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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Don’t Settle for Suitable Financial Advice

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If Snidley Whiplash dressed for Easter, it'd p...

My first blog post  relating to a Fiduciary Standard that many of us had hoped would soon be enacted into law Why Should I Care if My Financial Advisor is a Fiduciary? was written in October, 2009.  It’s now September, 2013 and we are still waiting for a Fiduciary Standard.  As an investor you should be outraged.  Moreover, in my opinion, you should not have to settle for financial advice that involves selling you financial products that are merely suitable for you.

Suitable for whom?

This definition from the Clausen Miller law firm which I used in my 2009 post is still the best concise definition of the suitability rule that I have found:

The suitability rule provides that when a financial representative recommends to an investor the purchase, sale or exchange of any security, a financial representative shall have reasonable grounds for believing that the recommendation is suitable for such investor upon the basis of the facts, if any, disclosed by such investor as to his or her other security holdings and as to his or her financial situation and needs. 

So what’s the problem?  The rule says nothing about the financial advisor putting the interests of the client above their own.  In fact a registered rep with a broker-dealer owes their first loyalty to the B-D firm.  There is nothing to say the rep should put a client in the best financial product available, just simply a financial product that is suitable for their needs.  As an example, a rep for a given broker-dealer might push a variable annuity product offered by their employer instead of a lower cost VA offered by another firm like Vanguard that might be a better fit for their client.  Among the reasons for this is the fact that there is no way for the rep to be paid for selling the lower cost product.

Why is it taking so long to adopt a fiduciary standard? 

In my opinion this has not happened because the major financial services firms don’t want it to happen.  They have deep pockets and have spent a lot to lobby against doing the right thing for you, the investing public.

Some of the major brokerage firms have said that they will not be able to serve investors with smaller account balances if they have to adhere to a Fiduciary Standard.  Are they serious?  And if they are is this a bad thing for those investors?  Are these firms and their registered reps really doing smaller investors a favor by putting them in high cost, poor performing financial products that often enrich the advisor far more than the client?

Why work with a financial advisor who is a fiduciary? 

First as you have likely surmised I’m terribly biased.  I am a member of NAPFA and a fee-only financial advisor who adheres to the Fiduciary Oath that all NAPFA members sign.

Beyond this, however, don’t you deserve an advisor who puts your interests first?  Aren’t you entitled to advice that isn’t tied to the sale of financial products?  NAPFA has published this guide to selecting a financial advisor.  There is some great information here and I encourage you to use this as you choose the right financial advisor for your unique situation.

Don’t settle for suitable financial advice.  Insist on a financial advisor who puts your needs first and provides advice based only on helping you to reach your financial goals.

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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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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Forget Retirement Seek Financial Independence

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This is a guest post by author and financial journalist Jonathan Chevreau.  Jon is editor of MoneySense Magazine and the author of the book Findependence Day.  

While the media and the financial services industry seem equally obsessed with the concept of retirement, there is in myFindependence Day Book from Jonathan Cheverau view a better more practical goal: one that is far less intimidating for newer investors just starting on their life and financial journeys.

Financial Independence vs. Retirement

This goal is Financial Independence or the short-form I’ve coined that means the same thing: Findependence. Note that Findependence is NOT synonymous with retirement.

Financial independence can and probably should precede traditional retirement by a decade or two. In these days of clean and healthy living and good prospects for longevity, it makes little sense to take “early” retirement in one’s 50s, if you define what follows as 30 or 40 years of doing little more than watching daytime television, playing golf and sailing.

By contrast, no age is too soon to establish findependence: if you can do so in one’s mid 20s, that’s a good thing, and many technology entrepreneurs have done just that: from Steve Jobs to Mark Zuckerberg to Tumblr founder David Karp, who just sold out to Yahoo at the tender age of 26. The first two did not stop working once their early payday arrived and I’m sure that will also be the case with America’s newest multi-millionaire, Mr. Karp.

What is Findependence?

As I note in my book Findependence Day, Findependence just means that total income from multiple sources – pensions, investments, rental income, employed or part-time work, etc. – exceeds earned income from the traditional sole employer.  I define Findependence Day as the day in the future when this magical moment arrives: henceforth you may continue to do exactly the same thing as before, except that deep down you know that you are choosing to continue to work, rather than feeling that one has no choice but to do so because of financial pressure.

To me, early findependence is a good thing, while early retirement may or may not be. Findependence means having the freedom and flexibility to pursue one’s heartfelt goals and dreams, without having to make financial compromises merely to make ends meet. Ideally, you want to achieve financial independence “while you’re still young enough to enjoy it,” which happens to be the sub-title of the new U.S. edition and e-book version of the book, which came out in April. (See www.findependenceday.com ).

For financial planners and investment advisers, such a paradigm shift would I think benefit their clients: average consumers and investors who use their services. And financial planning is a big component – fully a third – of what I’ve dubbed the Findependence Day model.

The other two aspects are online discount brokerages and index investing: either through index mutual funds or exchange-traded funds. And when I say financial planning, I mean primarily fee-only planning, although it can also encompass fee-based planning at least while clients are in transition from the traditional model to this mode of planning and investing.

In these days of ultra-low interest rates and volatile stock returns, I believe costs matter more than ever. Online or discount brokerages are one way investors can reduce transaction costs, while ETFs and index funds facilitate prudent diversification while minimizing investment management costs. But the third aspect of the model is also important, despite the perception by many that so-called do-it-yourself investors buying their own ETFs at online brokerages are in no need of third-party advice.

It’s true that in these days of online investing and so many online tools, financial blogs and social media, that do-it-yourself investors are more empowered than ever to make more of their own investment decisions. But there’s no reason why they can’t add a layer of financial advice, albeit on their own terms, and I believe the best of all worlds for such investors is through fee-only financial planners, the kind that can be found through NAPFA (the National Association of Personal Financial Advisors.)

In other professions, it’s perfectly natural for consumers to engage lawyers, accountants or physicians on a la carte basis, paying only for services as they are contracted for and provided. It shouldn’t be such a big leap for consumers to view the acquisition of financial advice in the same way, negotiating with the planner for a comprehensive financial plan at such and such a set price, or agreeing to tax and estate planning services on an hourly basis, or perhaps through monthly or quarterly retainers to monitor ETF portfolios and rebalance them yearly.

That to me is what financial independence is all about: a partnership with a financial life coach whose vision of your future findependence is perfectly aligned with their own values and skill-sets. You’re reading this guest article on the blog of just such a professional and I thank Roger for the opportunity. And by the way, the book – which some have described as a financial love story – is set in part in Chicago, which is where the action begins.

Jonathan Chevreau is editor of MoneySense Magazine and can be reached at jonathan@findependenceday.com.  His book Findependence Day  is available at Amazon.com, Barnes & Noble.com and Trafford.com.  Jon is a must follow on Twitter. 

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.  

Investing Seminars – Should You Attend?

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NYSE

Today an invitation to an investment seminar came in the mail.  It said that the investment firm “… Cordially Invites You to Attend an EXCLUSIVE Dinner Gathering!”  Wow, me invited to anything that was exclusive?  The only brokerage sponsored investment “seminar” that I have ever attended featured legendary market guru Joseph Granville who among other things played the piano in his boxer shorts.

Opening the invitation, it was from a well-known brokerage firm.  The topic of the seminar is “Strategies for helping build a stronger portfolio.”  Among the areas to be covered are:

  • Outlook for Domestic/International Stock & Bond Markets
  • Focus on distributions:  strategies for managing your retirement income
  • Developing a systematic process to help GET and STAY on the right financial track
  • Strategies to help take advantage of upside market potential while planning for a possible downside

So far this all sounds great.  Reading on I noticed that while the session is sponsored by two advisors from the firm, the featured speakers were from a mutual fund company that offers funds that are often sold by commissioned reps and the other speaker was from an insurance company who is big in the world of annuities.

Should you attend? 

Clearly the brokers are ultimately out to sell financial products, this is reinforced by the choice of speakers.  That said there might be some good information available, the topics are certainly timely especially for Baby Boomers and retirees.

If you feel that you can resist a sales pitch, why not attend, again keep an open mind.  In the case of this session, the restaurant is a pretty good one that is close to my home.

On the other hand, what are you hoping to gain from attending?  These advisors are likely spending a fair amount of money on this session and expect a return on their investment.  There will be a good deal of sales pressure at the very least to schedule a follow-up session with them.

Think about your real objective 

If you want a good meal and perhaps a little bit of knowledge, why not attend?

On the other hand if you are serious about finding a financial advisor to guide you to and perhaps through retirement perhaps you should forego the meal and try to find someone who is a good fit for you.  Those of you who read this blog regularly know that I am a fee-only advisor, I strongly urge that you seek a fee-only advisor who sells only their knowledge and advice.   NAPFA (a professional organization for fee-only advisors of which I am a member) has published this excellent guide to finding a financial advisor.

A free meal is great, but in the end as they say, “… there are no free lunches…”

Please feel free to contact me with your financial 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.

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Much to be Thankful For

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Thanksgiving is a time to reflect on life and to give thanks.  In my case I’m most thankful for my family.  My wife of 28+ years Kyung is pictured below with two very bored Chicago Police Officers this past June over the weekend in which NATO met here in Chicago.  We had hoped to see some “real live” protesters but we were too far north (this photo looks east from the Wrigley Building) and several hours too early. 

I am also thankful for our three great kids.  I couldn’t be more proud of each of them.  The best part of the holiday is that we will all be under the same roof (assuming no airline glitches for my oldest Jen who lives in LA). 

Blogging

I’m thankful that people actually read this blog and have some interest in what I have to say.  Blogging is like coming full circle for me.  Back in high school my career interest test indicated that being a lawyer, funeral director, or an author were the three most likely career paths.

Being a Financial Advisor

I’m thankful to have had the opportunity to work in such an interesting and challenging profession for the past 14 years.  I’ve been blessed with wonderful clients and I’ve enjoyed contributing to their success.

The past 14 years have been challenging in terms of the economic environment we’ve faced and I’m sure the next 14 years will be equally challenging.  I can honestly say that even the worst day as a financial advisor beats the heck out of the best day spent in the corporate world.

Having gone down the path of being a fee-only advisor and having later joined NAPFA (the largest professional organization of fee-only advisors in the country) I’ve had the pleasure to meet and learn from some of the finest, most dedicated financial advisors around.

Personally and professionally I feel very thankful and blessed.  Now on to tomorrow’s food fest.  As much as I adore my kids they had better keep their mitts off of my drumstick.  There is nothing better than cold, leftover turkey drumstick dipped in barbecue sauce.

I hope that you and your family have a great Thanksgiving.  As always please feel free to contact me with any and all questions.

Financial Choices and Presidential Elections

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English: James Earl "Jimmy" Carter

A fellow NAPFA fee-only financial advisor with whom I am a Facebook friend posted about the fact that this is her 9th presidential election.  I am one ahead of her (she missed voting in the 1976 election by a few months), not surprising since I believe we are close in age and coincidently both have daughters who are seniors at Northwestern University.

As I look back on these 9 elections,  notable among the choices that I regret after the fact was my very first vote for Jimmy Carter.  While a model ex-President, he is perhaps the worst President that I remember, and I vividly recall Richard Nixon as President.

This is a financial blog, not a political blog.  The connection with your personal finances is this.  Over your lifetime you will make many financial choices.  Some are thrust upon you and may be the lesser of two evils.  Examples are choices made in the wake of a job loss or a serious medical situation.

Those situations aside, we have the opportunity to make any number of financial choices during our lives.  Let me suggest a few choices that you should consider:

Choose to spend less than you earn.  This is intuitive, but not always followed.  This is the foundation of any serious financial planning. 

Choose to buy to less house than you might be able to afford.  As we have seen stretching financially to purchase real estate is not always a great idea.

Choose to contribute as much as you can to your 401(k) or other company retirement plan.

If you’re self-employed, choose to start a retirement plan as soon as possible.

Choose to invest in a fashion that balances your tolerance for risk but still allows for sufficient growth to achieve your financial goals.

Choose to set realistic financial goals.  To be clear, goals need to be quantified and have a time frame associated with them.

Choose to track your progress toward meeting your financial goals on a regular basis and to make adjustments in your savings, investments, and your goals as needed.

Choose to hire a competent professional financial advisor if you need help.

Whoever you choose to vote for on Tuesday, over time you might remain convinced that you made the right choice or you might come to regret your choice.  Over your lifetime your will have a number of financial choices to make.  Be sure that your choices are informed and that they make sense both now and down the road.  While a vote that you later regret is frustrating, poor choices with your money can haunt you for the rest of your life. 

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

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Friday Finance Links October 19, 2012

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The Packers did a number on Houston last Sunday night; let’s hope they can keep it up against the Rams.  On Saturday we 08FTB UNM 2167root for USC, Northwestern, Northern Illinois, and whoever is playing Notre Dame.  So this week it’s go Brigham Young.

Here are some articles and blog posts that I suggest for your weekend personal finance reading:  

Personal Finance Blogs

Peter Anderson describes The Three Fund Portfolio: A Simple Diversified Investing Strategy at Bible Money Matters.

J.P. outlines The Best Reasons to Sell a Stock  at Novel Investor.

Joe describes a Roth Conversion Math Fail at Roth Mania.

Barb tells us to Save for Retirement Now at Barbara Friedberg Personal Finance.

Glen offers 5 Tips for Helping You Stick with Your Investment Strategy at Free From Broke.

Posts from Fellow NAPFA members

Lon Jeffries wrote Short Sale vs. Foreclosure at figuide.com.

Carolyn McClanahan wrote A Binder Full of Women And Why They Need Health Reform at Forbes.com.

Jim Blankenship guides us in Understanding Your Credit Score at figuide.com.

Other articles from around the web

Christine Benz shares Best Practices for Health Savings Accounts at Morningstar.com

Also at Morningstar.com Morningstar Names Best 529 College-Savings Plans for 2012.

Ian Salisbury tells us there is A price-cutting war in your 401(k) at marketwatch.com.

I took a week off from blogging for the US News Smarter Investor blog but here is a link to my author page where you can check out my past contributions.

Shout Out To: 

Josh Brown who announced that last Monday’s The Good Leads  post would be his last for the Wall Street Journal.  Josh has featured several posts from this blog and I really appreciate his support, as well as the great content links he has provided on a daily basis.  Josh is a regular contributor on CNBC and I really enjoy his blog The Reformed Broker.  I’m sure we will hear much more from Josh, his voice lends a great perspective to the financial world.

Here’s wishing everyone a great weekend.  

Photo credit:  BYU.edu

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Friday Finance Links October 12, 2012

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Early season “do or die” game for the Packers on Sunday.  We will be heading up to visit our son at Northern Illinois

Northern Illinois UniversityUniversity tomorrow for their Homecoming game.

Here are some articles and blog posts that I suggest for your weekend personal finance reading:  

Personal Finance Blogs

Glen writes Credit Card Fees: Eroding Your Wealth at Credit Card Smarts.

Carrie outlines 5 Crucial Financial Steps To Take When Getting A Divorce at Careful Cents.

Miranda Marquit tells us What is an ETF and How Does it Work? at Excess Return.

Ken Faulkenberry provides some great explanations in Investment Vehicles: Individual Stocks and Bonds, Mutual Funds, or ETFs at AAAMP Blog.

Posts from Fellow NAPFA members

Jim Blankenship explains The Value Of Social Security Benefits at figuide.com.

Eve Kaplan wrote Retirement Spoiler: When Things Don’t Go As Planned at Forbes.com.

Other articles from around the web

Ian Salisbury tells us about Class warfare in your 401(k) at marketwatch.com

Philip Moeller takes A Closer Look at America’s Aging Workforce at usnews.com

Robert Russell discusses An Escape Plan for Your Variable Annuity? at usnews.com

In case you missed it here is my latest contribution to the US News Smarter Investor blog Are You Making the Most of Your 401(k)? 

Thank You To: 

Josh Brown for including my post on the extra cost of actively managed mutual funds in his The Good Leads post on Tuesday in the Wall Street Journal.

Colin at Humble Savers for including my guest post 5 Steps On The Road To Financial Freedom.

Veronica Dagher for quoting me in Five Big Mistakes Mutual-Fund Investors Make in this past Sunday’s Wall Street Journal.

Here’s wishing everyone a great weekend.  

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