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Monday, August 9, 2010
Fee-only registered investment advisors like to puff themselves up and proclaim how they are different from brokers. They emphasize that they are fiduciaries: they are "on the same side of the table as their clients". Really?
Many also manage assets. In fact, managing assets is typically their primary profit center. Watch them closely when they ask you how much in total assets you have to be managed. You'll notice their eyes narrow a bit and their lips purse out somewhat as their brains mentally calculate what they'll make off of you.
Let's break it down in simple terms. If an advisor charges 1% of assets (this is at the lower end), then he gets $10,000/year to manage $1.0 million. If you buy an annuity for $500,000, say, then obviously his compensation (his annuity, you might say)is cut in half to $5,000/year.
For many clients, handing over all of their money to be managed in the risky asset markets is not in their best interest. It is, however, clearly in the interest of the advisor.
In fact, we know from surveys that the number one fear of retirees is that they will run out of money. In most instances, it is why people do a financial plan in the first place. To alleviate this fear, the planner should, as a fiduciary, show people how to intelligently buy an annuity.
The bottom line is that people may want to separate the financial planning function and asset management function. At least then they'll know incentives aren't misaligned.
Related post: http://rwinvesting.blogspot.com/2010/07/single-pay-immediate-annuity.html