How Not to Outlive Your Nest Egg

Life expectancies continue to increase. Quite simply, many retirees who don’t have their money invested efficiently run the risk of outliving their nest eggs. This is no scare tactic; this is plain reality.

O.K., O.K., So What’s a Person To Do?

Determine whether you have the time, discipline, and emotional make-up to handle your own finances. Most people think they can succeed on their own, much like the vast majority of people think they are above-average drivers.

The data shows a different fact pattern. Long-term investor behavior studies, including research highlighted by Vanguard founder John Bogle, have shown that the average investor gets destroyed not only by fees, taxes, and transaction costs, but also, more importantly, due to emotional errors and lack of investing discipline.

If you outsource your taxes to a professional CPA and your estate planning (e.g., will and trusts) to attorneys, then why wouldn’t you seriously consider outsourcing your investments to a professional? “Professional” is the operative word, because unfortunately, many people in the investment industry are more akin to aggressive salespeople than they are professional investors.

Since there are so many conflicts of interest in the industry, it behooves you to perform your due diligence on advisors under consideration. Here are some items to mark off on your checklist:

1) Fiduciary Duty:

Does the advisor you’re looking at work for a Registered Investment Advisor (RIA), which has a lawful fiduciary duty to make investment decisions in your best interest? Most brokers operate under Regulation Best Interest (Reg BI), which replaced the old “suitability” standard but is still not the same as a fiduciary duty.

2) Compensation:

How is the advisor compensated? Many advisors are incentivized to sell, sell, sell because they make commissions by shuffling your investments around. You’re much better off by aligning with a “fee-only” advisor who has a natural incentive in place to make decisions that will grow your assets.

3) Experience/Credentials:

Find out how committed your advisor is to their trade. Would you want a nurse to perform your brain surgery or a flight attendant to fly your plane? Probably not. Find out if your advisor has ever invested money or have they just sold products? Do they hold the CFP® (Certified Financial Planner) designation and/or the CFA (Chartered Financial Analyst) designation? Do they have relevant degrees in the field of finance or economics? A small percentage of advisors hold this combination of credentials.

4) Investing Style:

Discover whether your advisor uses the same investments in their personal portfolio that they recommend to you. If not, why not? It makes much more sense to partner with advisors who “eat their own cooking”.

5) Reputation:

With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the Financial Industry Regulatory Authority (FINRA), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and the CFP Board, keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

Following these simple steps, you can weed out many of the shoddy financial advisors that have conflicts of interest and/or lack the skills and experience to invest your money prudently.

Conclusion

Do yourself a favor and get your financial house in order by finding a dedicated, competent financial advisor who places your interests first.

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