Advisors are adopting software and investment platforms geared to help them find the cheapest, low-fee retirement products for their clients — but that might not necessarily equate to added savings in retirement, new research says.

Lowering investment fees by 100 basis points saves the average investor $40,000 by the time they hit retirement, according to the research, but the vast majority of cut-rate products will also sacrifice quality and may come along with higher costs elsewhere, says Matt Fellowes, CEO of United Income and an author of the study “The Efficient Investor.” That’s because the inexpensive vehicles often ignore other important factors — like optimizing tax efficiency and properly analyzing risk assessments — that could carry even steeper consequences.

“Lower prices are necessary and a huge accomplishment for the industry,” Fellowes says, “And [they’re] a win for investors, too. But, what do you do next? That’s where we’re picking up the ball and running.”

A focus on lowering non-fee costs could save clients around $340,000 over the same period, according to the research, which analyzed 1,000 simulations of 26,000 possible future market returns. Non-fee costs include higher taxes, stunted investment returns and reduced money from public benefits like Social Security, which can all result from what Fellowes calls “oversimplified” money management strategies. The study finds that the typical retiree accumulated an average of 124% more wealth in retirement when using a strategy that reduced non-fee costs, rather than using products that just had a low relative price.

United Income retirement fees IAG

“We want to change the definition of what cost means,” says Fellowes, who is also the founder of the budgeting app HelloWallet, which was acquired by Morningstar in 2014 and then sold to KeyBank in 2017. “It’s not just how much you’re costing an investor to use your services. There are far greater consequences.”

The research sampled 68 different retirement products and found that reducing non-fee costs generated seven times more wealth in retirement for the typical client compared to lowering management fees by 100 bps. And that could be even greater for well-heeled clients, Fellowes says.

The first step is to efficiently navigate taxes. While robo advisors are off to a good start, tax-loss harvesting software is “low-hanging fruit,” Fellowes says. Greater savings come from lowering tax bills beyond the simple tax-loss harvesting software available from low-cost retirement options. Instead, advisors should optimize retirement withdrawals from the highest taxed accounts first, and locate investments in the most tax efficient manners, says the study. After all, clients will take out more withdrawals during retirement than any other time, they say.

“The choices you make about where you draw money from will determine how long that money will last,” Fellowes says, adding that clients will all be taxed at different rates depending on the individual.

“The reality is we are just scratching the surface,” Fellowes says. His goal is to digitize the entire tax code to reap the full benefits of tax efficiency. United Income brought in Adam Looney, former deputy assistant secretary for tax analysis at the Treasury Department, to help iron out the details. “When it comes to shielding income from taxes, we want to take into account every implication — which is what you can do today with technology that wasn’t even imaginable in the past.”

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Risk is another important step. When you ask a client about their tolerance in retirement, many think more conservatively that they should, Fellowes says, when they could be reaping the benefits of greater exposure to equity.

“When you ask a retiree: ‘What’s your risk appetite?’ They usually don’t want to take any. They’re not making any income and are worried about dips in the market,” Fellowes says. As a result, clients are put into high-percentage fixed income portfolios with little market exposure. Advisors should take outside assets and income into account — to make sure portfolios aren’t overly conservative — and take some of the “retirement liability” off the table, he says.

“For high-net-worth [clients] that quickly adds up to millions of dollars,” Fellowes says. “And it’s a lose-lose. Taking too little risk certainly doesn’t benefit the client, and it doesn’t benefit the asset manager either.”

Instead of assuming the risk appetite — which was necessary in a low-tech world that needed to keep things as simple as possible — talk to clients about the different spending habits they plan to have in the future, Fellowes suggests. “If it’s for travel, or for unforeseen health care, or to gift money away to heirs, each has different risk preferences and unique investment strategies.”

What shocked Fellowes the most about the data: the lack of subtlety when determining risk.

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“Risk is a fundamental component of money management — everything hinges on that assessment and it’s really a secondary consideration. I was really surprised at how poorly we as an industry have been measuring and responding to risk levels,” Fellowes says.

“You go to a doctor to get a prescription and the first question they ask is: ‘What other medications are you on?’ Risk assessment looks nothing like that. There’s no consideration of what other risks you might be taking in your life,” Fellowes says.

Sean Allocca

Sean Allocca is the associate editor of Financial Planning, On Wall Street and Bank Investment Consultant.