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Finding a Financial Planner

Nov 18th, 2009
by Karen.
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Ever since our previous financial planner changed firms a couple of months ago, I’ve been debating how to proceed.

I could go the DIY route. Suze Orman, in this column, states that most people really don’t need a financial planner. And in fact, I did switch some of our money to a mix of low-cost index funds – a move that I probably should have made years ago. The more I read about the ways in which actively managed funds (which our advisor had us in), do nothing to boost return while still socking you with hefty fees, the further I want to stay away from them. And, I’m fairly comfortable with our ability to choose an appropriate mix of investments.

At the same time, part of me likes the idea of working with an outside expert who can review our financial decisions, and bring us insight and ideas (solid ones, not get-rich-quick schemes) we might not come across on our own. I also view a good financial planner as an independent voice who could (hopefully) talk us out of any really foolish decision – like cashing in our retirement funds for a high-flying real estate scheme – that might tempt us. I don’t think we’re particularly susceptible to such stupidity, but we’ve made our share of money mistakes. The older we get, the less I want to risk that.

With that in mind, I’m going to at least look for a new financial planner. My husband and I already met with one firm, and have the names of a few others. Before we sign on the dotted line, these are a few of the things I’d like to know:

a) How do you get paid? My preference is a fee-only planner, who charges just for his or her expertise and the work of putting together a plan for our retirement savings and reviewing the kids’ college funds.

A fair number of planners earn their keep this way. I can go to the website of the Financial Planning Association, type in our address, and get a list of several dozen within about a 20-minute drive. However, some work only with clients who have a certain amount in investable assets. For some planners, the minimum is seven figures, which puts them out of our reach, at least for now.

In any case, I’ll definitely want to know if he or she will make more money if we invest in certain investments, or if the firm recommends products that are provided by an affiliated company.

b) What sort of approach to financial planning do you take? I’m not sure if I’d actually ask this, or just try to pick whatever vibe he or she might be giving off. First, I’m looking for integrity and honesty (I can’t help but be suspicious that anyone in this field could be another Bernie Madoff in the making), a realistic outlook (I know the market will go up and down, and don’t want any guarantees of certain returns) and some interest in our lives (if we’re going to be in this for the long haul, I’d like to enjoy working together).

b) What experience, degrees, and certifications do you have? I’d like our planner to have a solid track record in the field, and have been around long enough that he or she has a realistic view of just what the markets and investments can do. I don’t think any specific degree is necessary, but would like to know he or she has made it through college. A certification also is appealing, since I think it shows that the planner is committed to this career, and has studied a range of personal finance topics, such as investments, taxes, retirement planning. Certified Financial Planners (CFP) also pledge to adhere to a code of ethics. While this is no guarantee, it shows the planner has at least thought about the subject. CFPs also need to register with the SEC. I’ll check that he or she has, and ask to see what’s known as ADV Form, Part II.

c) What sorts of funds do you use? They definitely need to include low cost index funds in the mix. If it’s all high-priced proprietary funds, I’m out of there.

d) Where will our investments be held? Again, visions of Bernie Madoff come to mind. As this blog post by Marc Freedman, a CFP, makes clear, you never want to write your checks directly to the financial planner. Instead, our investments should be held by an independent custodial firm that is audited by the Securities and Exchange Commission and the Financial Industry Regulatory Authority, or FINRA.

e) Have any disciplinary actions been taken against you? Actually, I probably don’t need to ask this, as I can check this online, at the FINRA website. FINRA stands for Financial Industry Regulatory Authority; it is an independent regulator, overseeing securities firms that conduct business in the United States. Using FINRA’s BrokerCheck capabilities, I can check the backgrounds of about 850,000 current and former brokers who have registered with FINRA. The information comes from forms the brokers and brokerage firms provide when they register with and become licensed.

At this point, I should have a pretty good idea whether a particular financial planner is a good fit for us.

What about you? What’s been most important to you as you’ve looked at financial planners?

Posted in: Investment Portfolio, Retirement planning.

Target-Date Funds: Good, Bad or Ugly?

Nov 6th, 2009
by Karen.
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When I was scoping out 529 plans for my kids, I noticed several target-date funds that I could invest in. These funds are designed to make saving for retirement or college easier. You plunk your money into the fund and let it know when you want to use the money. The fund managers will automatically and gradually move you into more conservative investments as it gets closer to the time you’ve said you’ll need to tap into the account.

Target-date funds seemed so promising that the Pension Protection Act of 2006 allowed companies to enroll their employees into these funds as a default option. By 2008, 87 percent of Vanguard group plans relied on target-date funds as their default option, according to this report from the Senate Special Committee on Aging. Over the past few years, the amount of money going into target-date funds grew from $5 billion in 2003 to $35 billion in 2009, as of July. That’s according to a research paper by Morningstar.

However, target-date funds haven’t been the savior that some hoped they would be. In 2008, many funds saw steep losses. To some extent, that’s to be expected, since most investments fell off a cliff. What’s troubling, however, is that even funds with target dates that were coming quickly – say, 2010 – got hit. The reason? A number had equity allocations that seemed pretty high for someone retiring in a year or two. The Oppenheimer Transition 2010, for instance, was 70 percent in stocks; American Funds Target Date 2010 was 67 percent. Both figures are from the Morningstar report.

Not all the funds were so heavily invested in stocks. The Putnam Retirement Fund’s equity allocation was 27 percent; and stocks made up 26 percent of the Wells Fargo Advantage DJ Target. Still, of the 28 stocks reviewed, 16 had more than 50 percent of their holdings in stocks. The proportion in equities ranged from 26 to 72 percent.

As if that weren’t enough, the Morningstar report raises questions about the fees the funds charge; the average expense ratios ranged from .19 to 1.82 percent. Also, some funds limit investors’ choices to proprietary funds, according to the Senate report. Unfortunately neither charge is new when it comes to mutual funds.

None of this means all target-date funds automatically are a bum deal. But, iit makes sense to check into several aspects before investing in one:
- How does the allocations between different types of investments change as you move closer to my target date? (In mutual fund lingo, this is referred to as the “glide path.”)
- What funds can you invest in?
- What are all the fees charged?

While I don’t think target date funds are automatically a no-no, I’m also not rushing to invest in any right now. If I’m going to have to dissect the fund anyway, it seems like I might as well invest in a range of funds myself, and then each year, shift more money to conservative investments.

Have you invested in any target-date funds? If you have, how have they performed?

Posted in: Investment Portfolio, Retirement planning.

Inflation and TIPS

Nov 6th, 2009
by Karen.
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Lately, I’ve been hearing more predictions that inflation is about to make a comeback, as this AP article from October discusses. The thinking is that the deficits Uncle Sam is carrying might raise prices down the road. Here’s why: the countries that currently invest in bonds issued by the U.S. Treasury – namely China – are getting a tad concerned about just how the U.S. is going to pay for everything it’s buying. If these investors really get worried and decide to stop buying our securities, or sell they’ve already bought, we’d have to pay higher interest rates to attract them back, which could fuel inflation.

What’s more, to cover its spending, the government could decide to print more money. The value of each dollar itself would drop, so it would take more greenbacks to buy groceries or clothes or pay the mortgage.

If you really want to get into the theory behind this, here’s a link to an article from the St. Louis Federal Reserve that examines it in depth. It’s from 1981, but the concepts remain valid today.

To be sure, there’s some disagreement about whether inflation actually is right around the corner, as this post on Blogvesting from Dec 27, 2008 points out. If the government puts it money toward rebuilding the U.S. infrastructure – rather than just handing out money to get people into new cars or back to the mall – inflation shouldn’t be as much of a threat.

Even so, the preponderance of concern appears to be that inflation could reignite. I’m not about to make any predictions, but I am concerned about how the deficit might play out. If things don’t get under control soon, I figure it’s going to have some impact, and it probably won’t be good.

So, I decided to look into an investment that protects against it – TIPS, or Treasury Inflation Protection Securities. These bonds are issued by the U.S. Treasury for terms of five, 10, and 20 years. As you might guess from their name, the principal amount of TIPS adjusts to account for inflation; it actually also offers some protection against deflation. Here’s how: if prices, as measured by the Consumer Price Index or CPI, rise, the principal of the bond increases. With deflation, the reverse occurs, and the principal drops, although it won’t go below the level of your initial investment. So, when the bonds mature, you get back either the original principal, or your principal adjusted for inflation, whichever is greater.

TIPS also pay a fixed rate of interest every six months. While the rate is fixed, it is calculated off the adjusted principal, so the amount itself can vary.

TIPS have a couple of other features that also sound appealing. For starters, they’re negatively correlated with several other asset classes, including stocks. So, if stock prices rise, TIPS head down and vice versa. Between 1998 and 2008, the correlation between TIPS and the S&P 500 was -.20, the Treasury reports. That means they would have been a good hedge when stock market cratered in 2008.

And, their return hasn’t been too bad. Between March 1997 and March 2005, their average return on a rolling one-year basis was 8.3 percent. That topped both the 7.6 percent the S&P 500 earned, as well as the 6.9 percent return on the Lehman Brothers Aggregate Bond Index. That’s according to this report from GE Asset Management

Judging by the volume of TIPS outstanding, a growing number of investors appear to be interested in them. According to the U.S. Treasury Department, about $500 billion worth of TIPS was outstanding as of August, 2009. That’s up from $25 billion in 2000.

Treasury sells TIPS directly through a couple of programs called, not surprisingly, TreasuryDirect and Legacy TreasuryDirect. However, I’d probably invest in a mutual fund that offers TIPS. That way, I’d avoid the $1,000 minimum purchase that’s required with a direct purchase, and I’d get a range of maturities.

One drawback to TIPS: the interest is exempt from state and local taxes, but not Federal. So, if I bought any, they would go into our retirement funds. Based on what I’ve seen about TIPS, it seems like a smart move.

Have you invested in TIPS? Why or why not?

If you’d like more info on TIPS, head to http:, or http://www.treasurydirect.gov/indiv/research/indepth/tips/res_tips.htm.

Posted in: Investment Portfolio.

It’s that time of year….

Oct 27th, 2009
by Karen.
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Open enrollment time, that is. Sure, reviewing and signing up for an insurance plan might not be as much fun as watching your favorite football team in action or even raking the leaves. Even so, spending a bit of time now on this job can save money down the road and give you some confidence that your coverage matches your expectations.

This has become even more important as health care costs have jumped, with many employees picking up more of the tab. About one in five firms have either reduced the benefits they offer or have increased the employees’ share of the costs, according to a recent report by Kaiser Family Foundation. And, the price isn’t cheap: average annual premiums for family coverage hit $13,375 this year, Kaiser reports.

What’s more, if your company is like most, this may be the only chance you’ll have all year to change your insurance plan, or to enroll if you’re not currently in a plan. (The exception at most companies is if you have what’s referred to as a “qualifying event” such as getting married or having a baby.)

A couple steps can help you get the most from open enrollment season:

  1. Get a handle on your medical expenses for the past year. Before you can decide which plan is the best fit, you’ll need to know approximately how much, and in what areas, you spent money this year. Of course, your healthcare needs may change in the coming year. But, analyzing this year’s patterns at least provides a starting point. You’ll want to tally up the costs of the premiums, co-pays, and medicine.
  2. Learn the lingo. Sure, an HRA and an HSA sound awfully similar. But, they’re far from the same. Once you know the terms, you’ll be in a much better position to figure out which plan is a better fit. Check out this guide to the various types of plans, which is from Fallon Community Health Plan, ranked one of the top three Medicaid pplans by U.S. News & World Report and the National Committee for Quality Assurance.
  3. Dig into the details. For starters, you’ll want to check which plans include your current physicians within their networks. Sticking with in-network health care providers generally is less expensive than going out-of-network.

    You’ll also want to consider your specific situation. If you have a family, you’ll want to know which plans cover spouses and dependents. Similarly, if you need a prescription refilled on a regular basis, you’ll want to check the cost of the medicine under each plan. Also on your review list: does the plan require a referral before you can see a specialist?

    You’ll also want to review the deductible levels of the different plans (this is the amount that you pay before the plan reimburses your healthcare expenses). With most plans, the higher the deductible, the lower the premiums. If you’re in fairly good health and tend not to use a lot of medical care, you may be able to save by going with a higher deductible. (A word of warning: you are rolling the dice, at least to some extent. If your good fortune changes and you end up needing a lot of healthcare, you’ll pay.) On the other hand, if you have a chronic condition, a plan with a lower deductible, even if it has higher premiums, may work better.
  4. Compare. Pull together a chart showing the costs and benefits of the different plans available. Your goal, of course, is to figure out which plan most cost-effectively meets your needs. That won’t necessarily be the plan that with the lowest premiums. If it doesn’t the health care services that you’ll probably need, it’s really not a bargain.

    As part of this step, you may want to skim independent reviews of the plans you’re considering. For instance, the National Committee for Quality Assurance (NCQA) along with U.S. News & World Reports annually tallies its honor roll of health care plans.
  5. Decide. Based on your review, you should be able to identify at least one plan that best fits your needs.

Posted in: Financial Basics, Insurance Plans.

Value Averaging: What’s it All About?

Oct 27th, 2009
by Karen.
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If you’re like most investors, you’re probably familiar with the concept of dollar cost averaging: you invest the same amount at regular intervals, such as once a month. The theory behind it holds that by default, you end up buying fewer securities when prices are high, and more when they’re low. What’s more, it’s a simple, easy-to-follow plan and reduces any temptation you might have to time the market.

However, some investment gurus say that another investing technique can lead to higher returns than dollar cost averaging. In the late 1980s, Michael Edleson, at the time a Harvard professor, introduced the concept of value averaging. A few years later, he wrote a book on the topic: Value Averaging: The Safe and Easy Strategy for Higher Investment Returns.

To apply value averaging, you set a growth target for your portfolio; you might decide you want it to grow by a certain amount or percentage each month. Then, you calculate your contribution to make up for any shortfall from the rate you’re aiming for. On the other hand, if your portfolio has risen above your growth target, you could end up selling some of your shares in order to stay on your path.

For instance, say your account starts $1,000 and you’d like its value to grow by $100 percent each month, from both additional contributions, as well as the growth in the account itself. So, if at the end of the first month, the account’s value has gone up by $10, you only need to add $90 to reach your target of $1,100. At the end of the second month, you’d want the value of your account to be $1,200. If it’s at $1,115, you’ll need to throw in another $95. You would continue on this way until you reach your savings goal, whether that’s funding a college education or retirement.

One benefit of value averaging over dollar cost averaging, its adherents say, is that you purchase even more securities when their prices are low than you do even with dollar cost averaging, as this example from Investopedia shows. And, given the way the process works, you have a very clear idea of just how your money is growing (or not, if it’s a down market).

Paul Marshall, an associate professor of management at Widener University, published a comparison of dollar cost averaging and value averaging in the Spring 2000 issue of the Journal of Financial and Strategic Decisions. According to Marshall’s study, the average cost of the securities purchased using value averaging was lower than it was with a dollar cost averaging program, whether the markets were rising, declining or fluctuating up and down. In fact, when Marshall ran 500 simulations, comparing value averaging, dollar cost averaging and random investing, value averaging came out on top 73.5 percent of the time.

To be sure, this doesn’t mean value averaging is the best approach for everyone. For starters, a value averaging approach requires you to take a hands-on approach to your investments, and not everyone has the time or inclination to do that. In addition, as your portfolio grows, making up for any shortfalls from your targeted growth rate can require sizable chunks of money.

Ultimately, neither value averaging nor dollar cost averaging, nor any other investment approach is going to be a silver bullet. (To be sure, there are always going to be a few who strike it rich early on and can just sit back and count their money) While it’s not as much fun as hitting a jackpot early on, what’s likely to be most effective for most investors is taking a disciplined, methodical approach to saving and investing.

Posted in: Financial Basics, Investment Portfolio, Value Averaging.

Does Converting to a Roth IRA Make Sense?

Oct 27th, 2009
by Karen.
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If you’ve been hearing mumblings about the Roth IRA (Individual Retirement Account), but aren’t quite sure what the buzz is all about you’re not alone – nearly 90 percent of respondents to a recent survey by Fidelity Investments didn’t know about the upcoming opportunity to convert their current IRAs to Roth IRAs.

A Roth IRA differs from other retirement accounts in that contributions are made with after-tax money. When you contribute to most other retirement accounts, you use pre-tax money, which reduces the amount you hand over to Uncle Sam come April 15th. However, you’ll have to pay taxes when you withdraw your money later.

With a Roth IRA, on the other hand, qualified distributions generally aren’t subject to federal income tax, as long as you’re at least 59.5 years old and have had the account for five years. What’s more, you can contribute to a Roth IRA even after you hit 70 and ½, and can leave money in the account as long as you live, according to the IRS. (For more on this, see IRS Publication 590.

Until now, the $100,000 income limit on conversions from traditional IRAs to Roth IRAs kept many people from making the shift. However, a provision in H.R. 4297, AKA The Tax Increase Prevention and Reconciliation Act of 2005, eliminated the income limits on rollovers, beginning in 2010 (see the summary of the bill).

This provision also effectively removes the income limit on contributions, as well as conversions, to Roth IRAs. How? You can contribute to a traditional IRA and then convert it to a Roth IRA, as this report from the Center on Budget and Policy Priorities notes.

So, does this mean that you should move to a Roth IRA? Of course, you’ll want to talk with your financial guru before making any move. However, there are some general guidelines:

a) You will need to pay taxes on any money you convert. However, for 2010, income from conversions can be reported either in 2010, or equally on your 2011 and 2012 returns, according to Ameriprise Financial. What’s more, if your retirement accounts have sunk in value (really, whose haven’t?), your tax bill should be correspondingly lower.
b) Your tax rates now and later. To be sure, it’s hard to predict where tax rates will go. However, if you expect them to head higher, it may make sense to render what’s due Uncle Sam now, and avoid a bigger tax bill later.

It makes sense to review your own finances in light of the changes coming to Roth IRAs. You can check out this IRS website for more information.

Posted in: Financial Basics, IRA, Investment Portfolio.

New Rules on Giftcards Next Year

Oct 27th, 2009
by Karen.
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I just checked my stash of gift cards, and found five that have expired. That’s $180 down the drain. Another one didn’t actually expire, but the monthly fee that kicked in since I didn’t use it for 24 months brought the balance down to zero. That’s another $30 I don’t have.

Of course, none of this means we won’t be able to pay the mortgage or retire, of course, but still… it would be nice to have used the cards, instead of just throwing them away.

Starting next August, gift card procrastinators like me will get a bit of a break. Included in the Credit Card Accountability Responsibility and Disclosure Act of 2009, AKA the Credit CARD Act of 2009, is a subsection that deals with gift cards. It says:

a) A business can’t impose a inactivity or dormancy fee on most gift cards unless it hasn’t been used for at least a year. What’s more, the card has to clearly state that the merchant may charge a fee, the amount of the fee and the frequency with which it’s assessed.

b) The earliest expiration date allowed on most cards is five years from the date it was issued. Again, this date has to be clearly spelled out.

These provisions don’t apply to several types of cards, including prepaid phone cards, reloadable cards that aren’t sold as gift cards, loyalty and award cards, as well as cards or tickets that are going to be redeemed for admission to an event at a particular location.

This subsection of the Credit CARD Act of 2009 becomes effective August 22, 2010, or 15 months after the date the Act became law. I’m going to try to be more diligent about using gift cards when I get them, but having a little extra time will be nice, as well.

Posted in: Credit cards, Financial Basics, Gift Cards.

Money Clubs

Oct 27th, 2009
by Karen.
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At various points in my life, I’ve been a member of running clubs, several book clubs and a bunco group. One club that I haven’t tried, but that sounds like a great idea, is a money club. As the title suggests, these are made of between about a half-dozen to a dozen individuals – usually women, although that’s not a requirement – who get together regularly to discuss all things monetary. They may help each other set budgets, allocate investments, or devise a plan to pay off credit card debt.

Candace Bahr is a managing partner with Bahr Investment Group in Carlsbad, Calif., and a co-founder of www.moneyclubs.com. She and Ginita Wall, the other co-founder, wanted to get women to use the power of a group, not to sell to each other (think candle parties, jewelry parties, purse parties, and so on), but to help one other reach financial goals. Members of money clubs can offer each other support, advice and accountability – services they wouldn’t get just by talking with a financial planner.

With the economy in a tailspin, money clubs may be an even more important resource for their members. How can you start a successful one? The moneyclubs.com website offers several tips for success.

  1. Invite doers. You need people who will commit to the club and make it a point to show up at meetings.
  2. Plan on having between about six and ten members.
  3. Make sure all members get a chance to speak, although no one should dominate the conversation.
  4. Meet frequently enough that you don’t lose momentum between get togethers, but allow enough time that members can prepare for the meetings.

Sure, you’re thinking – this all sounds good, but do I really want to bare my financial goofs? I don’t think you have to give away any information that you don’t want, especially when the group is just starting and everyone is getting to know each other. Say you’ve got a credit card debt of $12,000 that you want to zero out within a year. You could talk about wanting to chop your monthly expenses by a certain amount, and discuss steps you can take to get there, without disclosing your card balance.

Of course, it may be difficult to discuss some concerns or goals without mentioning something about why they’re important. However, you can control just what you bring up.

Have you been a member of a money club? If you have, I’d love to hear about your experience.

Posted in: Investment Portfolio, Money Clubs, Women and finances.

Does Asset Allocation Still Make Sense?

Oct 27th, 2009
by Karen.
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Like most investors, I’ve taken it as article of faith that asset allocation, which the SEC describes as dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash, is the way to go when investing for the long term. It’s basically applying the idea that you don’t want to put all your eggs in one basket to investing.

According to the theory, diversifying your investments reduces the risk of your overall portfolio. That’s because when one investment is doing well, there’s probably another one that is having a rougher go of it. The securities will balance each other out, so that your overall returns are steadier and less risky than they would be if you invested only in a single asset type.

That’s been the theory, anyway. Today, at least a few investors are wondering if the benefits of asset allocation still apply. “Diversification works well, except when it really matters,” said Rick Bookstaber, a former fund manager and risk manager at a number of Wall Street firm, as well as author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation wrote in a September blog post.

As Bookstaber notes, pretty much all asset classes plummeted over the past year or so. For instance, between July 2007 and December 2008, the S&P Smallcap 600 Index, the Vanguard Emerging Markets Stock Index and the Vanguard Large Cap Index all plummeted, albeit by varying degrees. The small cap index was down by about 40 percent; the emerging market index dropped by about 44 percent and large cap index sunk 38 percent.

Granted, these are all equity indexes, and the economy fell off a cliff during this period. Of course, the time when you’d most want an asset allocation strategy to do its job would be when the economy is sinking. So, given this, does the concept of asset allocation still make sense? Or, has the impact of technology, which makes it easier to invest across borders and in different types of assets, mean that most assets now move up and down more or less together?

I say asset allocation still has a role to play. In a May 2008 report, Peng Chen, president and chief investment officer with Ibbotson Associates, says, “Although correlations have been rising in the global equity markets, there is still diversification benefit to be had in the long term.” In comparing U.S. equities with those of Europe, Australia/Asia and the Far East, using the S&P 500, and the MSCI EAFE Index, Peng notes that an investor who held only the non-US stocks would have missed the U.S. upswing starting in the late 1980s. Similarly, investors who stuck to just U.S stocks more recently would have been left out of the run up in non-U.S. stocks – up 22 percent on an average annual basis.

What’s more, even as most markets were melting down last year, the bond markets held fairly steady. The Vanguard Total Bond Market Index, for instance, actually rose 12 percent between July 2007 and December 2008.

What makes more sense than discarding the idea of asset allocation is to broaden the notion of what is considered diversified. Rather than focusing just on different types of equities, it makes sense for many people to include a wider range of securities in their investment planning.

Posted in: Investment Portfolio.

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