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.