Tips on Finding the Right Financial Advisor
Is the advisor acting as a fiduciary?
A fiduciary is required by law and his responsibility is to put the client’s needs above everything else. Even if a product would mean a bigger fee or commission for the planner, if it was not in the best interest of the client, the planner would not recommend it. An advisor who is not a fiduciary only has a suitability requirement. This advisor may recommend something that is suitable but not best for the client because he just wants a bigger commission. This type of planner might sell a riskier investment than would be in the client’s best interest.
Advisor or salesperson?
How and how much an advisor is compensated is very important for you to know before going into a new relationship. An advisor who only charges a fee typically doesn’t have the same potential conflict of interest when recommending investment strategies as an advisor who receives even a portion of their compensation in the form of a commission. It’s even more confusing when some advisors are a fiduciary for some actions, but not all. Some advisors are fee-based instead of fee-only. This typically means that they offer some fee-based solutions, but also sell products for a commission. Be sure to ask about fees, commissions, and any hidden fees for services and products. You need the total cost before making any decisions.
What are their credentials and experience?
Virtually every letter of the alphabet is used for credentials. The Certified Financial Planner (CFP) professional designation is the most widely known. This designation also includes continuing education and ethics requirements. Some others that you might see are CIMA, CLU, ChFC, PFS, CRPC, CKA, CFA and others. The designation doesn’t automatically qualify the designee as competent or with the experience and expertise needed to provide adequate planning. It does signify that the advisor has made an effort to gain knowledge and be subject to some accountability. The advisor should not just depend on their designation but should continue to research and study to gain more knowledge. Be aware that some advisors who have designations could still be trying to just sell products without financial planning.
What should a financial planner offer?
A financial plan consists of many components. Cash flow analysis helps determine how much money you need to live on, how much is available to put towards your future goals and other aspects. An objective insurance review makes sure you have the right amount of coverage for your family as well as the right kinds of insurance for your situation. Retirement projection and distribution planning will help you know when you can retire and how you might be able to make contributions to organizations or people you care about. Investment analysis makes sure you are at the right risk level, correct investments, among other things. Tax planning might be the most critical aspect because it can affect you on-going, helping make sure you are paying the right amount of taxes. Estate planning is important to make sure your affairs are in order. Over time the best planners teach their clients to understand that investments should be the fuel to support their life goals, not the focus of their life’s plan.
Did the advisor emphasize their ability to provide above market return?
If an advisor starts recommending a certain investment or portfolio during your first meeting, that is a warning sign. The first meeting should be finding out information about you. If the advisor is pushing you to buy something right away, he is not even meeting the suitability requirement. If the advisor says he is being paid by his company and not by you, that is false. The commission that he is making on that sale, which you are paying, is what his company is using to pay him. You should not feel pressured to buy anything from a good advisor. Don’t trust an advisor who is offering a big percentage back on an investment or guaranteeing a big return on your money. Those kinds of statements are not binding and unrealistic. Don’t rely only on performance. It’s too easy to evaluate your portfolio over a short period of time which can be too random. Using a goals-based approach will provide a better measure of your progress toward reaching your personal goals.
The best financial plan/planner is the one you will stick with!
Have any complaints been filed with FINRA or SEC?
For registered investment advisors (RIAs), look for Form ADV in the SEC’s Investment advisor Public Disclosure database if they manage more than $110M or with their state regulator if they manage less than $100M. Brokers and RIAs both have data on FINRA’s website. Don’t be intimidated about asking these tough questions. The prospective advisor should have nothing to hide, and you will be glad you asked.
Where do you start your search for your personal CFO?
If you ask a friend or relative, the advisor they suggest may not be a good fit for you, even though he was for them. Unless the person you ask is very savvy in financial matters, they might not really know if the advisor is competent.
Start by asking other professionals like a CPA or tax attorney who they refer their clients to for financial advice. These professionals usually work together to create and implement a plan for you.
Research the internet and read through the description of what is offered by the firm. You can get a good idea of what the qualifications are of the planners through the website. Read reviews that are posted. Be careful not to just ask for client referrals because, of course, the planner will give you only clients who like them.
Do not be enamored with someone who is on TV or quoted in a publication or is listed on one of the “Best of” lists. Many of these are based on production or total assets under management which does not address the quality of the financial planning they provide.
Have You Unknowingly Disinherited Your Grandchildren?
The NY Post published an article a number of years ago that was a stark reminder of the importance of checking your beneficiary designations. “A Brooklyn man says he was left destitute when his late wife’s pension, worth nearly $1 million, was awarded to his sister-in-law on a technicality…The Friedmans were happily married for nearly 20 years when Anne, a former city school principal, died suddenly of a massive heart attack…“The annual statement from the retirement system indicated that Anne had not named a beneficiary. He would be the beneficiary by default. However, after she died, the administrator found an old beneficiary form which had been submitted four years before the couple met, indicating that Anne’s mother, uncle and sister (his sister-in-law) were the beneficiaries! Her mother and uncle had already died, so his sister-in-law received the entire account balance—OUCH!!
From my experience, more mistakes are made with company retirement plans (e.g., 401K, 403b, etc.) than with individual IRAs, but the same warning applies—DON’T ASSUME!!
So how should you name your beneficiaries? Most people name their spouse as primary and their children as equal contingent beneficiaries. This accomplishes the goal in most cases, but be sure you haven’t disinherited your grandchildren. If at least one of your children have a child (your grandchild), I recommend that you add the phrase “per stirpes” to your beneficiary designation. Essentially, this means that if one of your children predeceases you (or dies at the same time), that child’s share would go to their “issue” (children or grandchildren). Plus, unless you name them specifically, your child’s spouse (son or daughter-in-law) or step-children are not automatically included as a beneficiary.
No problem, you say, I have them named in my Will or Living Trust. That takes care of this problem, right? WRONG! Any contract (IRA, 401K, Life Insurance policy, etc.) that has a named beneficiary automatically bypasses (ignores) the Will or Trust and goes directly to the named beneficiary.
If you want your Will to direct the proceeds, you will need to name your estate as the beneficiary. Problem solved, right? Wrong again! There are, in the vast majority of cases, no income tax issues with naming your estate as beneficiary of your life insurance policy. However, there are HUGE tax consequences if you name your estate as the beneficiary of your IRA or other retirement plan. Since your estate has no life expectancy, the IRS requires the IRA to be distributed and taxed within 5 years. If an individual(s) is named as beneficiary, he/she has the option of taking distributions over his/her lifetime. Please note that the contingent beneficiaries have to be named specifically as beneficiary to qualify for the “stretch” provision and must begin distributions no later than the year following the year of death. If distributions do not begin by the end of the year following death, the five year rule applies.
There are many other ways to pass assets to your heirs that I haven’t reviewed in this blog. Joint Ownership with Right of Survivorship, Transfer on Death, Payable on Death, or a Living Trust. There are advantages and disadvantages to each of these methods, but one similarity, the Will has NO AUTHORITY over who gets those assets.
Don’t trust your memory, verify that the beneficiary designation will accomplish your wishes!
Disability: The Living Death
A number of years ago, a good friend of mine (I’ll call him Joe) was diagnosed with Multiple Sclerosis (MS). Joe was in his late 30s with three children under the age of 10. His company made some concessions so Joe was able to work for a few more years, but eventually, the company could no longer accommodate his disability.
The good news was that Joe had purchased a disability insurance policy that paid him a portion of his salary. The bad news was that the benefit period was only five years. As is typical, the company didn’t provide any disability insurance protection. However, Joe was able to apply for Social Security disability payments. With his obvious disability, one would have expected the approval process from Social Security to be nearly automatic. Unfortunately, that was not to be the case. After about two years, Joe was finally approved for Social Security disability payments. The amount of money he received from Social Security was very helpful but was not nearly enough to meet their needs. If his children had not received a Social Security payment in addition to Joe’s, the result would have been devastating.
Joe’s church was a huge help financially, and emotionally, reminding us of the importance of having a church “family” to put their arms around you during a crisis.
Joe lived for many years after being diagnosed with MS. It was great to have Joe around for fellowship and to help raise his family, although his disabilities hindered the amount of help he could provide. Joe was a living reminder of the difficulties a family deals with when the main bread winner loses his ability to provide for his family.
A disability has been referred to as a “living death,” since the disabled person is not able to contribute toward their care but still needs to be cared for. Because of this, I have advised some people in the past that if they could afford only life insurance or disability insurance, they should buy the disability insurance. Don’t misunderstand me–I think both are very important, especially when most people can buy term life insurance relatively inexpensively.
There is a good reason why disability insurance is more expensive than life insurance. The insurance company prices these products based on the likelihood of a claim being filed. According to the National Underwriter 2016 Field Guide, the odds of experiencing at least one long-term disability before age 65 is 47% at age 30; 43% at age 40; and 36% at age 50.
Life and disability insurance is typically “sold,” not “bought.” However, I hope you will at least consider contacting your insurance agent (preferably one who is independent and can shop several carriers for you) and consider protecting you and your family from the potentially devastating effects of a long-term disability.
Can Your Spouse Handle The Money When You’re Dead?
Do you think you can manage your money from the grave? What will your spouse do with your money when you’re gone?
In the financial workshops I teach, I tell the story of a man who lived his life VERY frugally—some would say he was just plain stingy! One day God took him home. About two weeks later, I saw his wife and noticed that she was wearing a HUGE diamond ring. I told her I was surprised she bought such a huge ring right after her husband died—especially knowing how he hated to spend money. She responded by telling me that it was actually her HUSBAND’s idea for her to buy the diamond. I was shocked, to put it mildly! She said, “No, really, it was his idea. Right before he died, he told me to buy a cheap casket, have an inexpensive funeral, but buy a LARGE stone!” I doubt that the diamond was what he had in mind, but perhaps, he should have been a little more specific.
Of course, this didn’t actually happen, but something very similar happened with a widow I met with recently. Her husband had written some instructions for her, with one of the suggestions being that she contact me to help her with her investment and financial planning decisions. She fulfilled his wish by meeting with me, but she had already decided what she wanted to do with her money long before we met. She had decided to take the majority of the funds and pay off her kids’ mortgages and school loans. Fortunately, she was going to have liens put on the properties and take-back notes so the kids would pay her back at 3%.
My guess is that this is NOT what her husband had in mind when he suggested that she call us for help. He was obviously concerned that she may not handle the money in such a way that would be sure it was there for HER benefit. The obvious problems are (1) there is no liquidity, so if she has an emergency, those funds will not be available and (2) the bigger potential problem is that if the children run into financial difficulty, she will not foreclose on the property if they don’t make the payments. I hope this works out the best for her and her family, but it is fraught with potential danger—especially for someone as young as she is.
I have run into many people over the years who have told me that if something ever happened to them, they have told their spouse to contact me. I always encourage them to, at a minimum, make an appointment to visit with me and my team to see if we really are a good fit. It is also a great time to communicate with your spouse how you would like the funds to be invested, and disbursed, after you pass on.
I strongly encourage you to communicate with your spouse as to how you are currently managing your money and, just as importantly, what they should do after you are gone. If there is a firm you would like for your spouse to work with, please visit with them NOW. You and/or your spouse may discover that a different plan/firm would have been better for your spouse. That is not the kind of surprise your spouse wants to have!
The Perils of Giving Your Kids an Allowance—at age 40!
The Dilemmas Financial Enabling Causes!
I met with a prospective client recently who shared her story with me. Her husband has a rare combination of illnesses, including early-onset Alzheimer’s. They have two daughters, and one lives in a house they built for her after her divorce. This daughter works several jobs and does the best she can to be independent, but she still can’t afford to pay rent. The other daughter, divorced with one child, lives in another house owned by the parents. The only “requirement” the parents have put on this daughter is that she pay the taxes and insurance on the home. Unfortunately, she doesn’t even attempt to pay those costs or even try to get a job or make any other attempt to be independent and act responsibly.
Adding to this stressful situation is the husband’s/father’s spending money irrationally due to his cognitive impairment. He likes to get the mail each day, but then he proceeds to send money to the organizations persuasively asking for money.
I would like to think that this situation is not common, but after over 30 years’ counseling in financial planning, I assure you that it is all too common!
You need to ask yourself this question: “Who has the problem?” In the book Boundaries, by Dr. Henry Cloud and Dr. John Townsend, they describe a counseling session with the parents of a young man who was financially dependent on them.
“They tried everything they knew to get him to change and live a responsible life, but all had failed. He was still using drugs, avoiding responsibility, and keeping questionable company. They told me that they had always given him everything he needed. After they talked for a while, I responded: ‘I think your son is right. He doesn’t have a problem. You do. He can do pretty much whatever he wants, no problem. You pay, you fret, your worry, you plan, you exert energy to keep him going. He doesn’t have a problem because you have taken it from him. Those things should be his problems, but as it now stands, they are yours. Would you like for me to help you help him to have some problems? As it stands now, he is irresponsible and happy, and you are responsible and miserable.’”
Many of you reading this story would tell me that you would have no problem cutting this child off from the gravy train. However, the reaction changes quickly when a grandchild is in the picture. You don’t want the grandchild to suffer as a result of their parent’s negligence.
As hard as it is to actually do, it’s time to take off the training wheels, even if it means the son or daughter is going to fall down. Too often, the financial enabler takes off the training wheels but rushes to put them back on as soon as the child gets in trouble—AGAIN!! I know your child will tell you that it is the last time they will need help, but the odds are high that they’ll be at your door sooner rather than later. Why not come back for more? You’ve caved every other time.
Don’t let your kids use your retirement funds because they are not willing to make the effort to be financially independent. Read Boundaries and be the solution, not the problem!
Listen to more insight on Financial Enabling below!
Listen Now:
Is Life Insurance a Waste?
Life insurance is a waste of money–unless you die!
I have never had a widow tell me that her husband had too much life insurance! Of course, some of them did have more life insurance than they needed, but no one ever complains about having more money than they need.
If someone else depends on your income, you should take the time to think through a scenario of that person suddenly not having your income. Once you realize there is a need, there are two questions to answer: how much should I buy, and what kind should I buy?
Step One: How much should I buy?
The first piece of information you will need to know is how much of your income needs to be replaced. This is calculated simply by adding up all of your expenses and subtracting the income that will be available to meet those expenses, not considering any existing or new life insurance. Be careful not to underestimate your expenses just because you know that the lower your expenses, the less life insurance you will need to buy. Follow these simple steps to help give you a starting point for discussion:
Annual Expenses
Less:
Surviving spouse’s net paycheck
Social Security – spouse
Social Security – children
Retirement income – current
Other income
Total potential income
Income shortage
To come up with a reasonable amount of life insurance to produce the annual income shortage, simply divide the income shortage by 5% (0.05). For example, if the income shortage is $20,000, the amount of life insurance it would take to provide $20,000, assuming 5% earnings would be $400,000. If you already have $100,000 through your employer and/or an individual policy, you need to purchase an additional $300,000.
If you want to be more conservative (e.g., to account for higher inflation or lower earnings growth), simply use a lower earnings assumption. Conversely, if you thought the money wouldn’t need to last as long (e.g., your spouse is expecting a sizeable inheritance or would get a higher-paying job when the kids were out of the house), simply use a higher earnings assumption.
This is an over-simplified way of calculating the amount of life insurance you need, but it will at least give you a reasonable estimate.
Step Two: What kind should I buy?
Term life insurance is what I recommend in the vast majority of situations. If you are 30 years old, consider buying a 30-year level term life policy. It is also worth considering combining several term policies. For example, if the children will be done with college in 15 years, buy a 15-year term policy for $200,000. The other $200,000 you need should be a 30-year term that will take you until you are almost retired.
Of course, along with buying the term life insurance, you need to be putting money aside in your 401(k) or an IRA (Roth or traditional) so that when the term life expires, you have enough assets for your surviving spouse to live on.
If you think you will have a need for liquidity at death, or at least well into your retirement years (for things like a potential estate tax liability or your assets are tied up in illiquid assets like real estate), you should consider buying some permanent life insurance. Permanent life insurance is either whole life, universal life, or some version of these two. Typically, I recommend buying a whole life policy from a “participating” life insurance company (such as, Northwestern Mutual or Massachusetts Mutual). The amount you should buy depends on your circumstances, but I rarely recommend having more than $100,000 (and usually just $25,000 to $50,000).
What about accidental death and dismemberment (AD&D) insurance (or a rider on an individual policy)? If you can buy it very inexpensively and the cost doesn’t derail the rest of your financial plan, I don’t have a problem with someone buying it. Obviously, if you died in an accident, it would be a good deal. However, I believe one of the main reasons the cost for this type of insurance is so low is that the odds of dying by accident are low.
Remember, it is just for death by accident. I had a call from a radio listener who asked about collecting a death benefit from an AD&D policy. She told me that her husband had a heart attack. I told her that this type of policy paid only in the event of death by accident. She quickly told me, “He didn’t mean to have a heart attack. It was an accident!”
Finally, be sure to work with an independent agent who can shop around for the best price for you–especially if you have any physical issues. Insurance companies price diabetes, obesity, high blood pressure, etc., differently (depending on their own loss ratios). Be sure to check with your employer or professional association to compare prices–especially if you have a physical issue.
Take care of this TODAY! Your family will be forever grateful!
How to Conquer the “Phantom Risk”
When you think of investment risk, what comes to your mind first? Many people think, “I could lose all of my money!” If you’re invested in something like a diversified stock mutual fund, the chance of losing all of your money is very unlikely. However, there is definitely a risk of volatility, which can turn into a partial permanent loss if you sell out after a downturn in price. Did you notice that I said “price,” not value? Many investors confuse these two without even realizing it.
I remember a conversation I had with a money manager whom we were evaluating for potential use in our portfolios. I asked her what kind of risk controls they had in place, in the event the price of a particular stock they owned started to go down. She asked me if I meant if the stock went down in “price” or “value”? She said if it was just the price that changed, she would consider if it was a good time to buy more. If it went down due to the value of the company dropping because of a specific company issue, she would have a very different thought process as to keeping it or buying more. I confessed to her that I said “price,” but I meant “value.”
It is very easy to get caught up in the “excitement” of the live auction that we call the New York Stock Exchange to the point that we forget it is an auction. I have attended a number of auctions over the years, so I understand how easy it is to get caught up in the commotion and excitement and end up paying more than you should for the item being auctioned. The same feeling can overwhelm you regarding the stock market. We get excited when prices are on the way up and jump on the bandwagon and buy some stock, even though it is overpriced. The same bandwagon can appeal to your fear of permanent loss and cause you to jump off the wagon on the way down, which makes the loss a self-fulfilling prophecy. Emotions have a strong influence on our lives.
I have told my radio listeners, seminar attendees, and clients two of my philosophies that I think help keep them from making the wrong moves at the wrong time. First, be sure to keep some of your money in things like money market funds, CDs, and/or U.S. Treasuries. Even though these investments don’t earn as much over time, they do help keep you from bailing out at the wrong time.
Second, if you are the type of person who will bail out when your growth investment goes down 5%, 10%, or 20% (pick your number), then please don’t invest in those types of investments. History tells us that those types of investments WILL go down, but history also shows us that the price will go back up to a point higher than it was before it started going down.
What’s Your Attitude About Money?
I remember hearing the story of a man who applied for a job as the manager of his department. He had worked for the company for 15 years, which gave him seniority over the other applicants. When he found out he didn’t get the promotion, he complained to the boss, reminding the boss that he had 15 years’ experience. The boss proceeded to tell the employee that he didn’t get the job because the employee had 1 year of experience 15 times, and not really 15 years’ experience.
As I venture into the world of writing/blogging, I hope it will become clear that my 30+ years in the financial planning advice business was not just 1 year of experience 30 times!
There is much “art” that goes along with the science of financial planning, especially as it relates to investment management. Sometimes just plain old common sense reveals the right solution to a problem. I grew up as a PK (preacher’s kid) with three brothers and one sister. My parents were VERY frugal, but they still made sure that their children didn’t feel like they were making large sacrifices. My parents couldn’t really teach me anything about managing money, since they never really had any. But they did teach me the one financial lesson that is the basis of nearly all financial decisions—spend LESS than you make!
The temptation to buy, buy, buy is great! However, no matter how low or high your income, if you spend less than you make, you at least have a chance to become financially independent. I have met folks who earn $25,000 a year and are as happy as anyone I have ever met. I have also met folks who make well into six figures ($100,000+), but they are miserable. They have more “stuff,” but that “stuff” has not made them happy.
We all have heard the saying that “money isn’t everything, but it’s way ahead of whatever is in second place.” Or, “money won’t make you happy, but being poor doesn’t either!” Of course, we all need money to operate in this world. It’s your attitude about money that will determine whether you will be a slave to it or you will use it to leave a legacy of discipline and control.