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Smoke, Mirrors, and Alphabet Soup

Mar 19th, 2012
by jblankenship.
7 comments
A bowl of alphabet soup nearly full, and nearl...

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In an environment of Ponzi schemes and financial scandals many Americans have lost trust and confidence in the financial profession; seems like there are some financial advisers that have been helping themselves, more than their clients. To fight back against this trend of lost trust and skepticism, advisors are being more creative with credentials, some of which can be earned with minimal or no study and can be bought with a couple hundred dollars. A quick look at the Financial Industry Regulatory Authority’s web site (FINRA) (http://apps.finra.org/DataDirectory/1/prodesignations.aspx) shows over one hundred and twenty different credentials being used by advisors to build creditability and trust.  I’m sure there are many more not tracked by FINRA.

Professional certifications arose decades ago as a way for people in various industries to identify qualified practitioners. It’s always good to know that our doctor has an MD or our account is a CPA. In the financial realm, many well-established credentials, including the Chartered Financial Analyst (CFA) and Certified Financial Planner (CFP®) designations, require long study, demand continuing education and enforce strict codes of ethics. In order to become a CFP®, for example, one must meet the following requirements:

1)      A bachelor’s degree or higher from an accredited college or university

2)      Three years of full time financial planning experience

3)      Complete a CFP® board registered program or hold one of the following

  • CPA
  • ChFC
  • Chartered Life Underwriter (CLU)
  • CFA
  • Ph.D. in business or economics
  • Doctor of Business Administration
  • Attorney’s License

4)      Successfully complete the 10 hour CFP® certification exam

5)      Complete 30 hours of continuing education every two years.

Increasingly, I suspect, financial advisers are using dubious designations as marketing tools to win back the trust of older, wealthier clients.  Some of the more popular are those that use the term “senior” in their name. Some examples are: certified senior adviser, certified senior consultant, certified senior specialist, certified senior financial planner, chartered senior financial planner and chartered adviser for senior living. I get confused when hearing all the “senior” designations and am left wondering, do the advisors who hold these, really have any special education or experience working with seniors, or do they just want you to think they do?

To confound the issue even more many designations sound similar (and I think this is intentional) for example, the certified retirement financial adviser, or CRFA, sounds similar to the CFA designation. But the CFA requires roughly 900 hours of study in accounting, economics, ethics, finance and mathematics, and only 42% of candidates pass its three required exams, a process that can take several years. The CRFA, by contrast, requires that students pass one exam consisting of 100 multiple-choice questions, for which 40 to 75 hours of preparation is typically sufficient preparation.

In much the same way, the CSFP, or chartered senior financial planner, credential could be confused with the certified financial planner, or CFP®, designation. The CFP®, established in 1972, requires that students pass the equivalent of 15 credit hours of college-level courses, culminating in 10 hours of exams. The CSFP, launched in 2003, requires a three-day review course and the passing of one two- to three-hour exam.

Over the last few years the term “Wealth Management” has become popular with advisors as a way to attract wealthier clients.  It didn’t take long for a list of wealth management designations to appear.

  • WMS – Wealth Management Specialist
  • CWC – Certified Wealth Consultant
  • CWS – Certified Wealth Strategist
  • AWMA – Accredited Wealth Management Advisor
  • CWM – Chartered Wealth Manager
  • CWPP – Certified Wealth Preservation Planner

While some of these designations may be good for consumers by giving their advisor specific knowledge and experience, many will turn out to be marketing gimmicks employed by advisor to attract wealthier clients.

Credentials are used because they help advisers make more money. A 2007 study by FINRA’s educational foundation determined that 46% of older investors were more likely to accept financial guidance from someone with a professional designation – and 17% of investors would be more receptive to advice from a “certified adviser for senior investing,” even though such a credential doesn’t exist.

Buyers beware when it comes to initials behind someone’s name. According to the American Academy of Financial Management, based in New Orleans, the things to look for are these: accredited degrees, licenses, or master’s degrees from government-recognized or accredited programs or educational institutions with concentrations in Finance, Investments, Securities, Economics, or Accounting. These requirements make individuals eligible for Professional Designation. You can also check out designations yourself by calling the issuing organization and finding out what the requirements are – you might be surprised by what you find.
Steven Young, CFP® (XZ$, LMNOP, EIEIO)

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Roth Conversion – What Could Possibly Go Wrong?

Feb 2nd, 2010
by jblankenship.
1 comment

warning by jurvetsonIt is expected that in 2010 there will be more Roth IRA conversions than in any year in the past – maybe all years added together.  With all this converting and cavorting going on around IRAs and Roth IRAs, there are bound to be some problems arise.

One particular type of problem that could arise would specifically impact 2010 conversions – those conversions that qualify to be eligible for the special tax spreadout over the following two years.  That problem is the impact you’ll have when a significant sum is converted in 2010, the option for tax payment over 2011 and 2012 is chosen, but alas, the investments chosen go awry, terribly so, eroding your ability to pay the tax.

Specifically, this situation can cause a huge problem if the downturn on the investments occurs long after the conversion – long enough to be beyond the scope of the recharacterization possibility.  Below is an illustration of the situation I’m talking about.

Illustration

Here’s an example of the problem:  You have a significant sum in your IRA – let’s say $500,000, just for grins.  You have run the numbers and determined that it makes sense for you to convert this entire IRA to a Roth IRA in 2010, electing to spread the tax over 2011 and 2012, as you’re eligible to do.  You’ve chosen to do this because you expect that by retiring in late 2010, you will have a much lower taxable income in 2011 and 2012, thereby reducing the tax bite.

You estimate that your taxes will be $200,000 on the conversion, and since you don’t have that kind of scratch just sitting around in a savings account, you expect to pay that tax from the proceeds in your Roth account, $100,000 in 2011 and $100,000 in 2012.  Furthermore, you consider yourself a sharp cookie – you’ve decided to invest the entire amount of your Roth IRA in the hottest new mineral exploration company; you heard about it from a buddy at the club, and he’s always making money, or so he says.

By the October 15, 2011 (the last day that you could choose to recharactrize the conversion), your mineral exploration stock investment has grown 50% – now your Roth IRA is worth $750,000.  Things are going great!  Since the account has grown, you decide not to recharacterize the conversion, and you’ll just sit back and watch your stock grow.

Problems on the Horizon

Until… along about mid-March in 2012, the company you’ve bought into becomes a party of an environmental lawsuit, placing a restraining order against further exploration activities.  The lawsuit is not expected to have merit, it will just be a bump in the road – but the stock falls out of favor, dropping in value by 50%.  Your Roth IRA is now worth $375,000… and you have to pull out $100,000 to pay taxes in 30 days.  After doing so, the account is now worth $275,000.

Now you’ve decided that your hot tip wasn’t such a hot tip, but since you have faith in the company and truly believe that the lawsuit is just a bump in the road, you hang on.  And, in fact, in mid-June, the stock does come back, but nowhere near the 172% you’d have to gain to get back to the all-time high, and not even the 45% that you’d have to gain just to get back to your original $500,000.  More like about 20%, which brings your account balance up to $330,000.

these boots were made for throwing by Coyote2024More Footwear Decends

Just in time for the other shoe to drop:  in late October of 2012, the CEO of your mineral company is arrested for insider trading – and the stock takes another dive, losing 30%.  Your Roth IRA account is reduced to $231,000 – you decide the rollercoaster ride is over for you and you sell out, putting all your money in the money market at a 1.5% return.  When it comes time to pay the other half of the tax in April of 2013, you’ve achieved a bit of a return on the money market holdings, so that your account is now worth approximately $233,000 – but you’ve got to pull out the tax payment.  After you pay your taxes, your nest egg is now worth $133,000.  You’d planned on having at least $300,000 at this point. and now what you have left will be tough to get by on.

What Can We Learn?

What could have been done to avoid this?  Presumably you had weighed the risks and the plan met your needs, as long as the aforementioned problems hadn’t occurred.  This comes down to the long-time planning adage of not putting all your eggs in one basket… you should never try for the “home run” sorts of returns with your entire nest egg.  I’d say you should give up on taking your buddy’s stock tips as well – especially with regard to investing more than you can afford to lose in any one issue as was illustrated.

Of course, something similar could have happened in a diversified account; we have only to look at late 2008 and early 2009 for an example of an across-the-board downturn.  But the likelihood of a repeat of such a downturn is very low, and diversification across many asset classes can provide a buffer against that possibility.

In addition to diversification across asset classes, it makes great sense to diversify across tax treatment as well.  In your savings plan you should have some money invested in all three types of tax treatment: capital gains taxable, tax-deferred (as in an IRA), and tax-free (as in a Roth IRA).  Of course if you have the ability to have all of your money in a tax-free account (as the example did) that would be great, but as you can see, getting the money to the account could be problematic.

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Flash again! Homebuyer’s Credit Expanded to Non-first timers…

Nov 12th, 2009
by jblankenship.
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In an update to the update, I wanted to pass this along:  part of the bill passed last week which extended the first-time homebuyer’s credit through June of 2010, ALSO expanded the types of homebuyers to include “long-term residents of the same principal residence”.

This “long-term resident” is defined as a homeowner who has owned and lived in the same principal residence for five consecutive years within the eight year period ending with the purchase of the new home.

New limits are in effect, as well – originally this credit (maximum $8,000 for first-timers, $6,500 for long-timer homeowners) phased out between $75,000 and $95,000 MAGI for a single individual or between $150,00 and $170,000 for married filing jointly (MFJ).  The new phaseouts begin at $125,000 for singles and $225,000 for MFJ.  There is a further limitation in that the home must cost no more than $800,000 (although this is solely effective for homes purchased after November 6, 2009.

For more information, you can view the video below:

View the First-Time Homebuyer Credit video 

Prepared by Forefield Inc. Copyright 2009 Forefield Inc.


What is it?

Jun 1st, 2004
by jblankenship.
1 comment

Okay, so in the first message I said I’d begin to cover just what financial planning is…

I’m thinking, though, that any reader might be more interested in knowing what the benefits of financial planning are, rather than what ingredients go into the cake.

One of the most important benefits of financial planning is ORGANIZATION. Statistics tell us that fewer than 25% of Americans know their financial net worth. In addition, (prepare to be astounded) the average individual’s credit card debt is over $8,000. Think about that for a moment…

This figure includes all of those people who pay off their cards each month. How does this happen?? Folks don’t have a handle on the big picture of their personal financial world. If they did, they wouldn’t likely allow themselves to get this far into debt, as they would understand the impact that credit card debt has on everything else in their financial lives.

ORGANIZATION – is the foundation of financial planning. By organizing your finances and gaining an understanding of money flows (inflow is your paycheck, outflow is your electric bill), you have made the first step toward reaching your financial goals in life.

That’s all for now… more to come.

Financial Planning 101

Apr 19th, 2004
by jblankenship.
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FINANCIAL PLANNING 101
Nine Essential Tips for a Bright Financial Future

1. See a lawyer and make a Will. If you have a Will make sure it is current and valid in your home state. Make sure that you and your spouse have reviewed each other’s Will – ensuring that both of your wishes will be carried out. Provide for guardianship of minor children, and education and maintenance trusts.
2. Pay off your credit cards. Forty percent of Americans carry an account balance – not good. Create a systematic plan to pay down balances. Don’t fall into the “0% balance transfer game” as it will hurt your FICO score. Credit scores matter not only to credit card companies but to insurance companies as well; you can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
3. Buy term life insurance equal to 6-8 times your annual income. Most consumers don’t need a permanent policy (such as whole life or universal life). Also consider purchasing disability insurance; think of it as “paycheck insurance.” Stay-at-home spouses need life insurance, too! Note: Each family’s needs are different. Some families have a need for other kinds of life insurance, so you should review your situation carefully with an insurance professional or two before making decisions in this area.
4. Build a 3 to 6 month emergency fund. Establish a home equity line of credit before you need it – this can take the place of part of your emergency fund.
5. Don’t count on social security! Fund your IRA each and every year. If you don’t fund it annually, you lose the opportunity. Fund a Roth IRA over a traditional IRA if you qualify.
6. If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan. Use your company’s flex spending plan to leverage tax advantages. If you don’t use your flex plan or fund your retirement plan annually, you lose the opportunity – and the tax advantages – for that year.
7. Buy a home if you can afford it. Maintain it properly. Build equity in your property. You’ll have much more to show for your money spent than a box full of rental receipts!
8. Use broad market stock index funds and direct purchase government bonds to reduce risk, minimize costs and diversify your portfolio. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of options. Don’t over-weight in any one security, especially your employer’s stock – remember ENRON?If you are unsure about your financial affairs or you have financial goals such as retirement planning, college funding, business succession or estate planning that you’d like help achieving, call Blankenship Financial Planning at 217/488-6473 to schedule a no-cost, no-obligation “Get Acquainted” meeting to discuss your situation.