A recent report from the Government Accountability Office (GAO) revealed a considerable deficiency in the amount of savings set aside for retirement. The report showed that in the group of 55-64, almost 55% of those households had little or no money set aside for retirement. For those who have saved for retirement in that age group, the average account value was approximately $104,000. The small amount available for retirement puts cash flow pressure on other possible retirement income accounts, such as social security.
Many people feeling desperation about retirement often reach out to professional advisors who may offer advice, advice that may be in direct conflict to the client’s best interest. Often advice provided to a novice client may be in the best interest of the person providing the advice, the financial professional.
The long-term effects conflicting advice may have a very negative impact on the amount of accumulation in a client’s retirement account. An example could be: the advisors charged 1%, the percentage is based on the size of the money under advisement, of the account value. The advisor then may suggest a financial vehicle that often supplies the advisor with additional compensation. Compensation on some products can continue for years, an example is a variable annuity. While a variable annuity is technically an annuity, in truth it is a security. The sale of a variable annuity can compensate the advisor who suggested it for years after the purchase. The same can be true on some classes of mutual funds, funds that may include compensation for 4 or 5 years after the original purchase.
Adding the fees for the advice with the fees paid for the accusation of the asset can have a very damaging effect on the compounding of growth over a period of time. Money that could have been added to the client’s retirement account is actually benefiting the person providing the financial advice, the broker.
The fact that the advisor is paid for advice and once again for the action of the purchase is a complete conflict of interest. A conflict that can be very expensive for the client with reduced future retirement account values. What options are available to the working client? The truth is this; not many options are available.
Advisors can fall into two separate categories:
Fee-only planner: this category only charges a fee for advice; the client may buy the product from whomever they wish. Out of 285,000 financial planners in America, very few are Fee-only planners.
Fee-based planner: This category can be paid for advice and be paid again for the product purchased.
Then there is the giant income producer for the broker: Assets under management fees. In this category, the advisor is paid a percentage of the overall account value. Fee-based planners may use this to expand their compensation.
The best way to protect yourself against conflicting advice is education. Ask the planner how they are paid. Do they also receive compensation for their advice if a product is purchased? Ask the planner if they are fiduciarily responsible legally for their advice. The final step is to always ask for a second opinion, anything you do not understand, ask for a clear explanation. Also, conduct an internet search on the advisor, make sure of their internet credentials.
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