The pitfalls of single-solution financial advisors

Planning for a successful retirement can be confusing and stressful. Not only do you have to understand your federal benefits and how they fit into your retirement income, but you suddenly have options for what to do with your Thrift Savings Plan funds. 

Of course, you can leave your money in the TSP and keep it invested in the core funds, but you may be wondering if that’s still the best idea. 

One of the most common questions to ask as retirement approaches is “how do I protect what I’ve saved?”, which ultimately leads to seeking professional help.

A simple web search will yield dozens of financial professionals vying for your attention and offering their services. But, as with most things in life, not every financial professional is created equal. 

Beware the single-solution “advisor”

Recently, there has been an increasing trend of companies advertising themselves as financial advisors or benefits centers targeting federal employees. However, when you dig a little bit deeper you can find that the entire business is built on selling life insurance and annuities. 

Now, let's clarify: annuities and life insurance are not inherently bad financial products. In fact, they can serve as valuable tools in certain financial plans. 

Annuities can provide a steady income stream in retirement, while life insurance offers protection for your loved ones in case of unforeseen events. However, it's crucial to recognize that these are just pieces of the larger financial puzzle.

When a client comes to our firm with a proposal from one of these companies, recommending that they should roll their entire TSP balance, or a large portion of it, into an annuity, that comes off as a red flag. 

Understanding Annuities

At their core, annuities are insurance products meant to protect the investor against a financial risk. Annuities can be structured to pay lifetime income, similar to your federal pension, or to protect against market losses. 

These protections can be appealing, but, as with any insurance product, they come at a cost. 

Annuities typically pay high commissions to the salesperson, and to pay for those commissions there can be internal fees and long lock-up periods. 

It’s not uncommon for an annuity to have a 10-year surrender period with penalties of up to 9% to distribute money from the policy before that period is over.

If you want the “lifetime income” option, that will come with an additional fee called a “rider”, and if you want a beneficiary to have access to the money if you don’t use it all, that will usually increase the expense. 

Annuities can be structured in hundreds of different ways and are notorious for being over-complicated and under-explained. 

In the vast majority of cases, a client who brings us a proposal doesn’t have a full understanding of how the product works. And, once the finer details are explained, the policy doesn’t seem as appealing. 

As with most things in life, if it seems too good to be true, it probably is. 

Again, annuities aren’t inherently bad, and our firm has used them in certain cases where they make sense. However, if someone gives you a proposal where annuities and life insurance are the only things offered, there’s a good chance that’s because they only have an insurance license and that’s all they’re able to provide. 

In this scenario, I think of the expression “When the only tool you have is a hammer, everything looks like a nail.”

While insurance products can be a valid and important part of a financial plan, if those are the only tools used, there are a host of planning opportunities that will be missed. 

What to look for in a financial planning partner

In your search for financial advice as you approach retirement, make sure that your advisor takes a holistic approach, and has a fiduciary duty to keep your best interest in mind. 

Taking a holistic approach to your finances means considering a wide range of factors and options. It involves understanding your short-term and long-term financial goals, assessing your risk tolerance, and developing a diversified investment strategy.

A holistic financial plan considers not only insurance coverage, but also retirement savings, emergency funds, debt management, estate planning, and tax implications.

When seeking financial advice, whether it's from a company, an individual advisor, or an online platform, be wary of anyone who pitches annuities and life insurance as the only solution. While these products may have their place in your financial plan, a reputable advisor should take the time to understand your unique circumstances and offer personalized recommendations that align with your goals.

Tips for navigating financial advice:

Do Your Homework: Take the time to research different financial advisors or firms before engaging their services. Look for credentials, such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA), which demonstrate a commitment to professionalism and ethical standards. Also, ask if they’re a Fiduciary – this means they have a legal obligation to act in your best interest. 

Ask Questions: Don't hesitate to ask questions about the advisor's compensation structure, potential conflicts of interest, and the range of products they offer. A transparent advisor will be forthcoming with this information and will prioritize your best interests.

Review Regularly: Your financial plan should evolve as your life circumstances change. Schedule regular reviews with your advisor to ensure that your plan remains on track and adjusts as needed.

Remember, your financial well-being is a journey, not a destination. By taking a holistic approach and being discerning about where you seek advice, you can better navigate the complexities of personal finance and work towards achieving your goals.

Austin Costello is a certified financial planner with Capital Financial Planners. If you don’t feel confident in your investment strategy or your ability to keep a level head and would like feedback, register for a complimentary check up. For topics covered in even greater depth, see our recorded webinars.