Thursday, November 13, 2003
Check the credentials of your 'Certified Financial Planner' By SCOTT BURNS / The Dallas Morning News
Question: I am retired, 61 years old, have a $35,000 a year pension, no debts, and $300,000 in a 401(k). The 401(k) is in a stable value fund, making 3 percent to 5 percent yearly. I have been talking with a CFP who advises me to roll the 401(k) over to a self-directed IRA and invest the money in "Life Settlements" and Equity Indexed Annuities.
Can you please advise me if this is a good plan? I know nothing about "Life Settlements" and very little about the Equity Indexed Annuities.
– J.B., by e-mail
Answer: The first thing you should do is check whether this person is actually a Certified Financial Planner. You can do this at the Certified Financial Planner Board of Standards Web site: www.cfp.net/default.asp. Given the recommendations, I find it difficult to believe that your planner has done the work for the designation.
The certification "CFP" is an indication that the person identifying himself as a financial planner has completed a course of study at a college or university that offers a financial planning curriculum that is approved by the CFP board.
It also means the person devotes time each year to update his or her knowledge of financial planning and, most important, agrees to abide by a code of ethics.
This is no guarantee of moral perfection, and most CFPs regularly deal with the conflict of their commissions vs. their clients' best interest. Some do it better than others. These recommendations, however, are 100 percent commission driven. They have absolutely nothing to do with you or your needs.
Let me explain.
First, "life settlements," otherwise known as "viatical settlements," are the purchase of life insurance death benefits from an insured person who is terminally ill. In theory, you purchase the death benefit at a discount that is based on the insured's much-reduced life expectancy. You become responsible for making certain that the policy remains in force until death. The problem is that death may be inevitable but its timing is uncertain. In addition, your return can be much diluted by the large commission paid to the middleman, your purported CFP.
Second, equity indexed annuities sound good – offering equity-like returns with no downside – but the sales reps seldom detail the fine print. Although there is great variety in contracts, virtually all have some provision setting the maximum return you can have in any given year, limiting your return to the price change in the index (which means the dividend yield is excluded), etc. Lots of stock sizzle, not much steak.
One highly consistent thing about equity index annuity contracts, however, is that virtually all offer a high commission to the sales rep. I'd bet heavy money that the commission burden on this proposal is in excess of 10 percent – that's $30,000 of your money.
Your $300,000 401(k) account should get you good advice, personal attention and real analysis from a person with both a conscience and training. And you should expect your planner to be paid for her time and skill.
A CFP who provided service and tried to deliver good investment options for his clients, for instance, might direct your $300,000 toward the American Funds group. Although the commission on small purchases of front-loaded "A" shares is 5.75 percent, the commission rate is reduced as the purchase increases. For purchases over $250,000, for instance, the commission rate is 2.5 percent.
That's $7,500. Few would call that small change.
The sales rep does not receive 100 percent of this amount, but the amount he receives should buy you 50 hours of $150-an-hour professional planning advice or 25 hours of $300-an-hour professional planning advice. Either way, a real financial planner can guide you to an investment plan with low annual costs and a good track record while being well compensated.
How well compensated?
In a typical professional services business in which direct wages represent about 40 percent of revenue, a services fee of $150 to $300 an hour represents an annual salary of $120,000 to $240,000 a year.
Few would call that small change, either.