It is a well-documented fact that American workers are financially underprepared for retirement. For example, in a recent Government Accountability Office Report that examined the retirement savings of households in the 55 to 64 age group, researchers found that 55% of households had little to no retirement savings. Additionally, the remainder in that range that had saved for retirement saved a median of approximately $104,000. Even with Social Security, it seems the average American worker will have limited financial resources to generate income during retirement.
When you look at the savings data, this shortfall is not a surprise, as the U.S. consistently under-saves its peers. Data sourced from the Organization for Economic Co-operation and Development (OECD) spanning over a decade of savings rates ending in 2008 shows that the U.S. has historically come up short. Canada, France, Germany, Italy, Japan and the U.K. all reported generally better national savings rates during that time period. Although the retirement preparedness of the average American worker is distressingly bad and the savings trends and figures are of great concern, the focus of this article will be on the cost of conflicting advice on retirement preparedness.
The effects and financial impact of conflicting advice on American families is of consequence. In a 2015 report by the Council of Economic Advisers, the authors estimate that “the aggregate annual cost of conflicted advice is about $17 billion each year.” This conflicting advice comes from individuals and institutions that are “compensated through fees and commissions that depend on their clients’ actions. Such fee structures generate acute conflicts of interest.”
Unfortunately for the American family seeking “professional” financial advice, the choices are few. Just a small percentage of financial professionals are able to offer financial advice without facing the conflicts outlined by the Council of Economic Advisers. In a recent article (paywall) penned by Dr. Kent Smetters, he suggests that out of the roughly 285,000 financial advisers in the U.S., few are “fee-only advisers who follow a true fiduciary standard that prohibits commissions on products recommended to clients and legally requires the advisers to always put their clients’ interests first.”
It is challenging at best to determine which advisers, brokers, agents and mutual fund companies are able to act in your best interests as most say they will. But in order to get the real truth, some very specific questions are required. So is, likely, a little sleuthing online. The questions I’d tell my mother and father to ask if they were in the market for investment advice are:
• Are you (or your firm) compensated (either directly or indirectly) for any product that you might suggest for me or my situation, whether appropriate or not?
• Are you a fiduciary and legally required to act in my best interests all the time? If yes, are you willing to put that in writing?
• Do you receive any compensation of any kind and in any form for recommending one investment over another, including mutual funds, real estate investments and insurance products?
• And for your 401(k) adviser/broker and their firm: Do you get paid more to place this fund in my line-up or invest in your proprietary fund when I roll my money over?
If the answer to any of these questions is “yes,” the deck is likely stacked against you and your savings could end up being negatively impacted.
Finally, do some digging online to find out your financial professional’s work history, credentials, education and so on. Credentials such as the CFP, CFA, CPA and CIMA generally have rigorous requirements and seem to be at the top of their respective fields of financial planning, investment analytics, taxes, auditing and investment management. Credential research sites can be helpful when combing through the alphabet soup of adviser qualifications — many of which are hardly worth the paper they were printed on. Also, advanced education from accredited universities can imply that the adviser has the desire to continue learning and improving. Master’s degrees in taxation, personal financial planning or finance can add to what an adviser brings to the table. Spending a little time doing your own research on your adviser, combined with asking the aforementioned four questions, can go a long way in building your retirement savings by avoiding loss due to conflicting advice.