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Have You considered Hiring A Financial Adviser?

Posted By Dennis Damp On In BENEFITS / INSURANCE,ESTATE PLANNING,FINANCE / TIP,RETIREMENT CONCERNS,SOCIAL SECURITY / MEDICARE | Comments Disabled
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(Updated 2/26/2023) Many are uncomfortable with investing and managing money in general. The Federal Reserve intentionally kept interest rates artificially near ZERO for many years and now that interest rates and inflation are soaring in 2023, do we ladder CDs, buy short term Treasuries [2] and corporate bonds, and/or invest in the market with its inherent risks?

If we do invest in the market what stock and bond mix will not only preserve but grow our nest egg? If we are doing this on our own, do we buy individual stocks and bonds or invest in indexed mutual or exchange traded funds that often have very low management fees.

Years past, many retirees were able to ladder CDs making 5% or more with 48 month or longer maturities. That may be happening again very soon as the Treasury raises interest rates to fight inflation. Those in the TSP are keeping large amounts in the safe G-Fund to take advantage of rising yields. Unfortunately, we don’t know what lies ahead and there is so much to consider that many seek out professionals to help them navigate the investment world.




Who Controls What?

Often, one or the other spouse takes control of finances and manages investments for the family. If the person in control knows what he/she is doing, and has the time and energy to invest wisely, that often works fine as long as that person doesn’t take undue risks with your family’s life savings.

I basically assumed this responsibility with my family and have done this for years. Even though I manage the investments I discuss options and strategies with my spouse to solicit her input and she is knowledgeable about all of our accounts.

For situations where neither partner is knowledgeable about investments federal employees and annuitants often rely on the TSP Life Cycle Funds [3] to steer them towards retirement. Annuitants often consider investing in the L Income fund, a conservative choice with the majority in the G-Fund yet enough in the other funds to provide some growth even in retirement.

There are other investments that must be managed such as IRAs, private sector 401Ks, brokerage accounts, savings bonds, savings and money market accounts, and so on. The tide is turning in 2023, and higher yields are finding their way into most fixed income investments including I-Bonds [4], CDs, Treasury Bills and Notes, and many are abandoning riskier investments for this safe harbor.

One is the Loneliest Number That There Ever Was

The problem with having one person managing investments is that when that person becomes infirm or dies the surviving spouse is generally at a disadvantage. They will have to turn to another family member or financial adviser to help manage and preserve what has taken a lifetime to accumulate. Hence the need to establish a relationship with a knowledgeable financial adviser while both are alive and healthy, especially if you don’t have a family member to rely upon.

When you need assistance with finances, you require a professional who knows how to balance your need for trustworthy advice with his or her need to make a living providing it. This is so true, I’ve been researching adviser options for several years and if you aren’t careful, you can lose a lot through high management fees, front end loads, and transaction fees.

Find a Trustworthy Fiduciary 

A fiduciary is a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust.  This person must take the time to truly understand your goals and strives to achieve them without churning your account or focusing on certain investments excluding other more advantageous options.

Many suggest using a registered investment adviser because they assume a fiduciary roll and are legally required to put your interests first in the relationship. Yet, I still am personally concerned because you are trusting a third party to manage your assets or at least a good portion of them. It is much harder to recover from a loss after retirement when most are on fixed incomes.

One of the first questions an adviser typically asks is who you are investing for; yourself or your heirs. More risk can be tolerated if you are investing longer term for heirs. Personally, it seems a moot point, I don’t want to lose a significant portion of my investments no matter who I’m investing for even though, long-term, things may, and I reemphasize MAY improve. Once you’ve accumulated a lifetime of savings, I personally don’t want it to diminish significantly.

Unlike many in the private sector, federal employees have a substantial annuity to rely on in retirement. Add to that your TSP Savings, Social Security for all FERS employees [5] and for many CSRS employees [6]. When I first approached an adviser, I informed him that I didn’t need someone to establish a plan for retirement, I was already there and able to live within our means.

What I wanted was to set up an initial relationship with them so that when I’m not able to manage our accounts due to advanced age or death my wife and heirs can rely on them for assistance. I like to take things in baby steps, start small, learn about the new relationship, and then progress from there.




The First Step

The adviser we first met with reviewed our personal situation and introduced us to an attorney to update our wills and trusts. The first step. They also collected considerable data from us. Personally, I dislike giving out confidential information. Many federal employees, especially those who know they will be financially secure in retirement due to their annuities and other income sources, may be able to limit the information to account summaries and balances. If you need a plan to achieve financial security, then you may have to provide the additional information.

Most advisers request any and all information about every account, loan, asset, insurance policy, annuities, income from all sources, and much more including copies of income tax returns. In turn they offer to prepare a plan describing how, from their perspective, you can achieve financial independence in retirement. These plans are often free of charge and introduce you to the services they can provide to help you achieve your goals.

Basically, they will offer several levels of support from traditional brokerage accounts, portfolio reviews with quarterly updates, asset management, advisory and managed accounts. All come with a cost of course. For example, the fees from one of the firms I contacted included trading fees for the traditional brokerage account, .25% of the account balance annually for quarterly portfolio reviews and recommendations, 1% of the account balance annually for up to $500,000 under their asset management program, 1.25% for advisory and 1.65% for managed accounts. The management fees decrease for larger invested amounts, the more they manage the lower percentage you pay them.

The Bottom Line

I always consider the bottom line; how much is this going to cost me over my current expenditures. Yes, it is going to cost you more in most cases than what you are paying now to trade and manage your accounts personally. That’s not necessarily a bad thing but it is something you have to contend with.

It is always difficult making a decision to pay more. If your results are what your adviser projected and you expect, and you achieve the level of desired services, then the cost will be worth it. Plus, your time is valuable, and it will be freed up to do other things.

Not all brokerage accounts are alike. Fidelity offers many trading options such as trailing stop loss orders, options trading, corporate and government bond purchases, and they offer competitive yielding FDIC insured certificates of deposit if desired. One of the financial planning firm’s brokerage commissions were 1% of the trade value! If you purchased 100 shares of Apple stock at $145 a share the commission would be $145 for that trade!

That is excessive by any standard considering that Fidelity offers zero commissions [7] for stock, ETF and options trades with no minimums to open an account. They also offer zero expense ratio indexed funds! You may want to keep your trading account with your local brokerage firm if you are an active trader. If you don’t trade much, it wouldn’t be a big issue and if you are only transferring stock from one brokerage account to the financial planner’s brokerage house.

Review SEC Reports

If you are considering hiring an adviser, visit the SEC site to check out a brokerage firm, individual broker, investment adviser firm, or individual investment adviser [8]. The SEC and FINRA provide abundant information on advisers and firms that you can use to start your search.

When I was searching for an adviser, I wanted one that could purchase any and all investments for my account not just one family of funds or investment options. Firms that offer limited investment selections may be more interested in selling you a product rather than being a fiduciary and providing sound investment advice.

I also suggest asking the adviser, before sitting down with them, for an updated copy of their Part 2A Form ADV. The Form ADV is used by investment advisers to register with both the Securities and Exchange Commission (SEC) and state securities authorities. The form consists of two parts.

The second part requires investment advisers to prepare narrative brochures written in plain English that contain advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the adviser. The brochure is the primary disclosure document that investment advisers provide to their clients.

If you are considering talking to a financial adviser, contact several firms to compare options, costs and services before making a decision. The ADV forms will help you readily compare firms and advisers.

Once you sign up, stay in touch and monitor results to ensure they meet or exceed your expectations. If you start small, as they prove their worth you will feel comfortable expanding their role in managing your finances. It takes considerable due diligence to settle on an adviser. It’s a very personal decision and one that will hopefully make your life easier as they manage your investments in an ever-changing world.

Summary

I explored working with a financial advisor when I wrote the first article on this subject. Even though we didn’t take advantage of their services, we did find a highly competent attorney to draft our wills and joint trust. A must for everyone to avoid probate and confusion when the inevitable happens.

I’m still open to the prospect of eventually working with a financial advisor, for now I’m content with managing our investments myself.

 

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and financial information are subject to change. To ensure the accuracy of this information, contact relevant parties and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended, nor should it be considered investment advice and our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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