Objective information about financial planning, investments, and retirement plans

Is Your Financial Advisor Like a Replacement Ref?

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By now you’ve all seen the replay of the horrible call at the end of Monday night’s football game that gave the Seattle Seahawks a “victory” over my beloved Green Bay Packers.   In the interest of full disclosure I am a lifelong Packer fan.  This love affair with the Pack began towards the end of the 1966 season (I was nine) a season in which they won the first Super Bowl; Vince Lombardi was the coach; and Bart Starr and eight other players from this team would end up in the Pro Football Hall of Fame.  I’ve seen some great wins and some disappointing losses over the past 45 years.   Beyond the botched call on Monday, the whole tone of the games with these unqualified replacement refs is just hard to watch.

Update as of late September 26, 2012 the NFL announced that a tentative deal with the real refs had been reached and hopefully we will never see anything as shameful as this episode again.

Unqualified and incompetent referees in the NFL are discouraging, but an unqualified financial advisor can cause some real harm to you.

Is your advisor qualified?  The ref who signaled touchdown on that last play clearly was not.  He had never officiated a game above the junior college level before this NFL season.  Typically an NFL official must have at least five years experience at the college level.  As far as your financial advisor, ask yourself if she is qualified to advise you on your situation.  Does she take a holistic view of your financial situation or does she simply try to sell you more financial products?  Moreover does your advisor have the proper credentials such as the Certified Financial Planner (CFP®) designation?

Does your financial advisor collaborate with other professionals on your behalf?   One of the comments made by several of the experts on ESPN and other networks is that the head referee never called over the two officials who made the conflicting calls in the end zone to hear their explanations.  One of these experts is a former league referee and he indicated this should have occurred as a matter of course.  As a financial advisor I often tap the expertise of financial advisor colleagues and other professionals in areas like estate planning and insurance on behalf of my clients.  I consider myself a financial planning generalist, but I also know what I don’t know.  The key is doing the best job that I can for my clients.  Does your advisor take this approach?  If not why not?

Does your advisor place your interests first?  Clearly the NFL doesn’t really care about its fans or for that matter its players.  Why else would they put out such a cheapened product for the first three weeks of the season and put their players potentially at greater risk of injury?  It’s all about the money and the NFL is raking it in.  Likewise many financial advisors are all about the sale of financial and insurance products.  They are strictly out for the money; their client’s interests come second.  For many commissioned and fee-based advisors this is both the norm and perfectly legal as they are not held to a Fiduciary standard.  I’m biased, look for a fee-only advisor who holds him or herself out as a Fiduciary and who puts their client’s interests first.

Let’s hope the NFL settles their labor differences soon.  But more importantly, make sure that you have a first stringer as your financial advisor.

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

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

Photo credit:  Reuters

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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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Financial Planning Really Does Make a Difference

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Financial Planning Really Does Make a Difference

According to a joint survey by the Consumer Federation of American and the CFP Board, households with a financial plan in place felt a higher level of financial well-being than those without a plan.  According to the survey of 1,508 financial decision makers in households nationally:

  • Those with plans are more likely to feel they are on pace to meet all of their financial goals, such as saving for retirement or for emergencies, by a margin of 50% to 32% and for all but the lowest income bracket (those making less than $25,000 a year);
  • Those with plans are more likely to feel “very confident” about managing money, savings and investments, by a margin of 52% to 30% and across all income brackets;
  • Those with plans are more likely to describe themselves as living comfortably by a margin of 48% to 22%. In addition, as many people who plan and who make $50,000 to $99,999 a year say that they live comfortably as non-planners in the $100,000 and above income bracket;
  • Among respondents in the two highest income brackets, those with plans report saving a higher percentage of income and having built greater wealth than those without them. For example, people with plans who have incomes between $50,000 and $99,999 are more likely to report they save 10% or more of their income (57% vs. 39%) and to have accumulated at least $100,000 in investments (37% versus 19%);
  • For those in the two lowest income brackets, people with plans who use credit cards report being much more likely to pay credit card bills in full. That is true both for those who make $25,000 to $49,999 – 46% for people with plans and 26% for those without them – and for those with incomes under $25,000: 41% for people with plans and 16% for those without them; and
  • Overall, only 31% of respondents said they have a comprehensive financial plan, while about two-thirds or 65% indicated they follow a plan for at least one of their savings goals.

(Bullet points taken from an article on financial-planning.com Financial Planning Critical Regardless of Wealth: Survey) 

None the less, the findings of this study and others clearly show that having a financial plan in place is a key element in achieving your goals.  Financial planning typically encompasses areas such as:

  • Saving for College
  • Insurance
  • Tax Planning
  • Estate Planning
  • Retirement Planning
  • Employee Benefits
  • Investing

Some financial planning best practices (via the CFP Board) include:

  • Setting measurable financial goals.
  • Understanding the effect of each financial decision.
  • Re-evaluating your financial situation periodically.
  • Start planning as soon as you can.
  • Be realistic in your expectations.
  • Realize that you are in charge.

As a practicing financial planner I believe in the value of hiring a trained financial planner to help you through this process.  However there are many web sites that have financial planning tools that might be of help to you if you choose to do this yourself.  Among them:

  • T. Rowe Price has a number of tools and calculators on their site.
  • Morningstar.com has several planning tools; some may fall under their inexpensive premium umbrella.
  • If you participate in a retirement plan through your employer, many plan provider sites have a number of calculators and planning tools.
  • Mint.com has a number of budgeting and planning tools.

If you are seeking the help of a professional, you can find someone in your area here:

  • NAPFA is the largest professional organization of fee-only financial advisors in the country.  (Full disclosure I am a NAPFA Registered Advisor)
  • The Garret Planning Network is a group of fee-only advisors who mostly work on an hourly basis.  Many Garret members are also members of NAPFA.
  • The Financial Planning Association (fpanet.org) has a find a planner function on their site.
  • The CFP Board site has a link to help you find a Certified Financial Planner™ as well.

Whether you do it yourself, hire a professional to help you, or some combination of the two, the best time to get started is now.  In my experience, your investment strategy should be an outgrowth of your financial plan, not the other way around.

Please remember this:  Financial planning is an ongoing process not a one-time event.  

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Photo Credit:  Flickr

Should you Micromanage Your Mutual Fund Manager?

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I routinely receive a number of press requests via email during the course of the week.  I delete the vast majority of them because I either do not feel qualified to comment or I’m just not interested in being quoted.  However I did receive one today to which I did send a few thoughts to the reporter seeking input.

My Investments from the last year or so

He was seeking comments on:

“….financial planners who are surprised or have an opinion on some of the mutual funds that decided to buy Facebook stock in its first two weeks of trading. The monthly portfolio holdings for some fund families have been released in the last couple weeks.

Is it expected for some core mutual fund holdings (including those in 401ks) to participate in a volatile IPO like Facebook? Should Value or Dividend funds (have) picked up the stock, as a few did? Some funds have as much as a 5% to 7% allocation to the stock, is that worrisome?

Some of the funds that bought the stock between May 18 and May 31 include: …” 

My email response to this reporter was:

In the case of actively managed mutual funds such as the ones mentioned in the press request below, for better or worse you are buying into the judgment and skill of the manager or management team.  I would tend to evaluate the fund’s performance over time, their expenses, risk, adherence to a style, and other factors.  I wouldn’t necessarily look at their having bought Facebook during the IPO phase or any other singular holding.  Managers make some good bets and some that aren’t so good.  At this juncture it is a bit early to judge these purchases; however my focus would again be in the aggregate.  Have they made far more good bets vs. poor ones? 

The point of my response was that if one purchases an actively managed mutual fund (or separate account, annuity sub-account, closed-end fund, ETF, etc.) they are buying that manager’s skill and their ability to achieve some expected result.

There is a whole other debate about whether an investor should stick with lower cost index funds and ETFs vs. actively managed funds and that is not the point of this article.  For the record I am a fan of both, I use a high percentage of index products in my client portfolios but I also use a fair number of active funds as well.  As an advisor I have one advantage that many individual investors may not have in that I have access to institutional and other lower cost share classes for a number of the funds that I use both active and index.

In my opinion if you are looking at an actively managed fund you should evaluate the “whole picture.”  Typically when evaluating a fund, the starting points of my analysis include:

  • Track record relative to its peers.  It’s useless to compare a mid cap growth manager to one who invests in foreign large value stocks.  Note a stellar track record may not indicate success going forward so it is incumbent upon you to look further and understand what is behind that track record.  For example, how did this fund do on a relative basis in both up and down markets?
  • Expenses, how does the fund compare to its peers?
  • Alpha and Sharpe ratio.  These are measurements of the fund’s risk-adjusted return and to me are indicators of the value (or lack thereof) added by the manager.
  • Management tenure.  It is not uncommon for a successful fund manager to move on to greener pastures, especially if wooed by a competitor.  If the manager(s) who compiled the fund’s great track record are gone this is a big red flag, though not always a deal killer.  A number of years ago the long-time manager of a foreign fund that I like left.  Two of her underlings took over and frankly I think they have done an even better job.  Investing is about people, but it’s also about process.
  • Gain or loss of assets.  This is huge, especially if the fund invests in small or mid cap stocks.  Many funds have compiled a great track record with a low asset base.  One of the truisms of investing is that money chases performance.  Once a fund does well, new money can often poor in.  It can be tough for the manager to find enough good ideas in which to invest this new money.  Case in point is Fidelity Magellan.  This fund was managed by the legendary Peter Lynch and posted some fantastic numbers.  Money poured in, Lynch left, and the fund has been decidedly mediocre for a number of years.

These items are a starting point when researching an actively managed fund.  Overall my job is to develop portfolios for my individual and institutional (retirement plans, endowments, and foundations) clients that fit their needs.  Mutual funds and ETFs are the tools that I use.  I rely on the managers of these funds and ETFs and I judge them on their overall performance, not on any one individual holding or transaction.

If you need help evaluating your investments or with your financial planning  please feel free to contact me to discuss your situation.

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What do Financial Advisors Talk About? Should You Care?

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I am sitting in the Orlando airport waiting for my flight back home to Chicago. We just finished our fifth annual NAPFA Mix Group winter meeting. This is our third time in Florida and the first time here with decent weather. A Mix Group is a fancy name for a study group.

All eight of us are either solo or run very small financial advisory practices. All of us are members of NAPFA the largest professional organization of fee-only financial advisors in the country.

As both financial advisors and small business owners we have all found it vital to have a sounding board of our peers who are dealing with many of the same issues. The winter meeting is mostly devoted to our businesses. We reviewed our financials from the prior year with the group and also discussed our 2012 goals. In the course of these reviews we provide suggestions about each advisor’s business. Besides the direct input about my practice issues, much of the advice we gave to other members was applicable to me as well. I took many notes on points raised in these discussions.

For example we all told one member that she needed to make a tough personnel decision and that she should not be shy about implementing client fee increases that truly reflect the value she provides to her clients (a suggestion from a prior meeting). As was a surprise to nobody, she mentioned that there has been no negative feedback from the clients whose fees have already been increased.

Additionally we reviewed several sessions from the TD Ameritrade conference that a couple of the members had attended just prior to our meeting in Orlando. We also discussed several specific client and business issues raised by members relative to situations they were dealing with in their practices. At our Phoenix meeting last year we had a local estate planning and asset protection attorney do a presentation on issues we should be considering for our clients in these areas.

We do another face-to-face meeting, generally in Chicago in the summer or early fall where we tend to discuss a broader range of issues including investment ideas and strategies, practice tools such as financial planning and client management software, and often discuss client specific issues a member might be having. We schedule a group conference call bi-monthly and all during the year we call each other to help resolve a wide range of questions or issues ranging from client situations to investments, estate planning, or what have you. In short we serve as each other’s board of directors and collaborators.

As a client or potential client of a financial advisor why should any of this matter to you? I can’t speak for other advisors, but I often share with clients the fact that I have this support system of seven other experienced professionals with whom I can discuss any number of issues that might arise on their behalf. In addition to these folks, the entire membership of NAPFA advisors across the country is generally willing and ready to share their expertise to help a fellow member. I have been on both sides of that help frequently since joining in 2003.

NAPFA has over 20 of these Mix Groups and the feedback from advisors who participate has been excellent. Besides the NAPFA Mix Groups there are many advisors who participate in other study groups. Additionally most of us attend conferences during the year that focus on education on various topics such as investing, retirement planning, estate planning, and other areas. From my experience the best exchanges occur at these conferences via conversations between advisors in the halls and over dinner. Much learning takes place informally.

Ask your advisor if they participate in a study group or attend conferences. Ask about what they take away from these gatherings.

Differentiate between educational sessions and the trips that many financial sales types win as perks for peddling the most financial products. If your advisor goes on many of these outings ask yourself who is really paying for the trip.

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The Similarities Between Buying Coffee and Choosing a Financial Planner

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Choosing a Financial Planner

A couple of years ago my family bought me a Keurig single cup coffee maker. I love the ability to make a freshly brewed cup on-demand; the convenience has served to fuel my already robust coffee addiction.

Our local Sam’s Club sells a variety of K-Cup brands; they typically are boxes of 80 for around $37. Starbucks recently entered the K-Cup market so when I saw their box for sale at Sam’s I bought one. It wasn’t until I opened it a few days later that I noticed there were only 54 individual units for the same $37 price. It was clearly marked on the box, but I was so used to boxes of 80 that I never noticed.

When looking for a financial planner it is also important to know what you are getting for your money before entering into any sort of relationship.

First you need to understand that anyone can call themselves a financial planner. This is no requirement that they have any particular training or credentials in order to hold themselves out as a financial planner.  Do they hold the CFP® certification or perhaps the PFS certification (the CPA’s financial planning certification)? There are an ever increasing number of certifications and designations in this field. Some are more meaningful than others so be sure ask many questions here.

Understand the services offered. Do they provide comprehensive financial planning; investment advice; or advice on an ad hoc basis? More importantly does the planner offer services that match your needs?

Understand how the planner will be compensated. Is this person truly a financial planner, or do they simply sell financial and insurance products? Are they paid an hourly fee, an ongoing retainer or percentage of the investment assets they will be managing for you, or some sort of fixed project fee? Is their compensation all or in part based upon the sale of financial products?

Understand the planner’s value proposition. What does he or she bring to the table that makes their services unique and right for you?

Just like my coffee buying experience, it is important that you fully understand who you are hiring as a financial planner, what they will and will not do for you, the benefits of hiring that person, and how much you will be paying for their services.

NAPFA (the largest professional organization for fee-only financial advisors) has published a guide to finding an advisor.

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

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

Photo credit:  Wikipedia

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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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