Advisor Building Own Field of Dreams

For most people, retirement planning is a critical, but often overlooked, a step that they don’t face until later in life. Just like most things on Wall Street, there are several ways to successfully plan for your retirement, the key is to find one that works for you. That said, here are three timeless lessons for your consideration:

1. Enough Money Is Not Enough – Your Living Expenses Will Be Higher Than You Think When You Retire

Most people create a plan that will give them “enough” money when they retire. The problem with that mindset is that it does not account for the unexpected (and often expensive) surprises that happen in life. Some of these surprises can be unforeseen medical costs (including LTC), unavoidable travel, income taxes (For most people, Social Security is considered taxable income), unplanned debt (most retirees today still have a huge mortgage or other debt), and inflation. So, it is not enough to plan for enough money when you retire, to be safe, you want to have more than enough money.

2. Always Respect Risk – Your Portfolio Is Probably Taking On More Risk Than You Realize

Respecting risk is one of the most important components of a proper retirement plan. Most people invest 100% of their retirement portfolio into the stock market. In up markets, that is a great investment because your portfolio grows steadily but in bear markets that is a very risky proposition. Remember, a bear market is defined by a decline of at least 20% or more from a recent high. Over the past 100 years, there have been 8 devastating bear markets, ranging from -21.8% to -83.4%. The last bear market was in 2008-2009 and the market was cut in half. It is important to note that another bear market will happen, it is just a matter of when, not if. The key is to prepare for it now before it happens. Not after the fact.

3. Update Your Retirement Plan Frequently – The retirement plan you created just 5 years ago is probably obsolete or needs to be updated.

Think about everything that has changed in your life in the last 5 years. For most people, their occupation, income, spending, health, or even geography may have changed. That’s why it is imperative to update your retirement plan to make sure your plan stays aligned with your current (and future) needs. I spoke to Stephen A. Hartel, AIF® Wealth Advisor at Trilogy that has $3 billion in assets under management*, and he told me, “Your plan needs to be a living, breathing thing that you and your advisor work on every quarter or at least every year.” Steve told me that he does not believe in cookie-cutter financial plans because everyone’s needs and goals are different and that inspired this article.

Bottom Line:

These are just a few points to consider when planning for your retirement. The key is to plan early and make sure you are way ahead of the curve so you can retire comfortably.

Read the article here.

* Correction: Trilogy Financial has over $2 billion in assets, rather than the $3 billion referenced in the Forbes article, “3 Timeless Lessons for Your Retirement”.

Written by: Kathryn Flynn | 529 plans are investment products designed to help families save for future education costs. A direct-sold 529 plan is a lower-cost, DIY option that can be opened online. Advisor-sold 529 plans must be purchased through a licensed financial advisor.

There are many advantages to using an advisor-sold 529 plan. According to a study by Fidelity, 67 percent of families who work with a financial advisor feel they have a good understanding of the best way to save for college, compared to only 40 percent of families who do not work with an advisor.

But financial advice rarely comes free, and college planning is no exception. Families who purchase a 529 plan through a financial advisor often pay a sales charge in addition to the plan’s underlying mutual fund fees. The amount of commission an advisor earns depends on the mutual fund share class selected within the 529 plan.

Under the suitability standard, broker-dealers must have a reasonable basis to believe their share class recommendations are suitable based on the client’s needs and investment profile. The Financial Industry Regulatory Authority (FINRA) recently launched a 529 Plan Share Class Initiative to improve the supervisory practices and procedure of broker-dealers who sell 529 plans.

Two areas of concern were brokers who were recommending share classes to beef up their commissions, and the change in tax code that made K-12 tuition a qualified 529 plan expense.

A Sneaky Sales Practice

Advisor-sold 529 plans offered through brokerage firms (Merrill Lynch, Morgan Stanley, UBS, etc.) are typically sold as Class A shares or Class C shares. Class A shares have an upfront sales charge (as high as 5.75%) and low annual fees, and Class C shares have no upfront sales charge with higher annual fees.

Generally, Class A shares are recommended for 529 plan beneficiaries who have a longer investment time horizon, since there is more time to absorb the cost of the upfront sales charge and the investor will benefit from the lower annual fee.

But, some advisors intentionally placed clients with young children in Class C shares to collect the higher ongoing sales charges.

Shorter Investing Time Horizons for K-12

As a general rule of thumb, some broker-dealer firms recommended Class A shares for all beneficiaries younger than 12 years old. This was considered a suitable investment since the child had at least six years until college.

However, the Tax Cuts and Jobs Act of 2017 allows families to use up to $10,000 per year of 529 plan savings to pay for K-12 tuition expenses. Families paying for K-12 tuition typically have a much shorter time horizon than those saving for college, and therefore have less time to absorb the cost of an upfront sales commission.

How Broker-Dealer Firms are Responding to the Initiative

Many broker-dealer firms now use a suitability questionnaire and breakpoint calculator to see which share class is the best fit. FINRA supplied firms with a framework for the calculator, which provides a recommendation for Class C shares or Class A shares based on the investor’s time horizon.

Jeff Motske, President at Trilogy Financial Services in Orange County, CA, says that some broker-dealers are very strict about share class recommendations. Advisors are expected to understand the client’s investment goal and time horizon and keep documentation.

“With these new rules and regs, you’ve got to be examining pricing as part of your planning practice with your clients or you’re just not meeting the standard,” says Motske.

Russ Ryan, formerly FINRA’s Deputy Chief of Enforcement and a partner in King & Spalding’s Special Matters and Government Investigations team, says that although the deadline to self-report violations to FINRA has passed, taking a look at a firm’s supervision is a good business practice.

“The initiative may be prompting brokers to ask more questions of their customers before they make a recommendation to make sure they really do understand all the facts and circumstances of the customer’s situation and making sure that they are recommending the right type of 529 share class,” says Ryan.

How 529 Plan Fees Affect Your College Savings

With almost any 529 plan, the investor pays annual mutual fund fees. Direct-sold 529 plans typically invest in passively managed funds (such as index funds) with very low expenses. However, many advisor-sold 529 plans invest in actively managed funds with expenses as high as 1% and come with an additional sales charge to compensate the advisor. A 529 plan's expense ratio also varies by share class.

Even a small difference in 529 plan fees can add up over time. For example, if you invest $100,000 in a 529 plan with a 1% expense ratio you would pay $1000 in fees. If you instead invest in a 529 plan with a 0.10% expense ratio you would only pay $100 fees that year.

And remember, a 529 plan’s annual expense ratio is based on a percentage of assets in the account. So, as your account balance grows you end up paying more in fees. The more you pay in fees, the less money you are investing for your child’s college education.

Alternatives to Broker-Sold 529 Plans

Advisor-sold 529 plans are also sold by registered investment advisors (RIAs). RIAs have a fiduciary duty to put their clients’ best interests first. Instead of Class A shares or Class C shares, some RIAs place 529 plan clients in no-load share classes, such as Class I shares. The sales charge is waived, and the advisor typically charges an hourly rate, or an AUM advisory fee based on the assets in the 529 plan.

But, not all RIAs charge for 529 plan advice. Matthew Murawski, a financial planner with Goodstein Wealth Management, LLC in Encino, California offers pro-bono college planning advice to clients. His firm recommends 529 plans with low-cost index funds, no sales charge and no asset-based fee.

In Murawski’s experience, consumers are generally unaware of 529 plan share classes and that they can usually get the same investment at a lower cost. He recently helped two clients roll existing 529 plan assets from Class A and Class C shares to lower-cost Class I shares.

“Even if we were charging for it, let’s say we had an asset fee on there, we would still be saving you an incredible amount of money over the lifetime of the 529,” he says. “Fees really add up over the lifetime of a 529.”

Another RIA option is U-Nest, a college savings app that determines an optimal 529 plan investment portfolio based on your child’s age and time horizon. The funds are invested in Class I shares of the CollegeBound advisor-sold 529 plan managed by Invesco. Instead of charging an hourly rate, there is a $3 per month fee to use U-Nest.

According to Ksenia Yudia, Founder and CEO of U-Nest, the app is ideal for low- to middle-income families who may not be comfortable investing in a direct-sold 529 plan.

“Direct-sold plans come with certain complications, meaning the clients need to be comfortable opening their own investment account without the help of a financial advisor,” she says. “They need to have at least some basic knowledge of finance and investing.”

Final Thoughts

Families should regularly review their 529 plan to make sure the investments are still appropriate for their situation. It's perfectly reasonable to ask your advisor about which 529 plan share class you are invested in, especially if you have concerns.

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