MONEY financial literacy

What You Need to Know Before You Start Investing

Shannon Schuyler of PwC wants you to know this before you start investing your money.

MONEY Saving

Why Technology Makes It Hard to Save Money

Times have changed, and you don't have to actually talk to a teller to withdraw money. Shannon Schuyler of PwC thinks that's dangerous.

MONEY Financial Planning

The Danger of Mixing Politics and Investments

U.S. Democratic presidential nominee Sen. Barack Obama (D-IL) (L) makes a point to Republican presidential nominee Sen. John McCain (R-AZ) during the presidential debate at Hofstra University in Hempstead, New York October 15, 2008.
Jim Bourg—Reuters U.S. Democratic presidential nominee Sen. Barack Obama (D-IL) (L) makes a point to Republican presidential nominee Sen. John McCain (R-AZ) during the presidential debate at Hofstra University in Hempstead, New York October 15, 2008.

Believing that the country is headed in the wrong direction doesn't always translate into a good investing strategy.

Looking at a chart of the S&P 500’s performance from 2007 until now gives you a totally different perspective on the market decline of 2008-09. What an opportunity that was, right?

In hindsight, it’s easy to recognize that March 2009 was a bottom. I won’t bore you with stats on how much the market has gone up since then, because you already know it’s a lot.

We financial professionals find it easy to recall historical market data, but how often do we recall the politics that might have contributed to the decline in the first place?

Not too long ago I had the pleasure of meeting a man who had traveled extensively but was considering settling down given his advanced age. He had asked that I take a look at his portfolio because he was considering changing his “investment guy.” He mentioned that he had taken a significant hit in 2009 and that he had not fully recovered, so he wanted me to review his portfolio and advise him on what he should do now in order to have enough during retirement.

Soon after we started talking, it became apparent that he was of the belief that the country had been heading in the wrong direction since 2008. His portfolio appeared to have been built around an assumption that the market would collapse beyond its 2009 low.

Whether or not it was a good investment decision at the time would depend on a number of factors. In hindsight, however, it wasn’t a good strategy after March 2009.

Did his “investment guy” share his political views as well, continuing to believe that the country would come to an end? I don’t know. What is certain is that the client’s portfolio suggested that he was expecting a significant decline.

I recall having a similar conversation soon after 2009 with a couple who made it clear to me that they were not confident that American capitalism would survive. They shared with me their displeasure about the political environment at the time and felt that the country was in decline.

I began telling them they should ignore news reports and turn off their television because in the long run, that information would have no bearing on their investments

They looked at me as if to say I was misinformed, and politely walked out of my office.

As financial professionals, we all have our own political views, because we’re human. Some are in alignment with our clients’ views, and some might be to the left or right. But does that mean we should allow our political views to dictate our financial planning advice?

Over the years I’ve learned that my personal political views have very little to do with the advice I extend to my clients. Regardless of whether or not I agree with clients or potential clients, my goal is to remain neutral and apolitical. I focus on just the facts as best as I can.

Bottom line, my political views are irrelevant when it comes to planning and providing advice that would allow my client to navigate the financial noise.

———-

Frank Paré is a certified financial planner in private practice in Oakland, California. He and his firm, PF Wealth Management Group, specialize in serving professional women in transition. Frank is currently on the board of the Financial Planning Association and was a recipient of the FPA’s 2011 Heart of Financial Planning award.

MONEY financial advice

What I Learned in India About Financial Advice

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Stephen Wilkes—Gallery Stock Mumbai

One thing that crosses international boundaries is how people misunderstand the cost of financial advice.

In the airport shuttle taking us to our hotel in Mumbai, I looked out the window and thought, “We’re not in South Dakota anymore.” At midnight, the streets of India’s largest city seemed as full of people, vendors, and traffic as Times Square at noon.

I had no real comparison, though, for the garbage strewn about, the beggars going from car to car when traffic stopped, the people sleeping on the sidewalks, the ramshackle condition of most buildings, and the roaming packs of stray dogs. The third poorest county in the US — just 60 miles from my home — is no match whatsoever for the real ghettos of Mumbai, where 55% of the city’s 16 million people live.

Given these great dissimilarities in economic status as well as political, religious, and cultural views, I expected to find striking differences between the Indian and U.S. financial adviser communities and their clients. Here I was surprised.

I traveled to Mumbai to meet with a group of Indian financial advisers. The country’s financial regulators are actively encouraging advisers to change from charging only commissions to charging fees. My role was to offer suggestions for making that transition.

After spending several days observing and listening to the struggles of the Indian advisers, I concluded that 95% of the obstacles they face in promulgating client-centered, fiduciary planning are the same as the ones planners face here in the US.

The most frequent complaint I heard was that consumers just won’t pay fees. They would rather pay a high commission they don’t see rather than a low fee they painfully do see. I find the same behavior in US consumers. It seems irrational, but it makes perfect sense when we understand the delusional money script of avoidance that says, “If I don’t see the fee, then I must not pay a fee.”

Just as in the US, Indian advisers struggle to help consumers understand the math behind hidden commissions and visible fees. While most advisers can quickly calculate the amounts, consumers still find it hard to accept the numbers. There is great resistance to writing a check, even when a planning fee is half as much as an unseen fee or commission. In my experience, most consumers have great difficulty emotionally understanding that writing a check for $10,000 for advisory fees on $1 million represents a $15,000 savings on a 2.5% wrap fee they don’t see and for which no check is written.

Another similarity is that those most willing to pay fees for service are the wealthier clients. At first blush one might surmise that of course the wealthy are more open to paying fees because they have more money. That isn’t the case. The fees paid are roughly proportionate. In fact, usually smaller accounts that go fee-only save proportionally more than do larger ones. The difference is that affluent or wealthy clients tend to be business owners or professionals who are familiar with employing fee-for-service consultants, like accountants and attorneys.

The transition to introducing fees is slow, requiring a lot of education on the part of advisers and willingness to listen on the part of consumers. Similar to where the US was in the 1980s, India has only a handful of pioneering fee-only planners. Most advisers wanting to switch from pushing financial products to doing comprehensive financial planning have rolled out a fee-based model first. They hope consumers will eventually embrace the advantages — lower costs and fewer conflicts of interest — inherent in a fee-only compensation model.

In my career, I have watched and participated in financial planning’s growth as a profession in the US. It’s a privilege to be able to see it develop in India as well.

———-

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 former president of the Financial Therapy Association.

MONEY Financial Planning

Online Financial Planning Is More Popular Than You Think

piggy bank connected to computer mouse
Jan Stromme—Getty Images

Who needs to meet a financial adviser face-to-face? Not millennials and Gen Xers, who are often happier Skyping.

Hi, my name is Katie, and I’m a virtual financial planner.

If this sounds like a support group meeting, sometimes I feel like it should be. When I tell other financial planners that I work with clients across the country, they say, “But clients always value the face-to-face meetings that my firms provides.” So I ask them, “What is the average age of those clients?” The answer is usually in the 60s.

I started my own financial planning firm last year because I wanted to focus on clients under 50, in a way that lets me deliver advice without selling financial products. That doesn’t sound too complicated, does it? One of the ways I do this is by offering my services to people not in my immediate location. We either have a phone call while using screen-sharing software like JoinMe, or we use Skype or Google Hangouts to conduct meetings.

Since I’ve been in the industry for 10 years and always previously met with clients in person, I was a little apprehensive about the idea of not meeting clients face-to-face.

You know what? They don’t care. At all.

The clients I work with are well-educated, busy Gen X and Gen Y professionals. They use technology on a daily basis for work and personal reasons. The married couples I work with are usually both working in high-intensity jobs while juggling the demands of a family. Taking time out of their day to drive to a financial planner’s office, have an hour-long meeting, and drive back to their own workspace would easily eat up two to three hours of valuable time.

When we have a call or virtual meeting, we have a set agenda, the appointment is on their work calendar, and we are able to accomplish everything in 30 to 45 minutes. When we do this, my clients don’t need to spend a bunch of time away from the office, get a babysitter, or drive around town.

Another advantage to my clients (and me!) is that I am able to keep my financial planning prices down. Because I don’t keep an office in an expensive part of town, my overhead costs are lower. I can pass that savings along to my clients. I also have a lot of flexibility to conduct business even when I’m out of town for a conference.

What does a planner need in order to work with clients virtually?

  • A phone, and preferably a phone number that isn’t tied to a particular office space.
  • Comfort with screen-sharing tools.
  • Enough organizational skills to have the topic decided on beforehand — and enough flexibility to be able to answer other questions as they arise.
  • Financial planning software that clients can access online, or a secure client vault for sharing documents back and forth.

That’s it!

Clients that fit best in a virtual relationship are those that are comfortable with technology, somewhat self-sufficient, and aware of why this setup benefits them.

I’ve found that members of Gen X and Gen Y actually like working with a financial planner virtually because they are already comfortable with technology, they’re used to communicating this way, and they like the time-saving convenience. As an added benefit, those clients get to choose an adviser because the adviser specializes in their specific situation, not because the adviser happens to live near them.

———-

Katie Brewer, CFP, is the president of Your Richest Life, where she works virtually with Gen X and Gen Y professionals, helping them create and stick to a financial roadmap to live their richest life. Katie is a fee-only planner, a founding member of the XY Planning Network, and a member of the Financial Planning Association. She is also proud to be a Fightin’ Texas Aggie.

MONEY Financial Planning

Why I Want Clients to Get Emotional About Retirement

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Chutima Chaochaiya—Shutterstock

Digging deep into clients' emotions helps one planner uncover what they're really thinking.

I like to delve into clients’ emotions and feelings. People may tell me one thing initially, but upon further questioning may see that their first response wasn’t emotionally true.

One example of that came up in a recent meeting with a couple who were getting ready to retire. Of course, they had worries about what they should do.

They wondered if they should move all their money into conservative investments. They floated the idea of moving everything into an annuity — an option they believed carried no risk.

When I asked them about longevity in their blood lines, I learned they each had at least one parent in their mid-90s. I then explained to them how we are in a low-rate environment and talked about the danger that their annuities would be capped at very low rates of return that likely would not keep pace with inflation or taxes.

That’s where my emotional questioning began. Let me summarize our conversation:

Question: The chance of your living another 30 to 40 years is extremely possible. How do you feel about that?

Answer: That we won’t have enough money.

Q: How does that make you feel?

A: Afraid and very uncertain.

Q: When you started work and got married, what were the rules?

A: Save money in a retirement account, have children, and make sure they get good education.

Q: What are the rules in retirement?

A: We don’t know of any other than just making your money last.

Q: If all of us are living longer, and you know that certain health care costs and taxes are going up, why would you not want to grow your money? Why would you want to buy this financial product that is not designed to keep pace?

A: That’s just what we were told. And that’s what we thought you did as an adviser.

Q: Well now that you are here, how do you feel about this happening?

A: We are very uncertain and really don’t know what to do!

Q: Has anyone worked with you to put together a plan that is balanced with investments and also has an income component that is adjustable for you?

A: No

Q: If you could become more educated on a balanced plan and how that may help you navigate the next 30 years, how would that make you feel?

A: It would make us feel like we have a chance to succeed.

When clients say that they do not want to lose any money, my response is, “Okay, but how do you feel about not making any money?” They don’t like that idea either.

In today’s marketplace, “no risk” equals minimal return and loss of purchasing power.

It is very important to educate clients on current economic conditions and teach them that calculated risk is worth taking. The average retiree who has a net worth of, say, $500,000 to $1 million either falls prey to annuity salesman or is so shell-shocked from 2009 that he or she only trusts CDs.

There is a real need to educate clients on how rates work and why the market have been the place to be for the past six years. Retirees also need greater clarification on annuities in order to understand their income and growth restrictions.

Asking questions to gauge risk is key to financial success. More importantly, it is key to building a sound relationship between adviser and client.

I always ask my clients, “In the next one to two years, what do I need to make happen to assure you that you have made a good choice in working with me?” These answers vary, but generally speaking, clients want to know that they are staying on the right path and are not falling behind. Keeping in touch with clients and knowing how they feel emotionally is paramount to them feeling good about their adviser.

———-

Matt Jehn, CFP, is managing partner of Royal Oak Financial Group, which offers small businesses and individuals in Columbus and Lancaster, Ohio a complete financial solution through professional accounting, tax and wealth management services. Jehn, who earned a degree in family financial planning from The Ohio State University, enjoys helping his clients grow their businesses by educating them on the meaning behind the numbers.

MONEY

I Don’t Need a Financial Plan, Because the World Will End in Two Years

apocalyptic sky
Michael Turek—Getty Images

If someone believes we're in End Times, how do you convince that person to fix her finances?

As a financial planner, I’ve had a number of clients and potential clients who have felt comfortable enough to express their views about religion, politics, and society in general.

Sometimes their views have coincided with my own, and sometimes they haven’t. I don’t know who said you should never debate religion and politics, but my guess is it was someone who did.

Sometimes, however, these sensitive subjects are unavoidable, like in a conversation I had several years ago with a potential client.

We were in my office having a wonderful talk. This woman was extremely polite. She had a nice smile and a warm disposition. In fact, she could have easily won the award for World’s Best Grandma.

As our conversation moved along, I started explaining the importance of having a financial plan.

She politely allowed me to finish. Then, in a very nice voice, she told me that the reason she did not have a financial plan, nor want one, was because we were in End Times. She said that she believed in the Rapture and that it was near — within the next year or two.

I swallowed hard and thought, How do I respond to this?

At that moment it didn’t matter whether or not I shared her beliefs, because they were hers. I had to respect her and her right to believe.

I don’t remember the exact words I used after hearing her explain why she didn’t believe in financial planning, but I do know that I spoke with extreme caution. My response was along the lines of, “I completely understand what you’re saying, and I’m not disputing your belief. But my role is to help you plan for the what-ifs. In other words, what if your timing is off just a little?”

I knew if I pressed the point, I would be essentially trying to change her views about her belief in the future — a future she proceeded to describe in detail for me.

Our conversation ended cordially.

This woman did not become a client, but the experience was a lesson for me. My views about religion are unimportant when it comes to planning for my clients. What’s important is what they believe, and how their beliefs affect their outlook on the future.

As a financial professional, it’s easy to point a finger and judge others for their irrational behaviors and beliefs when it comes to finance. The reality is, however, that we are all subject to moments of irrationality.

Yes, this woman, it turns out, was clearly wrong in her forecast. After all, we’re still waiting for the Rapture.

But she’s not such an outlier. Someone who says he knows which way the stock market will go in the next year or two is not much different from a woman who says she knows the world will end in a year or two.

The difference is I’m not going to engage in a debate with a client about the timing of the world’s end. The ability to predict the markets? Now, that’s something I’m willing to argue about.

———-

Frank Paré is a certified financial planner in private practice in Oakland, California. He and his firm, PF Wealth Management Group, specialize in serving professional women in transition. Frank is currently on the board of the Financial Planning Association and was a recipient of the FPA’s 2011 Heart of Financial Planning award.

MONEY Financial Planning

Would You Trust Your Retirement to a Machine?

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Peter Yang

New websites called robo-advisers are promising smarter investment advice at a much lower cost. But are you really ready to give up the human touch?

Betterment looks like a startup right out of tech disrupter central casting. Its office, in an airy loft space, features a beer tap and Ping-Pong table. The founder, Jon Stein, favors open-necked shirts at work, not a suit and a tie. He is 35 years old.

But Betterment isn’t in Silicon Valley, and it’s not selling chat apps, cat videos, or cheap car rides. It’s in Manhattan and trying to make a splash in the very serious business of investment advice. Stein has a Wall Street résumé: He’s a former banking consultant and a chartered financial analyst. He also thinks that Wall Street charges way too much and that Internet-based companies can fundamentally change the way you invest for your retirement. “We’ve taken the friction out of the process. We’ve made [advice] accessible to everyone. That is the future,” says Stein, with the modesty you’d expect from a tech CEO.

What Stein calls “friction” other advisers call a good business. Advice can be expensive. You may pay about 5% off the top for a commission-based adviser who puts you in mutual funds. Or you might pay an annual fee—1% of assets is typical—but many advisers and planners often won’t bother with clients who don’t have a lot to invest. “It’s almost like there were two options: walking, or driving a Mercedes,” says Michael Kitces of Pinnacle Advisory Group.

Betterment and at least a dozen competitors, including Wealthfront and FutureAdvisor, think web tools and computer models can deliver advice much more cheaply. Known (sometimes pejoratively) as robo-advisers, they pick investments for you and monitor your portfolio. Many do it for 0.15% to 0.5% of assets a year and welcome tiny balances.

“Many financial advisers are going to get drummed out of the business,” says adviser Ric Edelman, a well-known industry figure. That’s a bold forecast: Robos manage $19 billion, a relative sliver. Charles Schwab alone runs $2.5 trillion.

Private venture capital investors are racing in—Betterment recently got a shot of $60 million. Using Betterment’s implied value as a yardstick, VCs think a robo may be worth about $30 for every $100 in client assets, vs. $3 per $100 for some traditional advisers. Robos “see themselves becoming the next Schwab,” says Grant Easterbrook, author of an industry report for the research firm Corporate Insight. “Based on the money they’ve gotten, the VCs believe them.”

A close look at what most robos do reveals a fairly cookie-cutter, if common-sense, investment approach—one many MONEY readers would feel comfortable doing themselves. And there are important things the services haven’t yet figured out how to do well.

Still, this could start to finally open up advice to a bigger chunk of middle-class investors, not just the wealthy. Even if robos aren’t for you now, you may soon benefit from the way they’re changing the business. Other sites, such as LearnVest and Personal Capital, are using technology to connect you to a human adviser or planner you just never happen to meet in person. Established players like Vanguard and, yes, the current Schwab are responding with their own low-cost offerings. (Schwab’s headline price: free.) The existence of the robo option puts pressure on everyone’s prices.

In other words, you don’t need to buy the Mercedes. “Now there are Kias. There are Fords,” says Kitces. “There are a lot more choices.” Here’s how those choices stack up today, and what they can do for you.

Continue reading the rest of this story here.

MONEY Financial Planning

The Surprising Power of a One-Page Financial Plan

goal list
Getty Images

When it comes to thinking about the future, sometimes less is more.

Gather round, because here is today’s personal-finance lesson inspired by famed Hollywood screenwriter William Goldman: Nobody knows anything.

In other words, no one knows where the market is headed. No one can tell you exactly what financial moves to make. And no one knows where they are going to be 40 years from now.

Here is what you can do: Make your best guess and muddle through life the best you can. That’s the thesis of The One-Page Financial Plan, the new book by New York Times columnist Carl Richards.

Rather than over thinking everything to the point of paralysis, just jot down a few general goals, get started, and don’t beat yourself up over past mistakes. Reuters sat down with Richards to talk about the surprising power of simplicity.

Q: Personal-finance experts usually don’t talk about uncertainty. Why was that important for you?

A: The giant fantasy of financial planning is that we all know exactly where we will be in 40 years, so we just need to sit down and plan for it. That gives people a false sense of precision.

The reality is that most of us don’t even know where we will be six months from now. We don’t know what our utility bills will be in the future, let alone when we are going to retire or when we are going to die. So the natural human reaction is to say, aw, just forget it. But that’s not a good choice either.

Q: So what should people do?

A: Call it what it is—guessing. Give yourself permission to let go of all this anxiety, and just make the best guess you can and be committed to the process of guessing.

Q: Your book is called The One-Page Financial Plan. So what’s on that one page?

A: On my one-page plan, there is a statement at the top of what’s important: For my wife and I, it is to spend time with the family, and to serve in the community. Then there are three goals: To fully fund all retirement accounts, to fully fund our kids’ education accounts, and to put money away for a house.

That’s it.

Q: You have had some financial missteps yourself. How did those experiences inform the book?

A: When you write publicly about this stuff, people think you have everything figured out. But nobody is foolproof, and making financial decisions is hard.

We got caught up in a very basic mistake: Projecting a rapidly growing business, which meant we could afford a big house. It turned out the business didn’t keep doing that, and we were faced with the tough situation of owing far more than the house was worth. So we lost it.

Q: What is one trick people can use to get their finances under control?

A: I use what I call the 72-hour Test. Once I found myself with a stack of unread books on my desk, and I thought: ‘What if I just waited 72 hours between when I thought I had to absolutely have a book, and when I actually purchased it?’

The surprising reality is that after 72 hours, whatever it is, you usually discover you don’t need it anymore.

Q: What about debt—how much is too much?

A: I have yet to meet anyone who has paid down debt and was unhappy about it.

Maybe on a spreadsheet it makes sense to have some mortgage debt, and invest the difference in the stock market, and make a bunch of money. But paying off your home makes people really happy.

Q: We are all so anxious about money. Why is that?

A: Money is not just about math, it’s about emotions. The stuff you dream about, the stuff that keeps you awake at night, your most cherished dreams and your biggest fears. The rubber always meets the road with dollars. That’s a very potent cocktail.

 

MONEY Financial Planning

4 Things You Need to Change Your Career

Want to change your career or launch a new business? A financial planner explains the four things you need.

A few years ago a client, Peter, came to me and said, “I’m doing all the work, but my boss is making all the money. I could do this on my own, my way, and make a whole lot more.”

Peter was an instructor at an acting studio. He was working long hours for someone else, knew the business inside and out, and felt stuck. He wanted a change.

We talked through his dilemma. Peter wanted to know what he needed to do to venture out on his own and start his own acting academy.

Many of us find ourselves daydreaming about making such a bold life change, but few of us do it. So what is stopping us from taking the leap? Why don’t we have the courage to invest in ourselves?

Peter and his wife, Jeannie, sat down with me to chart out a plan. We determined that they needed four major boxes to be checked for Peter’s dream business to have a real shot at success:

  1. Support from the spouse
  2. Cash reserves
  3. A business plan
  4. Courage to take the leap

Let me break these down:

1. Support from the spouse: Peter and Jeannie had to be in full agreement that they were both ready to take on this new adventure together. In the beginning, they would have significant upfront investments in staffing, infrastructure, and signing a lease for the business. Money would be tight.

2. Cash reserves: Peter was concerned. “How much money can we free up for the startup costs?” he asked. We discussed the couple’s financial concerns, reviewed financial goals for their family, and acknowledged the trade-offs and sacrifices they would need to make. We determined a figure they were comfortable investing in their new business. Then we built a business plan around that number.

3. Business plan: It has been said that a goal without a plan is just a wish. Peter and Jeannie needed a written plan in place so that their wish could become a reality. Their business plan would serve as a step-by-step guide to building and growing the acting academy. It included projections for revenues, expenses, marketing strategies, and one-time costs.

Once we wrote the business plan, we had one final step remaining: the step that so many of us don’t have the courage to take. Peter and Jeannie had to trust in themselves, believe in their plan, and…

4. Take the Leap: Regardless of how confident we are, how prepared we feel, and how much support we have, this is a scary step. We have to walk away from our reliable paycheck, go down an unfamiliar road, and head out into the unknown.

I’m happy to share that Peter and Jeannie’s story is one of great success. They faced obstacles and bumps along the way, but Peter persevered and succeeded in accomplishing his goal. He is now running a thriving acting academy with multiple instructors and a growing staff. If you decide to invest in yourself, you will need to take the four steps too.

———-

Joe O’Boyle is a financial adviser with Voya Financial Advisors. Based in Beverly Hills, Calif., O’Boyle provides personalized, full service financial and retirement planning to individual and corporate clients. O’Boyle focuses on the entertainment, legal and medical industries, with a particular interest in educating Gen Xers and Millennials about the benefits of early retirement planning.

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