By Brad Thomason, CPA
Do you want to be directly responsible for making sure that your money is both safe and earning a return for the rest of your life?
It’s actually a pretty big job. Maybe a bigger job than you want to tackle. And even if you want to, keep in mind that at some point in the future you may have health issues which make it impossible to continue doing so.
One way to address this is to hire an investment advisor to keep an eye on your money for you. While this is a popular solution, it may not be optimal. RIAs charge fees which can grow to significant sums over time.
Please note that I am in no way suggesting that the fees are unfair, nor am I saying anything at all negative about that profession. I’m merely pointing out the price tag.
If you have a million dollars with an RIA you could easily expect to spend $250,000+ in fees over the next twenty years. Moreover, the lost earnings on that money could be worth another $200,000 to $300,000 over the same period (in other words, when you write the check for the fees, that money stops being investment capital; and if it isn’t investment capital it can’t earn any future returns). I think it’s fair to say that half a million bucks qualifies as “real money” for just about everyone.
There is also the matter of risk. Having someone watch your money is probably better than ignoring it. But as long as it remains invested it remains at risk, and if there is a negative event the account owner (i.e. you) still bears responsibility for the loss. The advisor isn’t going to pay you back for investment- related losses. Not only is that not what they agreed to do, it would also be illegal.
As boring as it may sound to many of you, the only way to shift the burden of risk, and the responsibility for earning returns, to someone else, is to transact with an insurance company.
The whole reason the insurance industry exists is to allow risk to be shifted from one party to another. That’s what they do. And they’re the only ones – by law – who can.
Insurance gets a bad rap because there are higher theoretical rates of return available in other places you could put your money; and candidly, because a lot of the people who sell insurance are doofuses.
Sorry, but they are.
But if you look past the messengers to the message itself, I think the case becomes a lot stronger. Insurance companies have the ability to take on that risk, and have an extraordinarily solid track-record for absorbing the hits and delivering what they promised. They are also dramatically cheaper in terms of the fees they charge for tending to your principal.
Are insurance products a means to maximum returns? Probably not, although certain types of contracts pay substantially more than what you might expect. But still, I don’t think anyone would categorize them as the best way to make your money.
But there’s a difference between making money and storing it for later use. That which may not be such a great deal for the 40 year old might be exactly the right solution when she gets to be 70.
More and more I’ve come to view the ultimate goal of personal finance as a condition in which a person has enough money to cover what they are likely to need for the rest of their life, AND do it with little to no remaining exposure to investment risk. Why? Because that’s about the most conservative position I can envision in the midst of a situation that will never lose all of its aspects of chaos or unpredictability.
If a person wants to be able to say, “I did everything I could think of to secure my financial future,” isn’t that where they would necessarily have to end up?
There are many roads to building enough money. But when things approach the endgame, there are relatively few options for truly getting the money out of harm’s way. Banks and Treasury bonds probably deserve a place in that discussion. But the protection they afford comes at the expense of accepting the lowest return rates out there.
So if we take all of the at-risk stuff off the board, and we allocate to banks and Treasury bonds the maximum that we can tolerate on the return front, what’s left? The various offerings of the insurance industry.
They’ve had decades to design a host of products which deal quite directly with virtually all of the issues a retiree with money needs to address. They already know what your issues are going to be, even before you do, because they’ve already been through the various scenarios millions of times with past customers. Retiring may be new to you. But it sure isn’t new to them.
True, the contracts are often detailed and complex. But given that they are trying to defend against a vast spectrum of real world threats, I’m not sure why it would be expected that they would be anything but.
Insurance solutions are far from perfect. It’s just that everything else, in the end, may be even farther away. Winston Churchill said, “Democracy is the worst form of government, except for all those other forms which have been tried.” Perhaps there’s an analog here. Just because something isn’t perfect doesn’t keep it from being preferable to the other choices.
If you think you can do the job all by yourself, so be it. But most people are going to need help. Paid advisors may have a role to play, but they are expensive and can’t take the burden of risk from you. The insurance industry was the original retirement industry, and even though they get out-marketed by their flashier cousins over on the investment side, you shouldn’t assume that the substance isn’t there. There are things that insurance companies have a legal mandate to do that no fund company, broker/dealer or investment advisor can come close to matching.
So, if you are in need of what they excel at – low risk, with modest returns - doesn’t it make sense to include them as one of the options under consideration for your next rebalance?
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