A very interesting article came out today on Financial Planning <http://www.financial-planning.com> regarding the treatment of former employees of the Federal government by the investment management industry.

The article in question, should you be interested in reading it:  <http://www.financial-planning.com/news/regulatory_compliance/how-advisors-lure-federal-workers-out-of-low-fee-retirement-plans-2690130-1.html>

Some background:

The Federal government runs a retirement savings program which is basically the same as a 401(k).  Employees get to make pre-tax contributions out of their payroll and the money may be invested in any of several funds on a tax-deferred basis.  When the employee retires or leaves employment with the federal government, he or she may start making withdrawals or may roll the money over to an IRA.

And the investment options in the program, the Thrift Savings Plan or TSP, are fantastic: ultra-low expense index-based funds including the “G” fund, which invested in government bonds for interest income *without risk of loss of principal*, the “F” fund which tracks the broad bond market index, and the “C”, “S” and “I” funds which track large-cap, small-cap and international stock market indices, as well as a range of “L” funds which use those other funds to build target-retirement-date funds.  In all cases, the fees for the funds are less than 3 or 4 basis points.  By comparison, even the low-cost leader in the retail mutual fund industry, Vanguard, charges several times as much for their funds.  And the broader fund universe, including all the actively managed funds, charge many multiples higher than that.

<https://www.tsp.gov/investmentfunds/fundsoverview/comparisonMatrix.shtml>

Why are those fees so important?  Because those fees are all money out of your pocket.  And for all the claims of superiority that active fund managers keep making, the fact is that the best indicator (per a Morningstar study) of future investment performance relative to an investment’s asset class (i.e., if you are going with, say, large-cap US stocks) is the expenses.  That is not to say that you cannot outperform a specific index, but rather, that if you choose a fixed target allocation of stocks and bonds, it’s *awfully* difficult to beat it while paying high expense ratios.  

So who is being “lured” and what’s going on here?

What’s missing?  Advice.  And here’s where those advisors “luring” federal workers out of their low-cost plans are dancing on a very fine line.  Those advisors cannot buy lower cost investments for their clients.  Nor, if they are using index-fund based investment strategies, are they therefore likely do better than those TSP funds.  But a good planner or advisor is doing a *lot* more than just sticking his clients money into some funds.

And the article in question completely misses the real issue – that financial planning is *not* just asset management.  It’s a comprehensive view of the clients entire situation, advice about how much to save, where to save (i.e., IRA, 529, Roth, 401(k), maybe even in an insurance policy or annuity), it’s optimizing the portfolio (and account mix in general) for taxes, it’s projecting out the savings, advising on how much one can safely withdraw over time, helping optimize the use of Social Security, figure out how much you can spend on a home, prioritize amongst competing goals, etc. etc.  It can mean a *lot* of things and the actual funds used for implementation are only a small part.

The problem:

The problem is, therefore, not one of “luring” folks out of great low-fee investments in order to rip them off by putting them into high-expense ones (though that certainly *is* a problem).  It’s one of compensation.  Those planners and advisors have go get paid *somehow*.  And, frankly, those former federal employees can use some help, too.

Unfortunately, the industry is overwhelmingly populated by businesses where the compensation is either commissions for selling products — or asset management fees.  And to the extent that folks are actually getting the planning it’s being paid for out of those commissions or asset management fees.  And that’s the rub – if the client is going to leave the assets in the TSP, how is the planner going to get paid?

The answer is that the industry needs to grow up.  And the clients need to understand that the planning was never free – just being paid for out of other things.  The answer is separating asset management fees from financial planning fees.

And there are signs that this is going to be a real possibility as major changes are happening in the investment world.  The rise of target-date funds in 401(k)s, the growth of the “robo-advisor” (i.e., Betterment, WealthFront, others), and the vastly easier access to ultra-low-cost investments (Vanguard funds, the whole world of ETFs, ultra-low-cost online brokerage accounts) — all of that means that people are starting to know that they can get low-cost investment management.  Now we need to really highlight the flip side of this all – that if those same folks want comprehensive, professional financial planning advice – the “big picture” stuff – (a) they need to be prepared to pay for it some other way if not having it carved out of their investments; and (b) they need to become aware that it’s available.

There are hourly and project-based financial planners out there.  They are few and far between, and it may be a while before there are a lot of really great ones accessible to everyone.  And those who are working at it are fighting an uphill battle against the entrenched industry – it’s *hard* to convince clients to pay by the hour for advice which appears to be free elsewhere (even if it isn’t).

But we’re getting there.

The first step is to know what you’re paying.  And know what you’re paying *for*. And making sure you’re getting what you pay for.  There’s nothing wrong with an assets-under-management based financial planning engagement.  But if you’re paying 1% or more for it, you’d surely better be getting a lot more than somebody sticking your money into funds.  You should be getting the whole package – someone who will help you with every aspect of your financial life.

And if you don’t want to pay upwards of 1% and don’t want an advisor getting between you and the investments — which may well be the case if you have a fabulous retirement program like the TSP available to you — but you do want some advice, you should be able to find it if you’re prepared to pay for it.  

Remember – there isn’t any free lunch.  If your financial advice looks like it’s free, it’s probably a lot more expensive than you realize.