lower than the average industry fee.
Can You Trust Financial Advisors?
Remember that you should never do business with a retirement plan advisor without checking whether they are regulated or not. In doing so, you can be assured that your preferred individual is indeed a professional and is licensed and experienced. You must always verify their credentials before availing any of their services.
Check their legibility on the central register of the Financial Conduct Authority (FCA). Go to their website (www.fca.org.uk) and create an account. You can also contact them via telephone. Their phone number is 0800 111 6768.
To do this in the United States, ask what the agency oversees the financial advisor. It should either be the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA).
If it is FINRA, he must be able to present a securities license. On Finra’s website, go to the BrokerCheck section to see if there are complaints on file. If the answer is SEC, use the Investment Advisor search feature on sec.gov.ph to check the credibility and reputation of the business and financial advisor.
Furthermore, some firms and advisors are registered in both agencies. If the advisor doesn’t show up with any regulatory agency, look for another one. Don’t take the risks of being scammed.