Approaching Retirement FAQ
Is it usually beneficial to rollover money from an employer plan to an IRA?
Generally, yes. This is especially true if the adviser acts as a fiduciary and utilizes institutional funds with a long-term asset class investment approach. Unlike an individual retirement account (IRA), employer plans typically offer limited investment opportunities, especially among the various asset classes.
An IRA has substantially similar asset protection planning features found with employer-sponsored plans. Additionally, the distribution options available under an IRA following your death are usually more flexible for your beneficiaries than employer-sponsored plans.
How do I avoid commission-based products with a rollover?
Commissions (or loads) are a real and significant drag on a portfolio’s performance. Commissions are common with actively managed mutual funds and are often classified as Class A, B or C. These fund designations have nothing to do with the quality of the funds or its performance and instead it merely signifies how the commission will be paid to the broker. This commission is paid on top of the annual expense charges of the mutual fund or exchange-traded fund (ETF). We have similar thoughts and, to be certain, even more heightened concerns with annuities and limited partnerships.
The best practice for low cost investing is passive institutional investing (wholesale) as opposed to retail investing described above. The problem for investors is that most advisers have limited or no access to passive institutional investments. Investors should seek out fee-only fiduciary advisers who offer 100 percent passive institutional investments that are no-load, penalty-free investments.
How should I invest my retirement funds?
With an adviser that applies similar rigor and study to the field of investing that a scientist applies to his or her field of endeavor. The science of investing is the use of research and statistical models to design portfolios that track the efficient frontier. The efficient frontier represents the optimal volatility (for sake of simplicity we call this risk or volatility risk) and expected return tradeoff between various asset classes. The questions advisers should ask are which asset classes to include (or exclude), what is an optimal allocation of asset classes, and how to design and rebalance a portfolio suitable to an investor’s risk and return profile?
What experts and amateurs alike cannot do is predict which asset classes will outperform others, or when it will happen, or for how long it will continue, and certainly not in the long run. That being said, a passively managed or structured portfolio consisting of diversification both within and among various assets classes in relation to a low cross-correlative relationship will mitigate the downside volatility risk of any one stock or asset class. Indeed, if designed correctly, an investor can enhance his or her expected return while lowering the volatility risk until the investor has reached the optimal efficient frontier tangency. If a portfolio is not found along the efficient frontier, then it is found somewhere beneath it—this is an inefficient portfolio.
Inefficient in that an investor is taking on volatility risk for which he or she is not compensated. Significant uncompensated volatility risk and other inefficiencies are created mainly in three ways: high costs of investing, excessive trading and attendant costs (viewing the portfolio as a short-term play to somehow time the market as a risk manager), or inexpertly designed portfolios.
Should I avoid annuities and other forms of insurance-based investing?
Yes, avoid most annuities and especially avoid annuities inside of an IRA or other tax-qualified accounts. An annuity is an insurance product that, with limited exception, we do not recommend to investors. We encourage investors to review the State of Michigan Attorney General Bill Schuette’s recent consumer alert regarding annuities as well as the State of Michigan Office of Financial and Insurance Services unambiguous warning letter to the public on annuities entitled: “Seniors Beware: Variable Annuities May Not Make Sense For You!” These State of Michigan warnings about annuities are similar to warnings issued by the federal government at the SEC and FINRA.
How do I manage my fixed-income retirement when taxes are likely to increase in the future?
Through expert tax management at both the advisory level and fund level. Tax management consists of designing investment portfolios utilizing an optimal balance between investment performance (including expected return and risk characteristics) and the attendant tax consequences specific to a particular investor. It is the systematic and continual application of evolving tax strategies based upon new information, changing tax rates and laws, and the needs peculiar to the investor. At its core, tax management concerns itself with after-tax returns over time. Tax management is not a product. It is a process that comes directly from applied research found in professional journals and academic literature.
If your current wealth adviser is not a CPA or tax lawyer, then you may be missing opportunities to reduce taxes beyond simply the subjects concerned herein—for example, tax loss harvesting and HIFO accounting methods. Ask your fee-only CPA investment adviser about these and other tax-saving strategies.
I know that I need an estate plan, so what do you recommend?
The modern estate plan consists of a revocable living trust, pour-over wills, durable powers of attorney for property, healthcare and mental healthcare. A more involved estate plan arrangement for tax planning would include the use of A/B trusts, irrevocable trusts, qualified gifting strategies, family limited partnerships, or a family foundation. Regardless of the type of estate plan that you have or will require, it is vital that your estate plan and retirement plan are seamlessly connected and kept up to date. Without excluding other well-qualified advisers, we recommend working with wealth advisers holding law degrees to best coordinate efforts with your estate lawyer. After all, a wealth adviser with a law degree speaks the very same language as your estate lawyer.
What do I look for in a financial adviser?
A fee-only fiduciary adviser is an adviser who has the highest legal duty to his client, and accordingly, can have no conflicts of interest with his client, offering only objective and truly independent advice, who must operate with complete transparency and disclosure to the client of all fees, costs, expenses, expected rates of return, risks and so on. A fee-only fiduciary adviser is not a broker whose limited duty is merely “suitability.” Investors receive far more utility in an adviser who must, by operation of law, put his client’s interest first and not his fee.
There is simply no substitute for substantial education, training and experience. An adviser needs all three to be truly successful for his client. For wealth adviser educational credentials, we recommend advisers holding a JD, PhD, DBA, MS, MBA, CPA, PFS, and/or CFA. Indeed, it is probably best that the adviser hold some combination of the above degrees and designations. Such sentiment has been echoed by many academics and practitioners especially in recent years as the complexity of finance, law, accounting and taxation has turned financial advising into a rigorous profession.
In his well-regarded and top selling book, The Millionaire Mind, Dr. Thomas J. Stanley, professor and prolific author on the affluent, makes clear that today wealthy investors almost always look to investment advisers who are lawyers and/or CPAs and seldom engage financial planners and brokers.
The best practice in the industry is to have a multi-disciplinary team approach, which has the wealth adviser working with the investor’s lawyers, CPAs, insurance professionals and so forth, to develop an integrated and comprehensive retirement, tax and estate plan. If your wealth adviser is a lawyer and CPA, this takes the multi-disciplinary team approach to a whole new level of expertise and efficiency that is demanded by today’s high net worth retirees.
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Stephen L. Hicks, JD, MS, CPA and Roger L. Millbrook, JD, CPA/PFS, are Fee-Only Fiduciary Investment Advisers and principals of Siena Capital Management, LLC. Part of a larger Siena team, both professionals are lawyers and accountants and hold other degrees or designations in the area of financial services. Siena advisers can be reached at firstname.lastname@example.org.