MONEY financial advice

How Listening Better Will Make You Richer

140724_HO_Listening_1
Ruslan Dashinsky—iStock

A financial adviser explains that when you hear only what you want to hear, you can end up making some bad money choices.

Allison sat in my office, singing the praises of an annuity she had recently purchased. She was 64 years old, and she had come in for a free initial consultation after listening to my radio show.

“The investment guy at the bank,” she crowed, “told me this annuity would pay me a guaranteed income of 7% when I turn 70.”

I asked her to tell me more.

Allison had invested $300,000 as a rollover from her old 401(k) plan. She was told that at age 70, her annuity would be worth $450,000. Beginning at age 70, she could take $31,500 (7% of $450,000) and lock in that income stream forever.

“And when you die, what will be left to the kids?” I asked.

“The $300,000 plus all my earnings!” she said.

Suddenly my stomach began to sour.

Allison, I was sure, had heard only part of what the salesperson had told her.

I followed up with another question: “Besides the guaranteed $31,500 annual income, will you have access to any other money?”

“Oh yes,” she answered. “I can take up to 10% of the account value at any time without paying a surrender charge. In fact, next year I plan to take $30,000 so I can buy a new car!”

This story was getting worse, not better.

It was time to break the news to Allison.

I asked her to tell me the name of the product and the insurance company that issued it. Sure enough, I knew exactly the one she bought, since I had it available to my clients as well.

That’s when the conversation got a little tense.

I explained that if she withdrew any money from her annuity prior to beginning her guaranteed income payment, there was a strong likelihood she wouldn’t be able to collect $31,500 per year at age 70. Given the terms of the annuity, any such withdrawals now would reduce the guaranteed payment later.

She disagreed.

I explained that, with this and most other annuities, if she started the income stream as promised at $31,500, she would not likely have any money to pass on to the children.

She told me I was wrong — and defended the agent who sold her the annuity. She said that she bought a guaranteed death benefit rider so that she could protect her children upon her death.

I encouraged her to read the fine print. As expected, she reread the paragraph that stated that the “guaranteed death benefit” was equal to the initial investment plus earnings, less any withdrawals. When I told her that her death benefit in all likelihood would be worth nothing by age 80, she quickly said, “I need to call my agent back and check on this.”

I have conversations like this a lot, and not just with annuities. When it comes to investments, whether they’re annuities, commodity funds, or hot stocks, people often hear only what they want to hear. At various points in his sales pitch, the annuity salesman had probably said things like “guaranteed growth on the value of the contract,” “guaranteed income stream,” “can’t lose your money,” and “heirs get everything you put in.” What she had done was merge the different parts of the sales pitch together and ignore all the relevant conditions and exceptions.

When people hear about a product, there’s an emotional impact. “I want to buy that,” they think. They focus only on the benefits of the product; they assume the challenging parts of the product — the risks — won’t apply to them.

This story has a happy ending. Before Allison left my office, I asked when she received her annuity in the mail. “Three days ago,” she said.

I reminded her of the ten-day “free look” period that’s given to annuity buyers as a one-time “do-over” if they feel that the product they purchased isn’t right for them.

She called me back within two days. “The agent doesn’t like me very much,” she said. She had returned the annuity under the “free look” period and expected to get a full refund. The annuity salesman had just lost an $18,000 commission.

And I once again saw the wisdom of something I tell my clients every day: Prior to ever making a financial decision, it is absolutely critical you evaluate how this decision integrates into your overall financial life. That’s what’s important — not falling in love with a product.

———-

Marc S. Freedman, CFP, is president and CEO of Freedman Financial in Peabody, Mass. He has been delivering financial planning advice to mass affluent Baby Boomers for more than two decades. He is the author of Retiring with Confidence for the GENIUS, and he is host of “Dollars & Sense,” a weekly radio show on North Shore 104.9 in Beverly, Mass.

MONEY Financial Planning

The One Time Raiding Your Kid’s College Savings Makes Sense

Broken money jar
Normally, breaking into your college savings accounts is a no-no. Jeffrey Coolidge—Getty Images

It's never a great idea, but in an emergency tapping funds earmarked for education beats sabotaging your retirement plans.

Lauren Greutman felt sick.

She and her husband Mark were about $40,000 in debt, and were having trouble paying their monthly bills. As recent homebuyers, the Syracuse, N.Y. couple were already underwater on their mortgage and getting by on one income as Lauren focused on being a stay-at-home mom.

“We were in a really bad financial position, and just didn’t have the money to make ends meet,” remembers Greutman, now 33 and a mom of four.

There was one pot of money just sitting there: their son’s college savings, about $6,500 at the time. That is when they had to make a tough decision.

“We had to pull money out of the account,” she says. “We thought long and hard about it and felt almost dishonest. But it was either leave it in there, or pay the mortgage and be able to eat.”

It is a quandary faced by parents in dire financial straits: Should you treat your kids’ college savings—often housed in so-called 529 plans—as a sacred lockbox, or as a ready source of funds that may be tapped when necessary.

Precise figures are not available, since those making 529-plan withdrawals do not have to tell administrators whether or not the funds are being used for qualified higher education expenses, according to the College Savings Plans Network. That is a matter between the account owner and the Internal Revenue Service.

TIAA-CREF, which administrates many 529 plans for states, estimates that between 10% to 20% of plan withdrawals are non-qualified and not being used for their intended purpose of covering educational expenses.

It is never a first option to draw college money down early, of course. Private four-year colleges cost an average of $30,094 in tuition and fees for 2013/14, according to the College Board. Since that number will presumably rise much more by the time your toddler graduates from high school, parents need to be stocking those financial cupboards rather than emptying them out.

Joe Hurley, founder of Savingforcollege.com, has a message for stressed-out parents: Don’t beat yourselves up about it.

“The plans were designed to give account owners flexible access to their funds,” Hurley says. “I imagine parents would feel some guilt. But I don’t think they should. After all, it is their money.”

Why the Alternative Might Be Worse

Keep in mind that there are often significant financial penalties involved. With non-qualified distributions from a 529 plan, in most cases you are looking at a 10% penalty on the earnings. Withdrawn earnings will also be treated as income on your tax return, and if you took a state tax deduction on the original investment, withdrawn contributions often count as income as well.

Not ideal, of course. But if your other option for emergency funds is to raid your own retirement accounts, tapping college savings is a last-ditch avenue to consider. That’s not only because you do not want to blow up your own nest egg, but because it could make relative sense tax-wise. And as the saying goes, you can borrow money for college, but not for retirement.

“If you think about it, a parent who has a choice between tapping the 529 and tapping a retirement account might be better off tapping the 529,” says James Kinney, a planner with Financial Pathway Advisors in Bridgewater, N.J.

If the account is comprised of 30% earnings, then only 30% would be subject to tax and penalty, Kinney explains. And that compares favorably to a premature distribution from a 401(k) or IRA, where 100% of the distribution will be subject to taxes plus a penalty.

Lauren Greutman’s story has a happy ending. She and her husband made a pledge to restock their son’s college savings as soon as they were financially able. It is a pledge they kept: Now eight-years-old, their son has a healthy $12,000 growing in his account.

She even runs a site about budgeting and frugal living at iamthatlady.com. Still, the wrenching decision to tap college savings certainly was not easy—especially since other family members had contributed to that account.

“We tried to take emotion out of it, even though we felt so bad,” Greutman says. “Since we didn’t have money for groceries at that point, we knew our family would understand.”

Related: 4 Reasons You Shouldn’t Be Saving for College Just Yet

MONEY 401(k)s

Why Your 401(k) Won’t Offer This Promising Retirement Income Option

More investors are flocking to deferred annuities, which kick in guaranteed income when you're old. But 401(k) plans aren't buying.

Longevity risk—that is, the risk of outliving your retirement savings—is among retirees’ biggest worries these days. The Obama administration is trying to nudge employers to add a special type of annuity to their investment menus that addresses that risk. But here’s the response they’re likely to get: “Meh.”

The U.S. Treasury released rules earlier this month aimed at encouraging 401(k) plans to offer “longevity annuities”—a form of income annuity in which payouts start only after you reach an advanced age, typically 85.

Longevity annuities are a variation of a broader annuity category called deferred income annuities. DIAs let buyers pay an initial premium—or make a series of scheduled payments—and set a date to start receiving income.

Some forms of DIAs have taken off in the retail market, but longevity policies are a hard sell because of the uncertainty of ever seeing payments. And interest in annuities of any sort from 401(k) plan sponsors has been weak.

The Treasury rules aim to change that by addressing one problem with offering a DIA within tax-advantaged plans: namely, the required minimum distribution rules (RMDs). Participants in workplace plans—and individual retirement account owners—must start taking RMDs at age 70 1/2. That directly conflicts with the design of longevity annuities.

The new rules state that so long as a longevity annuity meets certain requirements, it will be deemed a “qualified longevity annuity contract” (QLAC), effectively waiving the RMD requirements, so long as the contract value doesn’t exceed 25% of the buyer’s account balance or $125,000, whichever is less. (The dollar limit will be adjusted for inflation over time.) The rules apply only to annuities that provide fixed payouts—no variable or equity-indexed annuities allowed.

But 401(k) plans just aren’t all that hot to add annuities—of any type. A survey of plans this year by Aon Hewitt, the employee benefits consulting firm, found that just 8% offer annuity options. Among those that don’t, 81% are unlikely to add them this year.

Employers cited worry about the fiduciary responsibility of picking annuity options from the hundreds offered by insurance companies. Another key reason is administrative complication should the plan decide to change record keepers, or if employees change jobs.

“Say your company adds an annuity and you decide to invest in it—but then you shift jobs to an employer without an annuity option,” says Rob Austin, Aon Hewitt’s director of retirement research. “How does the employer deal with that? Do you need to stay in your former employer’s plan until you start drawing on the annuity?”

Employees are showing interest in the topic: A survey this year by the LIMRA Secure Retirement Institute found 80% would like their plans to offer retirement income options. The big trend has been adding financial advice and managed account options, some of which allow workers to shift their portfolios to income-oriented investments at retirement, such as bonds and high-dividend stocks. Some 52% of workplace plans offered managed accounts last year, up from 29% in 2011, Aon Hewitt reports.

“The big difference is the guarantee,” says Austin. “With the annuity, you know for sure what you are going to get paid. With a managed account, the idea is, ‘Let’s plan for you to live to the 80th percentile of mortality, but there’s no guarantee you’ll get there.’”

Outside 401(k)s, the story is different. Some forms of DIAs have seen sharp growth lately as more baby boomers retire. DIA sales hit $2.2 billion in 2013, more than double the $1 billion pace set in 2012, according to LIMRA, an insurance industry research and consulting organization. Sales in the first quarter this year hit $620 billion, 55% ahead of the same period of 2013.

Three-quarters of those sales are inside IRAs, LIMRA says, since taking a distribution to buy an annuity triggers a large, unwanted income tax liability. But the action—so far—has been limited to DIAs that start payment by the time RMDs begin. The new Treasury rules could accelerate growth as retirees roll over funds from 401(k)s to IRAs.

“For some financial advisers, this will be an appealing way to do retirement income planning with a product that lets them go out past age 70 1/2 using qualified dollars,” says Joe Montminy, assistant vice president of the LIMRA Security Retirement Institute. “For wealthier investors, [shifting dollars to an annuity] is also a way to reduce overall RMD exposure.”

Could the trend spill over into workplace plans? Austin doubts it. “I just don’t hear a major thirst from plan sponsors saying this is something we should have in our plan.”

Related:

How You Can Get “Peace of Mind” Income in Retirement

The New 401(k) Income Option That Kicks In When You’re Old

Need Retirement Income? Here’s the Hottest Thing Out There

MONEY ETFs

Hot Money Flows into Energy and Bonds

Dollar sign in flames
iStock

Sometimes it pays to follow the crowd. At other times, you'll get burned.

All too often, I see investors heading in the wrong direction en masse. They buy stocks at the top of the market or bonds when interest rates are heading up.

Occasionally, though, active investors may be heading in the right direction. A case in point has been the flow of money into certain exchange-traded funds in the first half of this year.

Reflecting most hot money trends, billions of dollars moved because of headlines. The Energy Select SPDR ENERGY SELECT SECTOR SPDR ETF XLE 0.641% exchange-traded fund, which I discussed three weeks ago, gathered more than $3 billion in assets in the first half, when crude oil prices climbed and demand for hydrocarbons remained high.

The Energy SPDR, which charges 0.16% for annual management expenses and holds Exxon Mobil EXXONMOBIL CORP. XOM 0.6857% , Chevron CHEVRON CORP. CVX 0.9805% , and Schlumberger SCHLUMBERGER LTD. SLB -1.1463% , has climbed 22% in the past 12 months, with nearly one-third of that gain coming in the three months through July 18. Long-term, this may be a solid holding as developing countries such as China and India demand more oil.

“We think the Energy Select SPDR is a play of oil prices remaining high and supporting growth for integrated oil & gas and exploration and production companies,” analysts from S&P Capital IQ said in a recent MarketScope Advisor newsletter.

Headlines also favored European stocks as represented by the Vanguard FTSE Developed Markets ETF VANGUARD TAX MANAG FTSE DEVELOPED MKTS ETF VEA 0.2125% , which holds leading eurozone stocks such as Nestle, Novartis NOVARTIS AG NVS -0.2689% , and Roche. The fund has been the top asset gatherer thus far this year, with $4 billion in new money, according to S&P Capital IQ.

As Europe continues to recover over the next few years and the European Central Bank keeps rates low, global investors will continue to benefit from this growing optimism.

The Vanguard fund has gained nearly 16% for the 12 months through July 18. It charges 0.09% in annual expenses and is a solid holding if you have little or no European exposure in your stock portfolio.

Rate Hikes

Not all hot money trends make sense, however. As the economy accelerates and interest-rate hikes look increasingly likely, investors are still piling money into bond funds, which lose money under those circumstances.

The iShares 7-10 Year Treasury Bond ETF ISHARES TRUST 7-10 YEAR TREASURY BD ETF IEF -0.0096% , which holds middle-maturity U.S. Treasury bonds, continued to rank in the top 10 funds in terms of new money in the first half. The fund, which holds nearly $5 billion, is up nearly 4% for the 12 months through July 18, compared with 4.2% for the Barclays U.S. Aggregate Total return index, a benchmark for U.S. Treasuries. The fund charges 0.15% in annual expenses.

While investors were able to squeeze a bit more out of bond returns in the first half of this year, they may be living on borrowed time.

The U.S. Federal Reserve confirmed recently that it would be ending purchases of U.S. Treasury bonds and mortgage-backed securities in October. This stimulus program, known as “QE2,” has kept interest rates artificially low as the economy has had a chance to recover.

The phasing out of QE2 could be bearish for bond funds.

Will interest rates climb to reflect growing demand for credit and possibly higher inflation down the road? How will the ending of the Fed’s cheap money program affect U.S. and emerging markets shares?

Many pundits believe public corporations may pull back from their enthusiastic stock buybacks and trigger a correction. Yet low inflation and modest employment gains may mute bond market fears.

“The Fed is on track to complete tapering in the fourth quarter, and we think there is essentially no chance that it will move the fed funds rate higher this year,” Bob Doll, chief equity strategist with Nuveen Investments in Chicago, said in a recent newsletter.

“With the 10-year Treasury ending the quarter at 2.5%, the yield portion of this forecast is more uncertain,” Doll added, “although we expect yields will end the year higher than where they began.”

While there could be any number of wild cards spoiling the party for stocks, it is wise to ignore short-term trends and prepare for the eventual climb in interest rates.

That means staying away from bond funds with long average maturities along with vehicles like preferred stocks and high-yield bonds that are highly sensitive to interest rates.

Longer-term, shares of companies in consumer discretionary, materials and information technology businesses likely to benefit from a global economic resurgence will probably be a good bet.

Just keep in mind that the hot money can be wrong, so build a long-haul diversified portfolio that protects against the downside of a torrid trend going from hot to cold.

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 advice

Why Financial Advisers Have a Failure to Communicate

tin can toy telephone
James Porter / Alamy

Investment pros try to impress their clients with jargon, but the message isn't getting through.

Here’s a little quiz:

With each pair of phrases below, which do you think resonates more positively with everyday people? Which of the two sounds better to a client sitting across the desk from a financial adviser?

  1. Investment Strategies | Investment Solutions
  2. Straightforward Fees | Transparent Fees
  3. Financial Security | Financial Freedom.

I’ll get to the answers below.

I took this quiz myself recently at a presentation by Gary DeMoss from Invesco Consulting, a subsidiary of the money-management firm Invesco. The subject of the presentation: How financial advisers can better connect with clients by using the right words. The takeaway: We financial advisers are so familiar with investing jargon that we assume our clients understand it. But many don’t.

One study DeMoss’s group did with investors was to give them dials connected to a monitoring system and then have them listen to pre-recorded explanations of various financial and market topics. As the investors listened they moved their dials one way or another to rate if they liked what was being said or not. The consultants could then see which words made people react more positively or more negatively.

At one point in the presentation to this group of very experienced financial advisers, we were given a small deck of cards with words on the front and back. We were asked to guess which side we thought had resonated more positively with the investors tested.

Most of the advisers sitting around me — and me, too — got more wrong than right.

As for the three pairs of investment terms above, the first of each rated higher.

As DeMoss pointed out, it’s is not what we advisers say that matters, but what the client hears. I think many of us are guilty of trying to impress clients with our knowledge. We don’t realize that we need to speak in clearer, simpler terms. The specific words that we use make a difference.

We have to choose our words carefully and use less investing jargon. We should encourage clients to stop us whenever they don’t understand what we’re saying.

This will help us get our information across in a less intimidating manner — and serve our clients better.

———-

Raymond Mignone has been a certified financial planner and fee-only investment adviser since 1989, with offices in Boynton Beach, Fla., and Little Neck, N.Y. He is the author of the book RINKs – Retired, Independent, No Kids. His website is www.RayMignone.com.

 

MONEY dodd-frank

The Lions of Wall Street Are Finally Obeying Ordinary Investors

Lion tamer
Alamy

Today is the four-year anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Has it made our financial system fundamentally safer? Unclear. But one thing about the law is certain: It's forced the financial industry to get much more interested in individual investors.

Even today, a full four years after the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law, it remains unclear whether this massive set of financial regulations has made our banking system fundamentally more stable. But one thing about the law is certain: It’s gotten the financial industry much more interested in individual investors.

How important have mom and pop become to the titans of capital? On Thursday Morgan Stanley reported second-quarter operating profits jumped by nearly half to $1.3 billion. The biggest contributor wasn’t the bank’s investment bankers or traders, but its army of 16,000 financial advisers working with Main Street clients. That didn’t happen by chance, either: Chief executive James Gorman, a former management consultant who took over the storied bank in the wake of the financial crisis, has made a point of made a point emphasizing relatively steady activities like wealth management.

That flies in the face of Wall Street tradition. Historically, so-called Masters of the Universe have earned their status advising on giant mergers or trading bonds, which were far sexier (and more profitable) than telling well-to-do lawyers and dentists which stocks to buy. Then the financial crisis hit. Hot-shot bond traders, who once seemed able to conjure millions from thin air, no longer looked so bright. Meanwhile, blockbuster corporate deals that investment bankers specialize in dried up. The economy has finally bounced back. But relatively calm financial markets combined with new regulations like higher capital requirements and the so-called Volcker rule have made it harder for Wall Street trading machines to regain their glory.

That’s given Main Street financial advisers new prestige. It’s not just Morgan Stanley. Big banking firms like UBS and Bank of America, which acquired Merrill Lynch in 2009, have been racing to poach – and keep – top advisers, offering signing bonuses and other perks, even as they’ve sometimes thinned ranks among bankers.

Of course, for you and me, the $10,000 question is not who’s top of the pecking order but whether advisers’ new stature will mean better treatment for small investors who, to put it mildly, haven’t always been the Street’s top priority.

In some ways, being a chief profit engine could be a curse more than a blessing. The more banks rely on small investors for profits, the harder they’re going to push to wring every last cent out of their customers. There’s some evidence of this already: While big banks used to be satisfied with handling clients’ investments, they’re now leaning on advisers to pitch fee-laden products like loans and credit cards.

The attention that banks give to individual clients hasn’t been evenly distributed, either. Wealthy clients tend to be more profitable. And banks have pushed advisers to focus on these, sometimes at the expense of middle-class investors.

But there’s hope too. On Wall Street profitability eventually becomes clout. Wealth management divisions traditionally haven’t had much. One of the most painful examples: During the financial crisis many small investors got burned after buying instruments known as auction-rate securities, which were supposed to offer the safety of cash but turned out to be illiquid during the crisis. One of the industry’s biggest stars – Smith Barney’s Sallie Krawcheck, then among the highest ranking women on Wall Street – pushed Citigroup to provide restitution to her division’s clients. Instead, she was shown the door. Maybe in the future that sort of thing won’t happen.

MONEY Rollovers

Why Wall Street Is Wooing Women and Their Future Wealth

Businesswomen in a black car
Riccardo Savi—Getty Images

Women will receive 70% of inherited wealth over the next two generations, and Wall Street wants their business. So here's what you—and the advisers wooing you—need to know.

Is there a target on the back of my dress? Because it feels like there is a target on the back of my dress.

It was painted there by the financial services industry, which has grown hyper-aware of the fact that women have a lot of money and are about to have a lot more.

According to a 2009 study from the Boston College’s Center on Wealth and Philanthropy, women will inherit 70% of the money that gets passed down over the next two generations, and that excludes the increasing amounts they earn on their own. Women already own more than half of the investable assets in the United States.

Companies like Bank of America’s Merrill Lynch, Prudential Financial, and TD Ameritrade are studying the investing behavior of women, in the hopes of winning more of our dollars.

They know that when a husband dies, his widow often switches money managers.

Indeed, the Certified Financial Planning Board of Standards is trying to lure more women to the business of financial advice.

Sallie Krawcheck, who ran Merrill at Bank of America, recently bought a women’s network and started a mutual fund that seeks to invest in companies led or heavily influenced by women.

Last week, Barclay’s Bank moved in the same direction, creating a Women in Leadership index and related investments.

It’s great to be wooed, but it’s also scary to be the focus of a great marketing effort. It could all end badly if the industry simply pink-washes inferior financial products.

Here are a few bits of advice for women and Wall Street, as they circle each other warily:

Questions

There will be questions. Women are infamous in some financial advisory circles because we ask so many more questions than men. That is good. Do not invest in something you don’t understand. Advisers who want us to invest in complex products and services need to be willing to explain them clearly and simply.

Female Advisers Not Necessary

We don’t need our advisers to be women. It’s not like going to a gynecologist. A male financial adviser is fine with me, as long as he’s competent, straightforward and good with my money.

We also don’t need pink folders for our statements or ladies’ investment products. We like green, and want the products and services that will secure our money and make it grow.

Funds that invest in women-led companies may do well in the future; there’s some research that diverse boards govern winning companies. But women and men should be cautioned not to be over-dependent on niche funds and not to overpay for them.

Keep Costs Low

Women control most household income and tend to be price and budget conscious. So don’t try to win us with high-priced mutual funds when there are less expensive ones that do the job.

Don’t charge us a lot to recommend a generic plain-vanilla index fund portfolio we could find on our own.

Women, Worry Less

Survey after survey reveal that women are more afraid of managing money than men (which is not the same thing as being worse at it) and they are more afraid of market risks than are men.

Women keep a lower proportion of their money in stocks than men do, even though women live longer and the stock market has long proven itself to be the best place for long-term investors to keep money.

Advisers, Worry More

A good adviser won’t prey on those fears; she or he will help female clients overcome their worries and invest in low-cost products that balance risks and rewards.

And if they don’t? There’s another new company out there that is explicitly targeting women investors. It’s called FireMyAdvisor.com.

MONEY Kids and Money

The Surprising Place Your Kid Should Save His Summer Earnings

Pitcher of lemonade and a money jar
Your teen's summer earnings may not seem like much now, but they can serve as a cornerstone for his retirement 50-odd years in the future. Somos/Veer—Getty Images

Get your teen started off now in a Roth IRA for a big payoff down the road, says financial planner Kevin McKinley.

A few weeks ago, I wrote about how to figure out how much money you need to become financially independent, and how the process could help you teach your kids to reach the same goal.

But talking the talk only goes so far. You can walk the walk by helping them start saving for retirement in…drumroll, please…a Roth IRA.

Why a Roth IRA?

For most younger workers, the Roth IRA is preferable to a traditional IRA for two reasons.

The first is that contributions to a Roth IRA can be withdrawn at any time for any reason with no taxes or penalties whatsoever. Therefore, that portion of the account can be taken out for other expenses, such as college or a down payment on a house, without a severe cost.

The second reason the Roth IRA rules is that younger workers typically are in a low tax bracket, and therefore don’t need the deduction that a traditional IRA provides. But once they get to retirement, all the money in the Roth can generally be withdrawn with no taxes at all.

How much your kid can save

Children of any age can open a Roth IRA account—as long as they have legitimate earned income. Flipping burgers and bagging groceries certainly counts, but so does self-employment like babysitting and yard work, especially if it’s done for someone other than you.

Just make sure to keep track of what your kid makes so you know how much can be deposited in to the Roth IRA. For 2014 the contributions to a Roth IRA are limited to the lesser of the kid’s earnings, or $5,500.

Technically, for the 2104 tax year, the money doesn’t have to be deposited until April 15, 2015, the usual deadline for the federal income tax filing.

What you can do to encourage him

Congratulations to you—and your child—if you can convince her straightaway to put her hard-earned paychecks into an account that isn’t meant to be tapped for another 50 years.

But even if you can’t immediately get your teen into the savings habit, you may be able to motivate her by using some of your own money. The money for the Roth IRA doesn’t necessarily have to come from her. She can spend her earnings, and you can deposit into the Roth on her behalf.(Just remember that your deposits then become her money, and she’s free to do with it as she pleases once she reaches adulthood.)

Also, keep in mind that the source of the deposit to your child’s Roth IRA doesn’t have to be an all-or-nothing proposition. You may want to tell your kid that you will match every dollar she contributes with one of your own.

For further motivation, try showing your child how time can turn a relatively-small amount of money into a small (or large) fortune.

For instance, let’s say you and your child deposits $5,000 into a Roth IRA when he’s 15 years old, and it grows at a hypothetical annual rate of 6% per year.

By the time he’s 65 (and it will happen sooner than he thinks), the account would be worth over $92,000.

But if he has the earnings and discipline required to set aside $5,000 in to the same account every year until he turns 65, the Roth IRA will provide him with a tax-free total of $1.6 million.

And if that doesn’t get his attention, no amount of walking and talking will.

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Kevin McKinley is a financial planner and owner of McKinley Money LLC, a registered investment advisor in Eau Claire, Wisconsin. He’s also the author of Make Your Kid a Millionaire. His column appears weekly.

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The big companies favored by mutual fund managers have substantially underperformed the S&P 500 index this year.

Even fund managers’ best ideas are not working out this year.

In one sign of the poor performance of stock picking by fund managers as the U.S. stock market continues to rally, the largest overweight positions by large-cap fund managers substantially underperformed the broad Standard & Poor’s index over the first half of the year, according to a Goldman Sachs research report.

Those stocks which were the most shunned, meanwhile, posted above-average returns.

Visa, the most overweight position among the 485 large-cap funds included in the Goldman Sachs study, is down 0.4% for the year, while Exxon Mobil, the most underweight, is up 1.1% over the same period.

Overall, well-loved stocks gained 6% on average for the year through June, while the S&P 500 gained 8% over the same time. The most underweight stocks, by comparison, rallied by an average of 10 percent, according to the report.

The underperformance of active fund managers comes at a time when stock pickers were expected to prosper. The aging bull market, which began in 2009, and falling stock market correlations after last year’s big rally were supposed to make 2014 a time when fund managers would be rewarded for picking companies based on their fundamentals.

Yet poor stock selection is one reason why just one in five actively managed large-cap stock funds are beating the S&P 500 for the year so far. Typically, about 40% of managers best the S&P 500 over the same period, said Todd Rosenbluth, director of fund research at S&P CapitalIQ.

“What funds need to do to outperform is find unloved stocks and get in front of it. If they hold the same stocks that other managers are overweighting, then it’s more likely that they are just going to tread water,” Rosenbluth said.

Underweight stocks’ performance this year seems to bear that out. Shares of Goodyear Tire & Rubber, the company with the largest underweighting among consumer discretionary stocks, is up nearly 16% for the year to date, while shares of Essex Property Trust, the most underweight financial company, have rallied 32%.

Other companies with significant underweighting include Apple, PepsiCo, and Ventas, according to the Goldman report.

The lack of a significant market pullback could be another reason for the underperformance, Rosenbluth added. The S&P 500 has not had a pullback of 10%, known as a correction, in three years. That has made it hard for managers who sold during last year’s 30% rally in the S&P 500 to find places to invest their cash, he said.

“Some managers were prudent and sold during the rally, and now they are left wondering what to do,” he said.

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