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Financial Advice and Advisers


Congratulations to the owners of LearnVest, a financial planning start-up that is in the process of finalizing a deal with Northwestern Mutual wherein the latter will be acquiring the assets and business of the former. In a deal of more than $250 million in cash, a company that provided early funding for the start-up will now be the sole owner.

LearnVest entered the market as a service that put women in touch with resources, including financial planners, to help them reach their financial goals. The company later expanded its reach to men, as well.

But it’s quite probable, as Michael Kitces points out, that the value Northwestern Mutual sees in LearnVest isn’t in its small advisory clientele, it’s in the membership base for personal financial management software. This part of the business caters to more than 1.5 million customers.

The acquisition doesn’t come as much of a surprise. It behooves old financial companies to integrate businesses that have been successful in attracting younger customers. Millennials are more inclined to be customers of businesses that started online, use marketing that is catered to how the generation perceives itself, and are led by people who seem to have more in common with them.

But it’s those old financial companies that have the money, thus they provide capital funding for start-ups and are the most interested in making acquisitions like these. And you can be sure that the companies that provide the funding are those who benefit the most in an eventual sale and have influence in the management of the start-up companies during their funding periods.

But where does this leave LearnVest advisory customers? Are they now clients of Northwestern Mutual? In short, yes.

There is a legal regulation that prevents this from happening automatically. In order for one financial advisory to turn clients over to another which is the case in this acquisition, the Investment Advisors Act requires that customers give consent to the change.

And LearnVest is making this “easy” for customers. Any customer not taking an action is considered to have given his or her consent; in order to refuse consent, a customer must close his or her account. While LearnVest claims this is to make the change easy for customers, it’s really just an “opt-out” option, assuming customers agree with the change even if they don’t know about it.

This is the same tactic that consumer groups have fought against in other areas. Many services require an “opt in” confirmation of subscription, or even multiple confirmations just to be safe.

It’s unlikely that much will change immediately with this acquisition. Customers will likely retain their membership as is, and will be assigned to the same advisers. But if one of the reasons for becoming a customer with LearnVest was the opportunity to get financial advice from outside the “establishment,” financial industry’s old guard, and work with a company that seemed to be geared to you, you may not be interested in being a part of this new evolution of the start-up.

And LearnVest hasn’t yet communicated the acquisition to all of its customers. The company has presented a few social media posts with a link to a list of answers to frequently asked questions, and I expect emails to customers will be forthcoming. One of LearnVest’s Twitter posts was the first I heard of the acquisition, and that led me to check the news for the details.

Considering LearnVest has only managed to obtain 10,000 advisory customers over six years, this does not seem to be a huge concern for the company.

Born in 1976, I don’t quite fit the description of the Millennial generation (or Generation Y), yet I probably have more in common with the generation than I do with Generation X. It’s hard to say. Like Millennials, I’ve lived most of my life with technology like email, but only because I was a geeky kid and ran bulletin board systems from my house, learned how to code in various programming languages on my own, and built my first website in college when the cast majority of colleges didn’t even have their own websites.

Yet I hate text messages. So I obviously can’t be a Millennial.

I prefer desktop Quicken to Mint.com and other online personal finance management software — but I do have dreams about designing a successful financial mobile app that Millennials — and I — would want to use. I prefer talking in person to a financial advisor over allowing algorithms to suggest my financial actions. This would make LearnVest better for me than other “automatic” or “robo” advisers.

LearnVest’s advisory might be something I would explore if Vanguard didn’t present me with access to a Certified Financial Planner any time free of charge and if I didn’t have friends and colleagues with the CFP designation all happy to offer me their advice.

Northwestern Mutual plans to keep LearnVest’s operations separate, at least for the immediate future, so potential and existing advisory clients shouldn’t be too concerned about the change. The source of the company’s funding is still and has always been the financial industry and venture capitalists, except for the $75,000 CEO Alexa von Tobel reportedly invested with her own money.

The influence within the company doesn’t change much other than giving other investors a cash distribution to exit their ownership and leaving Northwestern Mutual with complete control. Maybe that’s a big change. Maybe it will mean very little. But if it’s affecting only 10,000 of the 1.5 million LearnVest customers, I think the bigger question is what the insurance company will be able to do with any data stored by the personal financial management software.

Are you a customer of LearnVest? Do you think this is a move in the right direction for the company?

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Over the last year, a friend of mine has been trying to convince me to move my financial assets.

I currently have a taxable investment account at Vanguard, and my portfolio consists of a mix that includes a domestic stock index fund, an international stock index fund, and tax-advantaged municipal bond funds. This friend believes that I should be approaching my investments somewhat differently.

He is a real estate broker, so he likes to think in terms of leverage. My asset level qualifies me for so-called “private banking” at most retail banks, and one of the things banks like to do for wealthier clients is hold onto their assets while offering special terms like reduced banking fees and great interest rates on a substantial line of credit.

I’ve had no need for such things thus far, but there may come a time where I want to use leverage to invest in a business, so I’ve been exploring the idea.

So far, I’ve talked to two firms. The first was the one recommended by my friend, as he manages the assets of his wife, who is a member of a prominent family that has seen success through generations in New Jersey. That’s Merrill Lynch. The other is a branch of my local retail bank, Wells Fargo Advisors.

I spoke to both separately, and they both put together proposals. Wells Fargo presented me with a team of people ready to take over my banking, while the Merrill Lynch adviser initially thought my plan was solid. Both parties drew up a proposal for me, and the two were very different. I had a much longer initial discussion with Wells Fargo, so their proposal took into account my preference for low-cost index funds, at least partly.

Neither of these teams of advisers are financial planners. They are salespeople, or stockbrokers, or financial advisers, or investment advisers, and they have products to offer. People in these roles can go by any variety of names and can be misleading to customers.

The price I pay for these products, in addition to the fees baked into investments that eat into net investment results, is generally a 1% fee for assets they manage. There are certain times when paying 1% of a portfolio’s balance every year — whether the portfolio gains or loses money — could be like paying someone’s salary. It’s far higher than the expense ratios embedded into my mutual funds.

In theory, even salespeople, whether they earn money from commissions, from kickbacks from fund managers, or from a combination of the two, should want to offer what’s in the best interest of the client. If they don’t, the client would leave, theoretically, and find a better salesperson. But I’m not so sure this theory works out in practice. Given two roughly similar investments, wouldn’t a salesperson want to offer the one that provides him with a little more income?

Legally, advisers must only sell investments that are appropriate for the investor based on the customer’s time horizon and risk tolerance. A financial planner, particularly one who is certified, is held to a different standard. A financial planner must give advice always with the customer’s interest in mind. That’s the fiduciary standard, and it would be the difference between a planner recommending a low-cost portfolio of index funds and an adviser or salesperson making decisions based on what’s more lucrative for the firm.

President Obama wants to change the regulations so all financial advisers, everyone who works for a bank and offers advice on investment decisions, are held to this fiduciary standard. This probably has more of an effect on what happens when you call up your employer’s 401(k) plan sponsor to ask for investment advice.

It’s clear why banks have no interest in adhering to a fiduciary standard. If stockbrokers were unable to sell all but the lowest-cost investments, it would change the entire nature of Wall Street. In order to stay in business, managers of active mutual funds would need to find a new way to sell their products. Banks would have to make up the income previously generated through incentives or kickbacks in other ways.

This is why the industry has reacted to the fiduciary standard proposal by claiming that the requested regulation would make it more difficult for the middle class to get financial advice. I don’t necessarily think that’s true. It might make investment sales at a bank less accessible to those without sufficient assets for the 1% fee to generate worthwhile revenue.

But that’s not the financial advice most people should be seeking — and I found that out when I attempted it myself. The middle class, whoever that may be — the not wealthy, who may be dealing with a growing retirement investment account, a house, and maybe some additional taxable investments — needs little in the way of investment sales and more in the way of basic financial planning advice. Maybe financial coaching.

Maybe there’s a different solution. More retail banks could offer financial planning or coaching, where the employees abide by the fiduciary standard, much like independent Certified Financial Planners. The model must work because Vanguard offers this service to its customers; there’s no reason why retail banks can’t figure out how to make sure the same type of service would be profitable.

If customers really believe the best place to go for financial advice is their local retail banks, those institutions can do a better job of meeting those needs rather than just putting them in front of salespeople. If financial planners can stay in business independently, banks should be able to find a way to incorporate that type of service into their offerings.

Employers may want to follow this example, as well. When I worked for a financial company, a company whose own subsidiary managed employee’s 401(k) accounts, employees were encouraged to talk to a company-provided financial expert. It was never clear — especially to me, thirteen years ago, before I knew about fiduciary standards and financial planners — who I was talking to or how they determined their recommendations and advice.

When you walk into a car dealership, you know you’re talking to a salesperson, and you know the goal of the salesperson is to sell you something. You also know that the salesperson has incentives to sell you cars, related products, and services that generate the most profit for the dealership.

For most customers, this isn’t as clear when you enter a retail bank. For some reason, customers believe that bank employees want to help and are financial experts who offer advice. The proposal of new fiduciary standard regulations could make sure that customers can walk into a bank and get the real advice they’re seeking.

The fiduciary standard isn’t a guarantee. As Walter Updegrave pointed out in a recent article for Money, an adviser and a client can never have completely aligned motivations. A financial planner would need to give advice that is in the best interest of his or her client, but must also be concerned about earning future business from each client, winning new clients, and staying in business.

No one, not even a fiduciary, can look out for yourself better than you.

And I understand that the general reaction to that fact is that we need to educate everyone more about managing their own finances, so they know to avoid brokers who try to sell customers what’s in the company’s best interest instead of what’s best for the clients. But this is a message that doesn’t get through completely, and especially not to the people who need to message the most.

Financial planners and coaches can keep trying to make it clear that they’re better resources for most people and we can continue pushing useless and harmful money management and financial literacy classes in high school, or we can make some industry changes to ensure that the professionals people are most likely to encounter when they need help are the right type of financial planners.

I’m going to go back to the bank. I may eventually move my assets to the bank to take advantage of access to credit, but only if I can do so on my own terms, investing how I want to invest, with no additional fees.

Do you think all brokers and financial advisers should be held to a fiduciary standard?

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I recently appeared on the Stacking Benjamins podcast to talk with Joe Saul-Sehy about the Debt Avalanche and the Debt Snowball, two very similar methods of paying off existing debt — usually applied to situations that involve mutiple credit cards. They two approaches differ in one important aspect, and I’ve discussed that in detail on Consumerism Commentary.

You can listen to that podcast episode here. We go beyond the details of debt payoff and discuss the mindset that comes about from being hopelessly devoted to gurus and strong personalities. And one thing that comes out of this mindset is that everyone who disagrees with your particular guru is wrong, doesn’t “get it,” and is jealous of the guru’s success.

I’ll call out experts I disagree with, but when I also find myself leaning towards certain advice, I’ll point that out as well. Gurus, even the most persuasive, can be wrong, and the same gurus can be right. It’s not that all strongly-opinionated authors and seminar leaders are providing bad information, but the nature of these communities is based on groupthink. People lose the ability to make decisions for themselves and see the subtlety in personal situations that destroys the relevance of one-size-fits-all prescriptions.

One thing that I’ve concluded, at least thus far, is that some criticisms of one author’s approach to building wealth, David Bach’s Latte Factor, are unfounded.

I wrote about two invalid criticisms of the Latte Factor yesterday — that time is better spent earning more money than saving money and that frugal people have already succeeded with the Latte Factor but have nothing else to gain from the advice. Today I’ll continue with two more criticisms I find to be incomplete.

3. The purpose of money is to spend it on things that make you happy. If that’s a daily cappuccino, so be it.

First, I’ll take a look at this criticism from the coffee-literal perspective.

Ask someone who relies on a morning latte to get through at least part of the day with their sanity intact, you can imagine the drink is something about which he’s not likely willing to compromise. But maybe having cheaper coffee at home would help him maintain a positive attitude through the morning while avoiding the $8 drink at the name-brand coffee shop.

Perhaps there’s a social aspect to getting coffee at the same shop every day, but if that’s the case, the drink isn’t the important part and can be easily switched with, say, a cup of water. It may just be the fact that you have a daily routine that maintains your happiness, and changing that routine might be difficult at first but will easily become the new normal.

Now, here are my thoughts on this criticism taking a more generalized perspective to the Latte Factor.

There’s no point in improving your bank account balance if you don’t have any ideas for what you’d like to do with your life. Money is not a goal by itself. When you know what the purpose of your money is — some type of legacy you want to leave on the world — you are more inclined to think about your financial choices carefully and make decisions that provide better results in the future.

Happiness is an important piece of long-term goals. And spending money on experiences, not things, is a more efficient of spending money when happiness is concerned. Most people should better understand that happiness is a choice, not an ultimate goal. In fact, happiness comes through the little things in your life on a daily basis, not a state of being that won’t be realized until some other condition is met (such as having a high net worth.)

The idea that happiness is a choice might come close to the same danger I illustrated yesterday, how living situations can be overwhelming to the point that not much philosophical change is possible, but regardless you don’t need a daily coffee to be happy.

The idea that one should continue spending money because it makes one happy is a convenient excuse that allows people to feel better about making bad decisions.

4. Most people who try the Latte Factor aren’t successful.

This is probably the most ridiculous criticism of anything, let alone the Latte Factor. It’s crazy for people to believe they’re better than average or can be more successful than average. And I pointed that out when I wrote about the chances of being a successful entrepreneur earning $10 million from something that starts as a side business. It’s possible, of course, but it’s not common.

But that doesn’t mean you shouldn’t try. Princeton University’s acceptance rate in 2012 was only 8.2% of all applicants. And it’s safe to assume that most of the high school students who bother to apply for Princeton University are already highly qualified to attend. That doesn’t mean that if you are qualified you shouldn’t apply because the chance of acceptance is so low. It’s not that difficult or complicated to succeed at reducing daily, habitual expenses, and by looking at the idea as a philosophy instead of a rule, the concept becomes a part of your life and invites success.

Find internal motivation and you won’t give up.

5. By the time you realize the great savings over a long period of time, inflation’s effect will make that money not worth nearly as much as its sounds today.

There’s some disagreement about how much the Latte Factor can actually save someone. We can easily calculate and define the savings amount on an annual basis, but beyond that, there are too many variables in play for anyone to make an informed decision based just on numbers. If you could save $5 a weekday by avoiding expensive coffee, a trip to Wendy’s, a pack of cigarettes, or some other expense, you’re looking at $25 a week or $1,250 a year (50 weeks). Over twenty years, that’s $37,500 saved.

That’s about where the facts end. You can assume that the $1,200 a year is invested on a monthly basis in a broad stock market index mutual fund in an IRA, the investment increases each year by 3% inflation, and the investment ends up earning an annual rate of 8%, a pretty average for the stock market. With all of those assumptions, your ending balance will be more than $220,000 after 30 years. That sounds great, but inflation eats away at the purchasing power of that money, so $220,000 30 years from now could be equivalent to $97,000 (a figure I determined by using the Bureau of Labor Statistics inflation calculator to compare 2014 dollars with 1984 dollars).

The assumptions are aggressive and leave holes in the calculation:

  • What are the chances that someone will invest all the money they save through the Latte Factor?
  • What are the chances he won’t need to withdraw money from the stock market during an economic downturn?
  • Is the daily “latte” (or whatever the habitual expense might be) just being replaced with another unnecssary daily expense?

There are too many variables to be able to make a prediction. It also doesn’t take into account the positive effect on other areas of your financial life by implementing the Latte Factor. In fact, the calculated savings might be too conservative — that is, you’ll save even more money than the calculation expects — if the philosophy helps you make better, informed decisions about money.

The important point is this. Even if you end up with $100,000 in your “Latte Factor” bank account at the end of thirty years, that’s $100,000 you wouldn’t have had otherwise. And while being successful with a business might generate $1 million, $10 million or more over the same amount of time, there’s no reason you can’t pursue that at the same time you’re being smart about your own finances. And I hate to disagree with the “You can do it!” entrepreneur coaches, but the chances of being successful in business at that level are quite low.

I don’t think any Latte Factor supporter has ever said that the concept of cutting back on habitually repeated expenses is the sole key to building wealth over the long term, but most of the criticisms assume that the philosophy is prescribed as the definitive solution, and those who follow it aren’t capable of taking a multifaceted approach to improving their finances, whether those financial goals include getting out of debt or reaching financial independence. No, $100,000 thirty years from now is not going to make anyone financial independent. That doesn’t mean the Latte Factor fails — it addresses a different concern.

That is the big assumption that drives the criticism. The Latte Factor is a simple concept, but it’s only one part of a larger philosophy. This is just a small part of the fact that people spend money and time on what’s important to them. When people say that saving money or earning more income is important, but spend no time or mental energy working towards those goals, their words disagree with their actions. It’s those actions that matter, like everyone knows.

If you want to be financially independent, but aren’t considering all avenues for reaching that goal, including reducing expenses and earning more money, then you don’t really want to be financially independent. You don’t really want to be out of debt. Or you don’t want these things enough to actually make changes in your life. Everything good is worth sacrificing for.

There may exist legitimate criticisms of David Bach’s Latte Factor. It’s not applicable for all people in all situations, certainly. But these five criticisms come from a misunderstanding of the goals of this frugal approach, bad assumptions inherent among some individuals who implement the advice, or incorrect expectations about the results.

Photo: Flickr

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More than seven years ago, I encouraged readers to forget about the Latte Factor. The Latte Factor — a registered trademark — is the core marketing message from personal finance guru and author David Bach. The concept uses a daily morning latte as a metaphor for all small, habitually repeated expenses, that add up to a lot of money over time. A lot of that money could better serve us by being placed in savings or investing than being spent through an unnecessary habit.

The Latte Factor and its bigger meaning have drawn much criticism. Not all financial experts are interested in encouraging those with advanced financial goals to pay too much attention to small changes. I, for one, have raised my concerns with the relevance of focusing on the Latte Factor for long-term wealth building. David Bach appeared on the Consumerism Commentary Podcast to discuss this financial advice, and he addressed some of my criticisms.

From the discussion with David Bach, from discussions with other financial experts, and through internal reflection, I don’t think there’s anything wrong with the Latte Factor, at least, not as much as other critics think is wrong. Most criticism comes from a misunderstanding of the goals of the approach.

Here are some of those common criticisms, including some of mine, and how the concept behind the Latte Factor still holds up to scrutiny.

1. It’s more worthwhile to spend time earning more income than it is to spend time saving money.

I completely agree with the above statement. Given the sentiment, building your ability to earn more money over the course of your lifetime greatly overshadows the benefits of saving $5 a day. There are good reasons why gurus, particularly entrepreneurial-focused self-proclaimed experts, encourage focusing on income rather than frugality through modified spending habits.

  • “Big wins” generate a strong impact on your ability to become financially independent.
  • Cutting back your expenses has a finite limit — when you reach the bottom level of Maslow’s Hierarchy of Needs expressed in budgets. Earning more income is theoretically infinite.
  • Focusing on building income instead of saving more money has benefits in life other than just increasing your bank account balance.

These are all good reasons for focusing on building income. I think everyone should work on building income if they can. But if you’re concerned that the Latte Factor was born in the “self-help movement” and relies on telling people what they want to hear to encourage action and motivate people to change their lives presumably for the better, the “you can earn more money, and so do I!” approach is even more rooted in those empty, aphoristic motivation techniques that sell millions of books.

The big assumption among those who say, “It’s easy. Ignore the Latte Factor and spend your time earning more money!” is that everyone listening to such advice is a middle-class American: gainfully employed, probably in a nine-to-five office job, a little dissatisfied with work and life, and having extra capacity for turning a hobby or passion into a side job and perhaps even a career.

I want to see one of these gurus walk up to a single mom, working two daily jobs to support a couple of children, juggling school and day care, and tell her, “Turn your passion into an income! Get another job! Work harder!” It’s just not going to happen. Some people can’t make changes to their lives as easily as those who write the books. Getting a better job requires education, education requires time, and time is hard to come by if you’re having difficulty raising your family as it is. The appropriate response to our motivational guru with this particlar gall is, “Fuck you.” (Pardon the French.)

Now, bad circumstances can’t always be an excuse for refusing to put in more effort to increase income. Sometimes being better at a current job is enough to make a little bit of an impact. Small changes in behavior can increase the chances. And some people are just lazy — if they are able to increase their motivation, they could see they have more opportunities than they initially imagined.

There is certainly a good proportion of people who can afford the time and energy to build their income through a better job. And those who can should. But that doesn’t make the Latte Factor irrelevant. You can spend your time and effort earning more money at the same time you analyze your spending and figure out where you can eliminate excess.

The Latte Factor is only one piece of the wealth building puzzle. No one is restricted to either saving money or earning more. The good thing is that once your spending habit is identified, it doesn’t take much effort at all, and still has significant benefits in the long run.

2. Frugal people have already eliminated their daily extras.

This was one of my questions to David Bach. Many frugal individuals and households have already eliminated their daily latte. They’ve already analyzed their spending and cut out what they could. Where does the Latte Factor leave them?

It’s going to be difficult to take someone who isn’t predisposed to a frugal lifestyle and encourage them to successfully adopt frugal strategies. People do change their philosophical beliefs, though not many, and a good number of those who do are frugal only out of necessity, for a short period of time. The loss of a job certainly increases the need to change one’s approach to saving money, but a job loss should only be a temporary situation.

To contrast, changing your approach to money through the Latte Factor has to be a lifelong commitment in order to realize the benefits that are strongly touted, like the purported nest-egg increase of a million dollars over the course of several decades. So if there is a good chance most individuals not predisposed towards frugality will ignore the advice anyway, and a good chance that individuals already considering themselves frugal have already applied the Latte Factor to their lives, why spend so much time and effort discussing the concept?

The Latte Factor is about more than fewer less coffee-related drinks. It’s about eliminating automatic habits and making decisions about money something that happens in the part of the brain that handles conscious decision-making. The philosophy encourages people to think about the consequences of their actions.

This is not only good for saving money, but it’s a positive approach that helps people earn more money, too.

In addition, unless you’ve reduced your life to the bare necessities of food, water, and shelter (Maslow’s Hierarchy of Needs as referenced above), there’s more you can do to save money. It’s just a question of how far you’re willing to go to adjust your lifestyle in exchange for long-term savings. Some changes, and perhaps the compromises you make in your happiness, may not be worth the savings, but that’s a decision you can make only once you’re able to fully evaluate the situation.

The Latte Factor encourages people to switch from automatic mode to conscious mode when dealing with financial situations. It doesn’t matter if that philosophy is put into effect through refusing expensive coffees, avoiding the fast food restaurant for lunch each day, cooking meals instead of eating in the office cafeteria, or quitting smoking.

Of all the criticisms of the Latte Factor I think go too far and miss the point of using a philosophical adjustment to change behavior and improve finances, these are just two. I will share three more tomorrow that focus on the happiness derived from daily habits, the “most people fail” criticism, and the erosive effect of inflation that helps overstate the financial benefit of saving about $5 a day.

Photo: Flickr

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How To Handle Requests For Financial Advice

by Luke Landes

I don’t have to remind myself that I’m not an expert when it comes to money. While my choices have improved over the past few years, I still make mistakes at about the same rate I always have. Even recently, I thought I could outsmart the public and take advantage of Toyota’s recent bad news. ... Continue reading this article…

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Don’t Tell Others How To Spend Their Money

by Outlaw

This is a guest article by Outlaw, who lives and works in New York’s financial district and writes on the blog Credit Card Outlaw. I don’t believe in conspiracies. A few weeks ago someone I vaguely knew from college forwarded me an email about how the World Trade Center was likely destroyed by government “beam ... Continue reading this article…

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Pay to Be a Financial Expert on Television

by Luke Landes

Last week, I had doubts about the advice provided by a so-called financial expert on the local prime-time network news program. Offering advice in public is a difficult task to do well. You have to appeal to your audience by suggesting solutions appropriate for the bulk of the listeners, a group that can vary in ... Continue reading this article…

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