The broker/advisor industry is salivating. With 8,000 people turning 65 from now until 2027, they want to manage your IRA and help themselves to big profits straight out of your pocket. Their single biggest opportunity is in rollover IRAs, a $321 billion per year business that continues to grow.
Are you are one of the 1 in 2 people with a 401(k) or IRA that uses an advisor? If so, don't walk -- run -- away from a "conflicted" advisor, or someone with a conflict of interest based on the fact they will make a profit off where and how you make your investments. A conflicted advisor could cause you to lose up to 12 percent in fees. The average IRA rollover for people between 55 to 64 is about $100,000. Losing 12 percent from conflicted advice is as if $12,000 was lost in the transfer and five years of funded retirement taken away from you. This is from a White House report released in March.
President Obama is moving to make conflicted advisors illegal, but that could take some time. For now, enforce your own rule. Find an advisor that follows a "fiduciary" standard and puts their clients' best interest first. How do you know if the advice is conflicted? Ask your advisor to spell "fiduciary." If they can't, run. If they can, stay longer and ask them if that is the role they play when advising you. If they say yes, most of your assets should be in indexed funds and you should pay a flat fee or percentage of assets to him or her.
Non-conflicted advisers do not accept conflicted payments. They charge an hourly rate, a percentage of assets or other similar fees that do not depend on the decisions made by you, the client. The only acceptable advisor is an advisor who gets paid no matter what you decide to do.
Another tell: if they advise you to roll your assets out of your 401(k) to an IRA and put your assets in a fund attached to their company. Then, as an extra bonus, they say they won't charge you for the advice. RUN.
The scary thing about conflicted advice is that it's legal, friendly and presents itself as free. Follow three simple rules -- find a fiduciary, pay a fee and avoid rolling over funds to an IRA. Don't make one of the costliest investments mistakes: using a conflicted advisor.