When you partner with someone to help manage your financials, you want to ensure that he or she is truly a trusted financial advisor with only your interests and goals in mind, not just a salesperson looking to make a commission.
Below are the 5 main differences between a trusted advisor and a salesperson.
- A trusted advisor is a fiduciary and always acts in your best interest. They won’t be talked into selling you a product even if you insist.
- A salesperson follows the suitability standard and may push you a preferred product that gives them a higher commission.
The definition of what it means to act as a fiduciary is very simple: he or she always act in the best interests of their clients. This is in comparison to a salesperson who only needs to check the suitability of a prospective buyer, which is based primarily upon financial objectives, current income level and age, to complete a commissionable sale of a financial product. In a way, when a salesperson checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor.
The difference between the two definitions may seem small, but the impact can be enormous. Let’s look at an example:
Two financial advisors, Mr. Fiduciary and Mr. Suitability, are both working with the same client and determine that it would be beneficial to add a Balanced Mutual Fund to the client’s portfolio. A Balanced Mutual Fund is a common type of fund that usually has an equal mix of stocks and bonds. All of the major fund families (Vanguard, Fidelity, T. Rowe Price, American Funds, Franklin Templeton, etc.) offer their own version of a Balanced Fund.
Mr. Fiduciary researches all of the available balanced funds and based on fees and expenses, performance, independent ratings, and how the fund is allocated picks the best one for his client.
The company that Mr. Suitability works for has an agreement with Mutual Fund Company XYZ. They offer a free trip to Hawaii for any financial advisor that meets a quota and sells XYZ’s Mutual fund to ten of their clients. It’s easy to guess which Balanced Fund Mr. Suitability recommends, right? While there is a chance that XYZ’s Balanced fund is a good one, it is not very likely. After all, Mutual Fund Company XYZ is going to have to pay for many Salespeople’s trips to Hawaii and in order to pay for those trips, most likely their Balanced Fund is going to charge higher fees and expenses while providing less of a return to investors.
- Comprehensive Planning
- A trusted advisor does not stop at money management but incorporates all areas of your finances while following a process to help you create a comprehensive financial plan that meets all of your goals.
- A salesperson has a technique for making a sale and placing a trade.
Clients want and need more than just investment management – they want comprehensive financial planning. Clients need an advisor who can act as their financial quarterback by helping them to understand their retirement plans and estate planning needs and coordinate with their legal and tax professionals.
Here is a list of financial planning topics that you should be focusing on to secure your Financial Future.
- A trusted advisor is upfront and transparent about all fees and expenses you will pay for their services and recommendations.
- A salesperson likes to bury the fees and expenses in reams of paperwork hoping that you never realize they’re there.
There are different ways that advisors could be compensated for their services but they should always be upfront, transparent, and detailed with those fees. If an advisor receives a commission when selling you a product, or tells you that there are no fees for what they do, then you are probably working with a salesperson.
Many clients think the financial advice they receive is free. I know of a large Wall Street company whose CEO once said, “The sole objective of our firm is to make money.” With those marching orders why would that company and other firms like it do anything for free? Some clients I work with were under the assumption that they were not paying any fees while with their previous financial advisor. When I showed them the fees they were actually paying, they were truly floored and astonished.
While on the topic of free advice, it’s usually not good or well-informed. You may have a colleague or family member giving you advice on what to do with your finances; like a hot stock tip or a way to pay less taxes. While intentions are usually good, the advice usually is not.
- You should never feel pressured when working with a trusted advisor.
- A salesperson often resorts to high-pressure tactics to get you to purchase something.
Occasionally, after doing an analysis on a new client’s financial situation and making recommendations to reach the goals set, I may hear nothing back. As much as a trusted advisor wants to inspire a new client to take action, they will never pressure them into doing it.
Still, there are many salespeople acting as advisors that use high-pressure tactics to close a sale. I’m sure at one point or another you have felt the squeeze of a salesperson and it does not feel good. Using manipulative talk, making outrageous promises, and inflating past performance are all typical tactics used by salespeople. Don’t fall victim to these schemes.
- Custom, Individualized Service
- A trusted advisor should provide a high level of personal attention and involve appropriate advice and service based on each client’s individual situation.
- A salesperson utilizes a general cookie cutter plan or product meant for a clear majority of clients.
Just like every person is unique, no two clients and financial situations are alike. While a Roth IRA may be the best option for one person to save for retirement it may not make sense for another person. A particular stock or bond may not be right for everyone.
In addition to the top 5 differences above to ensure you are working with a trusted advisor, below is a checklist to follow.
- If you were referred to the advisor, was the recommendation strong?
- Does the advisor seem thorough and detail oriented?
- Does the advisor take care in reviewing and calculating financial figures?
- Is your advisor reliable? Do they do what they say they will?
- Is the response to your financial details non-judgemental?
- Does the advisor listen well and ask relevant follow-up questions?
- Does there seem to be a “fit” between you and the advisor?
The best-trusted advisor will be with you for the long haul so you should also feel comfortable reaching out at any time with any questions. He or she will continue to touch base with you as you implement your financial plan, monitoring your progress to ensure you are progressing steadily to your goals while removing doubt along the way.
Please feel free to schedule a complimentary call with Bautis Financial.
“What return can I expect? How much are the fees? How often will we meet?” These are often the questions that arise when you’re ready to have your money managed by a financial advisor. These are all simple questions to answer, however, the most important question you should ask yourself is this: Is this the right advisor for me?
OK, let’s get real here. Life can throw us curve balls and sometimes bad things happen to good people. Trusted financial advisors like Bautis Financial are not just managing money for clients, but planning meticulously for the future, not only for your ideal retirement but also for when you’re no longer here. It’s hard to think about, but best to plan for those difficult times now rather than in the heat of a crisis.
I have lost clients unexpectedly and then spoken with the grieving family members, parents, business partners, and other advisors of the deceased – all these important people in our lives that make up who we are as people. It may be time to get us introduced, this way Bautis Financial can really take the best care of you, your loved ones, and your legacy.
Not many of us like to follow a set of rules, but for each component of our life we need to set some personal rules, or standards that can apply to our everyday obligations. If we don’t it’s like we are flying blind and that area of our life can quickly turn chaotic.
For example to have optimal health some good rules to follow are:
- Lift Things and Move Around…
- Avoid Excess Stress…
- Don’t Put Toxic Things in Your Body…
- Nourish Your Body With Whole Foods…
If we establish similar rules to guide us with our finances we’ll have a better chance of achieving our goals. Some examples of good financial rules are:
- Contribute the max to your retirement accounts
- Contribute the max to college funds
- Pay off your credit card balance each month
- Avoid excessive fees
- Have lots of insurance
- Invest in assets that generate income
- Keep a minimum balance in emergency savings account
- Set & adhere to a monthly budget for categories like dining out, entertainment, travel…
If we expand on one of the rules above we can see how it can guide our daily lives. Let’s say we set a rule to have a minimum of $10,000 in our emergency savings account. The behaviors that stoke the standard are important. You can expand the rule to say that we will not dine out or go shopping until we hit the standard.
The challenge is that most of us we don’t like rules and we covet the freedom to do and say what we want. However, if we don’t have any rules our financial lives can turn to chaos and set ourselves up for failure.
A target date fund is a type of mutual fund that is popular in retirement accounts like 401k’s. The way they are supposed to work is that you select the fund with the date closest to your retirement year and the fund will adjust itself over the years to become more conservative in its investment allocations as you get older. They funds have names like:
- Vanguard Target Retirement 2050
- Vanguard Target Retirement 2045
- Vanguard Target Retirement 2040
- Vanguard Target Retirement 2035
- Vanguard Target Retirement 2030
- Vanguard Target Retirement 2025
While it simplifies the choice of allocating your 401k investments, they may not be what’s best for you. Here is an analogy: Let’s say you are not feeling well and go to the doctor. He asks how old you are. You tell him your age and he says, “Ok, I’m going to give you this medicine because that’s what I give to all of the people that age.”
- Your job
- Your spouse’s job
- If you have kids & perhaps their age(s)
- How much risk with your investments you are emotionally comfortable with
- How risk with your investments you may need to take to hit your goals
- Any inheritance you may receive
- Other assets you have saved up
- Your projected expenses in retirement
Whenever I put together a portfolio allocation for someone I like to see how it would have fared during the 2008 and 2009 financial crisis. History doesn’t mean it’s going to repeat itself, but it’s interesting to look at. Studies show that many of the 2010 target-date funds were found to be too aggressive when the markets crashed in 2008.
Every year I send out a checklist to try to put the focus on some areas – like taxes, investments, health care, insurance, and retirement that may need attention before the end of the year. In this article I wanted to highlight an item or two from each area of the checklist and why it could be important to look at. I have curated some articles in each section that dive deeper into each topic.
You can obtain a copy of the checklist here
Watch a video that describes the strategy of rebalancing
The second strategy is often called “Claim Now, Claim More Later”, and it allows a spouse or qualified divorce spouse to claim only spousal benefits at full retirement age – worth up to half of their spouses benefit amount – while their own retirement benefit continues to grow to the maximum amount at age 70.
Utilizing these strategies may allow you to collect tens of thousands of dollars of additional social security income than you would have collected without them.
There is a phase-in timetable based on birth dates that determines who will be able to use these strategies and for how much longer, but anyone who is 66 or older who files after April 29, 2016 will not be able to use them. If someone is already collecting social security benefits the changes will not impact them.
If you want to know what areas you should be aiming to take advantage of with your finances look no further than the “loopholes” that are included to be closed or slashed in proposed budget deals or by presidential candidates on the campaign trail.
Two of the “loopholes” we are going to look at in this newsletter are the Backdoor Roth IRA and the Stretch IRA. These two strategies were on the chopping block of President Obama’s recent budget proposal.
Backdoor Roth IRA
Very few things in personal finance can have as positive benefit as the Roth IRA. With a Roth IRA you contribute money to your IRA and never have to pay tax on that money again. As the money grows each year you do not pay tax on the gains or income the account generates, nor do you pay tax when you withdraw money from the account. A triple benefit is since the IRS is not collecting tax on the withdrawals there is no such thing as Required Minimum Distributions (RMDs) on a Roth as there are on a traditional IRA. Also, unlike the Traditional IRA, you can also take out your contributions from the Roth at anytime without penalty. It can be a retirement, education saving, and emergency fund tool all wrapped in to one. Unfortunately the Roth IRA does have income limits on contributions into it. If you earn over $176,000 in 2015 as a married couple you are not allowed to contribute to a Roth. Don’t fear though, even if your income is over the limit you can still get money into a Roth IRA by using the “backdoor” strategy.
How to take advantage of the Backdoor Roth IRA.
Utilizing a backdoor Roth IRA is simple and straightforward. First you create and add a contribution to a non-deductible IRA. Soon after the funds hit the non-deductible IRA you would convert it into a Roth IRA. No tax is owed and your money is in the Roth where it can grow and you can take distributions tax free.
The Stretch IRA is a wealth transfer method that allows you the potential to “stretch” your IRA over several future generations. Under current rules, as a beneficiary when you inherit an IRA you can space out the distributions over the course of your life. The tax benefit is that the IRA can stay in tact for a longer amount of time growing tax-deferred.
If the provision in the new budget deal is passed, almost any non-spouse beneficiary would be forced to withdraw all of their inherited retirement accounts by the end of the fifth year after the account owner has died, effectively killing the tax benefits that come with the stretch IRA.
How to take advantage of the Stretch IRA
IRA accounts at death of the owner pass by beneficiary designation. It is typical practice for most IRA owners to name their spouse as the primary IRA beneficiary and their children as the contingent beneficiaries. While there is nothing wrong with this strategy, it might require the spouse to take more taxable income from the IRA than what he/she really needs when he/she inherits the IRA. If income needs are not an issue for the spouse and children-, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over generations. This is possible because grandchildren are younger and their required minimum distribution (RMD) figure will be much less at a younger age.
The backdoor Roth and the Stretch IRA are not the only items included in the budget proposal. The table below is from Financial Blogger, Michael Kitces and describes all of the potentially impacting changes.
The good news is that we are in an election year and there is little likelihood that any of the President’s substantive tax changes will actually come to pass. Although it does give an indication of what is on the radar screen of potential crackdowns and loophole closers that could appear in future legislation. The crackdown on Social Security file and suspend and restricted application claiming strategies last year was an example of this.
Do you ever wonder if you are on track financially? Sure. you can find plenty of websites out there with calculators that will say by age 30, 40, or 50 you should have various amounts saved. But is it possible to lump everyone together based on a certain age? What if you want to retire at age 55, and not at 65 years old? Or what if you want to purchase a retirement home in the Hamptons?
Utilizing the KISS protocol I like to take the approach of creating a dashboard that tracks specific goals. A goal that you track can be anything. You may want to ensure things like you are on track to retire at a specific age, see your net worth grow by a percentage each year, generate a certain amount of passive income, or that you will have enough college savings for your kids. Below is a sample dashboard that shows how you can take different measurements of your health at different times
For each of the measurements (Net Worth, Education Savings, Passive Income) the 1, 5, and 10 year goals in the box are generated by doing an analysis on what someone wants to achieve. For example in the net worth section, this person wants to hit specific net worth goals ($2, $5, and $12 million) over the next 1, 5, and 10 years.
In the Education section they said that they wanted to have enough saved by the time their child goes to college to cover 100% of the cost. In this case we could take a yearly measurement of their college savings and make determinations if they should save more or less, or be more or less aggressive with their investments. Or maybe they are on track and they do not have to make any changes.
In the Passive Income section usually everyone’s initial goal is to achieve financial independence by having enough passive income to cover all of their expenses. The first step with the analysis would be to take a look at how much passive income their investments are currently generating and then see what the gap is to get to financial independence. From there we would see how much every year the would have to save and allocate to income generating investments.
Determining and tracking your financial health is not rocket science. But it does take a system and a discipline to constantly measure and adjust what you are doing so that you stay on track and get to where you want to go.
Last month I wrote about the significance of timing in regards to when you start saving for retirement. Not surprisingly, because of the concept of compounding, the earlier you start saving the better. Makes sense, right? This month I wanted illustrate further the importance and significance of timing as it relates to the amount of money you will have saved for retirement. At what point during the year you make your contributions matters just as much as, if not more than, how much you a contributing. Let me explain further.
The IRS allows you to contribute to an IRA up to your tax filing date. Therefore, not counting extensions, you have up until April 15th, 2014 to make a 2013 contribution to your IRA. A lot of people will wait until April to make that contribution, however would it make sense to make that contribution as soon as possible? So instead of waiting until April 15th, 2014, you could have made that 2013 contribution in January of 2013.
Ed Slott, a nationally renowned IRA expert, hammers home the point that it makes sense to contribute to your IRA as early as possible in the year. Making a 2014 IRA or Roth IRA contribution in early January 2013 compared to late in the year equates to over a $50,000 difference over 30 years based on $5,500 yearly contribution and 8% rate of return. Over 40 years, it equates to over $100,000 – wow! If you are contributing more per year to a SEP, the difference is magnified more.
How do you end up with the additional $100,000? By making earlier contributions your IRA, it has more time to compound (16 months), which is amplified by the fact that it is compounding tax-deferred over many years.
According to a study by Vanguard, only 10% of the people contribute in January, the earliest month contributions can be made. There are some good reasons why people wait to contribute until it is close to their tax-filing deadline. At that point taxpayers know how much they will be able to contribute if they are contributing to SEP-IRAs, or if they will have low enough income to be able to deduct their contribution. But for some people the procrastination may be the result of investor laziness. This investor laziness is similar to not ensuring that you get the maximum employer match from your 401k or not seeking retirement advice until after you have stopped working.