The financial industry is broken down, basically, into two groups: Those who are regulated as fiduciaries, and those who aren’t.
However, wouldn’t you agree that most financial advisors held to the lower regulatory threshold would argue that they still hold themselves accountable to the higher standard?
In other words, acting in the clients’ best interest is, or should be, a concern, or a standard for the majority of advisors, not the minority.
(Related: Want Better Sales? Ask Better Questions)
Let me ask you something: If you don’t take the time to show, to discover, or to determine the financial path a client is currently on, then can you objectively prove you acted in the client’s best interest? Can you objectively show you even helped the client?
An LTCI Planning Case
Consider this: If clients wanted to buy long-term care insurance (LTCI), but, based on their current spending trajectory, they would exhaust their retirement savings within the next 10 years, then would it be prudent to add an additional cost for additional insurance that, due to elimination periods and daily co-pays, would be unusable?
About a decade ago, a couple that eventually became clients came to us because their advisor was recommending a $6,000-annual-premium LTCI policy. The advisor never took the time to figure out how much the couple would spend in retirement. He simply concluded that their $500,000 of retirement assets must be protected again potential long-term care (LTC) expenses.
The couple’s goals, spending and age of retirement would have put them on a path, such that, when statistically they were most likely to use the policy, they would no longer be able to pay the premiums or the co-pays if they did go on claim.
While we could argue the policy was suitable, we can’t argue it was in their best interest to focus on insuring a potential risk, when their desired retirement age and spending amounts gave a near certainty of exhausting their retirement savings.
I suppose, advocates of LTCI would say this is debatable.
Let me make this simpler.
A few years ago, during the Q&A part of a talk I was giving to a group of advisors, another advisor challenged my statement that we need to review a client’s tax returns and perform forward projections to conclude whether a Roth individual retirement account or a traditional IRA is most appropriate. He believed Roth IRAs were superior to traditional IRAs.
My answer to him was more elaborate than this, but I think this will suffice. Imagine a client is two years out from retirement, and he or she is currently in the 22% federal tax bracket but will dip into the 12% bracket at retirement. I see this often.
In this example, contributing or converting to a Roth IRA before retirement, taxes those dollars at 22%, when just two years later it could be taxed at 12%.
To illustrate the difference, let’s just use $20,000 as the contribution amount.
There’s two ways to increase Roth IRA assets.
- Make $20,000 in Roth IRA contributions.
- Convert $20,000 to a Roth IRA.
If, over the two-year period, a married couple contributed $20,000 to their Roth IRA, rather than to their traditional IRA, they’d have a tax-free balance of $20,000 in their Roth IRA.
If they contributed $20,000 to their traditional IRA, they’d have a taxable balance of $25,641 in their traditional IRA — $25,641, because $20,000 in traditional IRA contributions creates $5,641 in tax savings.)
Two years later, if we use a no-growth assumption, when this couple is in the 12% bracket (about $100,000 gross income), the after-tax balance of the traditional IRA will be $22,654, or $2,654 more than that of the Roth IRA.