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Advice for the Non-Affluent

By Chuck Yanikoski

For those of us who are not exactly all set financially, it's hard to get good financial advice.

Financial advisers who charge by the hour will want a few thousand dollars from you, a price designed for wealthier clients. Those who get paid for managing investments usually won't want to deal with you at all unless you have a six-figure balance, preferably a mid-to-high six-figure balance. Insurance agents are always happy to talk for free, but they make their money selling insurance and annuities, and unless your needs fall into those categories, they won't stick around. Likewise, your local bankers: unless you are looking to deposit money in their bank, they can't help you.

So you're on your own. Since you are reading this column, that might be all right with you. But to do it right, you need to put a whole lot of time into study - not only grasping each of the many financial issues that might affect your retirement, but also understanding the innumerable interconnections among them. And even so, you are likely to miss some important opportunities.

In addition, the advice that you will find in the financial press, on radio and television, and on the internet, is highly unreliable. Even when there's a consensus, this often reflects a herd mentality rather than really smart thinking. As with any field of knowledge, lots of people talk, but true experts are rare - and those with the most knowledge may not have the most wisdom.

But at least the affluent can afford to shop around for someone who seems to be a cut above the rest, and who shares their own outlook about life and about money. The rest of us have to make do with what we have, and our advice often comes from some friend or family member who has little or no real training, but happens to know more than we do.

So what's the answer?

I don't think there is a really good one, right now. But there is some hope for the future. There is at least the beginnings of a movement toward finding ways to provide appropriate information, advice, and other support to "middle income" individuals and families. The Life Planning Network is spearheading one such effort. "Financial education" has been the subject of Congressional hearings and academic analyses. And some individual advisers are experimenting with their own models for responding to the needs of the non-affluent.

I myself am trying out an approach which, admittedly, might not work. Fortunately, as the owner of a retirement financial software company that pays my bills, I don't need to make a living as a financial adviser as well. But I decided to get the appropriate licenses and go into that business as a supplement to the software business for a variety of reasons, one of which is to get a stronger real-world perspective by working directly with actual retirees and near-retirees, but another of which has been to see if I can work out a model for serving middle income households.

The model goes something like this:

First, the adviser provides advice about all aspects of retirement, both financial and non-financial. What this means is that the individual actually gets better advice than all but the wealthiest people (who have entire teams of advisers), because the perspective is broader, and critical issues are not overlooked.

Second, there is only a small fee for face-to-face advisory sessions. Even though the real value of such sessions might be in the $100-200 range, the actual price to the customer is closer to $20 (or even less, for those who cannot afford even that). I think of this as a sort of "co-pay". But if it's a co-pay, who pays the rest of it? This brings us to:

Third, the adviser needs to receive payments some other way. If the adviser's principal expertise is financial, then the ability to receive commissions on insurance and annuity sales (where appropriate) or asset management fees (where applicable) can make up the difference - not enough to make the adviser wealthy him- or herself, but enough to make a reasonable living.

Regarding asset management fees, my idea is that middle income families should pay a lower percentage than wealthy people pay. That's because middle income families in or near retirement should rarely, if ever, be investing in anything risky (see my earlier column, "Aggressive or Conservative Investing as You Get Older?"). So why pay 1% to an adviser to select among options you shouldn't even be considering plus another 1%-to-2% (or sometimes more) on management and sales fees on mutual funds or other sophisticated investments that, even at their best, expose you to more risk than you can afford?

So in my model, the adviser charges only one-half a percentage point for advice, but can still make some money by managing savings as well as investments. Specifically, the adviser can manage the use of bank certificates of deposit, and other conservative financial vehicles, shopping for the best rates, and planning the maturities so that cash is always available without penalty. The adviser can also earn his or her fee by helping people roll their 401(k) money out of the employer plan where built-in fees are high, and into an IRA with minimal costs. So even after paying the one-half percent, the customer has significantly lower costs, in addition to having professional management.

I think such a model can work, and I plan to prove it. But other models might work as well - and I hope that other advisers (and larger financial firms) will also make some breakthroughs that will truly help normal families without raking off all the profits for themselves.

Meanwhile you have to watch out for Number One. If you find an advisor willing to work with you, make sure you understand what s/he gets paid, and by whom (but at the same time, don't expect to get help without the advisor getting paid by somebody). And before you commit to any financial product, make sure you understand what all the fees are, both the ones you pay for directly and the ones built into the product. Sometimes, just asking the question alerts the advisor that you are paying attention, and you will be directed toward products that are better for you.


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