Objective information about financial planning, investments, and retirement plans

How Does Your Financial Advisor Define Success?

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I am grateful to Jean Chatzky for her selection of this blog as her top pick among investing blogs in a recent piece for AARP Finance Blogs You Should Read.  In her write-up she generously calls me “An entertaining writer prone to football references…”  With that said I could think of no better way to start a piece about your financial advisor’s definition of success than with a mention of the University of Louisville’s rehiring of Bobby Petrino as their head football coach.  To this college football fan, Louisville’s definition of success is clear and unambiguous.  Is your financial advisor’s definition of success just as clear?

Photograph of Coach Bobby Petrino at the 2010 ...Just win baby

The short story is that the University of Louisville rehired Bobby Petrino as their football coach to replace Charlie Strong who had left for Texas.  Petrino was highly successful at Louisville from 2003-2006 before leaving for greener pastures.  Petrino’s alleged lack of character and morals typify everything that critics point to as being wrong with big-time college sports, however I’m pretty confident that none of that was a factor in the decision to hire him.  He is a talented coach and a proven winner and Louisville needs both qualities as they move to the ACC next season to compete with the likes of Florida State, Clemson, Miami, and Virginia Tech.

As the late Al Davis, founder and owner of the Oakland Raiders, said, “Just win baby.”

For those of you who read this blog on a regular basis you know that I am a fan of openness and transparency in the financial services industry so I have no issue with Louisville’s motives for this move, though I did razz my friend, NAPFA study group mate, and UL grad Greg Curry immediately (Greg is an outstanding Louisville-based fee-only advisor).

Just as Petrino was clearly brought in to win, many financial advisors sadly seem to be in this business with the primary motivation of winning, which I am defining here as earning a whole lot of money for themselves.  Why else would sales training be such a big part of the orientation programs at many firms?  Why else would there be sales contests with nice prizes such as trips to luxurious destinations for selling certain financial products?  Don’t get me wrong I’m not against earning a good living, just not at the expense of the people whose interests are supposed to come first and foremost.

For more on Petrino and Louisville check out this piece on the CNN/Sports Illustrated site by Andy Staples and this one by Michael Rosenberg. 

Is your advisor a wolf? 

In keeping with our tradition for fine family entertainment on Christmas day, this year’s family movie outing was The Wolf of Wall Street.  Watching the film made me wonder what I’ve been missing by being a fee-only advisor all these years (just kidding).

Clearly I am not insinuating that if your financial advisor earns all or a substantial portion of their income from commissions and product sales that they also participate in dwarf tossing, consumption of mass quantities of drugs, lewd sex acts, or other forms of debauchery.  I do wonder if their measure of success is the same as that of the characters portrayed in the film, namely money.  Specifically money that inures to them from selling financial products to you.

While many advisors who sell financial products are competent professionals motivated by their client’s best interests, you always have to wonder if a particular investment, annuity, or insurance product is being recommended because it is the best product for you or rather because it is the most lucrative for the advisor.

As long as some financial services firms run sales contests for advisors and incent sales production this conflict will always be there.

My definition of success 

My definition of success is simple.  I am only successful as a financial advisor if my clients achieve success. 

I would venture to say that my closest circle of financial advisor colleagues, my NAPFA study group, would wholeheartedly agree with this definition.  My guess is that the bulk of my fellow fee-only NAPFA colleagues would as well.

If you are looking for a financial advisor to start off the New Year right check out this guide from NAPFA. 

Make sure that you clearly articulate your goals and your definition of financial success to your current financial advisor or to any advisor that you are considering working with.  Clear and open communication is a vital part of a successful client-financial advisor relationship.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

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Choosing A Financial Advisor? – Ask These 6 Questions

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Deciding to hire a financial advisor can be a tough decision for many investors. Once you’ve made this decision, how do you go about finding the right advisor for you?  Here are six questions to ask when choosing a financial advisor: 

Madoff, Looking the Other Way

How do you get paid?

Fee-only advisors receive no compensation from the sale of investment or insurance products. When selecting a financial advisor, ask yourself whether you feel that a financial advisor who receives a significant portion of their compensation from the sale of financial products can really be counted on to recommend solutions that are in your best interest?

Are you the next Madoff?

One of the tactics used by Bernard Madoff to perpetrate his fraud was to send clients his own statements instead of statements generated by a third-party custodian like Charles Schwab, Fidelity, TD Ameritrade, and others.  A third-party custodian provides periodic (monthly or at least quarterly) statements independent of any reports provided by the advisor.  You should never give your investment dollars directly to a financial advisor, they should always be sent directly to the custodian.

This is critical if the advisor will be providing on-going investment advice.   In fact it is a deal-killer if this is not the arrangement.  If the advisor says something like “… we send out our own statements to our clients…”  end the conversation and find another advisor.

Are we the exception or the norm for you?

Ask your financial advisor about their client base. If you are a corporate employee looking for help planning for the exercise of your stock options, you should ask the adviser about their knowledge and experience in dealing with clients like you.  A financial advisor who deals primarily with teachers or public sector employees might not be the right choice for you. Likewise if the advisor’s typical client has a minimum of $1 million to invest and your portfolio is more modest, this advisor might not be a good fit for you.

What can you do for me?

If the advisor’s primary service is focused in an area like constructing bond portfolios for their clients and you are looking for a financial planner to construct a comprehensive financial plan for you, this advisor may not be a good match.  Make sure to find someone who offers the types of services and advice that you are seeking.

What are your conflicts of interest?

Financial advisors who are registered representatives will often be incentivized to sell insurance or annuity products promoted by their broker dealer or employer.  Ask how they select the financial and investment products they recommend to clients. Ask them directly about ALL forms of compensation they will receive from working with you, and if they will disclose this information on an ongoing basis. Ask them if there are any restrictions regarding the products they can recommend.

Do you act in a fiduciary capacity towards your clients?

In laymen’s terms, you are asking if the adviser is obligated to put your interests first. The brokerage industry uses the suitability standard, but in my opinion this falls far short of a true Fiduciary Standard. This argument continues in the financial services industry as the regulators work through this issue.

The questions listed above are just a few of the many questions you should ask when choosing a new financial advisor or to ask of an advisor with whom you currently have a relationship.

As an investor, it is ultimately up to you to select the right financial advisor. Do your homework and due diligence. The National Association of Personal Financial Advisers (NAPFA), the largest professional organization of fee-only advisors, has a guide to selecting an advisor called “Pursuit of a Financial Adviser Field Guide,” which is an excellent resource for those seeking the help of a professional financial advisor.

A note to my readers.  I have applied to become a member of the Yakezie Blogging Network.  I am embarking on the required six month challenge designed to determine if my blog meets the high standards set by this group.  Yakezie is a network of personal finance and lifestyle related blogs.  This challenge is open for all bloggers irrespective of being a new writer or a veteran who wants to increase their blog presence. Besides trying to achieve certain search ranking goals, I view this as a chance to network with the other bloggers in the group to improve the ways I deliver information to you the reader about financial planning, investments, and retirement plans.  Your feedback is crucial to me so please feel free to contact me with any comments, suggestions, or criticisms you may have about anything you see on the site, or about topics that you would like to see covered.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.    

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Stock Market Highs and Your Retirement

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Difference Between Stocks and Bonds

Over the past 13 years we’ve seen two market peaks followed by pronounced market drops.   The S&P 500 peaked at 1,527 on May 24, 2000 and then dropped 49% until it bottomed out at 777 on October 9, 2002.  The Dot Com Bubble and the tragedy of September 11 all contributed.  The S&P 500 rose to a high of 1,565 on October 9, 2007 only to fall 57% to a low of 677 on March 9, 2009 in the wake of the Financial Crisis.  Since then the market has rallied with the S&P closing at a record 1632 on May 9, 2013.  As someone saving for retirement what should you do at this point?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.”  The recent PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced these drops well in excess of the markets were victims of their own over allocation to stocks.  This might have been their doing or the result of poor financial advice.

Regardless we are in the midst of a four year rally off of the 2009 lows and the past year’s gains have been especially torrid .  This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place or if the last one you’ve done is old and outdated this is a great time to have one done.  Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is a great time to review it and see where you are relative to your goals.  Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point?  If so maybe this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

John Hancock has been running a commercial that shows nicely dressed middle-aged couples in their financial advisor’s office saying that maybe this is the time to get back into the market.  As an advisor these commercials are nauseating to me.

It is said that fear and greed are the two main drivers of the stock market.  The talking suits on shows like CNBC seem to feel that the market has a ways to run and might even be undervalued.  Maybe they’re right.  However don’t get carried away and let greed guide your decisions.

Manage your portfolio with an eye towards downside risk.  This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash.  What is does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your long-term goals and risk tolerance.

Please feel free to contact me with your financial planning and investing questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

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Friday Finance Links April 19, 2013 – What a Week Edition

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Chicago Floods-31

I think that we would all be hard-pressed to recall a week like this one with the tragedies in Boston and in Texas.  In addition there was a large amount of rain locally here in the Chicago area with wide-spread flooding in parts of the city and the suburbs.  Best wishes to all who were impacted.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Jon explains The Two Sides Of Investment Risk at Novel Investor.

Ken discusses Asset Correlation – Definition, Examples, Problems, and Why It Is Important at AAAMP Blog.

Leah explains How to navigate college financial aid offers at Living on the Cheap.

Robert discusses The Best Self Employed Retirement Plans at The College Investor.

Posts from Fellow NAPFA Members 

Sterling tells us How Financial Advisers Get Paid at Jim Blankenship’s blog Getting Your Financial Ducks In a Row.

Alan Moore suggests that we  Just Ask “Do You Have A License?” at Figuide.com.   

Other financial articles from around the web 

Steve Parrish tells employers Why You Should Care About Your Employees’ Retirement Plans at forbes.com.

Elizabeth O’ Brien tells us Why your boss wants you to retire on time at marketwatch.com.

Robert Powell says that Singles swing into retirement with little savings at marketwatch.com.

I took a week off from my contributions to the US News Smarter Investor Blog, but you can check out my prior posts at my author page. 

Here’s wishing everyone a great weekend.  

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5 Steps to a Lousy Retirement

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English: Emotions Q-sort

I’ve written a number of posts on this site about saving for retirement.  This time let’s turn it around and discuss 5 steps to a lousy retirement.

Invest in stocks at the top of the market 

This tip is timely as major stock market indexes are at all-time highs.  In fact one company, John Hancock recently ran a TV ad encouraging investors who had been on the sidelines during the current market rally to get in now.  The commercial depicted upscale couples sitting in their financial advisor’s office with a sense of optimism about the markets and feeling like this is the right time to invest.  Don’t get me wrong, I have no idea where the stock market is going from here, but four years into a major Bull Market is not the time to be thinking about just getting back into stocks.  A better approach is to have a financial plan that includes an appropriate investment allocation for your situation through the market’s ups and downs.

Invest in high cost broker sold mutual funds 

Whether proprietary mutual funds offered by your broker or registered rep’s employer or mutual funds with expensive loads, these funds are generally bad choices for most investors.  While no financial advisor works for free, unless there is some overriding reason to the contrary it is generally a good idea to avoid these mutual funds.  Rather look for a fee-only financial advisor who sells their advice and expertise and isn’t dependent upon commissions and trailers from the sale of financial products.  This type of structure lends itself to utilizing low cost index funds and actively managed funds across the whole universe of fund families.

Make financial decisions based upon your emotions 

It is said that fear and greed are the two most potent forces that drive the stock market.  Many financial products, especially many annuities (including Equity Index Annuities) are sold by fear mongering sales types with retirees and Baby Boomers as their prime targets.  An annuity might be the right answer for you, but don’t write a check until you review all the details of this or any financial product.  Don’t buy into the doom and gloom scenarios pitched by many financial sales types, especially right after a market decline such as the one we experienced in 2008-09.  Make financial decisions with a clear head, not out of fear, greed, or any other emotion.

Don’t take full advantage of your workplace retirement plan 

Why contribute to a 401(k) plan, 403(b), 457, or similar retirement plan offered by your employer?  It’s much more fun to spend the money on things you want now such as clothes, a new car, that vacation you deserve, etc.  Besides, didn’t 401(k) plans let investors down in 2008-09?  The reality is that your employer sponsored retirement plan is one of the best retirement savings vehicles going.  Even a lousy 401(k) plan is generally worth funding at least enough to receive your employer’s full match if one is offered.  Over the course of my years as a financial planner I can tell you that I have many clients who have accumulated (or are in the process of accumulating) significant sums in their retirement plan accounts that will play a key role in their retirement.

Don’t plan for retirement, just wing it 

Why spend money on a financial plan?  Retirement will just happen and I’ll be ready.  Things have always worked out for me.  The reality is that retirement is a financial journey, both accumulating enough for a comfortable retirement and managing your money during retirement.  While you might win the lottery or inherit a princely sum from some long lost relative, the reality is that a successful retirement takes planning.

As the legendary golfer Gary Player once said, “… the more I practice, the luckier I get…”  The same applies to preparing financially for retirement.  Planning, preparation, saving early and regularly, and your good common sense are all key elements in engineering a successful and comfortable retirement.

Please feel free to contact me with your retirement planning questions.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.    

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

This article was selected for the 404th edition of the Carnival of Personal Finance hosted by financial coach Adam Hagerman.

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Friday Finance Links March 22, 2013 – Go Marquette Edition

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March Madness is underway and my grad school alma matter Marquette pulled out an exciting opening round win over a tough number 14 seed, Davidson.  Butler is up next tomorrow, should be a great game.  I grew up rooting for Marquette as a kid in Milwaukee during the Al McGuire era.  They won it all in his last game as a coach in 1977 and were National runners-up in 1974.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs 

Andrea explains Mutual Fund Turnover Ratio: What You Need to Know to Pick a Fund at Take a Smart Step.

Angie tells us about Herd Mentality: You Are Being Set Up to Fail in a guest post at Value Stock Guide.

Robert shows us How to Understand the Stock Market at The Collge Investor.

Jon explains What Is Preferred Stock? at Novel Investor.

Thanks to John at Frugal Rules for featuring my guest post Financial Advisor Compensation – Why it Matters.

If you are an aspiring blogger or an experienced blogger looking for a few tips check out Jeremy’s new page Guide to Starting a Blog at his blog Modest Money.

Posts from Fellow NAPFA Members 

Tom Orecchio shares a Financial Planning Overview at Figuide.com.

Jim Blankenship discusses the Adoption Credit For Tax Year 2012 And Beyond at Figuide.com.

Other financial articles from around the web

Jeanette Pavini tells us how Anti-aging scams can be costly and dangerous at marketwatch.com.

Tom Sightings lays out 7 Steps to Independence in Retirement at usnews.com.

Dan Solin explains why FINRA’s Win is Your Loss at usnews.com.

I took a week off from contributing to US News Smarter Investor Blog but you can check out all of my prior posts at my author page.

Here’s wishing everyone a great weekend.

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Greed is Good – What if Gordon Gekko was a Financial Advisor?

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A recent LinkedIn group discussion about the use of C Share mutual funds caused me to comment that the advisor in question must have been Gordon Gekko.  This made me wonder what the fictional Mr. Gekko would be like if he came to life as a financial advisor.

For those of you who may not know, Gordon Gekko is the Investment Banker from the film Wall Street played by Michael Douglas who uttered the immortal phase, “Greed, for lack of a better word, is good” at the shareholder’s meeting of a company that he was attempting to take over.

Compensation Structure 

I’m pretty certain that Gekko would not embrace the fee-only compensation structure with its transparency and lack of revenue from the sale of financial products.  Rather I suspect he would gravitate to either the commission or fee-based structures.  Certainly his slicked-back hair and big cuff-links would fit the stereo type of the financial advisor as a producer model.   

Load mutual funds 

I’m guessing that Gekko would love the high cost B Share mutual funds and would be doing everything he could to keep clients in this share class as long as he could.  Overall he would like favor share classes with some sort of sales load in order to increase his income.  No low cost index fund or ETF recommendations from Mr. Gekko.

High cost Variable Annuities 

Gekko would likely suggest that you buy one of the many high cost variable annuities that make him a ton of money and may have questionable results for you his client.  There is nothing wrong with variable annuities; in fact they can be a viable solution for some clients.  What is objectionable is the way these products are often sold and the high cost versions of these products that are generally pushed by fee-based and commissioned reps.  You will never hear them touting low cost, no surrender charge versions of this product that are offered by Vanguard and others.

Life insurance is a goldmine 

Life insurance is a key component in the financial plans of many folks and rightly so.  Life insurance can provide an easy way for a family to build an estate quickly and can help protect their lifestyle should the primary breadwinner die before accumulating a sufficient level of wealth.  Inexpensive term life insurance generally provides the best approach to life insurance.

I doubt that Mr. Gekko would see things this way.  In order for him to realize a big payday from selling you a policy,  some sort of cash value policy such as whole life, universal life, variable life, or some variation would likely fit the bill. He might try to sell you on the value of the policy as an investment or as a retirement savings vehicle.  While there are instances where a cash value policy makes sense, be very skeptical if your agent or financial advisor really pushes one of these products.  Make them show you a realistic illustration.  I’ve actually seen policy illustrations using a 12% annual rate of return.   12%, really?  Oh yes, greed is good I forgot.

Equity Index Annuities 

Whenever I’ve written a post in any way suggesting Equity Index Annuities are not the best alternative for the Baby Boomers and retirees, I receive a fair amount of negative comments that range from disagreement to questioning my knowledge of finance.  This leads me to believe that my comments are right on the money.

Mr. Gekko would especially love the fear-mongering approach that is often used to sell EIAs after a market downturn.  Given the popularity of these products among the financial sales crowd I have to assume the payouts are generous, making this product a natural fit for Mr. Gekko.

Gekko’s approach to the 401(k) world 

If Gekko offered 401(k) plans as part of his practice he’d likely love the high cost group annuity plans offered by many insurance companies.  The worst event from his point of view is the recent 401(k) disclosures mandated by the government.   I wonder if Gekko would even be able to spell the word Fiduciary.

Greed is good as long as greed it is pursued in an ethical fashion and on behalf of an advisor’s clients.  I’m also not saying that every advisor who is paid all or in part via commissions from the sale of financial products is a bad advisor.  Clearly, however, the fee-only model starts with fewer potential conflicts of interest for the advisor.

Gordon Gekko is one of the best movie characters of all-time in my opinion.  Let’s be glad that he is just a fictional character and not a practicing financial advisor.

Please feel free to contact me with your investing and financial planning questions.  Full disclosure I am a fee-only advisor and a member of NAPFA the largest professional organization of fee-only advisors in the U.S.

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Choosing the Right Financial Advisor – Key Considerations

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Happy young couple in discussion with a financ...

With the holidays behind us and taxes on the horizon, many folks are looking to find a qualified financial advisor who is right for their situation.  Maybe getting your finances in order was a New Year’s Resolution.  Perhaps you’ve realized that retirement is getting closer.  Whether you will be looking to work with a financial advisor for the first time or feel that your current advisor isn’t meeting your needs, here are some issues for you to consider in your process of choosing the right financial advisor for your situation.

Understand yourself first 

The first question that I ask a perspective client is:  What prompted you to seek the services of someone like me?  While you may not be totally sure of all of the areas in which you need help, thinking about what you want from a relationship with a financial advisor up-front will help you to find the right advisor for your unique situation.

Some common answers to my initial question over the years:

  • Retirement is looming and I want to make sure that I have everything in order.
  • We inherited some money and want to know how to best invest it.
  • Our investments are all over the place and we have no plan.
  • We want an independent review of our situation and a financial plan to help us move forward. 

How would you and the advisor interact? 

What is the advisor’s communication style?  How often would you meet?  Will the advisor be proactive about bringing relevant ideas and suggestions to your attention?

There is no right answer here, but you should be sure to ask about this so that should you enter into a relationship with this advisor your expectations are realistic.

Does the advisor work with clients like you? 

An advisor who focuses on clients who are retired might not be the right advisor for you if you are in your 30s with small children for example.  Does the advisor have a minimum level of net worth or investible assets?  Where does your situation fall in comparison to these minimums?

If, for example, you are a corporate employee seeking advice on how to best manage the stock options granted to you by your employer does the advisor have experience helping clients deal with their stock options?

Advisor or product seller? 

Does the prospect advisor focus on selling financial products?  Do they offer financial planning services?  Are they compensated on a fee-only basis or do they depend upon commissions from the sale of financial products for all or part of their compensation?

It is important that you fully understand how the advisor is compensated so that you understand if there are potential conflicts of interest that might be driving their advice.

What are this advisor’s qualifications? 

There are an increasing number of designations in the financial advice world.  The two that hold the most weight as far as financial planning goes are the CFP® designation and PFS designation.  The latter is the personal finance designation awarded to CPAs who qualify.

Make sure to ask about the designations held by a prospective advisor and also about their education and experience.  While none of these ensure that the advisor is right for you the answers to these questions will give you a sense of their commitment to gaining the knowledge needed to address your financial planning and advice needs.

Do some checking 

Check on the prospective advisor’s record.   FINRA’s Broker Check database of federally and state registered investment advisers allows you to search by name, and lets you check up on firms as well. Several private services, such as BrightScope, have services to check an adviser’s regulatory record. If the adviser is a Certified Financial Planner you can also look up their information at the CFP Board’s website. None of this is a guarantee, but it is a great starting point.

The right financial advisor can help you build the wealth you need to reach your various financial goals.  Take the time and put in the effort to select the right advisor for your unique needs.

Please contact me at 847-506-9827 for a free 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Check out our Resources page for links to a variety of tools and services that might be beneficial to you.

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3 Financial Products to Consider Avoiding

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Red and white sign to avoid construction zone

It’s a New Year and many of us are looking to start the New Year out on the right foot financially.  Couple this with the upcoming tax season and this is prime time for the financial product sales types.   Before buying ANY financial product make sure that this product is right for you in terms of your overall financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job and not the tool that the financial rep wants to sell to you.

Here are three products that you should consider avoiding:

Equity-Indexed Annuities 

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500.  Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss.  As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today.  Two problems here are generally high expenses and surrender charges that keep you locked in the product for years.  The reality based upon my experience is that while most investors suffered major losses during 2008-09, my clients (and the clients of other financial advisors with whom I network) had generally made up those losses in a relatively short period of time and now find themselves decently ahead of where they were.  I’m not sure that an expense laden Equity-Index Annuity would have made them any better off.  If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including index participation, expenses, surrender charges, and the health of the underlying insurance company.

Proprietary Mutual Funds

 It is not uncommon for registered reps and brokers, who are compensated all or in part by commissions or trailing fees from the mutual funds they sell, to suggest mutual funds from the family run by their employer.  While some of these funds are perfectly fine, all too often in my experience they are not.  Whether from high fees and/or low performance these are often investments to be avoided.  A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleges the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and these funds then paid fees back to Ameriprise and some of its subsidiaries.  JP Morgan settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

While this is most common in the world of fee-based and commissioned reps, if you are working with the advisory units of a fund company such as Fidelity or Vanguard you should also question recommendations that are exclusively or mainly into their own proprietary funds.  Though I like and use funds from both families you should still question these types of recommendations.  Moreover anyone who pushes you to invest mainly with mutual funds offered by their employer should be questioned vigorously.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes.  In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers.  A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more.  B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio.  This can amount to an addition 0.75% or more added to the fund’s annual expenses.  In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period.  B shares have been largely phased out by many of the major fund providers.  C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

Look I certainly don’t provide financial advice for free and wouldn’t expect any other professional to do so either.  Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.  My very biased opinion is that you should look for a fee-only advisor who isn’t compensated based upon the products they sell to you.  Rather fee-only advisors generally act as fiduciaries and are paid for their professional advice and expertise without the conflicts of interest inherent in selling financial products.

The above comments are general and reflect my opinions.  However no financial product is right or wrong in every case.  Before making any financial or investment decision it is best to review your specific situation.  Consult your financial advisor if you work with one.

Please feel free to contact me with questions about any financial products you may be considering or to address your investment and financial planning advice needs. 

Do-it-yourselfers check out morningstar.com to analyze your investments and to get a free trial for their premium services. Check out Personal Capital for a variety of online services including expense tracking, financial planning capabilities, and investment monitoring.

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4 Retirement Savings Steps to Take Now

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Seal of the United States Federal Retirement T...As we approach the end of the year, there are any number of things to occupy our thoughts.  Holiday shopping and celebrations are at the top of many lists.  Fears of the impending Fiscal Cliff may or may not grip your thoughts financially (CNBC thinks that this is so critical that they have taken to posting a Fiscal Cliff countdown clock, journalism or entertainment?).

For those of you saving for retirement here are 4 timely and timeless tips.

Increase your 401(k) contribution level.

Is it your intention to max out your 401(k) for the year (current limits are $17,000 if you are under 50 and $22,500 if you are 50 or over at any time in 2012; these limits increase to $17,500 and $23,000 in 2013)? Check your latest pay stub to see of you are on track, and adjust your withholding if you are running behind. While there is not much time left in 2012, you might be able to have additional amounts withheld from your last couple of 2012 paychecks. Even if your contributions are more modest this is a good time to take stock and see if you might be able to up your salary deferral percentage a bit. Over time even small increases in the amount saved can make a big difference in your ultimate retirement nest egg.  I urge you to take a look at your situation heading into 2013 and to consider increasing your deferrals to the extent that you can.

Start or fund a retirement plan if you are self-employed.

If you don’t have a retirement plan in place for yourself, make 2012 the year to start. Plans to consider are the SEP-IRA, the Solo 401(k), the SIMPLE, or if your business cash flow permits a Cash Balance Pension Plan. Whatever your situation, start a retirement plan for yourself. You work too hard not to reap the benefits. If you have a plan in place, make sure you fund it to the maximum amount possible.

Review your retirement plan allocation and your investment choices.  

Is your 401(k), 403(b), TSP,  or similar retirement plan account allocated in a fashion that is consistent with your retirement goals, your timeframe, and your risk tolerance?  Does your allocation fit with your overall financial plan and with outside investments (IRA, spouse’s retirement plan, taxable investments, etc.)?  This time of year is open enrollment season for the employee benefit plans of many companies.  Some companies also use this time to roll out new investment choices for their retirement plans.  While you are focused on your benefits, take the time to review your 401(k) and make adjustments.

Get a financial plan in place.

Planning for retirement is like any journey.  If you don’t know where you are headed you likely won’t know when you’ve arrived?  How much should you be saving?  How should your money be invested?  These are among the questions that a financial plan will address.  Have you been putting off hiring a financial planner to review your situation?  Have you been meaning to do this yourself but haven’t found the time?  My suggestion, lose the excuses and get this done.  Further if you do hire a professional make sure that this person is a fee-only (not fee-based) advisor who does not have the inherent conflicts that come with need to sell you financial products.

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

Photo credit:  Wikipedia

 

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