RIA | Financial Planner | Retirement Planning | Korving & Company Suffolk & Virginia Beach

Even the “rich” can’t afford retirement.

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires. There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month. To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement. Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people. How well is the person earning over $200,000 a year going to do in retirement? The issues that even these so-called “rich” face are the same: increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget. But once retired, that salary stops. That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments. At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan. He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs. Once the basics are determined, they can plan for their “wants.” This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues. Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy. The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

A good Registered Investment Advisor is a “Life Coach.”

People who are not familiar with Registered Investment Advisors (RIAs) too often view them as stock brokers. They are not; they are held to a higher standard and are focused on the client, not the money. RIAs are trusted advisors who put their clients ahead of themselves. They are fiduciaries that are skilled in the art making good financial decisions.

The Financial Advisor as a “Life Coach”

Younger professionals who are building careers would do well to find an RIA as their financial guru, a “Life Coach.” It takes time, experience, and a high level of expertise to manage money well. The young lack that expertise but have the biggest advantage of all: time. They are in a perfect position to build wealth with the least amount of effort if they can lean on experts who can show them how to navigate the risky ocean of investing. Just as important, they need a wise guide who can advise them on managing their income. Too many people, even those with six figure salaries, live paycheck to paycheck. Knowing what to spend and how to save is the role of the advisor.

a life coach can be found in a financial advisor.

This is very important for the independent professional – the doctor or lawyer. Focused on building a practice, they need someone to advise them on managing their money wisely.

For The Business Owner

For the business owner, the entrepreneur, it’s even more important. There is no career track and the challenge of building a business often results in poor money management. Excessive debt can lead to bankruptcy, a common result in many industries that depend on debt financing. A good advisor can help the business owner create a personal portfolio that’s independent of his business. At the same time he can advise the owner the best way of financing his growth.

Once the business is established the owner needs guidance setting up retirement and benefit plans for himself and his employees. This all part of the RIA’s skill set. And finally, as the business matures and the owner starts thinking of retirement, the advisor provides the guidance to transition the individual and his family to life beyond work.

That’s the point at which the coach gets the pleasure of knowing he’s done a good job as part of a winning team.

Conclusion

For more information on how a financial advisor can act as a coach for you, reach out to us through our contact page today.

Questions to ask when interviewing a financial advisor

A previous post referred to an excellent article on CNBC about financial advisors . You first have to consider what kind of financial advice you want or need.

Once you determine the kind of advice you’re looking for, here are some key questions to ask when interviewing the financial advisor.

What are the services I am hiring you to perform?
What are your conflicts of interest?
Identify for me all of the ways you or your firm are compensated by me or by any other party in connection with services rendered to me or my assets.
Do you have a fiduciary duty to act in my best interests?
Describe your insurance coverage.

We’ll add a few more of our own:

What is your investment philosophy?
Do you do your own investing or do you use outside firms?
What kind of experience do you have?
Are your other clients similar to me?

If you don’t get straight-forward answers to these questions, go on to your next candidate.

How does your financial advisor get paid?

No one expects their professional service provider to give their services away for free. Doctors don’t, lawyers don’t, CPAs don’t nor do financial advisors. However, in the financial services industry often what you actually pay is not clear.

Cerulli Associates surveyed investors and found that most investors wanted to understand how their advisors were getting paid. They wanted “transparency.”

“Helping investors understand the full extent of an advisor’s potential revenue streams has been a persistent challenge for both advice providers and advisors, and has become even more complicated with the ongoing evolution of integrated wealth management conglomerates,” Smith explains.
“The financial industry was built around the premise that investors understand the fees they pay and sign documents affirming their awareness,” Smith continues. “Cerulli’s research indicates that investors who truly comprehend the entirety of their costs are more the exception than the rule. The overall expenses of pooled investment vehicles, including management fees and other embedded fees such as 12b-1s, are essentially nonexistent to many investors-if they do not see a line item deduction from their accounts, they do not recognize a transfer of wealth from themselves to their advisor or provider.”

Even that last sentence can add to the confusion if you aren’t very familiar with the terminology of the investment industry, with terms like “pooled investment vehicles,” “embedded fees,” and “12b-1s.” To better understand how (and from where) financial advisors are paid, here’s a brief list:

• “Commissions:” when you buy of sell a stock, bond, or fund, you pay the broker a commission. This also applies to insurance products such as life insurance and annuities. Broker commission formulas for stocks are often based upon the stock’s price and trading volume. Commissions for insurance products and annuities are generally a fixed percentage of the size of the policy being sold, but they can be as high as 10{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}-15{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} for some products. Commissions for bonds are discussed below.

• “Mark-up” or “mark-down:” this typically applies to the purchase or sale of bonds, and is the difference between the market price of a bond and what an investment firm offers an investor. In other words, it is the difference between what the bond is actually worth and what you can buy or sell it for. The mark-up or mark-down formula is based upon the number of bonds being bought or sold, their price and their bond rating.

• “Load:” a sales charge that is assessed when purchasing a mutual fund. Some load fees are charged up front (referred to as a “front end load,” often seen with A share class mutual funds bought or sold via a broker), when sold (referred to as a “back-end load,” often seen with B share class mutual funds bought or sold via a broker), or as long as the fund is held (referred to as a “level load,” often seen with C share class mutual funds bought or sold via a broker). The load you pay is passed along to the broker. Front end loads are usually between 3{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} – 8{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, with 5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} being fairly typical. Back end loads are the most confusing, and (thankfully) are being eliminated by many fund companies. In very general terms (for the sake of this article), they don’t charge you a front end load, but if you want to sell the fund within 5 or 6 years of purchasing the fund, they will hit you with a fee (called a “deferred sales charge”) of between 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} – 5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, depending on how soon you sell it (with the higher fee coming the earlier you sell it). Oh, and on top of that, they typically also charge you a 12b-1 fee (discussed next) of 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}. Level loads typically don’t charge a front end load or a back end load, but they do maintain a 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} 12b-1 fee for as long as you own the fund.

• “12b-1 fee:” an annual fee, usually 0.25{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, paid by the mutual fund to the broker to help the fund market its products. It’s often referred to a “trailer.” As mentioned above, for B and C share class mutual funds, this fee is typically a much higher 1{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.

• “Management fee:” this is the fee that an investment manager charges for creating and managing a portfolio of securities.

A “Fee Only” investment advisor’s only compensation is the management fee. This eliminates the conflict of interest inherent in the other types of compensation such as commissions, loads and trailers. It provides an incentive for the Fee Only advisor to shop for the lowest cost investment products for his clients.

How Do I Start Saving and Making My Money Grow?

We contribute to several forums that provide advice to novice investors. One of the most popular questions goes like this:

• I’m 28 and will start a new job soon. I have accumulated $10,000 in a savings account and will be able to save an additional $1000/month when I start my new job. I need advice on how to start an investment plan.

It’s a good question. The person asking it usually has some money in the bank and has enough income to add to his or her savings. But because interest rates are so low the savings are not growing. There are three common reasons for not starting an investment program.
Not knowing where to start. The mechanics of opening an investment account can be complicated.
Fear of making a mistake. People work hard for their money and don’t want to lose if because they made some rookie error.
Not knowing who to trust. Who will provide good, honest advice for you?
Here’s how to begin an investment plan that works for people of all ages.

Find a Registered Investment Advisor (RIA) who is a fiduciary: who put their clients’ interests ahead of their own and provide unbiased investment guidance. They will help you through the process.
Find someone with experience. You don’t want to deal with someone who’s learning with your money.
Find someone who is accredited. A CFP™ (Certified Financial Planner) is trained to give advice on all aspects of financial planning.
Find someone who does not charge commissions. It eliminates conflicts of interest.
Find someone who has a good reputation in the community.

At Korving & Company, we’ve been helping people just like you make better decisions about their money and their lives for thirty years.

Setting Realistic Financial Goals

How realistic are your goals? Some people work hard and exceeded the goals they had when they were young. Others find their goals forever out of reach. For example, most people want to retire in their mid-sixties. That’s a goal, but is it realistic? Are they going to have a pension when they retire and, if so, how much is it? When are they going to apply for Social Security, and how much are they going to get? Will they need a retirement nest egg, and how much will be in it?

Career choices will have a big impact on these answers. A financial plan will also provide many of these answers. But a plan is only as good as the assumptions we put into it. As the old saying goes: “Garbage in, garbage out.”

The rate of return you get on the money you put aside has a huge impact on whether you reach your goals. Studies have shown that many people have an unrealistic expectation of the returns they can expect on their savings and investments. With interest rates near zero percent, putting your money in the bank is actually a losing proposition after taxes and inflation. Investing in the stock and bond markets may lead to higher returns. But the long-term returns that many people assume they can get often leads to taking unreasonable risks.

There is nothing wrong with having high goals. The best way to check to see if your goals are high, but attainable, is to talk to a fee only financial advisor. Preferably one that is a CERTIFIED FINANCIAL PLANNER™. They have the experience and the expertise to let you know if your goals are reasonable and what you can do to reach them.

Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

Market myth #1: the stock market can make you rich.

This is one of a series of posts about common market myths that can be dangerous to your wealth.

The market is rarely the place where fortunes are made. Real people get rich by creating and running great companies. Bill Gates became the richest man by building and running Microsoft. Steve Jobs the same way. The Walton Family, ditto.

In the less rarefied world of multi-millionaires, millionaires and semi-millionaires the same thing is true. People get rich (or well-to-do) by starting a business, studying and becoming a professional or just working for a living and saving part of what they earn.

This is not to disparage the market as a tool for protecting wealth, maintaining purchasing power, living well in retirement and getting a fair rate of return on your money. But the idea that you can get rich by trading stocks is a myth that can actually destroy your financial well-being.

One of the best ways of avoiding the temptation to use the market as a “casino,” a place where you can “win the lottery” is to turn to a professional investment advisor. Someone who knows what’s possible and what’s not. Someone who is in the business of getting you a fair rate of return on your money while minimizing the risk that you will lose it. An independent, fee only RIA is someone who will not try to sell you one the latest investment fad that the wire-houses are selling, but who will act in your best interest, because that’s in his best interest.

Have a question about the markets? Ask us.

It’s your money. It’s easy to change financial advisors if you know how.

It’s estimated that as many as 25% of investors are dissatisfied with their current financial advisor. Women investors and high net worth investors are the most dissatisfied.

If you’re not sure your financial advisor is providing the service and advice you deserve, getting a second opinion about your portfolio may provide the answers you’re looking for.

Most often, it isn’t investment performance that causes client dissatisfaction. Here’s the acid test: do you feel good after you’ve had a conversation with your financial advisor of do you feel uncomfortable? Were you being heard? Were you being talked down to? Was the advisor calling you to make a sale?

Change is rarely easy. Many people don’t realize that finding another advisor and moving their account is actually easy. You don’t have to talk with your current advisor or even let them know what’s going on. Find another advisor first.

Once that’s done, your new advisor will lead you through the transfer process and show you exactly what to do. He will prepare a new account form and a transfer form. The rest is automatic. Your new advisor and his custodian – the brokerage firm that will hold your investments for safekeeping – will monitor the transfer to make sure it goes smoothly.

If you wish to send your old advisor a gracious letter after the transfer process is started, feel free, but it’s not necessary as part of the transfer process.

If you want to get a copy of our brochure that goes into more detail, please ask for more information.
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How Great Advisors Search for Stand-Out Managers

In the bad old days, not that long ago, brokers for the “big box” stores recommended fund managers because

a) They were paid more or received benefits like trips or prizes.

b) They were trying to get their clients quantity discounts by using only one fund family.

c) They didn’t know any better.

So lots of unwary investors ended up with a hodge-podge of mutual funds, either all from the same fund family or a collection of funds that did not create a well diversified portfolio. Many funds were not reviewed regularly and investors hung on to them for years because no one bothered to do any analysis.

Today a lot of the landscape still looks the same. Even the “do it yourself” investor has a tendency to focus on things that may not really help them achieve their financial objectives. For example, the focus on fees has a tendency to distract from issues that are more important. Investors are constantly told that low expense index funds are the only way to go because they beat their actively managed cousins. Well, no, that’s not necessarily true. Active managers can beat index funds, and have done so over long periods. But managers need to be monitored. A smart investor needs to keep track of how a manager is performing, be sure that he’s sticking to his discipline and, finally, make sure that he has not left the mutual fund to someone else to manage.

Well-chosen active funds can pull their weight during market downturns by cushioning portfolios from the full decline. Since we can’t forecast the future with precision, getting great returns on a risk-adjusted basis is the guiding principle for the selection of stand-out managers. That’s why RIAs who are not part of one of the major firms and can give unbiased advice are so valuable.

Category: RIA