Financial advisors should start ringing the same bell as the one rung by President Barack Obama’s Council of Economic Advisers.
CEA analysts have calculated that the annual loss for retirement investments from conflicted advice is about $17 billion.
A recent CEA report also notes that savers receiving conflicted advice earn returns about one percentage point lower each year and “a retiree who receives conflicted advice when rolling over a 401(k) balance to an [individual retirement account] at retirement will lose an estimated 12% of the value of his or her savings if drawn down over 30 years.”
The report adds: “If a retiree receiving conflicted advice takes withdrawals at the rate possible, absent conflicted advice, his or her savings would run out more than five years earlier.”
Advisors need to share such statistics, even though they paint a gloomy picture of the profession, says Deborah Fox, chief executive and founder of Fox Financial Planning Network in San Diego, and a consultant to advisory firms.
Given the climate created by the rise of robo-advisors and Washington pressure for more transparency, advisors should spell out fee costs, particularly for retirement investments, she says.
“For advisors to simplify their marketing and entire business model, they should disclose all fees,” Fox says.
“They can make it a standardized procedure,” she says about advisors disclosing fees, even those embedded in mutual funds.
“I’m sure a lot of advisors don’t want to hear this, but in the end full disclosure is what it is all about,” Fox says.
Dusty Wallace, the director of financial planning and the compliance officer at Lee Financial in Dallas, agrees that advisors will need to make more explicit links between the long-term costs of retirement plans and fee disclosure.
But as a practical undertaking, she has shied away from “putting pencil to paper” and calculating for prospective clients what their retirement accounts forsake in fees.
Wallace also forgoes side-by-side comparisons showing rival advisors’ rates versus her firm’s.
“We don’t like to point out the negative of everyone else,” Wallace says.
So far, the fee transparency standards set by the Department of Labor for deferred-tax retirement accounts have fostered only a limited understanding among retirement investors about fees, she says.
“Those are still hard to read,” Wallace says about the fee disclosure material distributed by 401(k) plan sponsors.
Fee-only advisors might at first glance seem to have an easier time making distinctions between their practices and those of rivals who charge commissions.
“Each side seems to be calling the kettle black, but there are good and bad advisors on each side,” Fox says.
Instead of focusing on what others are doing, advisors should strive for clarity in terms of what they charge clients for retirement planning.
“With all the new technology, there is going to be more and more transparency,” Fox says. “It’s going to spill over to the retirement area.”
Miriam Rozen is a staff writer for Texas Lawyer who writes about financial advisors.
This story is part of a 30-day series on retirement planning strategies.
