Free advice involves homework and lots of questions

I recently received a call from a reader with an interesting dilemma. “Meryl’s” husband was about to retire. The couple had used a few traditional stockbrokers whom they enjoyed working with over the years. One of them proposed they purchase an investment that they didn’t understand, a certain type of complex annuity.

They wanted to go ahead with the purchase based on the recommendation, but they weren’t sure of what they would get in return for the investment. Where could they go for help? “And, oh, by the way,” Meryl added, “we don’t want to pay anything for advice.”

Again, an interesting dilemma. If this had been a plain vanilla annuity that pays a lifelong income stream with no penalties or complexities, it would have been a different story. However, that was not the complex product that was shown to this couple.

My first suggestion was to go back to the broker to ask for disclosure documents and the contract. Then, ask the broker to review them, with a focus on helping the couple understand the very basics, such as:

• Why are you recommending this particular product?

• What else have you considered?

• What will you get paid if I buy the product?

• After I buy this product, what can I expect?

• Can I take out money at any time?

• Are there restrictions on when and how much I can take out?

• Are there any penalties?

• And, please show me where I can find the answers in the contract and disclosure documents.

By the way, if the broker doesn’t want to tell you about his or her compensation for the sale, don’t hesitate to go to another broker. If the broker says, “Oh, don’t worry about that, you don’t pay anything,” go to another broker.

Only consider buying such a product if you can easily explain how it works to a friend — after reaching conviction based on understanding the benefits and pitfalls described in the contract and other disclosures.

So that’s the “free advice” route. Don’t forget that the broker is not working for free — he or she gets paid when you purchase the product.

If the fee is external, it is visible. If it’s internal, it is not visible. In either case, the broker gets paid; he or she is not working pro bono.

Let’s go further. It is always important to understand the cost of “advice” before purchasing a product or service. Cerulli, an international research and consulting firm, noted in its recent U.S. Advisor Edition that a certain type of person ("selfdirected”) has “little trust in financial providers” and is “not willing to pay for financial advice.” Meryl and her husband seem to fall into this category. That’s why they need to do their own homework. And, if they don’t reach a level of conviction that the product achieves their goals, good for them. That’s definitely a wise decision, since every investor has options.

The most important takeaway is to look at retirement as a transition that is unlike any other. The paycheck stops, but expenses continue, and the sources of cash to pay those expenses need to be understood. Some will come from Social Security and pensions; some will come from savings or investments.

Financial management of a household involves knowing your numbers for today and factoring in the loss of purchasing power due to inflation and taxes in the decades ahead.

A different set of investment rules govern after your retirement, all built around managing cash flow. Someone has to do that analysis for this couple before they even begin to think about what investments to buy. They can also do that themselves, of course, without needing to pay for the service. But will they? We’ll have to wait and see.

If you have a situation you’d like me to discuss anonymously in this column, send me an email (readers@juliejason.com). While not all emails can be chosen for discussion, all of them are read and considered.

Seasoned investment counsel (tinyurl.com/52nus8hz) and awardwinning columnist and author, Julie Jason, JD, LLM, promotes financial literacy and investor protection. Read her latest book, “The Discerning Investor: Personal Portfolio Management in Retirement for Lawyers (and Their Clients)" (tinyurl.com/4u7h9pjs), published by the American Bar Association. Write to Julie at readers@juliejason.com. While all questions cannot be answered, each email is read and reviewed and can lead to discussion in a future column.