Big name bankers and brokers have spent a lot of money on their brands, but what is it that they actually provide? In this article we would like to lift up the curtain and examine how and why the banker-broker approach to retirement does a disservice to retirees and why you should work with a fiduciary instead of a big banker or broker.
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What is a Fiduciary?
A fiduciary is required by law to recommend only what is in your best financial interest, not theirs. There are three easy questions you can ask to find out whether or not your advisor is a fiduciary:
- Are they Series 65 licensed, fee-only?
- Are they independent?
- Is their corporate structure designated as an RIA—Registered Investment Advisor firm?
Once you ask these questions, you will find out that most financial advisors at big banks and brokerages have their Series 7 license, meaning they cannot be a fiduciary because they take security commissions. They only make money when they sell you high-commission financial products, which are invested in the stock market. They are incentivized by selling you products, with very little explanation of potential pitfalls, all while claiming zero responsibility for suitability, performance, or returns.
By contrast, fee-only fiduciaries make more money when you make more money. They consider your situation, age, background, family dynamics, life goals, and objectives, then they carefully craft a custom financial plan for you. Once you reach your late 50s, they begin working with you to develop your retirement distribution plan. Fiduciaries take the long-term view and want to help you be financially successful throughout your lifetime. They want to help make sure you never run out of money, no matter what your age is.
The second question about independence refers to the scope and breadth of financial products that a financial advisor has available to offer or recommend to you. Typically, banker-brokers are limited to their own proprietary, high-commission options. Instead, independent RIAs and fiduciaries have literally hundreds of products from multiple providers and carriers available to them. They examine contract language and underlying fees carefully before they include an option or strategy in your overall retirement plan to make sure it’s in your best interest.
In short, bankers and brokers are salespeople. They sell you high-commission, market-based products that benefit them. Fiduciaries are bound by law to serve your best interests, and they are long-term, fee-only planners and strategists. When you make money and your money lasts, fiduciaries make money. Your success is their success.
All Equities are Risky, Including Bonds
To address a shortening time horizon and add more “safety” as clients approach retirement, bankers and brokers will use what’s called the “rule of 100,” meaning that a 60-year-old should have 60 percent of their assets in bonds or bond funds, and that a 65-year-old should have 65 percent, etc.
To say that bond funds are “safe,” especially when interest rates are this low, is financial malpractice. In the hundred-year history of the ten-year Treasury yield, we’ve only gone below 2% twice. The second time was last year, when the ten-year Treasury yield went to 1.4%, then went up in January to 2.6%. Right now, it’s at 2.3%–near all-time record lows.
The rule of 100 does not work when interest rates are this low. It makes no common sense, when you consider that at 60 years old, you’ll have 60% of your portfolio earning almost nothing.
Municipal Bonds
The retirement planners at Decker Retirement Planning have stayed away from municipal bonds since February of 2008 because 49 out of 50 states have pension obligations they can’t possibly pay back. We’re very concerned that bankers and brokers are not paying attention to the train wrecks that are sure to happen in the municipal bond industry when the states have to renegotiate all of this debt, and anyone holding municipal bonds will potentially be lumped in with all the other creditors.
But, having the largest percentage of your money in bonds in retirement earning almost nothing is not the biggest problem. The biggest problem is interest rate risk.
Interest Rate Risk
Interest rate risk is where you lose money on bonds and bond funds as interest rates go up. This is not opinion, it’s math. Let’s look at two examples. In one year—1994—the 10-year treasury rate rose from 6% to 8%. As a result, the average bond fund in 1994, according to Morningstar, lost about 20%. Here’s another example. In 1999, the 10-year treasury rose from 4% to 6%. The average bond fund lost about 17%.
Our economic situation in 2017 holds a lot of risk for retirees when it comes to bonds. If we go from where we are now at 2.3% on the ten-year treasury back up to, say 4%, that will mean a 15 – 20% loss of principal on what bankers and brokers are telling you is your “safe money.”
Use the Asset Allocation Model for Accumulation, not Retirement
The asset allocation model used by bankers and brokers is an all-risk model, because it puts all of your money in the market. It may work just fine when you’re in your 20s, 30s, or 40s, because it is an accumulation strategy.
The asset allocation pie chart method works like this: you’re given a risk questionnaire, and you’re asked questions about how much risk you want to take. Based on how you answer the risk questionnaire, a recommended “diversified portfolio” of mutual funds, managed stocks, and ladder bonds is produced. But, no matter what, all of your money will be put at risk in the stock market.
This is fine when you have a paycheck coming in and you’re just adding to your 401(k). You can take hits like 2008, where a 30-50% drop in your portfolio might take you only four years to get back to even.
But, you’re not fine if you are in the retirement phase of life. If you are 50 or older, you should be using a distribution plan, not an accumulation plan.
Why we Think the 4% Rule Doesn’t Work for Retirement
Strike three against bankers and brokers is the way they distribute your assets from your portfolio in retirement. It’s called the 4% rule, and it is the distribution strategy bankers-brokers are still using with retirees, even though it’s been discredited and was abandoned by its creator, William Bengen, in 2009.
Here’s how it works. The 4% rule says that stocks have averaged around 8% – 8.5% percent for the last hundred years. That’s true. Bonds have averaged around 4.5% for the last 37 years. That’s also about right. So, just drawing four percent of your assets for the rest of your life should be fine, right? Well, no. It is not.
The problem with the 4% rule is that it only works when the market is in an upward trend. But, historically, the stock market has 18 year cycles to it. From 1946 to 1964, there was a bull market. From 1964 to 1982, 18 years of flat returns. From 1982 to 2000, there was the biggest bull market we’ve ever had. And, from January 1, 2000 to present, the market’s been relatively flat.
When markets are flat, not only does the 4% rule not work, it actually destroys your retirement. This is a mathematical fact. The 4% rule is the most destructive, toxic financial advice out there, responsible for destroying more people’s retirement in this country than any other piece of financial advice. Here’s an example to prove it:
You have $4,000,000 dollars on January 1, 2000—you’ve retired at the beginning of a flat market cycle. Between 2001 and 2002, there is a 50% drop in the stock market. But, you lose more than that because you’re in retirement drawing 4% out each year. You start 2003 down 62%. The market rallies and doubles from 2003 to 2007, but, unfortunately, you’re still withdrawing 4% a year. Then, the markets tank over 50% from October 2007 to March of 2009, and you’re still taking 4%. You are done, you’ve run out of money. (By the way, running out of money before you die is the number one fear of people 50 years old.) Source: Transamerica Center for Retirement Studies
This scenario really happened. Remember in 2009 all of the grey-haired people that had to sell their homes, move in with the kids, or go back to work? This was because their retirement plan was destroyed by the 4% rule.
Retirement Distribution Planning
Qualified retirement planning fiduciaries, like Decker Retirement Planning, don’t follow the 4% rule. We build individualized retirement distribution plans for each client designed to minimize taxation and to help maximize your retirement income while focusing on principal-guaranteed accounts for the first 20 years.
We create a spreadsheet, which shows all of your sources of income, including income you will take using a tax-advantaged qualified and non-qualified account withdrawals. Everything is spelled out. Pensions, real estate rentals, Social Security, and all your income from assets. We total it up into gross income, minus taxes. That helps gives you a true idea of your annual and monthly income. You could see what you will have to spend each month, which usually goes a long way towards creating peace of mind.
What difference could a fiduciary approach to retirement planning advice make for you? Contact us for a no-cost consultation to find out: 1.855.425.4566.
