February 17, 2009, 6:00 am

Is My Financial Adviser Playing Me? Part 3 – Is The Color Of Your Retirement Plan Pink?

by: The Financial Blogger    Category: Financial Planning
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In my 2 previous post of this series, I told you that you should verify two things when meeting with a financial adviser:

– His income structure

– The rationale behind his argument

I go a little bit deeper with this one as I got shocked during a meeting I had recently with one of my client. He already had a “financial adviser” at another institution and said he had a plan. According to his “plan”, he could withdraw around 60K per year from his investment without any problems. The guy was 62 and thinking to retire between 66 and 68 years old.

How much do you think this guy had in his investment portfolio to be assured to withdraw 60K per year without surviving his capital? 500K! So let say he puts his maximum RRSP contribution for the next 5 years and his investment returns is 5% (since he’s 62, I guess he won’t take much risk with his investment… well this is what I would suggest anyway!). He would have enough money to live until the age of 80.

If they (him and his wife) would like to withdraw 60K per year from their investment and reach the age of 90 (there is a huge possibility that one of them will reach this age according to statistics), they would need a 8% return (net of fees). Considering that the stock market (without fees and taxes) had made an historic yield of 9% to 10%, his investment would have to be invested 100% in the stock market only to hope getting this return (considering that 7 fund manager out of 10 don’t beat their index and charges about 1% to 2% MER’s).

It was very hard to convince the client that his plan was wrong because he trusted his financial advisor. However, I would be curious to see what his plan look like to create a 60K withdrawal per year for retirement and the type of investment chosen.

When you receive your plan for your financial adviser, make sure to review it with him and ask questions. Ask him:

– How he made his inflation assumption

– How he made his investment returns assumption

– How your funds will be invested

– What are the fees related to the strategies included (investment strategies, will, mortgage and debt management tools, etc.).

– Is it possible to have different scenarios (what if his plan absolutely needs a 8% investment yield to happen?)

If he tells you that you are asking too much question, ask him one more:

– Could you please leave my house now?

Good luck with your financial adviser 😉


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