Trust but verify
Some farmers look forward to collecting Social Security as part of their retirement, but there are other avenues to boost retirement income. Many retired farmers find themselves wishing they had done more retirement planning for more secure income.
Those working through farm transition or succession from an older generation may not have thought about retirement or Social Security. Paula Ledney, Penn State Extension program specialist, retirement planning and business management, suggested consulting a financial planner to help craft a comprehensive retirement plan.
For some farmers, Social Security will be the sole source of retirement income. Although Social Security income is based on prior earnings, it’s guaranteed for life. Ledney described Social Security benefits as one leg of a three-legged stool, and urged farmers to also consider tax advantaged retirement plans along with savings and investments.
“Looking at the requirements and planning ahead can be valuable,” Ledney said. “You can decide what type of business you need to run, and whether it can be profitable enough to provide for a comfortable retirement. Make sure you’re earning enough to quality for Social Security and are working toward your ideal retirement from the beginning.”
While there is no standard definition for a financial planner, Ledney summarized the role: “A financial planner is a professional who assists a client in meeting life goals through financial advice that integrates relevant elements of the client’s personal and financial circumstances.”
Several additional definitions clarify the roles of various financial experts. “A fiduciary is an individual who is ethically bound to act in another person’s best interest,” Ledney said. “This obligation eliminates conflict of interest concerns and should make an advisor’s advice more trustworthy.”
Registered Investment Advisors (RIAs) are investment advisors registered with the Securities & Exchange Commission (SEC) and must act as fiduciaries. They are legally allowed to provide advice on investment vehicles such as stocks, bonds, mutual funds and annuities.
Broker dealers, stockbrokers and insurance agents are only required to fill a suitability obligation – the products they offer must be suitable, but these individuals are not required to put clients’ interests before their own.
Another qualification is a Certified Financial Planner (CFP®), which requires a bachelor’s degree and completion of an extensive certification program, followed by a lengthy CFP exam. CFPs must accumulate a designated number of hours of experience and complete an ethics requirement prior to claiming the CFP designation. A search on the CFP website can help determine whether someone is an RIA or a CFP.
According to BrokerCheck, a brokerage firm, or broker-dealer, “is in the business of buying and selling securities – stocks, bonds, mutual funds and certain other investment products – on behalf of its customer (as broker), for its own bank (dealer), or both.”
The BrokerCheck website includes a free tool to locate and research the background and experience of advisors, brokers and firms. BrokerCheck was created by the Financial Industry Regulatory Authority (FINRA), a private, nonprofit, self-regulatory organization that oversees all U.S. brokers and broker-dealers. It regulates trading, equities and corporate bonds and licenses brokers to protect investors.
The SEC Investment Adviser Public Disclosure website is another option for finding an investment planner. Financial planners are searchable by location, and search returns include advisors’ certifications, licensing and any complaints filed against them.
With the advent of computer-based advisors (robo-advisors) and DIY planning, people can get good advice or at least a basis for starting the process. When farmers decide to work with a financial planner of any kind, Ledney’s advice is “trust but verify” – and be aware that compensation for financial planners varies.
“For planners today, the traditional models of compensation assets under management (AUM) and commission have been and are still the major ways planners are paid,” Ledney said. “Most folks, when they think of a financial planner, think of one who says, ‘You must have $100,000 or $250,000 to invest with me, and I’m going to charge you a certain percentage of that every year to manage your funds.’ In years or decades past, that could have been 2.5% or 3%. It has been dropping, so a lot of advisors are now at 0.5% or 1% because there’s so much competition.”
However, fees can still add up to a significant figure, and as a portfolio and savings grow, the cost increases. The fee may remain at 1% but it’s 1% of a higher dollar figure.
“There’s been a shift in recent years to move toward a model of flat fee, retainer fee and hourly fee,” Ledney said. “A lot of advisors now will consider themselves and advertise as ‘advice only.’ In most cases, they cannot receive a commission on any product they recommend. Make sure you know how your financial planner is compensated … They should be very transparent about that, and if not, keep interviewing financial planners.”
by Sally Colby
