This was a good book, I truly enjoyed reading it.  The primary reason that I enjoyed it so much is because it’s the book I have been hoping to find from someone like author Joshua Brown: a book that tells the truth about what’s really going on on the seamy side of Wall Street (which is the only side, to be truthful).

Joshua Brown (TheReformedBroker.com) provides a unique perspective – that of someone who has been involved in the “inside” of wirehouse broker-dealers, but who has since seen the light and moved on to a career in independent investment advice.  As such, Mr. Brown has seen the worst of the worst, in terms of how these institutions treat the investing public.  Once he became aware of how it all worked, through a great degree of soul-searching (and a whole lot of gumption), stepped away from it all and has never looked back.

In Backstage Wall Street, Brown lifts the veil of secrecy around how the process works, explaining how the back-room dialers constantly call folks and work through a script to get the recipients of the call to agree to fork over money.  It’s understood that if the person picks up the phone, the longer the broker can keep the person on the phone the better the chance of selling something – no matter how bad it is.  This business is similar to the three-card-monte guy on the street, but worse: by working under the seemingly staid letterheads of large corporations, there is the impression that the callers are giving advice.  In the end, all they are doing is pushing a sale, and the guy calling you doesn’t care if it’s a good thing he’s selling you or not – only that he’s making a sale.

I found the book to be informative mostly in that it is confirmation of what I’ve learned through the years and believed to be true about these outfits.  Joshua Brown has done a great job in exposing the underbelly of the financial industry, and I believe he truly enjoys the position this has put him in.  As noted, he has been referred to as the “merchant of snark” by the New York Times for his expose’, and this snarkiness comes through in his book, making it a fun read in addition to an informative book.

If you have any involvement in the financial services industry as a profession, you probably know (or have an inkling about) many of these things already.  Brown’s insights and presentation make the book worth the read nonetheless (and you’ll probably learn a thing or two along the line).

If you use a broker to “help” with your investments, you owe it to yourself to read this book – asap.  If you have ever found yourself wondering just why it is that your “investment guy” makes one recommendation over another – you need to read this book.  If you have money invested anywhere at all other than bank CD’s, you need to read this book.  I am certain that your eyes will be opened, and you’ll be a better consumer as a result of it.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

In his Preface to the Fourth Edition of Benjamin Graham’s legendary book The Intelligent Investor, Warren Buffett wrote the following:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.  This book precisely and clearly prescribes the proper framework.  You must supply the emotional discipline.

I’ve seen the same sentiment boiled down and paraphrased a bit, also attributed to Mr. Buffett (although I couldn’t find the original source) as:

It only takes two things to make money – having a plan and sticking to it – and of those two, it’s the sticking to it that most investors struggle with.

Either way, the point is relatively clear – investing successfully, per se, is not rocket science, there are many sources you can use to develop your plan; or rather, your “intellectual framework for making decisions”.  The difficult part is keeping your emotions in check when your investments have gone to extremes, high or low, so that you can stick to your plan.  The whole reason for developing a plan in the first place is to help you to navigate the tough times.

The same goes for your overall financial goal plans – such as retirement plans or college savings.  Developing a plan is not exactly simplicity – there are many issues to be dealt with to ensure that the plan itself is sound, including investment allocation, tax concerns, coordinating various sources (Social Security, taxable accounts, IRAs, 401(k)s, pensions, etc.), timing of contributions and withdrawals, and so on.  These things are quantifiable, although the weaving together of these issues can be very complex.

The place where most financial and investing plans go awry is when difficulties arise, and you begin to question the plan.  It’s understood, in part because you can often find yourself facing these difficulties in a vacuum, without any idea whether what you’re experiencing is common for all folks in your position or if you’re doing better, or if you’re doing worse.  You may have no idea if the plan you’ve developed is appropriate for weathering the current storm, or if the reason you’re experiencing poor results is due to some problem in the plan itself.

This is where a good financial advisor can be worth her or his weight in gold.  If the advisor you’ve chosen is properly qualified, he or she can draw upon voluminous knowledge and experience to help you understand what the plan needs to include to weather the storms.  The second part, and according to Buffett the most important part, is staying with the plan even when things aren’t rosy all around.  A good financial advisor, one who will operate as a fiduciary, undertakes the duty to maintain calm and to ensure that emotions are not driving the decisions.

Note: Not all financial professionals undertake this responsibility in their work with clients.  Ask the questions, and if the financial pro you’re talking to won’t explicitly accept the responsibility to help you stay on track when things get rough, you need to look elsewhere for a new advisor.  Try www.NAPFA.org for starters.

Most often this “sticking-to-it” part becomes the most difficult when there is great volatility on the downside in the markets.  You don’t have to go very far back in time to recall some of those dark days… we saw such a dramatic downturn in the markets between Summer 2008 and Spring 2009.  Those were scary times, to say the least.  I remember sending out messages to my clients every few weeks during those days, repeating the mantra to stay with the plan, don’t panic. Maintaining perspective and remembering that the plan is for long term is the key – I can remember conversations where we discussed the concept that we’ve invested with the aim of using the money many years from now, and since what’s happening today is the short term, we need to maintain our positions.

That leads us to my final point on this quote: One thing that the rephrased quote above leaves out (versus the original) that I think is just as critical is where Mr. Buffett specifically refers to investing “successfully over a lifetime”.  Mr. Buffett has many times stated

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

… meaning of course, that moving in and out of the market based upon “timing”, gut feelings, or crystal ball predictions, is not the way to be successful.  Having long-term plans with solid investments, not the “get rich quick” type of investment, is the way to success.

So – here’s another rephrasing with my adjustment:  Have a well-thought-out long-term plan to help you make decisions for your future (investing or otherwise), and stick to it. And hire a financial advisor to help you with both, because you’ll need the guidance, knowledge, and discipline to help you through tough times.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

The reason this is important is because, as individuals, we are doing a poor job of creating success for ourselves.  Recent reports have shown that our overall savings rate (for Americans, anyhow) is essentially nil.  That is to say, we’re mortgaging our futures at a regular rate, month over month, with nothing being put back for the aggregate rainy days that are coming.

The Formula for Success

The basic, stripped down Formula for success is as follows (and don’t be surprised if this is boringly familiar):

Save 10% to 20% of everything that you earn, live debt-free, and invest your money in sensibly managed investments for the long term.

Following this simple Formula has provided many folks from all walks of life with a comfortable retirement, pretty much without regard to the ups and downs of the markets.  The Formula can work for anyone of any means – without the need for complicated projections, analyses, or any of the other fancy services that financial professionals provide.

That’s not to say that there is no value in those additional services – tax savings, estate protection, and portfolio optimization do provide powerful benefits, but not as much until your net worth has increased to a substantial size.  Following The Formula is the first step, the foundation of financial success.

What This Means

For the person just starting to put a real plan in motion, it really isn’t hard to get The Formula to work for you – the biggest roadblock is instilling the discipline into yourself to follow it.  It could be as simple as working together with your spouse, each of you holding the other accountable for maintaining the plan; in fact it’s essential that both of you are on the same page.  But often it is necessary to get some help.

Even though this process seems simple, it is at the earliest stages that guidance is essential to keep you on track.  It requires you to analyze your monthly expenses and income, consider your debt situation and any savings plans already in place, and then develop and work your plan to apply The Formula to your situation.  Guidance can be vital as you work through the process and can be critical to keeping you focused and on track.

If you don’t already have an advisor to help you to develop and work your plan, you should strongly consider getting one.  Many fee-only financial planners (but not all) can provide hourly service to help with just such a plan – you can search for this sort of advisor on the internet:  www.NAPFA.org and www.GarrettPlanningNetwork.com are the best places to start.  You could also go to my “How To Get Started” page to initiate a conversation your own situation.

The Point

So, the point of all this is – as Americans we have done a terrible job of preparing for our futures, but it’s never too late to start.  No matter where you are in the spectrum of potential financial success, putting The Formula into place (if you haven’t already) will improve your situation.  If enough of us do these simple things and stick to the plan, a brighter future will be in store for all of us.

Photo by kaibara87

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

What exactly makes up a comprehensive financial planning engagement?

Each individual situation is going to be different, and so your mileage is likely to vary from my explanation, but what I’ll do, as a starting point, is list out the areas that are typically covered in what I’d call a comprehensive plan:

• goal-setting – spending time understanding the wishes and desires of the client, and quantifying them in terms of time horizon and costs for use in planning; this can include retirement, college, home purchase or remodel, opening a business, parents moving in, and just about any major financial event
• priority-setting - understanding the relative importance of each goal
• risk analysis – explaining to the client the concepts of risk, how risk is required for return, and garnering an understanding of the tolerance level for risk given the timelines and current financial condition
• cash flow – review of financial flows, finding those “unknown” expenditures that can be harnessed toward financial goals; understanding near-term and long-term requirements for cash flow; review of prior tax returns for any isssues there as well
• present financial condition – review of present accounts, allocation, future inflows into those accounts; present position with regard to debt, as well as future debt planned and debt to be retired
• projection of future cash flows – modeling the future as it pertains to the goals stated, with regard to the present financial condition and assumptions made about holdings, inflows, taxes, debt, and timelines
• risk management – review of current insurance coverage(s), especially with regard to life, disability, and long-term care insurance needs, both now and in the future, given results from the future cash flow projections; this often also entails a review of employer-provided benefits and recommendations for participation therein
• estate planning – review of present accounts, ensuring appropriate titling and beneficiary designation both now and in the future, given results from other components of the planning process
• strategy development – this can entail anything from tax planning to portfolio development to insurance recommendations, debt reduction, distribution planning, and opening and funding the appropriate accounts.
• communication of the results/recommendations – sometimes this takes a couple of hours or more on its own. The point is that the client comes away with a thorough understanding of the recommendations and the reasoning behind them.
• implementation – not always required, but often is requested. I spend time helping the client open accounts and making allocations if required, implementing insurance coverages (reviewing policies and the like), implementing tax strategies, etc. – or sometimes the client turns the implementation completely over to me.
• follow up – regardless of the one-time nature of your example, plans are reviewed after approximately one year to ensure that circumstances have not changed dramatically (with regard to the information that I have on hand). If the client doesn’t wish to engage in formal follow up review, then the engagement is complete.

The Reality – What Really Is Involved

Now, given the fact that a typical comprehensive financial plan entails at least three meetings with the client, each lasting on average one and a half hours, that leaves five and a half hours (on the low end) or ten and a half hours (on the high end of my estimate) to cover the remainder of the activities I’ve listed. In the case of the lower end of the spectrum, some of the components are either eliminated or reduced in scope. For example, if the client only has a 401(k), no debt other than his mortgage, is single and has no children – then obviously the planning cycle is reduced, due to the reduction in planning factors.

Now, the other thing is that many financial planners (myself included) notoriously underrecover – that is, we often spend more time on the plan than what we bill, due to additional research required, or additional time required for communication of the recommendations, or any of a myriad of activities.

Hope this gives you an idea of what is involved in a typical financial planning engagement.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

Let’s back up a bit and get some history:  when 401(k)’s were first introduced (part of ERISA, back in 1974), the idea was that as traditional pension plans became more costly to administer, employers could provide these plans to employees to allow the employee to administer their own “pension” plan.  It was not anticipated that these plans would become the primary retirement savings vehicle available to most folks – but that is exactly what has happened.

So, while the originally-anticipated participants in the plans were expected to have a financial advisor available to them (401(k)’s were expected to be primarily an executive benefit), the vast majority of 401(k) participants today do not have such an advisor. And the problem is, it turns out that it’s not so simple for the average person to manage their nest egg without advice.  So this is why Congress has been discussing this recently.

This is not the first discussion on advice-giving for for 401(k) participants, it was most recently addressed in 2006, where it was determined that providers of the 401(k) plans (the custodians) could provide advice to the participants in the plan.  Lately, though, the discussion has centered around the question of independence of the advisor:  Congress is debating whether there is too much conflict of interest for the provider(s) of the plan(s) in also providing advice to participants.

This becomes a thornier issue when you toss in the “automatic IRA enrollment” idea that the Obama Administration has floated.  With a self-directed IRA, the custodian of the account (the company that stands to gain in commissions from selling investments to the account owner) is in a conflicting position to provide sound advice to the invester.

So – it comes down to this:  would you rather get objective advice about your investments from an advisor who benefits in no way from the recommendations that you follow (or choose not to follow) – or would you rather have advice provided by the guy (or company) who would lose out if you chose to not follow his recommendations?

Current thinking is that advice should be provided by third-party independent advisors (the first type from above) – although the big money mutual fund companies are pushing hard to keep things the way they are, arguing that they know more about the investments than an independent would.  What do you think?

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

And just like the baseball season comes around again, so comes the promise that we’ll soon see some improvement in the markets. As you may have noted, I have no crystal ball, but nevertheless I am pretty certain we’re going to begin to see signs of recovery soon. As the markets get the opportunity to digest the concepts laid out in the Stimulus Plan, we should begin to see real improvements. Soon enough we’ll look back on this past few months – and shudder, yes – but it will be an interesting story to tell our kids and grandkids about.

This month, being up to my knees in tax preparation, I thought I’d point out a few wrinkles in the tax law that you may find helpful. And something that I hadn’t mentioned specifically on these pages: last year I finished jumping through the hoops and the like with the IRS to become an Enrolled Agent. What this means is that the IRS recognizes me as “eligible, qualified and certified as authorized to represent another in practice before the IRS.” In layman’s terms, this means that if you have conflicts with the IRS, I can help by representing you before the IRS, regardless of who prepared your return. Please let me know if you’d like to learn more about this service.

If you haven’t been to my blog yet – don’t let the term “blog” intimidate you, it’s really just a sort of online journal – you’ll find lots of articles that don’t make it into this newsletter, along with some other useful information. In addition, you’ll find all of the back-issues of this newsletter out there as well. Just click on this link to access the articles. And you can still follow me at twitter.com/BlankenshipFP if you like!

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

As pointed out by Ms. McQuilkin, fraud by financial advisors is rare.  However, with several high-profile cases recently since the Madoff scandal, and you have every right to be concerned.  Included in the article are several steps that you can take to ensure that your guy is on the up and up.  One of the best things to do is to use an independent advisor, coupled with a separate brokerage for investments – this way there is a “checks and balances” operation in effect to keep everyone honest.  Bernie Madoff handled the entire business within his own company, removing the check and balance from the transaction.

Let me know if you have any questions!

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
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IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).

The interesting part is that this advisory is a part of the small group of Fee-Only Financial Advisors across the country – according to some figures, fewer than 2% of all “financial advisors” operate in this conflict-free mode.  The remaining 98% sell products and make commissions from the sales.  As you might expect, any advice offered by a commission-oriented advisor will almost always include the product for which he is compensated.  If there is no product sale involved, that’s one less conflict of interest in the relationship.

This doesn’t mean that the Fee-Only Financial Advisor is better.  There are scoundrels in all corners of our world these days – but this is one additional “hurdle” that helps you to ensure your financial advisor is working in your best interests at all times.

You can pick up my book, An IRA Owner's Manual, in either the print version or the Kindle version by clicking the links.
Post from: Getting Your Financial Ducks In A Row

IRS CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).