It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
By Cyril Tuohy
Financial advisors are splitting into three broad segments — all roughly equal in size — when it comes to advising clients about drawing on Social Security support, which for many retirees has become a primary source of retirement income.
A survey of more than 600 financial advisors found that 26 percent – the “educators” – educate and inform clients about Social Security strategies, 30 percent – the “scenario providers” – illustrate and offer scenarios but do not recommend an approach, and 36 percent – the “recommenders” – create tailored plans and recommendations on Social Security claiming strategies.
Only 8 percent of advisors said they do not generally discuss Social Security with clients or provide support.
The findings are included in a report titled “Social Security Support and Financial Advisors — Insights and Opportunities 2014,” published by Practical Perspectives in Boxford, Mass., in conjunction with GDC Research in Sherborn, Mass.
Across channels, registered investment advisors (RIAs) and independent advisors are more likely to fall into the “recommenders” category. Wirehouse advisors are more likely to belong to the “educator” category, the report found.
“Many advisors are not comfortable or do not see it within their existing scope of support to recommend specific actions on claiming Social Security benefits,” said Howard Schneider, president of Practical Perspectives, and Dennis Gallant, president of GDC Research, co-researchers of the report. “This suggests significant opportunity to extend support so that advisors can be more comfortable in fully engaging clients on Social Security.”
The report is one of the first to delve deeply into the habits of advisors with regard to their approach to Social Security benefits on behalf of clients.
Social Security, passed in 1935, was meant to supplement benefits for workers, victims of industrial accidents, the chronically unemployed, dependent mothers and children, and the handicapped.
With the demise of defined benefit and pension plans over the past 25 years, Social Security has taken on greater importance as a financial leg to stand on. A government entitlement designed to supplement income has become a lifeline for millions of retirees.
“Nationally, one in four retired Americans has no source of income beyond Social Security – in Maine the number is one in three – and four in 10 rely on that vital program for 90 percent of their retirement income,” said Sen. Susan M. Collins, R-Maine, in a hearing on retirement planning held earlier this year.
Government actuaries project the Social Security Trust Fund, funded by payroll taxes, will run out of money by 2033 if nothing is done to reform the program. Fixing the program - either by delaying the age at which people are eligible for Social Security, reducing benefits or both - is easy if politically unpopular.
That age at which workers elect to take payments makes a big difference in their monthly Social Security income. Schneider said more advisors need to incorporate Social Security into their practices to be able to craft a sound Social Security withdrawal strategy.
“While some advisors have incorporated Social Security support into their practice models, many others have yet to fully embrace helping clients identify a recommended strategy for taking benefits,” Schneider said in the report.
Individuals who delay the receipt of Social Security payments by several years benefit from as much as $700 or $800 extra in the monthly deposit. For a retired couple, the difference is even bigger and adds up to tens of thousands of dollars over the course of a lifetime in retirement.
People can start taking Social Security benefits as early as 62, but delaying benefits past age 70 carries no additional accrual advantages, according to a client brief from Wells Fargo Advisors. For every year that a payout is delayed, the benefit increases by 7 percent and 8 percent.
Knowing when to begin collecting on the benefit, therefore, is important. Advisors say they want more tools and support to help them navigate the nuances of what is, in effect, the largest annuity program in the U.S., the survey found.
Nearly three-quarters of advisors said they were “likely to seek out additional support, content or tools related to Social Security in the next year,” the survey found.
“Satisfaction with support from key sources, especially asset managers and insurance companies, is generally modest at best, suggesting a significant opportunity for these firms to enhance what is available to advisors,” Schneider said.
Popular advisor planning software tools come from vendors such as MoneyGuidePro, BlackRock and Horsesmouth, as well as “internally developed” tools like Naviplan from Advicent Solutions and Social Security Analyzer from Social Security Solutions, the survey found.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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