Is it bias, or are some financial advisors just inocmpetent? | General financial discussion | Discussion forum

At least half of this woman's income can be inflation-protected, so she will not be looking at high inflation - perhaps 1% overall instead of 2%. In addition, her assets will be higher than this advisor suggests because she will have been getting significantly higher interest for the previous 18 years. As you say, Norman, even small percentages add up over time, and this applies to interest too.

I think the advisor should have referred her to an annuity specialist. It's a complicated field and, from what I have read, one really needs to speak to a specialist in this area. I learned recently about term annuities. You buy them for a specific term, at the end of which you get your remaining money back and can make a new decision which reflects current circumstances. I think she could buy those and re-adjust them every so many years according to her situation as it develops. When and if she gets to the point of needing assisted living, she will have insurance (according to his plan) and she can either stop renewing the annuity and use up her capital at that point based on life expectancy or buy an annuity that suits her new circumstances when the time comes.

She also will not be losing nearly as much in taxes as it may first appear, due to the annuity, which will be almost tax-free. If, in today's dollars, her income is 100K, of which 40K is "return of capital" in an indexed annuity (he estimates 59K for non-indexed, and I don't know what the return would be on indexed, so this is what I think is a fair guess), she might pay something like 14K on the 60K in income tax, which is an average tax rate of 14%, far less than anything cited here. In cases like this, it is the average tax rate that matters, not the marginal tax rate which gives a more alarming result but is not relevant because she will not be adding any more income at the top end bracket. In addition, if indeed she requires expensive assisted living, this will involve tax-creditable costs.
Add that to the 1% inflation, and we have 15% lost. Big deal. 85K gives over 7K/month to play with, which is plenty, even in assisted care.

But she will not need assisted care from the moment she turns 65 until she dies 30 years later, as projected by this advisor.

Also, I didn't mention before that he does not appear to include the value of her condo in his calculation of her assets - which, since she lives in BC, might be very high indeed. When and if she needs assisted care or nursing home, or before, this property will be sold. Even at a modest valuation of 300K, this would provide over 4 years of care at 6000/mo, and she would still have all the rest of her income, which she wouldn't even need. She would also be cashing in on those insurance policies he wants her to buy. On average, most people who require this level of care will not live longer than that, but, if she does, then she can draw on her assets and the income which will have been piling up since she turned 65, as she clearly will not be needing it until she is physically or cognitively impaired. After 4 years of assisted living, her days will be surely numbered.

If the advisor had taken these and the other considerations I mentioned into account, then he might have had some cred with me, but I also think he would be forced to different conclusions.

The telltale sign of an advisor who uses cookie cutter approaches like this one, is that he advocates the predictable breakdown of 50/50 or even the riskier 60/40 between equities and cash, without any reference to the risk this would entail, her risk tolerance (except to complain about it) or the extent to which it might be "necessary" (in his terms) to meet her needs.

He also ought to be initiating a rational discussion about how much is really "enough", and whether she feels the trade-off is worth it between investing in equities and the cost of potential future care. At some point, everyone must make that decision for themselves. We all have to live within our means and within our risk tolerance, and it is the job of a financial advisor to honour that.

I would challenge him, or anyone trying to help this client, to make the effort to look at what can be done with the assets she has and will have. Take her seriously when she says she does not want to invest in the stock market. I have no doubt that a different set of figures would result. He has systematically ignored numerous significant factors in her particular case.

I regret that I can't give a more detailed analysis, taking into account every detail which ought to concern an advisor. It's not my job anyway, but we are not given all the details required to be definitive.

I would not touch this advisor with a ten foot pole. Others might, and no doubt many do. I have said what I can to warn about advisors who think the way this guy does. As Bill said in another post recently, people have to make their own decisions and do their own learning. However, I think a certain amount of regulation, both by the "profession", if it can be called that, and the public (i.e. government) is necessary in the public interest. In this guy's case, I think it is the "profession" that needs to be taking a long hard look at itself.

And, speaking for myself and my own opinions, if 1.66 million plus a condo and pensions aren't enough for one very frugal woman with no debts or dependents to retire on without taking a shot at the stock market with at least 40% of her money (which may or may not achieve the desired result), then we have reached a vey sorry situation in our country. The overwhelming majority of Canadians will never have anywhere near this much money, and I think we all know some of them. No doubt some could do better with what they have, but this is the situation.

I don't think we're talking about the same thing in terms of annuities. What I was reading about was a system where you could sign up for an annuity in a fashion similar to a mortgage. At the end of the term, let's say 10 years, you get to re-set it or pull out entirely. Perhaps I don't have the correct terminology for it.

I think you have demonstrated clearly how this woman could do just fine without ever visiting the stock market.

You're probably right that the "most valuable" part of the advice is that inflation needs to be considered. But, still, this is hardly news to anybody who is paying any attention at all; and the stock market is not the solution in this case.
I think the article boils down to an alarmist analysis which is meant to push someone into something they don't need or want. Really bad journalism. It would be one thing if the journalist used the advisor's analysis to teach the reader how to analyze advice, but he just repeats it, and in my opinion it's very poor advice. I sure hope this woman wasn't vulnerable enough to follow it.