Money Monday: Tips for Choosing a Financial Planner

Don’t sign up for the first financial planner who comes along. Use these valuable tips to make the right choice in this very important matter.

By Bridget McCrea

Up until now you probably handled financial matters on your own. Maybe you were in college and are now working full-time, perhaps you just got married, or maybe you recently moved into your own apartment. Regardless of the life change that you’re going through, chances are good that a financial planner can help you make some solid choices today and in the future.

Financial planners come in all shapes and sizes. Before you pick one, consider these five tips for selecting a professional who will work in your best interest and guide you in the right direction:

1) Look for a financial planner with the letters “CFP” after his or her name. These folks have passed a rigorous test administered by the Certified Financial Planner Board of Standards about the specifics of personal finance. CFPs also have to take ethics classes and continuing education in order to keep their designations current.

2) Learn how to discern between commission-based and fee-only planners. Commission-based planners take a cut of the profits that they generate for you, and some charge per transaction. Fee-only planners (typically members of an organization called the National Association of Personal Financial Advisors [NAPFA]) generate revenue through client fees (hourly, retainer, or both) that typically equal about 1 percent of your annual assets.

3) If you’re just starting out, consider picking an hourly-based planner. These planners are usually new to the business and eager to build their companies by referrals. They can help you with investments, taxes, retirement planning, and myriad other financial matters on a per-project basis. Over time you may want to transition to a more “holistic” approach — with the planner on retainer year-round — but for now having a professional working in your corner on an hourly basis may be enough.

read the complete article here: Money Monday: Tips for Choosing a Financial Planner | News | BET.

Five questions a financial planner should ask you – Life Inc.

By Jacoba Urist, TODAY contributor

Preparing for your first sit-down with a financial planner can be more than a little intimidating. After all, a good planner covers a lot of terrain, from analyzing your investment portfolio, estate plan and health care costs, to helping you figure out how to fund college or retirement accounts, to making sure you’ve got a healthy day-to-day budget in place. Chances are he or she may be the only professional who takes in your whole financial picture — with both a wide-angle and a zoom lens.Experts agree that finding the right fit between you and your financial planner is the key to making the relationship worth your while. To that end, most of us concentrate on what we should ask a potential adviser during the initial consultation. Many people don’t realize that a good financial planner should also be asking you at least five questions at the first meeting.

1. What is it you hope to accomplish by visiting a financial planner?A good financial planner needs to know exactly what you want from the relationship, explained Lauren Locker, chairwoman of the National Association of Personal Financial Advisors napfa.org. “Are you trying to save for your kids’ college and a house?” Locker said. “Are you here because you’re worried about retirement? Do you need guidance with respect to insurance issues? You might need a whole financial plan — and you might only need a few hours. It all depends on what you are looking for and why you’ve decided to meet with someone.” According to Locker, financial planning is a lot like a cooking recipe. You start with your goals and what you hope to achieve financially imagine trying to bake something without really knowing what you’re trying to make in the first place. Then, she said, a good planner will add in your current investments to see how far they’ll take you into the future, and sprinkle in your estate planning, taxes, lifestyle issues — whatever else you want help with — on top.

See the complete article here:   Five questions a financial planner should ask you – Life Inc..

Actual wealth vs perceived wealth (More is not always better)

I first read this great poem a few years ago.

It reminds that you more is not always better …

Here’s the poem:

SMART

My Dad gave me a one dollar bill
‘Cause I’m his smartest son,
And I swapped it for two shiny quarters
‘Cause two is more than one!

And then I took the quarters
And traded them to Lou
For three dimes
– I guess he didn’t know
That three is more than two!

Just then, along came old blind Bates
And just ‘cause he can’t see
He gave me four nickels for my three dimes,
And four is more than three

Read the complete article here:

via Actual wealth vs perceived wealth.

Retirement Planning 2.0: Retrain Your Brain for Financial Success

Dismal market returns haven’t exactly created a tailwind for 401(k) and IRA portfolios over the last decade or so, but an equally pernicious — and more entrenched — problem is that our brains are messing with our retirement plans.

“We are wired for financial defeat,” says Rapid City, South Dakota, certified financial planner Rick Kahler. “Whatever has the most emotional juice right now is what gets our attention. Invest $5,000 in your IRA for a retirement that is 10, 20, 30 years away? Or spend the $5,000 for a vacation to the Bahamas?” All too often, the Bahamas wins out.

William Meyer, founder of Social Security Solutions, notes that our thirst for immediate gratification can easily take a six-figure toll. More than two-thirds of folks opt to claim a lower Social Security benefit starting as early as age 62. For a married couple, than can mean leaving as much as $100,000 on the table. “If you wait to claim until age 70, you’re locking in a benefit that is 76 percent larger,” says Meyer.

More productive planning    …..

via Retirement Planning 2.0: Retrain Your Brain for Financial Success – Bloomberg.

Finding “Real Returns” in the Bond Market – from Bert Whitehead

This is one of the best discussions of Bond Yields and Risks that I have found.

Steve

Bert Whitehead’s Blog “Finding “Real Returns” in the Bond Market “

Bert Whitehead, M.B.A., J.D

Widespread consternation is erupting in the investment arena, particularly in Fixed Income Departments which handles bonds. Everyone wants to find the perfect investment with ‘decent’ yields like 5% to 8% which are our birthright. To accomplish this, many investment advisors devise complex allocation strategies, e.g. derivatives, collateralized mortgage obligations, annuities and whole life insurance, to justify the amount they charge investors.

I still have trouble believing that these ‘Professional Fixed Income Strategists’ can add any value for their retail clients. Surely if they had the foresight and analytic ability they claim, they would have been able to detect Collateralized Mortgage Collapse or Libor Rate scam. Their losses on these investments will exceed $100,000,000,000 (yes, 100 Billion)… and the scam had been ongoing since 2008!

The players include Schwab, BofA, JP Morgan, Citi Bank – plus virtually all the biggest bond dealers abroad. Their strategies in this area have been a continuous train wreck! Why would we conclude that they can make these kinds of fixed income strategies work for small investors in the retail market?

Rates Reflect Default Risk

The truth is this: if Treasuries are paying 2, and high-yield bonds are paying 6%, the 4% difference is entirely attributable to the higher risk (i.e. default rate) plus the outrageous fees bond dealers charge. That means that for every $1million invested in junk bonds, some retail customer(s) will lose $40,000 – net of everyone else’s gains. There is no free lunch.

In Las Vegas, the casinos set the ‘vig’ or the odds by adjusting the rules. In the financial world, the Gnomes of Zurich set the vig, based on their knowledge of the default rate of the debt. This is why subprime borrowers pay higher rates (currently 6.5%) than you and I do (3.5%). In aggregate, the higher amounts of interest the banks collect from subprime loans are offset by the higher losses and administrative costs except for a very small premium. If the ‘vig’ is set too low (as it was during the real estate/mortgage meltdown), the banks and investors in these bonds see their values plummet once the defaults start.

When these bonds are wrapped up in bond funds, closed funds, or sold to individuals through large institutions, the additional costs wipe out the small premium. These costs include underwriting costs, reporting costs, distribution costs, transaction costs, and other ‘monthly expenses’ that are added in. Then the institutions have to sell the bonds for substantially more than they bought them for, and the yield realized by the small investor is correspondingly less.

Essentially, especially at today’s rates, retail investors focus on the 6% yield, and have no idea that the correct odds, or risk premium, should mathematically be 8% on the world market. Investors take much greater risks than they think they are, and are paid less for the risk. Since the default rate is relatively small, an investor may never see the loss attributable to the higher risk of any one investment. But there are real losses when investors must take pennies on the dollar after a bond when there is a default (such as GM, Lehman Bros., etc.). In a bond fund, this loss is further obfuscated by the expenses of the bond fund, and its market value.

Interestingly, when bonds are sliding toward default their value drops and they can be bought at a sizeable discount. Since the coupon (i.e. the periodic income payment from the bond) is fixed, the bond’s yield rises. So a $10,000 bond with a 6% coupon pays the investor $600/year. If the bond issuer (e.g. Greece) starts to look riskier, the bond value could drop on the open market. So if the price drops to $6,000 the yield increases to 10%! To amateur investors, this makes the bond look like an even better deal simply because it has a very high yield.

Yields Increase as Bonds Become Riskier

In truth, the bond becomes more risky as the price drops and yield rises, and is considered less risky as the price of the bond increases and the yield drops.
This is a fundamental truth about investing in bonds: there is no excess long-term profit in a bond investment. A higher rate of return is always accompanied by more risk. Unlike stocks, diversification in a bond portfolio does not provide protection — only higher costs.
Bond dealers (who are paid more than stock brokers) have more latitude in pricing bonds because all bonds (except Treasuries) are very thinly traded. This is because bonds have many different variables: convertible, preferred, subordinated, call features, etc. Therefore, very few bonds are traded each day so bond dealers usually hold inventories themselves.

So when you sell the bond, it doesn’t sell for the amount shown on your statement–that is the ‘asked’ price if you were buying. The ‘bid’ price is generally not provided because the bond dealer will buy ONLY at a significant discount. The difference between the bid price and the asked price is called the ‘spread.’ These spreads are common in the sales of assets in inefficient markets, like diamonds. If you buy a diamond today and go back to sell it back tomorrow, you would likely get back only about 60 cents on the dollar since the spread is about 40%.

Since the dealer is taking the risk of holding the diamond, he can set his own prices. Stock brokers are called ‘brokers’ because legally they don’t take title to the stocks: they are only facilitating the transaction. Most stock markets are huge so the broker never actually owns the stock and must buy and sell at market values.

It is folly to think that the ABC bond you bought today at 8% yield is ‘better’ than the XYZ bond your friend bought with a 7% percent yield. At the end of the day, those who bought the XYZ bond will, in aggregate, have the same amount of money as the ABC bond buyers. The defaults and additional costs of ABC buyers will offset the extra 1% in yield.

These numbers are not just ‘made up’ any more than the casino odds (or vig) are haphazard. If you buy bonds with the belief that you can beat the market you are thinking like a casino gambler. You can no more outsmart the house with your system, than you can get an edge in a casino. You are facing an overwhelming disadvantage since the other side has much more information, analytic capacity and cash.

Bonds Are Useful for Cash Flow

That’s why I insist that ‘safety trumps yield.’ The function of bonds in a portfolio is to provide cash flow which is certain. Since bond yields only vary between about 2% and 20%, the only way to make money in the bond market is to be a market timer. Like trying to beat the casino, the bond dealers who are betting against you know more than you do, have more cash and, are more informed, so you are the chump.

The stock market, by contrast, can be a great investment because the risk of diversification only impacts the volatility. For ‘real people’ the wise choice is to dollar-cost-average by saving a certain amount every month over a lifetime into a low-cost diversified index fund. Cash and bonds are held to provide long term cash flow so stock investments don’t have to be liquidated.

The more complex an investment is, the less suitable it is for individuals. Complicated investment products are really designed for banks, insurance companies, and other financial institutions which can vet them properly. This is especially true for bonds. Our financial institutions offer stripped down versions of complex strategies, add on a huge profit, and sell them to people who don’t really know what they are buying.

People have lost more money by chasing yield than at the point of a gun!” — Warren Buffett.

I appreciate the discussion with our client Ward Johnson which inspired this blog. I also appreciate the professional copy editing provided by Shari Cohen.

 

Created By: Whitehead, Bert On: Thu, Sep 06, 2012 09:03 PM