We all sat back. The man stretched his callused hands over his head and the woman breathed an audible sigh of relief. We were hunched over a laptop for the last few minutes. They had patiently watched me input percentages for investments in a retirement plan. To me, it was normal and natural–like reading a book in plain English. To them, it was incoherent, opaque, intimidating. But then it was over; they relaxed.
I didn’t. I was angry.
I estimate that in ten minutes, we completely transformed their future lifestyle—from quickly running out of money to maintaining a secure and dignified retirement. Granted, this is only what our software estimated and not a guarantee of any kind of performance, but the difference was compelling. We also assigned beneficiaries to the account–something it lacked the entire twenty-seven years of its existence.
Sounds like I need to settle down, right? Good work was done that day–why was I angry?
Maybe this couple could teach me a thing or two in letting go, but I wasn’t ready at the moment.
The head-scratching, hair-pulling reality: they already had an “advisor”. Someone was already personally responsible for making sure this couple was taken care of, and they had completely blown it. They had been almost completely invested in cash for at least the last 8 years in their retirement account (that was as far back as I could pull statements).
Perhaps the worst part is that there was no one to chastise. The “advisor” was a robo-advisor. Inside their 401(k) plan was an optional service that you pay for. Answer its questions, enter in your other assets, and it would automatically spit out an investment allocation for your 401(k) account.
The problem: it asked confusing questions, and no one was truly there to question the correct answer. The couple was asked about other investment accounts, and they had one other account. The robo service asked what the account was invested in, and their response was that it was invested in a 401(k) at the husband’s employer. That employer happened to be a publicly traded company, and so it allowed them to input that as an answer.
The automated service assumed the account was 100% invested in the stock of that publicly traded company. Thus, to manage risk, it spat out a 100% cash allocation for the wife’s 401(k). Instead of growing with the stock market (the S&P 500 more than doubled just during the 8-year period I could track the account's performance), the account grew 14%.
That couple was happy to have things “fixed”, but I was furious that this hard-working couple could be so wronged. They paid a fee for that help every year. Ironically, the service bragged it cost less than half that of a normal financial advisor. They are also going to have to work an extra three or four years to feel comfortable retiring
It was like paying a discount mechanic to poke holes in your tires.
I have seen this in other ways through the years, but I have also noticed an uptick in companies offering advisory services inside their 401(k) plans. For an extra fee, they will create a custom investment allocation for you. There are often even living and breathing advisors.
To the reasonably educated employee, it looks like a great deal. You can access an advisor for a discounted price. Some use financial calculators to help create a basic retirement plan for you based on the account you have and Social Security. They even monitor your accounts on an ongoing basis.
Then you look under the hood. Clients have come to me with these advisory services, and we have found all kinds of problems. Clients are contributing to a pre-tax account when it should be a Roth. The investment allocation doesn’t account for the old pension they have, and so they are far too conservative. No one bothered to point out they shouldn’t be making normal contributions to a Roth IRA because they are over the income limit. They’d never heard of the state estate tax they need to be ready for. No one told them they didn’t have to sign up and pay for Medicare Part B premiums when they were still working and covered under a health insurance plan. No one bothered to show them that they didn’t have to keep working.
Twice this year I created a thorough financial plan with clients who had tried using the advisory services of a robo advisor. Both the plan we created and the 401(k) advisory service created an estimate of how much money is left over when someone reaches the end of their life expectancy. Both of these clients laughed: “That’s the same number that was in the service I used!”
Then I show them the difference: my estimates were in real dollars, adjusted for inflation. The 401(k) service’s answer was in normal dollars. Each time, it is my belief that the service failed to take into account key details somewhere else in the client’s financial life. The result: they were likely saving far too much or too little. To be fair, I remain convinced that most of these simplified calculators are designed to encourage people to save more rather than be accurate. This is because most people are under-saving for retirement.
But when the difference is massively off, it just becomes bad advice. Too much and you give people a false sense of security with nasty surprises down the road. Too little and you make people give up because their goals feel impossible.
Not to mention all the little things investors could be doing differently outside the investments of the account. In my experience, most of these providers specifically tell their advisors to stop short of providing tax-related advice. The liability is too great when you have hundreds or thousands of financial advisors providing guidance around complicated topics.
The problem is that this is a complicated story to tell; most people are simply trying to feel financially secure and plan ahead. They are already fighting against the tyranny of the urgent–all of those things in one’s life that make the little voice whisper in the back of your mind “This can wait–let’s worry about this another time.” They don’t have time to do an in-depth dive to figure out the shortcomings of one advisor versus another.
How do we make choices when things are complicated? We tend to focus on what we can understand, and we tend to choose what is easiest. The 401(k) advisory service is “right there”, just a click or two away when you log into your account. You may not even have to talk to someone! It is easy. Too easy.
Also, price is easy to understand. If two seemingly similar choices present themselves, we choose the one that costs less. Admittedly, in the financial industry you often actually get what you don’t pay for, because fees do detract from your total returns. But when the advice is second-rate or incomplete, you probably would have been better off paying more for better advice.
The unfortunate reality is that many investors have to search hard for quality advice. It takes time and occasional trial and error. I see it firsthand with my own clients; the majority of them already had an advisor when we started working together. Many of them had to experience what they believe was bad advice or a lack of service before realizing they deserved better.
My hope is that eventually these advisory services will improve, but I think the more likely reality is that more and more people will seek out experienced independent advisors who can provide comprehensive advice. It is an exciting trend we already see in our professional world, and it makes me hopeful that more and more people will access quality advice. The hard part is waiting for this giant ship of an industry to slowly change course.
Until then, I encourage you: have friends or family who need advice connect with us. We want to help guide people to a successful financial future, and if my rant here leaves you with anything, let it be this: people need help finding good advice!
We also find people who are given our information have a small chance of actually reaching us. The tyranny of the urgent has laid waste to countless business cards. We find introductions by email or in-person tend to work the best. Sending us their phone number and email also tends to work because we can reach out proactively. Part of our job is holding people accountable, and we are happy to extend that to friends and family.
A final thought: had that couple at the beginning of this soapbox had family or a friend who recommended them to a quality advisor, it could have changed their lives in an incredibly positive way. It is rare that you can be directly responsible for such measurable change in someone’s life. I have seen single conversations transform the lives of families–as long as they are open to advice. That potential to meaningfully change lives is what makes me so passionate about the work we do. And so I encourage you: be a part of that change!
Disclosures: This is a case study for illustrative purposes and should not be construed as a recommendation. It may not be representative of your experience. The opinions expressed in this article are those of the author(s) and do not purport to reflect the opinions or views of other financial advisors or Commonwealth. Working with an advisor does not guarantee future performance or success. You should consult with a financial professional regarding your individual situation.
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