I wrote this article on May 4th, 2012 on my Golden Valley Patch Blog.
I frequently write articles and lead seminars for professional investment advisors on the topic of how to provide company retirement plan advice to existing investment advice clients.
An advisor who attended a recent California seminar class suggested that I write a blog post on this same subject. He thought that individual company retirement plan participants would also be interested to know how to set up a company retirement plan advice arrangement with their current investment advisor.
So, here are the three elements of that kind of investment advice relationship.
The first and most important element of an investment advice relationship with an individual company retirement plan participants is the fact that the investment advice provided is not a product to be sold. Instead, the individual company retirement plan participant receives investment advice.
As everyone knows, a company retirement plan the menu of mutual fund options is fixed. For that reason, there are no products for an independent, third-party investment advisor to sell to an individual company retirement plan participant. The products to buy are already provided by the company retirement plan menu.
The second element is the calculation of the investment advisory fees.
The calculation of the retirement plan investment advisory fees is easy to understand and completely transparent to the company retirement plan participant. The advisory fees are a fixed percentage rate (usually around 1.50% annually). The fees are always calculated on the value of the company retirement plan account at the end of the calendar quarter.
The biggest benefit of fixed and transparent investment advisory fees is that the investment advisor has the same investment objectives as the individual company retirement plan participant.
In a rising stock market, the investment advisor is motivated to advise the individual company retirement plan participant to own the best available mutual fund option in the company retirement plan menu. In theory, the best mutual fund option will provide the biggest investment return in a rising stock market.
In a declining stock market, the investment advisor should provide a game plan to preserve as much of the individual company retirement plan account principal as possible. That game plan should include reducing the exposure to the stock market and placing part of the company retirement plan account in the money market.
The third element is the option to pay advisory fees inside or outside of the company retirement plan account. Not all company retirement plans offer the option to pay third-party advisor fees with company retirement plan account assets, but more and more companies are making this option available.
Many individuals can receive significant tax breaks by paying company retirement plan advisory fees with after-tax dollars instead of paying those same investment advisory fees with company retirement plan account dollars.
I will give you my standard disclosure that I am not qualified to give you tax advice on this matter. But I do know enough about the available tax deductions to tell you to make sure your tax professional is aware of your relationship with an investment advisor who your pay for advice on your company retirement plan account.
Ric Lager
Lager & Company, Inc.
