Objective information about financial planning, investments, and retirement plans

A Look Back

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I have been blogging for a bit over three years now.  This has been a great outlet for my love of writing.  Working as a

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financial advisor is about the best “job” one could have and I feel fortunate to be able to share what I’ve learned over the years with you.

Just as I often review the assumptions that I use in choosing investments to recommend to my clients, I thought it would be interesting to take a look back at a few of the prior posts on this blog and to update the underlying situations.

2010 The Year of the Fiduciary? 

Well 2010; 2011; and 2012 have come and will soon all be in the books without a uniform Fiduciary Standard that must be followed by all financial advisors dealing with the investing public.  I’ve read that this will be a top item for consideration among the regulators in 2013.  I hope this is the case.  One definition of Fiduciary:

fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest. 

I think this is the right way for all financial advisors to treat their clients; some very deep pockets in the financial services industry disagree.  

Is Your Financial Advisor Like a Replacement Ref?

I wrote this on September 26th of this year two days after the infamous Monday night game where the replacement refs robbed my beloved Green Bay Packers on a blown call at the end of the game in Seattle.  This was the game that brought the NFL referee lockout to an end.  Since then the Packers have won 7 of their last 8 games and stand atop the NFC North, Seattle has also had a good season and stands a 8-5 and are in the playoff hunt.  Nothing in this update about finance but I have been a lifelong NFL and Green Bay Packer fan.

Lessons From the Groupon and Facebook IPOs

Since writing this shares of Facebook have risen to over $27 per share from just under $18 when I wrote this post in early September of this year.  This is still far below the $38 IPO price in May, but the stock appears to be in the midst of a rally.  Time will tell how the company fares as a publically traded entity.

Groupon went public at $20 per share in late 2011.  The stock currently sits around $4.25 per share almost the same price as when I wrote this post in September.  Since then there has been some excitement as at least one hedge fund has purchased shares and the Board retained founder Andrew Mason as the company’s CEO amid speculation that they had considered replacing him.  Lastly there were some rumors that Google, a former suitor, was once again interested in acquiring the company at what would be a bargain price compared to their last offer.  I fail to understand the economics of the daily deal “industry” and view this IPO as nothing more than a payday for the founders and the investment bankers.

That Nice Man at Church Wants to Sell Me a ….

Since writing this post in January of 2011, Bernard Madoff remains in jail, one of his sons committed suicide by hanging himself in his apartment, and four years after Madoff’s arrest the trustee assigned to try to recover assets has recovered about half of the $17.5 billion that investors lost.

In the interim another famous Ponzi schemer Alan Stanford has been convicted and imprisoned.  Sadly financial fraud, including affinity fraud, is still rampant and all investors need to protect themselves.

Risk, Reward, and Peyton Manning

When I wrote this post in March the Colts had just waived Manning rather than pay him the $28 million due him at the time.  Seemed like a reasonable bet at the time given that he was coming off of neck surgery and had missed the entire 2011 season.

Peyton ended up in Denver and has the Broncos on the cusp of the playoffs with 10 wins as I write this.

Meanwhile the Colts took Stanford’s Andrew Luck as the first overall pick in the draft and he has performed beyond expectations.  He has the Colts in the playoff hunt after the team won only 2 games during 2011.  Further the team has rallied in the face of adversity with their coach being forced off the sidelines to battle leukemia.  Thankfully he is in remission.

Overall a win-win for both teams, both teams are so far being rewarded for the investments they made in Manning and Luck.

Just as with these blog posts, it’s a good idea to revisit your reasons for making financial and investment decisions to see if things panned out as you had thought at the time.  This is not to second guess yourself, but rather to reexamine your assumptions to see if you need to adjust your decision making process in the future. 

As always please feel free to contact me with your financial planning questions.

Photo credit:  Wikipedia

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Are My Investments Safe?

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This is a question that I hear and am asked often.  Concerns over the issue of investment safety have increased markedly

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over the past few years in the wake of high-profile investment scams, such as with Bernard Madoff, as well as a result of the severe market decline of 2008-09.  This is a question that should be addressed from several points of view.

Which investment was the safer choice? 

A major concern of investors in or approaching retirement is the risk of losing money from their investments.  Any way you look at it, a 37% loss in the S&P 500 Index (as occurred in 2008) is devastating, especially to an investor on cusp of retirement.  Many investors sold out of their equity positions in late 2008 or early 2009 just as the stock market was nearing bottom (the S&P 500 hit its low point of that cycle on March 9, 2009).

Let’s look at an investor who had $10,000 in an S&P 500 fund at the beginning of 2008.  The index lost 37% for the year so his fund was worth roughly $6,300 (we will ignore fund expenses for this example).  If this investor sold his holding and moved it all to a money market fund his money would have “grown” to maybe $6,500 by September 20, 2012.  As anyone who invests in a money market fund knows the interest rates are abysmal.

By contrast if the investor had held onto his fund, it would have been worth about $10,899 as of September 30, 2012.  While the market fund would not have lost any money during a couple of down periods over this time span, the investor certainly lost purchasing power.  Which investment was the safer choice?

When investing client money risk of loss is certainly top of mind, hence the reason client dollars are invested in a diversified portfolio that combines their need for investment growth with their aversion to losses.  I would tell any retiree or pre-retiree that their biggest risk in retirement is loss of purchasing power (aka running out of money) vs. the risk of investment losses.

Safety from fraud 

Whether its Madoff, Alan Stanford, or any number of lesser know fraudsters investment scams are in the news a lot.  I’d like to tell you that using a fee-only NAPFA member like me is an iron clad guarantee, but alas we’ve had several former members accused of defrauding clients, including two former organization chairmen.  Part of protecting yourself is using you own good common sense.  Ask these two questions (among others):

  • Are the returns touted by the money manager too good to be true?  In the case of Madoff he sold false consistency.  The returns were very steady, but unspectacular.  They were also not possible given how he claimed to have invested the money during the years of his fraud given what actually occurred in the financial markets.
  • Will your money be housed at reputable third-party custodian (Schwab, Fidelity, your bank, etc.)?  If not, this is huge red flag, end the relationship immediately.  This was again a key element in Madoff’s fraud.

Over and above this, check up on what your advisor is doing.  Get online access to your accounts and review each statement carefully with an eye towards verifying and understanding each and every transaction that occurred. 

Safety from fear mongers 

This isn’t one that makes many lists of investor concerns.  I won’t call these folks fraudsters as such, but when the markets aren’t doing well folks telling you to shun more traditional investments and put your money in gold or index annuity products come out of the woodwork.  Both of these can be viable alternatives for a portion of your investment allocation, as can many other non-traditional vehicles.  Again, understand what you are buying, the fees involved, any restrictions on accessing your money, and who is selling the investment product to you.  Invest from a position of knowledge, not fear.

As a brokerage commercial stated many years ago “… money doesn’t come with instructions…”  You don’t need to be a financial expert but you do need to be diligent about who you invest with and where your money is invested.

Please feel free to contact me with your financial planning and investment questions.

Photo credit:  Source: daylife.com

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Financial Fraud – Tips to Protect Yourself

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Chasing Madoff

Financial fraud is all over the news.  Whether high-profile Ponzi Scheme cases via the likes of Madoff or Allen Stanford or many smaller cases; investors are being defrauded out of their hard-earned money at an alarming rate.

I’d like to tell you that the problem emanates only from financial advisors who sell product, but sadly two former presidents of NAPFA the country’s largest organization of fee-only advisors have been implicated in fraud cases over the past few years.  Full disclosure, I have been a NAPFA Registered Advisor since 2003.

Given the increasing skill and imagination of fraudsters there is no fool-proof way to protect you and your family from financial fraud.  None the less here are some tips for you to reduce the risk:

  • If a financial advisor suggests that you don’t need to house your investments with a third-party custodian such as Schwab, Fidelity, your bank, Merrill Lynch, etc. I suggest that you run (don’t walk) away from any relationship with this person.  This was one of the key ways in which Madoff was able to perpetrate his fraud for so many years.  He sent his own client statements.  While a third-party custodian is not fool-proof, you should insist upon this arrangement.  Besides receiving an independently prepared statement, you can generally set-up online access.  As a financial advisor I can’t imagine doing things any other way.
  • Read and review your account statements on a regular basis.  Besides being a good practice anyway, this is a must to catch honest mistakes and potentially fraudulent transactions.  Case in point was (sadly) another former NAPFA advisor who allegedly took client funds from accounts at Schwab via forging their signatures.  I’m sure that he was counting on the fact that many clients never review their account statements.  (Post script to this, over the past year I’ve received calls from Schwab on two separate occasions to verify transactions for a client whose signature has changed from what they had on file when we first opened the account.)
  • Don’t assume that you can trust an advisor just because he or she attends your church or you are in the same Rotary club.  Affinity fraud is far too common.  Many of Madoff’s victims were member of the Jewish community up and down the East Coast.  I’m not saying to disqualify an advisor because they are a member of your church, but they should be put to the same level of scrutiny as any other advisor that you would consider.
  • If an advisor is insistent that you invest NOW, be very leery.  There is no investment that is that urgent.  Investments should be made after careful planning to ensure that they are part of a strategy that is right for you.  Don’t let yourself be pressured into doing anything with your money.  High pressure often equals a scam.
  • If you don’t understand an investment vehicle proposed by a financial advisor don’t allow your money to be invested there.  Demand he explain the investment to you until you do understand it so that you can make a good decision.
  • If you have elderly parents or relatives talk to them about investment scams as many are aimed at seniors.  While this can be a touchy subject it is an important one.  Sadly a high percentage of the financial fraud aimed at seniors is perpetrated by family members.  Your help here may include protecting these people from other members of your own family.
  • Overall make sure that if you work with a financial advisor that you stay engaged in the process of managing your money.  While it is great to find a trusted advisor, make sure you continue to ask questions about the advice they are providing and why they feel a particular investment or course of action is right for your situation.

Financial and investment fraud is rampant.  The steps above can help but overall be diligent about your finances and the people you are trusting to provide you advice.  Be especially leery of unsolicited calls urging you to invest in the next hot thing.  If something sounds too good to be true it probably is.

Please feel free to contact me with your investment and financial planning questions.

 

Photo credit:  Wikipedia

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That Nice Man at Church Wants to Sell Me a ….

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My point here is that just because you and a financial product sales type attend the same church or are both members of the same Rotary club doesn’t mean that the financial products or services this person is selling are right for you. English: Bernard Madoff's mugshot

My original inspiration for the above tweet was a pro bono financial counseling event in which I participated about 15 years ago.  I counseled a young couple with two young kids.  A registered rep from their church had sold all four of them a variable annuity product.  For the life of me I can’t come up with a good reason for a 7 and a 9 year old to buy a variable annuity policy. I was trying to be diplomatic in my answers when the wife said to me “…we really got _____ed…”  It was hard to disagree.

On a positive note, a client once asked me to review a long-term care insurance policy they were considering that was offered by an insurance company affiliated with their religious persuasion.  The policy had excellent features, the company was solid, and the price was competitive.  They purchased the policy.

Here are a few examples of affinity fraud from a Wikipedia article on the subject:

  • “Baptist investors lose over $3.5 Million”: The victims of this fraud were mainly African-American Baptists, many of whom were elderly and disabled, as well as a number of Baptist churches and religious organizations located in a number of states. The promoter (Randolph, who was a minister himself and who is currently in jail) promised returns ranging between 7 and 30%, but in reality was operating a Ponzi scheme. In addition to a jail sentence, Randolph was ordered to pay $1 million in the SEC’s civil action.
  • On November 16, 2007, Michael Owen Traynor a Bradenton, Florida, investment broker, who had found many of his clients though his church and private school social circles, was arrested on a first degree felony grand theft charge that he had stolen $6.5 million from his investors. It is believed Traynor stole funds from at least 34 clients in Sarasota, Manatee and Hillsborough counties between 2001 and February 2007. Traynor was subsequently sentenced to 12 years in Florida state penitentiary.
  • “125 members of various Christian churches lose $7.4 million”: The fraudsters allegedly sold members non-existent “prime bank” trading programs by using a sales pitch heavily laden with Biblical references and by enlisting members of the church communities to unwittingly spread the word about the bogus investment.
  • On December 11, 2008, Bernard Madoff, an American businessman, was arrested on charges of securities fraud, having been turned in by his own sons after allegedly telling them his business was a “giant ponzi scheme“. According to the New York Post, Madoff “worked the so-called ‘Jewish circuit’ of well-heeled Jews he met at country clubs on Long Island and in Palm Beach.”. Additionally, one of Madoff’s middlemen was J. Ezra Merkin of Ascot Partners. According to Samuel G. Freedman of the New York Times, Merkin was prominent in the Modern Orthodox community. This allowed him to defraud institutions such as Yeshiva University,Kehilath Jeshurun Synagogue, the Maimonides School, Ramaz and the SAR Academy. 

Should a religious or other affinity connection disqualify a prospective financial advisor?  Of course not.  However, this affiliation should not serve to give an advisor or a financial product a free pass either.

In all cases, verify then trust.  Check out the advisor and/or the company behind the financial products you are considering.  Put them through the same rigor you would if the affinity connection was not there.  Tragically there are people who prey on the trust and validity that can come via an affinity connection.  Don’t be another victim of affinity fraud.

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