Updated Monday, December 22, 2014 as of 9:56 AM ET

Talking About Risk? Advisors, Industry Must Do Better

While some financial advisors can be intentionally vague when detailing embedded risks to clients, others do not fully understand the risks themselves, says the author of a new book that looks at the "incestuous" relationship between Wall Street, Washington and regulatory agencies/

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Comments (2)
This is something which must be insisted upon by the top brass. Frequently it is the tone at the top which decides how forthcoming the advisor is with reference to risk in general and especially in case of structured products. There is also a modicum of truth in the statement that the advisor himself would not be aware of all risks. The way to tackle this is to have an open conference at the time of launching a new product and discuss threadbare the implications of the term sheet. A good advisor would think long term and act in the best interests of his client. Only then would he build a reputation.
Posted by KIMMY B | Wednesday, February 05 2014 at 12:38PM ET
I don't think most firms and brokers want their clients to know how much risk is associated with their investments. For years all that mattered was how much growth investments provided which is nice when saving up for retirement, however when you are taking money from your retirement account market fluctuations can cause the investor to run out of money much earlier than anticipated. You can average 7-8% returns but if you have bad returns in early years while taking money out, you stand a good chance of running out of money; its called the Sequence of Return Risk. Along with Drawdown Risk the Sequence of Return's are extremely important factors to a long and financially successful retirement. Most advisors are not aware of drawdown and sequence of return risk and fewer investors understand it even though it is extremely important to be able to withdraw a reasonable amount of income from their investment accounts. With people living longer and uncertainty with inflation and future healthcare costs; it is more important than ever for retirees have their money in a place that will keep up with inflation and last for 30 years or more. The stock market traditionally has been the best place to invest to keep pace with inflation but with the high volatility we have had the last 20 years it can be a dangerous place. Now with record low interest rates it is not prudent to take out more than 2.5 to 3.0% from an investment account; so if someone had $1,000,000 dollars set aside for retirement they could start taking out $25,000 to $30,000 if they want the income to keep up with inflation and not run out prematurely. This is about half of what someone could take out if they simply put their money in an index annuity with an income rider, however with the annuity you most likely will spend all of your money first leaving nothing available down the road for emergencies or for the children and grandchildren.

There are money managers out there that do not use the typical buy and hold along with asset allocation strategy. Instead they use various investment models that protect against market down turns while still giving the investor the upside potential of the market. This may sound like an index annuity but it is not, the problems with index annuities your upside potential is very low and if you use the income rider to provide lifetime income you will in most cases use up all your money first leaving your account balance at $0 but you still are guaranteed to have your income around as long as you live. Very few index annuities over inflation protection to their income riders so the longer you live the less your income will be able to buy in today's dollar.

This article is typical and shows that the industry is more based on growth rather than retirement income planning. The ideal situation is to take out 5 to 6% while having your retirement account grow while you are taking income so that you can keep up with inflation, have money available for emergencies down the road and have money to pass on to the children, grandchildren or favorite charity. With the investments offered by mutual funds and brokers it is a risky proposition to retire. So basically you need an investment with low volatility that returns 5 to 6% above inflation, there is nothing to guarantee that however there are Retirement Planning Specialists that can offer something different than the typical rhetoric you see in the media and from Wall Street.
Posted by Ken O | Wednesday, February 05 2014 at 1:19PM ET
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