Presidential Election – What Do Soccer & Investment Strategy Have In Common?

Resist the temptation to react, as difficult and counter-intuitive it may be.

Sometimes, the best reaction is no action at all!

Consider the following soccer strategy:

During a penalty kick, a soccer goalie must make a split-second decision to stay put in the center of the goal, jump left, or jump right.

Behavioral economist Ofer Azar collected data on more than 300 goalies and discovered that goalies who jumped left stopped just 14.2% of the shots, those who jumped right stopped a mere 12.6%. But goalies who stayed put in the center of the goal were able to prevent goals 33.3% of the time. Amazingly, only 6% of the goalies chose that option.*

Azar interviewed the goalies about their decisions and found that emotions played an important role. The goalies revealed that they felt worse if the goal was made and they were standing still. In fact, taking action, even if it’s certain to lead to failure, was considered better than taking no action at all.

Azar applied his soccer research to the behavior of investors and found that when the markets are in turmoil, we have a powerful urge to “do something” even when that “something” doesn’t make a lot of practical sense. In the 2008 market meltdown, many investors gave in to the instinct to sell because it satisfied their desire for action. But those who stayed put benefited in the long run as the market recovered.

The bottom line: During times of market stress, it can be difficult and even seem counter-intuitive to stay put, but that’s often exactly the best decision. Historically, the stock market delivers far more often than not. Working together, we can increase the chances for investment success by resisting the temptation to “jump” to one side or the other when markets erupt in turmoil.

While we’re not advocating doing nothing, what we are advocating is to work with a CFP® to HAVE A GOOD PLAN, and stick to it. At Financial Freedom Planners we can help you with planning with no conflict of interest. Not only are we your advocate, we are fiduciaries as well. If you’re not in our area, we recommend our colleagues at the Garrett Planning Network.

* Wray Herbert, 2010. “On Second Thought: Outsmarting Your Mind’s Hard-Wired Habits.” New York: Broadway Paperbacks.

Posted in Financial Advisor, Financial Planning | Tagged , , , , , , , , , , | Leave a comment


The short answer is YES! We have heard some FedSpeak in the last week or so that gives me cause for concern, and ergo the title of this post. It appears we may be facing a future when a government “independent” entity takes over the free market.

Last week, Fed Chair Janet Yellen floated the idea that the central bank should buy stocks and other long-term assets to mitigate a downturn in the economy. Taking a page out of the Bank of Japan and Bank of Israel, the Fed now appears to be considering whether it is a good thing to directly intervene in equities. Apparently central bank insanity knows no bounds. Even though these “techniques” have been attempted in Japan for a considerable period, not only has there been no discernible economic benefit, there are some that believe the policies are detrimental to the economy.

Toward the end of summer in #ZeroInterestRatesMatter – Party Like It’s 1999, we discussed the risk the Fed is taking in our economic structure (unintended consequences) by keeping interest rates so low for so long. I remain very skeptical about where we are in the capital markets….near highs in both the stock and bond markets. In our investment recommendations, we are encouraging appropriate portfolio balance in terms of risk, and very cautious on the average maturity of bonds.

In his October Investment Outlook, Bill Gross equates monetary policy with gambling with our economy, and talks about the “Martingale System” approach. He goes on to illustrate that ” that low/negative yields erode and in some cases destroy historical business models which foster savings/investment and ultimately economic growth.” In other words, these policies are actually hindering economic growth, not stimulating it.

All one needs to do is examine the results of the Japan “experiment,” both in terms of their attempts at monetary and fiscal policies…they are simply NOT WORKING! However it seems to be the default philosophy of policy makers and economists to say we haven’t done enough – we need to do MORE! We all know the definition of insanity authored by Albert Einstein:

“Insanity: Doing the same thing over and over again and expecting different results.”

Bill Gross goes on to suggest “at some point investors – leery and indeed weary of receiving negative or near zero returns on their money, may at the margin desert the standard financial complex, for higher returning or better yet, less risky alternatives.” If this begins to occur, you may see some vulnerability in both the stock and bond markets.

What does this mean to you, your 401 (k), and other investments you have? While our crystal ball is as cloudy as everyone else’s, there are a number of actions you can take:

  1. Take an objective looks at your risk positioning across your portfolios and review your balance. Consider reducing equity exposure in your Asset Allocation.
    • Many people within 5 – 10 years of retirement I see have relatively aggressive risk postures. It’s critical to be prepared for another potential downdraft like we experienced in 2000 and 2008 if your time-frame is in this area.
    • This is not a forecast, just common sense. The closer you get to the need to draw on retirement funds, the more caution you should employ.
  2. Reduce Interest-Rate Risk – pay close attention to the maturities of bonds and fixed income in your portfolios – reduce the length of maturity to reduce interest rate risk.
  3. Maintain greater than normal Cash positions.
  4. In a very recent Grant’s Interest Rates Observer conference in New York City, another very well-known money manager, Jeff Gundlach, had an interesting observation: he ‘thinks the world of monetary and fiscal policy is about to pivot. He decided that the narrative that benchmark interest rates around the world would stay lower for longer was “getting quite old.”’
    • He cited several reasons: inflation is picking up, the dollar did not strengthen after the Federal Reserve raised rates the last time. Also there’s this:“In the investment world when you hear ‘never’,” ( as in rates are ‘never going up’), “it’s probably about to happen,” said Gundlach, who is CEO of DoubleLine Funds.
    • For the first time in a very long time Gundlach is looking at “TIPS,” or bonds that benefit from inflation (Treasury Inflation-Protected Securities). Something to consider for your portfolio.

If you don’t have a trusted financial advisor to help you with this, we recommend a professional with the Garrett Planning Network.

Of course we are always happy to help at Financial Freedom Planners in an objective, fiduciary manner without conflict of interest!

“It doesn’t take a fortune to build one”

Posted in Financial Planner | Tagged , , , , , , , , , , , , , , , , , | Leave a comment

How Do Financial Advisors Get Paid? Glad You Asked!

This is an article recently published on the Wealthminder blog. The topic is on the minds of more and more consumers, and this post does a great job explaining a rather complicated subject. Not only is it well written, informative, and educational, but I would encourage you to check out their website if you’re looking for a Financial Advisor.

How do financial advisors get paid?

One of the bigger hurdles people face when hiring an advisor is answering the question “How do financial advisors get paid?” If you can’t figure out how—and how much—your advisor gets paid for the work he or she is doing for you, it’s virtually impossible to determine whether or not you are getting good value from their services and from your money.

You would think understanding an advisor’s compensation would be fairly straight-forward, but a multitude of compensation options, combined with a lack of transparency and lots of industry jargon make this a more difficult proposition than it should be—and even modest fees can significantly impact your investment portfolio’s potential over time.

To help cut through the clutter, we’ll walk you through the most common compensation models financial advisors use and give you a set of questions you can ask prospective advisors to ensure you understand how you would be paying them.

There are three general types of advisor compensation models: commission only, fee-only, and fee-based (or hybrid).

Commission Only Advisors

Commission only advisors get paid on the financial products they sell you. These commissions can come in many different flavors, some of which are less obvious than others. The most common types of commissions include:

Trade Commissions

Some firms charge you a fee for each securities transaction you make. For example, if you buy or sell $10,000 shares of a stock, you may pay between $50 and $150 in commission to process the trade. Trade commissions can work well for people who trade infrequently, but can be more expensive for investors who add money to their accounts regularly or who execute a lot of trades. The one concern you should have with this model is its potential to create an incentive for your advisor to recommend more frequent trades, which could increase his or her compensation while decreasing how much of your money actually makes it into your investment portfolio.

Front-End Loads

Most often seen with mutual funds, a front-end load is a commission or sales charge that takes the form of a percentage transaction fee that the product provider takes out of your investment up-front. These charges can be as high as 8%, though most are in the range of 3-6%. Front-end loads reduce the amount of your initial investment. If the fund charges a 5% load, for example, and you invest $10,000, only $9,500 get invested and the rest goes to the firm and your advisor. The biggest advantage of front-end loads is that they often come with lower on-going annual fees than other mutual funds. Over the very long term they can be less expensive than a no-load fund. On the other hand, it may take several years for you to overcome the initial up-front cost and many alternative investment options have lower costs than mutual funds.

If your advisor recommends mutual funds, be sure to ask him or her whether sales charges and expenses factor into the funds that he or she selects for client portfolios. Some advisors can create a conflict of interest here, because advisor compensation is higher for products with larger front-end sales charges.

Back-End Loads (Or Deferred Sales Charges)

Another concept seen in mutual funds is a back-end load or deferred sales charge. These come in many different flavors, but the basic idea is that instead of charging you the commission up-front, the product provider will charge you if you sell the fund before a predetermined time period. This time period can be as long as six years, after which you can sell the fund without penalty. Whether this is better or worse for you than a front-end or no-load fund will depend on the specific terms / rules of the investment and how long you hold the investment.

12(b)-1 Fees or “Level Loads”

Again, this type of fee comes in many different flavors, but regardless of what it is called, it is an on-going fee paid out of your investment to your advisor in the form of a higher expense ratio. Unlike front and back-end loads, 12(b)-1 fees are more-difficult to understand because you do not see them removed explicitly from your investment value. In the case of a mutual fund, it simply affects the share price over time.

Embedded or Hidden Commissions

These types of commissions are most often seen in insurance or insurance derivative products. In these cases, the exact costs, both initial and on-going, are often hidden in the fine print of a legal document, which can be long and complex. Worse, the way they are marketed and sold often leaves the buyer (and in my experience many times the advisor too) with a very misleading impression of the underlying costs.

Are Commissions Inherently Bad?

If you do a lot of searching online you will discover almost religious debates on this topic. The primary argument you will hear against commissions is they create an inherent conflict of interest between the advisor and the client. Advocates of commissions, on the other hand, argue they are actually less expensive in many cases than fee-only advisors who often charge an on-going fee for advice regardless of what services are performed.

If you do decide to go with a commission-based advisor, it’s critical you understand how they get paid for their services and recommendations. This will help you determine whether or not you believe he or she has your best interests in mind, rather than making recommendations that might favor his or her financial interests over yours.

Fee-Only Advisors

Fee-only advisors are those whose entire compensation comes directly from you. They do not accept commissions or other incentives from product providers. Advocates of this approach point to its increased transparency and lack of inherent conflicts.

Within the fee-only world, there are many different business models. Here are the most common ones.

Assets Under Management (AUM)

This is currently the dominant compensation model amongst advisors. In this model, your advisor charges you a percentage of the assets you have him manage, typically 1-2% a year. Oftentimes, they roll any and all services they provide you (like planning and non-investment advice) into this fee. Advocates of this model point to the synergies with the client. As you make more money, so does your advisor. Conversely, if your investment value goes down, you pay less. Detractors would argue, however, that you may be paying more than you should depending on your level of activity and that the value of the services doesn’t necessarily grow in proportion to your account growth. In addition, an AUM-based advisor has an economic incentive to not make recommendations that might reduce the size of your portfolio, such as paying off a debt or making a major purchase.

Hourly Consulting

If you have ever hired a lawyer, you are familiar with this model. You simply pay an hourly rate for whatever you ask your advisor to do. One of the biggest proponents of this model is Sheryl Garrett of the Garrett Planning Network. The advantage of the hourly is the costs are crystal clear and you only pay for what you need. However, those costs can really add up if you want to delegate most of the work to an advisor.

Fixed Fee

Some advisors will create a comprehensive plan for a one-time fixed or project-based fee. This is very similar in concept to an hourly model, but is a flat rate and is mostly used in the case where someone wants one-time advice they will then execute on their own.


A retainer model is one where the consumer pays the advisors a yearly or quarterly fixed fee for a set of services. As with AUM, this often includes planning as well as investment management with the difference being that the fees are fixed rather than being a percentage of the customer’s investment assets.

Is a Fee-Only Advisor the Best Choice?

As with most important decisions, the right answer will largely be predicated on your situation and your needs. With a fee-only advisor, you won’t have to worry about whether their recommendations are affected by how much a product provider is paying them. However, you also won’t be able to use them as a one-stop shop because certain financial products, like insurance, are only sold on a commission basis.

Fee-Based Advisors

People often get fee-based and fee-only advisors confused. This is not surprising since the two terms sound nearly the same. However, there are significant differences between the two types of advisors. Fee-based advisors are essentially a hybrid of fee-only and commission-only advisors. They can charge both fees and commissions, depending on the services they provide.

Advocates of this model would claim they offer the best of both worlds and can offer pricing that best fits the customer’s needs. In addition, they can be a one-stop shop, including handling the client’s insurance needs.

Detractors would say this model suffers from all of the same conflicts that arise in a commission-only model and has the potential for even less transparency (or at least clarity).

So, Which Type of Advisor is Right for You?

There are pros and cons to each compensation model. Picking the right advisor for you will depend on your specific needs and circumstances. The most important thing is finding an individual advisor you trust and fully understanding exactly how he or she will be compensated so you can make an informed decision.

Here are a few questions to ask prospective advisors to help you understand all the ways they will be compensated by working with you.

  1. “Are you a fee-only, fee-based or commission-only advisor?”

  2. For commission-only advisors

    1. “Can you provide me with details on how I will be charged for the different products you recommend, including costs that may be embedded in the products and any other sales incentives you receive?”

    2. “Do you provide financial planning, and if so, how are you compensated for this work? What do you provide as part of your financial planning?”

    3. “If you receive payment from product providers, how do you approach and resolve the inherent conflict?” If the advisor replies that they are a fiduciary (meaning they have to act in your best interests), confirm that this is a legal obligation for them and not simply a standard they say they hold themselves to.

  3. For fee-only advisors

    1. “Please explain your pricing model in detail. What is covered? What is not covered?”

    2. “Are there any other fees you would charge beyond what we just discussed? If so, how much are those fees and what are they for?”

    3. If you are hiring an advisor for more than just investment management, clarify with them how they will help you with determining appropriate insurance policies, coverage levels, etc.

  4. For fee-based advisors

    1. Once you’ve agreed on the types of services they will provide you with, drill down on whether they will be charging fees, commissions or both. If it’s both, you’ll definitely want to understand what the fees are for and what the commissions are for. “Which services and products will be paid for through fees and which serviced and products will be paid for through commissions?”

    2. Where commissions will be involved, ask the same questions you would ask a commission-only advisor.

    3. If fees are involved, ask the questions we recommended for a fee-only advisor.

Now that you know what to ask, get started on finding the right financial advisor for you today, or contact us at Financial Freedom Planners.

Posted in Financial Advisor, Financial Planner | Tagged , , , , , , , , , , , , , | Leave a comment

#ZeroInterestRatesMatter – Party Like It’s 1999

What should an investor do? Markets are confounding.  They appear to be almost predictable. Until they’re not!

We are in an investment environment that reminds me of the technology bubble 16 years ago, and the markets are partying like it’s 1999. Today rather than focusing only on the technology sector, perhaps we should examine both the bond market and the equity markets in their entirety.

We have been trained and told over and over and over again since the 2008 financial crisis the Federal Reserve has our backs. Indeed they have engaged in unprecedented monetary policy never in my lifetime would I have thought possible.

In addition to the Fed taking on dual mandates established by the U.S. Congress of full employment and stable prices, it appears they have created numerous other policies: creation of a minimum of 2% inflation; not raising interest rates due to (fill in the blank) Brexit, various and sundry economic data, negative monthly payroll reports, concerns about foreign economies such as China, currency issues, etc.; controlling the stock market upward – Chairman Bernanke called it “The Wealth Effect.”

As a result we have been at near-zero interest rates (ZIRP) for eight years, seen the Fed buy 4.5 Trillion bond securities from money creation through various schemes called Quantitative Easing, Twist, etc. In addition we have seen major banks, both domestic and foreign, bailed out with unprecedented amounts of money. They’re even open to the possibility of NEGATIVE interest rates!

As a result of all this we have arguably the most distorted stock and bond markets in history! Both bonds and stocks are at all-time highs, and the stock market made another historic high as I write this article.

What should an investor do, and what’s not to like you may ask?

The distortion created by effectively zero interest rates can result in many unseen consequences.  The Mises Institute in “The Unseen Consequences of Zero-Interest-Rate Policy” names a number of them:

  • Conservative investors by nature come under increasing pressure with respect to their investments and take on excessive risks in light of the prospect that interest rates will remain low in the long term. This leads to capital misallocation and the emergence of bubbles.
  • The sweet poison of low interest rates leads to massive asset price inflation (stocks, bonds, works of art, real estate).
  • Structurally too low interest rates in industrialized nations due to carry trades lead to the emergence of asset price bubbles and contagion effects in emerging markets.
  • Changes in human behavior patterns occur, due to continually declining purchasing power. While thrift is increasingly mutating into a relic of the past, taking on debt comes to be seen as rational.
  • As a result of the structurally too low level of interest rates, a “culture of instant gratification” is created, which is among other things characterized by the fact that consumption is financed with credit instead of savings. The formation of wealth becomes steadily more difficult.
  • The medium of exchange and unit of account function of money increases in importance, while its role as a store of value declines.
  • Incentives for fiscal discipline decline.
  • Zombie banks are created: Low interest rates prevent the healthy process of creative destruction. Banks are enabled to roll over potentially non-performing loans practically indefinitely and can thus lower their write-off requirements.
  • Newly created money is neither uniformly nor simultaneously distributed amongst the population. This results in a permanent transfer of wealth from later receivers to earlier receivers of newly created money.

What does all this mean to investors? In my view there are two critical takeaways in analyzing these issues:

  • Extremely high stock valuations: Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage. This will eventually end. Financial engineering like this has also reduced the amount of capital investment that results in growing companies in favor of elevating the stock price, reducing the outstanding share count, and showing better Earnings Per Share. However the dirty little secret not being discussed is we have seen 5 consecutive quarters of LOWER earnings in the S&P 500. Here is a chart from “Q3 EPS Expectations Just Turned Negative: Six Consecutive Quarters Of Declining Earnings” at Zero Hedge:

q3 eps factset_0

As a result of this distortion, the Debt-to-Earnings ratios are at the highest point of the CENTURY:

debt to ebitda ratio

  • Historically high government debt, corporate debt, and personal debt in this country. As any financial planner knows, the more debt one has the less flexibility one has in many ways, even beyond financial. That’s where we are today. I won’t bore you with a chart of U.S. Government Debt, but here’s a chart that shows the credit created since the financial crisis in “What Happens When Rampant Asset Inflation Ends?” by Charles Hugh Smith:


As a result of record high valuations, we look to place more emphasis on the return of your money than a significant return on your money. While there are many ways to reduce risk, here are five to consider:

  1. Reduce equity exposure in your Asset Allocation
  2. Reduce risk in the equity allocation you continue to own – some techniques are large-cap stocks vs. small-cap, reduce emerging or international markets, etc.
  3. Reduce credit risk in the bonds/fixed income you own – we already have begun to see signs of stress in the fixed income markets – we are VERY wary of any positions below Investment Grade
  4. Reduce Interest-Rate Risk – pay close attention to the maturities of bonds and fixed income in your portfolios – reduce the length of maturity to reduce interest rate risk
  5. Maintain greater than normal Cash positions – while rates are still ridiculously low, remember we are focusing on a return of your money

If you have a trusted financial advisor, we recommend reaching out to them before the end of the summer. If you’ve been partying like it’s 1999, at least get a designated driver. It’s time to reassess where you are in your own financial journey in context with where we are in the markets. If you don’t have a trusted financial advisor, we recommend a professional with the Garrett Planning Network.

Of course we are always happy to help at Financial Freedom Planners in an objective, fiduciary manner without conflict of interest!

“It doesn’t take a fortune to build one”

Posted in Financial Planner, Investing | Tagged , , , , , , , , , , , , , , , , | 1 Comment

Six Questions Every Proactive Investor Should Ask Their Financial Advisor

And Some Basic Math!

I felt compelled to write this article after recent meetings with two different clients. In each case, they entered into investments where high fees virtually guarantee they won’t be able to reach the projected returns, let alone their own personal goals. We’ll get to the basic math portion in a moment.

According to an article by noted attorney and investment education advocate, James W. Watkins, III, there are 19 different questions to ask your current or prospective financial advisor.  Given 19 is a rather large number, we are going to focus on six of these questions. We did touch on this in our recent post, Avoiding The Wolf of Wall Street, and this is an effort to give you additional support in this important area.

  1. Will you be acting in a fiduciary capacity in working with my account(s)?
  2. Would you be willing to agree to fully and completely disclose in writing any and all actual or potential conflicts of interest in connection with any advice or recommendations you provide?
  3. Would you be willing to disclose, in writing, both the nature and amount of any compensation, of any kind, that you receive in connection with any advice and any product recommendations you make, including commissions, fees, 12b-1 fees, referral fees, finder’s fees, trips and conferences?
  4. Are you willing to disclose, in writing, the terms of any and all revenue sharing arrangements that you, your firm, or your broker-dealer have with any other companies?
  5. In cases when you do recommend proprietary products of your firm, your broker-dealer, or an affiliated company, would you be willing to provide me with a list of comparable no-load mutual funds and/or exchange traded funds?
  6. Regardless of the eventual outcome, have you or your firm ever been the subject of a legal or a regulatory action? If so, are you willing to provide, in writing, the date(s) of such proceeding(s), the parties involved in the proceeding, the court or regulatory body in which the complaint was filed, the nature of the claimed offense, the eventual outcome and the amount of any judgment or settlement paid?

In question #1, the Fiduciary Question has received quite a bit of notoriety due to the Department of Labor recent rule. It’s purpose is to “Address Conflicts of Interest in Retirement Advice, Saving Middle-Class Families Billions of Dollars Every Year.” This is something we have covered and discussed most recently in “Is Your Financial Advisor Working For You?”

Questions 2 – 5 all are related to costs, fees and compensation, and this is where we get into the aforementioned Basic Math. I’m not going to pick on any particular financial services company, but what I’m about to describe represented $237 billion in investment in 2015, and about the same amount in 2014. That’s approximately $474 billion invested in the last two years (yes, that’s the beginning of Basic Math)! The product is annuities, and I’m going to illustrate two real-life variable annuities, some of which was in an IRA.

More math:

  • The financial advisor/agent received a commission of approximately 6-7% of your investment up front. If you invest $100,000, that’s $6 – 7,000. While they are quick to point out it doesn’t come out of your original investment, you are confronted with steep “surrender charges” in the event you want to take your money out. Typically these start out at 8 – 8.5% in the first year, and they decline by about 1% per year. In other words if you invest $100,000 and for whatever reason which to take the funds out in year 1, you will pay about $8,000. There are other strategies to get your money out that lessen this charge, but you need to keep you money in this investment for a longer time period.
  • While most people understand at least roughly the above expenses, here is where additional Basic Math is brought to bear. The following are Annual Expenses in a Variable Annuity, and are very common:

So using this as an example, if you invest $100,000 in this, you will be paying approximately $3,390 PER YEAR! If you consider the return of the S&P 500 in 2015 of 1.40%, that means you would be losing -1.99%! Obviously in better markets you would receive a positive return, but keep in mind you have 3.39% (or more) deducted each year.

In fairness, some of these expenses go into various riders and guaranteed annuity payouts, etc. However Basic Math illustrates how difficult it is to make money in these investments. In particular from our perspective, these have no place in any Qualified Retirement Plan such as an IRA.

There, I got it out of my system. Here’s a good resource piece written by a fellow CFP®, Jonathan Duong, “Variable Annuity Fees – A Guide to Help you Understand How Much You are Paying.” He outlines a concern we hear frequently, “how come my account isn’t growing?” and the reason for this article.

Please, seek out a second opinion before investing your hard-earned money into one of these investments. There are at times a place for them, but they are dramatically overused in my opinion. When looking for a second opinion, my recommendation would be a colleague from the Garrett Planning Network, and certainly we’re happy to assist you at Financial Freedom Planners!

“If you want to work the rest of your life, that’s your business.  If you don’t, that’s ours.”

Posted in Financial Advisor, Financial Services | Tagged , , , , , , , , , , , , , , , , | Leave a comment

Is Your Financial Advisor Working For You?

It may be a shock the answer to this question is in many, many cases, NO. Let me explain.

There is currently much controversy in the government right now over what’s called the “Fiduciary Standard.” The word “fiduciary” comes from the Latin “fiducia,” which means “trust.” A fiduciary adviser should be looking out for the best interest of the client, and have a relationship built on total trust and honesty.

We wrote in “What Your Financial Advisor Doesn’t Want You To Know” and “The ‘F’ Word You Should Be Aware Of” about the different ways Financial Advisors are structured, and the significant difference it can make to you, the consumer. I’ve seen numerous articles talking about how few Financial Advisors and Financial Planners actually are held to the Fiduciary Standard. The general answer is NOT MANY!

The truth of the matter is: Many financial advisors and financial planners are not fiduciaries; they are brokers who are subject to a “suitability” standard. With suitability, the SEC says the financial advisor “must have a reasonable basis for believing that the recommendation is suitable for you.” This is a much lower standard than being a fiduciary, which demands that the advisor place his clients’ interests ahead of his own. This may not look like much of a difference, but it’s huge.

According to a Market Watch article, “here’s a typical example: Suppose an advisor can either sell a high-commission product or recommend a no-commission fund, both of which are suitable for the client. The fiduciary advisor will always choose the no-commission fund, because he always puts the client’s interests ahead of his own. But the non-fiduciary advisor could go either way because both products are suitable. Of course, the client will probably be worse off if the advisor selects the high-commission product, since the added costs — often in the 3%-6% range — tend to reduce total investment returns.

Think of it: You invest $1 million, your advisor makes $60,000 in an instant (based on a 6% commission), and you’re worse off. Yet his conduct is just fine under the suitability standard since the investment was suitable for you.”

That’s why you should always invest your hard-earned money with an advisor who operates according to a fiduciary standard. Your interests should always come first.

We are constantly counseling clients who have made a similar mistake, and working with them to remedy it to improve their situation. It is estimated that conflicts of interest like the above example cost investors $17 Billion per year.

Getting back to the government, there is a move under way by the Department of Labor (DOL) to require the Fiduciary Standard of anyone giving advice on a retirement plan. Most people are truly incredulous this isn’t already a requirement, but it’s not. Needless to say the financial services industry is in an uproar over it, and fighting tooth and nail to stop this.

Some insurance companies are threatening to get out of the annuity business, and one already has announced it is doing so. Not only is the industry against it, as reported by Reuters, believe it or not the “U.S. Chamber of Commerce is ready to sue over the retirement adviser rule” (fiduciary requirement).

U.S. News & World Report reports some don’t believe the fiduciary rule goes far enough: “Susan Fulton, founder of FBB Capital Partners in Bethesda, Maryland, says broker commissions, and human nature itself, impede transparency under the suitability model. Like many other RIA founders, she left the broker-dealer world to become a fiduciary, establishing her firm in 1989 before the RIA model was well known. She says there are too many inherent conflicts left unaddressed by the suitability standard.”

As a consumer, what should you do? It is our belief the all advisors should be fiduciaries. The client should always come first. So do some homework either on your current advisor, or someone you’re considering (or both). Here are some pointers from MarketWatch:

  • Ask your advisor: “Do you always act according to a fiduciary standard? Are you legally bound to act in my best interest?”
  • Look at the advisor’s documents: Is the advisor’s adherence to a fiduciary standard clearly stated in writing?
  • Look at your account statements: Make sure you are not invested in proprietary funds (created or sponsored by the advisor’s firm) or products that charge commissions when your objective could be just as effectively met by non-commission funds.

When searching, we recommend considering someone from the Garrett Planning Network. The founder of the Garrett Planning Network, Sheryl Garrett, was recently quoted in an Investor’s Business Daily article, “How To Pick The Best Financial Advisor To Plan For Retirement.”

“Because everyone faces unique circumstances, Garrett argues that an advisor who excels in serving one type of client may not prove equally great for another client. It’s better to vet candidates by focusing on their credentials and retirement planning expertise.

Advisors with a certified financial planner (CFP) designation have undergone “a rigorous training and education process,” Garrett says. Other professional certifications, such as chartered retirement planning counselor (CRPC) and certified retirement counselor (CRC), further indicate an advisor’s commitment to understanding the complexities of retirement planning.

When evaluating an advisor’s ability to help pave the way for your retirement, take a holistic view. Look beyond your projected investment returns.

“Think in terms of your lifestyle, not just your retirement nest egg,” Garrett said. “You need someone who knows about all aspects of retirement life, from issues tied to aging to health care to home renovations if your mobility is challenged.”

Be careful out there, and we can help at Financial Freedom Planners!

“If you want to work the rest of your life, that’s your business.  If you don’t, that’s ours.”

Posted in Financial Advisor, Financial Planner | Tagged , , , , , , , , , , , , , , , | Leave a comment

Stocks – Is It 2008 Again? 3 Things To Do In Today’s Market

Are stocks a bargain right now?

Those who have children or have been a child are familiar with questions from the back seat on a long car trip, “are we there yet?” Many of us feel the same in regard to the stock market’s recent and abrupt decline so far this year. Are we there yet…at or near the low?

As we outlined in “Advice for 2016 – Reduce Risk,” we may well be in a year where we need to focus on the return of your money rather than the return on your money. For our client newsletter at year end, the title was “Going Nowhere But Getting There Fast.” We discussed the volatility that seemed to be on the increase, with sharp ups and downs. Unfortunately we have been going primarily down so far this year, and getting there fast.

Sellers were back in the market Friday as Wall Street weighed a weaker-than-expected January jobs report.

The Nasdaq slumped 3.2%, the S&P 500 gave up 1.9% and the Dow Jones industrial average fell 1.3%. Preliminary data showed NYSE volume coming in lower than Thursday’s levels. Nasdaq volume rose a bit. For the week, the Nasdaq lost 5.4%, the S&P 500 fell 3.1%, the Dow gave up 1.6%.

3 Things to Do In Today’s Market

The key question is what to do in these types of markets. Here are some thoughts that should help:

  1. Get Back to Basics.
    • Have a plan, be it financial, investment or both, If you don’t have one, spend some time putting one together. If you are doing it yourself, one place to go is “How to Create an Investment Plan” to get started. If you are seeking professional help, we recommend a member of the Garrett Planning Network.
    • Once you have a plan, it’s time to take a look and compare where you are now with where you should be on your plan.
  2. Have the right Balance – Make sure you understand how much RISK is in your portfolio.
    • Remember the market is always going to go up and down.
    • Make an assessment of where you are right now.
    • As we wrote over a year ago in BALANCED INVESTING IS PART OF A BALANCED LIFE, it’s very important to give your overall investments a risk assessment.
    • After you have a general idea of what your Asset Allocation is, see if it matches your attitude toward risk. Consider how many more years you have to save and invest toward your goals. Obviously the shorter the time period, the less risk and exposure to stocks you should have. Make sure you have the right balance.
  3. Don’t Panic!
    • I’m reminded of a quote from the renowned investor, Peter Lynch: “The key to making money in stocks is not to get scared out of them.”
    • Shut off the television and financial websites. The pundits are out in force writing the epitaph of the market, the economy, and are encouraging panic. The “noise” always goes up during extreme times.
    • Speaking of extremes, check out the CNN Money Fear & Greed Index. CNN uses 7 factors and each factor is weighted to calculated the weight average of what it defines as greed and fear on a scale between 0 – 100. These factors include:
      • -Market momentum
        -Market volatility
        -Put & call options
        -Stock price breadth
        -Stock price strength
        -Junk bond demand
    • Not surprisingly the Fear & Greed Index now shows Extreme Fear. This is where it was recently:

  • Just how bad is it? The index has a 100 point scale — with 0 indicating nightmare level fear and 100 signaling “buy everything in sight” greed. Yesterday the Fear & Greed Index fell to 18, and likely went below that after today. While an imperfect measurement, clearly we may be closing in on an opportunity…certainly not a time to panic.

We’re encouraging people to take a deep breath, look at the bigger picture, and not be overly concerned about a week or a month or two. Be intentional about investing. You will find it removes much of the stress you may be feeling after a week like this.

If you have a trusted advisor, touch base with them to take a look at how much sensitivity your portfolios have to market risk. If you don’t, give us a call – we’ll take a quick look under the investment hood and let you know at no charge. You can also schedule a free 15 minute phone conference by clicking this LINK and schedule a time. We’re here to help.

“It doesn’t take a fortune to build one”

Posted in Financial Planner, Investing | Tagged , , , , , , , , , , , , , , , | Leave a comment