Estate Planning for Procrastinators, Part 1

“Procrastination is the chronic postponement of necessary tasks – generally those considered difficult or unpleasant.  We waste so much time trying to avoid these tasks that our failure in doing them is assured.” – Eric G. Matlin.

Most sensible people understand that it’s important to have an estate plan to protect their family. Yet, it is estimated that 7 out of every 10 Americans die without a will.  What is going on?

My guess is that most people just don’t want to face the issue of their own mortality.  (And really, who does?)  They also don’t want to deal with the legal complications and the decisions to be made.  And then there is the legal terminology that can be off-putting: Probate, executor, irrevocable trusts, etc.  If ever there was a task that engendered procrastination, estate planning is certainly right up there.

And if all of that isn’t enough to give you pause, were you aware that estate tax laws will be changing in the near future?  Why do anything at all now, when better information will be available next year?

Now, I am not a lawyer, so I cannot in any way provide legal advice or documentation for estate planning.  However, as a Financial Advisor, I can help alleviate the anxiety, frustration, fear and loathing that may be causing you to avoid the estate planning that you know you should do.  It is said that a little knowledge is a dangerous thing, but not if it leads to further questions of an estate planning expert.

Let’s start with the realization that even if you have never actually signed a written last will and testament, you still have one.  How is this possible?  Simply put, if you don’t have a will, your state will provide one for you.  And most certainly, you (and your heirs) will not like the results imposed on you.

Without a will, there will be unnecessary delays in settling your estate, not to mention increased costs, all of which will come out of the money you’d have otherwise left to your family.  Court costs will be increased, as will family aggravation.  Without a will, your estate can be decimated by legal fees and/or additional taxes.

That is a summary of Chapter 1 of The Procrastinator’s Guide to Wills and Estate Planning by Eric G. Matlin.  I highly recommend you read this book, because not only does it explain complex matters in plain English, but it also deals head-on with the issue of procrastination.  The top 12 list of the most common reasons that people delay estate planning makes for interesting reading.  Counting down, the author tops the list with “Most people don’t like to think about death or money” and ends with “Guilt feeds upon itself.” 

Procrastinators of the world, “You are not alone.”

According to Matlin, many people avoid using attorneys, but “hiring an estate planning attorney isn’t like hiring most lawyers.  Usually an attorney is hired when it’s necessary to go to court.  Estate planning attorneys are hired, at least in part, to keep your family out of court.  And while any dealing with an attorney is likely to cost you money, the odds are good that in estate planning attorney will, in the end, save you more in taxes and probate costs then she charged as a fee – possibly much more.”

Matlin’s use of questionnaires, tables and forms help you get organized enough to prepare for a visit to an attorney.  And it encourages you to create an action plan by giving you the confidence that you can make good decisions.

Understand, though, that nothing you read in a book will replace the knowledge and expertise of an experienced attorney who specializes in estate planning.

Nevertheless, you have to start someplace, and understanding the lingo will make your journey much easier.  Accordingly, Part 2 will cover estate planning terminology.

Emotions and Investing

To be a successful investor requires not only a plan, but the discipline to follow it.  There are many pitfalls and stumbling blocks on the journey to “investments success” including our own brains, which, unfortunately, occasionally play tricks on us.  Our decisions may cause results that are ultimately contrary to our own best interests.

In a previous post, When Our Brains Short-Circuit, I wrote how our brain can affect our long-term investing performance, because we can be afraid of the wrong things.  There is actually much more to be said on the the discipline known as Behavioral Finance.  And given the extremely difficult year we (investors and advisors, both) have all suffered through, now would be a good time to reassess our actual risk tolerance and try to understand how our emotions affect our investment results.

For an excellent summary of the practical implications of Behavioral Finance, I recommend a video presentation by Scott Bosworth of Dimensional Fund Advisors.  His 20 minute talk, with slides, is called Behavioral Biases and Investment Implications. It combines theory, research and experience, but rest assured it’s not so technical that you’ll need a PhD to sit through it.

Bosworth discusses common biases, how they affect decision-making, and how investor behavior impacts investment results.

Here is my take on his presentation.

Overconfidence and Extrapolation

Overconfidence and over-optimism can cause investors to make irrational investment decisions; for example they may buy stocks that have gone up in price, simply because they have gone up in price.  And many people believe they are smart enough to forecast the future, even though the future is unpredictable.

Hindsight Bias

Selective recall leads us to believe that past events should have been easy to predict.  Consequently, we believe that future events should also be easy to predict.  They are not.

Fear and Panic

When stock prices go down, investors feel the pain and fear more is on the way.  The media feed on this fear.  They are interested only in getting more advertisers, not your investment success.  TV pundits, with their incessant and contradictory predictions, only serve to confuse you further.

After a steep decline, many investors just want to unload their stocks – they’ll sell at any price.  The problem is that this common behavior merely locks in losses.

Moreover, getting out of the market can create more stress (not less) in your life, because at some point you have to decide when to go back into the market.  Just when is that?  After you are no longer afraid?  After the market has gone up by 20%, 30% or more?  After you’ve missed the rebound entirely?

Conclusion

The natural inclination of investors is to buy high and sell low.  That is more than unfortunate. It is also why the research shows that investors typically under-perform the stock market, all of the time.  Buy-and-hold investors, on the other hand, typically earn higher returns than those investors who try to time the market.

Unless you have a trusted advisor with a strong long-term philosophy, you may not survive the stock market’s turmoil.  And make no mistake, the emotional responses of investors is a challenge that financial advisors have had to confront this last year.

Educating clients, instilling discipline and maintaining the right strategy are what good advisors provide.

Save on Restaurants

Many clients are taking a second look at their budgets and finding ways to cut back on expenses.  Even if everything is under control, it’s always nice to save money. If going out to a restaurant is something you do anyway, coupons are a way to reduce your expenses.

Restaurant.com is a website I have used before.  It offers $25 coupons for dinner and $10 coupons for lunch.  The list price for these is usually $10 for the dinner coupons and $4 for the lunch coupons.  That’s a bit of savings, but truth be told, the coupons are almost always on sale if you know the right Discount Code.

Sometimes the discount is 50%, sometimes as much as 80%.  But for the next couple of days Restaurant.com is offering a 90% off sale.  In other words, you can get a $25 gift certificate for just $1. Why not give it a try?

Note that this is a limited offer, ending on September 13th at 3 a.m. PST.

Go to Restaurant.com, enter a zip code or city where you would like to find a restaurant to try (or one you already know that you like). Order the Discount Coupons and enter the Discount Code NINETY. Then hit Apply.

You should see the reduced prices.

Keep in mind, that there are some restrictions, such as spending a minimum amount, and not being able to use the coupons on Saturday night.  And when you go, remember to leave a nice tip, based on the usual price of your dinner.

As Julia Child said, “Bon Appetit!”

P.S.  I just saw the movie Julie and Julia and enjoyed it.

Advice for the Newly Unemployed, Part 3

The first article in this series covered my recommendations on financial planning issues related to becoming unemployed.  The second article, by Belinda Plutz, discussed things you must do before beginning your job search.  This article offers practical and insightful tips on how to maintain a positive attitude while seeking new employment opportunities.

MANAGING YOUR JOB SEARCH
by Belinda Plutz of Career Mentors

Job hunting can be a very frustrating process.  People either don’t return your phone calls as quickly as you hoped they would, or they ignore your call completely, and more often than not email and letters go unanswered. Opportunities seem hidden from view. Time is limited, the clock is ticking and you want results NOW.  So how do you keep up your spirit, energy and commitment for as long as it takes?

MONITOR YOUR INNER MONOLOGUE (you know… those words that run around in your head automatically and are usually uncensored)

If you continue to say negative things to yourself  (I’m never… I can’t… I won’t…) your actions will reflect this negativity.  If you insist on telling yourself that the process is futile, and won’t yield a job that will satisfy your needs, you could very well wind up with just this result.  One way to fix this is to actively listen to what you say internally and consciously work at replacing that negative self-talk with positive (or, at the very least, more neutral) words.

LIMIT YOUR EXPOSURE TO NEGATIVE PEOPLE

We all know people who, for whatever reason, are always negative or overly critical or who couldn’t offer an encouraging word even if they were paid for it; real “downers” to put it succinctly.  What you need to do is to associate with people who feel good about themselves and about you.  They can help bolster your spirits and energy.  Being with people who radiate good feelings and enjoy whatever activity they are doing is essential.

COMMIT (IN WRITING) TO GOALS AND WEEKLY TARGET ACTIVITIES

Plan what needs to be done each week and break the projects into do-able time frames.  Make sure that you set realistic goals so you can meet them and keep things moving along.

GIVE YOURSELF CREDIT FOR YOUR ACCOMPLISHMENTS – BIG AND SMALL

When larger goals take time to realize, it is essential to give yourself credit for the intermediate steps that you’ve taken along the way.  For example, if you have two good weeks and then a not-so-good week, you can neutralize or mitigate the negatives by looking back at the positives and focusing on them.

WORK AT MANY JOB HUNTING ACTIVITIES SIMULTANEOUSLY — NOT SEQUENTIALLY

If you only focus on one thing at a time, you will not maximize your effectiveness.  Put more of your time and energy into the activities that have the greatest potential for generating positive results.  Keep moving the process along.  For example, if you have an interview that looks promising, keep working to get others lined up behind it.  If the first interview doesn’t result in a job offer, there will be other things happening and you won’t have to keep “restarting.”  Work methodically, and try not to let the lows (or the highs, for that matter) of job hunting affect your productivity.

ACCEPT THE FACT THAT YOU CAN CONTROL ONLY WHAT YOU DO

Unfortunately, you cannot control what others do or think or say.  But, even controlling only what you do, means that you have a lot to control. Make sure that you take care of all necessary tasks, not just the ones that are easy.  Follow-up is critical when you are job hunting. And you must do what you say you will do — always.

FIND A WAY TO ENJOY SOME PART OF THE PROCESS

Everyone is unique.  Everyone is better at some things than others.  If you can find pleasure in some (or even one) of the things that you have to do anyway, the process will go by much quicker and be less painful.

KEEP A BALANCED PERSPECTIVE

You’re not working, but that’s not all bad.  Spend some time with family and friends, take a course, renew a hobby, do some volunteer work.  Job hunting should be a part-time job if you are working or a “light” full-time job if you are not.  Spending too much time on the hunt can be counter-productive.  The goal is to work smart and hard, not just hard.

Belinda Plutz can be reached by telephone at (212) 947-3180 or by email at careermentors@comcast.net.

© Career Mentors, Inc. 2009

Advice for the Newly Unemployed, Part 2

It’s my pleasure to introduce Belinda Plutz as the Passionate Planner’s first guest blogger.  I’ve known Belinda for more than two decades, and over the years have come to realize that she possesses such an amazing combination of characteristics – she’s insightful and direct yet diplomatic, business-like but empathetic – that there can be no better individual to speak to the often highly stressful and emotional task of effective job hunting in a slow-to-recover economy.  Belinda is the person behind the company, Career Mentors of New York City.  If you need individualized help you can reach her by telephone at (212) 947-3180 or by email at careermentors@comcast.net.
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FIRST STEPS
by Belinda Plutz of Career Mentors.

So, you’ve lost your job.  While you’re probably very eager to “get out there” and “hit the street” there are quite a few practical, yet very important things that you need to do before you begin a job search. Working on these concrete actions can help you start moving; it is a way to “get your act together,” especially when you feel paralyzed by the lay-off.  Once these things are accomplished you can more readily, and effectively, focus on your job search.

TEST YOUR EQUIPMENT

Make sure your computer (both hardware and software), printer, internet and email access, telephones and answering devices (landline and/or cell) are all up-to-date and in excellent working order.  Purchase a back-up printer cartridge to avoid running out of ink at a critical moment, i.e. printing up your resume.  If you don’t know how to use any of your equipment – now is the time to figure it out.

VOICEMAIL

Record a clear, easy to understand landline and/or cell phone voicemail message with no kids, no pets and no comedic routines.  The message should be as professional as possible.  Give your name and/or your complete telephone number (including the area code) to make it easy for callers to be sure that they have reached the correct party.  Not changing the computerized phone message (typically the default program on your answering machine or service) may give callers the impression that you either are not technologically savvy enough to change it or simply too lazy to do it; definitely not a good first impression.

EMAIL

Establish a professional email address that projects the right image. No nicknames, birthdates or cutesy personal references.  For example, using “hotplanner@hotmail.com” clearly gives the wrong message.  Because email is a primary method of communicating with potential employers, it is very important to get this right.

RÈSUMÈ

To update your résumé begin by doing an analysis of your recent and previous positions.  Make sure that you acknowledge your accomplishments and functions, especially those that are relevant to your future job focus and those that you like or enjoy.  Highlighting experiences or activities that you hated doing will not get the results you want.  Do not lie, or even stretch the truth just a little bit – dates of employment and job titles are easily checked.

Create an easy to visually scan and read document.  Bullets are better than paragraphs.  Your résumé needs to be accomplishment focused, as well as “keyword rich” and “number rich” (e.g. sales results, staff supervised, budget figures).  It must be perfectly written with no typos, grammatical errors or mistakes; have someone (or a couple of someones) proofread it for you.  Test how it prints and also how it transmits electronically before you begin using it.

PERSONAL BUSINESS CARDS

Have personal cards made with all your contact information so that you can offer it to people or respond when someone offers you their card.  You will want them for casual connections as well as formal networking events. Carry a few with you at all times. If you run into someone while out walking, you will make a positive impression if you can hand them your card (as opposed to having to write your contact information on the back of a store receipt).  The image that you want to present is that you are professional and always prepared. And don’t even consider “freebie” business cards with the name of the printer on the reverse of it; remember, first impressions…

SELF INTRODUCTION

Carefully script the self introduction you use to answer the standard American social question, “So what do you do?”  Your response needs to be positive, because what you say first is what people will remember about you. Do not start with the news that you were recently laid off — that should be the third or fourth thing that people hear.  Beginning your response with, “I just lost my job…” focuses on your current non-work situation, not you.

Your message needs to be consistent and clear with virtually everyone getting the same message.  And if you can frame yourself without clichés, in a “features and benefits” kind of way, not just “title” and “function,” it will be far more interesting (and memorable).  This self introduction is one that you will use verbally, but you will also need to create a written paragraph that you can drop into emails.

This is worth repeating: What you say first is what people will remember about you.  You are helping to craft their impression of who you are and what you do, and it is up to you to present yourself in the most professional and appealing way.

NETWORK LIST

You may not realize this, but you already have a “network.”  Your network is all the people you know, and have ever known, and all the people you have ever worked with in any capacity.  Begin putting your list together – who should you be reaching out to and connecting with.  You can network for information, connections, insight and advice or any combination of those.

People will want to help, but you have to have realistic expectations; no one is going to hand you a job just because you need or deserve one.  In tough times (like now), it is very difficult to network directly “for a job.”  But, since companies do not hire people – people hire people – it is critical that you make connecting with people a major priority.

ONLINE PRESENCE

Having a professional social networking presence can be a good way for people to find you and for you to reach out to people.  If you are on one or more social networking websites, make sure that the message and image you project are the ones that you want potential employers to see… because they are definitely looking.

REFERENCES

Even though many companies have a “policy” of only releasing titles and dates of employment when called for a reference, you should be prepared to give a prospective employer the names, titles and telephone numbers of three or four pre-screened people who are connected with your most recent and previous jobs who can speak about your performance.

It is both flattering and courteous to let people know in advance that you want to list them as a reference.  It is also a great way to network.  Give each person a copy of your current résumé and review the pertinent information with them. Reach an agreement with them regarding dates, titles, responsibilities, achievements, etc., that you would like them to address.

Once you have all of these things in place, give yourself credit for accomplishing them. You are now in a great position to put all your energy and attention into a successful job search.

© Career Mentors, Inc. 2009

To be continued.

Advice for the Newly Unemployed, Part 1

Losing your job and becoming one of the growing number of unemployed can be a shock to anyone.  Even if you weren’t all that happy with your position, at least you had one.  But once the shock of losing a job wears off, there are several things that you need to attend to.  Some are obvious, and some require a bit of analysis.

File for unemployment benefits

First, you will want to file for unemployment benefits.  Each state sets its own benefit amounts, eligibility requirements, and benefit length.  Benefit amounts are based on a percentage of what you made during your last year of employment, up to the maximum in your state.  Remember that unemployment benefits, like regular income, are taxable.

To determine your benefits, inquire at your state unemployment agency or, if the option is available to you, file for benefits online.  Still, understand that it can take up to a full month before you will receive your first unemployment check.

Verify your termination benefits

The second thing you need to do is to verify what termination benefits your employer will provide.  You may be entitled to severance pay, continuation of medical benefits, and possibly support in finding your next job.  Take advantage of anything and everything your former employer offers in the way of help.

Obtain health coverage

Speaking of health insurance, you need to maintain your existing coverage or find a replacement insurance policy.  If you worked for a company that had 20 or more employees, you’re eligible for COBRA.  This federal law ensures that you can continue coverage for an additional 18 months, but you must pay the premiums for it yourself.  With no employer contribution you may be quite surprised at how much money your continued coverage will cost you. 

It’s important, especially if you have a pre-existing health condition, that you not let your health insurance lapse or you may find that pre-existing condition will not be covered under a new plan.

The recent federal stimulus program may cover 65% of the COBRA premiums for up to nine months, and that is certainly worth looking into.

Decide if you need life insurance

Your employer might allow you to continue to participate in the company’s group life insurance provided that you pay your own premiums.  But life insurance might not be worth the expense if you have no dependents or your children are grown up and self-sufficient.

If you do want to keep your coverage through your former employer, you may be able to find less-expensive term plans on your own, though it will take a little homework.

Review your budget

After taking care of the necessities of health and life insurance coverage you may want to evaluate your budget to see where you can cut expenses. Depending on your field, your flexibility, how well you network and a host of other things – including a little bit of luck – your job search could take a year, or even more.  That should be motivation enough to look for ways to save money.

Analyze your retirement plan options

What you should do with your retirement savings accounts is one item that requires extra care and analysis.  If you withdraw funds from your 401(k) or 403(b) employer-sponsored savings plan, you will pay ordinary income taxes on that amount, and if you’re less than 59½ years of age, incur an additional 10% penalty.

If you transfer your employer’s retirement plan to an individual IRA by “rolling it over,” you will not have to pay any income taxes.  Moreover, you can likely build a better portfolio, since you will have more investment choices in your IRA.  Do this with care, by doing a trustee-to-trustee transfer.  And by all means, consult a fee-only advisor to avoid high up-front commissions.

Once your money is safely ensconced in an IRA, you may be able to tap it without penalty, if you need it to cover large medical expenses or pay medical-insurance costs.  For additional details, read this article.

How best to approach your job search and other tips on how to survive your unexpected unemployment will be continued in Part 2.

I Told You So!

“Stock picking and market timing are expensive, risky, and ultimately futile exercises.” – William Bernstein.

As you may recall, on Friday, March 6th I wrote that it was a mistake to be scared out of the stock market.  The stock market actually hit its bottom on the next business day, Monday, March 9th.  Since then, prices have soared, not in a perfectly straight line, true, but the increases have indeed been spectacular.

What does that mean?  That I can predict stock market prices?  No, absolutely not.  That remains an “unacquired” skill.

What it does mean, though, is that I follow a buy and hold philosophy, because getting out of and into the stock market again and again is a losing strategy, simply because you are not going to do it well.  One benefit of working with a fee-only financial advisor is avoiding the emotional swings that accompany volatile stock prices.

Please read my March 6th post, Nobody is Buying Stocks?  in which I mocked the total negativity that was seemingly everywhere in the media.  I pointed out just how overblown the language used at the time was:

“With so much uncertainty, investors are parachuting out of companies…”

“No one is taking a back-seat approach. Everyone is just selling.”

“It’s like an unending nightmare.”

Please take a moment to read the entire post (if you haven’t already), but here is the conclusion if time is pressing:

“No one knows what tomorrow will bring, but unless capitalism ceases to function, stockholders will be rewarded in the long term for owning stocks and for taking risks. Yes, there is risk in owning stocks, as we have recently experienced. Since we’ve already seen the risk, how about staying around for the reward?

An old Wall Street proverb is that “Nobody rings a bell at the top or the bottom of a market.”

Are you waiting for that bell to ring?  Don’t.”

As I pointed out, since March 9th stock prices have soared.

Understand, though, stock prices can go down again.  In fact, I can  guarantee that.  Once again, I am not clairvoyant, and I rarely make predictions.  But, I have counseled a buy and hold strategy for many years. There is no evidence that anyone can get in and out of the market at the right time and improve on a buy and hold approach.

Heaven help the person who got out of the market earlier this year.  The March 6th post quoted financial advisor Bijon Mishras who said, “I want to wait for a firm turnaround, and be as safe as possible.” I wrote, “Whoa, Nelly. Remember this quote and see how it turns out.”  So, Bijon, is now the time to get back in?

On March 16th I wrote a series which started with Is Buy and Hold Not Working? Part 1.  I said that timing the market was impossible, “The evidence shows that most investors get it wrong over and over again.”

“Historically, stock markets have had sharp increases following a bear market.  The difficulty is identifying when that move is for real.  Bear market rallies, bear traps, etc. tend to keep investors gun-shy, so a sustainable bull market rally will only be identifiable in hindsight.

Nevertheless, individuals who keep their investments in cash or Money Market funds will miss out on most of the move.”

Conclusion

I’ll stick with what I said on March 27th, “Given what does not work, what is the recommended approach?  In my opinion, it is a diversified, low cost, buy-and-hold portfolio matched to your time horizon and risk tolerance.”

A good advisor should help you do that and also avoid the “big mistakes” of buying high and selling low.  Is that worth the annual amount you pay a fee-only advisor?  I certainly think so.  Do the math.

Read more

Politics without the Shouting

For someone who calls himself the Passionate Planner, I think you’ll agree that I’ve been very cautious on this blog.  I have not discussed politics, because I followed the advice given to salespeople, “Never discuss politics or religion.”  As I heard it years ago, you may win the argument but you’ll lose the customer.

Another reason I don’t discuss politics with my clients is because, when meeting with them, we have more important things to go over such as personal challenges, investments, estate planning, saving for college, etc.

But the latest political news is that people are shouting down elected representatives at town hall meetings when the issue of health care reform comes up, as it invariably will.  I find that extremely disturbing, because it is terribly corrosive of the democratic process. 

So here is my modest attempt to restore civility to political discussion.

Advice to liberals: Read or listen to someone who is a conservative.

Advice to conservatives: Read or listen to someone who is a liberal.

I believe that listening to someone who disagrees with you is hardly ever done.  People who tune in to Bill O’Reilly generally do not also listen to Keith Olbermann, and vice versa.  To do so would likely raise one’s blood pressure and possibly make one ill.  Because we primarily listen only to people we agree with, we essentially live in separate universes, with not only different political opinions, but different political facts.

But my advice is to start out slowly, or in small doses.  It’s just like exercise; you don’t want to overdo it at first and risk sidelining yourself to an injury. If you love Glenn Beck, do not watch the Rachel Maddow show.    Let’s be realistic.

Herein then are my humble suggestions to change the political dynamic.

If you are a conservative, it is very likely that you read the Wall Street Journal.  Buried in the op-ed page is a weekly column by Thomas Frank, who I suppose could be called the “token liberal” for the Wall Street Journal.  Read his Wednesday column for a different viewpoint.  And even if you don’t get the New York Times, I would definitely seek out the opinion of Thomas Friedman.  As my cousin Dahlia said, “Friedman is brilliant, even when he is wrong.”

If you’re a liberal, you probably read the New York Times.  I suggest that you read David Brooks, because he is the conservative liberals love.  And in my opinion, Peggy Noonan, who writes a column in the Saturday Wall Street Journal is always worth reading.

I’m sure there are many others, but we have to start someplace.  I also like the Charlie Rose show, because it is what I call a “no shouting” zone.

Finally I’d like to put in a good word for Joe Scarborough, who has a morning program called Morning Joe on MSNBC.  He certainly gets good guests.  Joe is a conservative (a libertarian, if truth be told) and though I frequently disagree with him, I find him engaging and likable.  You can see a recent interview of him on the Charlie Rose show, because Scarborough is plugging his new book.

According to Scarborough, liberals will listen to him and engage him in debate, simply because he doesn’t call President Obama a “communist” or Justice Sotomayor “a racist.”  Sad to say, that makes him unusual among some right wing TV personalities.  Truly, I wish there was more civility and less name calling.

My favorite quote of his is about his decision to live on the Upper West Side of Manhattan, a liberal bastion if ever there was one.  He says that he loves the Upper West Side, because little old ladies come up and hug him.  They have never met a Republican before!

Cute.

Investors Seek Objective Advice

“In the aftermath of the financial-market crisis, investors are leaving Wall Street to sign on with independent investment advisers.” – Wall Street Journal.

A perennial topic for articles in the mainstream press (and, subsequently, in this blog) is how individuals do, and also, should, choose a financial advisor.

Wary Investors Are Seeking Out Objective Voices in Wednesday’s Wall Street Journal is the latest installment on that subject.  They report that “registered investment advisers brought in more than $108 billion of net new assets into the three largest custodians” while “the four major Wall Street brokerage firms saw an outflow of $8 billion in 2008.”

While an individual investor may find it difficult to identify with billions and billions of dollars, that’s still good news; it means (in my opinion) that the good guys are winning.  Recall as I said in previous posts that registered investment advisors must act in the best interests of their clients, while brokers follow a less stringent rule.

More and more prospective and actual clients are getting that message, as the article reports that “investors seeking to repair their damaged nest eggs say the chief lure of independent advisers is more-objective guidance.”

The subhead of the article is a somewhat wordy, “Independent Advisers Are In Demand, but Picking One Means Homework.”  If not for that, the article would have been suitable for a Twitter post!  Nevertheless, the writers offer some good advice, which I summarize below.

…while most independents call themselves “advisers,” they aren’t all required to adhere to the same fiduciary standards.  As a result, the degree to which each must put a client’s interests before his or her own can vary.  The upshot, says Marilyn Dimitroff, chairwoman of the board of directors of Certified Financial Planner Board of Standards Inc., is that “the public is so confused.”

“To hire an independent who suits your needs, you should consider how much you have to invest, how much you can afford to pay and whether you want someone to oversee your entire financial life, or just pieces of it. It’s also important to probe the potential conflicts of interest your adviser may face.

Here are some questions to consider:

What type of adviser do you need? As with their counterparts on Wall Street, independent advisers come in two basic flavors: brokers, who typically focus on investment advice, and registered investment advisers, or RIAs, who may help you with everything from saving for college and retirement to tax and estate planning.

What are the potential conflicts of interest? Brokers’ income depends on commissions from client trading. As a result, they have a financial incentive to steer clients to products that pay them the most, such as variable annuities or mutual funds with high sales “loads.”

Still, many independent brokerage firms receive so-called revenue-sharing payments from mutual-fund and other financial-services companies.  In return for making such payments, fund companies may be given opportunities to promote their products to a firm’s advisers.

Investors wary of such potential conflicts may want to consider an RIA.  RIAs not only generally refrain from accepting commissions but are held to a higher “fiduciary” standard—a legal requirement that they act in clients’ best interests.  Brokers follow looser “suitability” guidelines, which means they can’t put clients in inappropriate investments. (A recent Obama administration proposal would require brokers to operate under the higher fiduciary standard.)

What are the adviser’s credentials? To find an adviser with specific skills, look for certain credentials.  A Certified Financial Planner must complete courses in investments, taxation, estate planning and insurance.  They also must pass a two-day exam, have at least three years of experience, and comply with ethical standards that require them to put a client’s interests ahead of their own.

To be continued… (as always)

Brokers May Have to Change

“A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest.  Advisers always have those duties, but brokers often don’t.  The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.” – Jason Zweig.

If you are confused by the difference among these titles: Financial Planner, Stockbroker, and Registered Investment Advisor, you are not alone.  The “Name Game” in the financial services industry is downright confusing.  How does your financial advisor operate?  How does she get paid?  What are the advantages and disadvantages of each arrangement?

Many people believe that they are getting financial planning from a stockbroker, when in fact financial planning is usually only an incidental part of what a stockbroker does.  Similarly, many people are not aware that a stockbroker does not have to act in the client’s best interests.

A June 19th Wall Street Journal article Big Change in Store for Brokers in Obama’s Oversight Overhaul brings home this point.

According to the article, stockbrokers might have to change the way they do business; they might have to act in their client’s best interests, the way a Registered Investment Advisor already does.

Wow!  What a concept.

Here are the relevant quotes:

Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.

Many investors don’t even know the difference between the two standards, believing their brokers already are acting in their best interests.

But requiring brokers to operate under a fiduciary standard could force them to offer products that are less costly and more tax-efficient. They will have to disclose any potential conflicts of interest, such as any fees they may get for favoring one product over another. That could mean clients will be offered fewer proprietary products if the broker can find a lower-cost option elsewhere.

For example, a broker couldn’t put you in a mutual fund with higher fees — or one he gets a bigger commission for selling — if he could get a comparable fund with lower fees elsewhere, says Tamar Frankel, an expert on fiduciary law at Boston University School of Law. (Emphasis added.)

The article implies that some stockbrokers sometimes put their interests above yours.  Hmm.   This might just be worth investigating.

Luckily, I’ve discussed this topic many times, and in fact I have a series called The Dark Side of Wall Street, which lists all of the relevant posts.  If you start with Choosing a Financial Advisor, Part 1 at the bottom of the page, you can read them in order by following the “To be continued” link at the end of each post.

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