4 signs your financial advisor is dangerous

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Generating reliable, retirement income for the rest of your life, no matter how long you live, is an ambitious undertaking that takes time and skill. It's entirely understandable that you might want to seek the advice of a professional financial advisor to help you with this task. If you're considering this at all, you should be aware that there are advisors who could be a danger to your retirement security: advisors who don't have the necessary skills or expertise about generating lifetime retirement income, or who are more interested in making money for themselves than for you.

I've been on the receiving end of enough sales pitches from financial advisors and have heard numerous horror stories about unscrupulous or uninformed advisors from participants in my retirement planning workshops that I know what to watch out for. But do you?

Here are four statements coming from a financial advisor that should raise red flags with you:

1. "When you retire, roll your 401(k) account out of your plan at work. I can deliver better returns."

Most likely, this is the wrong move to make if you work at a large employer -- say, one with 1,000 employees or more. In this case, it's very likely that your employer's HR or finance department has shopped around for high-performing funds with below-average investment expenses, and they may have even negotiated special deals on investment fees because of the number of people participating in the plan.

Company 401(k) plan may be your best retirement account

Now this statement might be right if you work for a small employer whose 401(k) plan has retail mutual funds with high fees. My advice is this: Do your homework. Compare the level of investment management fees of the funds in your employer's 401(k) plan to the fees the investment advisor is planning to charge you. If your advisor uses mutual funds, you should also compare the historical investment performance of these funds and the ones of your 401(k).

2. "If you're offered a lump sum from your pension plan at work, take it. I can deliver good investment returns that will generate a higher retirement income than a monthly pension check."

This type of statement reflects a poor understanding of the value of a lifetime guarantee offered by a typical employer-sponsored pension plan. Most people in average or better health are better off taking the annuity from their pension plan at work because they'll live long enough to realize a higher lifetime payout.

Pension plan lump sum payments: Why you should avoid them

3. "Take your Social Security as soon as possible, and invest it with me, even if you don't need the income. I can help you realize investment returns that will generate more retirement income for you."

Once again, this statement reflects a poor understanding of the value of the lifetime guarantee offered by Social Security benefits. The reality is, this strategy only produces higher retirement income if you take significant risks in the stock market or if you're unhealthy and are likely to die before your average life expectancy.

Start Social Security early and invest? Ask the actuary
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4. "Invest with me, and your annual retirement income can be a lot higher than four percent of your retirement savings."

There's been a lot of research published that demonstrates that if you invest in a balanced portfolio of stocks and bonds and withdraw from your savings for retirement income, you should limit your annual withdrawals to just 4 percent of your savings if you don't want to outlive your money. And even that 4 percent rule is being questioned these days, given our current low interest rates and the level of investment advisor fees. The 4 percent rule should be a starting point for an informed discussion about the level of withdrawal that is appropriate given your circumstances.

Yet some advisors boast that their superior returns can generate higher retirement income for you. If you hear an advisor promising high returns, I'd be very wary. My fellow CBS MoneyWatch bloggers Allan Roth and Larry Swedroe have demonstrated repeatedly that very few active managers can beat passively managed index funds. The 4 percent rule is based on the assumption that over the long run, you'll achieve returns similar to returns on stock and bond indices.

Active managers fell behind, again, last year
4 percent withdrawal rate may be too high for today's retirees
Retirement income drawdown: How to fix a serious flaw with the "4 percent rule"

It's much better to be cautious with your initial withdrawals, and then increase them down the road only after an advisor has actually delivered a solid investment performance for several years.

Why would advisors make the statements described above? If their charges are based on assets under management, which is common for fee-based planners, then they'll want a lot of your money to manage. A better way to buy financial advice is by the hour or project; this way, your advisor doesn't have an incentive to tell you things that bring them more of your money to manage.

Planning your retirement: Get professional financial help
Hourly financial advice -- the right model?
Are you paying too much for financial planning and advice?

The warning signs discussed here are just a start. Your goal should be to find a competent advisor who's qualified to help you generate lifetime retirement income, and who listens to you and asks questions about your specific circumstances before making any recommendations. And make sure they make money in such a way that doesn't influence their recommendations to you. Doing your homework now to help you choose wisely will save you a lot of heartache in the future.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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