After 25 years in the retirement industry, I have worked with plans of every shape and size and industry and consulted on over $2 billion of retirement plan assets. I’ve seen the good and the bad and have an intimate “insider’s” view of the retirement industry.
Here are some of my personal observations you should consider, whether you already use an advisor or are thinking about using one:
1. The vast majority of advisors are overpaid. Here’s an example. An advisor collecting .25 of 1% on a plan with assets of $20 million is making $50,000 a year. If they are providing the investment consulting services and the plan has 15 investments, it should take the advisor, at most, about 5 hours per quarter to analyze the funds. That works out to 20 hours a year of work. $50,000 divided by 20 hours equates to a rate of $2,500 per hour. How many professions make $2,500 per hour? Brain surgeons and most major league ball players don’t even make $2,500 per hour.
2. Advisors should be paid a flat fee or paid on an hourly rate that equates to $250 per hour – tops.
3. Plan sponsors are frequently under the impression that, if they have an advisor, they can’t be sued. Not true. If you sponsor a retirement plan, you are potentially vulnerable to being sued. When I suggest to these same plan sponsors who are convinced their advisor can shield them from litigation and suggest they get it in writing, they are shocked when they don’t get the letter.
4. Most advisors are not fiduciaries under ERISA and do not have fiduciary liability, even if you think they do. The only way for you to know for sure is if it is in writing, in your service agreement. Even if they are a fiduciary, you can (and most likely will ) get sued if there is a problem with your plan’s investments or, more likely, the plan’s expenses.
5. Independent advisors may have a minimum amount of insurance coverage in case of litigation. Make sure you understand how much there is and exactly what it covers. The cost of litigation alone would use up the insurance coverage. Furthermore, if an advisor has 20 or more clients, they typically they will use the same funds or provider platform for most of their clients. If there is a problem with one client, chances are, it will be replicated for many other clients. In this situation, the advisor can easily become insolvent, as any insurance would be woefully inadequate to cover legal or other expenses associated with a epidemic within the advisors client base.
6. Advisory firms generally have no assets to go after in the event of a settlement or litigation. Any personal assets that belong to he partners or principals are shielded from any litigation arising from their advisory firm’s activities. So, don’t expect to find a deep pocket when their insurance runs out.
7. Advisors are not objective when it comes to which providers they recommend. Some of their preferences are motivated by legitimate criteria, but their recommendations can also motivated by how much they get paid for doing business with one provider over another.
8. Most advisors never invest their money in the funds they recommend to their clients.
9. Even though you might think you know how much your advisor is being paid, there are a variety of “soft dollar” forms of compensation that are still not disclosed or regulated. Examples include: advisors that ask for and receive marketing budgets or “contributions” from mutual fund and insurance companies for hosting sales seminars; Advisor attended conferences that are paid for by the industry; overrides paid to the advisors’ firms that reward them for concentrating more business with one or two providers.
10. The services a plan sponsor receives versus what was committed to by the advisor decline significantly after the first few years of the engagement.
11. If your advisor works for a major brokerage firm, they will be 60% more expensive than almost any other advisor because 60% or more of the advisor’s fee is kept by the brokerage firm.
12. Advisors are often paid out of the plan’s assets, either directly or indirectly. So, in effect, the participants are paying for the advisor. However the advisor is primarily serving the needs of the plan sponsor, not the participants.
13. Advisors generally don’t want to meet with or talk to the individual participants. Ironically, this is exactly what they should be doing. Unfortunately, advisors are working to accumulate assets and need to sign up as many clients as possible. It isn’t practical for them to talk to individuals. If your advisor can’t or won’t, ask what kind of services are available for one-on-one consultations.
14. If participants want advice as to when they should be invested in stocks or on the sidelines in cash, the advisor has no way of providing it. Their default answer is “stay invested”, no matter what the market is doing. Recall September of 2008 through April of 2009. Advisors simply repeated what they were told by their firms: “don’t sell”. The reason is simple: money sitting in a money market account is generating almost zero revenue for the fund managers in today’s low interest rate environment. On the other hand, money invested in stock and bond funds generates 8 to 10 times the revenue that money market funds do.
15. This conflict of interest between the advisor/mutual fund companies and the investor almost guarantees that investors saving for retirement will suffer through another major correction sometime in the future. When that happens (remember 2008-2009), be prepared for a tidal wave of lawsuits that will include plan sponsors, advisors, administrators and anyone else associated with the plan. As the saying goes: the reason they say you are a “party” to a lawsuit is because everyone is invited.
In our next installment, we will share a simple and effective retirement plan design solution that can significantly reduce your chances of being sued, shrink your retirement plan’s expenses to the lowest level possible and minimize the time you spend sitting in 401(k) committee meetings.
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