Dear Advisors: Financial Plans are Not Retirement Plans

A growing number of financial advisors are pointing out an awkward reality on the investment planning market.

Too many of those plans are really tricked-up retirement plans, and the distinction between the two is important.

“Millions of Americans are walking around with financial plans disguised as retirement plans,” said Peter J. D’Arruda, president of the International Association of Registered Financial Consultants and an investment advisor for 25 years. “A financial plan should not be defined as a retirement plan unless a proper percentage of assets in that plan are devoted to a lifetime income that cannot be outlived.”

The distinction between financial plans and retirement plans is crucial, he added, even though consumers might not totally understand why.

“Most 401(k) plans (sold as retirement plans) are nothing more than lump-sum time bombs, in that they have no lifetime income component to them and just feature an account balance,” D’Arruda explained.

'Everything Else is Detail'

Retirement plans are specific plans related to the management, distribution, timing and monitoring of income during the post-working years, said William Ryon, co-founder of Compass Investment Advisors, in Dover, Del.

“All retirement planning is income planning, that's it, everything else is detail,” he added.

Advisors not differentiating financial plans from retirement plans could potentially be doing a disservice to clients.

“They do so by creating confusion and stress by allowing the client to focus on issues unimportant to a retirement plan, like beating the S&P 500, for example,” Ryon said. “There are plans that could focus on alpha, standard deviation or some other metric but those are completely different types of investment plans with very different goals and objectives.”

No doubt, a traditional financial plan is a very broad and general sounding term.

“A business could have a financial plan to complete a project, make an acquisition or manage a budget,” Ryon said. “An individual or household could have a financial plan that targets savings goals, like paying for a second home, college or a wedding that incorporates spending budgets to help them get there.”

Those situations are all very different than a retirement plan, whose primary objective is to distribute enough increasing income to sustain one’s lifestyle for the remainder of their years.

There is and should be a distinction between plans, said Chris Cosenza, a certified financial planner with Brookhaven Wealth Management in Brookhaven, Ga.

Clearly, the former should be more comprehensive -- covering cash flow/budgeting planning, employee benefit planning, investment planning, tax planning, insurance planning and risk management, estate planning, and retirement planning, Cosenza said.

All of these are areas identified by the Certified Financial Planner Board of Standards.

“I even assist some of my clients evaluating mortgage options, college and financial aid planning, and other areas of risk management like property and casualty coverages,” Cosenza said.

Just One Component

Retirement planning is but one component of a true comprehensive financial plan, Cosenza said.

“Clients who are at different life stages however may place different priorities on which of these areas they want addressed,” he said. “For those approaching retirement, the discussion of investment and retirement planning strategies are top of mind.”

Advisors who solely focus on that will miss many other areas that need to be addressed like Social Security, Medicare, health care, long-term care planning, and estate planning, Cosenza noted.

“These areas should be part of a comprehensive retirement plan but often are not, likely out of expediency or convenience,” he said. “Advisors who sell retirement plans as financial plans may be misleading clients if they aren't forthcoming as to all the planning areas clients should be considering.”

Others concur with Cosenza that retirement plans should be slotted within financial plans, and with careful planning.

“Financial plans should include retirement plans, but a comprehensive look at financial life also includes plans for cash flow management, risk management, and tax and estate planning,” said Jason Howell, a wealth advisor at Jason Howell Company in Vienna, Va. “Ultimately, fiduciary financial advisors should review those categories - and more - to deliver ultimate value.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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