I opened my fledgling Financial Practice in the fall of 2007. As any entrepreneur will tell you, the first few years can be brutal. From trying to define my business model to best satisfy my target markets needs, to getting the word out through marketing trial and error, it’s been tough.
For many, the title of Financial Advisor or Financial Planner conjures up a vision of a salesman. And, by most accounts, this interpretation would be correct. The most successful “Financial Advisors” by industry standards are those that have amassed significant “assets under management”. For companies, assets represent revenue and commissions. The role of the broker is to bring assets to the firm. Those that bring in the most assets are touted as the best in class. Competition is fierce for these Advisors as Brokerages and Insurance Companies attempt to lure them away from the competition, enticing them with increased revenue sharing packages and huge sign on bonuses.
If you ask me, I think the broker model is flawed. With financial advice contingent on the sale of a product, clients aren’t getting the advice that they really need, advice that isn’t related to an investment or insurance product. Consequently, it’s no wonder that most folks are suspicious of brokers and insurance agents, A.K.A. Financial Advisors. Yet, even as other industries transition to a more transparent compensation structure, these financial firms cling fast to this form of compensation.
In efforts to separate myself from the public’s perception of this industry, I’ve opted for a fee based model. This means that my compensation is based on the needs of the client. A fee-only model enables me to work with anyone along the socioeconomic spectrum and additionally provides assurance that my values remain in line with those of the clients. (To date, I continue to be contacted by Financial Services firms and Insurance companies touting their compensation packages over the competitions. I have yet to receive an employment offer whose focus is on the client.) My services range from providing simple budgeting advice (charged at an hourly rate) to sophisticated portfolio management (charged on a percentage of assets). Now, the trick is overcoming the negative image created by my predecessors and which is perpetuated by many still within the industry. Until these folks clean up their acts, the going will be tough for the rest of us.
Monday, January 12, 2009
Monday, December 29, 2008
There's a change in the air, hopefully...
As 2008 draws to a close, many are fearful of what next year holds in store for us. As an observer of the recent financial crisis, I am optimistic that many of us are beginning to awaken to the poor financial decisions that got us here in the first place. As we gradually feel the hangman’s noose of our financial creditors tighten, we've started replacing ill conceived spending habits with prudent ones. This past summers grossly inflated gas prices provided an additional wake up call, as we were forced to begin making choices on how best to spend our finite incomes.
It might come as a surprise to learn that not everyone is panicked by this recession in which we find ourselves. Folk’s recessions are going to happen, so you might as well get used to them. The economy is cyclical. It expands and contracts in a constant battle to find a balance between supply and demand. Right now we are in a period of contraction. A period for which a select few have prepared. So, what does one do to prepare? You live within your means and save for a rainy day.
"Living within your means", means to stop spending money you don't have. Aside from buying a house, if you can't pay cash, you can't afford the item. If you want, or need the item, save up your money and buy it! Stop playing the credit card shuffle and begin making plans for your money. Imagine your life without payments. No mortgage, car loan, credit card bills etc. It is possible! Make a New Years Resolution to stop borrowing, begin paying down debt, and prepare for the future. For more on budgeting, check out www.longrunfinancial.com and click on the "Financial Services" tab.
It might come as a surprise to learn that not everyone is panicked by this recession in which we find ourselves. Folk’s recessions are going to happen, so you might as well get used to them. The economy is cyclical. It expands and contracts in a constant battle to find a balance between supply and demand. Right now we are in a period of contraction. A period for which a select few have prepared. So, what does one do to prepare? You live within your means and save for a rainy day.
"Living within your means", means to stop spending money you don't have. Aside from buying a house, if you can't pay cash, you can't afford the item. If you want, or need the item, save up your money and buy it! Stop playing the credit card shuffle and begin making plans for your money. Imagine your life without payments. No mortgage, car loan, credit card bills etc. It is possible! Make a New Years Resolution to stop borrowing, begin paying down debt, and prepare for the future. For more on budgeting, check out www.longrunfinancial.com and click on the "Financial Services" tab.
Friday, November 14, 2008
Reality Check
So, it’s happened. Unprecedented in our lifetimes is the financial crisis that’s upon us. It is amazing to me that so many were caught off guard. As a steward of my client’s money, I must admit that I too have been amazed at the depth and breadth of this global event. And, it continues to spread like cancer to all corners of the globe.
For the past several years, much of the investing advice has been to allocate a larger, and larger, portion of our portfolios to other regions of the globe. The prevailing ideology has been that the overseas markets aren’t as closely linked to the US as in years past. That is, that they are capable of sustaining themselves. As it turns out though, much of the overseas growth can be attributed to the ever increasing consumption by the American Consumer. Now I’m not an economist or statistician but consider this, over the past decade thousands of jobs have been shipped over seas. The recipients of these jobs are spending their incomes on goods in their own respective countries. This increased demand for goods has in turn created additional jobs in these regions. I know this example is simplistic, but it appears to me that much of the economic growth in the developing world has been fueled by America’s hunger for cheaper goods and services. As the US has fallen into a recession, growth around the world has ground to a halt.
I was reading an article today that discussed China and how it’s been buying our Government bonds with its new found wealth. Understand folks, that when an entity sells bonds (in this case, the US Government), it is essentially borrowing money, money that must eventually be paid back. Now where do you suppose our Government gets its money? Yep, that’s right, by printing more money, and taxation. Guess who pays those taxes. Uh huh, you and me! Now I’m not going to say that China is currently doing that well, but they are now sitting on billions of dollars compliments of the American consumer. How’s that for a transfer of wealth?
Now we have a new problem. The average American Consumer is tapped out. We simply cannot sustain the standard of consumption to which we’ve grown accustomed. This can be evidenced by the unprecedented amounts of debt, and the negative savings rate of Americans. As you know, I wasn’t a fan of the Government’s $700,000,000,000 bailout. The reality is that the credit party is over. The Government has simply paid the band to play on for another hour, or so. It may keep the guests (American Consumer) happy for a little while longer. But eventually it’ll sink in, if it hasn’t already.
For the past several years, much of the investing advice has been to allocate a larger, and larger, portion of our portfolios to other regions of the globe. The prevailing ideology has been that the overseas markets aren’t as closely linked to the US as in years past. That is, that they are capable of sustaining themselves. As it turns out though, much of the overseas growth can be attributed to the ever increasing consumption by the American Consumer. Now I’m not an economist or statistician but consider this, over the past decade thousands of jobs have been shipped over seas. The recipients of these jobs are spending their incomes on goods in their own respective countries. This increased demand for goods has in turn created additional jobs in these regions. I know this example is simplistic, but it appears to me that much of the economic growth in the developing world has been fueled by America’s hunger for cheaper goods and services. As the US has fallen into a recession, growth around the world has ground to a halt.
I was reading an article today that discussed China and how it’s been buying our Government bonds with its new found wealth. Understand folks, that when an entity sells bonds (in this case, the US Government), it is essentially borrowing money, money that must eventually be paid back. Now where do you suppose our Government gets its money? Yep, that’s right, by printing more money, and taxation. Guess who pays those taxes. Uh huh, you and me! Now I’m not going to say that China is currently doing that well, but they are now sitting on billions of dollars compliments of the American consumer. How’s that for a transfer of wealth?
Now we have a new problem. The average American Consumer is tapped out. We simply cannot sustain the standard of consumption to which we’ve grown accustomed. This can be evidenced by the unprecedented amounts of debt, and the negative savings rate of Americans. As you know, I wasn’t a fan of the Government’s $700,000,000,000 bailout. The reality is that the credit party is over. The Government has simply paid the band to play on for another hour, or so. It may keep the guests (American Consumer) happy for a little while longer. But eventually it’ll sink in, if it hasn’t already.
Thursday, October 9, 2008
The credit markets meltdown
It was disheartening to see the Government pass the $700 billion bail out plan last week. Supposedly, the intention of the plan is to stabilize the credit markets and ultimately restore the American consumer's ability to get the credit that we "need" and "deserve". Immediately after the bill was passed by the Senate, and prior to it's passage in the House of Representatives, one misguided senator justified the Senate's decision by explaining that if consumers were unable to borrow money, they would be unable to purchase goods such appliances and other household items. What I'd like to know is, "What ever happened to paying cash"? Credit Cards didn't even exist prior to the 1970's, and yet many of us are so frightened by the prospects of being denied credit, that we are willing to give even more power to the Government. Yes, we might have been given a brief reprieve, but creative financing and credit extensions are not the solution to our long term problems. And, as we shift personal responsibility from the individual to the Government, we are yet another step closer to Socialism.
Wednesday, August 20, 2008
No Load Mutual Funds vs Load Mutual Funds ,and the on-going debate.
What are the differences between No Load Mutual Funds and a Load Mutual Funds, and which is better?
No Load Mutual Funds are mutual funds that don't carry a sales commission. They're typically found at discount brokerage firms and can be purchased directly without using the services of a broker.
Load Funds carry a sales commission and are sold by Brokers or other Financial Professionals employed at full-service brokerage firms, banks, and other institutions. These funds are typically available to individual investors in 3 share classes:
• The A share carries an up-front sales charge to purchase the fund. This charge usually falls within 4.00% and 6.00%. A person spending $1,000 to purchase A shares in a fund that has a 5% sales commission would be investing $950, after paying the sales charge. Load Funds also have a fee called a 12b-1 fee. This fee continues to pay the broker between .25% and .35% annually until the fund is sold.
• The B share has no up front charges, but carries a back-end load that diminishes over time, usually 5 or 7 years. It also has a higher 12b-1 fee imbedded in its annual cost. After the fund is held for a specified length of time, the 12b-1 fee is reduced to that of an A share. Like the A share, this fee continues to compensate the broker until the fund is sold. Since it carries no up front charges the B share looks more attractive than the A share, at first glance. But, the selling restrictions and higher 12b-1 fee makes the B share less preferable than the A share.
• The C share carries no up front sales charge, and has a level 12b-1 fee of usually 1 percent. This fund must be held for a specified period of 12 to 18 months, or the buyer is subject to a back end load. The 12b-1 fee remains at 1 percent until the fund is sold.
No Load Funds and Load Funds both have underlying administrative fees. These fees defray the operational costs of the mutual fund companies. Which type of fund to purchase depends on the individual investor. If you are a do-it yourselfer, understand or are willing to learn about investing, and are cost sensitive, then No Load Mutual Funds are the likely candidate. On the other hand, if you believe that your broker has your best interest at heart, you don't understand investing and aren't inclined to learn, then perhaps Load Funds are more suitable.
I would like to offer a few words of caution. All mutual funds, both load and no load, are basically invested in the same "stuff", i.e. stocks and bonds. The returns on the underlying investments are the same whether you own a No Load Fund, or a Load Fund. For this reason, the investor should be price sensitive and aware of what he is actually paying. Over the long run, the erosive effects of fund expenses and sales commissions can be detrimental to a comfortable retirement.
No Load Mutual Funds are mutual funds that don't carry a sales commission. They're typically found at discount brokerage firms and can be purchased directly without using the services of a broker.
Load Funds carry a sales commission and are sold by Brokers or other Financial Professionals employed at full-service brokerage firms, banks, and other institutions. These funds are typically available to individual investors in 3 share classes:
• The A share carries an up-front sales charge to purchase the fund. This charge usually falls within 4.00% and 6.00%. A person spending $1,000 to purchase A shares in a fund that has a 5% sales commission would be investing $950, after paying the sales charge. Load Funds also have a fee called a 12b-1 fee. This fee continues to pay the broker between .25% and .35% annually until the fund is sold.
• The B share has no up front charges, but carries a back-end load that diminishes over time, usually 5 or 7 years. It also has a higher 12b-1 fee imbedded in its annual cost. After the fund is held for a specified length of time, the 12b-1 fee is reduced to that of an A share. Like the A share, this fee continues to compensate the broker until the fund is sold. Since it carries no up front charges the B share looks more attractive than the A share, at first glance. But, the selling restrictions and higher 12b-1 fee makes the B share less preferable than the A share.
• The C share carries no up front sales charge, and has a level 12b-1 fee of usually 1 percent. This fund must be held for a specified period of 12 to 18 months, or the buyer is subject to a back end load. The 12b-1 fee remains at 1 percent until the fund is sold.
No Load Funds and Load Funds both have underlying administrative fees. These fees defray the operational costs of the mutual fund companies. Which type of fund to purchase depends on the individual investor. If you are a do-it yourselfer, understand or are willing to learn about investing, and are cost sensitive, then No Load Mutual Funds are the likely candidate. On the other hand, if you believe that your broker has your best interest at heart, you don't understand investing and aren't inclined to learn, then perhaps Load Funds are more suitable.
I would like to offer a few words of caution. All mutual funds, both load and no load, are basically invested in the same "stuff", i.e. stocks and bonds. The returns on the underlying investments are the same whether you own a No Load Fund, or a Load Fund. For this reason, the investor should be price sensitive and aware of what he is actually paying. Over the long run, the erosive effects of fund expenses and sales commissions can be detrimental to a comfortable retirement.
Wednesday, July 30, 2008
The trouble with commissions
I began my finance career working for a major brokerage firm as a Financial Advisor trainee. The first phase of my job was to obtain the licenses to sell investments and insurance. Upon receiving my licenses, my next task was to obtain clients and create investment portfolios with the numerous products available through the firm. Along with my peers, I was given a sales quota, a desk, and a phone. The firm appeared indifferent about which investments were selected, it's concern was only that I produce. The company had a variety of investment products that paid varying degrees of compensation to me. So far so good...
As I commenced the process of gathering clients, I began to experience internal conflict. Early on, I had decided to use a fee-only platform in which clients were charged a flat fee rather than a commission. I was having some success with this platform, but found myself discounting fees to a level that I believed was appropriate. I noticed that some of my peers were selling Annuities which carried higher commission rates than other Investments. Still others were selling a more expensive share class of mutual funds than was required. It dawned on me that this was an inherent flaw built into the Advisor pay structure. In the area of self-interest the incentive to use higher commissionable products was creating a conflict of interest between the broker and the client. The question arises, " Is the investment I'm selling to the client in his best interest, or is it in my best interest. After several weeks of agonizing over this issue, I decided to exit the firm and seek a model that was in-line with my value system.
As I commenced the process of gathering clients, I began to experience internal conflict. Early on, I had decided to use a fee-only platform in which clients were charged a flat fee rather than a commission. I was having some success with this platform, but found myself discounting fees to a level that I believed was appropriate. I noticed that some of my peers were selling Annuities which carried higher commission rates than other Investments. Still others were selling a more expensive share class of mutual funds than was required. It dawned on me that this was an inherent flaw built into the Advisor pay structure. In the area of self-interest the incentive to use higher commissionable products was creating a conflict of interest between the broker and the client. The question arises, " Is the investment I'm selling to the client in his best interest, or is it in my best interest. After several weeks of agonizing over this issue, I decided to exit the firm and seek a model that was in-line with my value system.
Tuesday, June 24, 2008
Retirement Number
I recently read an article discussing the ING television ads which show people performing their daily activities while carrying a sign under one arm. On each persons sign is a 6 or 7 digit number that represents that persons required nest egg figure. The author explains that rather than focusing on a specific number, the saver should focus instead on how much income will be needed, and then plan accordingly. He suggests that the reader use an online retirement calculator to derive his specific income need based on various data inputs.
I agree with the writer that focusing on retirement income makes more sense than trying to derive your magic nest egg number. But, I would challenge the reader to take the concept a step further. Based on my experience with clients, it seems that their main concern is to maintain the same standard of living post-retirement that they was attained during their working years. For many, this will present an enormous problem. In attempts to maintain present lifestyle demands, many are postponing their retirement savings. And, as lifestyle demands continue to increase, current paychecks have become barely sufficient to keep up with the monthly bills. Many are subsidizing their financial needs through a variety of methods including refinancing, home equity loans or lines of credit, borrowing on credit cards, and financing as much as possible. Such demands on present and future income makes calculating a retirement income an unrealistic fantasy.
So, here's the challenge. Suppose that you have no mortgage, loans, or monthly credit card or car payments. Run the calculator again (without all of these payments) and you'll discover that your retirement income requirements are dramatically reduced. Retirement begins to look like a tangible concept that almost anyone can achieve.
The following steps provide the means for you to lower your present and future income requirements:
(1) Separate your wants from your needs.
(2) Stop borrowing money.
(3) Develop a budget and stick to it.
(4) Pay off your debt and stop creating more.
(5) After your debts have been eliminated, begin saving as much as you can for retirement. Ten percent is a good place to begin.
(6) Persevere
I agree that this process appears to be too simplistic. But, implementing the process and seeing it through presents quite a challenge. However, I can assure you that it is an endeavor that is worthwhile, and one that will increase the odds that you attain the retirement of your dreams.
I agree with the writer that focusing on retirement income makes more sense than trying to derive your magic nest egg number. But, I would challenge the reader to take the concept a step further. Based on my experience with clients, it seems that their main concern is to maintain the same standard of living post-retirement that they was attained during their working years. For many, this will present an enormous problem. In attempts to maintain present lifestyle demands, many are postponing their retirement savings. And, as lifestyle demands continue to increase, current paychecks have become barely sufficient to keep up with the monthly bills. Many are subsidizing their financial needs through a variety of methods including refinancing, home equity loans or lines of credit, borrowing on credit cards, and financing as much as possible. Such demands on present and future income makes calculating a retirement income an unrealistic fantasy.
So, here's the challenge. Suppose that you have no mortgage, loans, or monthly credit card or car payments. Run the calculator again (without all of these payments) and you'll discover that your retirement income requirements are dramatically reduced. Retirement begins to look like a tangible concept that almost anyone can achieve.
The following steps provide the means for you to lower your present and future income requirements:
(1) Separate your wants from your needs.
(2) Stop borrowing money.
(3) Develop a budget and stick to it.
(4) Pay off your debt and stop creating more.
(5) After your debts have been eliminated, begin saving as much as you can for retirement. Ten percent is a good place to begin.
(6) Persevere
I agree that this process appears to be too simplistic. But, implementing the process and seeing it through presents quite a challenge. However, I can assure you that it is an endeavor that is worthwhile, and one that will increase the odds that you attain the retirement of your dreams.
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