We are currently in the midst of one of the largest transfers of wealth from one generation to the next that our country has ever witnessed. That’s because as parents of baby boomers start to pass, the legacies they are leaving behind in the form of inheritances are in the trillions of dollars.
Last year alone in our financial planning practice, one out of three new clients contacted our practice as a result of receiving an inheritance. And in many cases, the inheritance they received was a game changer - meaning the amount received was large enough to create financial independence.
At the same time, many of these new clients were totally unprepared emotionally and spiritually for the sudden wealth they were now dealing with. When you go from living and adjusting to a relatively tight family budget for most of your adult life, and suddenly your net worth increases, perhaps even high enough to never have to work another day in your life; it will change your life in unexpected ways.
Based on my observations over ten years of working with clients from all walks of life, some that have received small inheritances and some that have received very large inheritances, below are my 5 tips to help you prepare for this solemn and potentially transformational moment in life.
1) Get the Facts
As part of the process of developing a comprehensive financial plan, I ask all clients if they are aware of their parents’ estate plans and if yes, approximately how much their inheritance will be. If you never broached this subject with your parents, that’s understandable. But if you’re a boomer, it’s better to know the facts, as delicate a topic to discuss as it is, instead of guessing.
If you’re looking for an appropriate time or opportunity to broach this subject, informing your parent’s that you’ve hired a holistic financial planner and as part of the planning process you’re seeking a rough ball park figure of how they plan to distribute their estate is one option to consider. Most clients tell me how surprised they were to discover their parents were not only willing but eager to discuss this emotionally charged subject with them.
2) Beware of the Internal Saboteur
There are two common patterns that I’ve observed working with clients that have received large inheritances. One, perhaps the most familiar, is putting your entire inheritance into a savings or money market account earning 0.5%. That’s usually caused by a lack of self-confidence around money. The story you are telling yourself is you’re not capable of handling this. Please realize that’s the saboteur talking. Change the story in your head and tell yourself - yes you can!
The second, although less prevalent, is doing everything possible to sabotage yourself and eventually lose the money through risky or reckless investment choices. The reasons for this sabotage behavior are complex and much has to do with an unhealthy relationship with money to begin with.
Like a magnet strongly pulling you to the darkness, your unconscious money behavior manifests itself in ways that are very self-destructive. It’s crucial to know and understand your money patterns and habits before your inheritance is received. If you know for sure your inheritance will be large enough to change your life completely, lay the groundwork and inner foundation by seeking out a therapist or financial coach that can help you stay conscious when the time comes.
3) Make No Major Decisions the First Year
For many people receiving an inheritance, especially a large inheritance, it’s common to want to make a big and bold move with the money. That could take the shape of a new home, a second home, starting a new and costly business, etc.
The guidance that my clients find the most difficult to follow is when I ask them not to do anything major or bold the first year except invest their inheritance wisely. To make any major life decision in the first year of losing your parent is fraught with danger.
That’s because the urge you feel to do something big with the money is usually an emotional reaction to the pain you feel from the loss. To let your emotions guide major financial decisions in this first year is a risky proposition at best.
4) Talk with Your Partner about Your Intentions
Once you discover more information about your future inheritance, remember to include your partner and bring them into the conversation on how you would like to use this money. Yes it’s your inheritance and you have the right to do whatever you please with the money. That said, shutting your partner out of any discussion, which happens quite frequently, will lead to conflict down the road.
Better to think, dream and imagine the possibilities together, find common ground if there is disagreement and work together, mapping out your new life plan as a team instead of flying solo.
5) Feeling Grateful
When I ask my clients how they feel upon receiving their inheritance, the one word most often used to describe their feelings is gratitude. They feel extremely grateful for their inheritance, large or small, and they stay and nurture that feeling for a long time.
It’s easy to get tripped up emotionally when receiving an inheritance as there are so many conflicting thoughts and feelings running through your mind and body that often it’s difficult to remain grounded and centered. If you had a difficult relationship with your parents, then your emotional challenges are even greater once they do pass and you receive your inheritance.
Whatever your spiritual practice is, practicing gratitude is the way forward. It will help soothe the pain of your loss and is a powerful way to honor the memory of your parents.
Photo credit Pat Chiappa
Back in the day, I considered myself an ‘outsmarter’. It was the mid-80’s, I was young and carefree and believed, as did the vast majority of my friends and colleagues, that we had the winning formula for stock market success.
Conventional wisdom said trying to beat the market was a fool’s errand, but we knew better. And for many years, we seemed to have the magic touch. One score would be bigger than the next, so why not double down? And when we doubled down, the wins would be even bigger. And like many a twenty something of that time, we felt like there was no stopping us.
We were masters of the universe. Whatever we touched turned to gold. It was the era of Michael Milken of Drexel, Burnham fame. Risk was sexy and everyone wanted in. According to Bloomberg, “Drexel had its most profitable year in 1986, netting $545.5 million-at the time, the most profitable year ever for a Wall Street firm.“
In 1987, Milken was paid executive compensation of $550 million for the year. Yet on October 19, 1987, what has since been referred to as ‘Black Monday’, stock markets around the world crashed. Again, according to Bloomberg, the Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74, down a whopping and painful 23%. The DJIA did not regain its August 25, 1987 closing high of 2,722 points until two years later. And in March of 1989, Michel Milken was indicted for insider trading.
Index Funds, Diversified Portfolio. Long-Term Strategy - A Winning Strategy
Now being in my 50’s and thankfully having learned many of life’s lessons early on in my investing years, it’s been a long time since I recalled the madness of the eighties. Yet, I’m hearing and seeing all too familiar signs that point to the same type of madness, only this time the marketers of ‘beating the street’ have become much more savvy and sophisticated.
They’ll tell you index funds are for the weak at heart. A diversified investment portfolio is for wimps. Long-term investing and buy and hold strategies are dead. The financial marketers, to use a phrase that has been overused, are simply putting lipstick on a pig.
Sure, you’ll be told this time is different. That technology has leveled the playing field and that the only way to win at investing is to beat the market and to trade, buy and sell constantly. You’ll at once feel seduced by the many sales pitches and commercials you see and naturally you’ll question your strategy.
If you’re a guy, you’ll feel especially drawn to this more macho approach to investing and suddenly every smart and sensible approach to investing you have learned will come under scrutiny. Peer pressure may play a role as well as you won’t want to miss out.
Oh yes… I remember the feeling, the intoxication of it all. But then, I remember Black Monday and the way the stock market taught me the lesson of my lifetime which I will never forget.
So please, next time you get the itch to want to beat the market and throw your prudent and sensible long-term investment strategy out the window and put it all on black or red, call me and as they say from my home state of New Jersey; we’ll talk.
“Wise Investors won’t try to outsmart the market, They’ll buy index funds for the long term, and they’ll diversify”- John Bogle, founder of the Vanguard Group, New York Times.
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What is the biggest loss you would be willing to tolerate before you change your long-term investment strategy?
What would shake you?
How committed are you to your course of action?
In order to make investing more appealing to the regular investor, the financial services industry has conjured up multitude ways to promote and market investment options to the general public.
What’s left out of this discussion very often is the prudent amount of risk a long-term investor is willing or needs to take to reach their long-range financial goals. And instead of having a realistic and thoughtful discussion about risk tolerance, many investors and many financial advisors get caught up with pondering the benefits of the latest mutual fund flavor of the month or the seemingly endless new supply of ETF’s that seem to increase exponentially each passing week.
Don’t get me wrong, some of the new investing options, especially some of the newer ETF options that have recently been introduced, especially Vanguards ETF offerings are pretty outstanding. That said, before making any decisions on which funds to choose for your investment strategy, I suggest it’s more crucial to first understand and recognize how best to manage your investment risk.
Mastering the Art of Risk Management
In principle, the less sensitive you are emotionally to small fluctuations in the value of your investments, the better off you’ll be in the long run. Yet, as we all know, this is much easier said than done.
The real culprit that can sabotage your ability to reach your long-term retirement goals is very often the fear of losing money, also known as loss aversion, the first cousin of risk aversion. Investors that have a tendency to overreact emotionally to losses as well as gains are much more likely to feel disempowered instead of feeling empowered.
It’s that fear of loss that kicks the primal reptilian part of our brain into action. Fight or flight is our unconscious conditioned response to this fear that’s pumping through our body. Rational thought gets thrown out the window, our emotions take over and all too often, major financial decisions are made in a state of panic.
To begin learning how to master your emotions when it comes to investing requires you to truly understand your appetite and tolerance for risk. A good place to begin this exploration is by asking and reflecting on the three questions at the beginning of this article.
The more you truly learn and discover about yourself, the more honest you are about taking on risk, the better aligned your investment strategy will be with your acceptable risk level. If you already know that you’re someone prone to strong emotions when it comes to investing, then taking as little risk as needed to reach your financial goals is your winning formula.
Deciding on the right amount of risk to meet not just your financial goals but your emotional temperament as well is a process of trial and error. On paper, filling out a risk questionnaire that describes possible what-if scenarios and decisions you would most likely make in each situation is one thing. Holding steady, staying the course, sticking to your strategic investment plan when markets are highly volatile, well, that’s a whole other dimension of risk taking.
When is Enough, Enough?
Taking on more risk is a strategy for maximizing your wealth. The more risk you decide to take, the higher the potential return will be. Yet ultimately, what this all boils down to is a trade-off between personal comfort; being able to sleep at night through the markets ups and downs and taking the appropriate amount of risk needed to reach your long term goals.
It’s a balancing act for sure, one that requires lots and lots of practice and honest self- evaluation before you’re able to achieve mastery. Yet the investment of time you make will reap dividends and rewards greater than you can possibly imagine.
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Watch five minutes of financial news on television, and you may think investing is hopelessly complex—a frenetic blur of numbers, symbols, and hyperactive floor traders shouting and making strange hand signals.
The reality is very different. You can build a successful, long-term investment program with just a few simple components, bearing in mind that ‘simple’ isn't the same as ‘easy.’ And as important as your financial decisions are – so is the resolve to stick with your program.
1) Make a Realistic Plan
Review your finances honestly and carefully. Know your goals and determine what you need to do to achieve them. Then create an investment strategy that’s aligned with your long-range and short-range financial goals. Remember to be realistic. Don't expect your portfolio to earn a return of 25% each year. Instead, think about being ultra-conservative instead with your projected returns and go from there.
2) Pay Yourself First
The great thing about automatic investment and direct deposit plans is that you won't miss the money you direct into your investment accounts, because you won't have had a chance to spend it in the first place. You can easily arrange automatic deposits from your bank account or paycheck into your retirement and non-retirement accounts. Gradually increase your investment amounts as your income grows, and you may be pleasantly surprised at how your assets accumulate, without making a big dent in your wallet.
3) Diversify, Diversify, Diversify
A portfolio that has the appropriate mix of stocks, bonds, and cash investments for your needs is easier to create than you think. One of my favorite sources to recommend for designing an investment portfolio is the recommendations you’ll find in the great book, Work Less, Live More, written by Bob Clyatt.
4) Have an Emergency Fund
Many people, even though they invest for long-term goals such as retirement, don't think about how they would handle financial needs in an emergency. Generally, I recommend you maintain a spending cushion sufficient to cover at least three to six months of expenses in the event of a hardship, such as illness, job loss, or a death in the family.
5) Watch Costs
The lower a mutual funds cost, the greater the percentage of the funds returns that investors receive. Low costs are especially important in bond and money market funds.
6) Don't Be Emotion-Driven
It's all too easy to get caught up in the short-term volatility of the stock and bond markets and to chase performance, reacting emotionally when making decisions about your investments. However, keeping a level head and resisting the urge to change your portfolio are traits of successful investors. Stay the course and resist the urge to make sudden changes.
7) Monitor Your Plan Annually
At least once a year, review the performance of your investments and measure annual performance to the financial goals you set. Analyze any variances, positive or negative and course correct when needed.
Note: All investing is subject to risk including loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance, and especially short-term past performance, is not a guarantee of future results.
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If you’re a baby boomer, you most likely grew up with the notion that men are born with a natural ability to be good at managing money and investing.
Fast forward to 2012, and that notion has been turned on its head. Not only are women becoming the primary breadwinners in many households, but women are becoming financially empowered as well. More often than not, women are the ones managing a family’s personal finances and very often actively involved and making the major decisions around investing.
What a change a few decades can make on the perceptions and realities of the role money plays in people’s lives, especially women’s lives. And what a welcome change it is.
Yet even with all the change that has and will continue to occur, much still needs to be done to assure that women feel like they have the tools and knowledge necessary to make smart financial decisions. For far too long, the financial services industry has treated women as second class citizens. “Don’t worry your pretty little head, Mrs. Smith”, we’ll take care of everything, just sign here and here”. That common refrain left over from the Mad Men era was still the prevalent theme running through the financial services industry up until just recently.
So what’s changed to make this old boy’s club wake up and pay attention to women? You guessed it - money, and lots of it. Women now control more money than men in terms of investable assets. That alone is a big change. In addition, women are finding their voices and are not willing to be patronized or treated as idiots that don’t know anything about money.
As a result, you have classes, workshops, seminars, coaches, trainers, consultants; basically a cottage industry has emerged teaching male financial advisors how to talk with women clients. I’m not kidding, there’s not a month that goes by where I’m not receiving an unsolicited email, sales call or brochure in the mail touting the latest ‘strategies’ or ‘techniques’ on how best to talk and connect with women in order to attract them as clients. Crazy stuff if you ask me.
Leveling the Playing Field for Women Since 2003
Perhaps growing up with two older sisters allowed me to gain an advantage when it comes to working with women? Or maybe my prankster prone sisters taught me the ‘secret’ language of how to connect with women when I was little and I don’t even know it? But seriously, I discovered early on in my practice that women were going to make up the core of my financial planning practice.
It was a little over ten years ago when I held my first series of workshops at the Integrative Medical Center in Santa Rosa. This medical practice, run by Dr. Bob Dozor, MD, is devoted to practicing holistically, with MD’s, Naturopaths, Acupuncturists, Psychotherapists and Chiropractors all working in harmony with each other. A better place to offer a series on ‘Financial Wellness’, I could not find.
As it turned out, over the course of three financial wellness workshops, close to 70% of those that attended were women. Aha! So holistic based financial planning with an emphasis on education and empowerment was more appealing to women than it was to men.
Fast forward again to right now and guess what? Close to 70% of my clients are women. Many are boomer women that have built highly successful businesses, some are recently divorced, some have sadly lost their life partners too early, others are single moms and quite a few are just getting their careers launched and are seeking financial guidance.
Paying it Forward
One of my favorite clients decided last year that she didn’t want to continue working with the financial advisor her husband enjoys working with, as she felt him to condescending. She also wanted her money aligned with her values, and that was not happening.
Although that caused some initial conflict for them as a couple, once we transferred her accounts over to Schwab, and she started doing the homework I gave her to increase her financial intelligence, we were off to the races. Together we designed an investment strategy that aligned her money with her core values, even choosing a Pax mutual fund called The Pax World Global Women’s Equality Fund as part of her portfolio.
From there, she wanted her two daughters, both in their twenties, involved so they could see how their Mom was handling this as well as being a role model for them. Talk about paying it forward…this is beautiful stuff.
Overall, in my ten plus years of working with women I’ve learned this golden rule; When women like someone, they will tell just about everyone they know.
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When it comes to professional investment or financial planning advice, clients want to work with someone who is both competent and committed to serving their best interests, someone that honors and values integrity as a core belief. In short, they want someone they can trust. They want a fiduciary.
Maybe you’ve just received an inheritance, or you’ve decided to get your financial house in order by developing a comprehensive financial plan, or you’re preparing for retirement and you’re seeking the guidance of financial planner. Whatever the reason for contacting me, I often get asked the same questions:
Q - Can I trust you to look out for my best interests?
A - Trust is what clients crave and want most and it’s why I choose to run Spiritus in a fiduciary capacity. 'Fiduciary’ means a person in a position of trust, looking out for your best interests. I run my financial planning practice as a fiduciary which means I have a legal and ethical obligation to serve my clients best interests. Thanks to Wall Street’s game of smoke of mirrors, the word fiduciary unfortunately doesn’t mean much to most people. The more confused people get, the happier the big Wall Street firms are.
Q - Will you look at me as yet another customer to sell product to or will you provide me the honest and objective advice and analysis I need to make smart and informed financial decisions?
A - I make recommendations by carefully evaluating various investment opportunities and planning strategies available to meet a client’s goals without having to deal with the sales incentives and company mandates that non-fiduciary advisors have to accommodate. The big Wall Street firms strategy is to target a less informed, less financially savvy client so their financial sales people masquerading as ‘advisors’ can sell them products loaded with commissions. This is the exact opposite of a fiduciary in that the investment strategies developed by these salespeople are in the best interests of themselves, not their client.
Q - Will you put on the friendly act in order to gain my business and then wander off never to be heard from again?
A - Part of my fiduciary role is keeping clients apprised of their progress towards reaching their goals. For investment management clients – we’ll meet once a quarter either in person or by phone or Skype to review investment results and measure quarterly performance. For my financial planning clients – we’ll meet three months after a plan has been completed to make sure implementation is going smoothly and make any changes needed. Next, we’ll meet at least annually to monitor progress. Here’s a sample progress report which is used to evaluate annual results.
Q - Do you really care about the clients you advise or are they just numbers on a spreadsheet?
A - A good portion of my business are referrals from satisfied clients, so you’ll always be highly valued and treated with the respect you deserve. In order to refer me to their friends, clients have to have full trust in me. Trust is a precondition for any client-advisor relationship. In fact, studies reveal that the #1 selection criteria investors apply when choosing an advisor is whether the person seems trustworthy. What I work hard on everyday is replacing that vague sense of trust clients generally settle for with real and authentic confidence.
Q - If I’m loyal to you, will you return that loyalty by avoiding any conflicts of interest?
A - Prior to any investment strategy being designed and deployed, a comprehensive financial plan is developed that forms the foundation for reaching short-term as well as long-term financial goals. From there, a careful due diligence process of selecting investments appropriate to your risk tolerance and long-term goals is executed. As a fiduciary, I will always look out for your best interests.
My intention is to attract clients that seek out an advisor providing a fiduciary relationship. Clients that have gained a level of financial intelligence and are informed enough to distinguish between a smooth sounding sales pitch and strategic financial guidance.
When it comes to choosing a financial professional, look for the person willing and eager to practice as a fiduciary. This will provide you the peace of mind you desire and the foundation for developing and nurturing a relationship built and established on trust, not just investment returns.
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Who could have guessed back in January that Vanguard stock mutual funds would have performed as well as they have year to date?
So far so good. Of course, there’s three months left in the year; we have the Presidential debates and election still to happen, no clear picture on whether we’re going to ‘go off the fiscal cliff’ come January, and a slew of other economic events to be concerned about.
That said, keep these thoughts in mind as well.
Consumer confidence is on the rise. That’s huge news because remember, we the people make up approx. 70% of our GDP, our economy, in terms of our spending. So if we’re feeling more confident about the future, we’ll be more inclined to make the leap of faith and purchase a new home for example.
In the past 12 months, average home values across the country have increased over $1 trillion dollars, yes, trillion. In just the past month alone, nationally, home prices have increased by 8%. The ‘wealth effect’, meaning you feel wealthier when you have more equity in your home, at least for the moment, looks like the wealth effect is kicking into high gear. That’s another confidence booster for people.
On Monday, the Institute of Supply Management (ISM) reported the first increase in manufacturing output since May of this year. The ISM number is one of my favorite metrics to watch when assessing the health of the economy.
People are refinancing their mortgages in record numbers. With a lower interest rate comes lower monthly payments and higher cash flow at the end of the month. American’s have paid off debt like it’s nobody’s business since 2008 and in my opinion, lots of folks are looking to balance things out a bit and do a little old fashioned spending on fun stuff.
The Federal Reserve has openly declared they will keep interest rates low, like near zero low until 2015. Secondly, Federal Reserve Chairman Ben Bernanke has said he will keep vigilant about spurring on the economy by implementing further bond purchases. As a fan of Paul Krugman, this news was music to my ears. That said, many economists believe Mr. Bernanke is ‘encouraging’ investors to place more of their assets into riskier investments and attempting at the same time to have inflation begin to rise.
(Here's an interesting tidbit - Mr. Bernanke focused his graduate school work and his Ph.D on the great depression and that he and his counter-part in Europe, Mario Draghi, President of the European Central Bank, were classmates in graduate school.)
And finally, the stock market has performed quite well this year. With the S&P 500 Index at close to 15% year to date, the Nasdaq at close to 20% and the DJIA at nearly 10%, investors are feeling pretty good. Keep in mind, the stock market is a leading indicator and the unemployment rate is a lagging indicator. It’s another good metric to use when taking the pulse of the economy.
Below are the top 10 Vanguard stock and bond mutual funds in terms of performance year to date:
All investing is subject to risk, including possible loss of principal. This is not to be construed as advice or as a recommendation. For informational purposes only.
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Although not news to me – you might find it shocking and certainly disturbing to discover that some financial advisors will sometimes work against their clients best interests if – guess what? If the advisor can pocket more money in fees.
According to a new study, done by Cambridge Mass. based National Bureau of Economic Research, (NBER) many advisors will encourage chasing high returns and press clients toward funds with higher fees. This was discovered after NBER sent out auditors, posing as clients, to almost 300 financial advisors in the Boston area.
Those 300 chosen advisors were ones which your average Joe might choose. They were found at banks, independent brokerage and independent investment advisory firms. They were not fee-only financial advisors, but were paid through fees generated rather than assets under management or portfolio performance. The fake clients showed investments between $45 - $105,000, and sadly, the advisors tended either not to mention fees or downplay them when asked outright.
And if you think this is an isolated problem – think again. It happens everywhere and financial advisors are thinking and acting like salespeople more than ever before. Greed has gotten a strong hold on them.
The fake clients shared various portfolios with the advisors and then asked for investment advice. Sensing a sales opportunity, the advisor complimented the portfolio choices, but in 50% of the cases, attempted to change them toward actively managed funds – which have higher fees. Just 7.5% of the advisors suggested my favorite type of investments, index funds.
The advisors recommended investing in stocks more as the fake client’s income increased, assuming a higher net worth client could afford more risk. Advisors, shockingly, did not consider the age of the client when choosing the mix of stocks and bonds.
In effect, the advisors were gearing these new potential ‘clients’ toward an investment portfolio that was going to place the client in a more vulnerable position. By charging higher fees, the client was now going to be in worse shape with the ‘new strategy’ introduced by the advisor.
You can clearly see who the winner is in this scenario.
The study was based on the idea that investors are bad at choosing portfolios when left to their own devices, but input from financial advisors can influence and sway their decisions greatly. The findings also reveal that a financial advisors self interest overrides the clients best interest.
So when choosing a financial advisor for your investment portfolio – remember one thing: a fee-only financial advisor is the only way to go.
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It's true - if you want to achieve financial success, you'll need to develop your delayed gratification skills.
Each one of us is tempted by the latest and greatest shiny objects that bombard us through the many media channels countless times day after day. So why do some people seem to be able to resist the myriad of temptations while others succumb and end up in serious financial troubles?
There was a study done in the late 60’s by Walter Mischel, a Stanford professor of psychology, where four-year-olds were presented with a simple, but far from easy choice regarding candy, marshmallows in particular. A researcher offered each child two options: either eat one marshmallow immediately OR, if the child could wait while he left the room for a few minutes, the child could then choose to have two marshmallows once the researcher returned. Most of the kids struggled with the temptation for about three minutes before they caved – they were not able to resist the white, sticky-gooey treat.
But what does the marshmallow study have to do with money?
A great deal it would appear.
The results of the study concluded that the kids who resisted the marshmallow temptation and showed self-control, (which was only about 30%) became adults who were generally more successful than those who didn’t resist. They were self-motivated, patient in achieving the goals they set, had financial success including high incomes, were positive in nature and enjoyed better physical and emotional health. Those kids who displayed immediate gratification grew up to have more issues including behavioral problems, lowing paying jobs and unsatisfactory careers, poor health and many even had drug problems.
Most poignant was what researcher Mischel explained, “What we’re really measuring with the marshmallows isn’t will power or self-control, it’s much more important than that. This task forces kids to find a way to make the situation work for them. We can’t control the world, but we can control how we think about it.”
Ultimately, financial success requires the skill of delayed gratification - fighting the temptation to spend money while employing the discipline of saving money. Since we are all on our own when it comes to retirement planning, we really need to find a way to spend less and save more. If you are willing to postpone gratification by disciplined investing, you will experience sweet financial success and a retirement that provides you and your family with the comforts and freedom you deserve.
It comes down to saving money (delayed gratification) or spending money, (immediate gratification) it’s your choice.
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The public has received a hard earned education when it comes to finance and investing. The upside to the Bernie Madoff’s of the world is that consumers are now becoming savvy and more informed about how they manage their hard earned money – and who they trust when investing it. I'd like to offer a little more education when it comes to choosing an investment advisor.
First, a couple of terms that need defining:
Wirehouses – Brokerage firms such as Morgan Stanley, Merrill Lynch, UBS Financial and Wells Fargo who hire commissioned brokers. (BTW – if these brokers don’t reach their monthly sales goals, they are let go – so the incentive to sell is real – if they want to keep their jobs.)
Registered Investment Advisors (RIA’s) Independently owned or professional advisory firms that offer personalized financial advice to its clients. Whether it’s for retirement planning, your tax situation or estate planning, it’s important that your advisor understand you and your goals. Independent RIA’s typically charge a fee based on a percentage of total assets managed.
Fiduciary Standard of Care – The fiduciary standard requires advisors to put the best interests of the client first and to disclose all conflicts of interest. It is a commitment to provide the client with the highest level of care, integrity, full disclosure, loyalty, and good faith. A fiduciary (an investment professional required to adhere to the fiduciary standard) must make recommendations regardless of the amount of compensation he/she might receive that are in a client’s best interest. The fiduciary standard of care is the strictest and highest standard in the industry.
Honest Comprehensive Financial Planning
Many wirehouse/brokerage firms claim to do financial planning but they are not really structured to handle it as effectively as an independent financial planner can. We independent planners recognize that our basic service offering is financial planning and not investment management. We know that structuring and managing portfolios, while important ingredients of a comprehensive financial plan, are not our ‘bread and butter’. Clients want financial plans that consider their values, transitions and goals in many areas of their lives – or as I call it, holistic financial planning. Clients want updates on their progress and course corrections when needed. Brokerage firms use financial planning as a tool to sell products. Financial planners provide financial planning first, and then invest clients’ money as part of their overall financial plan. See the difference?
Fees vs. Commissions
The new trend is in paying fees rather than commissions. Years ago, it was unusual for a prospective client to ask about product sales and the inherent conflict of interest that comes with that transaction, but now it’s part of the initial conversation. Some financial advisors still earn commissions on products such as insurance and annuities, but savvy consumers are no longer interested in paying these extra charges.
Registered Investment Advisors vs. Commissioned Brokers
Most consumers don’t understand the difference between a brokerage firm’s “know your client” and a registered investment advisor’s fiduciary duty to place the client’s interests first and to disclose all conflicts of interest. If they did understand, I’m convinced that they would choose to do business with the advisor who, under the fiduciary standard of care, must legally adhere to the higher standard of care. As confusing as it may be for clients to understand the differences between a registered investment advisor and a commissioned broker, imagine how confused they must be when the same advisor acts as a fiduciary in some instances and in others acts as a broker. That is exactly what the commissioned broker from a wirehouse will do.
Communicating Reasonable Expectations
As a fee-only financial planner who is also a registered investment advisor – I don’t claim to beat the market, avoid volatility and give clients above-average returns, because that is a promise that no one can keep. But the brokers in the wirehouse continue to make these promises, setting themselves up for failure and often losing the unhappy client who had unreasonable expectations presented to them. This begins the brokers sales cycle where they lose clients which adds the burden on them to attract new clients, to whom they make unreasonable claims, which they can’t deliver on, which result in those new people leaving—and the cycle continues.
Clients deserve complete honesty in our ability to help them reach their goals. They rather be told the truth and have their expectations met rather than be promised the moon and be disappointed.
Delivering Outstanding Service
Probably the most annoying thing in any service profession is when a client has a difficult time getting their advisors to return their call or schedule regular updates. When you recognize that your client is your greatest asset, it makes no sense to play hide-and-seek with them. Wirehouses lose many clients because they are more interested in attracting new ones (to reach their quotas) than in retaining existing ones.
Personally, I would not have a business today if I didn’t respect my existing clients – who in turn continue to offer me referrals as a result of their being happy with my services.
Image by Marcleh