Archives For Financial Planning

There was an interesting article in today’s WSJ about the impact of automation on the financial advice business.

Quick summary: automation is forcing costs down from the traditional 1% annual fee.

I expect we’ll see more advisors moving to the hourly structure from the asset-based fee structure.

My question to you is:

Do you use a financial advisor or planner? If so, how much do you pay? If you don’t know, ask your advisor.

Meet Glover Quin

October 26, 2016 — 2 Comments

This is a great piece about financial savvy of Detroit Lions safety, Glover Quin. Doesn’t happen often enough.

He saved 70% of his income the first three years of his NFL career and lived on the other 30%. Too many young players get the big money and go on wild spending sprees. Not Mr. Quin. He not only saved 70% of his income, he INVESTED it. Now 30-years old, Mr. Quin might be lucky to have five more good years. If he continues at his current pace, he should be able to retire and live comfortably the rest of his life.

I wish him the best.

According to the latest Vanguard “How People Save” report, the average 401(K) balance is $96,000, while the median account balance is $26,405 (median age of participant is 46).

This does not bode well for the future of America’s retirees.

“Experts” suggest saving at least 10% of income. If you can’t do that, you should save as much as you can and increase it 1% per year until you hit your goal.

My advice: START AS SOON AS YOU CAN! The one thing you can never get back is time.

Back in January, I received a small book from a financial advisor who uses an indexed universal insurance policy as the backbone for his financial plan. His strategy is very similar to the Bank on Yourself scheme, but with a different underlying product.

I wasn’t satisfied with some of his charts and graphs because he (like every other insurance person I know) left out dividends when discussing the performance of the S&P 500 Index. I emailed him and asked him about his methods. After a few exchanges over several weeks, he finally told me this:

“The reason I did not use dividends (and as you point out I do say this in the book) is just to not complicate the analysis. If I wanted to include dividends I would also include taxes and management fees in the S&P account and then I would want to include the cost of insurance in the life insurance policy.”

Wow.

Folks, financial planning isn’t all that complicated. It gets complicated when people invent all these different “strategies” to help sell commission-based products. Don’t misunderstand, I am not putting all the blame on the insurance industry. I worked for PaineWebber for awhile and saw just as much underhanded behavior as I see in the insurance business. Call it the flipside of a poopcicle.

This author says he didn’t include S&P 500 dividends because it would complicate the analysis, but I think he didn’t include them because it would make his strategy not look as good by comparison. I mean, who wants to write a book about your financial planning strategy and have the strategy look bad?

Bottom line: KNOW what you’re getting. If you read it and don’t understand it, TALK to someone else. Ask questions. And yes, I’m biased but I think it can’t hurt to talk to a fee-only financial planner before making any major decisions. There are times and circumstances when an insurance-based strategy might make sense, but the vast majority of people would be better off using index funds for investing and insurance for protection.

Here is the scenario:

You’re either retired or getting close to retirement. Not to be rude, but you are “prime meat” for advisors. They love your demographic because it usually means a nice lump sum for them to work with.

You either get invitations in the mail or someone calls you to invite you to a “free” dinner. All you have to do is listen to a financial consultant’s (investment advisor, insurance salesman, etc.) presentation.

Before you decide to go, let me share a few tips with you.

1. Understand that the advisor is trying to SELL you something. Whether it’s his or her services or some kind of product or idea, the intent is to get clients.

2. Once you understand number 1, you would be wise to be skeptical of EVERYTHING they say.

3. If they are talking about some kind of insurance product (IUL, equity-indexed annuity, variable annuity, etc.), they’ll usually start off by trying to scare the audience with talk about how risky or volatile the “stock market” is, which is true. It is “risky”, but most retirees don’t have 100% of their assets in the stock market. If the salesperson starts throwing around numbers, BEWARE!

The S&P 500 Index that is quoted in the media is a price index. That means it does not include dividends. So, although a price index is a decent barometer, it is not good for
comparing investments because a person who invested in a mutual fund or exchange-traded fund that tracked the S&P 500 Index would receive dividends as part of their return. So, it is misleading on the part of the salesperson to use the S&P 500 Index price return when drawing a comparison to what they have to offer.

How misleading?

Take a look at the following graphic I took from a book I received recently. This book was published in 2015, so I’m not sure why they stopped at 2012 (I will note that 2013 and 2014 were both up years as you’ll see in a later graphic). He also has the wrong return for 2012. It should be 13.41%, not 10.20%. You can click on the graphic to see a larger version:

Table from pg 15

That table is based on the S&P 500 Price Return Index. Yes, the author does mention that the table does not include dividends, but I question his motive for not including them. The next graphic will show you why:

S&P 500 TR vs S&P 500 Price
NOTE: Does not include fees or taxes.

Obviously, leaving dividends out of the equation highly favors whatever product it is getting compared to. That’s why you should be prepared to ask the following question:

“Are the returns you are talking about real returns that include dividends?”

If the answer is “No” or “I don’t know”, you need to get up and walk out. They are being dishonest and purposely misleading the audience.

4. Ask about surrender periods and charges. Some strategies using insurance have long surrender periods of 7 to 15 years. A surrender period is a time period in which you must pay a fee in order to terminate your policy. The amount declines over the years.

5. Be wary of bonuses. Remember, there is no such thing as a free lunch. If a company is going to give you a 10% – 25% bonus, it’s coming from somewhere.

6. If it’s complicated, forget about it. Retirement planning doesn’t have to be complicated. The vast array of products (most of them unnecessary) is what complicates things. Insurance products are among the most complicated because there are so many of them and each company has its own spin, which makes them difficult to compare.

7. Ask them point blank how much they will make off your transaction. Don’t feel embarrassed to ask. It’s your money. If they say, “The insurance company pays me,” leave. That’s not the question you asked. If they avoid answering the question, don’t do business with them.

8. No matter how good the deal sounds, NEVER sign or agree to anything during that presentation. Instead, get as much information as you can and leave. Then, once you are home, read all the information and ask any questions you may have. I would even suggest you get a second or third opinion. Find a fee-only advisor through NAPFA.org and go see them. Expect to spend $250 – $500, but that’s a lot less than you could lose if you make bad decision.

Sadly, most of the people reading this blog post probably already know this stuff. Here’s to hoping this information reaches those who can use it.

For more information, check out this article from FINRA.

IF this is true, it’s very sad. According to Business Insider, 70% of Americans cannot answer all three of these questions correctly (not sure how they came up with that number, but we’ll go with it).

1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow?

A) more than $102
B) exactly $102
C) less than $102
D) do not know; refuse to answer

2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy

A) more than
B) exactly the same as
C) less than today with the money in this account
D) do not know; refuse to answer

3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”

A) true
B) false
C) do not know; refuse to answer

I would hope all AFM readers could get these questions correct. I’m going to ask my kids when they get home from school. I suggest you do the same.

Anyone Following This CFP Mess?

September 24, 2013

I’m not a CFP, but I have been following what’s going on with the CFP Board and their members who use “fee-only” as their compensation method.

Apparently, the board removed “fee-only” from all members’ profiles after it was reported that certain individuals were calling themselves “fee-only” when they were not.

Now people are claiming that the “fee-only” rule was too vague.

Hogwash.

It’s pretty simple, really. If you are “fee-only,” you are FEE-ONLY! Meaning, your fees are paid directly by the client. That’s it. If you get paid by a third party (other than portfolio management fees through Schwab or Fidelity), then you are not fee-only.

It doesn’t surprise me that stock brokers would move to call themselves “fee-only.” The compensation method is gaining in popularity as the public becomes more aware. I’m sure brokers are losing business to “fee-only” planners. What better way to combat the loss of clients than to simply call yourself a “fee-only” planner?

It’s sad and it only confuses clients.

So, the CFP Board should inspect their licensee’s compensation method and fine or revoke the licenses of those who are lying. Pretty simple if you ask me.