I have been fielding clients concerns over the last two weeks so now it's time for me to put in my two cents.
Most of you who have been following me for a long time, know that I have been bitching about the problems in the financial industry since day one. I have never been a big fan of government intervention in business affairs. Compliance is costly, onerous, and sometimes, plain unnecessary. But left to our own oversight, we fail miserably. Greed, dishonorable conduct, and unethical behavior is more the norm than ever before and so (as I gasp) it is time the government needs to step in and say, "What a minute! You have to stop this!"
How they intend to control this craziness, I have no idea. The disease has spread and unless the whole nation starts to "get it", I fear that it will continue- just in a more covert way.
To highlight just a few injustices that I and my clients have experienced over the course of my more than 24 years in the industry:
*After extensive analysis of a real estate transaction, a client goes to sign documents at the escrow company and finds that the loan rate has changed by more than an eighth of a point higher than he was quoted and told he had to close that day or else lose the deal."
This is a common bait and switch loan transction that was happening all the time.
*Client just bought a large life insurance policy from a broker that was backed by a AAA Excellent A.M. Best rated company. The life insurance company goes bankrupt as AM Best rates them AA Superior.
Life insurance ratings companies are useless
*Fannie Mae and Freddie Mac bondholders were rubber stamped high bond credit quality ratings that were all a sham to promote more sales and more commissions to large bond brokers"
Clients were told they had to use a certain title company to purchase real estate through their broker, But weren't told that the broker made extra fees by using that title company.
I could go on and on but you get the picture.
And the highest insult to the American people:
The Financial Planning Association and the National Association of Personal Financial Advisors sue the Securities Exchange Commission to force all people who call themselves Financial Advisors to disclose how they are compensated---- and loses.
The CEO of Citigroup is forced out of the company because she wanted the Citigroup hedge fund that fraudulantly lost customer's funds to repay every penny back to the customers.
"Financial Advisors forged customers signatures at least 96 times in order to articficially inflate sales volume. and to hide the fact that they hadn't met commitments to deliver completed financial plans." -WSJ4/10/08
Okay, you say, a few bad apples. So what?
The firm's signature product is its low cost financial plan delivered to clients in a book form to sell them products.
What happened to Financial Advisors acting as a fiduciary? Oh yeah, I forgot. The SEC still has that rule in force that brokers are exempt from acting as a fiduciary (that is, putting their client's interests first) because they really aren't Advisors but Salespeople. That's funny because they call themselves Financial Advisors.
Are you confused yet?
So if the American public.
When I ran my business out of an office, I was meticulous about keeping good records and keeping them organized. As my business grew, that process became very demanding of my time. It was important since I was managing money for individuals on a non-discretionary basis and so I could be audited at any time--- and I was ready (I am required to keep client records for 7 years). But I knew I had come to the tipping point when my assistant said that she couldn barely squeeze another file folder into our filing cabinets that lined almost every wall.
I knew I didn't want to be like my friend, an immigration attorney who had a garage filled with client records that she was required to keep. I had other business colleagues that had gone paperless and they were sharing their strategy online. I figured now was the time to go "paperless" and I researched it and decided to do this in-house by buying a commercial scanner and a software program (PaperPort). I hired college interns to feed that scanner all day and into the night. We had lots of late night pizza meetings to decide how best to organize the electronic file folders. Joseph thought I was crazy to take this on when my plate was more than full with other activities but I wanted to keep our garage from turning into a self-storage unit. The process wasn't that difficult once it was up and running and I had my eye on turning our home office into a paperless environment once I was done with the business. Can you tell that I hate clutter?
I was about 60% done when I had got into a car accident and ended up transfering the business to another competent Advisor who had similar services. That paperless trail was a blessing for Joseph to be able to access information and files and client databases so that he could sell my business for me. It also represented to the buyer that I had a solid business with good records.
Now I look around at my home office filled with books, and papers in boxes around me, and I am thinking of a paperless project to get rid of this clutter. Seems like this paper beast just follows me around.
Tips:
get all of your bank statements, and brokerage statements delivered electronically. Copy these and store on your own computer since they only keep the file for a few months. Before you do this, make sure you have good virus protection, your firewall in on, and you have spyware installed.
The IRS can audit you up to three years after you file or six years if income has been substantially understated or seven years if you have sold real estate.
Documents showing contributions to IRA accounts should be kept for many years untill all the money is withdrawn from that account.
Keep good documents on improvements to your home until the house is sold. It will help to increase your basis and lower your tax in the future.
Ask for brokerage account maintenance fees to be waived if you go paperless. They are saving substantial money so they should pass the savings on to you (not charge you as some do).
Many fund companies or brokerages will donate money to environmental organizations when you go paperless.
Going paperless doesn't mean going blind. Check your statements. I check quarterly to make sure all is well and nothing is out of sorts.
Get a shredder and experience the joy of getting rid of old documents. Get the kids involved. They love to shred!
Don't forget to back up everything! We use a free online service called Mozy. Some people use CDs, some DVDs, and some use tape backup.
Whatever medium you use, make sure you use it consistently.
Let's all stop the paper beast from growing!
Coaching Question- What would it mean to you if all of your financial records were organized and available to you at the click of a mouse?
I am now officially a gym rat. I work out twice a week with a personal trainer. It is my main form of exercise since I cannot play tennis, golf, mountain bike, hike, or any of the other things I used to do. I now walk and go to the gym. I did find a gym though that I really like- Axis. I knew I was in the right place when I walked in and saw trainers doing really unusual exercises and I saw machines that I had never seen before.
Right after or sometimes before my session, I walk on the treadmill. There are two televisions mounted high above the row of treadmills and stair steppers, and bikes---just like in the hospital. One television always has a financial station and the other some girly show like the View or Martha Stewart. I face the financial TV wondering what people see in that. Even when I was in the business I never watched that stuff but apparantly millions of Americans do. I don't know why because most of the advice is biased and the ticker- what's with that? Who looks at that and why? Even super short term traders know that by the time you are seeing that info on the west coast, the price is now different. So who cares?
I think about the referral I got years ago from a good client of mine. This woman had inherited a lot of money and decided to manage it herself. She got up every morning and turned on some financial TV show and traded on the news that day. She wanted me to do her tax return. She had a pile of papers showing her gains and a pile of papers showing her losses. She totaled each pile up and showed me the small gain she had, and how simple her return would be.
I told her I wish it were that simple. Each trade needs to be broken down to show the gains and losses. That would take hours and the return would cost her quite a bit. She agreed to let me do the return. After digging through the trades, many did not match and I found that she was trading stocks she didn't even own. The end result was that she had over a $100,000 loss. It was devastating to her but she needed that awakening to realize that she was not capable managing her own money. Yet she couldn't trust someone to manage it for her since no one could get the returns that she wanted without any of the risk-- yeah right.
I used Schwab Institutional Services for my clients and I used to chuckle as I would go into the local branch to deposit a client check and see a row of elderly retired gentleman sitting in the lobby watching the ticker and talking. Very cute way of socializing----- losing your money in the market. Eventually Schwab got smart and redesigned their branches (as well as closed down many).
I was reading the speech former SEC Chair Arthur Levitt gave to NAPFA's 2006 conference and was very inspired. Here is a quote:
"When I consider today the lack of knowledge among even the most sophisticated people in terms of investments, it really concerns me . A recent report showed that over 50 percent of Harvard's faculty and staff invest their entire retirement savings in money market accounts. The Los Angeles Times studied what recent Nobel Laureates in Economics did with their money, and said that most of those titans of economics were really terrible investors. One had the bulk of his retirement in a money market account; one spends most of his time on chasing the latest hot investments, from tech stocks to oil stocks; and another spent the entire 1990s with his winnings fully invested in municipal bonds. The fact is that most people don't have the knowledge, the background, or the termperament to manage their own money.
The so-called Merrill Lynch Rule that exempts brokers from the fiduciary requirements of the Investment Act of 1940 only confuses investors. While brokers will counter that that they are under NASD oversight, they are simply not regulated with the consumers' interest in mind. They are not required to obtain best execution pricing for trades and are allowed to sell to a client more expensive investment vehicles that will generate greater commissions to the broker. There is absolutely no reason why a fiduciary responsibility imposed upon Investment Advisors should not apply to retail brokers with equal coverage. The notion that a retail broker is an order taker is absolute and total fiction."
For a real Financial Advisor that adheres to a fiduciary standard, check out NAPFA http://www.napfa.org and/or the Garrett Planning Network http://www.garrettplanningnetwork.com/pages/splash/index.htm.
Interest rates are rising. So what are you doing about it? If you read the news, it sounds like a death knoll. And to people who are getting mortgages it may be. But to those who are saving money, it sounds like heaven. More interest on the money you save without any risk. So what are you waiting for? Get rid of those old CDs, and bank savings accounts, and get the highest rates that are available out there. Where? Why --- on the internet. You are already saying- "But isn't that risky?" No, it's not and here is why. Internet banks have lower overhead so they can offer you more interest. Also, their money market accounts are FDIC insured, unlike all of the brokerage money market accounts. What kind of interest? Well, check this out at virtual bank, http://www.virtualbank.com/
Also check out Emigrant Bank, and ING Direct online.
Why am I telling you this? Because even though I am still a registered investment advisor, I am not practicing but my registration allows me to provide information and education. So there..... you are informed and educated. Now go out there and prosper.
Although I am on the road, I was able to give this teleclass to a Special Interest Group (SIG) of financial Coaches on May 16th. I am putting the notes here from my class for all of you to in benefit.
Notes from Fern Alix LaRocca CFP® EA
Disclaimer- although I am a Registered Investment Advisor at no time during this talk will I be giving out advice. All that I will be discussing is informational and educational.
By 2020, 30% of the entire population will be retired, and 67% of United States assets will be controlled by pre-retirees and retirees. I believe that there will be many financial coaching opportunities to help people transition as they age. As coaches, we believe in people having a strong personal foundation. We should also believe that they have a strong financial foundation because this will be having this base will help them attract and retain more wealth and abundance in their lives.
The 7 Steps to Your Own Financial Plan!
The first step is like pouring the foundation for a house
Preserve what you have and what you acquire through……
Does anyone know what that would be?
1) Risk Management-
What would happen if your spouse’s income were not there?
What could you do to replace lost income?
How would you pay off debts?
Life Insurance, Medical & Dental Insurance, Property and Casualty, Disability Insurance, Long term Care.
2) Cash Flow Analysis- Determine discretionary income
Identify sources of discretionary income. You can only invest from what you save.
If wanted to save for the future what is the one thing you could do today?
How much would you need in cash in case of an emergency?
(Like the car breaking down, roof leaks,)
Typically 3-6 months salary- depending upon debt
3) Investment Planning-
Are you comfortable with the risk you are taking in your portfolio?
Power of compound interest
What could you do to maintain a diversified portfolio?
Bonds, Stocks, Mutual funds, etc. Real estate, rentals, vacation homes, land.
Own vs loan.
4) Retirement Planning-IRA, Roth-IRA, SEP, 401K, 403B, 457 and 412 retirement plans. Do you have a retirement plan that you are comfortable with?
Are you contributing the maximum to a retirement plan at work?
5) Education Planning- 529 Plans, UTMA
6) Income Tax Forecasting- Use of tax deferral, tax deductions and tax –free vehicles.
Concepts of tax deferral versus tax-free and tax deductions.
7) Estate Planning- Wills, trusts, powers of attorney for health care and financial care.
At www.wholeheartedway.com you can contact me for my 8- 1 hour coaching sessions, I cover these 7 steps in detail so that you will end up with your own personal financial plan.
Also Sign up for my free newsletter – at www.wholeheartedway.com
Also keep checking my website for free resources that you can use in your own practice to help your clients build a good financial foundation.
Send me resources to share, too.
Building your Financial House-
Risk Management- Preserve what you have and what you acquire through the use of insurance.
Cash Reserves- Have enough for emergency savings so you can invest for the long term
Identify sources of discretionary income. You can only invest from what you save.
Loaner Dollars, or Fixed income investments- CDs, treasury notes and bills, smart notes, etc.
Owner Dollars, or Equity investments- Mutual funds, stocks, etc. Invest for the long term. Understand the costs of investing and keep your assets diversified. Read the prospectus and understand the risks involved.
Use retirement plans and education plans to defer tax and build wealth. Always defer and deduct as much as possible. If you are in a high tax bracket, also make use of tax- free investments such as municipal bonds.
Identify risks, potential returns, liquidity, tax implications, and costs involved in all transactions.
Here is what others thought about the course:
“Excellent! You would be a fool not to take this course!”
-Anthony Hayes-Real Estate Agent
“It’s very beneficial for someone exploring how to invest.”
-Chris Gatto-Public Relations Specialist
“Helps give you a logical sequence of how to secure your financial future.”
-Tony Ramirez- IT consultant
“Great way to check out your previous understanding!”
-Thomas Cheng- Engineer
Attendees of the class will get 20% off the published coaching rates at www.wholeheartedway.com
My one on one Coaching sessions are valued at:
1 hour -$80/hr
3 hours-$220
6 hours-$440
The 7 Steps to your own Financial Plan- 10 hours, valued at $800- is only $600 just for Prosperity SIG members that sign up before June 1st.
(A deposit of 50% of the fee is due upfront)
Contact information:
Email: fern@wholeheartedway.com
415-819-3065 Phone
Website: www.wholeheartedway.com www.afdadvisors.com
Blog: www.dharmaofmoney.com
For years, business professionals at the many financial conferences that I went to prophesied the demise of the small independent financial advisor (like me- Yikes!). Merge, they said, or be forced out of business by the big giants like Merrill, and Morgan, etc. I defiantly turned the other cheek and kept my business small, successful, profitable, and what's most important- I had time for a vacation. Not too many Merrill or AmEX people can say that.
After reading this, I finally feel vindicated. It's not how big or small you are - it's the content, stupid. High quality, high service, independent and ethically run firms will flourish in today's environment. People now, in the face of Enron and World Com scandals, want someone that has few conflicts of interests and they are willing to write a check for that service instead of being sold a product for a commisssion.
Read it (wall st journal 042906) and understand the difference from a fee-only advisors who acts as a fidiciary and a stockbroker that sells a product. Don't get me wrong, a lot of commission planners really are ethical and care about their clients, but it is hard for them to do their job when their boss is telling them to sell xyz today. You decide. Time for them to look at "right livelihood".
Hey, did you notice how I still write like I am a practicing financial advisor? Hmmmm......talk about attachment!
Stockbrokers Loosen Up Their Ties
As Advisers Gain Ground,
Big Firms Change Strategies;
The 'Suitability' Standard
By JEFF D. OPDYKE and LINGLING WEI
April 29, 2006; Page B1
Wall Street's giant brokerage firms -- long the dominant force in the investing game -- are starting to lose their edge.
Increasingly, individual investors are turning over their money to independent brokers and advisers amid worries that big firms don't always have their best interests at heart. Over the past five years, independent advisers have nearly doubled their share of assets under management to 17%, according to discount brokerage firm Charles Schwab & Co.
Now Wall Street is fighting back. Some firms are making changes to minimize perceptions that their advice isn't as trustworthy as some of their more independent rivals. Morgan Stanley, for example, recently started highlighting that clients can pay a fee to have an adviser build a financial plan -- and then execute the plan at another brokerage firm. The goal is to ease concerns that the Morgan Stanley broker might encourage the purchase of some product that benefits the broker more than the investor.
Others have started granting their advisers greater leeway to recommend a broader range of products, including more options that aren't part of the brokerage's own investment tools.
And some are moving away from in-house investments entirely. Late last year, Citigroup Inc.'s Smith Barney sold its asset-management arm, which created its own in-house mutual funds, to, in part, eliminate the perception of self-interest when suggesting investments to clients.
Moves like these reflect a power shift under way as investors -- wary of undisclosed conflicts of interest after various market-related scandals in recent years -- insist that their financial professionals have no incentive to pitch particular products because of commissions or underlying fees.
For investors, the new options add complications to the process of picking the right person to help with high-stakes investing decisions.
Deciding whether to hire a full-service broker or an independent adviser -- or someone in between -- comes down to whether you want advice tied to an individual transaction or advice designed to map out your financial life, and whether you want that advice delivered by a brokerage firm or an independent shop. Each has its strengths and weaknesses.
Stockbrokers
First and foremost, brokers are salespeople. So, when acting in that role, their income depends on commissions from client trading. As such, a broker is best for investors who want someone to bounce specific stock and mutual-fund ideas off of or who want someone who will call with investment suggestions. With brokers, you usually have the choice of paying per transaction or paying an annual fee for all the services you use, as in a so-called wrap account.
You will pay for that hand-holding, though. Commissions can easily top $100, depending on the type and amount of stock you are buying and the size of your account, compared with the $5 to $20 you would pay at an online firm such as Scottrade Inc. or E*Trade Financial Corp. Some Wall Street firms require a $50,000 account to even get access to a broker; otherwise, you will be sent to a call center, where the level of individual attention is often greatly diminished.
Another important factor: Brokers aren't "fiduciaries," meaning they have no legal requirement to act in your best interest. Instead, they follow much looser "suitability" guidelines that, while backed by court decisions, aren't legal obligations. If you want a fiduciary relationship, a traditional brokerage account isn't for you. For investors who don't feel they need a broker's advice or helping hand making trades, discount and online firms are a better choice, since they also charge considerably lower commissions on trades.
Investors may increasingly come across independent brokers these days. They aren't employees of a traditional Wall Street firm but instead act as independent contractors with firms such as Linsco/Private Ledger Corp., a major independent brokerage firm, or Raymond James Financial Inc. Ostensibly, independent brokers have fewer reasons to push one product over another, and they generally have a broader selection of investments to sell and no sales quotas for particular products (unlike some traditional Wall Street brokers).
All of that should mean the independent broker is conflict-free. Yet that isn't necessarily true.
In December, for example, the National Association of Securities Dealers imposed a $2.4 million fine on Linsco/Private Ledger for inappropriately steering investors into costlier class-B-share and C-share mutual funds that generated higher commissions for the brokers. Bill Dwyer, Linsco's managing director of national sales, says, "We addressed any concerns regulators had, paid all the fines and moved forward."
Financial Advisers
There are essentially two types of advisers. Those who work independently, or outside of a brokerage firm, are known as registered investment advisers, or RIAs. Those inside a Wall Street firm are investment-adviser representatives, since the firm itself acts as an RIA, although they may have a different title. Both provide essentially the same service: big-picture financial planning and money management.
Advisers are the best choice for investors who want someone to help lasso their entire financial life -- from investing, tax planning and charitable giving to family-business succession planning and more -- and take responsibility for managing the investments. You will generally pay an annual fee of 1% to 2% of the assets under management.
RIAs typically charge a single fee for all the services they provide, which can be less expensive than paying for all the services and trading separately. By contrast, brokerage-firm advisers offer that arrangement as well but also allow clients to separate fee-based advice from transaction-based trade execution, if that better fits their needs.
Brokers are increasingly wading into financial-planning and advisory roles. Most no longer call themselves brokers but, instead, financial advisers or financial consultants. Indeed, "there is some good, meaningful planning going on inside" brokerage firms, says Dan Moisand, president of the Financial Planning Association, a trade group.
Yet the advice a broker can provide is limited because of Securities and Exchange Commission rules. Advice brokers offer in a brokerage account must be incidental to the job of trading securities for you. That means while brokers can talk about how a stock or mutual fund fits into your financial scheme, they can't offer a comprehensive financial plan. (Brokers are permitted to provide a financial plan, so long as it is part of an advisory relationship.)
Financial Planners
Investors have still another option: If you are looking for someone to fashion a financial plan that you will execute yourself through a traditional or online brokerage firm, you don't need an adviser or broker but, rather, a financial planner. Look for someone with these credentials, which indicate an adherence to certain ethical standards as well as a level of knowledge: certified financial planner (CFP), chartered financial consultant (ChFC) or a certified public accountant with a personal-finance-specialist designation (CPA with a PFS). Advisers often sport one or more of these credentials as well.
Planners can provide the same services as advisers. The only difference is that they generally leave the job of managing your money up to the client.
The cost of a financial plan is typically a one-time fee of a few thousand dollars, depending on the complexity of your needs. Local advisers and planners can be found through the Web sites of either the Financial Planning Association (fpanet.org1) or the National Association of Personal Financial Advisors (napfa.org2).
"There are two times in a man's life when he should not speculate in
stocks: when he can't afford it, and when he can." -- Mark Twain
"October: This is one of the peculiarly dangerous months to
speculate in stocks. The others are July, January, September, April,
November, May, March, June, December, August, and February." -- Mark Twain
Rings true even today.
Quote
"'While many professions like cutting hair require a license, it seems odd that there aren't even basic competency standards for all professional tax-return preparers."
--Rep. Jim Ramstad (R-MN), chairman of the Ways and Means Committee's Oversight Subcommittee (in the Wall Street Journal earlier this week)
So? ......do something about it, Jim.
It's no secret that children think that money grows on trees. We live in a world that bombards them with marketing messages to make them want this or that. I remember my foster daughter thinking (mistakenly) that if you paid a lot of money for something, then it was good and valuable. Silly girl!
The Money Savvy Kids(TM) curriculum can teach second and third graders about spending, saving and investing. Part of the curriculum uses the Money Savvy Pig which has four slots - one for saving, one for spending, one for investing, and one for donating. The most important progress for them was for them to recognize an increased willingness to forgo immediate gratification. Something even us adults have trouble with. LOL.
Here are a few sentences of Bob Clark’s recent article "Rebels Without A Cause" showing that NAPFA is the organization that must stand up for competent comprehensive fee-only financial planning:
"Today, we need a similar principle-based “miracle” to convince the media, the public, and the folks in Washington that all financial advice should be required to be client-oriented, fiduciary responsible, fee-compensated, and independent. Who’s going to make this happen? The CFP Board is too busy trying to figure out how to make all Merrill and Smith Barney reps CFPs. The FPA has stepped up its lobbying and PR, but its membership may be still too diverse to allow it to effectively make this fight. Only NAPFA has a membership that stands for all these things today. So it’s possible that only NAPFA can lead this fight. It’s a fight that has to be won. To survive, independent financial planners have to stand up."
New SEC Rule helps investors sort out brokers from investment advisers, requires a brokerage account disclosure,
“Our interests may not be the same as yours”
Important investor protection disclosure requirements for broker-dealers take effect July 22nd according to the National Council of Financial Fiduciaries, a Potomac Maryland-based organization of financial advisors promoting a client-first approach to financial advice.
Parts of the new SEC regulations, headed “Certain Broker-Dealers Deemed Not To Be Investment Advisors,” requires that broker-dealers who claim an exemption from the Investment Advisors Act and its fiduciary standards must disclose that their interests may diverge from those of their clients. Broker-dealers have been exempted from investment advisor registration and disclosure rules when their advice has been “solely incidental” to their broker-dealer role.
Harold Evensky, a founding National Council of Financial Fiduciaries (NCFF) board member noted, “This new disclosure rule is a vital step towards reinforcing the sharp historic and legal differences between an SEC registered investment adviser and an NASD registered representative or broker. For investors the key difference is not a matter of compensation or the number of regulations in place. It’s more than that. A broker and an adviser have fundamentally different responsibilities. They have fundamentally different jobs, based in law. A broker owes loyalty to his firm, and his job is to sell investment products and execute transactions. An investment adviser, on the other hand, provides advice and, by law, must put his client’s interests first. He owes his loyalty to his clients. This difference is not unlike the difference between your friendly butcher in the corner grocer and your dietitian. Each can be very helpful, but each has a very different job to do.”
Knut Rostad, the Executive Director of the NCFF, said the SEC rule does not go as far as his group advocates, but is a strong step in the right direction. “We believe that the public will best be served when there is no broker-dealer exemption from the registration and disclosure rules for investment advisers. But the new disclosure requirements at least place the public on notice that, when they seek advice from brokers, the ‘buyer beware’ warning applies.”
On July 22, 2005, the new rule requires that any broker or broker-dealer claiming an exemption from the fiduciary standards of the Investment Advisor Act must assure that “…all customer documents contain a clear, prominent statement as follows:
‘Your account is a brokerage account and not an advisory account. Our interests may not be the same as yours…. We are paid both by you and sometimes by people who compensate us based on what you buy….’”
Obviously concerned that some firms might attempt to bury this stark warning in small print deep in voluminous documents, the SEC specified that “To be ‘prominent,’ the statement should be included, at a minimum, on the front page of each document or agreement in a manner clearly intended to draw attention to it.”
“The NCFF applauds this important first step by the SEC to better differentiate brokers and registered investment advisors through these disclosures on ‘brokerage accounts’ said Rostad. As media attention to this issue broadens consumer awareness of the significance of this new disclosure, the loophole allowing advice-giving brokers to avoid their fiduciary responsibility will rapidly shrink. That’s good news for all investors.”
To help investors better understand how brokerage and advisory accounts are fundamentally different, NCFF has created the attached print public service announcement (PSA) that seeks to highlight the importance of the differences.
A survey of affluent Americans by PNC Advisors, a large wealth managemnt firm showed that of the 60% respondents who had more than $1 million in investable assets
only 46% had become happier as they accumulated more money
29% said having a lot of money brought more problems than it solved
33% still worried constantly about having enough money
49% worried that their children would grow up feeling "entitled"
37% did not have a will, health care proxy, or a trust, largely due to procrastination.
Sounds like a lot of these folks need a coach.....
Older Americans (45-plus) are the wealthiest segment of the spending public, yet half of them say they're really worried about making ends meet. This according to the findings of AARP's just- release 2004 Multicultural Study, Financial Perspectives Past, Present, Future:Traditional and Alternative Practices of the 45+ community, which tracked many of the financial behaviors amd concerns of this population. Read all about it at http://www.aarp.org/research/financial/retirementsaving/2004_perspectives.html
The majority of them said (63%) saving for a vacation is their first priority. After that 61% say paying off medical bills, and then
57% say saving for retirement, and then
45% say paying off credit cards and loans.
Yikes! Americans need to get their priorities straight.
The Forbes 400 "richest" have, as Gregg Easterbrook notes, been surveyed and studied on their views of happiness and life satisfaction. According to a report in the Wall Street Journal, the Forbes 400 life-satisfaction results come in at 5.8 (on a scale of 1 to 7) in the latest survey. But so do the Inuit people of northern Greenland and the Masai of Kenya, who have no electricity or running water. While economists have always assumed that having additional income, allowing one to meet and satisfy additional needs, results in higher satisfaction levels- along with the simple fact that more money affords more choices in life-psychologists see it a little differently.
Results from 150 studies on wealth and happiness, analyzed by psychology professors Ed Diener of the University of Illinois in Urbana-Champaign and Martin Seligman of the University of Pennsylvania in Philadelphia, indicate that increasing moves up the economic ladder don't necessarily bring extra happiness. Diener and Seligman also note that most studies don't analyze correlation and causation. People who say they're happy typically earn higher incomes over the long term than those who say they're not. While money may not buy happiness, it appears that happiness can buy money.
-Journal of Financial Planning December 2004
Many people are prone to trade their portfolios before the end of the year just for tax purposes or because they believe their returns are too low. Edwin Lefevre points out in his biography of Jesse Livermore, Reminiscences of a Stock Operator, "a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figures it must do. That is why so many men in Wall Street...lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."
Here's to sitting tight.
Steven Romick-President of FPA Cresent recently shared this:
A recent study co-authored by Professor Campbell Harvey of Duke University Fuqua School of Business surveyed 401 chief financial officers. I will share some of the distressing findings with you. "The survey found that companies routinely employed legal accounting gimmicks to hit their numbers. But the study also found that 78% of CFOs would give up real economic value in exchnage for artificially smooth earnings-including deferring spending and selling off patents. More that 55% said they would delay starting new projects to meet earnings targets."
Sadly sacrificing long-term earnings is determined by too many to be an acceptable business practice.
A new study by Merrill Lynch Investment Managers' Americans and their Money Mistakes survey shows that nearly half of Americans say their biggest mistake was to wait too long to start investing, more than a third said they lost money by holding on to underperformers, and admitting to buying "hot" stock without doing any research or buying an investment without understanding the fee and tax consequences. They also said they allocated too much of their portfolio to one investment or stock.
I conclude that although most people have at their disposal a large amount of information to make informed investment decisions, they don't. That's why it is important to work with a financial coach or a financial advisor to guide you through the maze. Let's work out your goals, your risk tolerance, and the tools you need to make good investments. Email me at fern@afdadvisors.com for more info.
This is part of an article written by Peter Baigent for the Money Minders Report.
Thanks, Peter
A Sucker Born Every Minute
An article about choosing safe investments. First published in our client newsletter "The Balanced Report" Spring 1993
By: Peter F Baigent, CLU, CHFC, RFP, CFP
This old adage should really be rephrased as "There is a sucker born every minute and two to take him". In our work we are constantly amazed at some of the horrible deals some people get involved with. They most often come to us for advice when it is too late to back out. Our function at that point is only to suggest how they can go about seeking legal redress for their bad investment and to explain the tax deductions they will be entitled to if they have lost their money. Their reaction is somewhat akin to 'Kill the messenger'. But, most respect our opinion and objectivity and will try to make the best of a bad situation with our guidance.
The worst investments seem to come from deals with family and friends. In these cases the normal investigative analysis and scrutinizing that may be required of an arms length deal is often brushed aside due to a blind faith in the other parties judgment or abilities. In some cases the party involved is too embarrassed to ask for collateral or personal guarantees. Many people fail to realize that if their friends could raise the funds they needed at a bank they will usually do so to realize 100% of the profit potential for themselves and not have to share it with anyone. At the bank they will have to give personal guarantees, legal and binding commitments as well as collateral. Why should they object to as much from their friends?
We have been in this business long enough to know that this years' Hero is next years' Dog. Diversification is therefore very important to keep from getting burned. In real estate they have the saying the three rules to successful real estate investing are 'Location, Location, Location'. In the investment business the rule to successful investing is 'Diversification, Diversification, Diversification'. If you or I were to buy stocks for our investment portfolio, we might be able to buy 10 or 15 different companies stocks, below that the transaction costs would be too high and the record keeping cumbersome. In a mutual fund they will have from 50 to 200 different companies in the portfolio. This provides economy of scale as well as lots of diversification. If some of the manager's choices do not do well there will be enough other stocks to soften the impact. This reduces the volatility of the investment. If a small fund or investor makes a big gain on a single stock it has a dramatic impact. In a large fund the big gain is diluted by the size of the fund. Over time the larger fund will do the best and you will sleep a lot better at night, not worrying about the ups and downs of the market.
My mother has a saying that "A fool and his money are soon parted" In our work we see this too often. If you want to lose your money buy lottery tickets or go to Las Vegas. If you want to make your money grow, the above rules are worth remembering.
Most financial planners believe that planning helps their clients to accumulate more wealth and accomplish their goals; if they thought otherwise, they’d likely be in a different profession. We’re now seeing a number of research projects that explore the relationship between planning and wealth accumulation. In addition, some researchers are starting to explore what they call a “propensity to plan,” in other words, individual characteristics or personality traits that are related to planning and saving.In recent research, John Ameriks, an economist with the TIAA-CREF Institute, along with researchers Andrew Caplin and John Leahy of New York University, have analyzed survey responses from TIAA-CREF participants who were asked a set of questions regarding the extent to which they engaged in planning for their financial future. As might be expected, the researchers found a strong correlation between planning and wealth: Individuals who plan have significantly higher wealth than those who don’t. But the real thrust of their work is to try to go beyond this simple correlation to understand whether planning, or “the propensity to plan,” can actually cause greater wealth. In their research, Ameriks, Caplin, and Leahy look at a variety of personal characteristics and behaviors and attempt to determine whether they are associated with financial planning — indicating a “propensity to plan.” For example, survey respondents were asked whether they like to plan vacations. The researchers found that answers to this question were positively correlated with financial planning at a high level of statistical significance. In addition, confidence in mathematical skills also proved to be strongly correlated with financial planning. As noted by one of the researchers in a recent interview, “In order to develop a plan, you have to be able to compute a few things.”Having established this connection, Ameriks, Caplin and Leahy’s work suggests that people with a “propensity to plan” tend to maintain personal budgets and save more than those who don’t. The researchers hypothesize that the mere monitoring of spending tends to result in lower spending.Further details about this research can be found in Mimi Lord’s article, “Financial Planning and Wealth Accumulation: Identifying Individuals’ Propensity to Plan,” published in the July-August 2002 issue of the Journal of Retirement Planning.
Fidelity Investments in Boston estimates that a person turning 65 needs $174,000 to cover much of what Medicare doesn’t cover. That factors in premiums for Medicare’s physician and prescription coverage, a supplemental health insurance policy, as well as other out of pocket deductibles and non-covered prescription costs. Long term care insurance and services are not included.
Baby boomers are also at risk. For those who are 55, the Employee Benefit Research Institute in Washington estimates that they will need to save between $151,000 and $550,000 for similar coverage – a range that depends on whether the individual lives to age 80 or 100. You can find information to figure out your health care needs and the costs at www.planforyourhealth.com.
The new HSAs (Health Savings Account) can help. They allow those who elect to purchase a high deductible health insurance to save up to several thousand dollars annually on a tax- free basis. Talk to your financial advisor to see if you qualify for one.
I was lucky to have very good health insurance coverage and I still have problems. Right after my accident, 11 months ago, my first four days in the hospital costs over $250,000, and the insurer still has not paid.
The number of Americans in poverty rose by 1.3 million to 35.9 million, or one in eight people.
The number of Americans without health insurance rose by 1.4 million to 45 million, or 15.6% of the population.
Both sets of figures rose for the third straight year.
(Figures provided by the Census Bureau.)
Do something about it and vote.
Okay, you’ve heard it before- past performance is no guarantee of future results. But check out these stats from Segal Advisors Inc., a New York based consulting firm. They analyzed returns of 129 large-cap growth managers during the three-year period at yearend 1999 and 2003, and found that 48% of those in the top quartile for the first period finished with negative returns of 12% to 16% for the 2001-03 period. Only 9 % of the bottom-quartile managers in the 1997-99 period had similarly negative returns for 2001-2003.
In 1999, the aggressive growth managers were hot performers until the downside came. Those managers in the third or fourth performance quartile at the end of 1999 were the more conservative ones, who are even outperforming today.
Take that, Morningstar and your four stars, too. You need a lot more data that the old news that you get from the newspaper, for sure. But there’s a lot more to the decision of what mutual fund to buy than pure research. It has a lot to do with what your goals are, the return you need, how much risk you are willing to take, how does it interact with your other holdings and what sectors does it invest in which may overlap with what you currently own.
Answer those questions in addition to your research and you will find the right mutual fund.
What’s the difference between a stockbroker and a financial advisor? Most people don’t know. Let me fill you in, but first a little background.
I got my start in the financial services field in 1981 at Waddell and Reed, an old line Kansas City firm that professed to do financial planning. It didn’t take me long to realize how slimy the brokerage industry was. There were about 160 of us hired as new trainees. About 86 passed the eight-month evening training sessions, which was a sales course. Fast-forward to more than 20 years later and there is less then 10 that I know of that are still practicing.
Back then Venita Van Caspel wrote the Money Dynamics, the first book about financial planning, and still a great primer for anyone interested in the topic. By 1989, Van Caspel got into trouble by selling limited partnerships that she owned interests in but did not disclose to clients. Note- everyone back then was selling limited partnerships, even moi. But not disclosing a conflict?!
When those Limited Partnerships went under, her clients sued. Van Caspel’s defense was that she was only acting as a stockbroker and under the broker’s exemption to the Investment Advisors Act of 1940, didn’t owe clients a duty to disclose her conflicts of interest. The courts agreed.
Now the FPA (Financial Planning Association) is filing a lawsuit to close the loophole that Van Caspel used. The Investment Advisors Act of 1940 requires a financial advisor to act as a fiduciary (meaning putting the client’s interest first) and to disclose any conflicts of interest. In 1999, the SEC proposed a rule that would exempt the fee-based brokerage programs from the fiduciary and disclosure standards of the Investment Advisor Act of 1940. This allowed brokers to start operating under the exemption immediately without waiting for a final rule. Since then stock brokers got to expand their wrap accounts and other fee-compensated programs without disclosing conflicts of interests to their clients. Now as the public clamors for more fairness, and more disclosure, real Financial Advisors have filed ADV Part II forms with the state or the SEC, have disclosed their compensation, their conflicts, and their fiduciary responsibility. Stockbrokers have hidden behind the broker’s exemption to the Investment Advisors Act of 1940. That is up until now. The FPA as well as NAPFA (National Association of Personal Financial Advisors) have joined together to force the SEC to take action to eliminate the broker’s exemption and its implications that brokers can act like they’re on the client’s side, but legally and actually represent their firm. The people who do understand this are going in droves to places like www.napfa.org to seek out committed fee-only financial advisors and you should, too.
Mutual Funds Integrity and Fee Transparency Act of 2003 (H.R. 2420)
I sure hope this Act goes through. Disclose, Disclose, Disclose, I say. The more the better. I think the public has just about had it with the Wall Street shanigans.
The U.S. House of Representatives is currently considering a bill to require greater disclosure of fees by mutual fund companies, as well as changes to funds' governance structures. NAPFA (National Association of Personal Financial Advisors) supports the proposed changes and will be following this legislation in the House and, when appropriate, the Senate.
A survey by the CDC (Center for Disease Control) showed that Americans with incomes of more than $50,000 were reported to feeling fewer "sad, blue, or depressed " than those with incomes less that amount. The research also reported that people who had the highest number of sad, blue, or depressed days also engaged in unhealthy behaviors, such as smoking and not exercising.
As a Financial Advisor, I found this unfortunately to be true. I had a thriving practice but still took on some lower income clients. I always felt like if they had a desire to work with me, I would be willing to work with them.
But the relationships were not as successful as the ones with wealthier clients. When I would discuss this with associates, we would come to the conclusion that a lot of these types of clients would sabotage their own financial success.
How so? Well, negative attitudes that come from a lack of self-esteem would pop up. A lack of self-confidence and a general feeling that everyone was against them also contributed. Such clients we liked to do some coaching with up front before we started the financial planning process.
Ask yourself now, no matter what income bracket you are in, what stops you from being financially successful?
Finally! What took Chuck so long to force Pottruck out? I was associated with The Schwab Institutional Advisors division when it started in the early 90s. The service and value was excellent. True to Schwab's integrity, it was always what is the best deal and best value to offer the client. Under Pottruck's rule, that evaporated. No one really knows what Charles Schwab & Co does or what it stands for. They have so many hands in so many businesses that it is just one big mess. Will Chuck sell out? Or will he take over and breathe life back into what was once an excellent discount brokerage firm that stood up for the little guy?