Posts Tagged ‘financial planning’

Like the mythical siren’s call, the pitch is enticing – a seemingly perfect investment.

Investors can buy into a contract offering a minimum return with the potential to capture the upside of increases in the stock market while avoiding portfolio value declines if – and when – the market goes down.

This blend of promises can be found in ‘equity-indexed annuities” or EIAs offered by insurance companies.

And these offerings have become popular given the steep declines in the stock market.  According to a report in the WSJ (9/02/09), sales of EIAs during the first half of 2009 rose 20% compared to a year ago to $15.2 billion.

As compelling as these products may sound, they are anything but simple.  There are many complicated moving parts to each EIA contract. So buyer beware!

Think of investing as finding the route to your destination (a goal) and matching that with the appropriate mode of transportation (or investment vehicle) to get you there.  You may be traveling from Boston to New York and can choose highways or back roads. You can choose hi-speed rail, a car, a bus, a bike or even a plane.  You can drive or fly yourself or hire someone else to drive. All will get you to where you want to go but it’s a question of what kind of comfort level you want on the ride, how much time you have to get there and at what cost – in fees or simply mental health.

For those who may not have the stomach for the gyrations of the stock market but are looking to be more venturesome, the EIA may be a suitable compromise. It’s sort of like someone hiring a driver for the trip but traveling on main roads while avoiding highways.

First, understand that an annuity is offered by an insurance company and backed by the credit-worthiness and deep pockets of the insurer.  There is no FDIC backing. This is not a bank product (although you may find them sold by brokers with desks in banks).

Next, understand that an index can be any benchmark for any asset class or market.  The most common benchmarks include the Dow Jones Industrial Average (DJIA), the S&P 500 and NASDAQ in the US.  Overseas, indexes include the NIKKEI in Japan for instance.

An equity-indexed annuity (EIA) ties the amount that will be credited to an investor’s account to the performance of a particular index. 

But don’t expect to receive a one-for-one increase in your account value based on the index’s increase.  Instead, these contracts include a “participation rate” that sets a percentage of the index gain that is used.

The index-based interest credit may be further limited by “caps” that set a maximum amount of gain.

For anyone who has ever had an Adjustable Rate Mortgage, the process is very similar to how loan rates are recalculated.

Calculating the interest credit is further complicated by the method of measuring the change in the index value.  For instance, the insurer can determine the index change based on the “Annual Reset” – the difference between the index value at the beginning and end of each contract annual anniversary date.  Or a “point-to-point” method may be chosen that compares the index value at the beginning date with some future date like the fifth anniversary. Or the insurer will use “index averaging” taking multiple index returns and averaging them.

By the way, the index value won’t include changes resulting from dividends. While total return on the S&P 500 averaged 9.5% between 1969 and 2008, more than one-third of the return was attributed to dividends.  So these EIA market participation formulas will be calculated on a lower base when dividends are not considered part of the index return.

Typically but not always, there is a minimum amount of interest that is credited. But be aware that this minimum interest credit may not apply to 100% of the contract value.  It may apply an interest rate of 3% to only 90% of the value.  It may apply 1.5% interest to 85% of the total value.  It all depends on the terms of the contract.

EIA contracts have dual values:  the one based on the index value, participation rate and cap; the other based on the minimum interest credit.  And if you get out of the contract before the full term, you may be forfeiting the index-based account value. The insurer would then pay out the amount based on the minimum guaranteed portion which may be lower than what you expected compared to the index formula.

And how many football fans would be happy if their favorite team was on the 1-yard line and the referees moved the goal post?  Well, most EIA contracts reserve the right to unilaterally change terms reducing the participation rate or using stiffer lower, caps for example.

And most contracts have very steep surrender charges that can start at 10% to 15% of the contract value in the first year and declining from there for up to 10 years.

And be aware of the financial incentives that are part of these contracts.  Some EIAs offer “bonuses” to investors – an extra 5% or 10% added to the initial deposit.  But there is no free lunch.  In exchange for such a bonus, the insurer will likely increase the surrender penalty.  So as much as the bonus is an incentive to open the contract, the penalty is an incentive to not move the money out.

Follow the money, too.  Many EIAs pay out commissions to brokers between 6% and 10% and sometimes more.  An investor should be aware that there may be an incentive by a salesperson to offer this as a catch-all solution whether or not it fits the investor’s particular situation. 

The advantages to an EIA include the opportunity to participate in the upside of a market index as an alternative to investing directly through mutual funds for instance.  When an investor opens up an annual statement, there may be less apparent volatility because the account balances aren’t fluctuating wildly.  So this may help a conservative investor dip a toe in the market and sleep better.  And like most annuity products, investors have free access to a portion of their money without surrender charge (usually 10%). And like any other insurance product, it provides a guaranteed death benefit.  Like other annuities, it offers an income stream that you cannot outlive.

The average return on such EIA contracts has been reported to be in the 5%-6% range.  Given the complexities of these contracts and the average returns, it may be a costly way to limit your market exposure but it may make sense for those looking for a principal-protected CD alternative for the cash portion of their portfolios as well as a source of income to supplement retirement.

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On Wednesday, March 11, I launched the inaugural event of my Financial Road Map Series teleconferences.

I want to thank each of you who stopped by to listen in to my brief discussion on taking control of your financial future by controlling what you can.

To recap the important points we discussed:

1.) Control What You Can:  No sense in worrying about things that are beyond our individual control.  There’s plenty enough for us to handle and impact directly.  Things that you can control can include:  Your saving and spending habits, your health and exercise programs, your asset allocation, your investing costs, and most importantly, YOUR ATTITUDE.

2.) Have SMART Goals:  Begin with the end in mind.  Be Specific with Measurable goals that are Attainable and Realistic and tied to a specific Timeframe.  It’s one thing to say “someday I want to be rich” or “someday I want to own a boat.”  But if you can put a number to that vision, your mind’s eye can picture it as reality and it becomes a real target to shoot for.

3.) Understand Your Risk:  These past seventeen months have tested what it means to be an investor.  It has highlighted the reality that most individuals do not have a handle on their own risk appetite.  Understanding risk is more than simply answering a few questions on a form.  It involves an open and honest conversation with yourself, your spouse (significant other) and your advisor. Go beyond the standard form and consider what does money mean to you, how your family treated money, what has been your best and worst financial decision and how you came to those decisions.  Ask yourself (or your advisor should ask) how you feel about these risk attitudes.  You may even want to consider using an impartial tool located at www.riskprofiling.com to provide additional insight into your risk tolerance.

  • NOTE: In my practice I utilize multiple risk profile formats to get a handle on how a client thinks and what motivates a decision.  This is helpful to be able to better communicate with a client. 

But having an honest conversation is also integral to proper investment planning.  For instance, I can use the standard risk profile tools, my questions and the website tool listed above and determine a Risk Capacity Measure for a client.

A person who has verifiable emergency reserves (3 to 12 months depending on their particular circumstances), has a positive cash flow and net worth, low debt ratio and adequate life insurance in place has a capacity for higher risk than someone not demonstrating these attributes.  For someone lacking these attributes, the financial plan will likely focus on improving these measures before investing in something risky.

4.) Have an Investment Road Map: Most people would not go on a trip without a map or GPS.  The same should be true about investing.  Having a road map (called an Investment Policy Statement) is something that professional investors like pension funds, insurance companies and endowments use all the time.  It outlines the end result desired (for instance, growth of capital with the investment generating $X in income per year), the types of investments that will be considered (i.e. no investment in nuclear power or tobacco), and the criteria for determining when to buy, when to sell and what to replace it with.  This helps take the emotion out of investing and avoids having a long-term plan sabotaged by the chatter of “talking heads” either in the media or at the office water cooler.

5.) Risk Allocation:  You don’t need a graduate degree in finance to understand that some things just make sense.  More than ever the old adage makes sense: Don’t Put All Your Eggs in One Basket.  While it is true that all asset classes have lost value from their peak nearly 18-months ago, that is no reason to give up on the wisdom of diversification. Just because someone doesn’t win a race the first time doesn’t mean you give up running ever again, does it?

But let’s be sensible about this.  Having a target risk allocation (based on investor age, timeframe until goal, risk capacity and risk tolerance) does not mean simply that you “buy and hold” or “set and forget.”  While academic literatute indicates that a buy and hold strategy will win out over time, in reality most investors do not have the stomach for the occasional and frightening roller coaster rides that happen like they have recently.  In which case in makes sense to buy, regularly and tactically rebalance while exploiting short-term trends and hold cash.  (Most investors do a poor job at following trends, implementing a disciplined trading strategy without emotion and sometimes having to go against the grain and do what seems uncomfortable like buying when everyone else is selling).

6.) Control Your Costs and Your Investment Vehicle: Invesment costs can weigh you down like an anchor.  And choosing the right investment vehicle helps you ride in comfort to your destination. 

Consider this:  Not all mutual funds are created equal.  Actively managed mutual funds have costs that detract from performance.  And typically more than 50% of active mutual funds do not match much less beat their benchmark index.  Does this mean that you give up on investing?  Heck, no. It just means you find another ride.  When a star football player gets hurt, does the team forfeit the remaining games?  No, they have a back up ready for replacement.  With a solid investment policy and using ETFs, you can make a quick switch, too.

This is why you should consider a strong core of index mutual funds and Exchange Traded Funds (ETFs) as part of your investment stratetgy (see “Top 8 Reasons to Use ETFs in Your Portfolio,” March 10 blog post).

7.) Estate Planning is for Everyone: Be prepared.  That’s the motto that every Boy Scout knows.  It’s good advice here as well.  Having the best investment strategy and record-breaking performance on investments will mean absolutely nothing if you’re not on a strong foundation.  This is what an estate plan will help do by laying the groundwork on how you want to control disposition of your assets and control your affairs.  Regardless of age or portfolio size, an estate plan is important throughout the various stages of life.  This goes for seniors and newly married couples.  If you have something or someone to protect, you need to talk with an attorney to draft a plan that includes at the very least: a Last Will, a durable Power of Attorney, a health care directive.  And if you have minor children it is imperative to have your guardianship issues addressed.

8.) Insurance: In uncertain times, it is even more important to make sure that you protect yourself from contingencies that can blow up your plans and get you off track.

Please review these items annually.  Consider putting it on your calendar to coincide with the seasonal change for clocks.

  • Make sure you have full replacement coverage on your property
  • Add an “umbrella liability” policy to your home and auto.  In a litigious world you don’t need to lose everything because of a lawsuit.
  • Make sure you have filed a “homestead declaration” recorded at the Registry of Deeds on your primary residence.  This will protect you from creditors placing a lien on your property that could force you to sell to settle a suit.
  • Review your employer-sponsored benefits and consider group Long-term Care Insurance, Short and Long-term Disability and Supplemental Accident coverages in addition to standard health/vision coverage.
  • You really need to consider coordinating these coverages with individually owned policies because when you leave your employer you will lose these coverages. 
  • Life Insurance:  Do speak with a financial planner who will do a detailed expense analysis to determine the appropriate level of insurance.  This approach is more likely to result in an appropriate level of insurance at a lower cost than rules of thumb based on income.  As with employer-benefits, consider having policies separate from your work.  A level-term policy is relatively inexpensive and offers cost-effective coverage during the peak years when you may have considerable debts and family responsibilities.

For specific advice on any of these matters, please consider speaking with an independent board-certified planner.

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According to a Wall Street Journal article, here are some of the many reasons why the financial planning process is vital for today’s consumer:


• Health care and education costs are

rising significantly faster than the general

inflation rate.


• Many retirees today will live 25 or more

years in retirement, requiring far more

financial management of resources to

maintain a desired lifestyle.


• Social Security and company pensions

no longer provide the majority of retirement

funds for many people.


• Tax laws change almost annually.


• Downsizing companies no longer provide

cradle-to-grave benefits or job security.


• The average American changes jobs

seven times in a lifetime.


• According to CardWeb.com, the average

American household today has

$9,300 of credit card debt, up from

$5,800 a decade ago.


• The Center for Association Leadership

reported a survey in which 50% of respondents

said they rarely, if ever, use

a household budget to manage their



• There are myriad investment options

available, and not all of them are appropriate choices for you.


Given our very busy lives,  is it very likely that a consumer will be able to evaluate all the options out there on their own without guidance? 

How does a consumer know how to make a proper evaluation of the various options on issues?

Most consumers don’t have a plan but a hope.  Yet hope, as important as it is on any difficult endeavor, is not a strategy.

Having a plan that starts with goals – an end in mind – will help focus one’s efforts and keep one on track even if detoured off course by the occasional pothole or market meltdown.

I want to encourage folks to open up and think about what they want their money to do for them.  It’s not enough to simply say, “I want to be rich.”  That is a relative term.  Being rich means something completely different to someone on Rodeo Drive compared to someone living in a hut in the jungle.

Regardless of where one lives there is common agreement that people almost universally want to be free from want, hunger, disease.  And all want to have a safe home for raising a family.

The trappings surrounding the success we call “being rich” are what may be different.

So how does one get there then?  Wishing alone will not make it so.

So take it one step further.  Be SMART about what you want – have goals that are Specific, Measurable, Attainable, Realistic and have a Time limit.

Having a plan is the first step.  Next is staying on track to get between Point A and Point B.  This is where the right coach can do wonders.  If Tiger Woods can have a coach, shouldn’t you?  A good coach can offer advice with an objective perspective, tell it like it is and be brutally honest. 

It’s a complex world out there – whole life versus term insurance, over 10,000 mutual funds, multiple options for elfer care and medical treatment, tax laws that change constantly.

Are you really sure that you’re prepared to handle these details on your own?  Do you really think that the Web or some talking head on TV is the best source of information for your specific needs?

Maybe it’s time to try something different and sit down with a real money coach, not just someone trying to sell you something.

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Separating the Wheat from the Chaff …

Trusting a Financial Advisor


How can a client trust a Financial Advisor? There are over 650,000 folks with registrations to sell products of one kind or another. It is awfully confusing for a consumer to figure out which person is best suited to help them and has the consumer’s interests (and not the advisor’s pocketbook) at heart.  


Consider the source of the advice and follow the money.  For comprehensive advice, it’s best to be working with someone working on your side .

The results of various industry surveys can be sobering.


In a poll of 1,200 individual investors, more than 83% admitted to not knowing how to determine the quality of a financial advisor.  More than 88% noted that they did not know the critical difference between advisors and financial sale representatives.  Nearly 85% base their selection of an advisor on some subjective criteria. These investors rely on an emphasis on personalities, brand names and advertising slogans.


A major source of investor confusion lies in the titles used by those in the industry. Financial planner, advisor, wealth manager, advisory representative titles mean very little to lay people.  And there is a virtual alphabet soup of credentials out there.  Some are issued by nothing more than “credential factories” earned in a weekend in a crowded hotel ballroom.


Consumers may assume that just because someone has initials after his name or passed a regulatory exam that that conveys some sort of expert status onto the advisor.


Since we live fast-paced and complex lives, it is sometimes difficult to have the time to do our own due diligence and we rely upon short-cuts to fill in the blanks here. As consumers we look to other trusted outlets to help in the comparison of products.  Think here of Consumer Reports and their monthly reviews of various products.  We are all familiar with Morningstar’s famous star rating system for mutual funds.  But there has rarely ever been an independent rating service for financial planners and advisors.  Consumers should consider the industry trade organizations as a resource.  Another non-affiliated third party trying to bridge the gap is the Paladin Registry (www.paladinregistry.com) , a four-year old firm that invites advisors to submit their information for review.  Those who meet their stringent list of criteria and background checking are rated as five-star advisors and featured as part of their network.


Whether a consumer decides to rely on a third-party organization, a trade group or a referral from a friend, I think that it is imperative that a consumer have a process in mind to selecting an advisor.


I would suggest that a consumer needs to consider at the very least:

·         Education

·         Credentials

·         Experience

·         Compensation Methods

·         Fiduciary Status

·         Background Checks


Anyone can hang out a shingle to be a “financial planner” or “financial advisor.”  There are minimal requirements to be licensed to sell securities.  But there is more to financial planning than just investing.


This is why the industry, trade groups and the media have been gravitating toward the CERTIFIED FINANCIAL PLANNER ™ designation as the standard.  This designation requires a commitment to education covering six major areas of financial planning ranging from insurance to retirement to estate and tax issues.  There is a rigorous multi-day, multi-part exam which has an average 50% pass rate of the typical 6,000 test takers each year.  Even if one passes, one can only use the CFP ® marks by passing an equally rigorous personal and professional background check including demonstrating a minimum of three years of related work experience. And there is an additional requirement for on-going professional education.


To learn more about the CFP ® marks or how to interview a prospective advisor, please visit the CFP Board of Standards web site at http://www.cfp.net/learn/knowledgebase.asp?id=8.


To access the regulatory agencies to check on a licensed sales professional, please visit http://www.cfp.net/learn/knowledgebase.asp?id=16.


Beyond the knowledge, skills and experience to do the job, consumers should consider if the advice they are given is compromised by the method of advisor compensation.  For a carpenter with only a hammer, all problems may look like a nail.  For someone who just represents life insurance, then all solutions will center on using insurance.


Working with an advisor should not be dictated by the size of one’s investment portfolio. 


I think it is imperative that an advisor be like other professionals and act as a fiduciary. Most do not. Acting as a fiduciary requires the advisor to act in the best interests of the client.  Advice has to be the best available for the client’s situation.  It is more than the standard that brokers must adhere to in their business of financial product sales. For a more complete discussion, you may want to check out the organizations I cited above or the independent rating service at www.paladinregistry.com.

A true planner is not expected to know everything but if you look in the text books you’ll note that the visual used is one of a quarterback – someone who can call the plays, leads the team and coordinates with other professionals. At the very least, a planner knows the client and can marshal resources and other experts.  

Planning is a process that requires full cooperation by the client, too.  A client has to also understand his responsibilities in the relationship. They can’t abdicate. They must be actively involved in the decision process. This means being truthful with the advisor and providing complete documentation. (Heck, if the same client went under the knife and didn’t disclose all the meds they take, can the doctor really be at fault if something goes wrong?).

With consumers burned by bad advice or inappropriate products offered by salespersons, it is no wonder that there is a lack of confidence.  But that is no reason to ignore taking action and working with someone qualified to lead through the financial jungle. Finding a qualified advisor does not have to be like searching for a needle in a hay stack. Using some common sense and the resources from reputable industry resources will help in finding the right person with the right approach for you.



CHARTERED RETIREMENT PLANNING COUNSELOR and CRPC® are registered service marks of the College for Financial Planning. CERTIFIED FINANCIAL PLANNER™ and CFP® are registered with the Certified Financial Planner Board of Standards, Inc.

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With Valentine’s Day just around the corner and the celebration of love and fidelity, it is somewhat incongruous to think about divorce.  But every ‘good-bye’ leads to a new ‘hello.’  And it is all the more important for smart individuals to prepare correctly with proper advice ahead of time so that each party can have a fresh start.

When love goes wrong, there are a host of money pitfalls and potholes on the road to and from the courthouse. 

Soon-to-be singles will benefit greatly by adding a financial planning professional to the team, especially one with special training in the area of divorce planning.

Too often individuals are caught up in the emotions of a love gone wrong and are too distracted by grievances to see the bigger picture.

Regardless of who gets the house, there are issues that neither the court nor your attorney may be skilled enough to address with you.

Consider how poor credit decisions, a job loss of an ex-spouse or medical problems during or after the divorce might impact you.  Otherwise smart people can make big mistakes that will haunt them as they try to start over.

Key points for you to consider:

  1. Get your own financial advice:  Just as you should not rely upon your spouse’s attorney, you should not rely upon his or her financial advisor.  Saving a little money on advice now may hurt you later.  In most cases, attorneys and courts are not skilled enough in the area of financial planning to adequately evaluate settlement offers to determine if they are equitable and in the long-run best interests of each party.  This is where an experienced planner will pay off in spades. Good planners experienced in this area will be able to identify financial issues unique to the situation and help evaluate the financial impact of settlement offers as well as outline the action steps to take to make sure your credit is preserved so that you are not adversely impacted later.
  2. Review each other’s Reports: While credit issues may be the least of one’s concerns when dealing with a risk of physical danger, it’s important to not lose sight of its importance in the big scheme of things. Before the divorce is finalized, negotiate to inspect each other’s credit reports for a period prior to and just after the divorce is finalized. Trouble can surface and it’s helpful to identify potential issues ahead of time.  If both sides haven’t already obtained their annual free credit reports from the three major credit agencies (TransUnion, Experian and Equifax), the place to go is www.AnnualCreditReport.com.
  3. Remove your ex-spouse from your accounts immediately: Call all lenders on joint credit accounts to arrange to remove the ex-spouse’s name as an authorized party. Terminate joint asset accounts as well. This will need to be coordinated with the ex-spouse or his/her attorney to make sure that there is a proper division of liabilities.
  4. Consider refinancing joint debts you keep after the divorce: Whether it is for a mortgage, equity loan or auto, it is a good practice to arrange to refinance these debts to remove the ex-spouse. This might be easier said than done given the realities of each household’s new cash flow situation, but it will make things easier if possible.  If it’s not possible to do so immediately, it is important to arrange for a credit-monitoring service to alert you about negatives impacting your credit report and consumer credit score. This will lessen the likelihood that erratic or even fraudulent credit activity by a former spouse will go unchecked and severely impact your own good standing.
  5. Update your beneficiaries and estate plan documents:  In the daily rush of life, it is all too common to forget to update beneficiary designations on asset accounts, retirement accounts or life insurance.  Contact your employer to arrange changes to delete your ex-spouse from benefits if permitted by the divorce decree. Nothing can be more painful than to have an unfortunate or untimely death result in your ex-spouse receiving your assets or insurance.  It happens all too often and is far from amusing to the loved ones who depend on you. Ideally, you should also consult with an attorney when your divorce is final to update estate planning documents like your Will, Power of Attorney and Health Care Proxy as well. Those who own a business or investment property interests have other special considerations.


A divorce is far more involved than simply signing a final divorce decree.  As I’ve tried to highlight here there are a range of financial issues that will impact each party and their children.

For a more complete checklist of the types of issues you may need to be aware of if planning a divorce, please call me directly for a complimentary copy of the Divorce Planning NewStart Checklist.

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