Two men holding money and a light bulb Retirement

What’s Retirement Advice Really Worth? Part 1

Fisher Investments explains how retirement advice is worth more than you think–but not for the reasons you’d expected.

People entering retirement with some savings face a choice—seek out professional retirement planning advice on how to safeguard and grow their nest egg, or go it alone, aided by whatever free resources or cheap products they can find.

The temptation to go it alone is often compelling, because it is easy to find tips and strategies in books, on the internet or even by asking friends or family. But is this the right path for you? Is it the best way to get quality retirement planning advice? There are many free “expert” opinions and resources available, but they may not be sufficient help for all investors.

So, is there value in paying for retirement planning advice?

According to one market survey, two-thirds of investors believe there is, and we agree: Individual circumstances always vary, but there are good reasons to take advantage of professional retirement planning advice as you invest during retirement.i In the first of this two-part series, we will examine the better-known costs of investment advice—and how complex calculations often mask their true impact.

No Such Thing as a Free Lunch

Managing your money isn’t free, even if you aren’t paying anyone to do it. Seem contradictory? It isn’t. There are always costs and risks, even if they don’t show up on a bill. Some of these costs are unavoidable whether you get your retirement planning advice from a professional or not. They include:

  • Trading fees
  • Management fees on funds
  • Broker’s product commissions

But there are other, less-visible costs that can be much more important and can make a big impact on your bottom line. Perhaps the largest cost is the cost of a missed opportunity, both financial and personal. Financial opportunity cost is the money you may have left on the table by being your own asset manager. Did you maximize return, and did you minimize risk in the process? A professional can help you gauge these risk-adjusted returns. Personal opportunity cost is the things you miss out on—such as family time or leisure time—during the time spent managing your finances. The bottom line: opportunity costs loom large for investors who go it alone. Professional retirement planning advice can help reduce the risk of leaving potential returns on the table, often resulting from poor planning or decision-making.

When gauging the worth of professional retirement planning advice, considering both sides of the equation is crucial. It is important to understand that what you pay an adviser should be weighed against the potential cost of mistakes that can be made by trying to plan your retirement investments yourself.

The Costs You See

When working with an investment adviser, you can have additional costs beyond what you might incur on your own. These costs may vary depending on the adviser and the services they provide. These can include, but are not limited to, surcharges, hourly fees, flat fees or fees based upon a percentage of your managed assets. Some of these costs are easy to recognize and are subtracted from your account in return for retirement planning advice or other management services. Other times it can be difficult to understand exactly what you are paying for so it is important to know what to be aware of when evaluating advisers.

Look out for red flags like these:

  • High Sales commissions. If a broker providing you retirement planning advice charges a high commission for a product , it is often because it is difficult to sell and generates a tidy profit for the seller—and has a layered or complex fee structures, which may obscure additional charges and expensive limitations.
  • High percentage Compounding can be an investor’s friend, but not when it applies to fees paid. Oversized fees crimp returns over time—$100,000 invested over 25 years and earning an 8% annual return will grow to about $685,000. Just a two-percentage-point reduction in yearly returns due to account costs (in whatever form) decreases the final total by 37%, to around $430,000. That is a big chunk!
  • Lack of transparency. Many financial products, like variable annuities, carry obscured, multilayered fee structures and/or severe penalties for withdrawing money early—a one-two punch that can cut a big hole in your savings.

That is why you should always demand total transparency on rules and restrictions associated with your retirement accounts from anyone providing you retirement planning advice.

And be very careful to review financial product disclosure materials and look at how fees and returns are calculated. For example, equity-indexed annuities (or fixed-indexed annuities) frequently carry no expressly stated fees. But there isn’t any free lunch here, either.

They use complicated calculations to retain a substantial portion of returns earned. And since you never see it due to the calculation method, the difference in returns effectively serves as a fee, even if there technically may be no stated fee. But these calculation nuances (called participation rates and caps) can be just as costly as variable annuities’ high fees—if not more so.

We go deeper into these fees in Part 2 of this series, but investors interested in learning more about retirement planning advice from Fisher Investments can contact us to request an appointment.

i Source: Natixis as of 07/19/2016. United States Ranks 14th in Retirement Security in 2016 Natixis Global Retirement Index.