Wednesday, October 26, 2011

I already have a Financial Planner... Do you?

I hear this many times in the marketplace. Someone will ask me what I do for a living and I usually say "I'm a Financial Planner." Their response typically goes something like this, "That's great. My Guy is with XYZ Bank, Insurance, or Investment Company.

The first thing that pops into my head is, Do They Really Have a Financial Planner?

When most people think of Financial Planning they usually think of someone that sells stocks, bonds, or mutual funds. And maybe even someone that handles their life insurance.

The Financial Planning Association defines it as: "A long-term process of wisely managing your finances so you can achieve your goals and dreams, while at the same time minimizing the risks that inevitably arise in every stage of life."

What most people really have are financial sales people that call themselves Financial Advisors or  Financial Planners.

If your Medical Doctor was compensated by how many Prescriptions he wrote or by how many Prescriptions his patients took, would you still take his advice?

So why do we take our financial planning advice this way?

Financial Planning is a process, not a product.

4 things to look for when seeking a REAL Financial Planner:

1.) Are they a Certified Financial Planner? Go to
2.) What is their process? Planning covers every area of your financial life and real financial planners will be able to quickly explain their process
3.) What conflicts of interest do they have? If they are paid by selling you a financial product you will have to decide if they can really act in your best interest
4.) Will they take on Fiduciary Duty? This means they legally must act in your best interest. Brokers and insurance agents are not fiduciaries.

If you have any questions, go to

Wednesday, October 12, 2011

Financial Planning "Rules of Dumb" Part 2

Rule of Dumb 3: It's best to use a 10 question form to determine your Risk Tolerance

Seriously? If it were that easy why not just hire a trained monkey to handle your investments? Determining risk tolerance is a difficult task. Everyone is motivated by Fear and Greed. When the markets are doing well everyone tends to get more aggressive. After the last few years no one has much of a stomach for volatility. The typical Risk Tolerance Questionnaire you fill out from most financial services companies is designed for mainly one purpose. CYA! or should it be CTA. To COVER THEIR ....., well you get the picture. These forms help them minimize lawsuits so they can say "Our recommendations were suitable for the client, we invested their money based on their risk tolerance." Give me a break! Those things are highly unlikely to get anywhere close to your real risk tolerance. Dan Ariely wrote an article for the Harvard Business Review ( where he surveyed people with similar questions from a typical Risk Tolerance Questionnaire. No matter how he asked the questions everyone came in about average.

It is better to dive into past behavior to determine your real risk tolerance. How did you think, act, feel, and react the last time your investments took a big drop? Past behavior is a big indicator on how you will react the next time we see another 2008. Risk Tolerance is purely psychological and different people have different "financial personalities." Some people are Gamblers and some are Misers (and anywhere in between), and these personalities have been developed over many, many years. It takes more than a simple one page questionnaire to figure out what makes someone tick regarding their investments.

Rule of Dumb 4: Asset Allocation Lowers Your Risk

I am a believer of asset allocation if it is done correctly. Most advisors manipulate what asset allocation really is and use it as a sales tool. Example, you get a call (or a knock on your door) from your local investment guy. His company spends alot of money on national advertising so you feel like he is creditable. You meet with him and he does a FREE review of your investments. He comes back with a very fancy report from Morningstar and you are impressed. He goes on to show you how you are not properly diversified by talking about sectors and styles. And if you would have been a client of his and followed his asset allocation model for your investments you would not have lost as much over the last few years. Maybe so but high-in-sight is always 20/20!

Many people are not properly diversified and are taking way too much risk but it is a more complicated issue that cannot be addressed from only a Morningstar Report. There are many asset classes: Stocks, Bonds, Real Estate, Emerging Markets, International, Fixed Income but for your allocation to be correct it must be based on 3 things. What is the return necessary to meet your goals? How does that line up with your tolerance for risk? And what is the functionality of each asset class you own? You can look at styles, sectors, and mutual fund mangers all you want but you will never have the proper asset allocation model until these 3 things are addressed. By addressing these 3 things you lower risk on 2 levels. The risk or volatility of your investments and the risk that you won't meet your goals.

Rule of Dumb 5: You Need a Financial Plan

This one might confuse you since I am a Certified Financial Planner but let me explain. A financial plan is something that you prepare only once before you start investing your money. What people really need is Financial Planning, an ongoing process that assures clients are on track to reach their goals. It is a process NOT an event. You need someone that understands you and your goals. Someone that can hold you accountable and steer you away from making mistakes with your money.

Hopefully this post will make you realize that Financial Planning can be more complex than some try to make it. Everyone's situation is different and using rules of thumb may not work for you. Radio and TV personalities have made themselves very rich by dumbing down financial planning so they could market it to the masses. But don't fall into the trap of believing everything you hear applies to your unique situation. If you have any questions please visit my website at

Tuesday, October 11, 2011

Financial Planning: "Rules of Dumb" Part 1

"Rules of Thumb" are dumbing down the financial planning profession. What may be the correct advice for one person could be totally wrong for another.

Rule of Dumb 1: You need an emergency fund of 3-6 months of expenses

This is what most financial pundits in the media say everyone should have for emergencies. Well, that is a great goal but for most of middle-America that is simply a pipe dream. In financial planning we must be honest and realistic with our clients. Cash reserve amounts should be based on the needs of the individual not some formula.

Example: Someone who is self employed may need 6-9 months of expenses so they are not living out of their cash register in the event of an emergency. On the other hand, a 59 year old nearing retirement that has accumulated plenty of other accessible assets may only need a couple months worth of cash.

Rule of Dumb 2: You need 8-10 times your income in life insurance

This one just infuriates me. The rationale behind this is that if you died, your heirs could take that money invest it at a 10% return and the interest would replace your income. If your advisor believes that consistent 10% returns are that easy to come by and is willing to bet on it with the financial future of your surviving spouse, you should fire him or her ASAP. Then run far, far away!

So how did the pundits form this crazy opinion? Well, they look at the average lifetime return of the stock market and see that it has an average annual return of about 10%. Then they some how think that anyone can earn that average return easily year in and year out by buying "good growth stock mutual funds." It just doesn't work that way!

Example: Lets say your husband earns $50,000 per year and he died in 2007 with a $500,000 life insurance policy (10 times his income) and you following this advice expect a 10% return so you can live off the interest. Lets see how it really could really play out:

Year                   S & P Return             Principal Balance + Gain - $50k withdrawal
2007                          +3.5%                                     $467,500
2008                         -38%                                         $239,850
2009                         +24%                                         $247,414
2010                          +13%                                        $229,577
2011                           +10%                                      $202,535
2012                           +10%                                       $172,789
2013                           +10%                                       $122,790

In this example, the money you thought would provide for you for your lifetime runs out pretty quickly if you follow the "Rule of Thumb". The market's history has an average of 10% but that in no way means that it is likely you will earn that each year. Heck, the S & P Index for the last 10 years has only earned about 3%.

If you are investing money for income you have to invest it in a way that gives you the best chance to meet your income needs while minimizing the risk of running out of money. If a widow needs my help to ensure she doesn't run out of money, I will not be basing my advice on a "Rule of Thumb" that ensures failure.