I recently worked with a couple where the true value in my approach to financial planning was apparent.
Mary and John are in their mid 70’s. They were in the difficult position of settling their son’s estate. Their son, Ed, a government employee in his 50’s, had died unexpectedly a few months earlier.
Ed named his mother as the beneficiary of his work related retirement benefits. This included a death benefit for the pension Ed would have received when he retired. It was worth about $250,000.
John did a lot of research before meeting with a financial advisor. Ed’s benefits were eligible to be “rolled over” to an inherited IRA account. This would allow Mary and John to defer income taxes on the distribution of Ed’s account.
Tax deferral was important to Mary and John. They had good pensions. They were in the 25% Federal Marginal Tax Bracket. If they received the $250,000 as a lump sum, a good portion of it could be taxed at 28% and potentially 33%. The money had to be rolled over to “inherited IRA” – this was a necessity.
John also knew that he didn’t want to tie the money up for a long time. Nor did the couple want to take a great deal of risk investing the money. They were financially comfortable before inheriting the money. They saw themselves using this inheritance for indulgences that they had been putting off.
Before meeting with me, Mary and John met with another advisor. At our meeting, John was clear – he and Mary did not want an annuity. They had read about the high fees and surrender charges associated with this type of investment. Yet John presented me with paperwork from the other advisor who had arranged to have the inherited money transferred to a variable annuity with a guaranteed income benefit. We called the other advisor. The advisor understood that Mary and John’s goals were guaranteed growth and income that would last for their lifetimes. He felt that the annuity would meet those goals. The advisor overlooked the “not wanting the money tied up for a long time” part of John’s request. Mary’s money would have to stay invested in the annuity for 7 years. If she withdrew funds prior to that, she would be subject to surrender charges of 2% to 7%.
Fortunately we still had time to cancel the annuity contract without penalties.
Then came the next step – where to put the money. Many of us are comfortable working online with financial institutions for banking, bill paying and investment management. John, in his mid 70’s, made good use of the Internet to do research on Mary’s options for dealing with her son’s money. At the same time, they wanted to meet and work with a live person. They didn’t want to pay me an annual fee to manage their assets. They were happy to set up laddered Certificates of Deposit with their local bank.
The trip to the local bank was frustrating. Mary and John were pointed in the direction of the bank’s investment consultant and another pitch for a variable annuity. In addition, they weren’t comfortable that the bank consultant understood the importance and nuances of an inherited IRA.
Mary and John met with me again. We worked together to set up a series of laddered Certificates of Deposit with an online bank. It wasn’t a perfect solution, as they would now be dealing with an online bank. But the bank offered good interest rates and their staff was knowledgeable in dealing with inherited IRAs.
Mary and John paid me for a few hours of my time. It wasn’t cheap – but they felt it was valuable. My focus was on their needs and preferences, not the sale of a product.
I want to add one thing about the other advisors in this story. Why do they recommend products, like the variable annuity in this case, when the client clearly states that they want something else? I can cynically guess that the advisor is simply out for a commission. That is how he or she gets paid after all. In many cases, I think it’s more nuanced than that. Commissioned advisors are trained to think that their products are the best investment product for your situation. They aren’t evil and in many cases they are trying to do what they think is best for you. It’s just that their paycheck is, in part, determined by what you buy.
Where are my conflicts of interest? I could stretch out the time I spend on your project to increase my fee. I address this by agreeing with you, up front, on the cost of a project. If I need to spend more time than originally estimated – I will get your approval first.