MONEY Financial Planning

How Families Can Talk About Money Over Thanksgiving

Family Thanksgiving dinner
Lisa Peardon—Getty Images

Holiday get-togethers are a great time for extended family members to discuss topics like estate planning and eldercare. Here's how to get started.

While most Americans are focused on turkey dinners and Black Friday sales, some financial advisers look to Thanksgiving as a good time for families to bond in an unlikely way: by talking about money.

The holiday spirit and together-time can make it easier for families to discuss important financial matters such as parents’ wills, how family money is managed, retirement plans, charity and eldercare issues, advisers say.

While most parents and adult children believe these discussions are important, few actually have them, according to a study conducted last spring by Fidelity Investments. Family members may avoid broaching these sensitive subjects for fear of offending each other.

That is where advisers can shine.

“When you help different generations communicate and cooperate on topics that may keep them up at night, it bonds them as a family,” says Doug Liptak, an Atlanta-based adviser who facilitates family meetings for his clients. It can also help the adviser gain the next generation’s trust.

Advisers can encourage their clients to call family meetings. They can also offer to facilitate those meetings or suggest useful tips to families that would rather meet privately.

Talking Turkey

Family meetings should not be held over the holiday table after everyone has had a few drinks, but at another convenient time.

“That may mean in the living room the next afternoon, over dinner at a fun restaurant, or at a ski lodge,” says Morristown, N.J.-based adviser Stewart Massey, who has vacationed with clients’ families to help them hold such mini-summits.

It is critical to have an agenda “and be as transparent as possible,” he says. Discussion points should be written out and distributed to family members a few weeks ahead to avoid surprises. Massey also suggests asking clients which topics are taboo.

Liptak likes to meet one-on-one with family members before the meeting. If you can get to know the personalities and viewpoints of each family member and make everyone feel included and understood, you will be more effective, he says.

“You might have two siblings who are terrible with or ambivalent about money, while the youngest is financially savvy, but you can’t give one person more say,” says Liptak.

It also helps to get everyone motivated if the adviser brings in the client’s children or other family members ahead of time to teach them about money management topics, like how to invest, says Karen Ramsey, founder of RamseyInvesting.com, a Web-based advisory service.

Sometimes the clients are the adult children who are afraid to ask how the parents are set up financially or where documents are, she says.

Ramsey says advisers can help by letting clients and their families know that a little discomfort may come with the territory. She will say, and encourages her clients to say: “There’s something we need to talk about and we’ll all be a little uncomfortable, but it’s okay.”

The adviser can kick off a family meeting by asking leading questions, such as “What one thing would you like to accomplish as a family in 2015?” says Liptak. Then the adviser can take notes and continue to facilitate the discussion by making sure everyone gets heard and pulling out prepared charts and data when necessary.

Massey suggests families build some fun around the meetings. His clients often schedule them around the holidays and in the summer, often tucked into a vacation or weekend retreat. It is a good practice to have them regularly, like board meetings, he says.

And if the family has never had a meeting before?

“Don’t start with the heavy stuff,” says Liptak. “It’s a good time to focus on giving and generosity, like charities the family can contribute to.

“You can collaborate on an agenda for later for the bigger issues.”

MONEY stocks

How to Stay Calm in a Rollercoaster Market

Man in business suit in hammock
PeopleImages.com—Getty Images

After a five-year bull market, investors worry that a big drop is right around the corner. Here are some ways advisers ease clients' fears.

Market swings are top-of-mind for people who still can’t relax, five years after the 2008-2009 stock market meltdown. Investors worry that the five-year bull market in stocks could suddenly turn.

Clients of financial advisers worry about market swings even more than they fear running out of money in retirement, according to a Russell Investments survey.

The reason? Many investors can’t erase memories of 2008, said Scott E. Couto, president of Fidelity Financial Advisor Solutions. The Dow Jones Industrial Average dropped 54% between October 2007 and March 2009. After that dive, the market has risen 133% from March 9, 2009 to Sept. 29, 2014.

“Losing hurts worse than winning feels good,” Couto said. Many older investors are particularly cautious because they are taking retirement distributions, or will need to do so soon.

Relaxation Strategies

Advisers can ease clients’ fears by describing market swings in a long-term context, Couto said. For example, advisers can share statistics with clients to show how long it typically takes for markets to rebound after a downturn, and how stocks have yielded decent long-term returns, despite fluctuations.

Other strategies include holding the equivalent of a “Back to School” night for advisers to tell clients what to expect for the year, said John Anderson, a consultant for SEI Advisor Network in Oaks, Pa., who counsels advisers on running their practices.

Advisers can also prepare clients for future risk, Anderson said. For example, advisers could show estimates of how much money clients would lose if the S&P 500 stock index dropped 20%, 30%, or 40%. That could prompt clients to switch to less volatile investments or at least assess their risks.

That type of groundwork is part of every first meeting with new clients for Robert Schmansky, a financial advisor in Livonia, Mich. Most clients, as a result, never ask about market fluctuations, Schmansky said.

Schmansky’s strategy uses stocks to maximize growth, while balancing portfolios with less volatile assets such as Treasury Inflation-Protected Securities (TIPS) and short-term bonds.

The approach eases clients’ minds because they know that part of their portfolio is safe from market swings and always available for income, he said.

Such strategies have grown more popular since the 2008 crisis, said Couto. Some advisers now pitch “outcome-oriented” investing that focuses on clients’ objectives, such as having a certain dollar amount for retirement or putting kids through college, instead of returns. The adviser may speak of dividing assets into “buckets,” each designed for certain objectives, such as achieving growth, hedging against inflation, or preserving capital.

Some advisers go even broader when adding investments to clients’ portfolios. They may include commodities, such as gold or timber, which could move in a different direction from stocks, or market-neutral funds that claim to do well regardless of the direction of the market. Couto cautions, though, that the risks and fees associated with some such strategies may overwhelm the benefits.

He suggests advisers build stability into portfolios by adding less-volatile bonds, shares of dividend-paying companies and quality big companies with market values over $5 billion.

More importantly, having conversations about risk and volatility can separate the great advisers from the average ones, says Couto. “One of the best things advisers can do is help clients understand their long term objectivesand stay focused on their ‘personal economy,'” he says.

MONEY financial advice

Why Won’t Advisers Disclose Their Investment Performance?

Prospective clients want to know how good a financial adviser is at investing, but information about returns can be incomplete and misleading.

Some financial advisers don’t mind sharing information about the performance returns they have pulled in for clients. Those numbers, nonetheless, may come with a caveat.

Clients of Jim Winkelmann, an adviser in St. Louis, Mo., can request a free performance report through his website. It lists details about six model portfolios including their ten-year annual returns, and year-to-date returns.

But a warning in bold, red letters reminds clients that little to nothing can be learned from past performance. “Do not base decisions on this information,” it says.

Winkelmann, who oversees $130 million in assets, is among a minority of advisers who share their investment track records. Yet some financial services professionals believe the practice should be more common because it can help prospective clients determine if an adviser will do a good job.

Some advisers, nonetheless, say they are skittish because of a maze of rules and guidance from the Securities and Exchange Commission and state regulators that make advertising tricky. The Financial Industry Regulatory Authority, Wall Street’s industry-funded watchdog, also warns on its website against advisers boasting “above-average account performance.”

Regulators typically prefer, but do not require, that advisers who advertise returns follow the Global Investment Performance Standards, the king of performance guidelines, say securities industry experts. This set of principles helps advisers calculate and report results. The group that developed the GIPS standards also recommends that advisers hire a reputable, independent firm to verify those figures.

While using GIPS is optional, advisers who do not use it may soon be at a disadvantage because it will be harder to distinguish themselves from competitors, said Michael Kitces, an adviser in Washington and industry blogger.

But the steep price tag — roughly $5,000 to $10,000 to put a system in place and hire staff — is keeping some advisers away, Kitces said.

Instead some advisers use their own calculations. But those can mislead investors or land advisers in hot water with regulators. Some advisers, for example, may showcase only the years of their best results.

Clashing Viewpoints

Many advisers avoid performance advertising, but not because of the rules or GIPS expenses. Rather, they do not believe the figures are an accurate reflection of their client portfolios. That is especially true of advisers who offer financial planning services and who must often work with some assets clients already have, said John Clair, an adviser in Midlothian, Va.

Some types of assets that advisers can get stuck with include retirement plans that offer poor fund choices or mediocre employer stock the client wants to keep, Clair said. Those investments can skew returns, which would make them of little value to potential clients, Clair said.

Other factors that can also sway performance returns include the wide range of investment goals and risk tolerances among advisers’ clients, said Dave O’Brien, another adviser in Midlothian.

What’s more, overall performance numbers alone do not explain two important strategies that may be boosting returns: an adviser’s ability to reduce tax and transactions costs, O’Brien said.

Clair and O’Brien both have software that lets clients track real-time performance of their individual portfolios. But advertising historical track records is more suited to hawking a product, such as a mutual fund, instead of comprehensive advice, said O’Brien.

“We’re providing a service that’s unique to each client,” O’Brien said. To the layman they may seem the same, but they’re not.”

MONEY College

Here’s How to Get Your Parents to Pay for Your Kids’ Education

Grandma opening coin purse
Getty

A 529 plan can help grandkids with their education -- and provide a tax break for Grandma and Grandpa.

Many grandparents want to help their grandchildren pay for college, but don’t know the best ways to do that. Good news: They can make those contributions while reaping financial advantages for themselves.

Nearly half of grandparents expect to contribute to their grandkids’ college savings, with more than a third expecting to give $50,000 or more, according to a 2014 Fidelity Investments study. That generosity can also be channeled toward significant tax and estate planning benefits for the grandparents.

Enter the 529 plan, a college savings investment account that provides tax-free growth as long as the money is put toward tuition and most types of college expenses such as fees and books. What’s more, grandparents can score their own financial perks, said Matt Golden, vice president of college savings for Fidelity Financial Advisor Solutions.

Grandparents can use 529 accounts to reap tax deductions or reduce the value of their taxable estates.

Furthermore, 529 plans have limits that might be comforting for grandparents who worry that their grandchildren might spend the money frivolously, or that they might end up needing it themselves. Grandchildren must use the funds only for certain college expenses, such as tuition and books. What’s more, grandparents can keep the money if they need it, subject to penalties and taxes, say advisers.

Working the Angles

For financial advisers, conversations with clients about these issues can build trust, said Charles Wareham, a Hartford-based adviser specializing in college funding strategies. Wareham’s firm holds Sunday brunches for parents and grandparents to teach them about college funding. The events have become relationship-builders, he said.

One way to showcase 529 accounts is by highlighting their advantages over other savings strategies.

“Many grandparents give EE bonds for holidays and birthdays, which can hurt more than help as far as tax purposes,” says Wareham.

For example, grandchildren who receive Series EE bonds as birthday gifts can later be socked with federal income taxes on the interest if they don’t use the funds for college, according to the U.S. Department of the Treasury.

A 529 plan, in contrast, provides for tax-free distributions for college. It also allows grandparents to give the funds to another grandchild if the intended recipient does not go to college or need the money.

Grandparents may also be eligible for state income tax deductions when they make 529 contributions – they are available in 34 states and the District of Columbia, according to FinAid, a website about financial aid. They can also take required minimum distributions from their IRA accounts and transfer those funds to the 529 plan, where they can continue to grow tax-deferred, Fidelity’s Golden says.

Savvy advisers can compare plans from various states and help their clients find the best ones, though usually tax breaks are only available to people who invest in their own state’s plan.

A 529 plan is also a unique way for grandparents to reduce the value of their estates: they can contribute up to five years’ worth of allowable gifts in one year without triggering federal gift taxes. That means clients filing jointly can invest $140,000 in one lump sum per grandchild.

One caveat: 529 accounts could make a grandchild ineligible for financial aid, says Golden. That is because the money, once withdrawn for the beneficiary, counts as income that schools use to determine financial aid awards. But grandparents can avoid the problem by waiting until the recipient’s junior or senior year to hand over the money, when students may not need as much aid, Golden says.

MONEY financial advisers

You Mean I Have to Pay for Financial Advice?!?

When financial advisers switch from working on commission to charging clients directly, they can run into resistance.

Financial advisers who transition from a commission-only business to a fee-based model are often stymied about how to explain their new fees without sending existing clients packing.

Some fear clients will feel sticker shock upon hearing they need to pay fees out of pocket instead of having costs deducted from investment accounts. Advisers also worry clients may question why they’re now paying a fee equal to one percent of their assets under management, instead of a fraction of that for their load funds.

The problem is that most investors don’t understand how adviser compensation works or how it affects the services they receive, says John Anderson, a practice management consultant with SEI Advisor Network, a unit of SEI Investments in Oaks, Pa. Many investors do not know what it means for an adviser to be a fiduciary, or somebody who acts in a client’s best interests, Anderson says.

A 2011 study by Cerulli Associates, a consulting firm in Boston, showed that 31 percent of investors thought financial planning services were free and one-third didn’t know how they paid for advice. What’s more, most investors prefer to pay hidden commissions instead of account fees, according to Cerulli studies.

Some clients might push back when advisers begin asking for fees, but their concerns usually dissolve once advisers show clients the benefits.

FOCUS ON SERVICES

Morgan Smith, an adviser in Austin, explained the ethical obligation of a fiduciary to his clients when he transitioned to a fee-only practice. “I asked, ‘Would you rather work with someone whose compensation structure has nothing to do with your best interest or someone whose structure is based on your best interest and goals?'” he says.

Every client except one, a day trader, stayed on. But some asked why they would pay him if their investments declined. He told them his advice would pay off more in a down market and that “when your investments go down, I get paid less,” he says.

Sheryl Garrett, whose Garrett Planning Network includes more than 300 fee-only advisers, says clients need to understand the difference between advisers who can afford to give advice because they sold a product and advisers who are objective because they have “no skin in the game.”

Clients who are paying for advice also need to know what other problems advisers are solving in exchange for the additional compensation, says Anderson. He tells advisers to create a one-page list of their services. That may include rebalancing clients’ portfolios and analyzing their future social security benefits.

He also starts client conversations by highlighting what they’ve recently accomplished, such as filling in paperwork to name beneficiaries for IRA accounts.

Anderson and Garrett both believe in showing clients that their daily decisions have more of an impact on their finances than the investments or insurance products they buy. It’s a holistic approach that often wins over clients, they say.

Related: Find the Right Financial Planner

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser