Is Good Advice On Retirement Plans Too Costly?

By Cyril Tuohy

InsuranceNewsNet

Americans are falling short of their financial retirement goals. This by now has become a truism among financial planners, but what if Americans don’t have enough in retirement assets to make it worthwhile for financial planners to bother?

What amount of assets does it take for a financial planner to perk up? $500,000? $1 million? $10 million?

“When the numbers are bigger, the math works,” said John Przybylski, director of financial planning for Federal Street Advisors, a Boston-based investment consulting firm. “If the numbers don’t work out, it’s not worth it for either of you.”

Przybylski said his firm charges a minimum of $70,000 to develop a retirement plan for clients. That sum — $70,000 — is far above the average annual salary for many workers, and it represents the equivalent of 1 percent of $7 million.

A 1 percent fee is typical of annual fees charged by advisors, but in the case of Federal Street, it “starts to make sense at about $15 million of liquid investments,” Przybylski said in an e-mail to InsuranceNewsNet. At $15 million, a $70,000 fee would translate to just under 0.5 percent of assets. As assets grow, fees usually go down but because that is rarely the only factor that changes as assets grow, there really is no set fee schedule, he said.

Federal Street’s subsidiary Old North Advisors offers a tiered fee structure and a minimum fee of $10,000 a year for clients with assets between $1 million and $15 million.

Considering that the National Average Wage Index in 2011 was $42,979, according to the Social Security Administration, what salaried worker even accumulates $1 million or $2 million by the end of his or her working life?

In financial services, the bigger the numbers, the more everyone benefits. As it turns out, though, for most of us the retirement numbers aren’t that big, and advisors like Federal Street are out of reach.

The average 401(k) retirement balance for a U.S. worker hit a record high of $80,900 in the first quarter, according to a Fidelity Investments survey of accountholders, and that was thanks to the strong gains posted by the stock market.

For pre-retirement workers 55 and older the average balance reached $255,000, nearly double what it was in the first quarter of 2009, Fidelity found, but still far below the level a fee-only advisory firm like Federal Street would even consider.

The average 401(k) account balance in the General Motors retirement savings plan is $150,000, but only $15,000 for participants in retailer The Gap, according to a survey of the nation’s top 401(k) plans by BrightScope, a San Diego-based financial information company which gathers 401(k) data on thousands of company plans.

At Google, the average account balance was $70,000, BrightScope reported. Even with $70,000 in a 401(k) account compounded at 7 percent a year for 20 years, the total comes to less than $300,000. For a fee-only advisor, that comes to $3,000.

Salaried workers are more likely to seek out retail financial advisors and registered representatives to serve their needs, but the lower price for advice offered by advisors comes from the commissions the advisors earn on the financial products they sell.

“These families and individuals often have less than $250,000, $100,000 or even $50,000 worth of investments, yet they are in need of affordable financial services and advice,” Bob Smith, president of the National Association of Insurance and Financial Advisors, said in an e-mail.

Critics say the danger of a commission-based model means that advisors aren’t necessarily giving the investor unbiased advice. So where do office workers go for unvarnished guidance?

Small investors can seek help from a no-load family of mutual funds belonging to a big fund complex, or they can get a recommendation from “uncle Fred,” said Bill Heestand, president of the benefits advisor Heestand Co. in Portland, Ore.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].