The daunting risks of the American retirement crisis call for fiduciary financial advice — financial guidance that’s legally obligated to put investor needs first. In 1983, 62% of private sector employees had a defined benefit pension plan. In 2010, that number was down to 19% as corporations moved to defined contribution plans like the 401(k). Financial planning risks that were largely handled by professional pension plan fiduciaries have almost entirely been handed over to individuals. Many of these individuals are either attempting to manage these risks on their own or turning to financial salespeople who have no fiduciary duty and are incentivized to sell generally “suitable” products. The results are a financial planning wake-up call.
Complex risks require fiduciary advice
Most Americans aren’t adequately funding retirement accounts. And working later to address funding gaps may or may not be a viable option — as nearly half of U.S. jobs could go away during many investors’ time horizon. A recent Oxford study estimates that 47% of U.S. employment is at risk of being replaced by computerization in the next 20 years. Funding retirement adequately requires both sound financial planning and well managed investment risk. Investment returns often fail to meet expectations, as many investors adopt unnecessarily complicated strategies and products. The Dalbar study of investor behavior found that a simple 20-year S&P 500 and Barclays Aggregate Bond Index investment produced more than three times the return as the average asset allocation investor. Just investing $100,000 in a 50/50 mix of the S&P 500 and the Barclays Aggregate would have compounded at 7.27% over the last 20 years and grown to $406,973, whereas the average asset allocation investor would have compounded at 2.29% and grown to $157,276 — almost $250,000 less. Putting investor needs first in a comprehensive financial plan is the first step to mitigating these and other retirement risks.
Fiduciary financial advice simplified
The Fiduciary Advisor blog aims to help investors put their needs first on an active basis — making sense of retirement risks in scenarios like those above and translating the latest financial news from a fiduciary perspective. My colleagues Nicholas Economos, John Hillman and I will tackle the big fiduciary financial planning issues and simplify them here in regular posts. Stay tuned for our next post, where we will go deeper on investment risk and portfolio management. To keep in the loop on every post as it’s published, sign-up for blog post email alerts.