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Archive for March, 2011


Finding a qualified independent financial advisor

There are many people who look for a financial planner when they have a specific question or problem.  Too often the person they contact concentrates on the question or problem presented without really looking for the cause of the problem or question. 

I believe that is why the solutions do not always work out.  Without trying to identify the problem and identify the consequence the solutions do not provide adequate flexibility.  Sometime they result in worse problems or not enough time to overcome the problem.  We have seen evidence of this in the headlines since 2007.

Fear is often used to create action.  Humans tend to do the wrong thing financially when they are reacting to fear.  This is evident when so many are buying investments when prices are high and selling investments when prices are low. 

The National Association of Personal Financial Advisors (NAPFA) recently released “Pursuit of a Financial Advisor – Field Guide.  It provides advice on how to find a qualified independent financial advisor.  

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Fiduciary standard

Starting in the late 1990’s, a battle has intensified.  It took an extensive study (Read Rand) of the financial services industries to realize people do not understand the different roles and responsibilities of service providers. 

Registered Investment Advisers and Broker-Dealers are regulated under two different federal statutes.  The insurance industry is regulated by the individual states and is not covered by either of the federal statutes.  Broker-Dealers are held to a lower standard an do not want to be held to the fiduciary standard on Registered Investment Advisers. 

One argument that has been presented is that the if both groups are held to a fiduciary duty, the term fiduciary should be redefined.  Some argue the fiduciary standard is too subjective.  Many think they know a fiduciary duty when they see it.  Some summarize it by saying it is putting the interest of the client first.  What are the things that might violate this standard?  Would receiving a bonus, a higher commission or otherwise personally benefiting from the transaction be putting the clients’ interest first?  Would not fully disclosing additional fees, costs, etc. or lower returns for features that make the service or product more attractive be putting the client’s interest first?  Would not fully disclosing fees, costs, reduced returns for cancelling the service or product be putting clients’ first?  Would not fully understanding the product or service or the consequences of the product or service be putting the clients’ interest first?

Until these issues are resolved, you must ask questions.  Read the mandatory disclosures known as form ADV.  Do not assume that

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Planning requires allowing for flexibility

The March 8th issue of “The Wall Street Journal” contained articles that discussed, strategies for retirees, making a case for annuities and ultra short funds.  A reader of these articles will realize that there are numerous approaches and variables to having enough for retirement.  The approach to take depends on many factors including how you want to live in the future, life expectancy, risk tolerance and an infinite number of other factors. 

The need for flexibility appears throughout all the articles.  The need to periodically review what has occurred is implied. There is not one strategy or product that fits every situation all the time.  Circumstances change, health changes, financial markets change, business cycles occur, life events occur, geopolitical events occur, etc.

None of the articles discuss when the planning should begin.  Planning should start early.  Choices made in selecting a career impact your human capital.  That is, how much you can earn in a lifetime.  The stability of a career will impact a person’s tolerance for investment risk.  Risk includes not only incurring a loss, but also seeing investment values fluctuate. 

Generally rates of returns increase as risk increases.  The amount of risk that can be tolerated changes with time and experience.  Having a plan early in life, will aid in adjusting to the unlimited factors that impact how much someone has and how long it will last.  The plan provides a way to identify what needs to be changed.  That is, an effective approach will be flexible and need to be reviewed periodically.     

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