Many industry brokers or financial advisors lack the training, knowledge, and sometimes even experience, to truly benefit their clients’ financial planning. Add to this that many of these financial advisors work in a system rife with conflicts of interest and you have a recipe for financial peril.

With the transparency that the internet offers, investors and financial consumers are becoming more aware of pricing and conflicts. Due to this openness, a new “fee only” model is emerging in the financial planning segment; one designed to avoid these conflicts of interest.

But how do you know what firm is right for you?

Most financial advisor firms offer a free introductory meeting. Here is a list of popular questions to ask a financial advisor that we feel will arm you through the process:

The Screening Stage – The “Big Three” Test

Three Initial Screening Questions to Ask a Financial Advisor to Help You Avoid Fraud

We believe that by asking the following three questions, you can significantly cut the amount of any potential “harm” caused by a financial advisor.

• Are you a fee only advisory firm?
• Firms that are fee only have no interest in volume based transactions (or churning accounts to generate commissions).
• Will my assets be held at an independent third-party custodian?
• Firms that hold client assets away at an independent custodian have, by virtue of the relationship, created a barrier for account access.
• Who is that custodian? Is it reputable?
• Some popular custodians are TD Ameritrade, Charles Schwab, and Fidelity Investments.

You are seeking a “yes” answer to all three questions, if possible. If the answer is “Yes” then you’ll find it is difficult for the financial advisor to engage in fraudulent acts.

The Interview Stage

Further Interview Questions to Ask a Financial Advisor When You Meet

After you have narrowed your list to firms that pass your Big Three test, you may want to print out the following list of questions to ask a financial advisor:

Background & Experience

• What is your educational background?
• What are your financial planning credentials/designations and affiliations?
• How long have you been offering financial planning services?
• How long has your firm been in business?
• Who is the owner of your company?

Business Practice

• Tell me about your ideal client.
• Do you have experience working with clients whose situation is like ours?
• How many clients do you work with?
• Will you or a financial advisor associate of yours work with me?
• Do you work in a team format or individual format? If so, how do you select your advisor staff?
• What is your advisor-to-client ratio? (# of clients to one advisor)
• If you are on vacation, who will help me?
• Do you have a business continuity plan?
• Are you now engaged in any other business, either as a sole proprietor, partner, officer, employee, trustee, agent or otherwise?

Compensation

• How is your firm compensated and how is your compensation calculated?
• Do you have a minimum fee?
• Do you have an agreement describing your compensation and services that will be provided in advance of the engagement?

Services

• What is the scope of financial help your firm offers?
• Do you offer a comprehensive written analysis of my financial situation?
• Does your analysis include recommendations for specific investments?
• Do you offer help with implementation of the plan?
• Do you offer continuous, on-going advice about my financial affairs?
• How often do you meet with clients to give this advice?
• What topics do you cover at these meetings?

 Financial Planning & Investments

• What is your approach to financial planning?
• What assumptions do you use for your financial plan projections?
• Tell me about your investment philosophy and why you have chosen this philosophy?
• Who develops your model portfolios?
• Will you figure my tolerance for risk? If so, how will you do this?
• How will you decide the proper investment strategy for me?
• Do you need “discretionary” trading authority over my investment accounts?

Account Access

• Will I receive a statement of my accounts monthly?
• Do you offer online access to my accounts?

References

• Do you offer any client references?
• Will you give me references from other professionals?

Regulatory Compliance & Conflicts of Interest

• Are you registered as an investment advisor?
• What agency regulates your firm? Are you licensed by your state, the SEC, or FINRA?
• Do you have a staff member who ensures your firm is abiding by those regulations?
• Have you (or your firm) ever been publicly disciplined for any unlawful or unethical actions in your professional career?
• Do you act in a fiduciary capacity towards your clients? How do you define this?
• Could anyone besides me benefit from your recommendations?
• Do you recommend any private investments of which you are an affiliate?
• Does any member of your firm act as a general partner, take part in, or receive compensation from investments you may recommend to me?
• Do you have a financial interest in the entity that houses my account?
• Do you sell any products that have a commission attached to them?
• Are there financial incentives for you to recommend certain financial products?
• Does your firm receive other compensation from mutual fund companies to invest in their funds?
• Do you receive on-going income from any of the mutual funds that you recommend in the form of “12(b)1″ fees, “trailing” commissions, or other continuing payouts?
• Do you have any proprietary products?
• Do you take custody of, or have access to my assets?
• Will my assets be held in my name only and always be under my control?
• Do you receive referral fees from attorneys, accountants, insurance professionals, mortgage brokers, or others?

Flickr Credit to Loozrboy

How should you invest for retirement?

Should you use a fixed income strategy or seek a total return strategy?

Times change and how we invest has changed over the years as new scientific study better explains how the stock market works and more encompassing ways to invest across the markets. The traditional approach was to create an income portfolio (more about that later) by chasing dividends, bond yield and interest, with a reluctance to touch “principal.” A lot of potential income was actually lost that way and people took more risk than was necessary.

Traditional Investment Approach: Chasing returns, chasing bond yield, throwing money at the stock market and hoping for a livable result.

Scientific Investment Approach: Developing a total return strategy aimed to produce the desired income needed to fund your goals.

Traditional Investment Approach: Don’t touch my principal!

Scientific Investment Approach: Capturing the gains is better than riding the winners back down. Over time, we look to the stock market to generate returns that outpace inflation so a total return strategy is more likely to help you meet your goals.

Traditional Investment Approach: I’m going to retire soon (or am retired now), so I should move my portfolio over to bonds and CDs to get a reliable fixed income.

Scientific Investment Approach: The key is to maintain your purchasing power, not your original investment. Inflation is the culprit; owning the right balance of equities for growth, according to your Risk Tolerance, better positions the portfolio to protect your purchasing power.

But, bonds aren’t risky or dangerous, right?

Actually, that’s not quite accurate.  Here is how risk plays out in bonds:

• Interest rate risk: when market rates go up, the value of current bonds typically goes down; which lowers bond yield as well
• Bond gets called early: When market rates go down, bonds may get called because the issuer can get cheaper money by replacing their bonds.
• No buyers: in every trade, there are two sides, a buyer and a seller. If it is low quality junk or rates have moved a lot, it’s harder to find a buyer.

“Fixed income” assets don’t grow and are subject to declining values. If creating an income stream is your goal, then it should not matter how the income is derived so long as the portfolio maintains its purchasing power. When viewed this way, stocks, bonds, CDs, US treasuries, and even money market funds can be viewed as sources of income; a portfolio manager can sell these securities and rebalance the portfolio to create the necessary income.  As a side benefit, structuring a portfolio for total return may also cut income taxes.  At current income tax rates, and depending upon tax bracket, paying a long-term capital gains tax rate may be preferable to paying taxes on interest income from bond yields.

This is the idea behind a total return strategy.

So, what, exactly, is a total return strategy?

Well, in its basic form it can be expressed as:  Total Return = Income (dividends/interest) + Capital Gains

Investors can use this scientific approach to invest in a way to protect themselves and their portfolio’s purchasing power. Letting go of some of those traditional ways that focused on chasing dividends, interest, and “fixed income” can give way to a portfolio with a total return strategy.

How long does this total return strategy need to last?

That depends on the investor and is highly variable.  Want to make your financial plan foolproof? Figure out your drop dead date. Literally. Otherwise, you can consider your family history, the state of your health, your lifestyle and maybe even head over to the social security website to check your life expectancy figures.  In truth, unless you have a chronic life-threatening illness, you should probably plan for the last person remaining in your relationship to live at least into their mid 90s. For those of you retiring in your 60s, that means you may need to generate a total return for 30 +/- years!

How do you do you create a total return strategy?

An appropriate total return portfolio will take into account your need for income and combine it with the need for long-term growth over the period during which you are not earning a regular salary. A well-diversified portfolio with assets in stocks and bonds may be able to generate more total income than one that is concentrated only on “fixed income.”

By structuring a portfolio in this way, investors can stop chasing individual bond yield and stock dividends by investing in mutual funds that offer what both the stock market and the bond market, have to offer with a Total Return Strategy.

The Gold Medal Waters team of charitable advisors spent a morning volunteering at the Community Food Share of Boulder County.

Upon arriving at the food warehouse, Sue, the Volunteer Coordinator, told the team about the mission, sources of donations, and programs supported by Community Food Share. Then the team entered the impressive food warehouse and began by transferring three palates of beets into open bins and then sorting through several more palates of breads and cakes. Matt and David were whisked away to help move boxes of cans and palates of pasta. The Gold Medal Waters team was proud to support a local philanthropy and give back to the community. What a rewarding way for our charitable advisors to start the day!

The following “Letter to My Executor” will help you decide what is important and where it belongs. If you get organized now, updating it on an annual basis becomes a fairly routine task. The idea is to keep original documents in your Safe Deposit Box (SDB) to prevent them from being misplaced or damaged. Before you put documents in the box, make copies and place them in a folder addressed to your Executor. Click here to read the sample “Letter to My Executor” that may help you stay organized.

If you update the documentation in your Safe Deposit Box when the annual SDB rent is due, it will make the update easier to remember. Whomever you trust to have keys to your Safe Deposit Box should be listed on the access card for the SDB. Since you can no longer send in the documentation to allow access to your SDB, those people will need to go to the bank to sign the documentation. Timing this visit with your visit to add documents to your SDB will streamline this process. Make sure to include fresh financial statements and keep the original of your Last Will and Testament in your Safe Deposit Box.

Make sure your Executor knows where to find this file of important information and don’t forget to update it annually with new copies of statements, insurance policies, and other documents. Your SDB may be sealed upon your death so it’s important for your Executor to at least have copies of these documents in the meantime.

One last thought on “final wishes”.

If you have thought ahead and purchased a pre-paid plan and/or have a plot, put the documentation in the file for your Executor. Funeral expenses can be very high. Even if you don’t wish to be buried, there are still costs and plans associated with the final disposition of your body.  More importantly, discuss with your family and your Executor what you want to happen when you pass. Whether or not you have a pre-paid funeral plan, you might want to set up a bank account that will give your Executor or a close family member access to some funds to handle your estate expenses until the estate can be dispersed. Please check with your Estate Attorney on the best way to handle this.

Here’s a do-it-yourself guide to help you navigate the Social Security website and use the Social Security Estimator. First step is to make sure you have your social security number handy (and your mother’s maiden name) before you go to www.socialsecurity.gov. Note: you can only estimate your own social security benefits; you can not go on the website to look up someone else’s benefits.

When you log on to the Social Security website, click on “Estimate Your Retirement Benefits” in the column of links on the left side of the Home page.  Read the two paragraphs on the next page before selecting “Estimate Your Benefits.”   Next, you will need to “Agree” to the Privacy Statement. On the following page, you will need to enter your personal information (About You), and press “Continue” on the bottom right corner of the page; the next page gives you a chance to double-check that you’ve entered the correct information before selecting “Continue” again.

On the “Benefits Calculator” page, enter your wages for the previous year and select Continue again. This next page is important and you can Print/Save it. Here you will find your Social Security benefits if you retire at age 62, at your full retirement age (which is supplied) or if you defer your benefits until age 70.

The column on the left side gives you links to other choices, that can be very valuable to you. Traditionally, we thought we would get Social Security benefits when we reached age 65 but that is no longer the case, unless you were born before 1937. The retirement age has crept up a bit and the Benefits Calculator tells you at what age you can collect your full retirement benefit. The chart “Retirement Benefits by Year of Birth” clarifies the details.

In the “Retirement Planner,” you will learn about eligibility issues and how certain other pensions may have an impact on your social security benefits.  For example, a government pension if you were in the military or a teacher’s pension (Windfall Elimination Provision (WEP)). You can estimate Social Security benefits and life expectancy.

The Social Security Benefits Calculator is probably the most useful page other than your personal benefits page. Here you can use four different calculators to estimate Social Security benefits, see the impact of WEP, input actual earnings and projected earnings or download the detailed calculator that will include WEP income in your calculations.

If you are nearing retirement age, the “Near Retirement?” page gives you a list of links where you can gather more information as well as the detailed links of how to apply for benefits. You can continue to work past retirement age while earning Social Security benefits, but there are strict limits and you’ll find that information under “Receiving Social Security Benefits While Working” link on the left side of “Your Retirement Benefit Estimate” page.

Ever been married for 10+ years? Many people do not understand the coordination of Social Security benefits, widower’s benefits, or benefits after divorce. This goes to the heart of social security planning. Before there were so many women in the workforce, a couple could only collect one Social Security benefit. Now it’s all about how to strategize the coordination of benefits.

For example, if the older person in a couple has attained full retirement age and has a higher benefit, the younger person in the couple, may apply for half the benefit if it is greater than his or her own full benefit.  If the husband attains full retirement age; the wife’s full benefit would be less than half of her husband’s because she took off time for child-rearing. If the husband files and suspends his own benefit and defers it, the wife collects half while the husband’s benefit grows. He claims a higher benefit at age 70.

Divorced women of retirement age can file for half of her ex-spouse’s benefit (it takes nothing away from him) without him knowing or having to file if he’s reached retirement age.

In both cases, the Social Security benefit will be higher the longer you wait. But how long should you wait? What is the trade-off? If you’re in good health and have a life expectancy past age 85, you may want to defer that benefit until age 70. Remember, you should file for Medicare within 3 months of turning  age 65 (that’s important!) regardless of when you take Social Security benefits.

There are additional considerations for people with disabilities, survivor benefits for both married and divorced widow(er)s, and minor children who receive survivor benefits until they turn 18. The social security website is a fountain of information. If you can’t find the information you need, the phone support at the Social Security office is very helpful.

Let’s suppose that you decide to employ three different financial advisors to manage your stock and bond portfolio. Your ultimate goal is to achieve long-term financial security through saving, accumulating and investing.

You need a comprehensive Wealth Management game plan that includes the correct asset allocation for your risk tolerance. Here are some questions for consideration in a multi-advisor scenario:

• Which advisor will develop your long-term comprehensive financial plan?
• How are you going to coordinate and execute this plan among three advisors?
• Who is going to agree to be responsible to whom?
• What if there are conflicting strategies?
• Who has the final say?
• How is ongoing communication going to be coordinated?
• How does each advisor always know what the others are doing to avoid conflicts?
• Are you going to be charged extra for time and energy spent by the three advisors to communicate and coordinate this strategy?
• How are differences in investment philosophy and asset allocation going to be arbitrated?

These are some of the realities you would likely encounter using multiple financial advisors.

Because each of your advisors would manage their portion of your portfolio independently, you might have overlapping exposures and/or overexposure to a single stock or a single sector. The actions of one advisor may cancel out the actions of another. Re-balancing a portfolio in a coordinated and integrated fashion is likely to be a very difficult task. This lack of clarity about who’s in charge, when these professionals communicate with one another, and how they communicate, may ultimately sabotage how investment decisions are made.

You, the investor, could very likely end up with a lot more work and stress to set up and maintain this plan, higher advisory fees, and the ultimate responsibility (“the buck stops here!”) for managing your team of advisors and ensuring that they stay on track with your Wealth Management game plan.

The important question becomes how does having multiple advisors add value and decrease risk. Are you perhaps decreasing the likelihood of reaching your longer-term financial goals after all?

There are circumstances where it may be smart to hire specialists for different types of investments. For instance, if you wish to develop a real estate portfolio, purchase multiple businesses, or invest in startup companies, it might be wise to use advisors who have expertise in these specific fields. However, if your investment strategy is primarily equities/stocks and fixed income/bonds, and your ultimate goal is to achieve long-term financial security through these investment vehicles, you’re better off finding one qualified firm you trust to be your financial “quarterback,” to develop and implement one cohesive plan and strategy.

Three timeless thoughts come to mind:

1. “Too many cooks spoil the broth”
2. “No Unnecessary Effort ” ( Zen philosophy )
3. “Simplicity is the ultimate sophistication.” Leonardo da Vinci

One of the major issues facing us as we look to downsize our lives is what are we going to do with all this stuff we have accumulated over the years? It’s not uncommon to hear someone say that they would like to move closer to their children and grandchildren, or they’d like to consider moving into the independent living section of an adult community while they can still make their own choices, but they don’t know what to do with this lifetime of accumulation.

Some people have spent most of their lives in one place — they tend to be the most at risk of not discarding along the way. Others have moved several times and had more forced opportunities to divest themselves of items they no longer need, but they may also have too much. At some point, those decisions need to be made and it’s not always easy.

Part of planning retirement is figuring out the lifestyle you want and what you are going to do with this houseful of treasures. Depending on your family’s circumstances, there are steps you can take along the way and plan a gradual divestiture of those treasures. Rather than go about it in piecemeal fashion — trying to give something to your children when they visit, which they sometimes have a hard time turning down because they know the “stuff” means so much to you, if not to them — as with your finances, it’s best to have a Plan.

Here are some ideas that may work for you:

• Although they can be a lot of work to complete, consider using an inventory website to help you organize your “stuff.” This can also be useful for insurance purposes and a copy of what you decide to keep should be retained in your safe deposit box.
• Ask each family member which items are meaningful to them. Once you have a list, sort through to see if there are duplicate requests and set those aside. Now looking at the rest, are there things they want that you don’t need to have around you any more? Take advantage and give it to them now. Unburden yourself!
• Now see if there are items you are not using that no one expressed interest in and make a list. These are candidates for divestiture. Share this list with your family before proceeding to the following options:
• Would they have value to others? If so, take pictures to put on Craigslist, Amazon or eBay. Ask family or friends for help if you haven’t done this before. Be careful not to attach too high a value. What you paid for an item may be irrelevant. Comparing similar items on the above websites may be a very useful way to ascertain the value of what you have.
• Have a garage sale or participate in a neighborhood garage sale. These can be more trouble than they’re worth but some people enjoy it.
• Donate items to your favorite charity. Make sure to get the receipts for tax purposes.
• Throw it out. What? Yes, throw it out if no one wants to buy it or accept it as a donation.
• Alternatively, once your family, and perhaps friends, have let you know what is valuable to them, you may not want to do all the work to get rid of the rest. You can hire a professional declutterer — that’s right, there are people who make a living helping other people, especially Seniors, categorize and get rid of everything they don’t want. Some are members of professional organizing associations; others may advertise in local newspapers or websites that are geared to Seniors, such as, Marketplace 50+ or www.seniorresourceguide.com.

Now for those items that more than one person wanted. There are numerous ways to handle this, and your success will largely depend on family dynamics. If you can make a list of those popular items and put a value on them, both dollar and emotional, that may help. Then you can have either individual or a family discussion about final disposition. (Finally, an advantage to being an only child!) The bottom line is that this is your stuff and you get to make the final decisions while you’re alive.

The most difficult items are often photographs and picture albums. Where possible, try to get duplicates made, upload them to websites where they can be shared, or have them transferred to CDs.

For those items of value that will be handed down, please discuss with your Estate Attorney the best way to accomplish your wishes. You may need to pay for an appraisal. The rest can be detailed in a list of who gets what that you would draft during your estate planning.

As for the rest, enjoy it! As you no longer need it, let the family member or friend who expressed an interest unburden you.

Click here to read the full article.

To me, a boy at the time, that cornfield was the most wonderful place on earth.  Sometimes, my friends and I would disappear into that field for hours at a time playing hide-n-seek or tag. Other times, we would sit on the outskirts and pick raspberries while we watched the farmer drive his tractor.  That cornfield always offered an adventure.

Until we trampled the corn.

During one of our games of tag, my friends and I got a little out of control.  We smashed down corn stalks as we ran away from each other.  I still remember how abruptly our game ended as my best friend’s father called us back to his house.  It was one of those moments that you don’t forget easily; I knew something was wrong right away.  My friend’s father had this look on his face – he was seriously upset.

He explained to us (in not so quiet a voice) that we were ruining the farmer’s living.  He demanded that we make amends.

But how?  We already did the damage.

After much deliberation, my friend’s father decided on a course of action.  In the morning, he would walk us over to the farmer’s house and make us apologize to him directly.  Face to face.  He wanted us to look the farmer in the eyes and tell him how sorry we were for ruining his harvest.

In our mind, the farmer was a gruff, hard-working man.  He scared us.  I remember walking up to the door and watching as my friend rang the bell.  Admittedly, I hung back and let my friend do the talking (I was a shy boy and he was the outgoing one).  My friend told the farmer that we knocked down his corn and we all voiced our apologies.

The farmer, while appearing upset, thanked us for our apologies and nodded his approval to my friend’s father.  (Years later, I still think that my friend’s father called the farmer and let him know how scared we were, so he would go easy on us.)

Thinking back, that was a defining moment in my life.  Whether this parent knew it or not, this was probably the most important lesson I learned in my childhood.

It reflects one of our firm’s guiding principles:

Do what is right.  Always.  

Now, that may sound cliché, but it is that concept found in the Fiduciary Oath that guides our practice.  Here’s an excerpt:

The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client.

When you’ve been around the financial industry long enough, you realize that many financial firms do not work in this way nor do they put the clients interests above their own.  And, to be blunt, most are not required to do so.  As my advisor David Bright wrote years ago in his Latin Lingo Lesson post, a fiduciary standard does not exist on most of Wall Street.  Translation…many Wall Street firms owe a duty only to their shareholders, and it’s a duty of profit.

This is why the recent Op-ed in the New York Times was so troubling for me to read.  (If you have not yet read it, we urge you to do so immediately.)  The op-ed, written by former Goldman Sachs’ executive director Greg Smith, described the “toxic” culture of his former employer.  If this article is correct, I applaud Smith for having the courage to step forward and voice his concern, even if it was a delayed realization.

The article paints a bleak picture of humanity – one in which the author no longer felt comfortable looking future employees in the eye.  Many bloggers and reporters are left wondering and contemplating the truth of Smith’s article.  Regardless of its accuracy, investors are left with depleted trust in an already shaken financial services industry.

If the article was right, can the financial services industry be fixed?

While I can’t answer the question about what was actually happening, I do have a perspective on what to do.  Not all financial firms work in the way described in the article.

Here’s a quick video that explains the difference:

There is a small, but growing minority of registered investment advisors, who are waving the “fee-only” fiduciary banner and are advocating on behalf of their clients for a fiduciary standard.  If investors and clients were to join forces with the small group of advisors who were willing to stand up for them, that voice would hold more weight.  Maybe just enough to enact a change…

Investors, themselves, can help drive that change by voting with their dollars and their investments.  Seek out a fee only registered investment advisor – a person or firm that is held to a fiduciary standard.  Find a company that is mandated to put your interests first.  Find a firm that doesn’t think of it’s clients as “muppets.”

As to where this leaves Mr. Smith.  This is just my opinion, but I don’t think you write articles like that to condemn a company or resolve a personal agenda.  I think you do it as a sort of confession or a way to ask for forgiveness.

You meet your farmer, if you will.  You confess.  And you hope that the world forgives you.