Do You Need a Financial Advisor?

The answer is likely to be yes if you have ever pondered this question, and you may need an advisor even if you have never considered using one.  If you are currently working with a financial advisor the question should be “Is my financial advisor right for me?”  The problem in both cases is that the term “financial advisor” is nebulous.  It is often used by a variety of individuals offering a variety of services and products of which some or all may not be appropriate for you. 

Let’s say you are not feeling well and decide you should see a doctor.  You are likely to choose your doctor based on the symptoms you are experiencing.  For example, if you are suffering with back pain you might see an orthopedic specialist; with foot pain you are likely to visit a podiatrist, etc.  Suppose your symptoms are not obvious, but you just don’t feel well and have no energy.  You probably would schedule an appointment with your primary care physician for an exam which would likely lead to some tests, and depending upon the results your doctor may refer you to a specialist.

You need to know two things to determine if you should be working with a financial advisor or if your advisor is right for you.  First, you need to identify your financial concerns (symptoms) and second, know what type of advisor can help you (specialist).  You need to know about the services the advisor offers as well as his or her areas of expertise.  If your financial concerns are focused on your investments you will need an advisor with expertise in investments, probably a registered investment advisor.  Conversely, if your concerns have to do with debt management you will need an advisor who can give you recommendations for better managing your debt.  The advisor selection process is made more difficult due to the terminology and the abundance of credentials conferred to individuals in the financial services industry.

The term financial advisor often includes stockbrokers, insurance agents, certified financial planners, CPAs, chartered financial consultants, chartered financial analysts, registered investment advisers and others that you probably never heard of.  It is important to work with an advisor who has the expertise and provides the services that can help you with your specific financial concerns.  An advisor who specializes in providing personal financial planning services (PFP) will in most cases be able to help with your financial concerns.  Your financial concerns are likely to fall into one or more of the following activities of PFP services:  cash flow planning, risk management and insurance planning, retirement planning, investment planning, estate, gift and wealth transfer planning, charitable planning, education planning and tax planning.

CPAs have been the trusted advisor to the public for many years.  Over the past three decades a growing number of CPAs have expanded into providing PFP services to individuals and families.  CPAs often work with other professionals who specialize or have years of experience in various areas under the PFP umbrella because it is difficult to be an expert in all of these areas.  Many CPAs offering PFP services have additional accreditations such as the Personal Financial Specialist (PFS) conferred by the American Institute of CPAs, or they may be registered investment advisers with the Securities and Exchange Commission, and some are also certified financial planners.  CPAs are licensed by state boards of accountancy and all AICPA members are subject to a rigorous Code of Professional Conduct which the majority of state boards have adopted within their accountancy laws.  CPAs are also required to complete rigid continuing education requirements (80 hours every two years in Pennsylvania). 

Here are some questions that may help you decide if you should be working with a financial planner:

• Have you had any life events in the past year (marriage, divorce, births, deaths, inheritance, retirement, job change, etc.)?
• Have you been told about the tax benefits of the stretch IRA?
• Will your children know what to do when they inherit a retirement account?
• Do you have any retirement accounts with former employers?  Did someone go over all of the rollover options with you?
• When was the last time you updated your beneficiary forms, and do they name contingent beneficiaries?
• Are you saving enough for retirement?

Questions to ask yourself if you are already working with a financial advisor:

• What recommendations has my advisor made to reduce my federal income tax?
• What plans do I have to create tax-free income in retirement?
• Does my advisor meet with me at least annually and stay in touch with me by phone more often?  Does my advisor educate me?
• Does my advisor return my calls promptly?
• Would a second opinion be helpful?

For more information about CPA financial planners see “Why a CPA Financial Planner”,
February 14, 2013, on my blog.

Preparing for Retirement...Start Early

In 2012 I compiled a listing of seven retirement planning tips.  These tips were intended for people to undertake prior to entering retirement, preferably within ten years of retirement.  Some of these may be helpful for recently retired individuals who may not have done sufficient planning.  Here are the seven tips in case you have forgotten or missed them:

·       Get a handle on your expected spending in retirement.

·       Eliminate credit card debt and bring other debt under control.

·       Educate yourself about when to claim Social Security benefits (especially if you have a spouse).

·       Set and maintain a retirement spending rate (withdrawal rate).

·       Plan for increased health care costs.

·       Plan to cope with market volatility.

·       Hire a fee only financial planner to help you look at the whole picture if you are not comfortable doing it yourself.

These steps are as important today as they were in 2012.  This posting is intended to expand on some of the above and add a few more.

I inadvertently omitted a very important tip from the original list, and that is to know what you will be doing in retirement.  Today it is not unusual for people to spend 20 to 30 years or more in retirement.  You should have specific ideas as to how you will spend your time in retirement before you stop working.  Playing golf is not a reasonable plan unless you are a touring pro.  The founder of a successful company that I used to work for told me that he planned to work as long as he could, and added that he would rather work than do anything else.  To the best of my knowledge he is still working today in his eighties.  If you are like him you should not plan to retire as you will never be as happy as you are working.

Most of us who do not wish to work forever have other aspirations.  Whether it is charitable work, volunteering, starting a new business (a different kind of work), taking up a hobby or writing a book, you need to make a plan.

Books have been written about when and how to claim Social Security benefits.  It is common for claimants not to understand the importance of knowing when and how to claim especially if there is a spouse.  Social Security is a lifetime government pension and a very important component of retirement planning.  It provides a lifetime income adjusted for inflation, and for many people their largest source of income in retirement.  Failure to properly plan to maximize your lifetime Social Security benefits can result in losing thousands of dollars for you and your spouse.  Forget what you have heard about the program going broke or being non-existent when you are ready to retire.  Social Security will continue to be modified to make it more financially stable with more means testing and other changes (extension of retirement age, etc.), but will be there in some form for those of us working today.

I am often asked if one should pay off his or her mortgage prior to retiring.  The short answer is yes; however, it is not always possible.  You should not delay your retirement just to pay off a mortgage as there are ways to retire and continue to carry a mortgage.  One solution may be to refinance to lower your costs or to shorten the remaining time on the mortgage.  It may be possible to pay an extra amount each month against the principal while you are working to shorten the life of the mortgage without refinancing and incurring closing costs (see blog posting of April 2, 2012: How to Reduce Interest Costs and Pay Off Your Mortgage Faster). 

Retirement planning is not something that can be done at the last minute.  Thinking about retirement should start when you begin working, strange as it sounds, but that is when you can begin implementing the most valuable planning tip of all: 

“Start saving as much as you can as early as you can.”

Financial Planning Tips for 2015

The New Year is a great time to get your financial house in order.  Here are some suggestions that may be helpful for you:

Commit to making a financial plan.

You need a plan.  It does not have to be complicated; a simple plan will often do.  First you need to identify your financial goals.  A financial plan will provide the necessary steps to achieve them.  Is retirement one of your financial goals?  Contributing $100 a month to your 401(k) is not a financial plan.  You need to decide when you would like to retire, how much you will need to retire and whether you are on track to achieve the financial goal of retiring comfortably.  Constructing a retirement plan is more complicated and you may need professional help.  Maybe your goal is to purchase a first home.  You need a plan.  You need to know how much of a home you can afford.  Will you be able to pay the mortgage, taxes and insurance?  How will this compare with the current rent you are paying?  This would be a relatively simple plan.

If you already have a plan now is a good time to review and update it if necessary.

Save more than you did in 2014.

Saving money requires discipline.  Living paycheck to paycheck is not a financial plan.  There is an old saying “Pay yourself first”.  There is much wisdom in these words.  You can create a plan to accomplish this.  It is called a budget.  A budget is a form of a financial plan that can be very useful for achieving your financial goals.  Did you save any money in 2014?  If not, do you know why?  The first step is to learn why you did not save in 2014 so that it will not happen again.  Was it too much credit card debt?  See the next tip for suggestions for reducing and eliminating credit card debt.

Reduce your debt (especially high interest debt).

You will never rid yourself of credit card debt without first establishing it as one of your financial goals and creating a plan to reduce and ultimately eliminate the debt.  Paying the monthly minimum is not a plan.  There are tools to help with this problem and also credit counseling companies that can help, but avoid ones that charge a fee.  A budget can be a useful tool for this purpose, but self-discipline is also a requirement.  Debt consolidation can be helpful in some cases and refinancing a mortgage or home equity loan can be part of the plan.  You should not be paying interest rates of 12 to 15 percent or higher in this low interest rate economy.

Take a hard look at your investments.

Review your investments annually at a minimum and more often if necessary.  Now is a great time to do this.  Look at your retirement accounts and non-retirement accounts.  Are your investments diversified?  Are they in line with your risk tolerance (if they keep you awake at night they are not).  Are you paying too much in fees?  Fees are not always adequately disclosed as they are often net of investment returns.  You should be able to get information about 401(k) fees from your employer.  Your broker or financial advisor can provide information about fees in your brokerage accounts that you should know about.  Visit Morningstar online for information about specific mutual fund and exchange traded fund (ETF) fees.

Establish a 529 savings plan for your children’s or grandchildren’s college education.

A 529 plan can be a great tax-advantaged savings vehicle for paying for college for your kids or grandkids, especially if you start while they are young.  Every state sponsors 529 plans.  Look for one with low fees.  You can do it yourself or use an advisor.  If you use an advisor do not use one that is paid on commission (you want a fee only advisor).

Look for ways to reduce your taxes.

The 2015 tax filing season has begun.  There is no reason to pay more than you are legally obligated to pay (Judge Learned Hand).  The tax code is complicated and errors and omissions can be costly.  Use online software if you prepare your own return.  Software will not guarantee that your return is correct, but it will eliminate math errors and often identify deductions you may overlook.  A paid preparer should suggest ways for you to reduce your taxes, but many do not.  You may need to seek out the services of a tax professional for a review of prior years' tax returns if you believe you are paying too much in taxes.

Utilizing some or all of these suggestions should result in a happier and rewarding 2015 for you.

Should You Borrow from Your 401(k)?

You may be tempted to take a loan from your employer sponsored retirement account.  Payments will be deducted automatically from your pay check and you have five years to repay (longer if the proceeds will be used for a down payment on a first-time home).  The interest rate may be low (often, one or two percent above the prime rate) and the paperwork is minimal.  Not so fast.... you need to understand the ramifications of what you are about to do.

My blog posting of 12/29/11, titled “How is Your 401(k) Doing?” advised against borrowing from your 401(k) even if your plan makes loans easy to get.  The posting also advised treating your 401(k) as one of your prized possessions.  Your 401(k) plan may be the deciding factor in determining when you can retire and how comfortable your retirement will be.  It is not wise to borrow from your future to pay for current obligations.

Some of the downsides of borrowing from your retirement account are:

·       The outstanding loan must be repaid within 60 days should you or your employer terminate your employment.  If not repaid the loan will be treated as a taxable distribution and subject to a 10 percent tax penalty if you are under age 59 ½.

·       You will need to have other funds to pay the taxes due which will be payable by April 15 of the year following the year of distribution.  Using retirement funds to pay the taxes will increase the 10 percent penalty.

·       There are lost opportunity costs while the loan is in force as you may be prohibited from making contributions to the plan during this time.  Your interest payments on the loan will be credited to your account, but that may be less than the investment returns you would have otherwise received.

·       Payments on the loan will be deducted from your pay each month, and you generally cannot stop this even if you should incur a financial hardship.

I advise people to take 401(k) loans only as a last resort.  A 401(k) should not be used as an emergency fund or paying for a luxury item or a vacation, nor should it be used if funds are available from other sources.  If you have a true emergency and there are no other funds available, you may have no other choice.  Should this be the case, pay down the 401(k) loan as soon as possible rather than extending for five years.  Five years is a long time, and you may change jobs or be laid off and faced with having to pay off the loan, or have to pay taxes and a 10 percent penalty on the unpaid amount.

Remember you can borrow for many reasons, but your retirement is not one of them.

Bill Tarlo's 10 Rules for Smart Investing

These rules for investing apply if you are a do-it-yourself (DIY) investor or if you use the services of a financial advisor.   Remember that there is a difference between investing and saving.  Investing is usually related to a longer term goal such as retirement whereas saving is typically for a shorter term goal such as a vacation.  The terms are often interchanged, but not necessarily synonymous.  The term “investing” is somewhat nebulous as it does not state how funds will be allocated and what investment vehicles may be used.  

Here are my 10 rules for smart investing:

1. Investing should be done as part of a financial plan with pre-defined goals.  Examples of these would be retirement, paying for children’s education and purchasing a first home where both the amount of money required and the time to acquire it can be reasonably estimated.

2.     Investing should take into account the investor’s risk tolerance.  All investments pose different degrees of risk, and the greater the risk the greater the potential reward and potential loss. 

3.     Never invest in anything you don’t understand or sounds too good to be true.  People who were burned by the Bernie Madoff Ponzi scheme did not follow this rule.

4.     Invest in low cost mutual funds and exchange traded funds (ETFs).  Expenses do matter and over a 25 or 30 year period can mean the difference between a secure retirement and one not so secure.

5.     Avoid investing in individual stocks unless you know the company well and are prepared to do research and follow the company regularly.  No one can know a company as well as insiders (e.g., management, board of directors and counsel).  If you only have a portfolio of individual stocks you are unlikely to have a diversified portfolio.

6.     Use the services of an independent fee-based financial advisor if you are not comfortable as a DIY.  Do not use someone who is selling proprietary products and receives a commission.  Use an independent fee-based professional.

7.     Do not chase return; past performance is no guarantee of future return.  It is more important to avoid huge losses when the market is tanking than to achieve the highest returns when the market is on a hot streak.  You should strive for a portfolio for all seasons.

8.     Invest for the long term and review your investments periodically (quarterly or not less than semi-annually).

9.     Do not ignore income taxes when making investment decisions.  The tax code is complex and small mistakes can cost thousands of dollars.

10.  Get a second opinion if you have any doubts about your financial advisor.   Warning signs are:  not returning phone calls promptly, pushing specific investment products, inconsistent advice, and poor performance over an extended period.

Following these rules will not guarantee financial success but they will increase the probability of reaching your financial goals.

Is an SBA Loan Right for Your Business?

The U.S. Small Business Administration (SBA) provides a number of financial assistance programs for small businesses.  This posting provides information about the SBA guaranteed loan programs.  The SBA does not lend money to small businesses, but guarantees loans made by SBA partners, primarily lending institutions (banks, community development organizations, etc.).  The SBA’s guarantee is the inducement for lenders to make loans that they otherwise would not make.  The SBA guarantees that the loans will be repaid thus eliminating the risk to lenders.  The SBA sets guidelines and requirements for the loans to fulfill the SBA guaranty.  SBA loans will not be made to businesses if the borrower has access to other financing on reasonable terms.  SBA loans can provide financing to qualifying fledgling small businesses and start-ups when they are unable to secure conventional financing.

There are several types of SBA loans available to small businesses:

• General small business loans 7(a).  This is the SBA’s most common loan program and can be used to purchase equipment, renovate your facility, access working capital and other special needs.
• Microloan program.  Can be used to obtain a revolving line of credit, or term loan for short-term working capital and other purposes.
• Real estate and equipment loans CDC/504.  This type of loan can be used to finance major fixed assets such as equipment or real estate with terms of up to 20 years.

As an incentive to help make financing more available to small businesses the SBA is waiving its guaranty fee on loans of $150,000 or less through September, 2014.  This can result in a savings of more than $2,500 on a $150,000 loan.  Also, effective January 1, 2014 the SBA launched a program for small business owners who are veterans, the SBA Veterans’ Advantage, which waives fees on loans up to $350,000.  This program is also available through September, 2014.

The National Small Business Resource Guide which can be accessed from the SBA website, www.sba.gov, can be helpful in deciding whether to seek an SBA guaranteed loan for your business.

Please see my blog posting dated February 11, 2014 for steps to take before talking to a business banker to see if you qualify for an SBA guarantee.

Now May be a Good Time for a Business Loan

Thinking about expanding your business, purchasing new equipment, making leasehold improvements or maybe you just need more working capital.  Now may be a good time to apply for a business loan.  Interest rates continue to be low, banks have money to lend and the Small Business Administration is waiving the guaranty fee on loans of $150,000 or less through September of this year. 

This posting provides general information to help the business owner prepare to apply for a business loan whether conventional or SBA.

Here are steps to take prior to talking with a business banker:

1.     Document the amount of the loan you need, why you need it, and how you will use the proceeds.  Have specific quotes in hand if you are thinking about purchasing equipment. Describe what the equipment will do for your business (expansion, increase productivity, lower costs, etc.).  Provide a clear explanation of what the loan will do for your business whatever the reason

2.     Demonstrate your ability to repay.  You will need to show the lender how you will repay the loan and the sources available for repayment.  A pro forma cash flow statement showing the amount of cash your business will generate over the term of the loan will be helpful.  Other sources of income if any should be documented.  Know the value of your business property that may be pledged for collateral if applicable.  A personal guaranty may be required.  Personal guaranties should be avoided wherever possible; however, if there is insufficient collateral this may be unavoidable. 

3.     Submit a business plan with your loan application.  This is not always a requirement, but a well prepared business plan can go a long way in persuading a lender to make the loan.  The business plan will describe your business, the industry and market you operate in, and your management team if applicable.  Financial statement projections should be included (balance sheet, P&L statement and cash flow).  You can get more information on preparing a business plan by going to the SBA web site, www.sba.gov.

4.     Your lender will require documentation with your loan application.  Be prepared to submit copies of financial statements, tax returns, and lease agreements.   Lenders may request copies of employment contracts with key employees and contracts with major customers that could significantly impact the business.  The amount and type of loan will dictate the documents required.

It is also a good idea to check your credit history to correct any errors prior to applying for the loan.  Also, let the lender know if you or your business is involved in any litigation and the status of the litigation.

My next posting will cover the types of SBA loans available.  SBA loans are government guaranteed, and in some cases these may be the only type of loan available to your business.  The SBA is helping to make financing more accessible to small businesses.