- Good financial advisors help investors/employees make better decisions and get closer to harvesting long-term market averages, which brings an average of 3-4%/yr in value.
- Advisors that help clients with retirement planning, tax planning, and income strategies bring about 1.4 – 2.0%/yr in value in addition to the above noted figures.
- If you are going to make advisors available to employees, why not allow them access to some of the best in the industry that are obligated to serve as fiduciaries:
- Many of these advisors are also the lowest cost option for employees.
- They have less conflict of interest since they do not represent any individual company.
Why work with Independent Registered Investment Advisors and allow Fee Billing?
Good Financial Advisors can help investors/employees avoid costly mistakes
The average investor performs about 2-6%/yr. (depending on the sampling time-frame, but about 3-4%/yr. over 20-30yr. time periods) behind the market averages. Take this fact combined with the compounding power of money over extended time periods and the consequences are potentially catastrophic to investors/employees retirement savings:
Read the 2018 DALBAR Report, “Qualitative Analysis of Investor Behavior.”
How much does this cost investors/employees?
With the elimination of many private pensions, reduction of many state pensions, and the potential that we will have to curb benefits from Social Security, it is more important than ever that we help our clients/employees properly prepare and accumulate for their future retirement needs. Let’s look at a couple examples of how this may affect their lives:
Example 1: Lets take an Ohio University Faculty member earning $75,000 with an average of 24% going into the Alternative Retirement Program (ARP) account, over a 30yr. career. Say that this investor/employee has a moderate risk tolerance and so we’ll just use the average of the S&P500 and Barclay’s Aggregate Bond Index over the last 20yrs. to estimate their theoretical return of 8.5%/yr.
This should allow them to accumulate ~$2,235,865. However, as the report above shows the average investor has underperformed the markets by 2-6%/yr so let’s give them the benefit of the doubt and say they only underperform by only 3%/yr. With our new rate of return at 5.5% our average faculty member will accumulate ~$1,303,838, which equates in an opportunity cost of ~$932,027 or almost $40,000/yr. in income.
Example 2:Let’s take a nurse at a local 501(c)3 earning $55,000 with an average of 10% going into their 403(b) account, over a 35yr. career. Say that this investor/employee also has a moderate risk tolerance and so we’ll just use the theoretical return from above of 8.5%/yr.
This should allow them to accumulate ~$1,059,859. Again, as the report above shows, the average investor has underperformed so let’s use a 3% underperformance per year. With our new rate of return at 5.5% our average nurse will accumulate ~$551,383, which equates in an opportunity cost of ~$508,476 (almost half is lost!).
Do Advisors really help?
You may ask, “Do advisors really help?” and the answer is mixed. We believe there are two fundamental things to consider:
Are they really a credentialed Financial Advisor: Most people serving in the financial services industries are sales representatives, not what we would consider a true “Financial Advisor.” So if we were to include every individual that calls themselves financial advisors then I would be skeptical of the mean result to clients/employees. However, if you limit the field to advisors that have some accreditation or advanced degree (say they are a CFP®, ChFC®, or have a Masters/Ph.D. in Finance, Accounting, and/or Law) then the answer is almost unequivocally yes if they actually spend at least 1-2hrs. a year with their clients to review their plans, investment managers (called “Alpha”), and investment allocations (called “Beta”).
Most credentialed Financial Advisors can also bring “Gamma” to help their clients: Morningstar has done extensive research in this area over the last decade and now tracks a new multiple that they call “Gamma.” Gamma is a representation of the value that a good financial advisor can bring to a client/employee by assisting them with their investment selection, rebalancing, behavior modification, retirement planning, tax planning, distribution planning, and estate planning. A financial advisor that does these successfully for a client/employee brings somewhere between 1.4- 2.0% per year in value. Read the 2013 Morningstar Report, “Alpha, Beta, and Now…Gamma.”
Why enable 3rd party Fee Billing and work with Independent Registered Investment Advisors (RIA)?
Frequently Asked Questions (FAQ):
1) Won't opening our plan up to Independent RIAs potentially flood our employees/plans with sales reps?
It is possible but generally, this will not happen for two main reasons. First, most people that have started RIAs have well-established practices with good client bases. They do not need to market aggressively to increase their client base and/or sales; in fact, most RIA owners that we know generally only take new clients from qualified referrals with minimum account sizes. Secondly, these advisors are generally fee-based and there are no commissions paid, which many times incentivizes sales reps from your other providers to aggressively solicit your employees to generate large up-front commission payouts.
The second line of defense on this is that your providers, such as TIAA CREF or Fidelity, value your relationship more than the RIAs’ ability to serve your employees and they force them to sign restrictive agreements that limit marketing and solicitation. In addition to this, you could also institute a policy for banning any advisor/firm that you felt was abusive or excessive and I’m sure the providers would comply with any reasonable request.