How to Disperse Financial Fog

I lived in San Francisco for three years, from ’68 to ’71. It was a wonderful climatic fit for me. I don’t like the heat. No worries. In San Francisco, fog comes in about 5 PM and stays until 10 AM the next morning. Mark Twain famously remarked that the coldest winter he ever spent was one summer in San Francisco. In the fog, San Francisco looks moody and dark and cold. In the sun, San Francisco is gorgeous, crisp and clear. If San Francisco were only clear, it would be perfect. That would make it the most attractive city in the world, in my opinion. Everyone would move there. Not so. The fog keeps the adulation and the population manageable.

It is impossible to see well in the fog. Fog is a word that we all use for other kinds of occluded vision. Money fog is everywhere on the web, for example. Most online financial sites contain a wealth of information and news on all things financial. But, though they may clarify a concept, they don’t lend themselves to action, because the information is not actionable. Much information is about investments. But family decision makers consider most investment jargon and investment details confusing. Business news seems to be popular. There are lots of opinions about the economy on the web. It’s recovering. It’s not recovering. Unemployment is going up, or maybe down. Business sectors are in a recession, or in a recovery. Most families don’t know what to do with this information. How does it help them? Actionable advice to resolve real family problems seems to be too mundane for economists and too personalized for brokers.

When can we retire? Are we saving enough for our kids education? How can we pay less taxes? Do we need an emergency fund? Families want help in answering these questions, then setting goals to make them happen. But, all family planning decisions are confused, not helped, by financial blather. This is where the fog has its worst effects. Confused and afraid of the consequences of making wrong decisions, many of us don’t navigate well in this fog. We either abandon our goals or move along cautiously, delaying decisions until things “feel” right, a formula for failure.

What does success look like? Successful financial planning sets family goals and objectives, then seeks help from an advisor who can speak the languages of both “family” and “finance”. An expert advisor helps families make good decisions that can’t hurt them. Investment decisions must be tax wise and safe; insurance decisions must protect assets rather than consume them with premiums; benefits selections must preserve and protect life and health, setting aside funds and programs for future use.

Only your family can set family goals, and pursue them until achieved. But effective steps to achieve family goals may require specialized knowledge, constant re-assessment attention, timely adjustments and regular review. For this you can pay an advisor. Your advisor’s commitment to you should be to deliver objectivity, fiduciary care (that puts your family first), ethical practice, competence and discipline. In short, a professional advisor can help you navigate through financial fog. A goal is a destination. Achieve your goals safely. Good advice and better decisions clear the fog and reveal the beautiful life you envision.

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The Cato Institute report on public sector wages

Government risk is getting to be a major risk category again, perhaps exceeding market risk and investment risk in 2010. It is always the intention of professional advisors to lessen portfolio risk by diversification. However, some risks are hard to manage. Government risk is the risk associated with government action that may spoil an otherwise solid portfolio return through taxes, inflation, or unintended negative consequences of proposed legislation.

The Cato Institute has released a video report and some interesting data points on the “Two America” problem posed by real income disparity between public and private sector employees, for example. Given these data, it is no wonder government costs seem only to rise. If government costs rise, revenues must rise to meet them, or costs in other areas must decrease to balance them, or money must be printed to inflate them away.

As the Cato report is summarized by PowerLine blog editor John Hinderaker,

There are, indeed, two Americas: the increasingly straitened world of the private sector, where jobs are competitive, money is scarce, and job security is, for many, nonexistent; and the lush world of the government employee, where competition is more or less unknown, salaries and benefits often double those available to private workers, retirement is ten or more years earlier than in the private sector, and it may take a felony to get fired. This is the central economic conflict of our time, between lavishly compensated and ever more gluttonous government employees, and wealth-creating private citizens who are increasingly unable to support their public-sector masters in the style to which they have become accustomed.

Has the current political move to reduce the size of government come too late? The new administration’s enacted healthcare program has reportedly added 146 new federal agencies to the federal bloatocracy. According to the Cato Institute study, it is both nearly impossible to fire federal employees and they retire about ten years earlier than private sector employees with larger retirement annuities.

It has been observed that current political environments may mean that more industries than ever go to Washington to get their deals made rather than to New York, since Washington permission or denial has become central to national economic activity. A political step in the process may weaken deals, or strengthen them if politically favored (e.g. “green” iniatives).

How will we plan for these additional government risks? I believe that our collective financial future is now linked to how we solve the size of our government and what cost extensions we accept or reject. Without the addition of the dreaded, European-style “value added” tax, there is a low probability of actually paying these costs from present revenues. If Bush tax cuts are allowed to expire, of course, they will increase federal revenues while burdening our weak economy even further. We may even elect some reformers to congress this fall. But, as always, congress doesn’t have a good track record of reducing expenditures, no matter who is in power. Congress also does not seem to be able to terminate unneeded federal agencies; it only extends and enlarges them.

Whatever we do or don’t do, it looks like the biggest “risk” to our financial future today is “government risk”. The present administration is empanelling a bi-partisan commission to study this problem and make some recommendations very soon. I wonder who will serve on that panel?  I’m guessing the commission will be composed of public sector folks: heavy on academics, former congressmen, environmentalists and internationalists.

What could go wrong?

Do you understand the problem posed by government risk better now?

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Reverse Mortgage Blues

Q. My mother is 86. She has consumed all her money and investments, now distributing her last IRA balance. She lives alone in a nice home, which she owns outright. She would be happiest staying in her home for awhile longer, but she can’t afford it. Should she consider a Reverse Mortgage? What are the pros and cons?

A. Yes. However, there are many complicating issues raised by your question. You will need to talk to a financial planner about them. They will include:

• The value of the house
  • How desirable is the neighborhood?
  • What’s the condition of the property?
  • How saleable is the property in this market?
• Her will or estate plan
  • Mother’s intent on her estate?
  • Interested heirs and their objectives?
  • Charitable intent?
• Her own health
• Her health insurance
• Her long term care insurance
  • Does she have any?
  • Does her coverage include home health care?
• You and your siblings feelings about the house
  • Do you want to keep the house in the family?
  • How convenient and likely is it that your family can help her take care of the house?
• The alternatives in financing her cash needs
  • Does anyone in your family want to finance her need in return for ownership or part ownership of the house?
  • Would anyone in the family like the tax benefits associated with this property?
• What are current interest rates associated with commercial reverse mortgages available to Mother?
• What life insurance does your mother have, if any?

Although RESPA and HUD have put safeguards in place to protect elderly consumers from coerced reverse mortgages, once a certificate has been granted indicating that a transaction may proceed, the family needs to work through all these financial planning issues. Using a Certified Financial Planner™ professional as opposed to a mortgage loan officer is wise. The mortgage company wants to make the loan and is typically not informed about or interested in presenting alternatives to a reverse mortgage or in working with the family as they consider the many issues listed here.

For these reasons, though the baby boomers have entered the reverse mortgage market (i.e., age 62 or above), this area of home finance contains a minefield of potential problems and poor decisions. Since a CFP® advisor is trained in the technical aspects of all the issues around a reverse mortgage decision, they should be involved with the project as soon as possible. Reverse mortgages can be blessing, but without proper handling, you might be singing the Reverse Mortgage Blues.

Talk to a CFP Professional™ about reverse mortgages today
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Too Much Information…

By Tammy Kraig, CFP®

Too Much Information….Simplifying Your 401(k) Allocations

The end of the quarter is a good time to reassess your investment allocations.  And maybe you want to invest that income tax refund that is coming your way.  Don’t get too caught up in all the information, analysis, and direction coming from the financial gurus.  If you are going to put in massive amounts of time to research and stay current on the financial markets – all the time – well and good.  You are armed and ready to buy and sell at a moment’s notice.  But for most people who aren’t making a living from analyzing the financial world, investing their retirement dollars can be done very well with a Simple Plan.

Four Steps to a  Simple Plan:

1. Your Risk Tolerance:  “To thy own self be true.”  Shakespeare was correct.  It’s your retirement money, and you need to be able to sleep at night.  This means take an afternoon or evening and really contemplate how you felt when the stock market dropped 37% in 2008.  Did you tell yourself you have plenty of time until you need the money?  And, hey, these companies are still in pretty good shape.  I should buy while prices are low.  Or did you feel panicky and a little despondent?  If you don’t ever want to go through a drop like that again, you will be more comfortable with a more conservative portfolio.  But, you have to accept that returns will not be as fabulous as the returns of the next person bragging at a cocktail party about his killing in the latest start-up.

2. Your Targets: Often, creating a plan comes down to defining your goals – and especially your time frame.  When you’re saving for something that is coming right up, you want to preserve your principal with a conservative investment.  Historically, CDs, bank savings accounts, and money market funds have provided the greatest stability to preserve principal.

If you will take some money out for a medium-range goal, you might want to consider supplementing your money markets with investments in short-term bonds and perhaps a small allocation to stocks.  Bonds usually offer more growth potential than cash – but, of course, there is risk.

For a target that is long-term, stocks offer the most potential – and the most risk.

3.  Your Asset Allocation:  Once you have decided how much risk you can comfortably take and are clear on your time line, create a plan for your investments.  Select a few mutual funds that will allow you to sleep at night.  An Index 500 mutual fund will attempt to mimic the market return – ups and downs.  Sector funds such as Energy and Health Care can be more volatile and usually require more attention.  If you are conservative, keep a portion in bond funds or money markets.

4. Stick to your plan.  Perhaps the most important rule.   We have seen individual investors come into our firm who have gotten out of the market at the very bottom and now want to get back in – but they have missed much of the rally.  Establish a regular schedule for investing;  take advantage of automated deductions such as payroll deductions into a 401(k) account or regular deposits into an IRA.  And then stay disciplined through the ups and downs.

Four steps to a Simple Plan.  Simplify all the dire predictions and too much information handed out by various self-proclaimed experts.  Your time targets and risk tolerance determine your asset allocation.

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Divorce is a Major Factor in College Financing

By Kevin Worthley, CFP®, CDFA™

I recently spoke with divorce attorneys on the benefits of pre-divorce financial planning and how the financial consequences of a particular settlement could make a large difference to their clients after the divorce is finalized.  The consequences on college planning for the children of a divorcing couple are often overlooked in divorce negotiations.  Family cash flow during the college years, financial aid, and the ability (or not) to meet the Estimated Family Contribution (EFC) are all factors that are heavily influenced by divorce and how the divorce is structured.  Given some cooperation and planning by the divorcing parents, they and their student(s) may avoid costly mistakes and actually benefit from a properly-structured divorce settlement.

For financial aid calculations, most colleges (especially the public schools) usually only consider the “custodial family” of the student.  This means the “non-custodial” parent living elsewhere may not have his/her income or assets as part of the aid calculations.  (Private schools requiring the CSS Profile financial aid application will ask for the non-custodial parent’s financials, however).  There may be a significant difference in the financial resources between the two biological parents and ideally, the student could potentially benefit by being the custodial child of the parent with the lower income and assessable assets.  Parents should be careful though, as a parent with higher income and assets may also have more obligations that may lower their net EFC below that of the other parent.

Although some state laws (such as RI) do not require provisions for college payments by divorcing couples, many parents often negotiate such obligations into their agreement to make sure one or the other contributes toward college in the future.  If their students apply to private schools, documenting such obligations may actually work against the family, since colleges often ask (on the Profile application) whether the parents are divorced and if there is such a provision in the divorce decree.  If so, the college chosen will often ask for copies of the divorce decree and this could work against the student in qualifying for aid. Assuming both parents are truly earnest in meeting college costs for their children, it may be better to leave such obligations un-documented if financial aid could be realized in the future. (Of course, if there’s a possibility someone will welsh on their promise, that’s another consideration and one’s attorney should certainly be consulted).

Many times, a student’s chosen college(s) will request financial information on the non-custodial parent, who then balks and refuses to provide tax returns, asset and income information.  This is due to fears the college may require contributions from that parent that were not part of the divorce agreement.  What many parents fail to realize is that colleges only assess certain assets in the aid calculations and even then, the percentage of value actually assessed of those assets are very low; often only 3-4%.  Home equity and retirement accounts are often not even a factor either.

Divorcing parents with college-bound children may benefit by putting aside bitter memories or past conflicts and cooperate together to find the most efficient and cost-saving solutions to pay college costs.  With open discussion and a little less ego-protection, divorcing parents might be able to give their children some financial benefits or even find some cost-savings for themselves in college financing.  Such measures may go a long way in at least giving the children the best start possible in their own lives.

Kevin Worthley is an investment adviser representative of the Retirement Planning Company of New England, a registered investment advisory group in Warwick, RI and a registered representative of Cambridge Investment Research Inc. (member FINRA/ SIPC).  RPC and Cambridge are not affiliated.  The opinions expressed above are solely those of Kevin Worthley and may not be those of the Retirement Planning Company or Cambridge Investment Research.

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Conflict-free Advice

Senate Committee on Banking, Housing, and Urban Affairs, Chairman Chris Dodd (D-CT) has put the kibosh on conflict-free advice by not including a “fiduciary standard” in his 1,336 page bill of new industry regulations. In this, incidentally, he is in opposition to the Department of Labor regulations on investment advice proposed by Vice-President Joe Biden. Instead of adopting the conflict-managing guidelines suggested by the Obama administration for retirement plans, Dodd has asked the SEC to “study” the result of investment companies’ advice practices when recommending their own mutual funds. How could advice given on new investment in mutual fund shares whose profits pay the advisor be anything but a conflict of interest?

So, it looks like the ongoing fog around investment decisions outside of the workplace will be maintained for another year or two. Until then, some argue, working families may be restricted to investment advice from a conflicted source or even be deprived of advice. Advice from a trusted advisor who exists only to serve the advisee is coming fast to replace the conflicted model. Myfinancialadvice offers a portal that allows advisors to give and consumers to receive conflict-free advice for a fee, exclusively, giving the public access to advisors that they can and will trust.

When you think about it, working families really need more than investment advice. A trusted “fiduciary” financial advisor might advise people not to increase investment in their 401k account, for example. By separating “advice” from investment (i.e., “buy” and “sell”) recommendations, fiduciary advisors are better able to help families consider all their financial planning goals. The fee the advisor receives, from the employer or the advisee, should be their only compensation. An independent CFP^® professional, for example, must advise in the best interests of his advisee. But dissimilarly, an investment or annuity salesperson, salaried or commissioned to “guide” plan participants to a narrowly described retirement investment purchase is not presently required to consider family goals. Regulations that don’t divide the advice from the sales function may solve the problems of the regulators, the employers and the investment companies. But instead, they should solve the dynamic problems and goals of working families.

Here are some examples. Some families might have a more immediate need for the money in their pockets than for investment. If they are young, they might want to put a down-payment on a condo so they can move out of their parent’s house. If they are newly married, they might want to save for a washing machine. If they are a little older, they might want to save for their children’s educations, fund their Health Savings Account or replenish their emergency fund. See the problem? Any decision support that people are given for retirement funding should also allow the freedom to make no investment at all. That’s why advice without conflict was proposed by the Obama administration.

Why didn’t that approach work for Chairman Dodd?  Why propose a “study”?  Enough studies have been done. It’s time to remove the conflicts of interest and give people “real” advice, from an expert. Today’s technology makes the economies of scale possible to serve everyone who needs financial advice. It reveals the possibility that all of us can have access to an expert, to advise on a small project associated with retirement funding, but given in the context of all other family goals and sensibilities. That’s valuable.

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What is “free” advice worth?

About what you pay for it, usually. Yet advice is what financial consumers want and need and their powerful pursuit of advice may be used to sell them something else. All the “brand name” investment and insurance companies do this. A “client” comes to them for advice but walks away with an investment or an insurance policy! Advice was used as the front end of a sale, establishing rapport and overcoming sales resistance.

The Obama administration and the Department of Labor have statistics that show that plan participants in 401k plans who get “conflicted” advice, lag behind those who get “fiduciary” advice. Less than expected growth in investment account balances is the result.  To fix this problem, new regulations that implement the Pension Protection Act of 2006 will now require that the advice function and the investment decision function be separated. The operative word is “fiduciary”. Advice given at a fiduciary standard is delivered solely to the advantage of the plan participant. Industry giants who sell their own funds and annuities are lobbying intensely to fudge these regulations in order to allow salesmen to continue to give advice. However, the cat is out of the bag. They may obfuscate and give large legal disclaimers to protect them from the accountability of giving conflicted advice, but the public is beginning to know what “real” advice looks like. Trustworthy advice is delivered by a competent independent advisor with no product links at all and it is NOT free.

But, here’s the problem. People have been trained to “think” that advice should be free! Their banker gave them free advice when he sold them a CD or a mutual fund. Their insurance agent didn’t charge them for advice when they bought their variable annuity. Their broker didn’t charge them for advice when they bought their exchange traded fund. Even the web, the new center of our financial lives, uses the same terms. “Come get some advice “free” and talk to one of our advisors.” Hmmmm. Wonder why they do that for free?

Well, the first part of a conversation with a professional advisor, i.e., one who is paid for his work, should be free. Without a free beginning conversation, he or she would not be easily trusted. When people ask for advice, they do so because the decision they are trying to make is fraught with the potential for a mis-step. They are trying to avoid the pain of making a bad decision. But, people want to feel safe in taking advice. They don’t feel safe with a stranger.

New business models are being developed on the web to ease consumers through this transition and help them find a trustworthy expert. First, we all need to learn that experts need to be properly certified and licensed. They aren’t an expert just because they hang out a shingle. Next, we need to know more about a chosen expert’s credentials than they are working for a big name company! Many household names of companies in finance are now defunct. Most didn’t die innocently. Often they were pursuing sales practices that bilked the public.

So, we want to know the truth about an expert advisor’s background and his work history, where he went to college, what his credentials are and what those who have used his services think of his work. All that can be found now on the web, checked by third party background vetters. New web portals like ours can arrange the data and allow that “free” introductory conversation that consumers need before paying for advice.

Free checkups or free get-acquainted sessions with qualified advisors who have good reputations, current credentialing and proper licensing are a defensible exception to the use of the term “free” when referring to advice. The checkup collects and interprets vital signs of financial health, then prescribes paid sessions to correct any weaknesses. We believe tha this new model will take the place of the old manipulative model which gave away advice in order to close a sale. “Real” fiduciary advice sessions, provided in small amounts to solve specific problems, prescribed and delivered by an expert advisor who delivers his advice in tandem with financial product recommendations from which he does not profit are an excellent value. A recent Hewitt/Financial Engines study estimated that plan participants who get advice and follow it may exceed their peers’ investment returns by an annualized 67 basis points. That’s not free. It’s valuable.

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