Investments—eat what you cook

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Financial advisors are really good at cooking up investment schemes. I’ve seen stews made up from crazy lists of gold, commodities, all cash, pink-sheet stocks—you name it, some advisor, somewhere, is recommending it as the only way to go. So, may I recommend you choose something other than the plat du jour? Try asking your advisor how much of his or her personal money is invested in the recommendation.

For mutual funds, this information should be in a Statement of Additional Information, usually grouped with the prospectus literature on an investment company’s website. From my point of view, it’s most interesting to know this information for actively managed funds. For index funds, it doesn’t much matter as the manager is making far fewer decisions. Their responsibility is to track their benchmark, not season the sauce. However, a manager that purports some strategy that claims to beat the market ought to sit down at the table and take a big gulp, and I’m not talking about a $10,000 investment, which is barely a tip to these guys. If he’s heading for the exit, he probably knows something you don’t (and should). Me, I’m LOTS more interested in investments I actually have money in, although some of them, some of the time, require a Pepto to stomach.

Now let’s take a look at those “investment advisors” who call you up with the latest hot high-commission sales product their firm is pushing—e-r-r-r, considered investment recommendation. I think it’s entirely legit to ask whether they’ve bought the product themselves, and if so, how much or what portion of their investment portfolio is placed in that investment? Of course, it’s always possible that the investment may not be “appropriate” for their personal portfolio, but I’d sure want to know why not. If they’re not willing to take the risk, why should you?

There is one big “but”, however. You don’t want someone who’s made a huge buy, decides to pump you up, then sell his own holdings at the now inflated price. That is, unless you enjoy seeing your “investment advisor” doing a perp walk in a photo in the Wall Street Journal.

You can’t protect yourself against every possible misstep, but these ingredients can go a long way:

1. Know how much you’re paying and how you’re paying it. Nobody works for free. There’s ALWAYS a fee or commission or hourly rate somewhere in EVERY investment.

2. Find out whether the advisor invests in the recommended investment.

3. If it sounds too good to be true, IT IS. This one principle alone would have saved all the Bernie Madoff victims and most of the victims of rip-off mortgage loans.

4. Just because someone’s nice doesn’t mean they’re good. Personal charm of the broker has nothing to do with the worth of the investment.

 Check it out before you fork over your money. Bon appétit!

 

 

Retirement planning—unusual budget items to consider

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We can worry and plan for so many possibilities, but the ones that get us are often the ones we never see coming. I’d like to submit a few items for your retirement planning consideration that are not part of traditional budgets.

We can all come up with guesstimates for food, housing, property taxes, utilities, and insurance. Car purchases can be scheduled periodically (although please make a plan to stop driving at the point where your kids tell you that you should). But while walking my elderly dog yesterday and looking at my weed filled yard, I realized there are two areas I’ve never really incorporated into my own retirement plans.

The first is routine household care. If you plan to stay in your own home as you age, you will almost certainly need more of this than when you’re younger and active. Even if you’re a do-it-yourself type, you probably won’t be forever. I’d happily quit wrestling with the snow blower and the lawnmower THIS MINUTE, but right now, hey, what are kids for? But a recent stint with a fractured foot and a child away at camp have given me many thoughts about how much lawn and snow removal assistance I might need at 75 or 90, and how house cleaning services might be essential.

I’m a pretty avid gardener, but I would have to face changing my “design” and get-to projects if I had a landscaping service—no one would fool with my yard the way I do. And those of us who have a cleaning person every other week, tidying up in the interim, would probably want to step up that schedule. Some people think that cutting back on these services might be a way to cut costs once they are no longer working and have “plenty of time”, but in fact, the reverse is true. You will probably need more services, not less. Based on the fractured foot incident, and the resulting immobility, I have a good window on how a garden can transform from nice and fairly under control to the front yard of Sleeping Beauty’s castle in less than six weeks. You don’t want the EMTs to have to hack their way in to get you.

But back to the aging dog. Vet care, while so worth it, can be astoundingly expensive. The dog and our beloved cat with cancer have rung up sums that, this year, are approaching 5 figures, and we’re only in July. And I’m here to say that this isn’t the first time it’s happened over the years. I could never willingly put down an animal that had a chance at a decent quality of life, so for me it’s essential to have a pretty large pet care budget. Then there are all the services for pet care that can come to your house if you’re not up to hauling the dog to the vet, but they’re going to cost you, too.

One of the most heart wrenching aspects of moving to assisted living or nursing care is the necessity of giving up pets, so before you acquire an animal at your retirement age, think about 15 years in the future (an animal’s life span, give or take a few years). That’s caused me to realize I need to choose a smaller breed dog in the future, I want my long-term care insurance to cover home care, and my daughter will need to bond with and be capable of caring for any animals that come to live with me.

Staying in your own home, surrounded by beloved pets, is a delightful prospect, but like nearly every other goal and dream, there are aspects of financial planning that need to be considered. Excuse me, but the cat is demanding petting…

Financial advisors: fee-only or fee-based?

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What’s the difference? About as much as pro-life vs. pro-choice. Yes, I have to think twice before I have those two straight, too. But on the fee-whatever, it makes a big difference in the kind of advice you’re likely to get.

If you’re old enough to remember the old comedy routine whose tag-line was, “That’s what they’d like you to believe,” you’ll understand why suddenly you see all the brokerage houses touting fee-based. It sounds more consumer friendly, like your broker
is really going to care about you, and is really a financial advisor, not a big, hairy, commission-hungry salesperson. Please bear in mind that, as of now, a stockbroker (or whatever else they call themselves now) is only obligated to recommend products or investments to you that are appropriate. Funny how appropriate also seems to mean the ones with the best commissions in any given genre, or the ones designed and marketed by their firm. The brokerage industry has fought tooth and nail to avoid being held to a fiduciary duty, which means an obligation to put the client’s interests first—to
recommend investments in the best interest of the client.

Fee-based is often a way to make the client believe they are paying less commissions for the trades they make. It’s also been a way for brokerages to sell clients a ton of different investments while basically ignoring any service. And you can be pretty certain that everything recommended in the account is going to be a product of the brokerage firm. Just compare the mutual funds management fees to one from, say, Vanguard. For a more extensive discussion, here’s a good article from Investopedia.

Guess what I’m going to recommend? Fee-only, of course. That’s what Haven is, and that’s what I think is ethical. With fee-only, you know exactly what you’re paying for. Currently, Haven charges only by the hour for financial planning advice. Fee-only set-ups don’t accept commissions, or referral fees, or lavish junkets (I wish). My recommendations are only based on helping you consider your needs and coming up with suggestions that are in your best interests.

At the moment, Haven does not manage money or your investments. However, some fee-only financial advisors do, and we may add this service in the future. Generally, this works by charging a percentage of your assets—if they go up, the amount increases (not the percentage) or down, and down goes the amount. Of course, a consumer needs to be careful of how high a percentage a fee-only planner is charging, and generally these arrangements are only cost effectivem(for both advisor and client) if the “Assets Under Management” exceed $500,000. Think about it—if the advisor is charging you .05%, you’re paying $2,500 per year. For accounts that “small”, many advisors will charge 1%. Ironic that the more money you have, the lower percentage you’ll be charged.

$2,500 would buy a lot of hours of time with an hourly planner. For under a million, you probably don’t need that much time if your investments are in well-thought out baskets. Maybe the first year, but probably not every year. However, if you’re way too busy, or nervous, and you expect to have ongoing needs for re-evaluation or advice, placing assets with an advisor who uses a custodian can be appealing. Fee-only investment advisors like “AUM” because, frankly, we get frustrated when we make great recommendations and the client never implements them. If you cringe at re-balancing, the advisor won’t be as likely to fall in love with your investments as you may be.

One other reason to use fee-only advice: a comprehensive look at everything that makes up your financial security. People will often say their advisor has done well for them if their account “goes up”, which may be due far more to the vagaries of the market than any expertise on a broker’s part. But a fee-only financial planner can take a comprehensive look at your planning for retirement, estate, college & family goals, insurance, tax, and spending management, without attempting to sell you products on any of them. For example, when have you heard a broker recommend a Coverdell? Why not? Too small potatoes. 529s make a lot more money for them.

So, how to keep them straight? My advice—ONLY fee ONLY.