Mail piling up?

This is one of the more common questions we hear about the amount of prospectuses, annual reports, etc. that our clients receive from their investment companies.  Would you believe that this much disclosure could actually be bad for you?  Especially when it comes to the financial services industry, more disclosure is a benefit to the client, right?

Disclosure Debate

With all the hub-bub in Washington of who should police the financial planning industry of late, the debate about the effectiveness of disclosure is heating up.  At a recent industry meeting last fall, discussions centered around the idea that the more disclosure a company unleashes on the public the more confused they become in case after case.  Daylian Cain, assistant professor of organizational behavior at the Yale School of Management, discussed his findings of how heavy disclosure can actually harm an investor.  The standard example in these cases being the more pages in a disclosure document the less likely the investor is to read it.  Read more about this interesting discussion here.

Plain-English Descriptions

Last July, the SEC changed financial companies requirements for disclosure so that it will now be in a plain English narrative form with the hopes of making it easier to compare between different companies.  Reading the article above describes how several firms will look to drown their clients with pages and pages of disclosure.  We’ve been working hard over the last few months to make our disclosure form (Form ADV) to be more concise and meaningful to our business activities.  We’ll be sending out new copies of this document in the next few weeks.

Photo Credit: luxomedia

Lots of people have made money in gold, right?  How about collectibles?  Hedge funds?  Wine?  As many investors discover, the world of alternative investing is cluttered with hard to understand rules that can create an uphill climb from the outset.  Take for example this recent story in Businessweek:

http://www.businessweek.com/magazine/content/10_31/b4189050970461.htm

The investor’s urge to do something different was driven by his desire to make up for losses in his portfolio.  So as he watched the price of oil plummet in early 2009 to $34 a barrel, he saw an opportunity to get in at a low price (buy low thinking is good!) and had his broker invest in an exchange traded fund, or ETF, that is designed to track the price of crude oil.

What he didn’t know about was something called contango.  Not only does this word sound like the famous dance, but it also a figurative dance as well.

As this investor learned, the contango trap happens when the price of oil, or other commodity, is rising, but the ETF designed to track the price of oil loses money.  Huh?…

It basically comes down to an inability to take delivery of the oil.  The ETF is a pool of investment dollars, not an empty oil tanker.  In order for the ETF to stay in the game, it has to renew its futures contracts.  So when the contract it currently holds is close to expiration, it buys another one at (you guessed it) a higher price, thus eroding the value of your original investment.

It’s not just individual investors learning hard lessons by using strategies involving alternative investments, there are plenty of examples of big pension and endowment funds gambling their assets on risky and overly complicated investments.

http://www.tampabay.com/news/politics/state-pension-funds-266-million-investment-disappeared-in-2-years/1034097

http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aHQ2Xh55jI.Q

The moral of the story is to control the impulse to go in a different direction just for the sake of trying something different.  If you are going to go down a new investment path be sure that you have charted the course by using a sound, straight-forward strategy.

As a rule of thumb, the more complicated an investment is the less likely the investor fully appreciates the risks they are taking.  As Warren Buffett once said, “Never invest in a business you cannot understand.”

Photo Credit: Rndoam

Listen to Me

Many of our new clients tell us they found out about fee only financial planning by listening to talk radio or watching their favorite financial pundit on television.  Media personalities such as Suze Orman, Clark Howard, and Dave Ramsey do a great service by inspiring consumers to take control of their financial lives. We also appreciate those who send clients our way by touting the benefits of fee-only financial planning.

While the work they do providing financial education and empowerment to the masses is terrific, there is one thing missing from their advice — YOU.  Every once in a while we shock clients by recommending a different strategy than the hard and fast rules preached by these financial celebrities.  This is because we take the time to get to know you, what your values are, and help you define your long term goals.  We appreciate that every client is different and can benefit from planning and investment strategies that address their unique needs.  Media personalities have to define systems intended to work for nearly everyone, so their methods tend to be extreme, from only using cash in envelopes for expenses to denying yourself purchases that may increase your quality of life.

Food for thought

Sometimes the methods used by financial celebrities remind us of the health gurus on TV that come to your house and throw away all the food in your pantry or promote juice cleanses and no-carb diets.  These measures may help you lose weight in the short term, but are not always realistic or appropriate for your specific needs.  A few of the financial strategies we have recommended against are:

Pay Off Your Mortgage Early

This principle is one that is so appealing, because interest costs over the life of a mortgage are huge when looked at in dollar terms.  However, we typically do not recommend neglecting contributions to your retirement accounts or emergency funds in order to pay off a mortgage early.  The reason for this is that, for borrowers with good credit, mortgage rates are at historical lows, plus the interest payments are tax deductible.  Therefore, the interest paid on this debt is likely to be lower than the rate of return earned on your investments over a 15 or 30 year period.  While debt can be a four letter word, using debt responsibly as part of a coordinated strategy can help you achieve your long term goals.

Pay Cash For Everything

This concept also makes sense and the goal is to keep you from living beyond your means.  After all, if you can afford something, you shouldn’t have to use a credit card to pay for it.  However, credit cards have made our financial lives easier by allowing us to visit the bank less frequently and carry less cash on us.  Unless you have struggled with credit card debt in the past, we find that many people can handle the responsibility of spending reasonably with a credit card and paying off the balance every month.  Typically only extreme cases warrant a cash only strategy.

Buy and Hold Only Index Funds

This is not bad advice for the average investor just starting out or going it on their own.  This comes down to whether you believe in active or passive investing and cost.  Index funds charge lower expense ratios than actively managed mutual funds.  Therefore, if you believe that no one can beat the market, it is pointless to pay more for active management.  We embrace a more active investment philosophy and acknowledge that while not everyone can beat the market, talented managers that can provide additional returns can be worth the extra cost.  Another problem with this advice is that most investors can not stick to a buy and hold strategy and tend to make portfolio changes based on short term market volatility and emotional biases.  This leads to sub-par performance over time.

Photo Credit: Steph Anderson

The following is Will’s recent letter to our clients announcing his achievement.

When I joined Financial Symmetry a little over three years ago, I came in with a broad goal of using my extensive experience in accounting and taxation to help others achieve their financial objectives.  It soon became apparent to me, however, that having the CERTIFIED FINANCIAL PLANNER™ designation would enhance my hard earned skills and allow me to better serve our clients.  I am proud to announce that upon completion of an intensive preparation course and diligent self study, I successfully passed the comprehensive national CFP® exam in July.  In the months following I completed the remaining requirements to earn the CFP® designation and now possess the necessary credentials to move into a primary financial advisor role.

To earn the CERTIFIED FINANCIAL PLANNER™ designation, candidates must complete what the Board of Standards refers to as the “4 E’s”:

• Education
• Examination
• Experience
• Ethics

In addition to earning a bachelor’s degree, completing a board certified education program, passing the exam, and adhering to a strict code of ethics, candidates must also have completed three years of relevant work experience in an industry related field.  As a licensed Certified Public Accountant I was automatically eligible to apply for the CFP® Certification Examination in lieu of the education requirement.  Thirty hours of continuing education every two years is also required in order to maintain an active CFP® license.

Being part of the team here at Financial Symmetry has enabled me to build upon my experience as a partner in a local CPA firm.  Through working on plan development, personalized investment analysis, and implementing strategies in our high-level client service model, I have added the essential knowledge and skills to move into this new role with our firm.  I look forward to the new challenges and responsibilities that this opportunity presents.

For a complimentary initial consultation with Will Holt, CFP®, CPA,  please contact him at (919) 851-8200 ext. 203 or by email at wholt@financialsymmetry.com.

Can You Trust Your Financial Advisor?

Written by Chad Smith, CFP®.

Protecting What You Have

1:00 pm – 2:00 pm ET

Instructor Roseann Bove, CFP, CLU

NAPFA-Registered Financial Advisor

Your health, family, and home are important and need to be kept safe. Roseann will provide information on how you can protect the things you have through life, health and medical insurance.

Click here to register for this Webinar.

Click here to view archived Webinar sessions.

The following is a good example of the pitfalls of the sales model:

CIT Debt Sold to Widows Has Fine Print Pimco Resists

Notice that FINRA, the self regulatory authority for brokers says:

“….it’s investigating whether the risks associated with the securities were adequately disclosed.”

Well here is an example of so called disclosure:

CIT Group Inc. Prospectus Supplement

It is our opinion that it is ridiculous to expect most Americans to be able to adequately interpret 72 pages of “disclosure” (and this is only the supplement to the initial disclosure document).

Yet the world of FINRA regulation provides the framework for a Prudential spokesman to proclaim:

“As with all bonds, investors choosing to sell the notes before maturity may sell them at market value to other investors and face certain risks, which are fully disclosed at the time of issue…”

In other words, buyer beware.

The inherent problems and conflicts of interest with the sales model is why we choose to operate as Registered Investment Advisors.  Our regulatory framework is the Investment Advisors Act of 1940, which requires that we act in our client’s best interest.  We believe this is the best framework for client relationships.  The SEC is responsible for supervision under the Act, and they have unfortunately been underfunded for the last several years.  We hope that will be corrected as we feel more of the public should be served by Registered Investment Advisors.

If you haven’t noticed, budgeting is hip these days. This is thanks to the economic uncertainty caused by the stock market’s second worst bear market in the last 100 years. People’s fear of losing their jobs and significant losses in their investment accounts has shifted the importance of financial planning and knowing how to budget back into the spotlight. But there are still people resistant to both of these ideas.

Here are some common excuses, and why they can hurt your savings:

• Not Good With Numbers. It doesn’t take a mathematician to implement a budget. You just need an understanding of how much money is coming in and which directions it is flowing out. You could use an online tool or scribble down your monthly income minus your fixed bills every month to get an idea of what’s left for discretionary spending. When creating a budget worksheet, it’s important to consider 12 months of expenses in your budget, as there is often a lot of variance month to month. Using a year of spending targets also provides the framework to make corrections when you have a few months go over your budgeted amounts.
• Don’t Have Time To Budget. If you have 15 minutes every two weeks you can manage a budget. Most banks now allow you to download your spending data into budgeting software in a matter of minutes. If you can limit your spending to two accounts (checking and credit card) you will also cut down on time. Spend a few more minutes on categorization and you’ll be able to tell if you need to tighten up for the second half of the month or if you are on track with your targeted spending patterns. Conducting regular monthly reviews will go a long way in helping you to have a successful household budget.
• Buy Now. Save Later. Sound familiar? Spending now instead of later is a major roadblock to implementing a budget. This behavior will eat completely through any shell of a budget discipline you attempt to create. The danger with the “buy it now” mentality hangs on the standard of living concept. Most of us become comfortable with a certain level of spending and it’s a lot harder to lower that standard once established than it is to increase it. Don’t let bad spending habits dictate your budget decision-making.
• We Only Live Once. While this is a true statement, it amounts to a hill of beans when you actually need to access savings. As the latest economic crisis has clearly proven, a job loss can wreak financial havoc when you don’t have an emergency fund. Spending like there is no tomorrow will leave you ill-prepared if you find yourself unemployed. This is why it is imperative when setting up your spending categories to carefully consider how much will go towards your savings accounts. Setting up a monthly draft from your primary checking account is a good way to build your emergency fund while also providing a natural discipline for your spending.
• Spending Is More Fun! There is no doubt the instant gratification you get from purchasing an expensive meal out, a new big screen TV or a trip to Europe is very satisfying. But making those purchases within the parameters of a budget doesn’t drain all the fun. Budgeting tools simply help you to take control of your overspending habits. The power of budgeting comes from knowing where you stand and recognizing the next steps you should take to achieve your targets. When setting your targets, make sure you carve out the extraordinary and the semi-regular expenses that could ruin your motivation as well. Remember, delayed gratification is a budget’s best friend!