Banker-Broker vs. Fiduciary Model in Retirement

Banker-Broker vs. Fiduciary Model in Retirement

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What Is a Fiduciary?

A fiduciary is required by law to recommend only what is in your best financial interest, not theirs. This is very different from most of the financial advisors at big banks and brokerages which hold a Series 7 or other securities license. They only make money when they sell high-commission financial products that are invested in the stock market.

By contrast, fiduciaries consider a client’s situation, age, background, family dynamics and life goals and objectives, and use that information to craft custom financial plans. Fiduciaries take the long view, and want to help make sure people never run out of money, no matter what their age.

All Equities Are Risky. Period. Including Bonds.

It is very important for a fiduciary to address a shortening time horizon and add more “safety” as clients approach retirement. Most wirehouse advisors will use the “rule of 100,” putting 60% of a 60-year-old’s portfolio assets in bonds or bond funds, 65% of a 65-year-old’s, etc.

But to say that bond funds are “safe,” especially when interest rates are this low, is incorrect, to put it mildly. Right now, the 10-year Treasury yield is at 2.3%.

Does it make sense to have 60% of a portfolio earning almost nothing?

Watch Out for Municipal Bonds

Forty-nine of 50 states have pension obligations they can’t possibly pay back. States will have to renegotiate all of this debt, and anyone holding municipal bonds may potentially be lumped in with all the other creditors.

But having the largest percentage of your money in bonds in retirement earning almost nothing is not the biggest problem—the biggest problem is interest rate risk.

Interest Rate Risk

Interest rate risk is where you lose money on bonds as interest rates go up.

Our economic situation in 2017 holds a lot of risk for retirees when it comes to bonds. If we go from where we are now at 2.3% on the 10-year treasury back up to, say 4%, that will mean a 15% – 20% loss of principal on “safe money” held in bonds.

Why we think the 4% Rule Doesn’t Work for Retirement

The 4% rule is still being used as the distribution strategy for retirees, even though it’s been discredited and was abandoned by its creator, William Bengen, in 2009.

When markets are flat, the 4% rule does NOT work. The 4% rule is the most destructive, toxic financial advice out there, responsible for destroying more people’s retirement in this country than any other piece of financial advice. Here’s an example to prove it.


You have $4,000,000 dollars on January 1, 2000—you’ve retired at the beginning of a flat market cycle. Between 2001 and 2002, there is a 50% drop in the stock market. But you lose more than that because you’re in retirement drawing 4% out each year. You start 2003 down 62%. The market rallies and doubles from 2003 to 2007, but unfortunately, you’re still withdrawing 4% a year. Then the markets tank over 50% from October 2007 to March of 2009 and you’re still taking 4%. You are done, you’ve run out of money. (Running out of money is the number one fear of people 50+ years old.)

This scenario really happened. Remember in 2009 all of the seniors who had to sell their homes, move in with the kids or go back to work? This was because their retirement plan was destroyed by the 4% rule.


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