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Three Important Questions Ray Johnson, CFP
March 2006
A couple of weeks ago, I received a call from a retiring couple who was struggling with the question of how best to take the husband's pension. They had talked with a couple of local financial advisers who had each suggested that they forego the monthly life-time pension and take the lump sum pension option. Seeing my invitation for a "Second Opinion," they called me.
The decision they faced was whether to take a one-time lump sum pension distribution of about $300,000 or a guaranteed life-time monthly pension check of $2,100. In our meeting, they expressed their comfort with taking the life-time guaranteed income, but they expressed concern that each of the financial advisers they had talked with had recommended taking the lump-sum amount, rolling it into an IRA, and investing it for both income and long-term growth as the better alternative to the lump-sum pension.
The long and the short of it is that all of the other financial advisers they had previously talked with were also selling investment services with annual fees ranging from .75% to 1.25% a year. A $300,000 pension rollover IRA would therefore generate an annual investment fee of between $2,250 to $3,750 to each adviser. If the couple decided to take the guaranteed monthly pension option, their adviser would receive no annual investment fee.
Financial advisers are economic animals who know where the money is. Many sales agents have found it progressively difficult to earn a living in their traditional role selling investments and have begun calling themselves financial advisers. When you shop for a financial adviser, it might help you to visualize that you are really buying a used car without any guarantees. It is important to ask the right questions. Here are three questions that should make your decision easier:
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Is my account an investment advisory account or a brokerage account?
Investment advisory accounts are held to a higher standard of financial advice. With brokerage accounts, any financial advice is "incidental" to the sale of the financial product.
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Do you acknowledge a fiduciary responsibility to act in my best interest?
Financial advisers who accept a fiduciary responsibility are required to act in the client's best interest at all times. Another way to put this is: "Are you working for me as my adviser or as a salesman for the company whose products you are selling me?"
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Will you disclose all conflicts of interest?
You want to hear a "YES" to this question.
Our Answers to These Three Questions
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Is my account an investment advisory account or a brokerage account?
Investment Advisory Account
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Do you acknowledge a fiduciary responsibility to act in my best interest?
Yes. We act as a fiduciary in all of our client relationships.
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Will you disclose all conflicts of interest?
"YES".
For a detailed listing of our disclosures, go to: About Ray Johnson, CFP
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