I thought I hired a “Financial Planner”

As I’ve indicated in the past the financial service industry is full of smoke and mirrors. There are all kinds of misinformation being exchanged as discovered by a recent Cerulli Associates study. They asked financial service providers to report what their practice type was and what their deliverables were with regard to that practice type with very interesting results. While over 60% of advisors claimed to be financial planners it turn out that only 30% were actually completing the work of a financial planner for their clients. The study also looked at both the education and experience of the person claiming this profession.

On the other end of the spectrum only 22% of advisors claimed to be an investment planner while they determined 56% were actually using this business model for their practice. The new hot term is wealth management and the trend continued under this heading with 11% claiming to be wealth managers while only 6% were meeting the criteria. Their definition of wealth managers revolved around both the deliverable to clients and the fact that over 50% of their clients had a net worth of over five million. It appears the only group of advisors that were honest was pure money managers coming in at 9% and the report confirmed all 9% were exactly what they claimed.

This becomes a problem when the general public thinks they are getting one thing and they end up getting something else. I hear about this all the time when clients tell me stories about other planners they have interviewed and found out they just wanted to sell them insurance or were asset gatherers or mortgage brokers. Make sure if you get what you thought you were getting by asking enough questions to make an educated decision.

1. Can I see a completed financial plan you have created?

2. What areas of my financial situation will we work on?

3. Will you review and advise on my auto and homeowners policies?

4. What about my wills and trust?

5. Do you include tax planning?

6. How are you paid? Commissions’, fees or combination?

These and many more general questions will assist you in hiring a trustworthy financial planner. Make sure you have a list of questions you want answered before hiring someone and don’t move forward till you get satisfactory answers.

Social Security and why most people get it wrong

Social Security and why most people get it wrong

Over the years it’s been my observation that most people do the wrong things at the wrong times. Signing up for Social Security is a prime example of this illustration. Recent statistics show that over 50% of retirees will begin Social Security before they qualify for full benefits and as much as 33% of enrollees will start receiving benefits at age 62. This was not such a big deal 15 or 20 years ago when you could still make 7 or 8 % in bank CDs but in today’s environment it is really a big deal. Each and every year you wait to sign-up for Social Security you get a 7-8% raise in benefits; for life. Not only do you get a great benefit increase but you also get all future cost of living increase based on the higher number. This done correctly assuming you live a long and health life can compound for decades and generate twice as much retirement income.

Not only do most people sign-up for Social Security early but only 6% wait till the maximum benefit age of 70. In my opinion almost everyone should wait as long as they possibly can to lock in their Social Security payments even at the risk of using their own assets to fund their sixty’s. In our practice we have clients working second or third careers and pulling from investment portfolio’s to bridge the gap till age 70. Most advisors won’t use this strategy with their clients since it creates a conflict of interest because they are paid by assets under management and this strategy reduces assets but increases long term income. Let’s face it; most people that reach age 70 will live another 15-20 years or maybe even another 30 years. This longevity risk in conjunction with a guaranteed 8% increase for each year you wait is what should drive the decision to delay locking in as long as we can and stay active and productive earlier vs. later. It’s a lot easier to get work in your sixty’s compared to your eighty’s.

Sure there are always exceptions to this strategy. Certainly if you are in terrible health or maybe a married individual that qualifies from your own earning you might start collecting at 62 while your spouse delays till age 70 at which time you stop collecting your own and start collecting 50% of you spouses higher benefit. We find that most people with a little thought can generate enough income by participating in things they enjoy to delay collecting Social Security till at least they receive full benefits. This is a once in a lifetime decision and should be considered carefully so you have the highest probability of a successful retirement. We wish you all a Merry Christmas and hope you prosper in 2012.

"Im Back"

“I’m Back”

After taking more than one year off from this column I have decided to return. Since times are still uncertain we find most people need straight talk regarding their finances I will continue to give you common sense solutions that will strengthen your financial situation. I will be writing this column once per month and will try to give you one strong recommendation each month. For those that have followed my articles over the years you will remember I warned back in “09” that this recovery may be long and hard. Some of the solutions I recommended were paying off debt, saving more in your retirement accounts and diversifying your portfolio. We also suggested you pay attention to investment cost since they are one of the few things you can control. If your portfolio is generating two percent and your overall investment expenses are three percent; you automatically lose money. If you followed our advice over the last three years you should be in a much stronger financial position than you were back in 2008. You should have less debt, more cash flow, higher cash reserves and a stronger retirement account; these changes have you in a much stronger position even though the economy doesn’t seem any better. If you pay attention you will find that most of corporate America is doing the same. The banks have more cash; corporations have more cash and less debt along with stronger cash flow and profits since expenses are down (less employees). Therefore when the economy starts to turn you will have the wind to your back instead of in your face. The economy will eventually turn around and by paying attention to the things you control you will be ready. Over the last three years we have had our clients systematically moving first into fifteen year mortgages and now have started moving into seven to ten notes. In many cases this will eliminate fifteen to twenty years of mortgage payments. Think about how that one change will impact each of their lives and we are now in position that virtually all of our clients will be debt free by retirement. That one change will not only give our clients tremendous flexibility and options but “Peace of Mind”. If you have a thirty year mortgage please contact your banker to discuss moving to a twenty or fifteen year note. If you already have a fifteen year mortgage look hard at a seven or ten year mortgage. Don’t forget to shop rates and cost; they vary widely so do your homework. Many homeowners are under the impression that they can’t refinance since they have lost most of their equity with the housing bust; this is not always the case so check with your lender because there are many programs to get you a shorter note with less interest many times even if you have no equity.

A recent article indicated that nine of ten investors are unhappy with their advisors or their strategy during the last five years. Next time we will discuss where to find someone you can trust, how much it should cost and what you should learn from that meeting.

Mark R. Folgmann is President of Ark Advisors LLC a fee-only firm in Traverse City. He has spent the last 28 years helping people simplify their lives and gain “Peace of Mind” over their financial situation. He can be reached at 668-4118.

“Pick a Great Game and Keep Your Butt in the Seat”

Behavior Matters

At Ark Advisors LLC we have been educating clients about the downfalls of hanging out with Retail Investors” for many years. Sometimes we forget how much protection we provide clients without ever thinking twice about it. Earlier this week I was reading an Investment News article about the number one family of retail funds by volume; American Funds. The article talks about the massive exit by retail investors of over 24 Billion dollars; that’s right Billion with a “B”. These mammoth actively managed funds that try to maintain high returns while investors bail is like an aircraft carrier attempting a U turn. We have been telling our clients for years that the mass population will normally do the wrong thing at the wrong time and sure enough here we go again. With over fifteen percent of the fund cashing out the managers are forced to hold extra cash and liquidate holdings they would like to hold. It always reflects in returns; as stated in the article Growth Fund of America has underperformed its group by over 5% for one year and underperformed its group by over 2% per year over three years. This is happening with several American Funds and other retail funds throughout the country. If you combine this with DFA funds out performing its groups by 1-3% you end up with a 3-8% spread on overall returns.
I compare this behavior with DFA investors and we find that the opposite is true. DFA investors are disciplined, diversified and behave as professional investors would. I can remember when I went to DFA training in Chicago and they used the hockey analogy to explain investment discipline. If you show up for the game fifteen minutes late (miss the first goal) and during a bathroom break (miss the second goal) and actually find yourself in your seat for the final goal; you are going to have a much different experience (outcome) than the person in front of you that happened to enjoy all three goals. We never want to be caught out of the market when a goal is scored and we never know when the next goal will be. If we pick disciplined low cost funds and diversify the risk, we should end up with a successful investment experience. Just think how many times you have witnessed fans leaving the stadium just in time to miss the greatest comeback in franchise history. These fans get stuck listening to the end of the game while stuck in their parking space.
This is the reason we use DFA funds within “The Cambridge Plan”. I can remember during 2007 and 2008 when the financial worlds were crumbling; inflows into DFA funds were positive. It’s like your parents always said “It’s who you hang out with that matters”. Remember; hang out with institutional investors and keep your butt in your seat.

Upgrade to “First Class”

The SIMPLE has been compared to having the middle seat on an airplane. Flying is a much faster way to travel long distances than driving, but it’s just not as good as having the window and definitely not as nice as flying first class. The SIMPLE IRA’s name is a bit misleading (it actually stands for Savings Incentive Match Plan for Employees). While both employer and employee can contribute to the plan, the employer must match and matching is vested immediately. Also, the employee contribution limit is set at $11,500 for 2011 and catch-up for those over age 50 is only $2,500. Also there is not a Roth option, loans or annual contribution increases. Almost all current SIMPLE contributions end up in expensive Retail Funds with individual accounts in actively managed funds many times with up front loads. SIMPLE’s also carry a 25% penalty if withdrawn within the first two years and you are not allowed to contribute to both a SIMPLE and 401(k) within the same year.

Since the SIMPLE already demands matching; it has already overcome the major stumbling block for the employer joining “The Cambridge Plan”. With that taken care of we can upgrade the client to first class (The Cambridge Plan) in most cases for less expense and pick up all the benefits of flying first class. Roth (many employees will be better off funding their portion of savings on a post tax basis including high income earners) and Loan options. Automatic annual increase using institutional portfolios tied to age based glide paths with potential of extended vesting schedules. On top of all these benefits each employee has the option of increasing their total contribution to as high as $22,000 for employee’s over age 50 from just $14,000 within the SIMPLE. Employees under age 50 can contribute $16,500 vs. $11,500. Ask each and every small business if they would like to upgrade to “First Class”.

SEPs; The Good, the Bad and the Ugly

Last month we talked about how a SIMPLE was like flying from coast to coast sitting in a middle seat instead of first class. After thinking about it I realized I was completely wrong. Both first class and coach arrive at the final destination with the same success rate and this is absolutely not true of The Cambridge Plan and the SIMPLE and certainly not true of this month’s topic the SEP. There are too many problems with a SEP for most of the employees to arrive successfully at their final destination (Retirement with Dignity). Let’s start with only an employer contribution; that’s right no employee contributions. No Roth option or profit sharing option, and no catch-up if you’re behind. Forget about automatic salary deferrals and escalating contribution levels over time. Probably not using Institutional funds or any type of model portfolios. Most of the time invested in “Retail” loaded funds. With all these deficiencies’ there’s no wonder why we can’t safely get to our destination. As you can see it would be a much better analogy to compare a first class flight “The Cambridge Plan” with attempting to fly across the United States in a glider. Statistics I’ve read indicate that less than 7% will successfully navigate the retirement dilemma with a standard 401(k) where they can contribute; I would love to see the statistics on SEPs.

As many of you are aware; we have discontinued the monthly training sessions on “The Cambridge Plan” but we are still available to help and support on any individual cases you may run into throughout your year. We have found that both CPAs and accountants are very receptive to the idea of discussing and upgrading their clients SIMPLE, SEPs and Profit Sharing Plans. This is a big win for the CPAs in front of their clients but in most cases need to be educated on what a MEP is and how it can help their clients. Take a CPA to lunch and have the talk. It works.