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My wife & I have company pension plans which together have about 1 million in savings (thanks stock market). Since we're close to 60 years of age, retirement is approaching, and while we haven't used a financial planner I'm wondering if it's worth getting one so that our "nest egg" is used for our best interest? Top rated financial planners want at least a 1% fee to "manage" our accounts and advise us, but that means $10,000 or more to this person, what can they possibly do to make this a smart financial hire?

Right now the company plans have an annual fee of $200 each ($400 total) and we pick which funds to have our $$ invested. Fairly easy to look at different ratings services and pick only 4* or above funds. So what can the CFP do to justify the 10k fee?

More information in response to answers:
The bulk of our net worth is definitely in our company pension plans, however you're correct that my wife's account is a 401k plan where she can withdraw funds by filling out a form, she's not set up for monthly withdrawals although I'm guessing she could. My company plan is a 403b plan and it looks similar in withdrawing whatever amount by filling in a form. I do also have a "state run" pension plan that is set up for fixed monthly payments. I'm just not seeing what the CFP could do to justify the $10,000 or more fee. And everybody I talked to said they would charge the 1% fee(or more by some) on our entire portfolio. We just don't understand tax laws & strategies enough to see what the CFP could advise for our best interest and justify the huge fee.

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A percentage fee advisor will not have your best interests in mind. It's equivalent to usury, in my opinion.

A fixed-fee (or fee-only, or flat fee) financial planner is your best bet. There are several similar questions on this web site that may help you with your search.

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    A percentage fee adviser has more motivation to see their client succeed than their fixed-fee counterpart. Do you really think every percentage-fee adviser is unethical? – Hart CO Dec 1 '17 at 3:18
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    @HartCO The risk is asymmetrical. A percentage fee adviser never loses money, while the client certainly can. There is more to be made by steering clients into higher-fee funds than into low-cost better-performing funds. As a consequence, many advisers (but not all) compensated in that way do not act in the best interest of clients. – Chris W. Rea Dec 1 '17 at 4:15
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    @HartCO Percentage fee advisors benefit a little bit when their clients' wealth increases but they gain a lot immediately when they put their client into funds with a high 12b-1 fee and again when they increase their annual management fee. Retail-level financial managers face a systematic moral hazard problem that, as a group, they have succumbed to. – farnsy Dec 2 '17 at 21:25
  • @ Hart CO That's more true with regard to fees based on percentage of gains (although in that case the adviser has an incentive to engage in riskier investments than is optimal for the principal). Percentage of portfolio gives little incentive to maximize returns. – Acccumulation Dec 5 '17 at 17:12
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TL:DR version: You are quite correct in your suspicion that the financial advisor who charges 1% of the assets under management (subject to a minimum of $10K) will not be providing enough value to justify the cost.

If you have money in company pension plans and you will actually be receiving a pension from the plan (as opposed to a 401(k) plan or 403(b) plan which have different rules), then typically, there is nothing to manage: all your money will continue to be held by the pension plan which will dole out your pension on a monthly basis. Some plans do have the option of getting a lump-sum payout (that you can roll over into an IRA to avoid paying taxes on the entire payout right away), but there can be a penalty for doing so: some plans will charge a substantial fee for the lump-sum payout as opposed to leaving the money in the plan. For example, the State Universities Retirement System of the State of Illinois credits (or used to credit) 8% annual compound interest on the (mandatory) contributions (plus previously credited interest) in determining the pension benefit, but if the retiree opts to take a lump-sum withdrawal in lieu of the pension, then the entire account value is recomputed as if only 4.5% annual compound interest had been credited over the years, which is a substantially smaller amount. The retiree who opts for a lump-sum payout also loses free healthcare insurance for life for retiree and spouse. In short, there is a huge whack for choosing a lump-sum withdrawal which will not be easily made up by handing over the lump sum to a financial planner (even if it goes into an IRA with the CFP (or his company or brokerage) as the IRA custodian).

On the other hand, if your money is in a 401(k) plan (or 403(b) plan), it is generally a good idea to roll over the money into an IRA upon retirement. Most 401(k) plans have excessive fees (403(b) plans less so), and offer investments that are not all that great or are restricted in various ways, and you are much better off rolling over the money into an IRA where you can get lower fees and better investment opportunities. Indeed, many mutual fund houses have no fees charged on IRA accounts larger than $25K$ or so (and even smaller minimums if you opt to receive your monthly/quarterly/annual statements electronically rather than on paper). Of course, you do continue to pay the fees corresponding to the expense ratios of the funds that you choose to invest in (same as in the 401(k) or 403(b) plan) but nothing extra (e.g. the $200 fee that the you mention). If your IRA money is substantial, mutual fund houses also offer free (or discounted) financial planning services (pretty much like a one-time fee-only financial planner), or assign you a personal representative (just like your $10K or 1% financial planner), give you free (or discounted) access to tools such as TurboTax, and so on. About the only two reasons to leave money in a 401(k) or 403(b) plan are that (i) the plan offers superior investment opportunities not available outside the plan, and (ii) money in a 401(k) plan or 403(b) plan is safe from creditors if you happen to have a personal judgement against you: creditors can, is some cases, go after your IRA money in order to collect but not after the 401(k) or 403(b) plan money. Note, however, that with 401(k), 403(b) plans as well as IRAs, it is necessary to take Required Minimum Distributions from these plans unless they happen to be Roth plans.

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Professional financial advisors are often unscrupulous, charging way more than they are worth, investing your wealth in funds with high fees, and in general charging a lot for not very much or very good service. Sorry. It's just one of those professions where this is the norm. My advice is not to use them unless you really need them (like you have a LOT of money, a compulsive spending personality, or mental decline that makes you unable to do basic money management yourself).

One idea is to keep looking until you find an advisor who will charge a one-time fee for advice and not "manage" your assets---that is where you really get taken advantage of. Alternatively, there are lots of sources to get very good financial advise for free. People who get paid to give advice have a financial incentive to make the problem they address seem complicated when in fact it is not very much so. People who give advice away for free, including me, have the opposite incentive. Personal financial management is not rocket science.

You can see more details on my answer to this almost identical question.

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As long as your money is in a 401K or other company retirement account, or pension there is little an advisor can do except advise you how much to put into each account type and help you pick from a limited set of funds. Of course they could also tell you to invest through non-employer based plans or a taxable account.

They can also help you determine the money moves you need to make during retirement to make sure that you have enough income while also considering taxes and long term growth.

If the bulk of your net worth is locked into those retirement accounts and your house, I would argue that the amount they will be managing and advising is a much smaller number. An advisor that is charging a percentage of your wealth as their fee should be basing it on that smaller number.

I would suggest a planner that for a fixed fee will spell out what steps you need to make from now until retirement and then the first few years of retirement. They will discuss not just investments but also Long Term Care insurance, downsizing your home, etc. These moves generally don't require exact timing, thus the need for somebody to actively manage the investments is limited.

  • 401(k) accounts can invest in the stock market. – Acccumulation Dec 5 '17 at 17:17
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He'd look at your age, and the market, and then advise whether or not your portfolio is too risky (thereby saving you money in a market down-turn) or too conservative (thereby earning more than you currently are).

But as long as you have 70% in equities and 30% in investment-grade corporate bonds, the FA honestly can't tweak it that much...

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