Ask Liz Weston

Get smart with your money

Liz Weston

Q&A: How to avoid hiring a Madoff-like financial advisor

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Dear Liz: What is the best way to pick a financial advisor to make sure they don’t make off with all your retirement money? I don’t want Bernie Madoff handling my retirement savings.

Answer: Even if you turn over day-to-day investment decisions to an advisor, you should make sure your money is invested at an independent custodian such as a nationally known brokerage or mutual fund company. That won’t immunize you from fraud, but Ponzi schemes are a lot harder to pull off when there’s third-party oversight.

Returns that are too good to be true, investments that you don’t understand or pressure from an advisor to invest are other red flags for fraud.

Protecting yourself from fraud is important, but so is protecting yourself from bad or conflicted advice. You need to check out any advisor thoroughly. Ask about experience, credentials and other qualifications. Find out how they get paid. Fee-only advisors are compensated only by the fees their clients pay and don’t accept any commissions for recommending products. Fee-based advisors, by contrast, may accept fees and commissions.

Your advisor should be willing to sign a fiduciary oath to put your interests first. That’s not currently required. Advisors can put you in expensive or underperforming investments just because those options pay them higher commissions and there’s little legal recourse for investors unless they can prove that the investments were clearly unsuitable for their situation.

Starting next year, advisors will be held to a fiduciary standard when counseling clients about retirement funds. There’s no reason you should wait for that rule to kick in, though. You can download a copy of a fiduciary oath for your advisor to sign at www.thefiduciarystandard.org.

Q&A: Guaranteed income in retirement

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Dear Liz: Is there such a thing as guaranteed income in retirement? Private pensions are gone and public pensions aren’t far behind. There are calls for pension reform and I’m not sure if anything is guaranteed anymore. As far as annuities are concerned, insurance companies are on shaky ground and the U.S. government had to bail out AIG. My kids, in their 20s, have told me they aren’t expecting Social Security to be there when they retire. The term “guaranteed income” has lost its meaning.

Answer: I wouldn’t rely on your twenty-something offspring to be oracles of financial wisdom. The reality is that Social Security will collect enough in taxes to pay about three-quarters of promised benefits even if Congress never gets its act together to improve the system’s financial situation. As bad as Americans can be at math, most of us can understand that “75%” is not the same as “0%.” Social Security is an immensely popular government program that millions rely on for most or all of their retirement income, so the odds are pretty good that the system will be there when your kids need it.

Pensions are another common source of retirement income. Private pensions are on the wane but millions of people still have them. If a plan can’t pay promised benefits, the Pension Benefit Guaranty Corp. takes over. The PBGC has a maximum limit for payouts, which may trim the pensions of highly paid employees, but the vast majority of workers get what they were promised.

Public pensions, meanwhile, aren’t impossible to cut, but it’s tough to do, and most government agencies prefer to defer the pain by trimming benefits for younger employees rather than older ones.

Finally, it’s not true that insurers are on shaky ground — the vast majority survived the financial crisis without a bailout. You still should check into an insurer’s financial strength before you buy an annuity, of course, and many financial planners recommend buying only from top-rated companies. If an insurer does fail, many annuities are covered by state guaranty associations up to certain limits (typically $250,000).

Q&A: Using two-factor authentication

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Dear Liz: In a recent column, you discussed the importance of setting up two-factor authentication to protect financial accounts. My concern about using this method is that if my cellphone is lost or not working, I won’t be able to access my accounts when necessary. What do you think about this?

Answer: Two-factor authentication typically combines the use of a password with a code texted to your phone. Most providers have backup options, including one-time-use codes and toll-free numbers to call if you run into trouble.

Friday’s need-to-know money news

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budgetToday’s top story: Mapping your financial journey. Also in the news: What Wells Fargo’s settlement might mean for you, six unusual ways to get out of debt, and surprising Social Security benefits for divorced spouses.

Mapping Your Financial Journey
Building a roadmap to success.

What Wells Fargo’s $185 Million Settlement May Mean for You
The Wells Fargo wagon has rolled into some big trouble.

6 Unusual Ways to Get Out of Debt
You don’t have to deliver pizzas.

2 surprising Social Security benefits some divorced spouses can get
All is not lost.

Thursday’s need-to-know money news

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FICO-score-calculation-300x281Today’s top story: Applying for the wrong credit cards can make bad credit worse. Also in the news: Store reward programs worthwhileness, preschoolers and personal finance, and the #1 cause of financial stress in your state.

Applying for the Wrong Credit Cards Can Just Make Bad Credit Worse
Be selective.

Are Store Rewards Programs Worthwhile?
Only if you’ll actually use the benefits.

Should Preschoolers Be Taught Personal Finance?
It’s never too early to start.

This is the No. 1 cause of financial stress in your state
Odds are pretty good your state is worried about debt.