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 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 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 Debt

Have You Conquered Debt? Tell Us Your Story

Have you gotten rid of a big IOU on your balance sheet, or at least made significant progress toward that end? MONEY wants to hear your digging-out-of-debt stories, to share with and inspire our readers who might be in similar situations.

Use the confidential form below to tell us about it. What kind of debt did you have, and how much? How did you erase it—or what are you currently doing? What advice do you have for other people in your situation? We’re interested in stories about all kinds of debt, from student loans to credit cards to car loans to mortgages.

Please also let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

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

MONEY 401(k)s

Vanguard Study Finds (Mostly) Good News: 401(k) Balances Hit Record Highs

Stock market gains boosted wealth for those putting away money regularly in the right funds. Are you one of them?

If you’ve been stashing away money in a 401(k) retirement plan, you probably feel a bit richer right now.

The average 401(k) balance climbed 18% in 2013 to $101,650, a new record, according to a report by Vanguard, which is scheduled to be released tomorrow. That’s an increase of 80% over the past five years.

The median 401(k) balance — which may better reflect the typical worker — is far lower, just $31,396. (Looking at the median, the middle value in a group of numbers, minimizes the statistical impact of a few high-income, long-term savers who can skew the averages.) Still, median balances rose 13% last year, and over five years, they’re also up by 80%. All of which suggests that rank-and-file employees are building bigger nest eggs.

Vanguard balances
Source: Vanguard Group

That’s the good news. Now for the downside. Those rising 401(k) balances are mostly the result of the impressive gains that stocks have chalked up during the bull market, now in its sixth year. (The typical saver currently holds 71% in stocks vs. 66% in 2012.) Why is that a negative? Because at some point stocks will enter negative territory again, and all those 401(k) balances will suffer a setback.

Meanwhile, the amount that workers are actually contributing to their plans remains stuck at an average of 7% of pay, which is down slightly from the peak of 7.3% in 2007. And nearly one of four workers didn’t contribute at all, which has been a persistent trend.

Ironically, the savings decline is largely a side-effect of automatic enrollment, which puts workers in 401(k)s unless they specifically opt out. More than half of all 401(k) savers were brought in through auto-enrollment in 2013. These plans usually start workers at a low savings rates, often 3% or less. Unless the plan automatically increases their contributions over time—and many don’t—workers tend to stick with that initial savings rate.

Still, when you include the employer match—typically another 3% of pay—a total of 10% of compensation is going into the average worker’s plan, says Jean Young, senior research analyst at Vanguard. That’s not bad. But most people need to save even more—as much as 15% of pay to ensure a comfortable retirement, according to many financial advisers. (To see how much you should be putting away, try the retirement savings calculator at AARP.)

Even if 401(k) providers haven’t managed to get people to step up their savings rate, they are tackling the problem of investing right. More workers are being enrolled in, or opting for, target-date retirement funds, which give you an all-in-one asset allocation and gradually shift to become more conservative as you near retirement. Some 55% of Vanguard savers hold target-date funds—and for 30%, a target fund is their only investment.

With target-date funds, as well as managed accounts (which are run by investment advisers) and online tools, more 401(k) savers are also receiving financial guidance, which may improve their returns. As a recent study by Financial Engines and AonHewitt found, 401(k) savers who used their plan’s investing advice between 2006 and 2012 earned median annual returns that were three percentage points higher than those with do-it-yourself allocations.

Vanguard’s data found smaller differences. Still, over the five years ending in 2013, target-date funds led with median annual returns of 15.3% vs just 14% for do-it-yourselfers.

The lessons for investors: You’re better off choosing your own 401(k) savings rate, and try to put away more than 10% of pay. And if you aren’t ready to manage your own fund portfolio, opting for a target-date fund can be a wise move.

 

 

 

 

 

 

 

MONEY 401(k)s

Get (Nearly) Free 401(k) Advice at Work

As you approach retirement, take a second look at the help your 401(k) plan is offering.

It’s the best-kept secret in 401(k)s: free or low-cost professional investment advice.

Three-quarters of 401(k) plans offer some form of help, from target-date funds and online tools to managed accounts. And taking advantage of this guidance can pay off, especially when it comes to reducing risk.

For many workers, professional advice starts and stops with target-date funds, which simply shift your asset mix to be more conservative as you age. When you’re nearing retirement, though, you typically need more help than a single investment can provide.

With most 401(k)s, you’ll find retirement calculators and tools; 39% also offer managed accounts.

For a cost of 0.2% to 0.7% of assets a year (on top of investment fees), you’ll get a customized mix of your plan’s mutual funds geared to your goals and risk tolerance, either run by the plan’s investment provider or an outside adviser, such as Financial Engines, Guided Choice, or Merrill Lynch.

Total assets in managed accounts, which tend to be held by pre-retirees, grew to $108 billion in 2012, up from $71 billion in 2010, according to Cerulli Associates.

In 2012 workers using Guided Choice plan advice earned 2.1 percentage points more, with 50% less risk, than their colleagues who didn’t. Over the past five years, managed account returns lagged slightly, Vanguard data show. But, crucially, investors working with pros tended to be better diversified and saw steadier returns.

Still, paying for advice isn’t right for everyone. Here are the three key times to do it:

When you’re unsure where you stand. You can use your plan’s retirement calculator to check your progress. But you may find it more helpful to have a pro run projections, especially if you’re uncertain about what investment return, saving, and spending assumptions to make, or you need to take outside assets into account.

When it’s time to trim risk. As you approach retirement, you need to shift to a safer allocation that will produce steady income. “The goal is to minimize the risk of a market crash just as you retire by creating an income cushion,” says Financial Engines CEO Jeff Maggioncalda.

A target-date fund would give you that more conservative tilt. But with complicated finances that make diversifying difficult — such as company stock, outside IRAs, or a spouse’s plan — you’re a candidate for a managed account. Make sure the fee is reasonable — no more than 0.5% of assets.

When you’re ready to retire. Both Financial Engines and Morningstar recently launched services that adjust your mix and calculate your withdrawals in retirement.

If your 401(k) doesn’t offer this program (only 28% do) or you aren’t up to devising your own income strategy, hire an outside planner who charges by the hour or a percent of assets. You’ll also get help with taxes, insurance, and Social Security. After all, your 401(k) is only one piece of the retirement puzzle.

MONEY

Help! Rich Grandparents, Poor Grandparents: What to Do?

Did you ever want to be a personal-finance advice columnist? Well, here’s your chance.

In MONEY magazine’s “Readers to the Rescue” department, we publish questions from readers seeking help with sticky financial situations, along with advice from other readers on how to solve those problems. Here’s our latest reader question:

How do you handle a situation where one set of grandparents can afford to be (and is) much more generous to their grandchildren than the other set can afford to be?

Got a good answer? Submit it to us in the form below. We’ll publish selected reader advice in an upcoming issue. (Your answer may be edited for length and clarity.) Please include your contact information so we can get in touch; if we use your advice in the magazine, we’d like to check with you first, and possibly run your picture as well.

Thanks!


To submit your own question for “Readers to the Rescue,” send an email to social@moneymail.com.

To be notified of future “Readers to the Rescue” questions and answers, find MONEY on Facebook or follow MONEY on Twitter.

MONEY

Sugar-Coated Financial Advice for Women Leaves Bitter Taste

Do women really require female-targeted money books with chick-lit titles, cute covers and hipster language ?

That’s the debate sparked by an essay published on Slate last week about the rise of sugar-coated personal finance books for women.

Many people — not just those of us who write about women’s financial issues — have been baffled by the popularity of books such as Hot (broke) Messes and Does This Make My Assets Look Fat?

And in her Slate piece, Hannah Seligson argues that these books perpetuate a myth that women are financial dopes who can’t handle money, a la Sex and the City‘s Carrie Bradshaw (“Oops, I spent $40,000 on shoes”) and the protagonist of the Shopaholic books and movie.

Many women still hold the damaging view that they aren’t “good” with money, despite evidence to the contrary. Seligson cites data from Generation Earn, by US News & World Report columnist Kimberly Palmer, which dismantles the idea that women are chronic overspenders or have more debt than men.

Although Seligson is right that women are no less savvy and responsible about money than men are, I disagree with her conclusion that women don’t need additional, specialized financial advice.

The problem Seligson doesn’t address is that women, on average, are still lagging far behind men on the financial front. As I wrote in a November feature for MONEY, women tend to earn less and thus save less. And certain lifestyle issues — taking time out of the workforce to raise children, for example — further compromise women’s long-term financial health.

On average, according a survey from MassMutual, women’s retirement nest eggs are two-thirds the size of men’s. Studies from the Employee Benefits Research Institute show a similar gap. Yet we have to stretch our assets, flattering or not, to cover much longer lives.

It’s galling — and as a woman, it’s scary.

Is the answer to dole out financial advice in the paperback equivalent of brightly colored Pez dispensers?

As Tracy Clark-Flory wrote in a rejoinder on Salon: “As if I needed more reason to avoid the subject of finance, said section is apparently color-coded for the ladies, just like the rest of the bookstore…with the color pink.” Although Clark-Flory would like “a special sub-section just for me, and all other literate females,” the truth is that many women are buying the advice that’s packaged like candy.

I just don’t know if the spoonful of sugar is going to make the medicine go down. The more upsetting truth about these books isn’t that women don’t need them — as Seligson argues — but that they need something. And what’s being aimed at them is making matters worse, by perpetuating women’s own lack of financial confidence.

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MONEY

Financial Advice Needs His-and-Hers Models

What do women want…from a financial adviser? A new study indicates that, as in so many other aspects of life, it’s quite different from what men are looking for.

And as I wrote in the November issue of MONEY, that’s probably a good thing: Women’s financial needs are very different from men’s, given that they typically earn less and save less than men do, but have to plan for a much longer lifespan.

Yet there seems to be an advisory gap between what women want — and need — and what they experience from financial planners. After surveying 12,000 women around the world in 2009, the Boston Consulting Group reported that women identified the financial services industry as the one they were most dissatisfied with among those affecting their daily lives.

Specifically, women said they were frustrated by financial planners who were condescending, who didn’t listen to female clients’ concerns and who seemed overly focused on a male partner or husband.

Now, a study recently released by Ameriprise sheds light on what women do want, as measured by the qualities women identified as “very” or “extremely important” in a financial pro:

  • 75% of women want a financial adviser who understands what’s important to them, compared to 63% of men.
  • 58% of women say an adviser who can coach them toward their retirement goals is key. Only 43% of men said so.
  • And 55% of women said they’d want adviser to tailor guidance to their particular “life and lifestyle,” versus a surprising 41% of men.

So if you’re a woman seeking professional financial advice, how do you find the right adviser?

  • Shop around. A growing number of financial planners and advisory firms are billing themselves as female-friendly. Only you will know for sure, so try on a few for size. Most planners offer a free initial consultation.
  • Network. Search at Napfa.org for fee-only certified financial planners who specialize in working with women, or ask other women who they work with.
  • Be honest. Look for someone to whom you can comfortably explain the nuances of your financial life, says Mary Claire Allvine, a principal with Brown, Rehmus & Foxworth, “the same way you would with your doctor.” Without that level of candor, Allvine says, you can put your financial health at risk.

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