Hidden Biases Threaten Your Retirement Dreams
For years, commission-based financial advisors were criticized for pushing expensive products to maximize their own gains. Now, fee-based advisors have emerged as a supposedly unbiased alternative. But a recent study reveals a troubling truth: even fee-based advisors may not be immune to conflicts of interest.
The Rise of Fee-Based Advisors and a Lingering Problem
The financial landscape has shifted dramatically. Trillions of dollars have flowed from commission-based advisors to fee-based advisors who charge annual fees based on a percentage of a client's portfolio. This model, lauded by regulators and consumer advocates, aimed to eliminate the incentive to push unnecessary products.
However, a new study by PGIM DC Solutions and the American College of Financial Services exposes a hidden danger. While fee-based advisors may not be driven by commissions, their compensation structure can still influence their recommendations in ways that aren't always in your best interest.
Taking It Early May Not Be Best, But It Boosts Advisor Fees
The study focused on Social Security claiming strategies. Surprisingly, the research found that fee-based clients claimed Social Security at a younger age (average 65) compared to those who paid hourly fees (average 66). This trend directly contradicts financial best practices, which often recommend delaying Social Security benefits to receive higher monthly payouts later in life.
The reason? When clients claim Social Security earlier, they withdraw less from their investment portfolios, generating higher fees for the advisor throughout their retirement.
Are Advisors Giving You All the Options?
The study also revealed potential biases when it comes to managing debt and retirement income products.
Holding Onto Mortgages in Retirement: Advisors often encourage keeping mortgages in retirement, even with historically low interest rates. This strategy allows clients to keep more money invested, maximizing the advisor's fee base. While some argue this strategy can lead to higher returns through stock market growth, it also exposes clients to market volatility and debt risk.
Apathy Towards Annuities: The study suggests some fee-based advisors may downplay the benefits of immediate annuities. These products offer retirees a guaranteed income stream for life in exchange for a lump sum investment. However, advisors may be hesitant to recommend annuities because it removes money from their fee-generating investment accounts.
Do Your Research and Ask Questions
The findings highlight the importance of client vigilance. Don't assume fee-based advisors are automatically acting in your best interest. Here's what you can do:
Understand Potential Biases: Be aware of how an advisor's compensation structure might influence their recommendations.
Ask Questions: Don't hesitate to ask about alternative strategies, especially regarding Social Security claiming, debt management, and retirement income products like annuities.
Research Independently: Educate yourself about different investment options and retirement planning strategies before making any decisions.
