Tag: financial advisor

Why do smart people use financial advisors?

What is the real value to hiring a financial advisor, and who uses them?  What is the value proposition?  What makes one car with four doors and wheels worth $300,000 and other $30,000?  Although we might have an answer, the answer differs from person to person.

People use financial advisors for many reasons.  Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.

Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money.  This anxiety often results with money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.

There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.”  They want to hire an “investment coach.”

A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement.  They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.

A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake.  This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:

It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.

Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.

Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns.  They attribute this to the seven services that a good advisor provides:

  1. Creating a suitable asset allocation strategy.
  2. Cost-effective implementation.
  3. Rebalancing
  4. Behavioral coaching
  5. Asset location
  6. Spending strategy.
  7. Total return versus income investing.

If you have an advisor but he is not meeting your objectives, ask us for a second opinion.  If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.

Questioner asks: "Should I roll my SEP IRA into a regular IRA or a Roth IRA?"

There are two issues to consider in answering this question.

  1. If you roll a SEP IRA into a regular or rollover IRA, assuming you do it right, there are no taxes to pay and your money will continue to grow tax deferred until you begin taking withdrawals.  At that point you will pay income tax on the withdrawals.
  2. If you decide to roll it into a Roth IRA you will owe income tax on the amount rolled over.  However, the money will then grow tax free since there will be no taxes to pay when you begin taking withdrawals.

If you roll your SEP into a Roth, be sure to know ahead of time how much you will have to pay in taxes and try to avoid using some of the rollover money to pay the tax because it could trigger an early withdrawal penalty – if you are under 59 1/2 .

It’s up to you to decide which option works best for you.  If you are unsure, you may want to consult a financial planner who can model the two strategies and show you which one works better for you.

As always, check with a financial professional who specializes in retirement planning before making a move and check with your accountant or tax advisor to make sure that you know the tax consequences of your decision.

Getting Financial Help

When people have financial questions, what do they look for?  According to a recent survey most people are looking for someone with experience.  We want to take advice from people who are familiar with the issues we face and know what to do about them.  We all know people with experience, but financial problems, like medical problems, are personal.  Most people we know would rather not go into detail about their personal finances with family or friends.  They are more comfortable sitting down with a financial professional to discuss their finances, their debts, their financial concerns, and their financial goals in both the short and long term. Professionals will provide advice without being judgmental and are required by their code of ethics to keep your information confidential.

Once people find someone who has a track record of giving good, professional advice, they want personalized advice and “holistic” planning.

No two people have exactly the same problems.  A good financial advisor listens attentively to learn the goals, the concerns and personal history of the people who come to him for advice.

People have specific issues and questions.  For example: a couple, aged 39, is seeking advice about their path to retirement.  They give their financial advisor a laundry list of their assets, their investments, their savings rate, their debts, and the ages of their children and ask if they should be doing something different or are they on the right path.  That’s a very specific question and the advisor’s response is going to be personalized for them.

The plan that the advisor comes up with is going to involve much more than money.  It’s going to take their personal characteristics into account.  This includes personal experience with investing, their risk tolerance, and their closely held beliefs and ethical values.  This is what is referred to as “holistic” planning; taking personal characteristics into consideration.

There is a fairly big difference in the advice sought by

  • “Millennials” (those born after 1980 and the first generation to come of age in the current century),
  • “Generation X” (the children of the Baby Boomers) and the
  • “Baby Boomers” (children of the soldiers returning from World War 2)

“Millenials” say that among their top three concerns are saving for a large expense such as a car or a wedding.  Too many are saddled by debt acquired to pay for higher education and are finding that their degrees are not necessarily an entry into high paying professional jobs.  Their next largest concerns are saving for their kids’ education and putting money aside for retirement.

“Generation X” is primarily focused on saving for retirement.  They are married, own their own home and may have children in college.  Concerns two and three are tax reduction and paying for their children’s education.

“Baby Boomers” have finally reached retirement age.  More than a quarter million turn 65 each month.  As a group they are a large and wealthy generation, but a vast number have not saved enough for a comfortable retirement.  Many are forced to continue to work to supplement Social Security income.  Their number one concern is the cost of health care.  Concerns two and three are protecting their assets and having enough income for retirement.  The three concerns for Baby Boomers are inter-connected.  For many Boomers, Medicare helps them with the costs associated with most medical issues.  However, as people live longer, there comes a time when they are unable to care for themselves and live independently.  Long-term-care insurance was once believed to be the answer but insurance companies found that costs were much greater than anticipated.  The result is that many insurers have stopped offering the policies and those remaining have hiked premiums beyond the ability of many to pay.  The cost of long term care is so high that many Boomers are afraid that their savings will soon be exhausted if they are forced into assisted living facilities or nursing homes.

Each generation has its own problems and at a time when the world has gotten much more complicated.  Getting experienced, personalized and holistic financial advice is more important than ever.

Buying insurance and annuities

Two kinds of insurance products are often sold as investments, and should not be:

  • Life insurance
  • Annuities

There may be a place for both of them in your financial plan.  But they are often bought for the wrong reason because they are often misrepresented by the agent or misunderstood by the buyer.

Insurance products are complex and difficult for a layman to understand.  Let’s first review the basic purpose of these products.

Life insurance – its primary purpose is to replace the income that is lost to a family because of the premature death of the primary earner.  A young family with one or more children should have a life insurance policy on the earners in the family.  Ideally the insurance is will allow the survivors to continue to live in their accustomed style and pay for children’s education.

This usually means that younger families need more insurance.  However, there will be a trade-off between what a young family needs and what they can afford.  To obtain the largest death benefit, I suggest using a “term” policy.   “Whole Life” policies which have some cash value generally do not provide nearly as much death benefit and are less than ideal as investment vehicles.  Whole life policies are often sold using illustrations showing the accumulation of cash value over time.  What most people don’t realize is that illustrations are based on assumptions that the insurance company is not committed to.  This is the point at which an advisor who’s not in the business of selling insurance can prevent people from making mistakes.

Life insurance can also be used for other purposes.  One popular reason was to pay for estate taxes.  However, changes in the estate tax exclusion amount have made this much less attractive except to the very wealthy.

Annuities – useful for providing an income stream that you cannot outlive.  Like life insurance, it comes in a dizzying array of options that the average layman has trouble understanding. It is also one of the most commonly misrepresented insurance products.

Some of the most heavily promoted annuities are sold as investments that allow you to get stock-market rates of return without risk.  That’s one of those “too good to be true” offers that some people simply can’t resist.  The problem is that few people either read, or understand the “small print.”  Insurance companies are really not in the business of giving you all the upside of the stock market and none of the downside.  If they did, they would quickly go out of business.

These products are popular with salespeople because they pay high commissions.  Unfortunately they also come with very high early redemption fees that often last from 7 years to as much as 16 years.

If you have been thinking about buying a life insurance policy or an annuity you should first get some unbiased advice on what to look for.  Most insurance agents are honest, but like most sales people they would like you to buy their product.  It would be wise to get advice from someone who is an expert, but who is not getting paid to sell you a product.  There are a number of financial advisors who will provide guidance.  At Korving & Company we are Certified Financial Planners™ (CFP®) and licensed insurance agents, but we do not sell insurance products.   Since we don’t get paid to sell insurance we can evaluate your situation, advise you, and if life insurance or an annuity is what you need we can refer you to a reputable agent who can get you what you need.

The Trouble with 401(k) Plans

assets.sourcemedia.com

The 401(k) plan is now the primary retirement plan for employees in the private sector and Ted Benna isn’t happy.  Benna is regarded as the “father” of the 401(k) plan but now he calls his child a “monster.”

There are several problems modern with 401(k) type plans.

  1. They are too complicated. The typical 401(k) plan has dozens of investment options. These are often included to satisfy government regulatory demands for broad diversification.  For the plan sponsor, who has a fiduciary responsibility, more is better.  However, for the typical worker, this just creates confusion.  He or she is not an expert in portfolio construction.  Investment choices are often made when an employee gets a new job and there are other things that are more pressing than creating the perfect portfolio.  Which leads to the second problem.
  1. Employees are given too little information. Along with a list of funds available to the employee, the primary information provided is the past performance of the funds in the plan.  However, we are constantly reminded that past performance is no guarantee of future results.  But if past performance is the main thing that the employee goes by, he or she will often invest in high-flying funds that are likely to expose them to the highest risk, setting them up for losses when the market turns.
  1. There are no in-house financial experts available to employees. Employee benefits departments are not equipped to provide guidance to their employees; that’s not their function.  In fact, they are discouraged from providing any information beyond the list of investment options and on-line links to mutual fund prospectuses.  Doing more exposes the company to liability if the employee becomes unhappy.

What’s the answer?  Until there are major revisions to 401(k) plans, it’s up to the employee to get help.  One answer is to meet with a financial advisor – an RIA – who is able and willing to accept the responsibility of providing advice and creating an appropriate portfolio using the options available in the plan.  There will probably be a fee associated with this advice, but the result should be a portfolio that reflects the employee’s financial goals and risk tolerance.

Single Women and Investing

Women are in charge of more than half of the investable assets in this country.  A recent Business Insider article claims that women now control 51% of U.S. wealth worth $14 trillion, a number that’s expected to grow to $22 trillion by 2020.

Single women, whether divorced, widowed, or never married, have been a significant part of our clientele since our founding.  Widows that come to us appreciate that we listen and take time to educate them, especially if their spouses managed the family finances.  Once their initial concerns are alleviated they’re often terrific investors because they are able to take a long-term view and don’t let short-term issues rattle them very much.

Unfortunately, we have had women complain to us that other advisors that they’ve had in the past did not want to discuss the details of their investments and the strategy employed. Other women have come to us with portfolios that were devastated by inadequate diversification.

Our female clients are intelligent adults who hire us to do our best for them so that they can focus on the things that are important to them.  We are always happy to get into as much detail on their portfolios as they require.  Our focus on education, communication, diversification and risk control has led to a large and growing core of women investors, many of whom have been with us for decades.

Our book, BEFORE I GO, and the accompanying BEFORE I GO WORKBOOK, is a must-have for women who are with a spouse that handles the family finances.  Men who have always handled the family finances should also grab a copy and fill out the workbook.  If something were to happen to them, it would be a tremendous relief to their spouse to have such a resource when taking over the financial duties. 

Planning to Retire Someday? Start Planning Today!

A recent survey showed that most Americans don’t want to do their own financial planning, but they don’t know where to go for help.  60% of adults say that managing their finances is a chore and many of them lack the skills or time to do a proper job.

The need for financial planning has never been greater.  For most of history, retirement was a dream that few lived long enough to achieve.  In a pre-industrial society where most families lived on farms, people relied on their family for support.  Financial planning meant having enough children so that if you were fortunate enough to reach old age and could no longer work, you could live with them.

The industrial revolution took people away from the farm and into cities.  Life expectancy increased.  In the beginning of the 20th century, life expectancy at birth was about 48 years.  Government and industry began offering pensions to their employees.  Social Security, which was signed into law in 1935, was not designed to provide a full post-retirement income but to increase income for those over 65.  (Interestingly enough, the average life expectancy for someone born in 1935 was 61 years.)

For decades afterwards, retirement planning for many Americans meant getting a lifetime job with one company so that you could retire with a pension.  The responsibility to adequately fund the pension fell on the employer.  Over time, as more benefits were added, many companies incurred pension and retirement benefit obligations that became unsustainable.  General Motors went bankrupt partially because of the amount of money it owed to retired workers via pension benefits and healthcare obligations.

As a result, companies are abandoning traditional pension plans (known as “defined benefit plans”) in favor of 401(k) plans (known as “defined contribution plans.”)  This shifts the burden of post-retirement income from the employer to the worker.  Instead of knowing what your pension income will be at a certain age and after so many years with a company, now employees are responsible for saving and investing their money wisely so that they will have enough saved to adequately supplement Social Security and allow them to retire.

In years past, people who invested some of their money in stocks, bonds and mutual funds viewed this as extra savings for their retirement years.  With the end of defined benefit pension plans, investing for retirement has become much more serious.  The kind of lifestyle people will have in retirement depends entirely on how well they manage their 401(k) plans, their IRAs and their other investments.

Fortunately, the people who are beginning their careers now are recognizing that there will probably not be pensions for them when they retire.  Even public employees like teachers, municipal and state employees are going to get squeezed.  Stockton, California declared bankruptcy over it’s pension obligations.  The State of Illinois’ pension obligations are only 24% funded.  Other states are facing a similar problem.

In fact, many younger adults that we talk with question whether Social Security will even be there for them.  They also realize that they need help planning.  Traditional brokerage firms provide some guidance, but the average stock broker may not have the training, skills or tools to create an unbiased financial plan; many are only after your investment accounts or using the plan to persuade you to buy an insurance product.  Mutual fund organizations can offer some guidance, but getting personal financial guidance via an 800 number is not the kind of personal relationship that most people want.

Fortunately there is another option.  The rapidly growing independent RIA (Registered Investment Advisor) industry offers personal guidance to help people create and execute a successful financial plan that will take them from work through retirement.  Many RIAs are run by Certified Financial Planner (CFP™) professionals.  Many are fiduciaries who put their clients’ interests ahead of their own.  And many, including us, offer financial plans for a fixed fee as a stand-alone line of business, meaning that we don’t push or require you to do anything else with us except create a plan that you’re happy with.  Contact us to find out more.

How Advisors Can Help Surviving Spouses

Investopedia published an article we authored.

When the subject of death comes up, a term that’s often used to describe the feelings of those left behind is “loss.” But there is more to that loss than the loss of companionship. There’s also the loss of information, especially if the person who died also handled the family finances.
In my 30 years of experience advising families I have often had to help and council widows who depended on their husbands to manage the family finances. It’s fairly common for families to have several investment relationships. It’s quite rare to find that the spouse who managed the money actually did a good job keeping records and keeping his spouse “in the loop” when it comes to money management. And when her spouse dies, the widow has to deal with a host of organizations whose primary focus is on making sure that they don’t distribute money to anyone who is not entitled to it. The liability is too great. So we typically have a widow dealing with the death of a loved one, plus the Social Security Administration, the husband’s pension plan, and two, three or more brokerage firms who handled the couple’s investments. (For more, see: Estate Planning: 16 Things to Do Before You Die.)

Who Handles the Finances?

One of my earliest experiences was with a widow whose husband took care of all the family finances. He made the investment decisions, paid the bills and balanced the checkbook. He died suddenly and his wife did not know what to do. Childless and with no near relatives, she needed help. (For more, see: Estate Planning for a Surviving Spouse.)
While her husband’s will was up to date, during our first meeting she revealed that she knew nothing about her financial condition. She did not know how much she was worth, what her income sources were or what it cost her to live. It took a while to learn where all the investments were, what her income sources were and how much she needed to maintain her lifestyle. (For related reading, see: Advanced Estate Planning: Information for Caregivers and Survivors.)
Over the years I found that this situation was not uncommon. Balancing a checkbook, paying bills and making investment decisions does not appeal to a lot of people. They are happy to allow their partner to do that for them. The problem with this division of labor does not appear until the individual in charge of the finances disappears either through death or incapacitation.

Helping Manage the Transition

This is the point at which a trusted financial advisor can ride to the rescue. A good one is willing to go through records to see what it takes to run the household. He will be able to determine the survivor’s income. He will know how to identify the family’s investment and bank accounts even if the records are incomplete. Just as important, a financial advisor should be willing to provide more than simply financial advice to the surviving spouse. This is the point where questions arise about selling the extra car, upgrades around the home, moving to be nearer the children – or moving into a senior living facility. These may well be the questions a trusted advisor is able to answer. (For more, see: 6 Estate Planning Must-Haves.)
Advisors who are simply money managers will, at this point, probably find themselves replaced. According to PriceWaterhouseCoopers’ Global Private Banking/Wealth Management Survey, 2011, more than half (55%) of the survivors will fire their financial advisor following the death of a spouse. A lot of that will be due to the changing level of service that a surviving spouse needs. (For related reading, see: Why Do Widows Leave Their Advisors?)
But there is actually a better answer to the financial confusion that often follows a death. The best time to gather comprehensive information about family finances is when the couple is still alive.

Why a Will Might Not Be Enough

With due respect to the legal profession, will and trust documents are written to specify how assets are to be distributed at death. With few exceptions, they rarely get down to the kind of detail that allows the surviving spouse to take up where the deceased has left off.
What is needed is a specific book of instructions itemizing financial assets, their location and their ownership. Income will be vitally important to the surviving spouse. Realizing that income will change once one’s spouse dies, it’s important to know what the survivor’s income sources will be. Finally, the cost of maintaining the surviving spouse can be determined while both are still alive much more easily than after one has passed away. And since so many transactions now take place via password protected Internet portals, the survivor needs a list of those portals and passwords. (For further reading, see: The Importance of Estate and Contingency Planning.)
When someone dies, the surviving spouse will always have a period of grieving. But if a little though is given to preparing for the inevitable, grief does not have to be accompanied by fear of an unknown financial future.

To make it easy for couple who want to plan, purchase a copy of our book: BEFORE I GO and the BEFORE I GO WORKBOOK. 

Who, exactly, are these financial advisors

There’s a really great article on the CNBC website that discusses the question of what financial advisors are.  There is a lot of confusion because people use the term “financial advisor” for a group of people who are really different.  There is less confusion in the medical field because we distinguish between various kinds of doctors.  When you have a medical problem you distinguish between a pediatrician, a heart surgeon, a dentist or a psychiatrist.   They’re all doctors but people know there’s a lot of difference between them.

The same thing is true of financial advisors.  They could be a stock broker, an insurance salesman, or a Registered Investment Advisor (RIA).

Here is one important difference between brokers (technically known as Registered Representatives) who work for investment firms like Merrill Lynch, Wells Fargo, UBS or other major firms and investment advisors.

Brokers can only offer you investment advice that is incidental to them buying or selling financial products, whereas investment advisors are professionals who are paid by you to give you advice — advice that is in your best interest. The latter is called a fiduciary responsibility.

Before engaging an advisor, Ask yourself these key questions:

  • Are you looking for advice on individual stocks or someone to manage a diversified portfolio for you?

  • Are you looking for a product to solve a problem or a long-term financial plan?

  • Are your assets straightforward, or will you need more coordination because of complex estate-planning issues?

  • Are you an employee of a company, or might you be dealing with potentially complex tax issues, like selling your business?

  • Are your issues acute and immediate, or will they be ongoing or recurring?

  • How much do you want to rely on the recommendations of your advisor, or do you want to be the ultimate arbiter of what’s best for you, whether to follow a recommendation or not?

  • Are you prepared to evaluate each recommendation to determine whether it’s aligned with your needs?

These questions will help you determine what kind of financial advisor you need.

Feel free to contact us to answer some of your questions.

Four “Hidden” Ways We Help Our Clients Save Money

We often tell clients that our long term investment objective is to provide them with a fair rate of return over time while working to minimize the amount of risk they take.  Part of that objective is achieved by finding ways to save them money.

Buying the right mutual funds can save clients a lot of money.  Many mutual fund families offer the exact same fund in several different “share classes.”  The primary difference between each share class is the expenses the fund charges the client.  After deciding which fund we want to buy, we choose the least expensive version of that fund.  This means that our clients keep a bigger share of the fund’s returns.

We also pay attention to the tax consequences of our investment strategy and work to minimize the taxes that our clients pay at the end of the year.  Occasionally we will sell some losing investments to offset gains in other investments.  At the end of the day, this allows our clients to keep more of their money.

We help clients understand how much they need to save for retirement.

For example, we might tell them that buying the new luxury car that they really want every three years will mean they have to work for another five years to meet their stated retirement goals. This helps them with their decision making.

 Making sure our clients understand how much they can safely spend and where they should take the money for their goals is a key value-added service that we provide.

 

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