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Bargain financial advice
You don’t have to spend a fortune to manage a fortune, or at least one in the making. Yes, you can now find good, inexpensive
advice, even if your nest egg is hummingbird-sized.
In our investigation of 10 low- and no-cost financial plans, we discovered that all kinds of companies, including big-name
firms such as Fidelity and Charles Schwab, are competing for even the tiniest accounts. Not long ago, financial advisers would
often turn you away if you had less than, say, $250,000 to invest. Many still will because they can’t make enough off your
money, since most charge a percentage of the assets they manage for you. But more companies seem to be recognizing the growth
potential of large masses of small-fry accounts.
What the brokerage firms, banks, insurers, and mutual-fund companies have their eye on are demographics: Millions of baby
boomers are on the verge of planning for retirement, or are already in the throes of it. Financial-services firms are also
responding to research showing that consumers expect inexpensive advice they can trust. The result has been a riot of low-cost
and free services that run the gamut from Web-only planning programs to one-on-one sessions with advisers who work on fees
only, not commissions from financial-product sales.
But can you really trust your money with a bargain-priced adviser or with a service that’s free?
Yes, but don’t expect a highly personalized, comprehensive plan with lots of hand-holding and follow-up. What you can count
on is mostly solid investment advice to help you accumulate enough money for retirement. Most of the services will tell you
if the age at which you’d like to retire--and the money you’d like to have--is realistic. If it’s not, they’ll help you figure
out what is doable. They’ll also tell you how much of your money to put in stocks, bonds, and other investments.
But you’re usually on your own when it comes to picking individual stocks or mutual funds, which can make it tougher to put
a financial plan into action. Two companies we tried out that did recommend specific investments, mutual-fund giants Vanguard
and T. Rowe Price, touted only their own products. Although their mutual funds are low-cost and their reputations are good,
that advice may not lead to the best choices.
We also found that paying thousands of dollars to an independent financial professional doesn’t guarantee perfection either.
The bottom line: You can’t expect to hand off your finances to someone and put your retirement on autopilot no matter how
much you pay.
As you’ll see from the experiences of three testers described below, financial planning is a time-consuming and sometimes
nerve-wracking process. You can’t avoid spending hours on preparation, which should include checking on the adviser’s background
and doing some soul-searching to figure out how to balance your current financial needs and desires with your retirement goals.
After you get your plan, you must question its assumptions--from inflation predictions to life expectancies--and make sure
all the numbers add up, according to Robert J. Glovsky, the expert we hired to review the plans we purchased. Glovsky is director
of Boston University’s program for financial planners; a member of the Certified Financial Planners Board of Governors, which
oversees the certification of financial planners; and president of Mintz Levin Financial Advisors, a fee-only financial planning
firm in Boston.
cheap advice test
Our three testers, all employees of Consumers Union (the publisher of Consumer Reports magazine and ConsumerReports.org), represented a range of ages and financial needs: a 42-year-old with a stay-at-home wife and kids ages 2 and 6 (let’s call
them the Youngs); a 63-year-old married granddad with grown kids, including one in college, and his eye on early retirement
(the Readys); and a 48-year-old married working mother with one child in middle school (the Middles).
We had our testers seek retirement-planning advice from nontraditonal sources, such as banks, mutual fund companies, online
planner networks, Web-based software, and discount brokers. Most of the services offered testers help from a human being,
typically a Certified Financial Planner. The 63-year-old also commissioned a comprehensive plan, which included retirement
advice as well as insurance, tax, and estate planning, from an independent adviser. We compared that with a comprehensive
plan by Vanguard. Here is a peek at what we got for our money--and for no money--and what we learned along the way. (For more,
see Three family plans)
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Watch those planning assumptions
At the heart of a good financial plan are reasonable assumptions: projections of future inflation, investment returns, life
expectancy, and other factors. Those assumptions help determine recommendations on how much you’ll have to save, how long
you’ll need to work, how much you’ll be able to withdraw each year in retirement, and what will be left over for your heirs.
The following are common assumptions planners use. Over time these figures can change. Your planner also may have a plausible
rationale for using different figures. At the very least, he or she should be able to explain and defend those assumptions
with facts, not hunches.
Inflation. Based on the Consumer Price Index, the average inflation rate has been 3.3 percent since 1913. A cautious planner might use
a more-conservative 4 percent to account for the possibility that upcoming years will be atypical. Higher assumed inflation
rates, however, mean you’ll have to save more or earn more on your investments, or both, to keep up.
Education inflation. College tuition costs have risen 8 percent on average since the data were first recorded in 1978, according to the Bureau
of Labor Statistics.
Rate of return. The average annual rate of return on stocks, based on the Standard & Poor’s 500 Index, has been 10.4 percent since 1926.
Long-term government bonds, the benchmark for the bond category as a whole, have averaged 5.5 percent over the same period,
according to Ibbotson Associates, a Chicago-based investment consulting company.
Age of death . Planners generally use age 90 as a rule of thumb to cover the fact that a couple who are currently both 65 can expect that
at least one will live to age 90. But if your family tree includes some very long-lived limbs, you might want to stretch that
age out further, to 95 or even 100.
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