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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How much is Financial Advice Worth?

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A fellow NAPFA advisor  and I were pondering this question this morning.

Retirement

Our meeting was centered upon marketing our 401(k) participant advice services to employers, individuals, and related service providers.  In our minds people should be beating our doors down given the general state of retirement readiness in this country.

The interesting obstacle that we’ve encountered is a resistance among many plan participants to pay for advice, with fees starting as low as $400 per year.  Both of us run our own separate practices that focus on moderate to high net individuals, and in my case also to retirement plan sponsors, foundations, and endowments.  These folks are used to paying fees and the level of the fees we ask are usually not a surprise to these clients.

We came up with two great questions in terms of the 401(k) participant advice market.  How much is financial advice worth?  Is your financial future worth $400?

I recently needed a new water heater, and we paid upwards of $1,500 for the water heater and the labor to install it.  Given that this is not an area of expertise for me, and the fact that working with our gas connection made me very uncomfortable this seemed like money well-spent.

Depending upon their specialty and your location, an attorney might charge $250 -$500 per hour.  If you find yourself in a situation requiring their legal expertise, most of us wouldn’t bat an eye at these fees.

People routinely spend $1,000; $2,000; or more on a vacation.  This is money well-spent; I know that our adult children still talk about some of the family vacations we took when they were younger.

So how much is competent, unbiased financial advice worth?  Part of the answer lies in the benefit that you expect to receive from spending the money.  I ask the question rhetorically because we really want input.  Please leave a comment with your thoughts; we’d really love to know what you think.

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

 

Photo credit: 401(K) 2012

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Client Interests Shouldn’t Come First?

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The financial services lobby (primarily major brokerage firms and insurance companies) have vigorously fought a proposed Fiduciary Standard that would cover all who provide financial advice to consumers.

They have made arguments including one that many investors with smaller accounts might find themselves without access to advice as a result of an inability to charge commissions on these smaller accounts (an argument that is not necessarily true).

The bottom line here is that a financial advisor who acts as a Fiduciary is required to place the best interests of their clients first. Maybe I’m making this all too simple, but to me the opponents of a Fiduciary Standard for all advisors are saying that the interests of their clients shouldn’t (or don’t) come first.

If the client’s interests don’t come first, whose interests do come first? I’ll leave that as a rhetorical question for you the reader to answer.

I first wrote about this topic in 2009 in my post Why Should I Care if My Financial Advisor is a Fiduciary? Sadly this debate continues between the regulators, the financial services lobby, and groups who support a Fiduciary Standard for all advisors.

Some resources you can use in choosing the right financial advisor for your needs:

NAPFA’s Pursuit of a Financial Advisor Field Guide; an excellent resource to help guide you through the process of finding the right financial advisor for you.

6 Questions to Ask Your Financial Adviser, an article that I recently wrote for the US News Smarter Investor Blog.

As always feel free to contact me  if I can be of help.

Full disclosure, I am a Fee-Only advisor and a member of NAPFA, the largest professional organization of fee-only advisors in the country. We sign a Fiduciary Oath towards our clients when we join and reaffirm that oath annually upon the renewal of our membership.

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How is my Financial Advisor Compensated? – Fee-Only vs. Fee-Based

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Fee-Only is pretty straightforward. The client pays the advisor for his/her advice. The fees can take one or more of several forms:

• A flat fee for the services rendered.
• A percentage of the client’s investment assets or in some cases another metric such as net worth.
• Hourly

Additionally the fee can be for one-time or ongoing services. In no case will a Fee-Only advisor receive any compensation from sales commissions, trailing commissions, or any other form of compensation derived from financial product providers.

Fee-Based compensation is bit fuzzier and quite often very misunderstood by the public. A typical Fee-Based arrangement might work like this:

The advisor will charge a set fee for the initial financial plan. This is the “fee” part of the arrangement. However, in many cases, if the client wants to implement the advisor’s recommendations for investments, insurance, and other financial products this will be done via the sale of commissioned products.

Where Fee-Based can become even more confusing is in the case of a broker or registered rep using a wrap program as a means to implement investment recommendations. A wrap involves investment management services for a percentage of the assets under advisement, a structure similar to that used by many Fee-Only advisors.

What differs in most cases is that the Fee-Based advisor and their broker-dealer will also receive compensation from the underlying investment vehicles (mutual funds, etc.) in the form of 12b-1 fees or a similar form of trailing fee, or in the form of commissions on stock trades executed exclusively through the advisor’s brokerage firm. Additionally it has been my experience that often the assets under management fee for these wrap programs is higher that charged by most Fee-Only advisors for similar asset levels.

I am a Fee-Only advisor and am admittedly biased. My point in writing this post was not to disparage those advisors who are not Fee-Only, although I do remain convinced that this is the most client-friendly compensation structure. Rather, I want to reiterate that clients and those looking for a financial advisor need to understand what they are paying for, how much they will be paying, and how they will be paying for financial advice and any financial or investment products they will be purchasing.

For more please see my prior posts:

How is my Financial Compensated? 

Why Should I Care if My Financial Advisor is a Fiduciary? 

The idea for this post originally came from a recent post and some of the subsequent comments on the Oblivious Investor Blog:

How Much Does a Financial Advisor Cost? 

Wondering where you can find the names of Fee-Only financial advisors in your area? Check out NAPFA’s website and click on the Find An Advisor button on the left side of the site.

Please feel free to contact me with your questions. 

Please check out our Resources page for more tools and services that you might find useful.

Photo credit:  Wikipedia

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Why Are You Running Your Company’s 401(k) Plan?

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Smart Money recently ran an article depicting several small companies where either the owner or a group of senior managers were in charge of the firm’s 401(k) plan and who were largely making decisions regarding the plan on their own. The article pointed out that many of these folks do not have a background in either investments or qualified plans.

The focus of the article was to point out to plan participants that in many cases their plan was being run by folks who may or may not be qualified to make decisions as to investments offered, the custodial platform, or the plan record keeper.

My take on this article is to wonder why these small/mid-sized company owners and managers would want to take on this responsibility?

First of all, these individuals would be considered plan fiduciaries,which means that they can be held personally liable under certain circumstances for doing a poor job.

Effectively managing a 401(k) plan involves taking the time to select and monitor the investments, overall plan expenses, as well as the fees and performance of all plan vendors. Today it seems that business owners and their senior managers have more on their plates than ever.

Running a 401(k) plan is about more than the investments. Total plan cost has always been a key issue and is coming more into the limelight as the spotlight shines on the issue of Fiduciary roles and obligations.

Selection and monitoring of Target Date funds is receiving much attention in the press and in Congress in light of the losses suffered in 2008 by some of the shorter maturity date funds. Defaulting to the funds offered by a bundled provider is not always the right answer, this option will likely come under more and more scrutiny over the next few years.

Even if the business owner is a knowledgeable investor in his/her own right, does this knowledge translate into the ability or the time to select and monitor all aspects of a solid retirement plan that is a great option for the majority of the company’s employees?

I’ve seen instances of plans that will take the suggestions of their bundled provider (a fund company such as Vanguard, Fidelity, or T. Rowe, or an insurance company such as Prudential) and implement those suggestions as the plan’s investment lineup. The representatives of these companies are not plan fiduciaries, but company managers running the plan are. I doubt that these folks are trying to do the plan any harm, but at the end of the day their loyalty is to their employer not the plan participants.

If your company’s plan is via an insurance company, your agent or registered rep may be providing investment advice to the plan. Again, this person is likely not a fiduciary, they receive commissions paid by the provider and their loyalties are at best divided.

In the interest of full disclosure I am a fee-only consultant to 401(k) plans providing advice to small/mid-sized plans. If this post seems self-serving I apologize, but this is a key issue for both owners/managers of these companies and their employees. In my opinion, running the company’s 401(k) plan requires a level of diligence and expertise that the “do it your selfer” business owner often does not have. Pulling out a Morningstar report on the funds once or twice per year does not, in my opinion, constitute proper diligence and monitoring of the plan.

For further reading in this area, please see these posts:

4 Signs of a Lousy 401(k) Plan

The Process of Monitoring Investment Holdings

Hellish Retirement Plans

Retirement plan sponsors, do you need an independent review of your company’s plan?  Do you need help selecting a new plan provider?  Are you looking for ongoing financial advice to help you meet your fiduciary obligations and to provide a superior retirement savings vehicle for your employees?  Please feel free to contact me to learn about our investment consulting services for retirement plan sponsors.

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) plan options and to get a free trial for their premium services.  

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Characteristics of a Good 401(k) Plan

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My last post discussed some really sub-par 401(k) plans. I’ve also been fairly vocal in discussion groups on LinkedIn about some of the issues and problems I see in many plans.

So what does a good 401(k) plan look like? Here are some of my thoughts based upon my experience as a consultant to a number of small to mid-sized plans (typically in the $3 million to $75 million range). Some of the characteristics of good, well managed plans are:

An active and engaged Investment Committee is essential. Several committees I deal with are comprised of the company chairman, president and the top financial executive. One committee is made up of the president, the senior finance and human resources executives, as well as three members of the union from the company’s manufacturing operations. What these committees have in common is an interest in the plan and a desire to offer a top-notch plan for their fellow plan participants.

An investment process governing the management of the plan. The major piece of this process is a written Investment Policy Statement (IPS). Think of the IPS as the “business plan” for the 401(k) plan. Included in a good IPS are things such as a definition of the types of investment vehicles permitted; asset classes to be considered; criteria for the selection of the investments offered; criteria for monitoring those investments; a process for the review and possible replacement of any investments that fall outside of acceptable criteria. Additionally the IPS should specify that the Investment Committee will review expenses associated with administration, custody, and related services, as well as the quality of those services.

A well-documented investment process does two things. First it is a vehicle for the plan sponsor to document that they are running the plan in a fashion consistent with their fiduciary obligations. Second, this type of process, if followed, will ensure that there are solid investments being offered and that expenses are being reviewed.

A menu of solid, well diversified investment options is offered. A provider can offer the greatest website and all of the bells and whistles available, but at the end of the day what really matters is that the participants have a diversified menu of very solid investment choices that are selected and monitored in accordance with the IPS. The investments should cover most or all of the nine Morningstar domestic style boxes as well as at least one fixed income, money market or stable value, and at least one international equity choice. Balanced options, lifestyle, or target funds that allow the participants to delegate the allocation of their assets should also be included. These choices should be scrutinized, monitored, and reviewed in the same manner as the other plan investment options. Depending upon the preferences of the Investment Committee, the company’s census demographics, and other factors, options in other assets classes might be included as well.

Overall plan expenses are monitored and controlled by the investment committee. Investment expenses are an obvious aspect of this, but the plan sponsor is responsible for all plan expenses. This also includes all expenses associated with record keeping, administration, and custody. The sponsor should know what is being charged for all services and how these total expenses compare with plans of a similar size. If there is revenue sharing involved, the plan sponsor should receive a full accounting at least annually of all revenue sharing paid to the plan provider and how that revenue sharing was spent. This is after all the participant’s money, accounting for these dollars is a fiduciary obligation of the plan sponsor.

In the future hopefully plans will offer their participants the option of having an unbiased, unconflicted Fiduciary Advisor manage their individual 401(k) accounts. This goes far beyond the education currently offered by some plans and, in my opinion, gets to the real heart of what participants need.

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