MONEY financial advice

Schwab Readies Low-Cost Robo-Broker Service for Millennials

Within weeks, the brokerage may introduce free, automated portfolio management to lure younger investors.

Charles Schwab is weeks away from introducing an automated investing service aimed at winning business from novice investors it does not currently serve, company officials told Reuters.

The service is being developed in-house and likely will be free, giving the San Francisco-based discount brokerage pioneer a leg up on a slew of upstart firms known as robo-brokers that charge management fees of 0.15% to 0.35% of a client’s assets.

It would position Schwab as the first conventional brokerage with its own robo-broker offering. In automated investing plans, clients fill out questionnaires about investment goals and risk tolerances. Their answers automatically determine the portfolios of exchange-traded funds or other assets they buy.

Executives at some large broker-dealers, which typically charge 1% to 3% of client assets in managed account programs, have said they do not feel threatened by robo-brokers because they make money offering more sophisticated wealth-planning and investment services to wealthy clients.

But they also want to nurture younger investors to replace affluent but aging Baby Boomers, the bulk of their client base.

Schwab is betting young investors in early stages of wealth accumulation will remain in-house and use more sophisticated advisory services as they prosper or as markets become complicated, one source said. Like other brokerage firms, it receives payments from mutual funds its clients use as well as interest that accumulates on cash held in their accounts.

The automated service is expected to include features such as automatic portfolio rebalancing and tax-loss harvesting that some robo-brokers recently introduced.

Neesha Hathi, head of technology solutions for independent investment advisers who use Schwab services, told Reuters on Thursday the program would likely be introduced this month. She did not comment on details, but a person familiar with the plan said it would be introduced without fees.

In July, chief executive Walt Bettinger told investors Schwab was working on “an online advisory solution,” but declined to provide details on timing or whether it would build or buy a robo-service.

A Schwab spokeswoman said Friday she could not comment further.

Schwab currently offers almost 200 commission-free exchange-traded funds, including several managed by the company.

“Schwab definitely has a track record of entering a market by underpricing or pricing low, but I don’t think it has a proven way to dominate markets,” said Adam Nash, chief executive of Wealthfront, the largest robo-broker with more than $1.4 billion of client assets.

As of June 30, Schwab had $2.4 trillion of total client assets, including $11.5 billion of net new assets gathered in the second quarter.

Nash would not say whether Wealthfront, which charges a flat advisory fee of 0.25 percent and waives the fee on accounts with $10,000 or less, will adjust its fees to compete with Schwab.

Another robo firm, Betterment, “would not alter pricing” if Schwab introduced a free service, said a spokeswoman. “We offer an incredible value.”

Some consultants said Schwab risks antagonizing outside investment advisers who use its services and fear losing clients, but technology head Hathi disagreed.

“There’s more of an opportunity here than there is competition,” she said, noting that most turn away smaller investors and younger members of families that are clients. “What Walt talked about is that here’s a solution for advisers that’s going to allow them to serve those accounts.”

MONEY Financial Planning

How to Be Charitable…and Hold Onto Your Money

Bench in Yosemite Valley.
Bench in Yosemite Valley. Geri Lavrov—Getty Images

You can inexpensively plan for a donation from your 401(k) while retaining access to the account if you need it.

After they got married, I met with Luke and Jane, both 33, to think through how much they are going to spend and how much they are going to save. Luke is a gentle soul. It took him many years to find work that he could feel good about, and he currently has a good-paying job. He wants to keep working forever.

Part of him seemed shocked, although happily so, by his fortunate financial situation. He feels that he and his wife together make a lot more money than they need.

If he knew their finances were always going to be the way they are now, he’d give more money away. He gets a lot of satisfaction from financially supporting changes he feels are positive in the world.

One of the things that Jane loves about her husband is his philanthropic bent. But she’s also concerned they might give a lot of money away and then regret it. They plan to start a family within the next five years. How can they decide to give money away when they might need it later?

I left our meeting somewhat frustrated, because I didn’t have a great answer to their conundrum.

Meanwhile, I was working on a book about connecting all areas of finances with meaning. Previous authors have explored how to consciously spend or invest. But I wanted to write about not only spending and investing, but also taxes, estate planning, and insurance — all areas of personal finance.

The book idea sounded good. Then I had to write the thing. I know a lot about the subject, but when I got to the chapter about estate planning, I drew a blank.

After what I deemed an appropriate length of procrastination, I started writing the dreaded estate chapter. I found myself thinking about Luke. At the same time, I was reviewing everything I do when I talk to clients about estates, focusing on the angle of more meaning. More meaning.

Then some ideas started sparking.

Reviewing 401(k) beneficiaries, for instance, is something I talk about during estate planning meetings. Seems mundane, but wait, there could be something there. This is cool, I thought as I wrote.

What if Luke designated someof his 401(k) — or all, if he really wanted — to charity? Say, the National Parks?

It wouldn’t cost Luke a dime now. Plus, it’s totally revocable before he dies. If and when Jane and he have kids, he’ll revoke the designation. So during his critical period of family financial responsibility, he can leave his 401(k) to Jane and the family. But if it’s just Jane and him, setting aside some money in case of his untimely death is one answer to the conundrum — how to give more without regretting it.

Other details I uncovered when I wrote and researched this strategy: Larger, well-established charities are more likely able than smaller ones to handle a 401(k) donation. The theater company down the street generally won’t.

Setting up this designation doesn’t cost anything; Luke doesn’t have to talk to an attorney. Jane will have to sign off on it, but she’s fine with it.

Other perks? He might be able to designate what his 401(k) donation is used for, in the case of his death, and the charity might recognize him on a plaque at his favorite park. Charities vary on how they recognize these gifts. The recognition isn’t just for ego gratification; it encourages other people to give, too.

Luke doesn’t have to risk their retirement, and I’ve got a good idea for my estate chapter.

————————

Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.

MONEY 401(k)s

What Bill Gross’s Pimco Departure Means for Your 401(k)

The people who tell companies what retirement-plan investments to offer employees are questioning the value of the giant Pimco Total Return bond fund.

Bill Gross’s sudden departure from Pimco and the Total Return Fund he ran for 27 years was the last straw for Jim Phillips, president of Retirement Resources, a Peabody, Mass. firm that advises 401(k) plans with $50 million to $100 million in assets. He’s advising clients to head for the exits.

After 16 straight months of outflows and a 3.5% return over the past year, worse than 75% of its peers, the $222 billion Total Return Fund is failing Phillip’s standards when it comes to meeting the retirement needs of his customers.

“We do not have ongoing confidence in the way the fund is being managed,” Phillips said. “We are recommending to clients that we replace this fund with another one.”

Philips said he joined a conference call Monday with Pimco chief executive Doug Hodge and some of the company’s portfolio managers, but said the conversation “doesn’t change any actions that we have planned.”

About 27,000 of the largest corporate 401(k) plans in the country had money in the Total Return Fund as of the end of 2012, according to the most recent data from BrightScope, which ranks retirement plans. The roster includes Walmart’s $18 billion plan, the largest in the country by assets, as well as Raytheon’s and Verizon’s.

Total Return holds $88.3 billion of the $3 trillion in 401(k) assets listed in BrightScope’s database of more than 50,000 of the largest plans, the biggest mutual fund in the database.

Walmart didn’t return calls, and Raytheon and Verizon declined to comment for this article.

Phillips isn’t alone in his dissatisfaction with the fund — investors have pulled $25 billion from Total Return Fund so far this year. But a bad year that began with a public falling out between Gross and top deputy Mohamed El-Erian in January and has now seen the Pimco co-founder quit is causing many 401(k) plan consultants and advisers to put the Total Return Fund on their watch lists, and in some cases start replacing it.

Though companies usually make decisions about where to invest their retirement funds during investment committee meetings, which typically occur quarterly, Gross’ exit could prompt companies to have meetings or calls sooner than scheduled, said Martin Schmidt of H2Solutions, a Wheaton, Ill. consultant for 401(k) plans with assets from $150 million to $4 billion.

“I have sent out emails to clients telling them that we need to start looking at alternatives,” Schmidt said. He said he hasn’t heard from anyone at Pimco.

Once an employer decides to switch a fund out of its plan, it can take three to five months to make the change and give employees the required 30-days’ notice.

Jump Ship

Gross’s new fund, the $13 million Unconstrained Bond Fund from Janus Capital, is unlikely to be the destination for any funds that decide to jump ship on Total Return, given that it’s only been in operation since May and has produced a negative 0.95% return since inception, according to Morningstar.

“We have to see at least a three-year track record and we actually prefer five,” said Troy Hammond, president and chief executive officer of Pensionmark Retirement Group, a Santa Barbara, Calif. adviser that serves over 2,000 small 401(k) plans across the country.

There is also the question of whether Gross will have the same level of support and resources at Janus as he did at Pimco.

“If Bill were leaving with the top 10 people from Pimco, like Jeffrey Gundlach did when he left TCW, that would be different,” said Mendel Melzer, chief investment officer for the Newport Group, a Heathrow, Fla. consultant to institutional investors, including 401(k) plans with assets between $20 million and $1.5 billion. “But this is just Bill Gross leaving on his own, and it is hard to say that the track record he accumulated at Pimco should translate into the Janus fund.”

Melzer is advising clients to see how the new Pimco team does with the Total Return Fund, which has been on Newport’s watch list since earlier this year.

“We will keep it on a very short leash,” Melzer said. “If it does not improve in the next two quarters we will look at alternatives.”

MONEY Financial Planning

Why Financial Planning Needs More Religion

In God We Trust on a coin
iStock

Acknowledging faith and spirituality helps people better understand their financial goals — and stick to them.

As part of my getting-to-know you interview with new clients, I ask about their faith. Most are caught off guard. “Why do YOU care?” was one client’s response.

Such a reply comes with good reason; my clients hired me to talk about money, not religion. But there are many advantages to discussing spirituality with clients before we address their finances.

Know Thyself

Spiritual thinkers from Socrates to John Calvin advocated the importance of introspective familiarity in the pursuit of wisdom. Certainly, in the financial realm, the client who understands why he behaves the way he does will be more successful in achieving goals. Asking him to articulate the spiritual beliefs that drive him is a great exercise for him as well, even in cases where those beliefs are simply, “I don’t practice any sort of spirituality.”

If you don’t practice your own spirituality, or you simply don’t want to talk about spirituality with clients, a discussion of values can be an effective start to the relationship. Everyone has values, regardless of their stated faith or religion. Even old Ebenezer Scrooge valued wealth, frugality and financial independence. My clients receive a list of 140 common values from which they select the most important. I then have them narrow the list down to 20, then 10 as they look at themselves in a completely new way.

Integrating Faith into Financial Plans

As many advisers have learned by experience, it is the long term that will make or break a client’s financial goals. When our assets serve a larger purpose, we experience a deep inspiration and motivation over the long haul. By incorporating the big picture into our planning, we have better success with helping clients implement behavior changes. Rather than saying, “You need to spend less next month, and every month thereafter,” we can include a client’s faith to motivate a greater level of intentionality: “I know you want to be able to provide XYZ for ABC. That will be much easier if you spend less in the short term.”

Putting money in its place

Maybe money shouldn’t be the key ingredient in our financial decisions. Where strong values are present, ideally our financial life will reflect them. When your money is in service to your values, it becomes a supporting cast member of a show where your values play the leads.

In a fast-paced, credit-loving society, it is easy to let money guide our decisions. We make risky investments in hopes of large payoffs with money we can’t afford to lose. We take jobs that pay well but require such dedication of time that we begin to lose touch with the people we love. We constantly seek “more” without taking the time to be grateful for what we have.

But when values take the lead in our decision-making, our behavior finally changes for good. Investments no longer cause insomnia, jobs support a worker’s lifestyle, and gratitude becomes a regular part of life. Clients will appreciate an adviser who cares for the whole person and advocates that kind of wellness.

I have one client who took a different view of money; she hated it. Despite tremendous earning potential, she considered wealth the cause of greed in this world. In what she deemed acts of faith, she continually put herself in positions to earn very modest amounts. Is she wrong? That’s not my place to determine, but I do have a responsibility to help her understand her default reactions so she can evaluate whether or not they reflect her core beliefs.

I knew she was a Christian, and her upbringing took place in a notoriously upper class town. I suggested she examine her religious teachings for more detail on the topic of wealth. She eventually decided that her attitudes don’t reflect the actual teachings of her faith. She read of biblical figures who used the power of their wealth to serve God and in so doing, mightily improve the lives of others.

My client’s entire financial plan changed once she acknowledged her attitudes toward money were more reflective of her teenage response to her home town than they were an outcropping of her faith. She has accepted a new mantle; while avoiding monetary entrapments, she wants to make more money so she can use it to improve the lives God brings into her path.

It’s About Our Roots

I liken our spirituality to the root system of a tree: It gathers nutrients and supports the weight of the tree. In nature, what we see above ground only partially represents the root structure we can’t see. Everyone has roots, and ignoring those root systems can lead to ineffective attempts to grow.

As much as we hate this fact, we grow in leaps and bounds when we suffer. For those who dedicate their lives to a higher purpose, even life’s pitfalls present growth opportunities; we learn to grapple gracefully and walk out of those pits with our soul intact. I frequently mention to my clients my own financial struggles due to two chronically ill family members. While I wouldn’t want to relive those life setbacks, their spiritual benefit seriously outpaces the dollar signs. Where the prudent financial plan would create such stability that you never find yourself in a financially precarious position, there still is beauty in those down times, and they serve to forward our purposes for being in this world.

Certainly, knowing your client’s faith is not a shortcut; there are as many varieties of beliefs among denominations as there are types of trees and root structures. But it helps you know the right questions to ask. Perhaps you are wondering why there is a disconnect with a longtime client of yours. When you look at her, could there be something underground that will give you a better understanding of the whole person? How much more effective could you be if you brought your advice under the umbrella of her faith and spirituality?

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Candice McGarvey, CFP, is the Chief Story Changer of Her Dollars Financial Coaching. By working with women to increase their financial wellness, she brings clients through financial transitions. Via conversations that feel more like a coffee date than a meeting, her process improves a client’s financial strength and peace.

MONEY financial advisers

Why Financial Advisers Should Discuss Their Own Money Problems

pen stain on white business shirt
FineCollection—Getty Images

Talking about medical bills, divorces, college funds, and past money mistakes can help an adviser and client connect.

Recently, a prospective client of financial adviser Robert Wyrick Jr. wanted to know exactly how Wyrick handles his own finances.

Wyrick, of MFA Capital Advisors in Houston, wasn’t fazed; he had plenty to say. Seven years after spending more than $1 million for his wife’s costly and ultimately losing battle against ovarian cancer, he still had managed to start his own company and make sure his two kids had enough money for college. He felt confident he could share the bad and the good, so he answered the prospect’s questions, even sharing screenshot of his investments. And Wyrick won the client’s business.

“I say, ‘Why not?'” said Wyrick. “If a person is sitting there with their life savings, and they’re interested in talking with an adviser, everything should be on the table,” he added.

It can be tricky for an adviser to introduce his or her own point of view and experiences into the conversation — after all, the focus needs to remain on the client — but advisers say dropping a veil or two goes a long way to building trust and the client relationship.

The key is making the conversation about the client, and picking up on cues. Some clients may want to know everything, down to the last mutual fund sale, while others may just want to hear that they are understood.

David Edwards, of Heron Financial in New York, lets prospects and clients know that he went through a divorce, and that he has kids in college. He said it helps to establish commonality.

“People feel very vulnerable,” he said. “They are in their underwear. And anything I can do to get into my underwear with them goes such a long way to easing the conversation.”

Of course, it’s easier to share financial successes, such as fully funded college accounts, than it is financial missteps, but Rick Kahler of Kahler Financial Group in Rapid City, S.D., has learned to be open even about those. He often emphasizes to his clients that most millionaires have more financial failures than less wealthy people.

“I tell my clients, ‘My job is to make every mistake I can possibly make, so you don’t have to,'” he said. Kahler, who’s 59 and been in the business over 30 years, said he used to think it would be bad to admit missteps to clients, but he’s changed his mind. “Now I’ve done a 360. It comes with the gray hair.”

Emily Sanders, a managing director at United Capital in Atlanta, has also found that sometimes, sharing a personal story can help a client avoid a misstep.

When she was married to her ex-husband, for example, Sanders contributed less to her 401(k) than her husband did to his, because she of course did not guess the marriage wouldn’t last. When she sees women making the same mistake, she gently refers to her own experience and suggests a more practical course. Relating her own experience makes it a friendly conversation, not a scold, Sanders said.

“It comes down to being a genuine person,” Sanders said. “Even though I’m a financial adviser, I’m not perfect.”

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 Ask the Expert

How to Pick the Right Financial Adviser

140605_AskExpert_illo
Robert A. Di Ieso, Jr.

Q: “I am 50, and my wife is 40. We have been managing our finances ourselves. How do I find and select a financial adviser to assess our finances and make overall recommendations? What should we expect to pay?” —Mark, Massachusetts

A: When it comes to picking a financial planner, you have a ton of choices, from an adviser who works at a large bank or brokerage to a local independent planner.

You can start your search at the Financial Planning Association website, where you can look up planners near you. Then cut down that list by asking potential pros these three important questions.

1. What services do you provide?

You can get all sorts of help from a planner. “Some do comprehensive planning where they help clients with retirement, college, insurance, taxes, and estate planning,” says Janet Stanzak, president of the Financial Planning Association. “Other planners will only focus on a certain piece of your financial planning, like investments or insurance.”

If you want investment advice or even ongoing money management, also ask about the adviser’s investment philosophy and the kind of products he or she puts clients in, be they index funds, individual stocks, variable annuities, or something else. If you’re a long-term investor, you don’t want an adviser who makes frequent trades. If an adviser pushes just one type of product or family of mutual funds, you’ll want to know that as well.

Another way to gauge if a planner is right for you: Ask for a profile of his or her typical client and see how closely you fit that description.

2. What’s your background?

You’ll see lots of credentials thrown around, but not all are created equal. One of the best is the certified financial planner designation. To become a CFP, a planner must pass a test administered by the Certified Financial Planner Board of Standards and commit to continuing education and ongoing ethics classes.

Keep digging. You can ensure the planner’s credentials are current by calling the administrator of that designation. Use the Financial Industry Regulatory Authority’s BrokerCheck to see if the adviser has ever been disciplined for unlawful or unethical behavior.

Depending on the total amount of money they manage, investment advisers should be registered with the Securities and Exchange Commission or with their state securities agency and have filled out a registration form, or Form ADV, which lists their education, employment history, and any regulatory problems and complaints (in Part I) and services, fees, and investment strategy (Part II). An adviser should be willing to give you a copy of this form, or you can pull up one on the Securities and Exchange website.

3. What will I pay?

Financial planners make money two ways: from commissions on the products they sell or by charging hourly, annual, or one-time fees. If you buy a mutual fund through an adviser who works on commission, for example, you might pay him or her 4% or 5% of what you’re investing upfront. Sales commissions on variable annuities run as high as 6%. With a fee-only planner, you might pay $150 to $300 or so an hour, a flat $1,500 for a financial plan, or 1% or more of your assets under management every year.

Because commission planners have an incentive to sell you certain investments, you may be better off with a fee-only planner who doesn’t profit from pushing any particular product. Fee-only advisers can have conflicts too, however. An adviser earning an annual fee might be disinclined to encourage a smart financial move if it would shrink your total assets under management.

Most fee-only financial planners are also fiduciaries, meaning they are legally required to act in your best interest. Planners who aren’t fiduciaries, typically broker-dealers, are held to a lesser standard called the suitability standard, which means that anything they sell you merely has to be suitable.

Finally, watch out for any planner making market-beating brags. If a planner tells you they can outperform the market, walk away. “Beating the market is not a way advisers add value,” says Allan Roth, a fee-only financial planner who has also taught behavioral finance classes at the University of Denver. “You want an adviser who adds value by helping create a tax efficient portfolio, looking at your risk management, and helping with estate planning issues.”

Do you have a personal finance question for our experts? Write toAskTheExpert@moneymail.com.

MONEY financial advisers

How to Be Nosy About Your Financial Adviser’s Finances

magnifying glass looking at new $100 bills
LM Otero—AP

You probably want to know how rich your financial adviser is. Here are some better ways to pry about his or her money.

What’s your net worth?

We financial professionals think nothing of asking clients this question. If the tables were turned, though, and clients or prospective clients asked the same question of us, how would we respond?

Every now and then this issue comes up in conversations among financial planners. Some advisers think their net worth is none of their clients’ business, any more than doctors’ cholesterol levels are any business of their patients.

Others are concerned that a single number like net worth is incomplete information and can even be misleading. Knowing a financial professional has a net worth of, say, $5 million doesn’t necessarily mean the person is a trustworthy or capable financial planner. Net worth tells prospective clients nothing about where the money came from. The planner may have inherited it, won the lottery, made it through a business other than financial planning, earned it from commissions on poor investments, or even obtained it illegally.

Nor does net worth reveal anything useful about someone’s understanding of money or knowledge of financial planning. I’ve worked with plenty of multi-millionaires who were horrible money managers and inept at investing. There are also many brilliant young planners who haven’t had the time to accumulate a large net worth.

I suspect that most clients who want to know about their planners’ net worth actually have several deeper questions in mind. Some may be asking if the professional actually follows his or her own advice. Imagine how troubling it might be to find out your financial planner doesn’t have a retirement plan, is a habitual over-spender, or hasn’t gotten around to making a will.

Another reason for the question may be a concern whether the planner is financially stable and will be around in the future. During the Great Recession, many financial professionals saw their revenues fall by 30% to 40%. Some who did not have a business emergency reserve had to resort to laying off staff, cutting services, or in some cases closing their doors.

Still another concern may be whether the planner is familiar with a potential client’s particular financial issues. This is especially true of high-net-worth clients. They need to know a planner can relate to the complexities, responsibilities, and emotional challenges of managing wealth.

All of these are legitimate concerns. Knowing a financial planner’s net worth, however, doesn’t address those concerns. It would be more useful for clients to get answers to questions like the following:

  • Do you follow the same advice you give clients? Give me some examples.
  • Do you have six months’ living expenses in an emergency account?
  • Do you invest your money in the same manner you will invest mine?
  • If I were to run a credit report on you, what would it tell me?
  • What are some of the things you have learned from your financial mistakes?
  • Tell me what your company has in place for emergency planning and succession planning.
  • Tell me why you can relate to someone with my net worth and the issues I am facing.

Very few prospective clients are likely to ask questions like these. That doesn’t mean they don’t want to know the answers.

Planners who want to provide exceptional service to their clients might consider providing such answers freely and transparently, without waiting to be asked. We expect clients to trust us with their financial information. One way to build that trust may be to share some information of our own.

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Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.

MONEY financial advisers

Dealing With the ‘Personal’ in Personal Finance

Two people shaking hands above restaurant table with laptop
Tom Merton—Getty Images

To really help people, financial planners have to delve into the the feelings and emotions that drive their clients' financial decisions. One planner explains why that's so hard.

While most of us financial advisers want to do the best for our clients, we often struggle at the task.

The main problem, as I recently wrote: We don’t know our clients well enough. We may say that a client’s values and goals are important, but most of us don’t adequately explore these more personal (a.k.a. “touchy-feely”) parts of a client’s life.

Why is this?

One reason we avoid deeper discovery with clients: No matter how we’re paid—whether by commissions or fees—most of us don’t get compensated until the financial planning process has neared its end.

Let’s use the six-step Certified Financial Planner model as an example. The information-gathering stage, when we have the chance to really understand who our clients are, is the second step. But most advisers don’t get paid until step five, when clients implement our recommendations.

Advisers, therefore, have an inherent economic bias to get to step five as soon as possible.

The second reason we don’t dig deep: Having in-depth conversations with clients can be uncomfortable—mostly for us. We, as advisers, may feel underqualified or inadequately trained to delve into the beliefs, feelings and emotions that drive their financial decisions.

I get it. About seven years ago, I decided that I needed to give and get more out of client interactions, not merely through questions at opportunistic times, but by a deliberate process.

On the day I decided to implement this new strategy, I saw I had a data-gathering meeting on my schedule. Perfect. I was ready to jump right in.

I had met the woman in this husband-and-wife household before—she was a human resources executive at a large company—but not the man. And he turned out to be a “man’s man.” His shoulders were so broad that he had to turn sideways to get through the doorway to my conference room. Scowling, he extended a bear-sized arm and squeezed my hand hard enough to send the clear message that he’d rather be anyplace but there.

“Really?” I asked myself. “I’m going to ask this guy about his values and goals? About his history with money and about the feelings and emotions evoked by his personal financial dealings?”

After I could delay no longer, we got down to it. My assumption that this guy would recoil from an introspective conversation was completely wrong. In fact, my nonfinancial questions clearly set this visibly hesitant client at ease.

The truth is that we’re all capable of communicating more meaningfully with our clients. We do it with our family and close friends all the time. Aren’t we capable of simply getting to know someone?

To claim lack of expertise is a cop-out. There is plenty of help out there for gathering information about intangibles. Here are three resources I’ve found extremely useful:

  • George Kinder: Kinder is a Harvard-educated financial planner who is often dubbed the “Father of Life Planning.” Personally, I find the term “life planning” problematic. It seems to brand intangible data-gathering as something apart from good financial planning, which lets the rest of us off the hook. Kinder’s work, however, should not be discounted. Kinder’s book, The Seven Stages of Money Maturity, effectively started a movement that continues to grow as new generations of planners look for more personally rewarding practices. Another of his books, Lighting the Torch, provides planners with a practical methodology to incorporate into their process.
  • Rick Kahler, Ted Klonz, and Brad Klontz: Kahler, a financial planner in South Dakota, teamed up with psychotherapists Ted and Brad Klontz on two projects that have immeasurable value to the financial planning community. The Financial Wisdom of Ebenezer Scrooge is a short, easy-to-read volume that will help both advisers and their clients examine the motives behind our financial decisions, successes and failures. I had the privilege of studying with Ted and Rick immediately following the release of their second collaboration, Facilitating Financial Health. Written for the serious practitioner, it’s one of the most highlighted books in my library.
  • Carol Anderson and Amy Mullen: Last, but in my opinion the most important, is what I believe to be the ideal resource for financial advisers who truly want to institute more meaningful conversations with their clients. With Money Quotient, Anderson and Mullen have created something very special: a nonprofit devoted to providing advisers with tangible tools designed to elicit intangible information from clients. Various degrees of licensing allow advisers to merely dabble with some of Money Quotient’s tools or transform their entire practice in a way that puts client values and goals at the center of their process.

Acknowledging that personal finance is more personal than it is finance is a great beginning. But the light-bulb moment is only valuable if it leads to the application of the associated theories and concepts.

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Financial planner, speaker, and author Tim Maurer, is a wealth adviser at Buckingham Asset Management and the director of personal finance for the BAM Alliance. A certified financial planner practitioner working with individuals, families and organizations, he also educates at private events and via TV, radio, print, and online media. “Personal finance is more personal than it is finance” is the central theme that drives his writing and speaking.

MONEY retirement planning

3 Smart Moves for Retirement Investors from the Bogleheads

The Bogleheads Guide to Investing 2nd Edition
Wiley

A group of Vanguard enthusiasts offers sound financial advice to other ordinary investors. Here are three tips from one of their founders.

Wouldn’t be great to get advice on managing your money from a knowledgeable friend—one who isn’t trying to rake in a commission or push a bad investment?

That’s what the Bogleheads are all about. These ordinary investors, who follow the teachings of Vanguard founder Jack Bogle, offer guidance, encouragement and investing opinions at their website, Bogleheads.org. The group started back in 1998 as the Vanguard Diehards discussion board at Morningstar.com. As interest grew, the Bogleheads split off and launched an independent website. Today the Bogleheads have nearly 40,000 registered members, but millions more check into the site each month. (You don’t have to be member to read the posts but you must register to comment—it’s free.)

As you would expect given their name, the Bogleheads favor the investing principles advocated by Bogle and the Vanguard fund family: low costs, indexing (mostly), and buy-and-hold investing—though the members disagree on many details. The Bogleheads are led by a core group of active members, who have also published books, helped establish local chapters around the country, and put together an annual conference. Their ranks of regular commenters include respected financial pros such as Rick Ferri, Larry Swedroe, William Bernstein, Wade Pfau, and Michael Piper.

For investors who prefer their advice in a handy, non-virtual format, a new edition of “The Bogleheads’ Guide to Investing,” a best-seller originally published in 2006, is coming out this week. Below, Mel Lindauer, who co-wrote the book with fellow Bogleheads Taylor Larimore and Michael LeBoeuf, shares three of the most important moves that retirement investors need to make.

Choose the right risk level. Figuring out which asset allocation you can live with over the long term is essential—and that means knowing how much you can comfortably invest in stocks. Consider the 37% plunge in the stock market in 2008 during the financial crisis. Did you hold on your stock funds or sell? If you panicked, you should probably keep a smaller allocation to equities. Whatever your risk tolerance, it helps to tune out the market noise and stay focused on the long term. “That’s one of the main advantages of being a Boglehead—we remind people to stay the course,” says Lindauer.

Keep it simple with a target-date fund. These portfolios give you an asset mix that shifts to become more conservative as you near retirement. Some investing pros argue that a one-size-fits-all approaches has drawbacks, but Lindauer sees it differently, saying “These funds are an ideal way for investors to get a good asset mix in one fund.” He also likes the simplicity—having to track fewer funds makes it easier to monitor your portfolio and stay on track to your goals.

Another advantage of target-dates is that holding a diversified portfolio of stocks and bonds masks the ups and downs of the market. “If the stock market falls more than 10%, your fund may only fall 5%, which won’t make you panic and sell,” says Lindauer. But before you opt for a fund, check under hood and be sure the asset mix is geared to your risk level—not all target-date funds invest in the same way, with some holding more aggressive or more conservative asset mixes. If the fund with your retirement date doesn’t suit your taste for risk, choose one with a different retirement date.

Don’t overlook inflation protection. Given the low rates that investors have experienced for the past five years—the CPI is still hovering around 2%—inflation may seem remote right now. But rising prices remain one of the biggest threats to retirement investors, Lindauer points out. If you start out with a $1,000, and inflation averages 3% over the next 30 years, you would need $2,427 to buy the same basket of goods and services you could buy today.

That’s why Lindauer recommends that pre-retirees keep a stake in inflation-protected bonds, such as TIPs (Treasury Inflation-Protected Securities) and I Bonds, which provide a rate of return that tracks the CPI. Given that inflation is low, so are recent returns on these bonds. Still, I Bonds “are the best of a bad lot,” Lindauer says. Recently these bonds paid 1.94%, which beats the average 0.90% yield on one-year CDs. If rates rise, after one year you can redeem the I Bond; you’ll lose three months of interest, but you can then buy a higher-yielding bond, Lindauer notes. Consider them insurance against future spikes in inflation.

More investing advice from our Ultimate Retirement Guide:
What’s the Right Mix of Stocks and Bonds?
How Often Should I Check on My Retirement Investments?
How Much Money Will I Need to Save?

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