How Traditional Retirement Models Cost Clients Millions

Rajiv RebelloAdvisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

The choice to use an advisor in retirement is one that will cost clients and their beneficiaries millions of dollars in fees and opportunity costs as I show in this article. If advisors are allocating clients only to traditional stock-bond investment models without implementing any actual retirement, investment planning, or estate planning solutions, clients will never recoup this fee. The word “fiduciary” gets used a lot by AUM-based advisors who claim to be acting in the client’s best interests because their fee model aligns incentives with that of the client. The idea is that by providing long-term advice, and charging for it on an ongoing basis, the fee-only advisor is aligned with the client more than an advisor who only sells products that earn a large, one-time, upfront and often opaque commission. The reality of the situation is that the AUM-based advisor has similar conflicts of interest – namely to advocate for solutions on which they can charge their AUM fee.

If there is a better fit for the client that doesn’t allow the AUM-based advisor to charge a fee on or would result in a reduction in the AUM fee but is ultimately better for the client’s goals, then the AUM advisor has the same conflict of interest as the commission-based advisor. This conflict is most evident when clients enter retirement. The traditional glidepath for AUM advisors involves increasing the allocation away from stocks towards bonds as clients near retirement to reduce the volatility of the portfolio and protect against sequence-of-return risk. The client can withdraw a steady stream of income every year in retirement without fear of running out of money.

But this allocation choice often hurts client retirement goals and long-term wealth – particularly for clients in higher tax-brackets. Furthermore, paying a fee-only retirement advisor an ongoing fee to make and manage this decision for clients adds a heavy drag to long-term wealth.