Archives For October 2006

Tips From a Reader

October 31, 2006

A reader named Bryan left the following comment just a little while ago and I thought I would share it with everyone:

My wife and I are about 5 years from the upper end our our age bracket and exceed both the median and average net worth, the average by almost 4 x’s. That’s our financial net worth, not including our crap…furniture, jewelry, cars, etc. We didn’t inherit anything. We don’t make exhorbitant amounts of income. We have a financial advisor. We systematically save and invest into managed mutual funds across multiple categories. Only about 30% of our net worth comes from our home equity, we don’t live in a residential housing bubble part of the country.

Here’s the secret(s):

  • live below your means
  • don’t buy new cars all the time
  • have a ginormous emergency fund
  • have some insurance in case you get sick, can’t work, or … DIE
  • don’t ever put anything on a credit card or any kind of financing or delayed payments through any retailer
  • put 15% of your income into a 401k or IRA and fuhgit aboutit

it’ll happen automatically…

I couldn’t have said it any better myself!

Some advisors will tell you that “fee-based” and “fee-only” financial planning is the same thing. They are wrong. They are very different. Here’s how:

A “fee-only” financial planner is one who gets paid SOLELY by the client. There are NO commissions whatsoever. The client pays for the planner’s services either by the hour or by the plan. Some fee-only planners also manage assets, charging a percentage of “assets-under-management.” This percentage varies, but is usually no higher than 1% per year. Of course there are always exceptions to the rule. Regardless, there are NO commissions on products sold because the fee-only planner does not sell products. If a product is needed to complete a plan, the fee-only planner either refers the client to a salesperson or directs the client to a no-load or low-cost alternative.

NOTE: Some people have said that fee-only financial planners who charge fees based on assets under management (AUM) also represent a conflict-of-interest because they get paid MORE when the clients invest more with them. So, if a client comes to a planner for advice on whether to take some of their assets to pay off their house (assets that would remain in AUM if they weren’t used to pay off the house), would the planner act in the best interest of the client? It’s an interesting question.

Now, contrast that with a “fee-based” advisor. A “fee-based” advisor can charge fees under management but can also receive commissions on product sales. This should show you just how lucrative product sales can be. Granted, some fee-based advisors do something called a fee-offset, where they charge the client either a commission or a fee, but not both at the same time. From the client’s perspective, I don’t see how this is superior to the old commission-based model.

As I have said in the past, it isn’t fair to say that all fee-only planners are good and all fee-based or commission-based advisors are bad. There are excellent commissioned-based advisors out there. The problem is the built-in conflicts-of-interest that exist in the commission-based way of doing business. I have seen PLENTY of examples of advisors doing the wrong thing to make me a believer in the “fee-only” model.

Today is the last day of the Bogleheads’ October Project. Bringing us the review of the last chapter is Ironman of Political Calculations.

To celebrate the end of this project, I will send a copy of the book to two lucky commenters. All you have to do is a leave a comment, which will enter you in the giveaway. I’ll announce the two randomly-selected winners on Friday. Good Luck!

Here’s today’s Question of the Day:

If your broker recommended a particular mutual fund family to you and then told you that his firm had a special revenue-sharing arrangement with that mutual fund family, would you still invest in that mutual fund?

I realize that MOST of the readers of this blog are do-it-yourselfers and would NEVER use a full-service broker. However, I still wanted to ask this question in light of an article ($)I read in today’s Wall Street Journal about Jim Weddle, the new head of Edward Jones. For those of you who may not be familiar with the story, Edward Jones recently settled a case (without admitting or denying guilt) for $75 million dollars for failing to disclose their revenue-sharing arrangements with mutual fund providers to their clients. They also agreed to pay $127 million to settle nine class-action lawsuits that were related to the scandal.

Revenue-sharing agreements are arrangements in which a mutual fund family pays the brokerage firm extra fees or commissions for selling their product. The brokerage firm then pays the brokers more commissions to sell that particular mutual fund. So, a broker may earn 4.5% commission for selling mutual fund “1” but earn only 4% commission for selling mutual fund “2.” Which fund do you think he wants to sell? In addition, lots of mutual fund families used to sponsor trips for those brokers who sold the most of their mutual funds. Isn’t that the same thing? My guess is that this little tidbit of information was never divulged to clients. “By the way Mr. and Mrs. Smith, this mutual fund sale just won me an all-expenses paid trip to Bermuda. Thanks for your business.” Not gonna happen. What I don’t understand is why Edward Jones was singled out for doing something that ALL FIRMS do (or did do).

I thought this quote by Mr. Weddle regarding the lawsuit was interesting:

The scandal eroded morale inside Jones and hurt the firm’s recruiting efforts, Mr. Weddle says. “We took it incredibly personally and felt it was difficult to communicate our side of things,” he says. “It is not like we set out to hide our arrangements but now we disclose what we do and then some,” he says.

They “felt it was difficult to communicate [their] side of things?” What could “their side of things” be?

Regardless, my advice is BUYER BEWARE!

After I posted about how I hated the Yoplait commercial, I got to thinking about it. I’m NOT SUPPOSED to like that commercial. In fact, I bet there aren’t too many men who like that commercial (for the record, my wife HATES that commercial too!). There’s even a forum thread dedicated to the commercial over at Commercials I Hate. I’m of the opinion that ANY commercial dedicated solely to targeting women will be hated by men. I’m trying to think of one now and I’m coming up blank.

Anyway, for me to like a commercial it has to have one main ingredient:

HUMOR! I like commercials that entertain me. Commercials like:

1. The Miller Lite Man Laws commercials. My wife thinks I’m nuts to admit that I like those commercials. Say what you will, but those commercials ARE HILARIOUS! My personal favorite is the “No Fruit in Beer” commercial. And yes, sadly, this is the type of stuff men think about.

2. The Capital One Guardian Angels commercials. I like this one. I also liked the ones with David Spade and tubby.

3. Jack in the Box commercials. Pretty much all of them. There’s a few on YouTube.


4. Oh and me must not forget this radio classic.

No, there’s nothing intelligent here and some of my readers will be disappointed to learn that I am such a simple man. LOL!

What are your favorites? Leave a comment along with a link to your favorite (if a link exists).

Stupid Yoplait Commercial

October 31, 2006

Have you seen that stupid Yoplait commercial with the two women lounging in a spa, eating yogurt? One of the women says to other about the yogurt, “This is Zen wrapped in Karma, dipped in chocolate…good.”

What the heck does that mean? Everytime I see that commercial it makes me want to hate yogurt.

Reader Stacey sent me a link to an interesting article by Liz Pulliam Weson about getting your free financial report card. I read through the article and think there’s some useful information there so you might want to check it out. I’ll try to write more about it in the morning. Right now, I’m going to go get some sleep.