The Fiduciary Fallacy

Do you really need a fiduciary in your retirement?

Many believe that you must use a fee-only financial planner for your retirement, but I believe this is part of the big Fiduciary Fallacy in financial planning.

The legal definition of a fiduciary, according to Merriam-Webster, is “One often in a position of authority who obligates himself or herself to act on behalf of another (as in managing money or property) and assumes a duty to act in good faith and with care, candor, and loyalty in fulfilling the obligation.”

If you are trying to plan for retirement, you may think that a simpler definition of fiduciary is “fee-only.” And that the only advice worth getting is from someone you pay directly to provide that advice.

When I was retired six years ago, the best advice I received was from a life insurance agent, who charged me nothing to review my retirement plans. In fact, I had three financial advisors look at my retirement savings and offer advice and I did not pay for any of the plans.

I should note that because I had been actively saving for retirement, I thought I had enough assets to begin retirement, even one that began six years a head of schedule, when I was “retired” a month before turning 59.

At my wife’s insistence, though, we sought three professional reviews of our financial plans.

The first was from a financial planning firm, AYCO, that was retained by my former employer as employee benefit. I had a few weeks after termination to use that service during the separation from service. A financial representative talked with us over the phone and generated a 29-page report on our asset allocation, and another 9-page report projecting retirement income, if I took an early pension and began Social Security at full retirement age.

In subsequent weeks, my own financial planning work helped me to conclude that I would wait for a pension at 65 and wait for 70 for Social Security.

The second review came from a Charles Schwab broker, since that firm held one of my IRA accounts and a taxable brokerage account. The local branch manager met with me and he essentially walked me through the prototypes of the free financial plan on the website, which are now offered free to all of its customers. He did talk me into consolidating two other IRAs at Schwab, which I did, but I manage them. I didn’t sign up for any advisory services.

Our Northwestern Mutual Life insurance agent gave us a third review. I originally reached out to him to figure out how much of the permanent life insurance I needed to retain in retirement, now that I no longer needed income-replacement insurance. My two children had made it through the college years and I was now retired.

The agent was a Chartered Life Underwriter (CLU), a Chartered Financial Consultant (ChFC), and an investment advisor. He reviewed our life insurance policies, my policies and my wife’s policies, and determined which ones had sufficient cash value to switch to paid-up life policies. He also offered to review our full retirement plans, and he provided a detailed plan using his professional software, with cash flow projections, at no additional cost to us.

All three plans began with a review of all of our retirement and savings assets and what they might earn over time. The three planners considered what Social Security benefits we would receive and a small pension. They each took a rough estimate of what we thought we needed each year for expenses. And finally, they considered how long the money needed to last for a successful retirement. And that meant an educated guess of how long we would both live.

All three plans included Monte Carlo reviews, to run their numbers through a myriad scenarios. And all three plans determined we had a high probability of success. The plans said I had saved enough to fund our retirement.

Yes, my life insurance premiums paid a commission to this agent through the years, but I paid nothing for his advice at retirement.

Charles Schwab earns fees over time for the accounts that I keep in their custody, and indirectly, that pays for the financial advice they provide.

And AYCO earned its fee from my former employer, which offered the service as an employee benefit and to fulfill its own fiduciary duties in offering a 401(k) plan.

Many people think you need to pay for a fee-only financial planner. In fact, many parts of the field proclaim that you should avoid talking to anyone earning a commission or fee from a third party. Yikes! Tainted advice! For them, the only answer is a fee-only financial advisory, who promises to be a fiduciary.

This fee is often charged as a 1 percent asset under management or AUM charge, collected quarterly from your accounts by the fiduciary. A 1 percent AUM fee might seem like such a small number, but a percent here, and basis point there have a way of adding up to real money in retirement.

I did the math and know that I don’t want, nor can I afford, to pay a 1 percent AUM on my retirement savings.

Here’s an example.

Let’s assume a retiree has $1.5 million in total savings for a 35-year retirement. And let’s assume that the 1 percent AUM, plus another 0.13 percent in investment fees for the actual investments chosen. That is a total of 1.13 percent in fees. Assume our retiree has an average annual return of 4.2 percent. Also assume that the retiree takes out $40,000 in the first year and then increases that by inflation of 3 percent each year. The fees are assessed on the assets under management each year, and after 35 years, at age 100, the retiree has paid $462,000. In early years, it adds up to about $16,000-plus a year!

I can’t afford fees like that! Could you? I believe that the financial planning profession must come up with better models than the AUM model, especially for DIY retirees who may want a second opinion, but who cannot afford an ongoing drain on their assets from an annual recurring fee.

As a DIY retiree, I also believe that innovation is going to catch up with these AUM advisors. There are some pretty impressive tools available from discount brokers and other sources that help you plan without the ongoing fees.

Now there are other fee alternatives. Some planners are charging a flat fee for advice-only service. Others charge an hourly rate. That may appeal to some. After all, I paid a one-time fee for an estate planning attorney for the advice and execution of documents. He’s not charging me an annual fee for the service!

If I hire a CPA to do my taxes, I expect to pay the accountant to prepare that year’s taxes, but not take an annual fee based on the size of my assets.

I use TurboTax myself, and I keep looking for the financial planning in a box application that would be comparable.

If you are suddenly retired, I would recommend you go through at least one detailed financial plan with a trusted advisor. Pay for it if you must, but before you do, talk to your trusted advisors and see what free advice they can offer.

You may receive enough information for you to make decisions in your own best interest and save the expense. The best person to act in your best interest is you!