Many advisors would agree that helping clients optimize their Social Security benefits is an integral part of retirement income planning, but a surprising number of advisors have not latched on to this important trend. Advisors who fail to incorporate — and become educated on — the myriad Social Security claiming strategies are not only at risk of losing clients, but they're also putting clients' retirement security in jeopardy, which could land them in legal hot water.
Actions to rein in entitlement programs by the GOP-controlled Congress could further obscure the already complicated process of optimizing clients' Social Security benefits.
"If you select the wrong Social Security claiming strategy for your client, it's irrevocable," said William Meyer, founder and managing principal of Social Security Solutions.
Indeed, failing to recommend the right strategy for a client could leave a gaping hole in retirement benefits over a client's lifetime. "The average advisor's client is getting $1 million out of Social Security" during the course of their retirement, he said. "It's their largest asset."
Marguerita Cheng, CEO of Blue Ocean Global Wealth Management in Potomac, Maryland, agreed that Social Security "is a valuable asset, not simply a monthly check."
Social Security optimization "is a great value add for clients and is a must for anyone doing comprehensive financial planning," agreed Tara Scottino, an advisor with True North Advisors in Dallas. "Most clients do not have any idea of the number of choices they have or how to go about making a decision," she said, adding that "there is a science behind choosing the correct timing for taking benefits, and, in many cases, once you've made a decision, there is no going back."
Fine, but Do I Have a Legal Obligation?
While a good number of advisors are taking (or teaching) Social Security courses or using software to help determine which claiming strategy is best suited for a client's unique situation, there's a brewing debate over whether advisors are under a fiduciary or legal obligation to ensure clients choose the best Social Security claiming option.
Marcia Wagner, founder of the Wagner Law Group, who specializes in the Employee Retirement Income Security Act (ERISA), said that advisors should consider such discussions a "best practice," and argued that it's "expected that a good financial advisor who wants to add value" would talk to clients about the various Social Security claiming techniques.
For "a lot of people, one of their primary benefits to live on in retirement isn't the assets that they've saved; rather it's the 'uber DB plan' that the government has created—and to which [clients] have contributed their whole lives—known as Social Security," she said.
While Social Security advice is not governed by ERISA, as it's a government program, advisors "can be sued for professional negligence," added Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath in Los Angeles. "There is not, at least at this time, any duty on RIAs to give Social Security advice. And both RIAs and attorneys can define the scope of their engagements in their agreements" with clients.
However, for "financial planners (many of whom are RIAs), there might be an implication that if the agreement didn't exclude Social Security advice (or if it were silent on the subject), then the financial planner would have a duty to properly and reasonably include the Social Security benefits (and the claiming of benefits) in his or her advice and recommendations."
Meyer argued that his firm has already heard from consumers who are exploring litigation based on "bad" Social Security advice that they've received. "It's only a matter of time before a case is made and precedent is set," he said, adding that under a fiduciary duty, advisors must provide clients with the "best" possible advice.
With Social Security being the largest retirement asset for most Americans, the "best possible advice," Meyer said, "must include Social Security claiming strategies, especially when an optimal strategy could mean hundreds of thousands [of dollars] more for a client."
The Social Security advice area could be a ripe one for litigation, agreed Wagner. "I believe […] you will have plaintiffs' lawyers with a case."
Stephen Saxon, chairman of Groom Law Group in Washington, which specializes in employee benefits, noted that "the universe of services that advisors and wealth management professionals are being expected to provide is changing." If advisors "want to be competitive, [they] may need to take into account the Social Security benefit and how [to] maximize it."
"If an advisor has a contract with a plan sponsor or participant that says the professional advice they give is fiduciary in nature and it includes looking at sources of income, including Social Security," Saxon said, "then I would submit it would be very difficult for you to wiggle out of that obligation." So, Saxon warned, advisors should "be careful about having open-ended, generic statements" in their agreements.
Determining the Best Strategy
So how are advisors helping clients decide which claiming strategy best meets their needs?
As Meyer explained, picking the optimal Social Security claiming route is "really a complicated decision," and the "number of rules and exceptions [is] daunting." Advisors "really have to be careful," as Social Security claiming strategies are dependent on different variables such as life expectancy, household type or whether clients work part-time. Then there are rules for receiving disability benefits (see sidebar, "The Third Rail of American Politics Is Live"), as well as rules for those of retirement age who have young children.
