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David Blanchette and Jason Fichtner`

Retirement Planning > Social Security > Claiming Strategies

Are Advisors Giving Conflicted Social Security Advice?

By John Manganaro

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What You Need to Know

  • A big new research paper finds that financial advisors may be biased toward Social Security claiming strategies that provide higher advisor compensation.
  • The paper, by David Blanchett and Jason Fichtner, found that households with an advisor claim earlier on average.
  • Commission-based advisors, in particular, are associated with earlier claiming.

Financial advisors who want to keep up with the latest academic and industry research about retirement planning have many places to turn for insight (including ThinkAdvisor.com/retirement), but one particularly useful source is the LinkedIn profile of PGIM DC Solutions’ David Blanchett.

One of Blanchett’s latest posts raises an uncomfortable question that no wealth management professional can afford to ignore: Do financial advisors’ asset- and commission-based compensation models cause them to deliver subpar Social Security claiming advice?

To answer the question, Blanchett wrote a paper in collaboration with Jason Fichtner, the former chief economist for the Social Security Administration who is now vice president and chief economist at the Bipartisan Policy Center. Their headline finding, set to be featured by the Investment & Wealth Institute’s Retirement Management Journal, is that there are “significant differences” measured in claiming ages based on whether a household works with an hourly accountant, a commission-based banker or broker, or a fee-based financial planner.

The chart included in Blanchett’s LinkedIn post demonstrates the main results, with strong evidence that households that work with an accountant-style advisor claim later, on average, while those working with a commission-based broker claim earliest — especially those households with higher levels of financial assets. In this latter case, the difference in claiming ages is almost two years.

“Coming into this piece, I would have expected all households working with financial advisors to claim later (although potentially differences to exist by advisor type),” Blanchett wrote. This is because, for most singles and couples in most scenarios, it makes sense to delay claiming as long as possible in order to derive a larger monthly benefit that provides ample income and a hedge against excess longevity.

According to the duo, the nature of the data underpinning the research means it is impossible to know the underlying drivers of these decisions. However, they believe it is likely that advisor compensation is “at least partially a consideration,” whereby financial advisors may be biased toward strategies that provide higher compensation — even if those recommendations are not in the best interests of their clients.

A Longstanding Question

In a recent interview with ThinkAdvisor to preview their results, both Fichtner and Blanchett said this project has grown out of discussions they’ve been having with industry peers for the better part of two decades.

“I’ve been working on this claiming narrative question for more than 15 years, since I was working at the administration and going out into the SSA field offices,” Fichtner explained. “I think the information and education people receive today is better than it was back then, but we still see that the most common claiming ages are early — often at 62. We wanted to dig deeper into this question of why early claiming is still so prevalent.”

Blanchett agreed with that framing, noting that the math on the delayed claiming of benefits is clear. While Social Security calculators can easily come up with simulations where claiming benefits earlier than 67 or 70 adds up to more funds overall, such results tend to come from assuming inaccurately low life expectancies. In a world of rapidly advancing longevity among the top income earners, this could be a big mistake for financial advisors and clients.

“Given this pretty straightforward set of facts, I would have expected that it wouldn’t matter what type of advisor you would use,” Blanchett said. “If you have an advisor, you should likely be claiming later, but that’s just not what we’ve found.”

Some Eye-Opening Results

As Blanchett and Fichtner noted, the new research uses data from the 2019 Survey of Consumer Finances to explore how advisor compensation is related to Social Security retirement benefit claiming decisions.

Compensation models are grouped into three categories, including accountant-style advisors paid hourly for their work; advisors and financial planners who are paid a fee based on assets under management; and commission-based professionals such as brokers and bankers.

“We find significant evidence that households working with any type of advisor tend to claim earlier on average, which is contrary to expectations,” the paper states. “However, there are notable differences by advisor type.”

For example, households with higher levels of financial wealth working with an advisor paid hourly claimed benefits two years later than similarly positioned households working with a commission-based broker. “In other words, households with financial advisors paid hourly appear to be making decisions that are consistent with clients’ best interests, but households with financial advisors paid on commission are making the opposite decisions,” Blanchett and Fichtner write.

Notably, there is no meaningful effect measured among clients of fee-based financial planners. Such clients’ claiming age is not materially different than households without an advisor. Unfortunately, though, their claiming age is still earlier than would be optimal, suggesting fee-based advisors aren’t pushing their clients to make “better” claiming decisions.

According to Fichtner and Blanchett, these results suggest that compensation methods may have a significant impact on the scope and quality of financial advice received by households. It appears that commission-based models, in particular, may bias advisors against certain delayed claiming strategies.

“Unfortunately, we do not have additional information about the exact method of compensation or the fiduciary role of the advisor,” the pair admit.

What It All Means

In the conclusions section of their new paper, Blanchett and Fichtner suggest Social Security retirement benefits remain a fundamental component of the U.S. retirement system, providing necessary inflation-protected income for millions of people.

“However,” they write, “it is evident that too many older Americans are failing to claim benefits at the most optimal age. Financial advisors have an important role in helping their clients maximize both their wealth and their income in retirement.”

The authors conclude that it is “impossible to know” the underlying drivers of these decisions, but the dramatic differences in claiming ages suggest it is likely that compensation is at least partially a consideration.

“Even if the financial advisor is a fiduciary and legally required to act in a client’s best interest, there is a spectrum of optimal strategies,” they write. “This research shows that financial advisors may be biased toward strategies that may provide higher advisor compensation, even if those recommendations are not in the best interests of their clients.”

The pair urged advisors who favor earlier claiming recommendations to think about the broader picture, both because of their personal ethical duties and because other recent work has shown later claiming of Social Security doesn’t mean clients are likelier to deplete their portfolios faster. The opposite may be true, in fact, because the higher guaranteed income floor from delayed benefits can allow greater risk-taking and growth in the portfolio throughout retirement.

Pictured: David Blanchett and Jason Fichtner 

John Manganaro

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