Call It What It Is

Words are supposed to mean things but big corporations in the financial services industry and regulators have been redefining words to help themselves. The problem is more and more consumers are confused and less trusting of the people providing financial advice. 

Bob Veres, in a column for Financial Planning magazine wrote about this issue. Here are some of the terms and definitions from the article I believe you should be aware of.

Advisor: This term should only refer to an SEC or State registered investment advisor, duty-bound to live up to a fiduciary standard. If the person described as an advisor is working for an organization that has successfully fought against having to register its sales agents with the SEC, then the proper term is "broker," "sales agent" or perhaps "sales representative." It doesn't matter if these sales agents make all of their money from asset management fees; their employment agreements stipulate that they will recommend only house products, fee-laden in-house investment programs, or funds and separate accounts that have revenue-sharing arrangements that everybody but the SEC recognizes as overt payment for shelf space.

Fee-based: "Fee-based" means "charges fees but also sells investment, annuities and life insurance products for a commission." Brokers know that saying "fee-based" sounds better than commission because consumers are avoiding commission sales people.  The problem is "fee-based" confuses the public when evaluating advisors. I am a "fee-only" advisor. This means the only money I make is directly paid by my clients and I have no incentive to sell you one investment over another. Fee-only advisors do not receive commissions, have back room deals, are have revenue sharing agreements with mutual fund companies. This allows for unbiased advice and the consumer doesn't question if I am shilling something that lines my pockets at their expense.

Disclosure: This is the brokers get out of jail free card. Brokers or "Fee-based" salespeople give you all of this fine print and legalese documents that allows them to sell you garbage and not get in trouble. Disclosure, when used in the broker regulatory context, really means "an alternative to treating our clients as we would our mother." Instead of simply giving the best advice in the best interests of the client, brokers should be disclosing the ways in which they will act in their own interest instead - and also put their company's interests (and quite possibly also those of the separate account that is openly paying for shelf space) before those of the consumer. 

Top producer: Translation: top salesperson. Why are we constantly avoiding the term "sales" - unless we want to hide the real agenda of these members of the financial community?

Once you deconstruct the clever terminology, you begin to see some of the ideas the brokers and "fee-based" sales industry desperately wants to hide - and make its agenda obvious to the consumer whose financial well-being it endangers.

Value of an Advisor: Vanguard reports up to +3%

Recently, Vanguard conducted a study on the potential value a Financial Advisor can provide to clients. What they found is that an advisor can add up to 3% in additional returns. Below is a summary of the Vanguard report:

To calculate this additional return, Vanguard found it is largely based on five wealth management principles. Although the exact amount of additional returns may vary depending on client circumstances and implementation, Vanguard found an advisor can add value by:

• Being an effective behavioral coach. Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value add: up to 1.50%.)
• Applying an asset location strategy. The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value add: from 0% to 0.75%.)
• Employing cost-effective investments. This critical component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value add: up to 0.45%.)
• Maintaining the proper allocation through rebalancing. Over time, as its investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value add: up to 0.35%.)
• Implementing a spending strategy. As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value add: up to 0.70%.)

Vanguard considered adding two additional principles, asset allocation and total return versus income investing. These areas can also add value, but they believe these areas are too unique to each investor to quantify.

This figure should not be viewed as an automatic annual increase. Vanguard’s research emphasizes that it is more likely to be intermittent, as some of the most significant opportunities to add value occur during periods of market duress or euphoria that tempt clients to abandon their well-thought-out investment plans.

In such circumstances, the advisor may have the opportunity to add tens of percentage points. Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.

Click this link for the full report: https://pressroom.vanguard.com/press_release/Vanguard_Research_Quantifies_the_Value_of_Advice_3.10.2014.html

Young Parents Checklist

As young parents, it is very important to have a financial plan. Here is a quick checklist to prepare for the potential opportunities and challenges ahead.

Update Beneficiary Info: Add or update information for your spouse and children to your IRA, 401(k), Life Insurance, Annuities, “in trust for” accounts. Instructions in a Will or Trust do not override beneficiary accounts.

Apply for or Increase Life Insurance Policies: Meant to provide short and long-term financial security to your family. Life insurance can help pay bills while your spouse deals with the situation and then fund future expenses such as college and a mortgage. We can help you determine the amount of insurance you need and evaluate different insurance companies. We do not sell insurance or receive commissions.

Contribute to Retirement Accounts: Your 70s will come up faster than you know! Regularly add to an IRA or company plan to avoid being a burden on others and ensure you can live comfortably in retirement. Put contributions at the top of your budget!

Start a 529 College Savings Plan: On average, college costs double every 9 years! 529s are a tax-free account and they can help you stay ahead of those rising costs by investing in stock and bond mutual funds. Another plus is the beneficiary can be changed giving you the flexibility to pay for multiple children’s college expenses.

Will: A Last Will & Testament will provide a “Guardianship Plan”, Trustees for testamentary trusts, and who receives your assets. A Will dictates your wishes instead of the courts and can help limit family disputes.

Trusts: Testamentary Trusts dictate when, where and how your children receive money or assets. This can help your children avoid the pitfalls of sudden wealth. Trust assets are neither subject to probate nor disclosure to the public.

Health Care Directive: Names someone as your agent to make medical decisions for you instead of the courts appointing someone. Only becomes effective if you are unable to make medical decisions for yourself.

Durable Power of Attorney: Names someone as your agent or attorney in fact to make business or financial decisions for you. Powers given to the agent can be very broad or very limited depending on what you specify.