Financial Advisors Category
Dear Liz: My husband and I are nearing 60. The company where we both have worked for over 30 years recently merged with another firm. The money in our retirement accounts, which totals several hundred thousand dollars, will be distributed to us, and we need to figure out how to manage it.
We took your advice to interview several fee-only financial planners, and all of them are pushing for wealth management. They would manage the money in exchange for a percentage of the assets. How do we find an unbiased opinion of whether it is worth it to spend over $10,000 a year for this service rather than putting that money toward our retirement?
I find it doubtful that any of the planners can earn a return that would be worth at least $10,000 a year. We’re with Vanguard’s Target Fund 2020, which we currently use for retirement funds we have gathered outside of work.
Answer: You’re right that a financial planner — or any money manager, for that matter — is unlikely to offer returns substantially above what you would get in passive investments that seek to match the market, rather than beat it. Study after study shows that few investors, professional or amateur, can consistently outperform the stock market averages.
What wealth management should provide is a suite of services to help you in all areas of your financial life. You should get a comprehensive financial plan as well as assistance with your taxes, insurance needs and estate planning.
Your investments should be targeted to your specific needs, time horizon and risk tolerance. Your planner should advise you about sustainable withdrawal rates once you retire, so that you minimize the risk of running out of money.
Your planner should be willing to act as your fiduciary, meaning your needs come first, so you don’t have to worry about the conflicts of interest that may arise when an advisor is recommending products that pay him or her commissions. The best wealth managers, in short, provide a one-stop shop that alleviates the need for you to try to coordinate all these services yourself.
If you don’t feel you need this level of service, however, seek out a fee-only planner who works by the hour. You can find referrals to this type of fee-only planner from the Garrett Planning Network at http://www.garrettplanningnetwork.com.
Dear Liz: I am 56 and will be receiving $175,000 from the sale of a home I inherited. I do not know what to do with this money. I have been underemployed or unemployed for six years, have no retirement savings and am terrified this money will get chipped away for day-to-day expenses so that I’ll have nothing to show for it. Should I invest? If so, what is relatively safe? Should I try to buy another house as an investment?
Answer: You’re right to worry about wasting this windfall, because that’s what often happens. A few thousand dollars here, a few thousand dollars there, and suddenly what once seemed like a vast amount of money is gone.
First, you need to talk to a tax pro to make sure there won’t be a tax bill from your home sale. Then you need to use a small portion of your inheritance to hire a fee-only financial planner who can review your situation and suggest some options. You can get referrals for fee-only planners who charge by the hour from the Garrett Planning Network at http://www.garrettplanningnetwork.com.
You’re closing in quickly on retirement age, and you should know that typically Social Security doesn’t pay much. The average check is around $1,000 a month. This windfall can’t make up for all the years you didn’t save, but it could help you live a little better in retirement if properly invested.
You should read a good book on investing, such as Kathy Kristof’s “Investing 101,” so you can better understand the relationship between risk and reward. It’s understandable that you want to keep your money safe, but investments that promise no loss of principal don’t yield very much. In other words, keeping your money safe means it won’t be able to grow, which in turn means your buying power will be eroded over time.
Dear Liz: I’m 56 and have never had a clue about money matters although I have money. Over time, from your column, I have gleaned that one should go to a fee-based financial planner, but I have a hard time trusting people. I’ve had more of these professionals contact me than there are stars in the sky. I’m pretty scared and in “ostrich mode.” I would truly appreciate it if you could give me a nudge toward the right man or woman to chart my path.
Answer: Ultimately you’ll be charting your own path, but it can help to have a trusted advisor point the way.
“Trusted” is the key word, obviously. Many people prefer “fee-only” (not “fee-based”) arrangements because the planner is compensated only by the fees you pay, not by commissions he or she might earn on investment products. A fee-only planner doesn’t accept commissions, while a fee-based planner might.
Something else you’ll want to determine is whether the planner is willing to say in writing that he or she is willing to act as a fiduciary. What that means is that the planner is willing to put your interests ahead of his or her own. This is a much higher standard than most advisors must adhere to by law. Typically advisors only have to recommend “suitable” investments and strategies, rather than the ones that may best serve your needs.
It’s likely that many of the professionals contacting you are not fee-only financial planners but are instead investment salespeople of some kind. If you want a good financial planner, you typically have to seek one out.
Since you have money, you can start by asking for referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org. NAPFA holds its members to high educational, experience and ethics requirements. Many of its members specialize in financial planning for high-net-worth individuals and typically charge a percentage of your assets or a retainer fee. You also could get referrals from the Garrett network mentioned above if you want to pay for advice by the hour. Both organizations’ websites have additional tips for choosing a planner.
Dear Liz: I had to nod my head when reading your recent column concerning the financial advisor who kept trying to get her client to buy a variable annuity. My wife and I for many years dealt with a like-minded lady who was personable and intelligent. We did purchase several annuities before research alerted us that maybe this wasn’t the best way to go. Every time we met with her she wanted to transfer us to a new “fantastic” annuity, which started up new surrender charges, some as high as 20%. Finally, our accountant suggested a financial planner. We paid the gentleman $1,000 for a full-bore assessment, turning over all our records and meeting three times with him. His advice? Buy a variable annuity. I have a hard time trusting anyone in the financial world.
Answer: It’s possible, but rather unlikely, that you were dealing with a fee-only financial planner. Some planners charge fees, but they also take commissions — and annuities tend to pay fat commissions.
If you want advice that’s free of such conflicts, you’ll need to look for a true fee-only (not fee-based) financial planner. You can get referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org or the Garrett Planning Network at http://www.garrettplanningnetwork.com.
Dear Liz: We’re in our mid-60s and have $1.4 million in a brokerage account totally invested in stocks. Our broker maintains that we have plenty of money for retirement. Is he right?
Answer: Unless your broker is a comprehensive financial planner — which is highly unlikely, given that you’re 100% invested in stocks when you almost certainly should be taking less risk — he shouldn’t be offering advice. You need to consult a fee-only financial planner who can review your entire situation, including how much you spend, your risk tolerance, your health, your expected longevity, any upcoming purchases or lifestyle changes and any legacies you may want to leave behind. Only then can the planner give you personalized, knowledgeable advice about this crucial area of planning.
You can get referrals from the National Assn. of Personal Financial Advisors at http://www.napfa.org, the Garrett Planning Network at http://www.garrettplanningnetwork.com and the Alliance of Cambridge Advisors at http://www.acaplanners.org. Each site offers advice about how to evaluate and choose a planner.
ear Liz: I’m writing to get some help on what to do with $300,000 that I have recently inherited. My husband and I are in our early 50s. We owe $180,000 on our home at 5% interest, with seven years left on our 15-year loan, and have no other debt. We have a combined $225,000 in retirement accounts and about $15,000 in a regular savings account. Does it make sense to pay off or pay down our mortgage with the inheritance or just keep it in savings?
Answer: You need to take a small chunk of that money and invest it in a session or two with a fee-only financial planner who can review your entire situation and give you personalized advice.
In all likelihood, the advice won’t be to pay off the mortgage. You’re on track to have your home loan paid off before retirement age, and most people have better things to do with their money than pay off a low-rate, often tax-deductible debt.
It doesn’t make much sense to let your inheritance languish in a savings account, however, when you’re likely to need more money for retirement. A planner can help you come up with an investment allocation that takes somewhat more risk but that should bring you greater returns.
You can get referrals to fee-only planners from the Garrett Planning Network at http://www.garrettplanningnetwork.com and from the National Assn. of Personal Financial Advisors at http://www.napfa.org.
ear Liz: It looks like my mother is going to win a lawsuit that could bring her more than $2 million. Can you advise us what steps to take once she receives her money? She wants me to play a major part in her finances as she is not a native English speaker, but I do not know much about finance, either. I can probably look for a financial advisor, but how do I know we are not going to bump into another Bernie Madoff?
Answer: Your mom needs at least three advisors to handle such a big windfall: a financial planner, an accountant and an estate-planning attorney.
You can get referrals for fee-only financial planners — who are compensated only by fees their clients pay and not by commissions or kickbacks — from the National Assn. of Personal Financial Advisors at http://www.napfa.org or the Garrett Planning Network at http://www.garrettplanningnetwork.com. You should interview at least three prospects about their education, ethical commitment and experience advising people who acquire sudden wealth. Check out their backgrounds using the BrokerCheck feature at the Financial Industry Regulatory Authority website (FINRA.org).
Garrett advisors typically charge by the hour and often don’t manage assets — the client makes the actual investments. NAPFA advisors typically do offer asset management and may charge a percentage of assets.
One way to reduce the chances of becoming a Ponzi scheme victim is to make sure your money is held by an independent financial institution such as a bank, brokerage or mutual fund and that your statements come from that institution. You also should find out who audits your advisor and do a background check on that company as well.
Dear Liz: My husband and I make good money. We have a low-rate mortgage, a good amount in savings, and our retirement fund is well on its way, despite recent losses. We still have 25 years until retirement. What’s the best thing to do with our extra money? We have been putting it into projects to spruce up the house but otherwise just throw it in savings.
Answer: How about investing some of it in a session with a fee-only financial planner? That’s the best way to know if you really are on track for retirement, if you have enough emergency savings and if you’re adequately insured.
You can get referrals to fee-only planners who charge by the hour at Garrett Planning Network (www.garrettplanningnetwork.com) and the National Assn. of Personal Financial Advisors ( www.napfa.org).
If your finances are indeed as rosy as they seem, then you may want to consider enjoying your money a little more. Research shows us experiences make us happier than possessions, so consider a special vacation or travel to see family and friends.
You also might consider boosting your charitable donations to share your good fortune in these increasingly hard times.
Dear Liz: Are laws regarding probate the same in all states? Do all estates have to go through probate upon the owner’s death, or does the estate go through probate only if it is above a certain value? If the rules vary by state, how do I find out the procedures for my state?
Answer: Probate is the legal process in which a court oversees the distribution of a dead person’s property.
The basic process is the same in every state: Assets are identified, creditors and taxes are paid,Â feesÂ are distributed to attorneys, appraisers, accountants and others handling the estate. Whatever remains is distributed to the heirs.
You can avoid probate in all states by taking certain actions, such as creating a living trust or holding all your assets in ways that bypass probate, such as joint tenancy.
Otherwise, the rules about which estates must go through full probate, and which can avoid it, vary considerably by state. Some states have affidavit procedures that allow small estates to bypass probate entirely, but the definition of “small” ranges from $5,000 inÂ New JerseyÂ to $150,000 inÂ Wyoming.
Other states offer simplified probate procedures for certain estates. InÂ California, for example, estates worth $100,000 or less can qualify.Â CaliforniaÂ also has a “community property petition” that allows property of any amount to be transferred to a surviving spouse without going through full probate.
The Nolo Press Book “Plan Your Estate,” by attorneys Denis Clifford and Cora Jordan, includes a brief summary of state probate laws. You’ll find more complete details for each state in Nolo’s “8 Ways to Avoid Probate” by Mary Randolph.