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Financial Advice and Advisers

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Pay to Be a Financial Expert on Television

by Flexo on October 13, 2008

in Financial Advice and Advisers

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 terms of intelligence, experience, and education.

In many cases, what ends up happening is that the advice is geared to the “lowest common denominator” (in the non-mathematical sense) and those in need of personalized financial advice end up feeling dangerously fulfilled by platitudes, rules of thumb, and averages. But aside from financial guru superstars like Suze Orman, Dave Ramsey, and Robert Kiyosaki, how do producers of local news programs find the experts they use for their economic/human interest pieces?

According to “the Mole,” my favorite undercover financial adviser, radio and television stations contact financial professionals in the community. The stations approach financial advisers to invite them to present “expert opinion.” There is a catch, however. The financial adviser must pay the station to appear.

Previously, I assumed two things. First, if you are interviewed on a television or radio show, you are not paid for your appearance, nor do you have to pay the broadcaster. I’ve been interviewed several times for print and radio, and never once have I been paid nor have I received an invoice. Second, if you are a station or program’s “official financial expert” or “resident financial adviser,” you are paid for your affiliation. The station should be lucky to have an expert like you on “staff.”

This is not the way media works. Radio and television considers your appearances as advertisements for your financial advisory business. Accordingly, you must pay in order to appear. While I have no evidence if that was the case with the financial adviser on the ABC news program I happened to catch, if the Mole is correct (and I generally trust what he has to say), it’s likely she paid ABC in order to be their resident expert and have her name and phone number flash across the screen.

It makes sense from a business standpoint as well. Presumably, the news audience will believe that this financial adviser is reputable for her to be “awarded” the post of resident expert. In turn, some of the audience may become clients. This may make the adviser’s fee worth the price of admission.

As consumers, it’s more evidence that we can’t simply trust appearances.

Taking financial advice from radio gurus, the Mole, Money Magazine, October 1, 2008

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Dave Ramsey’s Baby Steps

by Flexo on August 25, 2008

in Financial Advice and Advisers

I’ve done a good job of sharing my disdain for Dave Ramsey’s popularization of a method of getting out of debt that caters to unmotivated individuals, the “Debt Snowball” method. That doesn’t mean I don’t agree with his principles or his intentions. I just think he, as one of the most popular “gurus” in personal finance, has to cater to the masses. It makes sense for him to profess a methodology that is simple reaches people on an emotional level. Real financial planners who work one-on-one with individuals to get out of debt and formulate a lifetime financial plan would be able to supply better options.

Dave Ramsey does offer something I like, his “Baby Steps.” These are seven suggestions that, when followed sequentially, will do wonders for helping people struggling with their finances to take ownership of the money in their life and start moving towards a more prosperous future.

Here are Dave’s suggestions, verbatim:

In general, I like this plan of action. These “baby steps” help someone ease into a pattern of new, financially responsible behavior, with small mini-goals which when taken in full view go a long way to help ensure financial stability.

These “baby steps” are designed to appeal to a large mass of people. This is not advice based on any one individual’s real situation, so it’s fair to apply some customization and perhaps even improvements. Here are a few small criticisms.

Is $1,000 enough or too much for an emergency fund base? Dave Ramsey suggests shoring up a $1,000 cash cushion before beginning to pay off debt. Although $1,000 is a finite number of dollars, its value has a different meaning to different people or to different families. A family with an income of $250,000 a year and $1,000,000 in debt may not consider $1,000 to be much of anything, while a family earning $20,000 per year and $100,000 in debt might find the saving of $1,000 to be a struggle. So what’s a better option? I would suggest that this base savings, what is needed to lay the groundwork before embarking on the great debt reduction journey, should be one months’ expenses, whatever they happen to be. That sets a high enough starting goal.

The “Debt Snowball” method is not so great. Despite its popularity and proven track record with a million dollar business marketing this method, I’d like to see more people give a real try to the Debt Avalanche. They’ll save money and time in the long run if they are intrinsically motivated. I’ve discussed this at length before.

Is it too soon to worry about college funding for children? I’ve heard experts suggest that parents should make sure their retirement is fully funded before worrying about funding education for their children. I don’t think saving 15% of household income, unless begun at a young age, will get most parents to a secure retirement, but that depends on the family’s needs at that later date. There are too many variables to predict that with any accuracy. The reason most experts suggest this is because you can borrow money for college, but you can’t borrow money (as easily or inexpensively) for retirement.

I strongly believe that parents have a responsibility to ensure that the best educational opportunities are available to their children, but with the prices of tuition increasingly well beyond the rate of inflation, I’m not sure how well that philosophy will work in the future.

Why pay off the mortgage early? Dave Ramsey is strongly against holding all forms of debt. Mostly, I agree. If the mortgage rate is low enough, and you have the fortitude, risk tolerance, and availability to invest the funds you would otherwise use to accelerate your mortgage payment in an asset allocation designed with a long-term time horizon, it may make more sense to pay just your minimum to the mortgage. But I won’t stop anyone who wants to pay off their mortgage early, even if they might end up with a lower net worth than if they had invested. The market is unreliable, but when paying off a mortgage early, you’re guaranteed to “earn” the rate of interest you’re being charged. It’s not a precise way of figuring the math, but knowing that you don’t have to pay interest that was originally included in your amortization is good.

Thanks go to Dave Ramsey for popularizing good general advice.

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Financial Tips for Students Entering College

by Flexo on August 22, 2008

in Financial Advice and Advisers

Fourteen years ago this month I was nervous about what was about to transpire. At this time. although I had been away from home for extended periods of time, I was about to leave for college. Honestly, I thought I might be biting off more than I could chew. Rather than living at home and attending a local college like a number of my high school classmates, I was preparing to live on the campus of a major university in another state.

I should have known that I had little to worry about. But there are a few things I wish I had known — or at least thought about — before entering college.

Pay attention to your expenses. For me, my expenses were fairly controlled. On campus, I had a meal plan. My breakfasts, lunches and dinners were paid for in advance and rolled into my tuition and board expenses. In order to eat in one of the many dining halls, all I had to do was flash my student identification card. This meal plan entitled me to a certain number of meals per week in addition to an allotment of “points” which can be used to purchase snacks at other times.

The meals and points expired at the end of each semester, and the college reminded students that “It is [their] responsibility to budget [their] points over the course of the semester/session.” I don’t recall doing any budgeting. I may have known at the time how many meals and points were available to me, but I didn’t do any planning. I ate when I felt like it and bought snacks and other things at the university’s shops when I desired. There was an option to add points to the account, and I’m sure I did this as needed.

Who is paying for college? My undergraduate education was paid for by my parents, a partial scholarship, and loans in my name. If your parents are paying for your education, be careful not to fail any courses. If you fail a class required for your degree, you will have to take that class again, paying for it twice. It’s not worth it, particularly since it’s usually difficult to outright fail a class. Paying for college yourself supposedly gives you ownership of your academic decisions while in school, but if you’re in a situation where you don’t have to worry about affording your own tuition, then consider yourself lucky.

Work shouldn’t interfere with studies. I am quite grateful I didn’t have to pay for most of my undergraduate education. It allowed me to focus on my education and extracurricular resume-building activities in my field rather than focusing on earning income to afford tuition. I did find a few jobs, however. I stayed on campus for winter and summer sessions to take more classes, but with a lighter load during these in-between semesters, I worked in the department library to earn some extra money. I also served as a web consultant in my department, designing their first departmental web site and teaching professors how to publish their own sites for a measly ten dollars an hour.

These jobs provided me with a little extra cash. I probably spent it just as fast as I was earning it, however.

Open a Roth IRA. I wish I had known about Roth IRAs when I started college. It would have been impossible for me to do so without a crystal ball or some other form of premonition. These retirement accounts were brought into existence while I was enrolled in the university, but I did not hear of it until a few years after I had graduated. If I had known that I could put money away for retirement in a tax-advantaged account while I was in such a low tax bracket, I might have taken advantage of the opportunity. Then again, I might not have. It’s hard to imagine retirement before you’ve officially begun a career, but it’s harder to argue with long-term investing in the stock market. If I had invested $1,000 in the S&P 500 index on October 11, 1996, it would be worth $1,825 now (not including reinvested dividends) and much more by the time I retire.

Like many, I played the “stock market game” in elementary school. By the time I entered college, I probably knew only a little more about investing, but my interests lay elsewhere so I did not particularly think about having a secure financial future.

Avoid credit cards. The credit card companies are vultures on college campuses. I remember when I first arrived on campus as a freshman for orientation, one week before the upperclassmen. The companies set tables outside the dorms with applications and free tee-shirts, enticing subfashionable freshmen like myself to sign up. Although I escaped relatively unscathed, having a credit card without a job is asking for trouble.

One particularly sneaky aspect of college-geared credit cards is the introductory offer. The 0% APR on purchases deal sounds great, but what they don’t explain is that you must pay off your entire balance on the card before the promotional period ends, otherwise you could owe back interest as if the 0% APR promotion never existed. It’s always explained in the fine print, but if you have an appointment for orientation, chances are you just want to sign the form and grab the tee-shirt.

Forbes offers these thirteen financial tips for students entering college for the first time.

  • Use credit cards sparingly
  • Pay all credit card balances in full
  • Get the best deal on a checking account
  • Start saving
  • Keep track of your spending
  • Set a limit on entertainment
  • Shop at second-hand stores
  • Keep an eye out for free money
  • Get a part-time job with tips
  • Walk or ride a bike — don’t drive
  • Avoid the tax on stupidity
  • Look for student discounts
  • Don’t eat out all the time

Tavis Smiley has a number of similar suggestions. He suggests making a budget, shopping smart, and learning to cook.

Had I known what I know now about compounding interest and the tendency for the stock market to increase over time, not just theoretically but from experience, I’d be in a better financial position right now. And it’s not about having more money, it’s about having more options for doing the things I like to do.

Photo credit: Éamon
13 Financial Tips For College Kids, Scott Reeves, Forbes, August 30, 2004
Financial Advice for College Students, Tavis Smiley

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The Path to Mediocrity: Doing What Works For You and Other Self-Limiting Philosophies

by Flexo on August 20, 2008

in Financial Advice and Advisers

General advice for an imaginary average person

Personal finance advice comes in many forms, running the gamut from Dave Ramsey’s philosophies on getting out of debt to Suze Orman’s no-nonsense anti-stupidity spending advice. Opinions vary wildly as you stroll down the promenade from the broker, a salesperson, to the financial planner paid by the hour rather than commission. Mass media, by definition, must appeal to the masses, so unless you’re working individually with a professional, the advice you hear is geared towards the “average” individual.

I don’t know any average individuals. This concept is a fictional statistical human being, an amalgamation of a sample population, with no defining characteristics. Mass advice cannot cater to the most diligent or intelligent of the crowd, because invariably less apt individuals overestimate their abilities, attempt techniques designed for the more able, and fail. Thus, advice is often “dumbed down” or simplified to meet the lower qualifications of a larger group.

Take, for example, the case of the best way to pay off credit card debt. I call it the “Debt Avalanche” but it certainly wasn’t my invention. While there are exceptions, this method of debt repayment calls for credit card debt always being paid off by focusing on the debt with the highest interest rate first. But people don’t always want to take this approach. They may receive more “satisfaction” by paying off the debt with the lowest balance first, which they believe will motivate them to continue paying off debt. Money, after all, is emotional more than it is mathematical.

Unfortunately, it’s this mindset which helps many people fall into debt in the first place (or repeatedly), and it is not correct. The best way of reaching a specific financial goal will always be the mathematical way. If not, your true goal is not purely financial. For example, is your true goal to get out of debt quickly and efficiently or is it to feel good about your debt situation? You will feel better in the end knowing you took less time and spent less money to get out of debt. If not, then perhaps you haven’t learned much from the experience and will find yourself succumbing to the “emotions” of money again and perhaps falling back into debt.

There are legitimate places for emotions when dealing with money, but debt reduction is not one.

Self-limiting philosophies and beliefs

You may hear that “doing what works for you” is the best way to approach a financial situation, but it’s often not a good idea. Doing what works the best mathematically is the ultimate approach. Other approaches may help you reach your goal, but not in the best way possible. “Doing what works for you” is an admission that you feel you have no need to improve yourself. This philosophy tells the world that you’ve learned everything you need to learn and are satisfied with your choice, even though you know it may not be the best. Or worse, if you have not learned all you need to know about your situation, you may not even realize that what you’re doing is in fact “not working.”

“Doing what works for you” is one of a number of self-limiting philosophies, excuses that people will use to convince themselves that they don’t need to strive for excellence. Here are some others:

“Luck and chance affect me more than my effort and skills.” Do you attribute a missed career opportunity to bad luck or not enough hard work? When you received a good grade on a college exam, was it due to the ease of the test or your preparedness? Those who attain their goals are more likely to be those who believe their own decisions and actions affect outcomes, good or bad. Those whose philosophy of outcomes is built around an internal locus of control have been shown to reach their goals more often.

The locus of control is one way psychology pays a significant role in your goals, financial or otherwise.

“Anything is better than nothing.” When it comes to saving, reducing debt, and investing and planning for the future, I agree. You have to start somewhere, but it is only a start. But if you believe that your financial condition in the future is important, the minimum is not enough. Don’t stop at “anything,” even if it is better than “nothing.” This is like saying it’s fine to feed your children one meal a day because one meal is better than no meals. Everyone is busy, but if the minimum is all you have time for, don’t expect results.

“At least I’m better than average.” The New York Times recently cited the Federal Reserve Board with an “average household credit card debt” figure of $8,565. Owe less than that and you’re in good shape, right? It’s unclear how that figure is determined. It may in fact be the average credit card debt of only households that have credit card debt. Include debt-free households in the calculation and the figure will drop. A number this high lulls many people into a false sense of security with the belief that with their balance of $6,000 in credit card debt, they’re “doing better” than most of the country.

This “security” leads to inaction and, in this case, to the glee of credit card providers, merchants, and manufacturers around the world.

Getting over it

The result of a lifetime with these beliefs is guaranteed mediocrity. While removing self-limiting philosophies doesn’t guarantee excellence and the ability to reach every goal, keeping these philosophies guarantees that you will not do your best. I do not know any man or woman with children who is satisfied with being anything but the best father or mother he or she could possibly be, so why are so many people satisfied with being an average personal financial officer?

There is usually a perfect mathematical solution to financial goals, like the Debt Avalanche mentioned above. Although Dave Ramsey says that most people have more success with a different, more expensive and time-consuming technique, that doesn’t mean you shouldn’t strive for the better solution. Just because perfection is not always attainable doesn’t mean that it’s worthwhile to stop striving for that approach and settle for lackluster results, especially if the better approach is not more difficult than the alternatives.

If you’ve found something that “works for you,” don’t assume that there isn’t something else that works better for you. Follow the best examples, not examples set by the fictional average individual. If your financial security is important to you, don’t settle for mediocrity. You won’t always reach your highest goals or always be excellent, but you’ll never be excellent if you limit yourself.

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Can You Judge a Financial Adviser By Her Own Portfolio?

by Flexo on June 6, 2008

in Financial Advice and Advisers

Consider a hypothetical popular financial adviser with $30 million in investable assets. Her (or his) primary clients may average $500,000 of liquid reserves ready to be directed in any manner as instructed. The typical advice these clients may receive likely involve investing mostly in equities through stock index funds. They have low expenses and are poised to provide decent returns with average risk. This advice may include special consideration of asset allocation, with a slide towards lower risk once in retirement to help provide more reliable income while maintaining capital.

This is sensible advice for the average client, though a financial adviser has the responsibility to tailor his advice to the client’s unique situation.

Let’s take a look inside the portfolio of a $30 million adviser. In fact, it just so happens we have some details on one particular famous financial adviser with television and radio shows, books, and a strong brand image, so let’s use her portfolio as reported in 2007.

Suze Orman has a liquid net worth of $25 million, which doesn’t include her $7 million in real estate. Only $1 million, or 4% of her liquid net worth, is in equities. Suze, whose advice is over-simplified and dumbed down to be understood by the most idiotic of callers and is usually accompanied by “motivational” words of empowerment bordering on mean, doesn’t follow her own advice. Far from it. As of 2007, Suze invests almost exclusively in municipal bonds, favoring “safe,” lower returns over the risk of the stock market. Out of her entire portfolio, Suze invests only what she can afford to lose in equities.

Does her asset allocation and refusal to follow her own rules mean she is a bad financial adviser? While there may be several reasons to seek personal advice elsewhere, her own portfolio isn’t one of these reasons. Her advice is not directed at people with $25 million to invest. While some of the general tenets of her advice, like pay off debt, spend less than you earn except in some circumstances, and avoid costly commissions, hold true universally, some of the specifics like asset allocation are directed toward a certain type of client.

Suze’s personal choice makes some sense. With $25 million, you can afford quite a bit of flexibility. With $24 million in bonds, you may be generating a yearly income of $720,000. (Add to that seminars, royalties, appearance fees, and endorsements, and you’re doing pretty well.) One might levy criticism that she is not securing the future for her heirs, but I’m not convinced of that argument. Personally, I have no idea if Suze has any heirs or future plans, but I would think that she would want to do something with her accumulation when she dies, either provide for a family or provide for a foundation. And I would also think that she wants to build as much as possible to do the most she can to help whatever cause she chooses. So in that sense, she may not be doing all she can to allow her funds to grow.

But her current wealth puts her in a position where she can still reach her goals, and give herself a better *chance* of doing so by backing off and choosing less risky investments for a major part of her portfolio. You and I, her average clients, can’t afford to forgo the potential for higher returns and must therefore take on higher risk.

The first fallacy is the idea that one piece of financial advice fits all people all the time. The other fallacy is that one cannot give advice without following that same advice. A stunt man can advise an actor not to jump out of a moving car. A parent can advise a child not to handle knives. A police officer can advise a civilian to put down the gun. Suze — or any other financial adviser — can advise her average clients with not much investable assets to invest as much as possible in equities for the greatest return, regardless of her own portfolio.

But when Suze yells at callers, placates the lowest common denominator, or is otherwise condescending, I change the channel. I tend to think her recommended allocation for the average caller is a little on the safe side. However, she’s free to do whatever she likes with her money, and it doesn’t affect the quality of her advice.

Information on Suze’s portfolio from Outing Sue Orman’s Investments, Chuck Jaffe, MarketWatch, March 8, 2007.

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Is a CFP Certification Necessary When Choosing a Planner?

by Flexo on May 9, 2008

in Financial Advice and Advisers

I like the new columns from Money Magazine featuring “The Mole,” an undercover financial planner. Like me, The Mole prefers to write anonymously to protect his or her identity. While my reasons for doing so pertain more with my desire to post sensitive personal information, The Mole maintains incognito status because he tends to speak out against the practices of his contemporaries and associates.

Some time ago, I considered publicly becoming a financial adviser or planner. Eventually, I decided it wasn’t the path I wanted to take, but the resulting discussion was interesting. So what does a would-be financial planner need in order to be hired and trusted by customers?

Perhaps a certification. The Mole says “maybe.” He has good things to say about Certified Financial Planners (CFPs), as he is one. This is a quality certification program with stringent requirements. Unfortunately, not all certifications require rigorous education and some have a loose grasp on ethics and fiduciary responsibility.

Now by my last count, there were more than 100 financial designations. Many, like the CFP, take a significant amount of time and expertise to master before the designation is awarded… Unfortunately, many of the others require nothing more than brief courses geared toward sales techniques; how to use emotions to sell annuities to seniors is a popular one.

A strong designation would reduce the chances your financial planner turns out to be sleazy like these annuities salesmen profiled by Dateline NBC.

However, even a designation like CFP does not guarantee the quality of the planner. Regardless of the designation, it’s best to get referrals from satisfied customers before selecting your financial planner. Don’t know anyone who is retaining financial advisory services? You can get referrals from the Financial Planning Association or the National Association of Personal Financial Advisors.

With referrals in hand, research your potential advisers with the North American Securities Administrators Association.

Walter Updegrave, another columnist for Money Magazine, submits the following:

I’d be wary of any advisers who contact me unsolicited, and doubly wary of ones who run free retirement-planning lunches or seminars. Many times such sessions are just a come-on to sell high-priced investments.

The lesson is to remain skeptical. If your adviser isn’t listening to your goals, suggesting products that are right for you, or trading frequently, it may be time to fire him or her, regardless of the adviser’s certification.

Do I Really Need a CFP? [Money Magazine]
Cracking the mysterious code of financial advisers [Money Magazine]

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Take This Rule of Thumb Quiz

by Flexo on January 11, 2008

in Financial Advice and Advisers

I often rail against “financial rules of thumb” for their overly simplistic view of what are often complex situations. There is far too much potential for snappy catchphrases to lead people to refuse to think and evaluate situations on their own. Rules of thumb don’t take into account individual circumstances and even the most popular ones are simply incorrect.

Kiplinger asks about the usefulness of twelve financial rules of thumb, particularly when some can be harmful if blindly followed. What do you think? Which “rules” are true and which are false?

# You should always close credit card accounts you no longer use. (See How to Best Handle Old Credit Card Accounts.)
# Save and set aside an emergency “rainy day” fund to cover at least three months’ worth of your expenses. (See Always Be Prepared: The Unexpected Job Loss.)
# The percentage of stock in your portfolio should equal 100 minus your age.
# Always go with a fixed-rate mortgage — especially when interest rates are rising.
# Save 10% of your income each year.
# Buying a car is always cheaper than leasing.
# A Roth IRA is better than a traditional IRA.
# Never buy a house that costs more than 2.5 times your annual income.
# Make sure your own retirement savings are on track before you save for your kids’ college education.
# If you carry a balance, you want a credit card with a low interest rate.
# If you need life insurance to protect your family, your coverage should equal eight to 12 times your annual income.
# With a nest egg of $1 million, you can retire comfortably. (See Does This Number Impress You?)

Some of the answers may surprise you. Leave your thoughts in the comments or take the quiz at Kiplinger.com. Also, take a look at 25 Rules to Grow Rich By.

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5 Stupid Financial Mistakes I Made in 2007: Underutilizing Financial and Tax Advisors

by Sasha on January 7, 2008

in Financial Advice and Advisers

In 2007, I actually sought a financial advisor, developed an asset allocation model, and started to track my finances more closely than ever. All good moves, but after reallocating some of my investments, I made my third mistake:

3. Underutilizing Financial and Tax Advisors

I mentioned that I developed an asset allocation model with my new advisor (after lots of meetings and questionnaires, mind you). Nowhere did I say I actually read it.

I skimmed the hefty report, then tossed it aside. It’s hard to explain this incredibly lax behavior on my part. I called my advisor and asked her to summarize, then acted on what she said, yet the report remained shut. I am reading it this week, because after admitting my behavior here I am sufficiently humiliated. Shame on me.

But not reading the report led to even more bad behavior. [click to continue…]

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