The Advice Yield – How to Achieve the Best Deal for Savers

Benjamin Franklin famously said, “If you fail to plan, you are planning to fail!”

This philosophy is especially relevant to workers who are increasingly responsible for navigating their way to a financially secure retirement due to a decline in defined pension plans and the tenuous future of Social Security.  This can be a daunting task for many who feel intimidated by the markets and fearful of making uninformed investment decisions that will dramatically shape their ability to retire with ease.

In a speech this week at the White House Conference on Aging, President Obama said too many older Americans are underprepared for retirement when they leave the workplace, and that public policy should encourage people saving for retirement to get a “fair deal”.  While the President’s focus on increasing retirement savings is commendable, his statements too frequently diminish the value of financial advisors and the services they provide.  On multiple occasions the President has stated that the Administration must crack down on “back door payments,” “hidden fees,” and “conflicted advice” by advisors who are more self-interested than doing what’s right for their clients.  These assertions make for good sound bites, but the facts don’t support these claims.

A 2014 Consumer Survey by the LIMRA Secure Retirement Institute found that households that use a financial advisor are twice as likely as non-advised households to have $100,000 or more in retirement savings, and three times as likely to have a retirement nest egg greater than $250,000.  Similarly, a study recently released by Oliver Wyman emphasizes the value of working with a financial advisor in planning for retirement, finding that “advised individuals making less than $100K per year had 51% more assets than similar non-advised investors.”  The Wyman report concludes that there is “substantial evidence that advised individuals are more sophisticated and diligent long term investors who achieve better investing outcomes.”

Individuals often begin saving for retirement through an employer-sponsored defined contribution plan, and these plans are critical to retirement security as they are often the primary and sometimes even the sole source of a worker’s tax-deferred retirement saving. The LIMRA survey shows that people who engage a financial advisor are more likely to contribute at least 10% to their employer provided plan, which is the commonly recommended saving rate.  This is much higher than the average default contribution rate of 3.4% that unadvised individuals make with automatic enrollment.

Unfortunately, many employees of small businesses do not have access to workplace-sponsored defined contribution plans and must save for retirement on their own.  The Wyman report shows that small businesses may not offer a retirement plan due to cost, prioritization of other employee benefits, and significant use of temporary labor. The good news is that small businesses who do turn to financial advisors are 50% more likely to set up a defined contribution plan for their employees.

Financial professionals help people understand their investment options, manage their risks, and meet their saving goals.  While there have been many improvements in today’s retirement saving options including auto-enrollment and auto-escalation, many workers are still uncertain about how to best proceed and look to a trusted financial advisor for guidance.  According to the Wyman report, “Many people are uncomfortable tackling retirement savings on their own.  By one measure, professional financial advice is solicited by 58% of households with under $100,000 in investable assets and 75% of households with more than $100,000 in investable assets.”  Working with a financial advisor allows individuals to have more stability and success over the long run.  Financial advisors help investors create diverse, balanced portfolios, take advantage of packaged products, hold lower cash allocations, avoid early withdrawal scenarios, manage tax law and tax risk, and rebalance their portfolios regularly.

Unfortunately, consumers may soon find it difficult to obtain the help of a financial professional because the financial planning industry is currently facing its own set of risks.  The substance of a well-meaning proposed rule by the Department of Labor is impractical and will not work for investors. The unfortunate impact will mean workers saving for retirement will face limited services that financial advisors currently provide to investors and small businesses seeking to help their employees save for retirement.  Their remaining services will be more costly, and middle-income investors will no longer be able to afford the help of a financial advisor who can diversify and rebalance their portfolios and reduce their risk exposure.  However well-intentioned the DOL proposal may be, it will not be a fair deal for retirement savers.

Let’s not rush to adopt a risky piece of regulation with a questionable return.  Instead, let’s be careful to acknowledge the value of financial advisors and the services they provide.  With the help of financial advisors who have the freedom and flexibility to help their clients, investors will neither fail to plan nor plan to fail.

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