What Rich People Need to Know

I ran across an article at Market Watch titled “Ten things rich people know that you don’t.”  It listed the usual things:

• Start saving early
• Automate your savings
• Maximize contributions to 401(k)s
• Don’t carry credit card debt
• Live below your means
• Educate yourself about investing
• Diversify
• Hire a qualified financial advisor

All of that is something to take to heart when you’re young and just starting in life.  But what do people who are already rich need to know?

Lots of people get rich without following the rules.  They may start a successful business, enter a highly compensated profession, climb the corporate ladder, win the lottery, become a sports star or inherit a fortune.   Once you are rich, the number one objective for most people is to stay rich.  One very successful financial advisor with just 28 very wealthy clients said

“People don’t come to me to get rich, they come to me to stay rich.”

That’s the role of a good financial advisor.   Their job is to  do more than manage their client’s portfolios, it’s to take care that all of the other boxes are checked off:  to diversify the client portfolio, to educate the client about investing, to see to it that they live within their means.  In many cases they take care of family issues, lifestyle issues; the kinds of things that family offices do.

It’s what we do.  It’s what our clients expect.

Have a wealth maintenance question?   Contact us.

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Are you flunking the retirement readiness test?

A recent article in Financial Advisor proposed an interesting analogy: “Imagine boarding a jet and heading for your seat, only to be told you’re needed in the cockpit to fly the plane.”

That’s the situation many people are finding themselves in today.  Once upon a time, employers set up pension plans managed by investment professionals.  You worked and when you retired the pension checks began coming for the rest of your life.

That ended when 401(k) plans began replacing defined benefit pension plans.

Once, employers made the contributions, investment pros handled the investments and the income part was simple: You retired, the checks started arriving and continued until you died. Now, you decide how much to invest, where to invest it and how to draw it down. In other words, you fuel the plane, you pilot the plane and you land it.

It’s no surprise that many people, especially middle- and lower-income households, crash. The Federal Reserve’s latest Survey of Consumer Finances, released in September, found that ownership of retirement plans has fallen sharply in recent years, and that low-income households have almost no savings.

But it’s not only the low-income workers who lack basic financial wisdom.

Eighty percent of Americans with nest eggs of at least $100,000 got an “F” on a test about managing retirement savings put together recently by the American College of Financial Services. The college, which trains financial planners, asked over 1,000 60- to 75-year-olds about topics like safe retirement withdrawal rates, investment and longevity risk.

Seven in 10 had never heard of the “4 percent rule,” which holds that you can safely withdraw that amount annually in retirement.

Very few understood the risk of investing in bonds. Only 39 percent knew that a bond’s value falls when interest rates rise – a key risk for bondholders in this ultra-low-rate environment.

If you fall into this category and want to find out what help is available, contact us.  We’ll be glad to chat; no sales pitch and no pressure.

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It’s about making people’s lives better

It’s not just about money.

In most people’s minds the term “financial advisor” has all the emphasis on “financial” and very little about “advisor.” We disagree. We think of ourselves as advisors to the family, helping guide families with a whole range of issues. Some don’t have anything to do with investing.

We have gone car shopping for a client who didn’t want to deal with car salesmen. We have helped people choose the right retirement community.  We help educate young people about investing to make sure they get a good start in life.  We explore vacation destinations for our clients. We review our clients’ estate plans and beneficiary designations to make sure that they are in line with their wishes. We wrote a book designed to help people provide critical information to their heirs before they pass on (Before I Go).

And, of course, we have provided peace of mind to clients who worried about running out of money in their retirement years. This allowed them to do the things they wanted such as travel, spend time with their grandchildren or just relax with a good book.

We do more than manage portfolios. We assist the people who come to us for advice with the deeply personal things in their lives. Making people’s lives better is our goal.

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Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

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Who Will Serve the Underserved? The Big Brokers Don’t Want Clients With Less Than A Quarter Million $$$

It’s been a trend at the big brokerage firms since 2008: the focus on the on the multi-millionaire and billionaire client. At Merrill Lynch, management has increased its effort to discourage their brokers from dealing with clients under $250,000. It simply won’t give its brokers their usual percentage of the commissions these clients generate.

From Financial Advisor magazine:

Merrill Lynch told its 14,000 brokers on Wednesday they will get higher bonus payments in 2015 for attracting new clients and assets but eliminated pay for servicing clients with less than $250,000.

Because Merrill Lynch is now owned by Bank of America, it is encouraging its brokers to have their clients buy loans, banking and trust products, or put into fee-based advisory accounts. Merrill brokers get cash bonuses if they do this.

This can certainly lead to a conflict of interest. Merrill is one of a growing number of firms that don’t want the younger, less wealthy clients. That leaves a great opportunity for the independent RIA community who are able and willing to service this under served cohort.

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How do financial planners add value to workers seeking to retire?

The November 2014 issue of the Journal of Financial Planning published an article by two professors, Terrance K. Martin Jr., Ph.D.; and Michael Finke, Ph.D., CFP® “A Comparison of Retirement Strategies and Financial Planner Value”

They conducted a study to determine if – and how – financial planners made a difference in how well people retired.

Financial literacy and planning is much more important today than ever before.  The last two decades has seen a dramatic shift in how people prepare for retirement. A generation ago, most employees worked for companies that provided pensions as an employee benefit. The company took care of investing for their employees’ retirement. The employee was guaranteed a pension income when they retired.

That’s no longer the case. The responsibility for funding retirement has shifted from employers to employees. The (defined benefit) pension is out, the (defined contribution) 401(k) is in. But that’s a problem.

“Only 38 percent of all private workers participate in employer sponsored defined contribution plans, and just 14 percent of Americans are confident in their ability to retire comfortably.”

“Greater employee responsibility for funding retirement means that individuals, rather than pension professionals, must estimate how much saving is needed to provide an adequate retirement income … A lack of financial knowledge and sophistication among many American workers may contribute to inefficient retirement savings … Most American households cannot maintain a constant level of consumption in retirement with their current retirement savings … and one-third of retirees obtain 90 percent of their income from Social Security, according to 2012 data from the Social Security Administration.

The study was intended to determine what value financial planners brought to workers saving for retirement.  There were three main benefits.

1. Professional financial planners can help households accurately estimate the amount of retirement income needed to fund household retirement goals.
   • Most people have heard the old adage that if you don’t know where you are going, any road will take you there. Without a specific goal most people save too little. Studies have shown that young households aged 35 to 45 save 9% to 19% less than they should. Another study estimated that the median household needs to save 20% more than they do.
2. A financial planner can provide a financial plan that provides the steps needed to meet a retirement goal, review progress regularly, and make appropriate adjustments.
   • Planning for retirement begins with an analysis of current assets, the mix of assets needed to achieve the retirement financial income, and the savings rate to meet the goal. The financial planner will use an investment strategy consistent with economic theory and “help reduce a client’s behavioral biases.” The professional financial adviser will help the client overcome the anxiety that comes from market volatility.
3. Working with a financial planner helps the worker become aware of the consequences of low savings and help overcome the biases that many people have against participation in the financial markets.
   • Financial literacy surveys show that most American workers don’t have the investment knowledge to make effective retirement savings decisions. The simple process of process of calculating retirement income makes people realize that they have not been saving enough for retirement. A major value of working with a financial planner is to be shown the difference between current and optimal retirement saving.

To understand the value of a financial planner it is important to distinguish between types of financial advisors. Many who hold themselves out as advisors are stockbrokers or investment managers. The ones who have the biggest impact on retirement savings behavior take a holistic approach, making the plan and the goal the center of the relationship. They take the time to explain the complex choices involved in creating the appropriate portfolios.  They are typically RIAs.

Here’s the bottom line:

Results indicate consistent evidence that a retirement planning strategy and the use of a financial planner can have a sizable impact on retirement savings. Those who had calculated retirement needs and used a financial planner (which likely captures those who used a comprehensive planner who follows a more thorough planning process that includes retirement needs assessment) generated more than 50 percent greater savings than those who estimated retirement needs on their own without the help of a planner.

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Companies Offering “Financial Wellness” Benefits.

Companies offer benefits to their employees to attract better employees. It’s also a way to encourage good employees to stay. The range of benefits has expanded to include financial wellness.

Financial wellness is becoming an important priority for many companies. Money troubles can distract employees from their jobs. Merideth, Inc., publisher of such magazines as Better Homes and Gardens and Ladies Home Journal, does more than offer employees a 401(k). It reimburses eligible employees for the services of a financial counselor.

A number of companies help their top executives as well as their over-50 employees with their financial planning. They realize that they don’t want these experienced, highly paid employees to spend their time studying investment guides or wondering how to invest their retirement plan. Employees who suffer from money worries get sick more often, do not perform as well, and are apt to be absent. By offering to pay the fees of a financial advisor, these companies – for a relatively modest investment – reward their employees and boost productivity.

The typical company offers workshops for their employees, being careful that these meetings do not turn into a sales pitch.  If an employee decides that they wish to work with a particular financial advisor, they sign a separate form stating that they are entering an agreement separately, not as part of a company sponsored solicitation.

The advisor is almost always fee-only and often an independent RIA (Registered Investment Advisor).

If your company wants to offer financial wellness benefits, contact us.

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What if Brokers Had to Call Themselves Brokers?

From “Financial Advisor IQ”

Brokers have run away from their long-held designations and now call themselves “financial advisors” or given impressive sounding titles such as “Vice President – Investments” by the Big Box stores.  But most of them are salesmen for their firm’s products who sell on commission.

There is a difference between sales people and fiduciaries, a difference the few people who use brokers or financial advisors understand.  And there’s a reason.

He [Bob Veres] characterizes the debate over the fiduciary standard as a single skirmish in “a long war between professionals and sales agents.” The latter — Veres’ term for brokers who work at wirehouses and big broker-dealers — won’t rest until they “emasculate” the legal framework that currently separates them from fiduciaries. “Tossing millions of dollars into congressional campaign coffers,” the brokerage industry wants regulators to dilute the fiduciary standard until it looks just like the suitability standard, he says.

I have lots of friends in the investment community, many who work for the big big names on Wall Street.  Many are good people who try to do their best for their clients.  But they are not fiduciaries; that is, people who are legally obligated to put their clients’ interests ahead of their own.  And that makes a big difference.

If you want to know more about the difference between brokers and fiduciaries, please contact us.

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Four ways elite advisors select mutual funds

How do professionals select the people who will manage their money? That is the fundamental question that top-rated Registered Investment Advisors (RIAs) have to answer as they select the mutual funds that go into their portfolios.

What are the traits that are crucial for selecting a fund? At Korving & Company we believe that the number one consideration is clarity and consistency of investment philosophy. The fund should know what its role is and stick to it. If a fund begins to change – a term known as “style drift” – it loses our favor.

Following closely behind is risk-adjusted return. This is a fairly complex calculation. One observer defines it as

… a measure of the return on an investment relative to the risk of that investment, over a specific period.

A third criterion is the distinctiveness of strategy or expertise in the strategy. We create diversified portfolios. We choose funds that are distinctive and that are managed by individuals or teams that have exhibited extraordinary expertise in their particular investment strategy.

Fees are another consideration. Most funds offer several classes of the same fund, differing only in the expenses they charge. We have the ability to choose the least expensive version of the fund we wish to use.

By using the services of a professional RIA, all of these factors go into creating your portfolio. Call us for our guidance in choosing the best people to manage your money.

 

 

Benchmarking Inverts the Basics of Investing

The problem with “benchmarking”  – that is measuring your investment performance against market indexes (known as “benchmarks”) – is that it often leads to buying into asset bubbles.

During the tech boom of the last 20th century, billions of dollars went into internet stocks whose values became wildly inflated.  People who participated in this as a way of reaching for high rates of return, found that no one rang a bell when the party was over.  Many lost their retirement savings and saw their 401(k)s devastated.

Certain stocks become wildly popular, industries become wildly popular and investing styles become wildly popular, all of which leads to wildly inflated values.  This almost inevitably leads to financial pain.

But this does not only happen in the stock market.  In the first decade of the 21st century, real estate seemed to be a way of making outsized profits.  Of course, when the housing bubble collapsed, many not only lost money, but their homes.

The focus of serious investors is to align your portfolio with your personal objectives.  The focus should be on long-term – multi-year – performance.  The only benchmark that should concern you is the one you set for yourself.

At Korving & Company we keep our clients grounded and work with them to meet their personal benchmarks.  Contact us to do the same for you.