One of the most common questions that I receive is about talking to the various people that educators are directed to discuss their retirement options. It is important to understand that not all financial professionals are equal, and whose interest are they really looking out for when giving advice.
Sometimes the email includes a simple phrase like, “He/She said I should take a lump sum distribution on my pension,” or “I was told that I should take the highest monthly pension payment and buy insurance.” My reaction to these statements is always “why?”
Understanding the thought process behind what someone is suggesting is important. Is it because of some information I have yet to be told? Is it due to some underlying worry by the client and/or professional? Is it because the professional is simply trying to pigeonhole the client? Is the professional trying to figure out a way to sell the client something?
Fiduciary vs. Suitability
Over the last few years there has been more and more emphasis on what is called a “fiduciary” or the “fiduciary standard.” A fiduciary is obligated to look out for only the best interest of the person being served.
Most brokers, insurance agents, and some financial professionals only follow what is called a “suitability standard.” That simply means that the investment they are discussing must be suitable, but it may not actually be in the best interest of the client - it could be in the financial professional’s interest due to fees/commissions.
The financial industry has fought between the fiduciary standard and the suitability standard for many, many years as brokers have not wanted to be forced to be fiduciaries. Under the Obama administration, the fiduciary standard was set to become law, but President Trump has slowed the process and rolled back some of the provisions.
Additionally, some designations may make their members adhere to a fiduciary standard. For example, a CERTIFIED FINANCIAL PLANNER™ (or CFP®) must adhere to a fiduciary standard as a basic part of the Code of Ethics and Standards of Conduct. They placed a full page ad in The Wall Street Journal on 12/22/17 stating as much - The Wall Street Journal Ad.
Check out what Investopedia said on the subject - Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards.
So Are You Getting the Right Advice?
Without trying to sound all knowing - Maybe.
Looking at the examples in the second paragraph, there could be some valid reasons for taking a lump sum distribution or taking the single life payout and buying insurance, but these are determined by the facts of each individual case.
Lump Sum Distribution - For example, someone of retirement age that is not married and is diagnosed with a terminal disease may look at a lump sum as a way to get the maximum from the plan for their beneficiaries rather than a pension. I would still say to rollover the lump sum to an IRA (for tax reasons), but this could potentially be the best for the client or at least an option to discuss.
Highest Pension Benefit and Buy Life Insurance - This example is usually a bit more complex in that the beneficiary(ies) are a big concern. If a retiree is married with a spouse that is not in great health, this is sometimes the option that a retiree may be given. Thinking it would give the healthy retiree a high benefit with life insurance benefits for the spouse in questionable health if the retiree passed. This is still somewhat of a problem option in that many pensions give a “pop-up” choice that gives one benefit then adjusts to a higher benefit if the retiree is the surviving spouse - BUT not all pensions have this option, so again each case needs to be thoroughly researched and reviewed.
Ask Questions
What I am attempting to say is that when you are talking to a financial professional, ask questions. You would ask a doctor questions giving you medical advice, and this should be no different.
These are obviously just basic questions to ask, but they are a good place to start to get information and become knowledgeable about your financial situation.
If you do not know the answers to these questions about your financial professional, I would suggest starting 2018 with finding out this information.
Sometimes the email includes a simple phrase like, “He/She said I should take a lump sum distribution on my pension,” or “I was told that I should take the highest monthly pension payment and buy insurance.” My reaction to these statements is always “why?”
Understanding the thought process behind what someone is suggesting is important. Is it because of some information I have yet to be told? Is it due to some underlying worry by the client and/or professional? Is it because the professional is simply trying to pigeonhole the client? Is the professional trying to figure out a way to sell the client something?
Fiduciary vs. Suitability
Over the last few years there has been more and more emphasis on what is called a “fiduciary” or the “fiduciary standard.” A fiduciary is obligated to look out for only the best interest of the person being served.
Most brokers, insurance agents, and some financial professionals only follow what is called a “suitability standard.” That simply means that the investment they are discussing must be suitable, but it may not actually be in the best interest of the client - it could be in the financial professional’s interest due to fees/commissions.
The financial industry has fought between the fiduciary standard and the suitability standard for many, many years as brokers have not wanted to be forced to be fiduciaries. Under the Obama administration, the fiduciary standard was set to become law, but President Trump has slowed the process and rolled back some of the provisions.
Additionally, some designations may make their members adhere to a fiduciary standard. For example, a CERTIFIED FINANCIAL PLANNER™ (or CFP®) must adhere to a fiduciary standard as a basic part of the Code of Ethics and Standards of Conduct. They placed a full page ad in The Wall Street Journal on 12/22/17 stating as much - The Wall Street Journal Ad.
Check out what Investopedia said on the subject - Choosing A Financial Advisor: Suitability Vs. Fiduciary Standards.
So Are You Getting the Right Advice?
Without trying to sound all knowing - Maybe.
Looking at the examples in the second paragraph, there could be some valid reasons for taking a lump sum distribution or taking the single life payout and buying insurance, but these are determined by the facts of each individual case.
Lump Sum Distribution - For example, someone of retirement age that is not married and is diagnosed with a terminal disease may look at a lump sum as a way to get the maximum from the plan for their beneficiaries rather than a pension. I would still say to rollover the lump sum to an IRA (for tax reasons), but this could potentially be the best for the client or at least an option to discuss.
Highest Pension Benefit and Buy Life Insurance - This example is usually a bit more complex in that the beneficiary(ies) are a big concern. If a retiree is married with a spouse that is not in great health, this is sometimes the option that a retiree may be given. Thinking it would give the healthy retiree a high benefit with life insurance benefits for the spouse in questionable health if the retiree passed. This is still somewhat of a problem option in that many pensions give a “pop-up” choice that gives one benefit then adjusts to a higher benefit if the retiree is the surviving spouse - BUT not all pensions have this option, so again each case needs to be thoroughly researched and reviewed.
Ask Questions
What I am attempting to say is that when you are talking to a financial professional, ask questions. You would ask a doctor questions giving you medical advice, and this should be no different.
- Are they a fiduciary?
- What are their fees?
- How are they paid and by whom?
- Is there a conflict of interest?
These are obviously just basic questions to ask, but they are a good place to start to get information and become knowledgeable about your financial situation.
If you do not know the answers to these questions about your financial professional, I would suggest starting 2018 with finding out this information.
