Three family plans

The Youngs

Our 42-year-old tester and his 36-year-old wife are typical of many Americans. They have a mortgage, some life insurance, and credit-card debt. Mrs. Young wants to stay home with her kids, so the family struggles to save from one salary. They have about $2,000 in Exxon Mobil stock. The rest of their $84,000 in savings is in Mr. Young’s 401(k) account.

With most of their net worth tied up in a 401(k), it can be tough for an adviser to make money helping the Youngs. In fact, a few months before our test, the Youngs visited a planner who looked over their situation and told them there was nothing to work with. “We felt pretty small after that,” said Mrs. Young. Mr. Young added, “I felt like dog meat.”

So the Youngs were relieved to find a planner through Garrett Planning Network, which bills itself as a planning group for “everyday people.” The adviser, who fit our parameters--local, at least five years’ experience, a Certified Financial Planner, and fee-only--interviewed the Youngs for more than an hour. Five weeks later, the couple received his plan, which cost $650. Among other things, the 19-page report recommended additional life and disability insurance for Mr. Young. The planner also suggested an online budgeting tool called Mvelopes to help them cut costs.

Glovsky, our expert, liked the Garrett plan, especially because it included insurance, which is crucial for a young family but wasn’t covered by other planners they tested. But Glovsky was disappointed the planner didn’t initially give investment allocations for Mr. Young’s 401(k). Mr. Young was also disturbed by a potential conflict of interest he found in the planner’s Form ADV, a disclosure document that all registered advisers must provide. The form showed that the planner was a registered rep of a securities broker/dealer, meaning he could earn commissions on financial-product sales.

Sheryl Garrett, founder of Garrett Planning Network, which bills itself as fee-only, said new network members like the Young’s planner aren’t allowed to accept any new commissions, although they can continue to earn them from existing clients for up to two years. Glovsky said the incident underlines the importance of thoroughly checking out a financial planner before you start working together to avoid surprises down the road. (See How to avoid rip-offs.)

The Youngs also paid $250 for advice from T. Rowe Price and $500 for a “starter package” from the Alliance of Cambridge Advisors, which like Garrett is a national network of fee-only planners. Business with both advisers took place over the phone.

The Cambridge planner advised setting up a home-equity line of credit for emergencies, allocating 90 percent of the 401(k) money to stock funds, rebalancing their portfolio annually, and cutting their income-tax withholding. The Youngs felt the planner had listened to their needs and regretted they had not met her in person. But they found it heartening to hear from the planner that Mr. Young might be able to retire at age 62 if they continued saving 10 percent a year and living modestly. Glovsky found the recommendations sound but wondered why the planner didn’t mention life insurance.

Our expert was impressed by T. Rowe Price’s Investment Checkup. “It’s clear, detailed, accurate,” Glovsky said. Among other things, the plan advised buying bonds and gave specific fund recommendations. Unfortunately, all of them were T. Rowe Price funds, which weren’t available in Mr. Young’s 401(k). And it too didn’t give insurance or savings advice.


The Readys

Our 63-year-old and his 55-year-old wife are at the other end of the spectrum. With about $1.3 million from an expected lump-sum pension, investments, and 401(k) savings ready to roll over, they’re the kind of clients that make advisers salivate. They’ve got assets large enough to generate a decent management fee. A typical 1 percent fee would earn a planner $13,000 a year in the Readys’ case.

Mr. Ready wants to retire this year. His wife expects to retire several years after him. Mr. Ready figures he’ll do consulting after retirement that’ll bring in $15,000 a year. He would like to keep their income about the same as before retirement. Financial planners typically aim to maintain 80 percent of income in retirement, but many retirees like the Readys figure they’ll be more active in early retirement and don’t want to cut back.

The Readys wanted a comprehensive plan to ensure they’d have enough. For $1,000, The Vanguard Group’s “personal financial report” provided an excellent retirement road map but was far from the comprehensive plan it claims to be. A Certified Financial Planner spent two phone sessions with Mr. Ready asking about everything from his retirement goals to monthly expenses. The resulting 55-page plan told the Readys they’d need to put half of their retirement funds in stocks and half in bonds and covered the tax implications of making the change. All investment recommendations were the company’s own funds.

But while the plan mentioned the couple needed more life insurance, it didn’t say how much, nor did it touch on long-term-care, estate, or education planning, all part of a comprehensive plan. “If they’re claiming to be a full comprehensive plan, they’re not,” Glovsky said.

The Readys also consulted an independent, fee-only planner for a comprehensive plan. Of all the advisers in our test, this one gave testers the most time and, at $3,000, charged the most. He met with them face-to-face in several one- and two-hour sessions. The Readys also spent at least 13 hours filling out forms and organizing paperwork. During the three-month process, they revised their wish list and expectations. Mr. Ready decided that he might have to consult more and downsize the family home.

The final product included all the elements of a good comprehensive plan. It toted up the clients’ net worth and discussed financial goals and planning assumptions such as future rates of return on investments. Finally, it made recommendations on investments (allocate 45 percent to bonds and 55 percent to stocks), insurance (buy long-term-care insurance with a $200 daily benefit for a period of five years. Note that Consumer Reports has deemed most of these pricey policies not a good buy because there are often better ways to fund long-term care), estate planning (specify in wills that taxable investments go to a trust upon death), taxes, and education planning for a child in college (buy $40,000 in certificates of deposit with staggered maturities to cover annual tuition bills).

With the help of a widely used computerized planning tool unsettlingly called Monte Carlo, the planner projected that if Mr. Ready followed his advice he could retire as planned, and that he and his wife had a 98 percent chance of staying solvent for the rest of their lives. But Glovsky pointed out some problems. The planner recommended a type of trust that would save estate taxes but would leave heirs with less. He also projected inflation at an overly rosy 3 percent.

This wasn’t the only plan with faulty assumptions. After two half-hour phone interviews, a T. Rowe Price planner sent the Readys a 33-page, $500 retirement plan that our expert judged less useful than T. Rowe Price’s Investment Checkup at half the price. It offered no specific investments and assumed that Mrs. Ready would die at 85, too early for most planners’ comfort. Most planners aim for at least age 90. Glovsky said these mistakes underscore the importance of constantly questioning a planner’s assumptions and asking for explanations.

The Readys also tried out another adviser network, Myfinancialadvice.com. Using the online search engine, Mr. Ready found a planner who fit our criteria and charged $250. Initially, all contact was online, which Mr. Ready found irksome. After a couple of short phone calls the planner e-mailed his recommendation: an overly aggressive portfolio with 89 percent in low-cost stock mutual funds. When questioned, the planner realized that a major item was missing from the plan: $425,000 in a lump-sum pension payment. The planner then said all of that money would go into bond funds, making the stock allocation a more reasonable 60 percent. Still, our expert deemed his assumptions, including a 2 to 3 percent projected inflation rate, not conservative enough.


The Middles

Our third tester is 48, and her husband is 47. They aren’t ready for retirement but they’re beginning to think about it. They’re wondering whether the $650,000 they’ve accumulated in 401(k) accounts and through an inheritance could grow enough so Mrs. Middle could retire at 62, and Mr. Middle at 55. But they don’t want to spend much to find out.

Mr. Middle has a small IRA at Charles Schwab, so the two went to “Talk to Chuck”--the new slogan for the discount broker’s advisory service, which offers free retirement consultations. The interviewer the Middles met was studying to become a Certified Financial Planner.

The Schwab interviewer “covered all the bases,” Mrs. Middle said. But the first plan was rife with errors. He switched the couple’s retirement ages and left out the husband’s 401(k) contributions. When the Middles pointed that out, the adviser’s second plan was better. He showed the couple that to retire early they’d need to save an extra $22,400 a year if they wanted to keep their current home.

Our expert liked that the plan showed how the couple could reach their goals by delaying Mrs. Middle’s retirement to age 66 or by reducing spending by $18,000 a year. The couple was also pleased the Schwab planner had estimated how much they’d need to save to send their daughter to college.

Another free service Mrs. Middle checked was at the Web site of her local bank, Wachovia. The Readys requested but never received their Wachovia plan, though they’d pestered the planner three times. Mrs. Middle, however, was connected immediately to a phone interviewer. When she pressed for a Certified Financial Planner, Wachovia obliged.

The bank’s plan, discussed over the phone, was encouraging: By maintaining a 60 to 70 percent stake in stocks before retirement and their same level of savings, the couple had an encouraging 79 percent chance of retiring at 62 and being comfortable until 90. Unfortunately, the rosy conclusions were not backed up by hard numbers or specific investment recommendations, Glovsky pointed out.

Mrs. Middle concluded that although free analyses have their limitations, they can give you a good picture of where you are and should be. “Considering what I had to pay,” Mrs. Middle said, “I felt I got pretty good value.”