Do advisors have a fiduciary obligation to provide Social Security planning to clients?Article added by Steven McCarty on February 24, 2016
Steven McCarty

Steven McCarty

San Diego, CA

Joined: March 22, 2006

Social Security planning experts have also begun to use the “F” and “L” words — i.e., “fiduciary” and “liability.” They suggest advisors may have a fiduciary obligation to provide Social Security planning in order to select a claiming strategy that produces an optimal payout. If you don’t do this, they add, you may be facing a legal liability years down the road when a client finds out how much money they left on the table.

Whatever you make of these arguments, the facts are clear: Assisting your customers with Social Security makes a lot of sense. For clients, it provides clarity to a whole financial area that is mind-numbingly complex. According to Laurence Kotlikoff, a top Social Security expert, there are 567 possible ways to claim Social Security benefits and 2,728 rules in the Social Security handbook. Complexity, along with a lot of cognitive biases (example: Just let me take my Social Security money and run!) lead consumers to make costly errors in judgment when deciding how to structure their future benefits. There are four fundamental ones, writes James Mahaney, Vice President, Strategic Initiatives at Prudential Financial, in the company’s publication "Innovative Srategies to Help Maximize Social Security Benefits." Here's what he wrote:
  • First, clients underestimate the real value of Social Security, either because they discount the system’s viability, underestimate their longevity or don’t consider how Social Security benefits are indexed for inflation.

  • Second, they rush to collect and then wind up regretting leaving, in some cases, $100,000 on the table. If they knew waiting until age 70 might double their benefit, they’d surely give that option more weight.

  • Third, not comprehending the advantages of integrating each spouse’s benefits to optimize the total payout, largely because they don’t understand how spousal benefits, worker benefits and survivor benefits interact. However, this strategy has become less useful after the passage of the Bipartisan Budget Act of 2015, which eliminated the file-and-suspend and file restricted planning approaches.

  • Fourth and finally, they get blindsided by what Mahaney’s calls “the tax torpedo.” This results from corporate defined contribution plans being rolled over into IRAs and withdrawals being made that raise a client’s income level and marginal tax rate in retirement. And as that rate increases, so does the share of each Social Security benefit dollar that is taxed. At a $34,000 threshold for singles and $44,000 for married couples, every dollar received from an IRA causes up to 50 percent of each Social Security dollar to become taxed as well, Mahaney says.
Put these mistakes together and advisors must ask themselves if there’s a strong business case to be made for helping clients with their Social Security planning. If they agree, then advisors should consider the following questions as they plan next steps:
  • Is this capability something to develop internally or farm out to a third party?

  • Should Social Security planning be deployed as a prospecting tool (i.e., offered as a lead generation seminar) or as a service provided after the sale?

  • Should one offer it free or charge a fee for it?

  • What technology supports will be needed, especially which software calculator will be used to do break-even analyses?

  • Should one opt to pursue a Social Security planning designation, several of which have entered the market in recent months?
But the most important question is this: Are you doing this to help your clients or to help yourself? Unfortunately, recent research has found that the vast majority of advisors are not providing hands-on Social Security recommendations, in part because they don’t want to spend the money on software. Is this defensible from an ethical perspective? Check back next month when we discuss “Social Security Planning: The Ethics Case."
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