Objective information about financial planning, investments, and retirement plans

Dangerous Myths About Asset Protection

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This is post was written by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends.  I have spoken with Ike many times for advice on client asset protection issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix.  Ike generally advises physicians and high income professionals, but these asset protection tips are relevant to all of us. 

I’ve spent the last eleven years of my practice helping successful Americans at all net worth levels protect and enjoy their hard earned wealth. A good part of that involves re-educating people about their money and their risks.  Below is a summary of the most common asset protection myths and mistakes top legal and financial planners want their clients to be concerned about.

Trumbull County Courthouse, Courthouse Square ...

I can do it later 

Asset Protection it best analogized to “net worth insurance” and like insurance you have the best, most effective and legally supportable options available to you when you implement the planning before a crisis exists. Transfer of assets into plans after you have specific exposures is costly, ineffective and some cases illegal (fraudulent conveyance). The best time to act is always now and every day that passes makes your planning stronger.

I’m not rich enough to worry about asset protection  

This is a sin I see committed on a weekly basis, often by professionals like lawyers, CPAs and financial advisors. These advisors often tell clients that they are not rich enough to do any planning and that that they should have a net worth north of five or even ten million dollars to consider it. Nothing could be further from the truth, especially if you are in the “Fall” of your earning career. Of course high net worth individuals must implement this kind of planning and always have, but all you have is important to you and there are precautions that can be taken at any net worth level. When should you start?

There are many simple ways to analyze this but here is an easy one, answer these questions: 

  • If you lost what you have today, or some significant portion of it, are you at an age, earning level and financial condition that will allow you to maintain your family’s goals and expenses?
  • Do you have assets that would be difficult or impossible to replace given your age, health and economic conditions?
  • Are you financially and legally prepared for a lawsuit that is either not covered by liability insurance or which often produces verdicts above the limit you are carrying?

No one can touch me because I have a “Trust”

Not a week passes when I don’t talk to someone who says, “I’ve got this covered, I think. I have my home, cars, and investments all titled in my Trust.” A little more probing on my part reveals what I expected, that the layperson I am speaking to feels that a transfer of these assets to a vehicle like an estate planning trust, commonly a Revocable Living Trust, is effective protection; it’s not. The first word in the trust is “revocable” and in most cases a judge will simply order you to revoke the trust and tender the assets for a judgment. I’m all in favor of estate planning, the huge new looming estate tax exposure is one of the issues on my client exposure checklist we address every day, but  that is death planning. What has been done about your life planning and the exposures you face every day practicing your profession, driving a car, having children (some driving your car), or having employees…?

I lease all my vehicles through my business and get an awesome tax deduction in addition to asset protection 

Similarly, we often see dangerous articles of personal property like your personal vehicles moved into this structure or others like an LLC or S-Corp that is your primary business, or equally dangerous, into an entity like an FLP that is holding safe and attractive assets like cash, stocks, bonds and other liquid assets. Think about it, if you lease or own your vehicle through your business, you have linked the most dangerous thing you likely do on a daily basis, drive a car, and linked it to either the source of your wealth, your business or in the case of your FLP, the place you keep your wealth. 

I don’t own anything – I gave it all to my wife and kids 

Transferring all of your assets to your spouse and/or children, especially after something has happened, will not protect your assets from a lawsuit. Even if it did protect you from your lawsuits, transferring your assets to your spouse and/or children opens up another Pandora’s Box. Keeping in mind that there are thousands of lawsuits filed daily due to employment grievances, “slip and fall” and auto accidents, consider this scenario:

Let’s suppose that you transfer all of your assets to your 18-year old son who causes an auto accident. Several other cars are involved in the accident and several injuries are incurred. Chances are high that the other parties will come looking for the driver with the deepest pockets. If your son “owns” your house and business, a sympathetic jury will undoubtedly take the possession away from your son in order to teach him a lesson for his reckless driving. The same holds true for spouses, parents and even friends. Also, gifting is limited to about $14K annually, per spouse, per donee. Gifts over that amount must be documented with a gift tax return. Failing to do so will result in you having to answer the question, “Are you lying now re: the date and validity of this transfer or did you cheat the IRS?” A bad place to be in a time of need.

I’m insured and have an umbrella

This is a reasonable and common question we get from clients and advisors alike. In the most egregious cases of arm-chair quarterback misinformation, we actually see uninformed advisors telling their clients that the only Asset Protection they need is a good umbrella policy – THIS IS FLAT OUT WRONG for the kind of successful people we protect. Why? Because they are successful, visible and typically have assets above and beyond just the insurance policy itself, they are good targets from a net-worth perspective.

Our position on Liability Insurance (as distinct from Life Insurance) is pretty simple: Buy as much liability insurance as you can afford, assume it won’t be adequate and have a plan B. Asset protection planning is about layers, redundancy and backstops.

What about my “umbrella” policy? – It is a great idea to have an umbrella policy, in fact, I insist on it for my clients as one of several layers.  You and your liability carrier have different ideas about what umbrella means. To you it means everything, to your carrier it means specific events in the base policy, covered to specific increased limits, and governed by a specific set of exclusions detailed in the fine print of your policy. Clearly two very different definitions. The lesson here is that there is no real way to insure yourself against a universe of possible exposures and have every single one covered to an unlimited dollar amount, nor is this reasonable to expect of your liability coverage.

Some real examples of the “impossible” that actually happened and resulted in large claims: 

  • Parents away for the weekend return to find that a teenager died at their home during a party their child had from the drugs he brought with him results in multi-million dollar wrongful death lawsuit;
  • Chiropractor adjusts a patient’s hip and the woman dies on table from cardiac arrest-he is sued for wrongful death;
  • Long time, most trusted employee of medical practice molests a minor female patient during treatment;
  • Employees of moving company get drunk and severely beat another employee and lock him in company truck in company yard over weekend;
  • LLC for real estate development is pierced and a passive member is held jointly and severally liable for the actions of the other members;
  • Dentist works on elderly patient who goes home and dies of unrelated heart attack hours later, dentist sued for wrongful death. 

SOLUTION – So how do we help make sure that the coverage is enough? Pretty simple – we buy all the insurance we can reasonably afford, make sure we have the appropriate riders and umbrellas in place then we present a hard, uncollectible target beyond the limits of the policy. Most, if not all, lawsuits are motivated by the potential financial gain to the plaintiff and their attorney. In most cases, plaintiffs and their attorneys don’t chase people beyond the limits of the policy if there is nothing else to take or if there is nothing that they can get their hands on with any reasonable certainty.

This article just scratches the surface of what you need to consider when evaluating your exposures, Asset Protection planning and the countless options available. I encourage you to act today, seek experienced counsel, and remember that information in forums like this is not specific to you, is written in the broadest terms and is never a substitute for consulting with an experienced professional.

Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com.

As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation. 

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

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Financial Advice and Mini Bottles of Liquor

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Regular readers here know that the inspiration for some of my blog posts comes from non-financial sources such as youth soccer fields and the Rolling Stones.  In that spirit the idea for this post popped into my head while waiting in line to pay for an item at a local gas station.

Financial Advice and Small Bottles of Liquor

I noticed the clerk behind the counter restocking the very prominent display case with mini bottles of liquor of the type you would buy on an airplane.  When I asked if they sell a lot of these she indicated that I would be surprised and I was.  This is the last place that I would think of buying mini bottles of liquor.  My hope is that the contents are not being consumed en route from the gas station.

I liken this to some of the places that people seek financial advice.  Are you getting financial advice from someone best positioned to advise you or simply from where it is convenient to obtain it?  Here are a few thoughts on some of the alternative sources available to you when seeking financial advice.

Insurance companies and agents

We have had our auto, homeowner’s, and person umbrella policies with an agent affiliated with a major insurance company for years.  Our agent is great and has provided outstanding service.  His company made a big push into providing personal financial planning largely to tap into their vast customer base to try to sell various financial products to these customers.  When I asked my agent if he was now going to become a financial planner he just kind of grumbled as he wanted no part of this.

My experience is that insurance companies are looking to sell annuities and other insurance-based products as their answer to your financial and retirement planning needs.  Many of these companies also offer their own proprietary families of mutual funds and other investment vehicles.  As with anything you need to understand the motivations and capabilities of the person trying to sell these products to you.  Is this agent qualified to provide you with unbiased financial advice or do all questions lead to a solution that involves the sale of a variable annuity or a related product?

Banks offering financial advice

Many banks offer investment and financial advice across a number of formats.  It’s not uncommon to have a registered rep at the branch selling various financial products.  The bank may even have their own line of mutual funds and their own brokerage operation.

Other banks have in-house or affiliated investment advisory operations which offer investment and perhaps wealth management services for a fee as opposed to the commission-based services mentioned above.

Again banks view this as a way to expand their service offerings and broaden their revenue streams by tapping into their depositor base.  As with any financial services provider you need to understand what your bank offers, how they offer it, any potential conflicts of interest, and most of all if this type of arrangement is right for you. 

CPAs offering financial advice

CPAs have rightly earned a reputation as a trusted advisor, especially for business owners.  The good ones offer a range of tax and financial advice that is invaluable.  Many CPAs have ventured into the business of offering investment and financial advice as well.  They realize that this is an excellent revenue stream, often a better one than they can generate via their core business.

As with other providers of financial advice you want to understand that if your CPA is qualified to provide financial planning and investment advice as this is a different knowledge base than his or her normal world.  A few other considerations:

  • Does the CPA have specific knowledge or training here?  A designation such as the CFP® or the PFS (the CPA equivalent) can be good evidence of training and commitment to this area.
  • What happens during tax season?  Are they available to answer your questions and monitor your situation?
  • Is the advice offered as an RIA (Registered Investment Advisor) or via a Broker-Dealer type arrangement?  In the latter case the CPA is likely engaging in advice via the sale of commissioned financial and insurance products.   

Financial Planners 

The term financial planner can be used by anyone so you will want to understand a few things about how any financial planner operates before determining if this is the right advisor for you.

  • What are the financial planner’s credentials and training?  Does he/she hold a CFP® or some similar designation?
  • How is the financial planner compensated?  Fee-only?  Commissions?  A combination of fees and commissions?  It is important for you to understand if there will be any conflicts of interest involved in the delivery of financial advice.
  • What type of financial advice does the financial planner offer?  Hourly as needed?  Comprehensive financial planning? Investment advice and wealth management?  More importantly is this the type of advice that you need?
  • Who are the financial planner’s typical clients?  If you are 60 and nearing retirement an advisor who specializes in clients in their 20s and 30s is probably not the right advisor for you.
  • Check out NAPFA’s guide to finding an advisor for some tips on choosing the right financial advisor for you.  

I’m often puzzled by the process used by many folks in choosing a financial advisor, but I guess it is no stranger than buying mini bottles of liquor at a gas station.  Choosing the right financial advisor can be very rewarding, choosing the wrong advisor can have a devastating impact on your financial life.

Please contact me at 847-506-9827 for a complimentary 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.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

  

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What I’m Reading – Mother’s Day Edition

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Started out as a beautiful Sunday here in the Chicago area for Mother’s Day, though it’s starting to look like rain.  To all of the Mom’s out there I wish you a Happy Mother’s Day.

Here are some financial articles that I’ve read lately that you might find interesting and useful.   

Jason Hull explains Why Soldiers Need Financial Help at Financial Planning online. A real eye-opener for me.

Glen Craig discusses Lifestyle Inflation: The Silent Killer of Your Finances? at Free From Broke.  This is a real issue for many at all stages of their lives.

Robert Powell writes Retirement investing: Don’t go it alone at Market Watch.  You may well need a financial advisor to help accumulate enough for retirement and to give yourself some financial peace of mind.

Christine Benz shares Concerned About Longevity: 4 Mistakes to Avoid at Morningstar.com.

Trading rules for the newly enthuasiastic retail trader provides a great discussion of renewed interest in the stock market at its current high levels and  some rules new retail stock traders should keep in mind at Abnormal Returns.

3 generations face USA’s retirement crisis is discussed at USA Today.

Jason Zweig asks Just How Dumb Are Investors? in the context of variations in the returns of many individual investors compared to popular benchmarks like the S&P 500 at The Wall Street Journal.

Here is my latest for the US News Smarter Investor blog 3 Things to Know About Bond Funds.  The environment for bond investors going forward will be challenging to say the least.

If you are new to The Chicago Financial Planner here are the three most popular posts over the past 30 days:

A Pre-Retirement Financial Checklist

Life Insurance as a Retirement Savings Vehicle – A Good Idea? 

4 Signs of a Lousy 401(k) Plan

I hope you enjoy some of these articles and have a great rest of your weekend.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Please contact me at 847-506-9827 for a complimentary 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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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.

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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Why Anthony Weiner Would be a Great Financial Services Spokesperson

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Anthony Weiner, NYC, May 2011 (Pre-"Weine...

Former New York Congressman and current New York City Mayoral candidate Anthony Weiner is at it again.  Mr. Weiner has admitted to another episode involving his texting photos of a certain part of the male anatomy to a woman who is not his wife.  While this lack of judgment, and apparently a moral compass, will certainly serve Mr. Weiner well in politics, I want to suggest that a major financial services company should consider hiring him as their spokesperson.  He is perfect for the job.

Mine’s bigger 

At the end of the day this is what financial services marketing is all about.  Our services are the best.  Our investment returns are better than the competition.  Our trading costs are lower, we offer more investment research.  Clearly given Mr. Weiner’s proclivity to show off his anatomy he is in fact implicitly saying mine’s bigger, mine’s the best.

Brand loyalty 

Whether it’s the E-Trade Baby or Tommy Lee Jones with Ameriprise, these spokespeople are trying to build brand loyalty for these companies.  Given that not once, but at least twice we’ve seen Mr. Weiner’s wife by his side as he addressed the media, I can’t imagine anyone engendering any greater brand loyalty.  I’ll leave it to others to ask “…what was she thinking?”

The ultimate Super Bowl Ad

Ok this one’s too easy, but I would think some shameless financial services firm would jump on the idea of teaming Mr. Weiner with NFL great Brett Favre in an ad.  Favre holds most of the NFL passing records and is a sure first ballot Hall of Fame inductee when he is eligible.  Favre, of course, allegedly texted photos of his male anatomy to female members of the New York Jets organization.  What a sensational tie-in!

Ignore the advertising hype

Clearly this will never happen and it probably shouldn’t.  My point is that while financial services commercials are often fun (I love the E-Trade Baby) they are designed to sell the advertiser’s products and services.  No matter who the firm is, I hope that nobody would actually go ahead and do business with any financial services firm based just upon an ad without doing their homework and due diligence.  Moreover find a financial advisor who is right for your unique needs.  Find a custodian who offers the services and investment vehicles that are right for you at a reasonable cost.

Please contact me at 847-506-9827 for a free 30-minute financial planning consultation and 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.   

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

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Your Stockbroker is Not Your Friend

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This is a guest post from Bob Richards, the publisher of The Retirement Income Blog.

Your broker may seem like he wants to help you make money and odds are he does.  Unfortunately, he works in a system that decreases the possibility he can help you.

Your Broker Does Not Give You the Best Advice

English: File depicts image from the official ...

Your broker has positioned himself as your advisor, someone acting in your interest.  However, this is not always so.  If he works for a large firm, that firm issues his paycheck and he is beholden to that firm.  Say he works for ABC Financial.  Notice that he often recommends the mutual funds or annuities created by ABC Financial.  This allows his firm to not only get a commission when you buy the fund but also fees for managing the fund.  So even though there may be better-performing funds he can recommend, he is under no obligation to do so.  His legal obligation is only to sell you what is suitable, not what is best.  And he often recommends “packaged products” such as mutual funds, annuities, or wrap accounts rather than individual stocks and bonds.  It is much easier for his firm to bury high fees in a packaged product.

You Broker May Not be Competent 

In order to become a broker (now called financial advisors at many firms), one must take a test.  The exam is like most exams—you memorize a bunch of information and then regurgitate it.  The test is multiple-choice.  Any intelligent 12-year-old can pass the exam. In fact, many brokers attend a 40-hour cram course the week prior to the exam as their only preparation. Furthermore, the exam tests knowledge about rules and regulations and almost nothing about what it takes to help you make money.  From my experience as a former branch manager for a major brokerage firm, about 80% of the brokers know very little about the market or the investments they sell. The other 20% may have actually taken investment management, economics and finance classes in school but this is not a prerequisite for becoming a broker.   Alternatively, the 20% who are knowledgeable may have educated themselves.

Your broker sells you offerings he may not understand.  Investments come with a prospectus.  I have never met a broker who read the prospectus of the investments sold. The way he often learns about the investments is by attending a luncheon given by a wholesaler (a sales person to sales people) who provides the sales talking points for the broker to incorporate in his pitch.  Because the broker cannot distinguish between a “good” and “bad” investment, he generally sells what his firm recommends. 

A Better Investment Professional

Very few investors realize that there are two types of professionals in the investment business. I have described so far a registered representative, the technical term for a stockbroker who sells investments and earns commission. There is another type of investment professional called a registered investment advisor. This person has obtained a license that permits him to give investment advice for a fee. He won’t sell you something and earn a commission (though some brokers and registered reps are both sales people and registered investment advisors via their firms). He will give you advice in return for payment. He is also legally responsible to you as a fiduciary. The definition of fiduciary duty:

“A fiduciary duty is the highest standard of care at either equity or law. A fiduciary (abbreviation fid) is expected to be extremely loyal to the person to whom he owes the duty (the “principal”): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents.”

The way that most registered investment advisors work is that they manage your investment portfolio for a percentage of the assets for which they are providing advice (e.g. 1% of the portfolio value would be $1,000 annually on a $100,000 portfolio). Because of the way they are compensated, they have no motivation to sell you this stock, that stock, that mutual fund or this bond. Their motivation is to retain you as a client and to make your account grow. Only in this way can they make more money from you by helping you grow a larger investment nest egg from which they can collect their 1%. Yet others simply work hourly much like an accountant or an attorney or via a fixed retainer. Again, they have no incentive to sell you the product-du-jour as does a broker.

Advice for Selecting an Investment Professional

So here’s the advice I’d like to give every investor.

  • Do not buy packaged products because unless you read the 80 page prospectus, you are likely being ripped off in terms of high fees.
  • Buy individual stocks and bonds and no load mutual funds which you must buy on your own because commission brokers don’t sell them.
  • Either deal with a registered investment advisor who will charge you fees and not commissions or you’ll need to learn enough about investing to do it yourself.

This is a guest post from Bob Richards, the publisher of The Retirement Income Blog.

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our 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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My Thoughts on PBS Frontline The Retirement Gamble

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Gamble

The PBS show Frontline recently aired The Retirement Gamble, an investigative documentary on the state of retirement savings and the problems with 401(k) and similar retirement plans.  The show did a great job of highlighting a number of issues and was pretty scathing in its treatment of the financial services industry and workplace retirement savings plans.

As a professional who serves as a financial advisor to a number of 401(k) plan sponsors as well as to individual clients (most of whom are either close to retirement or in retirement) I watched this broadcast with great interest.  Here are my reactions to what I saw.

Key issues highlighted by The Retirement Gamble

  • The high fees imbedded in some retirement plans, often these fees are next to impossible for the average participant to uncover.
  • Poor investment choices offered in some plans.
  • There are a lot of lousy 401(k) plans out there.
  • The confusion and frustration that many retirement savers in 401(k) and other defined contribution plans feel due to the fact that they are responsible for accumulating enough for retirement.  This is in contrast to the era when many folks were covered by a defined benefit pension plan where the investment risks and responsibilities for funding the plan were on the employer’s shoulders.
  • While the issues highlighted were not new to me nor to many of us in the industry, I think this documentary was a bit of an eye-opener to many in the general public.  I say this as there have been several surveys taken over the years where a shocking number of investors responded that they had no idea that there were fees charged by their 401(k) plan.

Where the documentary fell a bit short in my opinion 

As regular readers of this blog and those who follow me on Twitter and other social media outlets know, I am highly in favor of lower retirement plan fees and anything that increases transparency for investors.  That said I thought The Retirement Gamble had a very decided bias against the financial services industry and almost felt as though they had come to their conclusions before they started on the project.

  • The show did not highlight a single good 401(k) plan and there are many out there.
  • The show did not highlight a single person who had used the 401(k) to accumulate a significant nest egg. I have the privilege to serve as advisor to a number of folks who have done just that.
  • While I am an admirer of Vanguard founder John Bogle and use index funds extensively in the 401(k) plans that I advise and in the portfolios of all clients, I disagree that there are no actively managed funds worthy of investor’s dollars.  That’s not to say that these are the majority of active funds, but they do exist.  Finding them and determining if they are an appropriate investment choice for a plan sponsor to offer is what plan investment consultants are paid to do.
  • While the program did mention advisors who act as Fiduciaries in passing, the focus was on those advisors, reps, and brokers who sell plans and/or suggest investment options that serve to line their pockets sometimes at the expense of the plan’s participants.  Why not interview some advisors who do the right thing for their plan sponsor clients and the participants of those plans?
  • The worst part of The Retirement Gamble was that while many problems and issues were brought to light, there was little in the way of advice or suggestions for plan participants on what to do to improve their situation.

I do have to say that the most amazing part of the show was the interview with the head of Prudential Retirement Christine Marcks.  She insisted that she was unaware of any of the research showing the advantages of low cost index investing over high cost active management.  While she may or may agree with the findings, the fact that she insisted that she was unaware of this research was jaw-dropping in my opinion.  I think Ms. Marcks should have been coached prior to her appearance by someone at Prudential.

The documentary is very worthwhile and if you haven’t seen it there is a link to the video on our Resources page.  Please weigh in below as to your thoughts on The Retirement Gamble.

Please contact me at 847-506-9827 for a free 30 minute retirement planning consultation and 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.   

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.

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

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Gordon Gekko

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 likely 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.

Photo credit:  Flickr

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E*Trade’s Fee Commercials – Informative or Misleading?

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During the Super Bowl I watched E*Trade Financial’s commercials deriding the 2% (of assets under management) fees they claim are charged by many financial advisors and portraying their advice services as the white knight answer to this problem.

Are these commercials informative?  

I say yes in that they focus on the issue of fees for financial advice.  Fees for investment vehicles such as mutual funds as well as for financial advice have come under scrutiny of late which I think is a good thing.  Any advisor who is charging 2% is charging too much.  That said I am not aware of any advisors who actually charge this much, but I’ll give E*Trade the benefit of the doubt on this.

Are these commercials misleading?  

Again the answer, in my opinion, is yes.  There are many questions that I have such as:

  • How many advisors actually charge 2%?
  • What types of services are we talking about?  Investment advice only?  Wealth management?
  • What is included in the 2%?  I’m assuming this is only the actual fee charged by the advisor and not the expense ratios of mutual funds or other investment vehicles.

In any event I feel that E*Trade was conveniently vague here.

What does E*Trade’s Financial Advice Cost?

Here’s what I found looking around their site:

Managed Investment Portfolios $25,000 minimum

Managed Investment Portfolios are actively managed discretionary portfolios of leading mutual funds or ETFs, rigorously researched, selected, and optimized by a team of experienced investment professionals. We’ll help you choose the portfolio that’s right for you. 

To me this sounded a lot like what the brokerage firms call a wrap account, which in fact I found that this was when I read the fine print on the site.  Some portfolio manager (who E*Trade describes as “E*TRADE Capital Management, LLC, a registered investment advisor, manages the Managed Investment Portfolios program. Our investment committee and a team of analysts develop investment portfolio models and evaluate individual investments in accordance with various macroeconomic factors, fund and security data, and proprietary and third-party institutional research.”) manages your assets based upon several model portfolios.  So far this sounds like you are getting a “prefab” portfolio managed by some unknown person(s).

For these services you will be charged a percentage of the assets that you have invested in the program:

Investment assets Percentage of assets fee
$100,000 or less 0.90%
$100,001 – $250,000 0.80%
$250,001 – $500,000 0.75%
$500,001 – $1 million 0.70%
Over $1 million 0.65%

 

These fees seem reasonable, but not cheap by any stretch of the imagination.  Remember there is no financial planning advice, just strictly portfolio management.

Note these fees do not include the expense ratios of the underlying investments.  The program description mentions that either an all mutual fund or all ETF portfolio will be used, it doesn’t sound like there is any mixing and matching of the two.  If I were a betting man I’d bet that all of the underlying investments are on some sort of E*Trade platform for which they pay for inclusion.

Unified Managed Accounts -$250,000 minimum

Complex financial needs require flexible investment solutions. Unified Managed Accounts offers broad diversification across several asset classes, tax management features, and access to experienced money managers—all in one professionally managed account. 

This option is actually managed by E*Trade advisors and an outside investment firm called Lockwood Advisors.  Investors in this service do receive more custom services such as tax-efficient investments and a portfolio that can include a combination of investment vehicles such as mutual funds, ETFs, and individual stocks.

The fees are of course a bit higher for these services, and frankly seem a bit on the high side to me:

Investment assets Percentage of assets fee
First $1 million ($250,000 minimum) 1.25%
Over $1 million up to $2 million 1.15%
Over $2 million to $5 million 1.10%
Over $5 million 0.95%

 

Again, note these fees do not include the expense ratios of the underlying investments nor does this include any sort of financial planning or wealth management services.

Questions to ask if considering E*Trade’s advice services  

  • Who exactly will be managing my money?
  • Who is my point of contact?
  • How much experience do these people have?
  • How much turnover has there been among the investment management and the Financial Consultant group?
  • Does E*Trade Financial receive compensation from the mutual fund and ETF providers they recommend?
  • What types of real (not back-tested) results has E*Trade achieved?

Note these are the types of questions that you should ask of any money manager.  And make no mistake you are hiring a money manager and not a financial advisor when you go with one of these services from E*Trade.  Note that mutual fund, ETF, and separate account managers are also considered money managers.

This is differs from a financial advisor who is also a financial planner and/or a wealth manager in addition to being an investment advisor.

Am I knocking E*Trade’s advice solutions, absolutely not.  What I am knocking is the lack of transparency and clarity in their commercials.  I would say to anyone considering these services that the ambiguity of these commercials is disturbing and this should be taken into consideration when evaluating their offerings.

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

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and 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.

Photo credit:  Crunchbase

 

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