December 30, 2017

Who Is Looking Out for Your Best Interest?

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.

  • 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.

December 27, 2017

Winding Down 2017 and Gearing Up for 2018

As we wind down an eventful and interesting 2017, I wanted to say that 2018 will be a bit more active on The Educator's Retirement site.

First, I have continued to receive emails from various educators and others over the last few years asking numerous questions. I know most of the items on the site are a bit older, but most are still very relevant - but I will be reopening the discussions and updating the information as needed.

Also, the new tax reform bill will dramatically change numerous items for most Americans, so as the law becomes more concrete, I will try to discuss it more. What I can tell you is that approximately 35-40% of Americans itemized in years past, and with the new tax reform bill, this number will drop to approximately 5-8% based on one estimate. This could dramatically change a number of items, so I will try to comment as we move forward.

Additionally, while I will try to continue to focus on educators, I have been receiving more and more emails asking about the spouses of educators and what they should be doing. I will dig into that subject because today "we" cannot just base everything on one spouse and hope it all works out. If both spouses are working, they both need to be contributing to retirement accounts/pensions to make sure that the family potentially has the best retirement possible.

Finally, many people have asked me to include a photo or two and/or chat more about my life. I will try to do that as well. I think the photo below will tell you what I have been up to for the past few years, and how busy life outside the office truly is!

Robby, Caroline (3.5), Danielle, and Reid (2)
As always, I look forward to hearing from you and trying to help guide you toward your retirement.

I wish all of you continued success and a happy and healthy 2018!