Putting Your Interests First!!

This morning, I read (and watched) an NBC News Report titled: “The Great 401(k) Experiment Has Failed for Many Americans.”  The report goes on to state that the median 401(k) retirement account balance of working Americans is $18,433.  That’s it!  For some of you, that’s just 2-months of family living expenses…and then you’re out!

While this dismal statistic researched and reported by the Employee Benefit Research Institute shows just how bad retirement savings rates are, what are the problems causing Americans not to have enough in retirement?  Here’s just a few reasons off the top of my head:

  1. Lack of financial education.
  2. Buying high and selling low.
  3. Actively trading in attempt to time the market.
  4. Impulsive purchases to satisfy immediate wants.
  5. Not contributing on a monthly basis to their savings account.
  6. Not properly diversified across asset classes.
  7. Wrong allocation based on risk tolerance and timeline.
  8. Using historical returns as a forecast of future results.
  9. Not planning for emergencies, sickness, or disabilities.
  10. Not planning for college expenses.
  11. Not planning for possible early death.
  12. Not planning for taxes.
  13. Not following a budget, and spending way beyond it.
  14. Accumulation of credit card debt and late fees.
  15. Not having a master plan.

A more enlightening point to note is for those people who manage their own investment accounts.  Every year since 1994, Dalbar Inc. has produced an independent report titled “Quantitative Analysis of Investor Behavior (QAIB).”

In this report, [the study utilizes mutual fund sales, redemptions and exchanges each month as the measure of investor behavior.  These behaviors reflect the “average investor.” Based on this behavior, the analysis calculates the “average investor return” for various periods. These results are then compared to the returns of respective indices.] The results are shocking!

By the end of 2014, the 20-year annualized return for the average equity mutual fund investor was 5.19%, while the S&P 500 Index (the closest index of all stocks) returned 9.85% over the same period.  People…..this is a 4.66% difference per year, every year, for 20-years!

Why was there so much of a difference?  Was it possible that these mutual fund investors were acting upon their emotions?  According to the 2015 Dalbar QAIB report for advisors, the majority of the contributing factors was related to emotion. Here’s the 9-distinct investor behaviors they identified in their 2015 annual advisor report.  See if you have experienced any of these tendencies:

  • Loss Aversion–Expecting to find high returns with low risk.
  • Narrow Framing–Making decisions without considering all the implications.
  • Anchoring–Relating a new experience to a familiar one even when inappropriate.
  • Mental Accounting–Taking undue risk in one area and avoiding rational risk in others.
  • Diversification–Seeking to reduce risk, but simply using different sources.
  • Herding–Copying the behavior of others even in the face of unfavorable outcomes.
  • Regret–Treating errors of commission more seriously than errors of omission
  • Media Response–Tendencies to react to news without reasonable examination.
  • Optimism–Belief that good things happen to me, and bad things happen to others.

So I ask you: “Do you think that working with a competent advisor (Certified Financial Planner) can help you avoid some, any, or all of these emotional investor attributes?  Hopefully, you can answer “yes.”

Now I can understand that a 1-percent fee per year can seem like a lot to pay if you are not getting anything for it. But what if any of (or multiples of) the aforementioned items (from both my list and Dalbar’s findings) were also part of your financial problem?  Do you think that any of those items could have an effect greater than 1% of your investment balance?  Again, I hope you can truthfully answer “yes.”

Overall family wealth (when you include real property, art, education, emergency funding, etc.) is affected by more than just market returns.  So it is easy to see how potential losses in family wealth could be significantly more than a 1-percent fee when you consider how irrational we, as humans, can be when managing our own money!!

In putting your interests first, here’s what your 1-percent fee in paying an advisor should buy you each and every year:

  1. Handholding through volatile and unpredictable markets.  This alone will keep you from acting upon emotional investment decisions.
  2. Periodic face-to-face meetings discussing your personal goals, challenges, and opportunities.
  3. Determining how much “you” are going to need in retirement, your emergency savings, college accounts, life insurance, etc. and formulating a plan on how to fund it within your income and lifestyle.  (This is not a cookie cutter formula!)
  4. Helping plan for your tax situation by exploring methods to minimize your tax liability and the chance of a BIG tax surprise on April 15th.
  5. Creating a contingency plan for your family in regards to untimely and/or unexpected occurrences such as disability, death, or severe sickness.
  6. Working with you and your attorney to make sure your personal and financial intentions are directed in the capacity you want.
  7. Assistance in developing a personal budget for your family…and the coaching and encouragement to stick to that budget.
  8. The knowledge on how to live a balanced life…between saving and spending.
  9. Assurance that an impartial, trained, ethical, and experienced professional will put your financial interest above their own, and do so in a non emotional manner.

While this list is incomplete, these are just some of the services a client should expect for a fee of “1-percent of assets” per year.  If you noticed, performance and returns ‘within’ your account are not mentioned here.  That’s because the direction and performance of the market is something that cannot be controlled.  Everything else can…if you choose to do so.

Since the Pension Protection Act of 2006 was passed, the 401(k) and 403(b) markets have been trying to find a way to make investing more advantageous for the consumer/investor through a variety of ideas.  None of these ideas was to increase or promote the use of a financial advisor–which leads me to my closing point.

The general public is significantly unprepared for retirement—financially speaking.  And I’ll be the first to admit that there are some unscrupulous insurance agents and financial advisors out there who would sell their mother if they could make an extra buck.  I don’t like those people…they are the ones who have given my profession a bad rap.

However, using the services of a CERTIFIED FINANCIAL PLANNER™ or CFP® (who is under obligation to uphold the CFP® Board’s Code of Ethics), investors from all walks of life can better prepare themselves for the challenges life throws in the path to a successful retirement.

You can read more about the ethics and responsibilities I, a CFP® Professional, am personally held to right here: CFP® Ethics and Enforcement.  You won’t find a finer organization supporting “you,” the consumer/client, to manage your financial woes and wealth in a fair and unbiased manner.

Help me educate the public on this difference, and we’ll make the world a better place!  If you refer a friend or colleague to me, you can be sure I will provide them the best experience possible.

Let me know how I can help!


The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. Investment in stocks will fluctuate with changes in market conditions and indices are unmanaged measures of market conditions it is not possible to invest directly into an index. Past performance does not guarantee future results.