Category Archives: RIA

Consolidating your assets

In 1945, two brothers, Jacob and Samuel, were rescued from the Nazi extermination camp of Buchenwald. The rest of their family had been killed. The brothers joined other refugees that left Europe after World War II. Jacob came to the United States, became an engineer, and worked many years for a major corporation. Samuel immigrated to Australia and became an accountant.

Several years ago, Jacob died. He had never married. Samuel — by now quite elderly —came to the United States to settle Jacob’s affairs. What he found was financial chaos. Jacob had always lived frugally and invested widely. Unfortunately, he kept very poor records. Samuel spent several weeks rummaging through files, boxes, drawers, and even under couch pillows trying to gather together all the certificates, statements, and even uncashed dividend checks that Jacob had left behind. We will never be certain that all of Jacobs’s assets have been located.

Few people leave behind as chaotic a financial tangle as Jacob did, but I find that more than half of the people I advise after a death are not certain that they can identify all of a deceased’s investment assets.

The first lesson from this example is this: DO NOT KEEP STOCK OR BOND CERTIFICATES AT HOME OR IN A SAFE DEPOSIT BOX. KEEP ALL FINANCIAL ASSETS IN BROKERAGE ACCOUNTS.

Modern brokerage accounts now allow access via checkbook, electronic funds transfer (EFT) and charge cards. Have all dividends and interest payments deposited in your account; and, if you need cash, you may write a check. There is no reason for your heirs to search through your papers to find uncashed dividend checks.

As people get older, financial advisors and estate planning attorneys often advise clients to consolidate their assets. This is sound advice and greatly simplifies the job of managing an estate at death.

It is often possible to consolidate assets — even mutual funds that you have bought outside of a brokerage account — with a single financial advisor or team of advisors. This has the advantage of giving your financial advisor a better view of your assets and thus providing more comprehensive plans and advice. It also makes it easier for the surviving spouse or heirs to identify your investment assets.

Investment accounts with brokerage firms, money managers, and mutual funds typically make up the bulk of the assets of most families. It is not unusual for a family to have multiple accounts.

Be sure to make a list of your investment accounts. You may use that investment section of the workbook to do so.

From BEFORE I GO by Arie Korving.  Available at Amazon.

 

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Even the “rich” can’t afford retirement.

Investment Approach

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires.  There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month.  To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement.  Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people.  How well is the person earning over $200,000 a year going to do in retirement?  The issues that even these so-called “rich” face are the same:  increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget.  But once retired, that salary stops.  That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments.  At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan.  He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs.  Once the basics are determined, they can plan for their “wants.”  This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues.  Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy.  The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

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Why do smart people use financial advisors?

What is the real value to hiring a financial advisor, and who uses them?  What is the value proposition?  What makes one car with four doors and wheels worth $300,000 and other $30,000?  Although we might have an answer, the answer differs from person to person.

People use financial advisors for many reasons.  Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.

Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money.  This anxiety often results with money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.

There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.”  They want to hire an “investment coach.”

A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement.  They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.

A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake.  This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:

It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.

Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.

Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns.  They attribute this to the seven services that a good advisor provides:

  1. Creating a suitable asset allocation strategy.
  2. Cost-effective implementation.
  3. Rebalancing
  4. Behavioral coaching
  5. Asset location
  6. Spending strategy.
  7. Total return versus income investing.

If you have an advisor but he is not meeting your objectives, ask us for a second opinion.  If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.

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A good Registered Investment Advisor is a “Life Coach.”

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People who are not familiar with Registered Investment Advisors (RIAs) too often view them as stock brokers.  They are not; they are held to a higher standard and are focused on the client, not the money.  RIAs are trusted advisors who put their clients ahead of themselves.    They are fiduciaries that are skilled in the art making good financial decisions.

Younger professionals who are building careers would do well to find an RIA as their financial guru, a “Life Coach.”  It takes time, experience and a high level of expertise to manage money well.  The young lack that expertise but have the biggest advantage of all: time.  They are in a perfect position to build wealth with the least amount of effort if they can lean on experts who can show them how to navigate the risky ocean of investing.  Just as important, they need a wise guide who can advise them on managing their income.  Too many people, even those with six figure salaries, live paycheck to paycheck.  Knowing what to spend and how to save is the role of the advisor.

This is very important for the independent professional – the doctor or lawyer.  Focused on building a practice, they need someone to advise them on managing their money wisely.

For the business owner, the entrepreneur, it’s even more important.  There is no career track and the challenge of building a business often results in poor money management.  Excessive debt can lead to bankruptcy, a common result in many industries that depend on debt financing.  A good advisor can help the business owner create a personal portfolio that’s independent of his business.  At the same time he can advise the owner the best way of financing his growth.

Once the business is established the owner needs guidance setting up retirement and benefit plans for himself and his employees.  This all part of the RIA’s skill set. And finally, as the business matures and the owner starts thinking of retirement, the advisor provides the guidance to transition the individual and his family to life beyond work.

That’s the point at which the coach gets the pleasure of knowing he’s done a good job as part of a winning team.

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Exploding health care costs

Here are some scary projections about the cost of health care for retirees:

 The average lifetime retirement health care premium costs for a 65-year-old healthy couple retiring this year and covered by Medicare Parts B, D, and a supplemental insurance policy will be $266,589. (It is assumed in this report that Medicare subscribers paid Medicare taxes while employed, and therefore will not be responsible for Medicare Part A premiums.)

If we were to include the couple’s total health care (dental, vision, co-pays, and all out-of-pockets), their costs would rise to $394,954. For a 55-year-old couple retiring in 10 years, total lifetime health care costs would be $463,849.

These projections come from Health View Services.

“Obamacare” enrollment has just begun for the coming year and premiums are increasing an average of 22% even as deductibles have increased to $6,000 for the “Bronze” plan before insurance actually pays anything.   The number of companies offering health insurance to individuals is shrinking and some of the larger companies have stopped offering individual policies altogether.

Many people tell us that health care is one of their top concerns in retirement, right up there with running out of money.  Unfortunately the majority has not even begun to put money aside for retirement and those who have underestimate the cost of doctors, hospitals and drugs during their retirement years.

No matter where you are in your life cycle, you should take action now to get to know a knowledgeable financial advisor, preferable a fee-only Registered Investment Advisor (RIA) who specializes in retirement and who can provide guidance on these issues.

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The financial risks of dementia

dementia-symptoms-and-brain changes

Dementia covers a broad range of mental diseases that cause a gradual decrease in the ability to think and remember.  It often affects a person’s daily functioning and is different from the decline in cognitive abilities that are the usual effects of aging.  The most common type of dementia is Alzheimer’s disease.

About one in ten people get dementia.  It becomes more common with age and it’s estimated that about half of those over age 85 suffer from it in some degree.

As the disease progresses, most people with dementia require a certain amount of skilled care.  Eventually the family will not be able to provide the 24 hour services that the patient requires and they will be placed in a facility designed to provide that care.

According to the NY Times:

On average, the out-of-pocket cost for a patient with dementia was $61,522 — more than 80 percent higher than the cost for someone with heart disease or cancer. The reason is that dementia patients need caregivers to watch them, help with basic activities like eating, dressing and bathing, and provide constant supervision to make sure they do not wander off or harm themselves. None of those costs were covered by Medicare.

For many families, the cost of caring for a dementia patient often “consumed almost their entire household wealth,” said Dr. Amy S. Kelley, a geriatrician at Icahn School of Medicine at Mt. Sinai in New York and the lead author of a paper published in the Annals of Internal Medicine.

As people age their cognitive abilities deteriorate.  Even before they begin to suffer the effects of dementia, they may become forgetful or lose the ability to focus on their finances.  Obtaining the services of a Registered Investment Advisor (RIA) well before this happens – a fiduciary that puts his clients’ interests first – is vital.  And, as people prepare retirement plans, the cost of dementia treatment and care should be one of the things for which they plan.

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How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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Who do you trust?

The latest issue of Wealth Management magazine dealt with the upcoming election.

One of the more interesting things about our recent presidential election (and it’s a long list) is that the traditional political battle lines have not only moved, they’ve been decimated—broken into such unrecognizable shapes that the head spins.

What the Editor found interesting is that neither candidate projects warm feelings toward Wall Street for different reasons.

For both parties and their supporters, Wall Street, and by extension financial services, is to be viewed with deep suspicion and skepticism.

The editor finds this troubling.  We’re not so sure.  When you turn your financial affairs over to another there has to be a certain level of trust.  However that trust must be reinforced over time and “Wall Street” has done enough damage to the trust that people have placed in it that it deserves to be viewed with suspicion and skepticism.

Trust is generated when promises made are promises kept.   The problem is that too often the promises that the major Wall Street firms have made were deceptive.  Wall Street firms like to pretend that they have the best interests of their clients in mind.  The truth is that the firms view their clients as customers and their brokers as the sales force.  The object is to generate commissions via the sales of products created to generate profits for the firm.  And if it benefits the client, that’s nice but it’s a by-product of the sales effort.

That’s why the growth of independent Registered Investment Advisory firms has been a good thing for people seeking investment advice that they can trust.  RIAs who charge fees for their services are not compensated for selling Wall Street products.  Because they work for their clients, not for Wall Street firms, they do not have divided loyalties.  They are supposed to be fiduciaries, not salesmen.  Not to say that there are no bad apples in the basket, but the vast majority of them will work to earn your trust.

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Taking Advantage of a Declining Stock Market Might Actually Help Your Retirement

savings questions

Saving for retirement is like a long journey.  On this journey, a declining stock market can work to your advantage if you take the opportunity.

A declining stock market is a chance to buy cheap; a time when stocks go “on sale.”  If the stock of a great company drops in price by half, you can buy twice the number of shares.  When it eventually recovers, you have twice the wealth.

“Dollar cost averaging” is an old technique that has been used by patient investors who put a fixed amount of money into their portfolios in good markets and bad.  It allows them to buy more shares when the market is cheap and fewer shares when the market’s expensive.

When workers put a fixed amount of money into their 401(k) plan this is exactly what they are doing.

Even people who are no longer adding money to their portfolios can take advantage of market fluctuations.  By rebalancing their portfolios regularly they buy more of what’s cheap and sell some of what’s expensive.

Taking advantage of these opportunities requires three things:

  1. Patience to view your goals from a long-term perspective.
  2. Keeping the emotions of greed and fear out of your investment decisions.
  3. Adding to your portfolio with regular contributions and strategic rebalancing.

Millions of people are using this approach to achieve their long-term savings strategy.  Using market declines to buy allows people to accumulate more money for retirement.  If you need help with patience, emotions, or investment strategies contact an RIA like Korving & Company.

Send for our free brochure: “Are You Ready for Retirement?”

 

 

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Is bigger really better?

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Everyone wants to see their business grow.  That’s true whether you own a small restaurant or an investment firm.  Some investors look at the size of the firm as an indication of the quality of the advice they will get, assuming that bigger is better.

But that is often the opposite of what they will experience.  Most people are aware that some of the best restaurants are small, with just a few tables, catering to a select clientele.  For the same reason, small investment firms are often better for their clients than large firms.

Large firms are the training ground for smaller firms.  Large firms recruit people who have no experience as investment managers and train them in selling their company’s products.  Once a financial advisor gains experience, he sees ways that his clients can be served better.  That’s the point at which he forms his own small firm where clients get the benefit of his knowledge and experience.

Clients who do business with small firms typically deal directly with the owners, who work for them, rather than employees who work for a paycheck.  As everyone knows, it makes a lot of difference when you’re dealing with the owner of a business rather than an employee.

Small firms are more flexible in meeting the needs of individuals.  Everyone is not the same.  Everyone has a different set of experiences, a different array of needs, and seeks a different level of service.  Large firms create policies and procedures that stack people in silos and try to impose uniform rules on everyone.  The larger the organization, the greater the need for uniformity and the less the business cares about any one individual.

If you have an investment portfolio worth a million dollars, an investment firm with assets-under-management (AUM) of $100 million will care about you and do its best to address your needs.  A firm with  AUM of $1 billion dollars will not care about you as an individual, you’re a statistic.

Korving & Company is growing Registered Investment Firm (RIA), but doing so in a way that makes sure that we always know our clients, care about them as individuals, and go out of our way to meet their individual needs.

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