Like all kids, I couldn’t wait for school to end and summer to arrive. The thing that I looked forward to growing up in New Jersey in the ‘60s was going to day camp. This was an opportunity to meet new friends, swim, and play lots of different sports for two months each year.
One of the activities I enjoyed was tetherball. For those who may not be familiar with this sport, allow me to give you a brief overview. The equipment is simple, consisting of a volleyball hanging from a rope, or tether, that’s attached to a stationary metal pole. Two players stand on opposite sides of the pole, hitting the ball in opposing directions. The game ends when one player wraps the ball all the way around the pole so that it’s stopped by the rope.
Ever since I began specializing in retirement income planning, I’ve seen the tetherball visual surface from time to time. It was inspired recently while I was reading an article, “Advisor Retirement Product Picks Vary By Channel, Survey Says,” in Financial Advisor magazine. The article cited a study by Cogent Research that concluded that the specific retirement income products offered to clients are dependent upon their investment adviser’s particular “channel,” i.e., their bias.
The study found that broker-dealer advisers are far more likely to recommend products offered by insurance companies, such as variable annuities. Registered investment advisers, or RIAs, on the other hand, lean toward investment products offered by a mutual fund company. Finally, the study found that independent and wire-house advisers tend to favor insurance company products.
The average investor isn’t aware of the fact that investment advisers play in different sandboxes, let alone understand the differences between them. Unless it’s explained, which it rarely is, clients aren’t aware of potential limitations of individual retirement-income planning strategies recommended to them by a particular adviser, or of the impact of those limitations on their ability to experience and maintain a successful retirement. Furthermore, the availability of alternative strategies that may be better suited to their needs may never be discussed.
The results and conclusion of the Cogent Research study confirmed what I have known for years. It reiterated the message I offered in a January 4, 2010 post on my blog, Retirement Income Visions™: What Tools Does Your Financial Advisor Have in His or Her Toolbox? In this post, I cited a 2009 Fidelity study that found that 83% of investors between the ages of 55 and 70 who are working with a fee-based adviser believe it’s more important for them to generate guaranteed income (subject to individual insurers’ claims paying ability) for retirement than to deliver above-average returns.
The type of investment vehicles used in the retirement-asset planning stage isn’t as critical as it is in the retirement-income planning phase of one’s life. Most people can generally afford to assume more risk in the first stage, weathering the ups and downs of the stock market. It’s an entirely different ballgame when you enter the retirement-income planning zone where sustainable, inflation-protected, tax-efficient lifetime income is the name of the game.
In the same Fidelity study previously referenced, 97% of investors said protecting against market volatility is the most critical role that advisers can play today, and 86% said they would be interested in a product with monthly guarantees. How do you fulfill this need if your investment adviser (a) isn’t insurance-licensed or (b) doesn’t work closely with someone who is? His or her access to products with monthly guarantees, and recommendations of same, is limited at best.
As I stated in my Retirement Income Visions post, there’s a strong likelihood that if your financial adviser isn’t discussing fixed income annuities with you, he or she probably isn’t licensed or trained to do so. While your financial adviser may be an excellent retirement asset planner, he or she may not be equipped with the necessary tools to design and implement a comprehensive retirement income planning solution for you.
Anyone who has engaged or is considering engaging a new or replacement investment adviser to provide retirement-income planning services needs to always ask two crucial questions:
- Do you know what’s in your investment adviser’s toolbox?
- Is your retirement tethered to your adviser’s bias?
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.