Jim'sMoneyBlog

Financial Opinion and Insights

Posts Tagged ‘Financial Planning

Are Risk Questionnaires A Waste of Time?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Are these things worth anything? … or nothing.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor.   Frankly, I’ve always felt they were a little stupid.

Elmer Duckhunter walks into Brainy Smartsuit’s office at Behemoth Securities.  It’s a beautiful place, full of mahogany with lots of beautiful brochures in the lobby.   Brainy has been successful at Behemoth, gaining promotion to Sr. Vice President after selling more Secure Your Future product than anyone else in the office using the “Secret in a Box” software supplied by the product wholesaler. 

“How can I help you?”, Brainy asks.

“Well,” says Elmer, “I have a lot of money from all those Tractor Pulls I won and I think it’s time I began investing for my future.  What should I invest in?”

“I think I can help you, but first I have to know more about you!”

“Makes sense.  What do you want to know?”

Brainy pulls out the Behemoth Risk Assessment questionnaire.  “First, I’d like to know a little about how you feel about investing.”

“Okay.”  Elmer settles in.  “How many questions are there?”

Brainy smiles, “Just six.”

“Six?  You can learn everything you need to know about me with just six questions?”

“Trust me.  This is very scientific, “says Brainy.

“Okay.”

Brainy begins.  “On a scale of zero to 10, how much risk do you feel you can handle?”

“I don’t know.  What would a ‘five’ feel like?”, asks Elmer.

“Just pick one that you feel comfortable with, says Brainy.  “The people who prepare these know what they’re doing.”

Elmer thinks for a second.  “Well, back in 2007 I was a 9, but after the crash I was a 2.  Now, I don’t know what I am.  That’s why I’m here!”

“Well, I can’t tell you how much risk to take until you tell me how much risk you want; then, I can tell you what you told me and we’ll have the answer!”

“Huh?”

They both look at each other, then Elmer continues, “How much risk do I want?  Seems to me you should be telling me how much risk I need or don’t need!”

“But what if it’s more than you want?”, asks Brainy.

“I don’t know how much I want.  I need to know how much I should or should not have?

Brainy perks up.  “Now we’re getting somewhere.  What are your goals?”

“Simple”, says Elmer, “to retire with as much money as possible with as little risk as necessary.”

“How much is that?”

“How should I know?  You tell me.”

Brainy senses a lack of forward progress.  “Let’s come back to that.   Try this one:  If your portfolio went down, what would you do?”

“I’d probably ask you for advice!  Isn’t that your job?”  Elmer’s beginning to wonder if Brainy Smartsuit is so smart after all.  “Why are you asking me all this.  I just want to know what I should be doing!”

Brainy comes clean.  “We have regulatory compliance concerns.  We have to make sure what we recommend is consistent with how you feel about investing.”

“I’d rather have advice that’s consistent with what I need,” says Elmer.  Are you protecting me or your firm?

“Well, actually, both…”

“There are six of these?”  Elmer’s fed up.   He puts on his duck hunter cap with earflaps, and stomps out of the office.

Maybe these questionnaires can shed some light about attitudes; but, they don’t tell Elmer what he needs to know.  Elmer just wants to know what he should be doing and why.

Once he understands what and why, the rest gets easier.  Fear can exist only where there’s a knowledge vacuum.    When knowledge replaces ignorance, fear dissipates and understanding prevails.

Maybe questionnaires have zero to do with long term success for the client; but, they maybe do help sell more Secure Your Future product.

—————————–

The Independent Financial GroupSubscribe to IFG Insights letters for individual investors.

Visit IFG on Facebook:  Facebook.com/IFGAdvisory

Follow Jim on Twitter:  @JimLorenzen

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

Good Retirement Issue from Money Magazine!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

As much as I’ve been an unabashed critic of most of the financial media, I can’t help but noting that Money magazine’s October Retirement Guide issue has some excellent articles about preparing for retirement; and I recommend picking up a hard copy to pass around to family members.  Articles in this issue discuss things most people simply don’t think about in advance.

Back in 2005, it became obvious that my parents back in Florida could no longer take care of themselves.  Mom had broken a hip and was in a health center recovering from surgery – and the anesthesia didn’t help the Alzheimer’s which was then in its early stages.  Meanwhile, dad, who was living alone while mom was in rehab, could barely get around.  He had lung cancer, though he hadn’t told us about it and I’m not sure he even knew.

My wife and I made three trips between California and Florida over a six week period:  Arranging  financial and legal matters, home care for dad and mom when she arrived, selling their home, and prepping our home for their arrival, i.e., outfitting bedrooms, bathrooms, etc., and arranging for in-home care in our home for them when they arrived.

There was a lot we didn’t know and we had to learn on the fly.  This issue of Money – look for the Retirement Guide sub-heading –  is certainly worth reading and talking about with your family.  It also asks some good questions like, “Who will change your light bulbs when you can’t?  Do you trust them?”  The answers may not be as easy as you think.

If you can’t wait to get a hard copy, you can read some of the articles here.

Jim

———————

Subscribe to IFG Insights letters for individual investors.The Independent Financial Group

Visit IFG on Facebook:  Facebook.com/IFGAdvisory

Follow Jim on Twitter:  @JimLorenzen

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

Written by Jim Lorenzen, CFP®, AIF®

October 31, 2012 at 8:00 am

Abnormal Markets – Abnormal Times

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

When the Fed announced an open-ended QE3, the stock market rallied.  In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began.  But, was that good?  Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or  buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result! 

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation?  Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

—————–

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. 

 

How to Recognize Investment Service Models

IFG BlogThe average investor can often have a difficult time understanding just how different investment professionals operate and who they’re really dealing with.

There are three basic service model environments where investment professionals can be found; but, what can make these environments even more difficult to understand is that it’s possible for two to be combined… or one can be masqueraded to look like something else entirely!   When you add to all that the alphabet soup of credentials and designations – some excellent and most meaningless – it’s no wonder the average investor has trouble figuring it all out.

While it would be impossible to address everything without writing a book, here’s an admittedly cursory overview of the three environments.  All have their selling points and negatives – and none is intrinsically better than the other –  but, since I’ve worked in all three, maybe I can help shed a little light on this and make them a little easier to understand.

1.      The Captive Registered Representative

This is how many, including yours truly, began their careers; and, in fact, many never leave!  The captive RR is someone you may know as a stockbroker, although the broker-dealer is actually the employer firm and the person you’re thinking of is a Registered Representative of the broker-dealer firm.   These firms can be the well-known large ‘wire houses’ with widely-recognized names or they can be smaller regional or even local firms.  In all captives, the RR is an employee of the firm and it is the firm that must sign ‘selling agreements’ with outside product providers if the RRs are going to offer anything other than in-house product.

I began my career in such a firm that provided all the services and infrastructure.  The job of an RR was is to generate revenue for the firm.  The hierarchy looked something like this:

What you may not know:  In the old days, these large firms made most of their money from their own packaged in-house proprietary product, including mutual funds, unit investment trusts (UITs), and other offerings.  I don’t know how true that is today – my guess is it’s probably much less so than in those days.   The reason I think this is because the wirehouse industry’s margins have been declining steadily over the years, indicating fewer proprietary product sales and evidenced by (1) a greater number of mergers that never seem to end, and (2) the fact that broker payouts – the percentage they pay their RRs on generated revenues – have been declining.  Brokers throughout the industry are having a tougher time ‘keeping their desks’ as margins have put pressure on RRs to increase revenue production.  This may be a reason why some, if not all, within that community are resisting the adoption of a fiduciary standard.

As I said, some RRs never leave the large wirehouses, for a variety of reasons, including the large in-house back-office infrastructure support, etc.   And, let’s face it, some may not be cut-out for self-employment.  For those who are, they often take the next step.

2.     The Independent Registered Representative

Some RRs who don’t want to remain ‘captive’ often want to set-out on their own and open up a private practice.  When a RR makes the decision to ‘break free’, they have to pay their own bills.  In my early days, that meant getting office space, phones connected, office furniture, supplies, and paying for my own insurance and a thousand and one other things; but, I could now select my own broker-dealer (BD) to function as my back-office and process all the paperwork through the various providers, etc.   

There are hundreds of BDs available to the independent RRs and they come in all shapes and sizes with different attributes.   Since my need was primarily for back-office processing, I wanted one that had (1) prompt and quality personal service, and (2) good relationships with quality custodians and other service providers.  Today, almost all can probably fit that bill.   While the RR is not an employee of the BD, the BD must still have Selling Agreements with product providers before the RR can access them for his/her clients.

One of the things about independence that independent RRs like is that the hierarchy can be flipped, which, to my mind, creates more of a ‘client first’ environment.

What you may not know:  An independent RR may be operating out of a small office in your local community; but, don’t let that fool you.  That independent likely has access to a huge array of institutional money managers and widely respected and recognized asset custodians and other service providers.   In fact, it wouldn’t be at all surprising if your local RR office actually had a wider menu of availabilities than the major wirehouse down the street, since many BD operations have provided their RRs with greater access to the marketplace.   An independent is far more likely able to provide you with a choice of custodians, etc., than a captive whose employer itself may want to be the custodian.

Something else you may not know:   Ever walk into your local bank branch and see the investment desk sitting somewhere in the lobby or off to the side?   When you sit down at that desk, you may think you’re still in the bank; but, guess again.  There’s no FDIC insurance there!  The likely scenario:  Some BD has signed a deal with the bank to private-label a brokerage service.  Not bad; you should simply be aware.

3.  The Independent Fiduciary Model:  The “pure” fee-only Registered Investment Advisor (RIA)

Some independent RRs finally decide to complete the process:  They want to drop all sales and commissions and gain access to the entire world of products and service providers, including those who don’t work through sales channels.  In my case, since I had already been in business in my own office for fifteen years, it was a simple process to register as an advisor and simply drop all the selling licenses.  An RIA must avoid conflicts of interest and operate under a fiduciary standard:  The clients’ interests must be paramount.

The model, however, looks much like the independent RR:

What you may not know:   Captive RRs and independent RRs both very likely work for or with a BD that is dually-registered, making the RRs also RIA representatives.  This allows them to work on a fee basis, as well as on commission.  Some will tout their fiduciary status during the planning stage; but, you should ask if they will operate under that status during the investment implementation stage.  It’s one thing to “adopt a fiduciary standard’ and quite enough to accept fiduciary status in writing.  From what I’ve observed, few, if any, BDs will allow their RRs to accept this status, whether they’re captive or independent.   That doesn’t mean they aren’t honest or that they don’t do good work; it’s just something you should be aware of.

Also be aware that some RIA firms provide investment management, asset custody, and portfolio reporting services all in-house while others prefer to work in a purely advisory capacity using third-party providers for the various services. 

Example:  In my own practice, most clients’ assets receive custody services from Pershing (owned by Bank of New York-Mellon).  All institutional managers are independent of the custodian and all portfolio reporting is provided by third-party services independent of the managers.  All parties are compensated by client fees only, as are my advisory services.   While it may sound like more fees, it’s often actually less.  All these services are usually ‘bundled’ by investment providers; I just unbundle them and ‘shop’ them individually, which can result in savings.

While this overview just scratches the service, it might give you some idea of the playing field.  In the final analysis, choosing an advisor is a personal choice.  You should find someone you’re comfortable with… and someone who will talk with you like an adult.  Avoid the ‘glad handers’ who tell you what you want to hear; find one that will talk straight and tell you what you need to hear, even if you think you’re an investment genius.  

Good luck!

Jim Lorenzen, CFP®, AIF®

—————————

Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

 

Additional IFG Links:

 

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

How Does Inflation Affect the Markets?

IFG BlogDo all markets react to economic forces the same way all the time?  As any good consultant worth his salt will tell you, “It depends.”

Asset classes, for some reason, seem to have this annoying habit of reacting differently to different environments – probably because investors react differently to varying environments, and all these indexes we keep talking about are only reflecting what investors are doing with their money.

For example, it should come as no surprise to most that bonds and commodities generally react differently in high inflation environments, whether inflation is rising or falling.

Here’s a chart from JP Morgan Asset Management that depicts how different asset classes have reacted to varying inflation environments since 1972.  It’s important to remember this represents a forty-year period and that during those forty years, these asset classes have rarely moved in tandem.

Which environment are we in now?  It depends on what inflation number you use.  While the core consumer price index (CPI) excluded food and energy, the broad CPI today isn’t too different from the median CPI reflected above.   Since we seem to be coming off a low inflation base and can realistically expect a rising inflation scenario – the government hasn’t stopped printing money – the lower left quadrant does get our attention.

Does this mean you should avoid bonds and cash?  Not likely.   Asset allocation is about diversifying risk – and that’s all about blending correlations in a way that brings portfolio volatility (standard deviation) in line with a given investor’s risk profile.

The central question to the puzzle:  How can we best diversify assets to achieve an investor’s long-term goals while staying within defined risk parameters? 

That’s the $64,000 question.  And, for many people, not knowing the answers or how to allocate assets, has been far more expensive than that.

Jim Lorenzen, CFP®, AIF®

—————-

Jim Lorenzen, CFP®, AIF®Jim Lorenzen, CFP®, AIF® is founding principal of The Independent Financial Group,  a fee-only registered investment advisor serving retirement plan sponsors and selected private clients.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com  and by subscribing to IFG Insights letters  for corporate plan sponsors and individual investors.  Follow Jim on Twitter: @JimLorenzen

Written by Jim Lorenzen, CFP®, AIF®

June 7, 2012 at 8:00 am

Think You’ll Spend Less in Retirement? Really?

IFG BlogConventional wisdom:  When you retire you’ll be spending less.  You’re not commuting and you won’t need clothes for work; so your financial needs in retirement will be less.

Not my experience.

I’ve been helping people plan for, and manage, retirement for more than twenty years, and here’s what I’ve learned:

When people retire, they have time to do all the things they’ve been wanting to do for years:  Travel, play golf, visit family and spoil grandkids, take classes, start new hobbies… you get the idea.

Advisors – me included – have been preaching the 4% rule:  “You probably don’t want to take more than 4% of your initial assets, plus a cost-of-living increase, each year you’re in retirement.   It’s a mantra we all have preached.

But, people are living longer and there’s a factor many haven’t considered:  Inflation.

Yes, we did address cost-of-living increases in our 4% distribution formula; but, there’s more that hasn’t been addressed, even by yours truly!

Some time ago, I wrote a paper, ‘Why Investors Fail’, in which I addressed the `order of returns’ as a significant factor in retirement success.  I was by no means the first to talk about this and I certainly didn’t discover it.  But my discussion of the order of returns was limited to the investments.  It applies to inflation, too!

Bob Veres, writing in the current issue of Financial Planning, pointed out something interesting:  Inflation tends to strike retirees harder than preretirees.  The biggest reason:  Health care costs are rising faster than the inflation rate!  But, adding to the mix is the concern about withdrawal rates and their relationship to inflation.

Jim Otar, a Thornhill, Ontario-based financial analyst and planner, conducted a study of withdrawal rates over 111 years.  The results, cited in this month’s Financial Advisor, shows that the sequence of returns and how much prices move up and down contribute 32% to the total return of a portfolio and inflation can contribute 21%, with asset allocation and management making up 31%.   So, the order of inflation numbers, combined with withdrawal rates, can have a significant impact on how long money lasts!

The insurance industry, of course, has been jumping on this issue for some time offering guaranteed future or ‘longevity’ income annuities to ease investors’ worries.  Indeed, many planners are beginning to include these products in their planning for clients; however, there are some drawbacks everyone should consider, including their high internal costs, surrender charges, and high sales commissions – all paid by the purchaser.  Another concern is the risk that the insurance company could fail!  We’ve seen what’s happened in the credit markets before.  If an insurer fails, the policy holders would be subject to the payout limits and state insurance guaranty associations.

Another consideration:  Immediate annuity income won’t likely keep pace with inflation, even with cost-of-living adjustments.  And, government COLA data doesn’t include food or energy, and I wouldn’t put it past them to factor out health care before long.  The old-fashioned approach of simply diversifying assets among asset classes, using low-cost vehicles, according to age and risk tolerance, and using dividends and capital gains to meet income needs, as well as retirement plan distributions is still, in my opinion, the best way to keep your money for yourself instead of making the product sellers rich.

——————–

Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  Additional resources:   IFG Investment Blog. Retirement Plan Insights Archive.

Twitter:  @JimLorenzen.

Portfolio Diversification – Don’t Be Fooled

Jim Lorenzen, CFP®, AIF®

Too often you’ll see senior executives and business owners make the mistake of putting all their eggs in one basket – their own company.    Depending upon the value of a single business isn’t a good planning strategy.  The same intelligent people who would never put their entire life savings into a single stock will still often bet their entire future on the fortunes of a single business, simply because they own it or work for it.

“But, Jim!  Warren Buffett has ALL his money in his own company, Berkshire Hathaway!”  

True enough; but, you neglected to mention that Berkshire Hathaway’s business is investing in scores of other businesses.  Berkshire IS diversified.

Proper diversification is a simple concept to understand; but, how to do it?  Today, the ‘flavor of the month’ is the target-date fund.  The idea is to select the fund with a target date that coincides with your retirement date!  Like all strategies, it has its advantages and disadvantages; but it’s most likely always better than no strategy at all.  The advantage is an obvious one:  It’s easy to do and it frees you from having to make a lot of allocation decisions – at least seemingly. 

The disadvantage is hidden inside the advantage:  You’re not making decisions that, maybe, you should be making.   For example, suppose your target date is 2027, 15 years from now; should everyone with that target date have the same allocation?  If one person has saved only $100,000 and someone else has already amassed $1.2 million through investments, inheritances, and maybe other sources, should  both of them be investing the same way?  Do both of them have the same `return’ requirements or risk profile?

The answers to those and other questions will help determine what the appropriate allocation should be for each investor.  Those participating in 401(k) plans should ask their employer about available tools or advice; but it’s likely everyone should get professional advice which will encompass their entire financial picture.

———

Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner™ and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.