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Gurus: Is Your Client Saving Too Much for Retirement?

Scott Burns has spent decades trying to figure out how people can retire comfortably and yet sacrifice as little as possible pre-retirement. Which is ironic since Burns, at the age of 67, appears to have no interest in filling his Golden Years with tee times and early-bird buffet specials. A couple of years ago the nationally-syndicated personal finance columnist took a buyout from the Dallas Morning

Scott Burns has spent decades trying to figure out how people can retire comfortably — and yet sacrifice as little as possible pre-retirement. Which is ironic since Burns, at the age of 67, appears to have no interest in filling his Golden Years with tee times and early-bird buffet specials.

A couple of years ago the nationally-syndicated personal finance columnist took a buyout from the Dallas Morning News, and ended up as the chief investment officer of AssetBuilder, a registered investment advisor based in Plano, Texas.

Via the firm's website (, his syndicated columns and a new book that Burns co-authored (see sidebar), he pulls no punches when taking on what he sees as “financial charlatans” at financial firms — those overcharging for underperformance.

Instead, Burns and AssetBuilder maintain that they can use mean variance optimization and low-cost index funds, ETFs and Dimensional Fund Advisor offerings to provide investors with less risk and more return than what they've been able to get from traditional stockbrokers and financial advisors.

Will the firm's rock-bottom cost structure and “rocket science” approach to asset allocation succeed? We caught up with Scott just as his new book was about to be released. (Also note that his co-author, Laurence Kotlikoff, was the subject of Registered Rep.'s cover story last November.)

Registered Rep.: One of the chapters in your book is titled “Fire Your Broker.” What would you suggest as an alternative for people who want financial advice, and are still willing to pay for it?

Scott Burns: There is an important distinction to be made between investment management — which is what we do at AssetBuilder — and financial planning. I think AssetBuilder represents a step toward “unbundling” investment management and financial planning.

I think we'll see rapid growth of consulting services, done on an hourly fee basis, to help people answer questions about downsizing, major purchases, changes in mortgages and other personal finance decisions we all need to make. I also think we'll see more do-it-yourself planning as consumption smoothing software like ESPlanner, which is more widely used by individuals than by planners, becomes more available. [ESPlanner was created by co-author Kotlikoff, and is a far more sophisticated retirement planning algorithm than what you'll find on most mutual fund websites.]

The difference is that you'll pay a fee to answer the question if you can't answer it for yourself, or find the answer in the growing universe of social computing.

RR: What are your suggestions to financial advisors who wish to emulate your way of thinking?

SB: Independent financial advisors — as opposed to those who must follow the company line of a large legacy distribution system firm — should be looking for ways to get ahead of the coming wave of expense reduction. Building a more consultative practice, where investment management and day-to-day personal finance advice are unbundled, will give the advisor a much more competitive position.

RR: You seem troubled by much of the investment advice offered by the financial services industry, as well as many of its practices. What are your biggest objections to the way both the full-service companies (i.e. Merrill Lynch) and do-it-yourself firms (such as Vanguard) work?

SB: The full-service firms are part of what I call the legacy distribution system, which also includes insurance-based investments. They share a business model whose cost to the investor exceeds possible value added. They often sell what is possible rather than what is probable — sizzle not steak. Retirement investing needs to be based on probable results, not possible results.

Our complaint about the do-it-yourself firms is more about disappointment. We have come to expect more from firms like Vanguard, Fidelity, TIAA-CREF and T. Rowe Price. They are great firms, far ahead of the legacy distribution system firms. But while their costs are not punitive, they still oversell financial products because they use braindead notions such as the 70 percent to 85 percent income-replacement rate for retirement. Larry Kotlikoff and I demonstrated in Spend ‘Til The End just how wrong that particular conventional wisdom is.

RR: How did your firm, AssetBuilder, come to be?

SB: AssetBuilder was conceived over dinner with Kennon Grose, a former Microsoft exec, the day I accepted a buyout offer from Dallas Morning News. That was August 2006. We had the basic blog set up by September. Today we're a team of 10 people. Assets under management exceeded $110 million at the end of April, and we have nearly 300 clients in 24 states. All of this was done through our website. We think that's an indication that our business model works.

RR: What types of services does your firm provide, what is your fee schedule and what does your typical client look like?

SB: We offer a portfolio review, enabling potential clients to compare the cost, diversification and trailing performance of their current investments with an AssetBuilder portfolio of similar risk. That helps potential clients to tune in better to the importance of risk and its implications. From that foundation, they can select one of our risk-measured model portfolios.

Our fee schedule ranges from a maximum of 45 basis points for accounts just over $50,000, down to 25 basis points for multi-million dollar accounts. We don't have a typical client in terms of assets. We're regularly surprised by the range of assets, ages and household compositions. What they share is a degree of self-direction. They understand the benefits of index investing, they appreciate the effort we bring to risk measurement, and they see AssetBuilder as a cost-efficient way to get the entire management chore done.

RR: Now that you're out of the newsroom and actually advising real human beings, have you been surprised by the difference between writing for the masses and advising individuals?

SB: Newspaper and Internet readers, of necessity, cover the ballpark. Our clients are self-selecting. They are smart and interested in investing. But they don't want to do it for themselves. We don't get to meet all our clients personally, but many have fascinating life stories and work. For me, it's an enormous pleasure to see how directly we can be helpful.

RR: What are some of the myths about money and investing that you think investors and/or their advisors are following in error?

SB: Here are the biggies:

a.) Magical belief that costs don't matter — they always matter. They matter while you're accumulating assets; they matter even more when you are retired and distributing assets. Costs are constant; performance is not.

b.) Setting totally wrong retirement targets. That 70 percent to 85 percent replacement rate figure that is the standard used in the financial services industry is brutally misleading. Kotlikoff and I clearly demonstrate that in our new book. It causes many to save too much and/or take too much risk.

c.) The idea that risk diminishes the longer your investment term. It doesn't, and failing to take risk into account can work to dramatically reduce your standard of living late in retirement.

d.) That everyone should invest as much as possible, as early as possible. This is a great idea — for the financial services industry. But it is contrary to the way real life works for most people. Excessive saving early in life requires a sacrifice in standard of living that is unnecessary. This doesn't mean we don't all need to save. It simply means saving a lot of money at the appropriate time.

RR: Are there economic and financial risks to which financial advisors and investors should be paying more attention?

SB: Most advisors and investors seem to take an un-calibrated view of Social Security and Medicare. Many are entirely dismissive of the largest single source of security and care for the vast majority of all people, including those with substantial assets. Most people don't understand that your financial assets have to approach $1 million before they are as important for your wellbeing as Social Security and Medicare. We need to put more effort into both optimizing our Social Security benefits and investing to offset the very major risk that our government won't be able to deliver on its promises.


And other heretical advice aimed at your clients

This will likely be the first and last time that a financial advisor (me) writing for an audience composed largely of financial advisors (you) will recommend a book geared to the investing public that has a chapter titled “Fire Your Broker.”

That's just one of the many unconventional wisdoms presented by Scott Burns and Laurence J. Kotlikoff in Spend ‘Til The End — The Revolutionary Guide to Raising Your Living Standard Today and When You Retire (Simon & Schuster, $26.00).

Burns has been a syndicated personal finance columnist for decades, and is now a founder and chief investment strategist for AssetBuilder, a registered investment advisor. Kotlikoff is a highly-regarded economics professor at Boston University with a specialty in applying economic principles to financial planning.

A few years ago the two collaborated on a book titled The Coming Generational Storm, one of the first formal “callouts” on what will happen when the Baby Boomers begin tapping Medicare and Social Security. Whereas that book was a big picture analysis, Spend ‘Til The End is a guide that attempts to show individuals how to save enough for retirement without sacrificing their current standard of living (an economic concept known as “consumption smoothing”).

In advocating the smoothing of consumption, Burns and Kotlikoff turn several financial maxims inside out. They call for individuals to generally avoid maximizing contributions to at-work retirement plans, take a second look at the economic return on the cost of getting a college degree and use an “M-shaped” curve for the stock portion of a lifetime asset allocation model.

But the authors bring out the harshest criticism when discussing the traditional financial services industry. And they don't confine their fury to Wall Street titans — the likes of Vanguard, Fidelity, and TIAA-CREF also get tarred and feathered.

Burns and Kotlikoff indict these firms and their minions for several offenses, including using inaccurate rules of thumb (“Rules of Dumb” in the book) to calculate how much clients will need for retirement. This leads to oversaving, overinsuring, and (naturally) higher fees and income for the firms in question.

According to the book, those overestimations of future financial needs also potentially result in overly aggressive portfolio recommendations (and an uncomfortable level of volatility), as well as investors diverting money to IRAs and insurance premiums that should instead go toward more tangible and immediate gratification. — KM

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