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Archive for November, 2012


Picking a financial adviser

Aparna Narayanan’s November 5th article in The Wall Street Journal  provides tips on how to decide on which financial adviser you should work.  The article is the basis for this discussion.

Determining what help you are seeking is the first step.  You could be looking for an answer or guidance to one or more questions, a comprehensive plan and/or investment management.  Generally people are trying to provide a framework to improve their financial well being.  Often the issue that motivated someone to see a financial adviser is not what needs the most attention.  This cannot always be determined in the introductory meeting.

Understand how the adviser is paid.  You want to understand if the compensation arrangement could create a conflict of interest.  Some advisers get paid only by their clients, in fees that are hourly, a fixed amount or a percentage of investment assets.  Others get commissions or a combination of fees and commissions.  Some advisers are legally required to put their client’s interests first as fiduciaries.

Each adviser has their own approach to an introductory meeting.  Many will offer a free introductory meeting.  The information required for an initial meeting varies among advisors.  The more information you have available the broader the initial discussion can be.  It is best that your partner or spouse is also at the initial meeting.
Understand the purpose of an initial meeting is generally not to provide answers.  The purpose is to see if you (and your spouse or partner) wants to work with the advisers.  The reverse is also true.    The adviser is trying to determine if there is a good fit with you and your needs.

There is no such thing as a bad question.  Listen to the responses to see if the adviser you want helping you with your financial issues.

Let the adviser know once you have made a decision as to who you want to work with.  Also let those you are not going to work with know you will be working with someone else.  This will eliminate unwanted follow-up with you.



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“Borrowing Against Yourself”

The following is based on Jason Zweig’s September 21st article.

“Margin loans’ allow an investor to borrow using their own investments as collateral.  Interest rates are often very attractive compared to other loans.  Although you seem to be borrowing from yourself, you are borrowing against the security market.  The amount that the investor can borrow increases as the market moves up.  The reverse is true.  The amount that the investor can borrow decreases as the market moves down.

There are regulatory restrictions and brokerage policies that limit the amount that can be borrowed.  The amount of the account and the nature of the investment are factors that determine how much can be borrowed from a brokerage account.   If your investments fall below the required amount, some of the assets may need to be sold (margin call) to maintain the required value in the account.  That is, you may be required to sell as the value of your securities drop.  For this reason margin loans are not generally a long-term strategy.

If you are a long-term investor, you hold your investment for the long-term.  An unexpected drop in the market could eliminate a portion of your portfolio, regardless of your intent to be a patient long-term investor.  If you are using margin, be sure to adjust your allocation of your portfolio for this.
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IRS announced the standard mileage rates for 2013

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 56.5 cents per mile for business miles driven
• 24 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

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Do you know the future?

If you do, then you know what tax and financial decisions to make today.

For the rest of us, we need to consider our alternatives.  Making a tax decision based only on possible future tax changes in the future could be a mistake.

Should you sell appreciated stocks you have held for more than 12 months in 2012 because future tax rates may be higher?  Yes if the stocks are no longer appropriate for your portfolio.

Reasons why a stock may no long be appropriate include: lack of performance, lower expectations, and they are too large in relation to the total portfolio.  The possibility of future higher tax rates may encourage an investor to do what is best, regardless of tax rates.  This would also eliminate the immediate impact relating to congressional action relating to the fiscal cliff.

If you have stock options that expire soon, you could exercise them in 2012 and/or sell them in 2012.  This would eliminate any negative impact of changes in tax rates or problems in avoiding the fiscal cliff.

Making sizable gifts in 2012 may be appropriate.  If gifting is an applicable strategy, making the gifts in 2012 eliminate the uncertainty of changes in the tax law or the impact of issues relating to the fiscal cliff.  Future gifts can be reduced if based on the gifts in 2012.

The point is, you need to keep in mind where you are, where you are going and allow flexibility in case thing do not go as planned.
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When did you last review your planning assumptions?

It is necessary to make estimates regarding various factors when planning for your financial goals.  Regardless of the goal, whether it is a car, wedding, new home, college, retirement, etc. there are numerous factors that you need to consider.  For example, when do you want to meet the goal, how much will it cost at that time, how long will the expenditure be required.  You will need to project how much your savings and investments can earn until the funds are needed, what the tax rates will be and what inflation will be.  These and other factors must be considered to know how to accomplish your goals.

Saving for retirement requires addition factors, such as: how long will you live, how healthy you will be and how much will it cost to maintain your desired standard of living.  There are many calculators available on line today.  Each uses different assumptions and factors.  You need to pick the one that you have the most confidence in.

Try to build a cushion into your calculations.  Do not just use long-term trends.  Consider what is happening today and what your expectations are for the future.   Do not use the most optimistic factors.  Round expected future investment returns down and round up future expected expenses.  Remember to factor in inflation and longer life expectancy.

The most important step is to review your assumption at least annually.  All these factors change.

Before 2008, many people expected long term investment returns of 10%.  Today many people are estimating returns of 5%.  Today, many expect future taxes to be higher. Regardless of what your projections of the future are, you should review and adjust your planning to reflect the changes.

Do not delay your planning.  The sooner you start, the easier it will be to meet your goals.

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