In today’s world, we can use GPS to get us to our destinations. We can ask Siri, Google Home, or Alexa for news and weather. We can control lights, locks, thermostat, and appliances at home using our smartphones.
And yet, when we want to know what to do with our retirement plan account–which we’re counting on to be worth more than our house someday–there’s no “app for that”.
Why not? It’s 2018. Let’s get with the program, already!
If you’ve ever called your retirement plan provider and asked what to do, you know the frustration of being transferred to an “advisor service” department, then being told they can’t recommend you do anything in particular, but “you should consider” XYZ and ABC funds. Or, maybe you’ve had a meeting with your plan’s advisor and been told something similar.
Want to know what the problem is? Your request is for advice, and these parties LEGALLY cannot provide it for you.
Let me explain.
In the U.S., there are two kinds of financial professionals–registered representatives of broker-dealer firms (brokers), and investment adviser representatives of registered investment adviser firms (investment advisers). In a nutshell, there is no such legal term as “financial advisor”. It’s made up, chiefly to confuse consumers into thinking they will be getting advice about their investment strategy. However, legally, these brokers-in-disguise cannot advise you. You can read about more differences here and here.
[Devil’s advocate] Why ask for advice? Why isn’t “education” about investment types and various asset classes good enough?
When it comes time to fix something my car or house, there is always some point at which I exhaust my personal ability and expertise. At this moment, since I need to drive my car and live in my house, I have a choice to make. Do I head to the hardware store and ask them for “advice”, when all they’re going to do is charge me for equipment and supplies I purchase from them? Or, do I hire a professional mechanic or contractor and pay them to do the job and get it right?
There are times when either one is appropriate, but generally speaking, the bigger the project and the higher the stakes, the more likely I am to hire a professional. In the world of retirement plan investing, the broker is the hardware store, and the investment adviser is the professional contractor. I know I can go take a Saturday morning class on re-wiring my kitchen for 220V AC electricity, but that doesn’t mean I trust myself enough to actually do the work. Sometimes mistakes can be deadly, and there’s no substitute for experience.
[Devil’s advocate] Even if I want to hire an investment adviser, how can I know whether they are worth the fee?
First, since the broker gets paid commissions on the funds, they will likely guide a participant to the active funds with higher expense ratios, and avoid any no-load or low-expense options like index funds or ETFs. An investment adviser cannot recommend a fund option unless its tradeoffs of performance versus expense can be academically justified. The result is usually lower investment management expense ratios.
In a landmark study of 723,000 plan participants over seven years, Aon Hewitt and Financial Engines tracked plan participant performance in plans where the two companies were both vendors servicing the plans. They found participants who utilized “Help” resources (advisory and managed options) in the plans experienced +3.32% per year better returns on average, net of all fees, over those participants who did not take advantage of “Help”. So, even after fees, the Help participants would have 23.68% more money in their accounts, on average, than the non-Help participants after just seven years. (Your individual difference can be calculated here.)
Back to my car and house repair scenario… Sometimes, when I think I can handle a project on my own, I get started on it. I end up breaking things that weren’t broken at the start, and I have to fix more than what I began with. (I’m sure this doesn’t happen to you, but you can probably imagine.) In the end, I did more harm than good, and I had to spend WAY more time than I wanted, and the money savings over hiring a pro was negligible. (Actually, my ego doesn’t want you to know that I actually spent MORE by doing it myself.)
Remarkably, there actually is “an app for that” when it comes to individual investment advice in a qualified retirement plan. Imagine setting the thermostat on your 401k or 403b so that the “system” made adjustments in various weather conditions to keep you comfortable. And, imagine inputting your desired retirement financial position into a GPS on your 401k or 403b so that the “system” knows what turns you need to take and when…all while keeping you comfortable.
This is real. It’s called the 401k Toolkit. You can read more about it here. This innovation exists because its time has come. No longer does anyone have to rely upon a broker that can’t give them individual advice about the right thing to do.
You can hire an investment adviser at a flat rate, no matter your account size, and know that your best interests are being served for retirement, complete with a thermostat and a GPS.