I Am Human

Are financial advisors supposed to be upstanding citizens of financial planning? Are we the beacon on the hill that does it all right? Do we budget correctly, live within our means, save for college, and fund our retirements? In theory, I would say yes. We are supposed to be all of those things.

Unfortunately, we are human and are not perfect. Life is not linear and we, like many of our clients, rarely go from point A to point B in a straight line. We encounter curves, dips, and bumps along the way just like everyone else.

Like many of you, the first financial priority my wife and I established was to plan for retirement. There will come a day when we will stop working and we'll have to support ourselves on what we have saved as well as social security. My wife defers the maximum into her company's Thrift Plan and I defer as much as I can into my SEP IRA. We have rolled over the 401k’s from all of our previous employers so we can keep an eye on all of our assets in one place. In terms of retirement planning, I will give myself a check for doing the right thing.

Insofar as estate planning is concerned, I will also give myself a check. Our estate is not much of an estate but we have done the basics: bought life insurance; established wills; and arranged a power of attorney and healthcare proxies.

Saving for our kids' college has proven harder than I previously imagined. As a parent with two kids in college and one in 10^th grade, I can safely say that no matter how much you save for your child's higher education it's probably not enough. There is the known quantity of tuition, but housing costs vary and books and course packets are very expensive. There are social dues if your child joins a fraternity or sorority, and grocery and cable bills if they live off campus. There are spring breaks to pay for, as well as plane rides home for the holidays. Have we saved enough for college? No. We did start 529 plans when our children were young - and our kids' grandparents have contributed - but we will still fall short. I will give myself half a check for college savings.

When it comes to budgeting household expenses, we've struggled. As a financial advisor, I preach living within your means. Nothing will get you closer to your financial goal like living within or below your means. One of the great challenges I have is understanding the difference between a need and a want. I want stuff because it makes me temporarily happy, but do I really need it? Wants are like milkshakes. You love them, they taste amazing, but they are not necessarily good for you. How do you eliminate the wants when you only get one life to live? So yes, I get a Starbucks in the morning and own more shoes than I need. Only half a check.

Living within your means is living within your income, but how do you budget for non-reimbursable healthcare costs, a broken furnace, or taking care of an elderly parent? It’s not easy unless you can save more from each pay check.

I am a big fan of the financial writer Carl Richards. One of his greatest columns was in the New York Times a few years ago. It was an  honest and personal account of a failed endeavor in which he lost his home http://nyti.ms/1y2qJL0.  As a financial writer and advisor it must have been very difficult to come to terms with such a mistake. Carl has recovered and is probably doing better than ever. I am sure that what he learned from this error has made him a better advisor, listener, and colleague.

It’s a challenge every day to improve oneself. But if we are any good at what we do, we must learn from and embrace our mistakes. I should have saved more for college and I shouldn’t carry a balance on my credit card, but I am human.

 

It’s a Baby’s World. Let’s Prepare.

 

Here is another post from our recent hire Zach Scott. Enjoy.

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Ah, babies! So adorable, so sweet, so…everywhere.  At least that’s the case in my neighborhood and age bracket. A lot of close friends have added to their families recently, and my wife and I have been making house calls to visit the new additions and their proud parents. Even if I’m not calling on a friend’s baby, I am most likely dodging double-strollers while walking outside. I am at an age where it is hard to avoid seeing babies and talking about babies - but I really can’t complain. It’s been a delight to see the joy being a parent can bring. 

But babies, as cute as they are at a young age, grow up, and if you’re like a lot of my friends you are probably thinking about next steps in terms of saving for your little one’s education. Higher education in the US has hit choppy waters over the last 10-15 years, since I graduated from college, with some students amassing loans of upwards to $250,000 for degrees at institutions with lackluster credentials and few to any job prospects. But what does college really cost? While some people will become paralyzed by fear and cry out to the heavens, “Two hundred and fifty thousand dollars!?” it is important to keep in mind that a 4-year education currently only costs that much at the most expensive universities in the country. And that cost assumes your child won’t work while in college, receive financial aid, or get a scholarship. 

To get a better idea of what of what the cost of college currently looks like, I pulled the rates for my alma mater, Indiana University, a pretty good institution:

University of Indiana at Bloomington – ANNUAL COSTS 2014-2015 Academic Year
In-State Tuition & Fees	$10,388
Out-of-State Tuition & Fees	$33,240
On Campus Room & Board	$9,494
Books & Supplies	$1,500
Transportation	$930
Personal Expenses	$2,106

That comes to a total annual cost of $24,418 for in-state and $47,270 for out-of-state students. If your child is one year old right now (and assuming our higher education system doesn’t undergo fundamental changes in the near future), this means that the cost of a 4-year college education, using a 5% inflation rate, will be $241,223 by graduation. For an out-of-state education using the same assumptions, the cost rises to $466,975.

If you are appalled by those figures, you’re not alone. And while it is debatable whether or not the cost of college will continue its meteoric rise, those figures are plausible given the trends of the last 30 years. But, remember, those figures don’t take into consideration money you can begin to sock away and invest right now for your child’s education. For example, if you start putting away $400 a month toward your child’s education today, in 20 years, using an annual rate of return of 6% before tax, you will have saved $145,071, enough to cover 60% of your child’s in-state education. For out-of-state tuition, you will have saved enough to pay for 31% of the total cost of college. 

Even though the funding gap that remains for both in-state and out-of-state tuition is still wide - and $400 a month might be more than you can afford at the moment - don’t forget that the money you make right now is not what you will be earning in 10 years’ time. For most people, peak earning years are between the ages of 40-55. Most likely if you are just starting a family you haven’t even hit that age bracket yet. As your income rises, you’ll likely be able to save the $400 a month much more easily or, perhaps, even quite a bit more.

The point is that affording your child’s education is much like saving for retirement. Start as early as you can, contribute regularly, and have a plan to reach your goals. If you are unsure of the savings vehicle you should use or how your money should be invested for your child’s educational needs, consult a professional.  Then you can sit back and enjoy all that cuteness, without worrying about what the future holds.

The Evolution of a Stockbroker

The other day I was meeting with a client, discussing his business, specifically how his business had changed over the past year. He is an online retailer and was struggling with the two 800 pound gorillas in the room, Amazon and Google.  Amazon is competing with him on the price he sells his merchandise and Google is making it more expensive and challenging to advertise. His business is in a vice being squeezed on both ends.

The conversation shifted to my business and how things have changed. My mind wandered down memory lane, realizing how much things have transformed over 25 years. When I first entered the business, it was known as the securities business back then, you were a stock broker and you sold securities (stocks and bonds). I was in the EF Hutton training program and it was not much different than the movie, The Wolf of Wall Street. It is sad and scary that this is how they trained young advisors. You were taught to dial the phone until your index finger was numb and that you didn’t get off the phone until the person on the other end of the line had bought something. To call this advisor training would be a gross misrepresentation; you were being trained to be a salesperson. Like Alec Baldwin’s character in Glengarry Glen Ross you were taught, ABC, Always Be Closing. Disgraceful, nothing about asset allocation, risk management, retirement planning or passive investing. You were taught to sell, have the client buy something and sell it, and then buy something new, rinse and repeat.

 

It was during my time with Smith Barney in the late 90’s that the business moved a bit upstream. The business model shifted from commission based to fee based. We were no longer charging to buy and sell a stock or bond. We were charging a percentage fee of assets under management. This puts you and the client on the “same side of the table,” and removed any conflict of interest to motivate a client to sell something so they would buy something else, thus generating revenue. We were still picking stocks, though, and crafting stories why one company was better than the next.

All of this came to a crashing halt when a series of large, household name companies crashed and burned. There was the dot com bust and then Lucent, MCI, Enron, and Tyco. Then our nation’s largest financial institutions crumbled, Bear Stearns, Lehman Brothers, Citibank and AIG. Wall Street could no longer be trusted. Analysts were recommending stocks of companies that had investment banking relationships with their firm. Rating agencies were not doing their jobs. Banks were assembling pools of toxic mortgages; packaging and selling them to their clients knowing they were a time bomb.

Boom, I knew then that Wall Street didn’t have clients’ best interests at heart. Heart, I should retract that, I don’t think Wall Street ever had a heart for their clients. I shifted my business from constructing portfolios with individual securities to using index funds, ETFs, and passive investments. The academic research is crystal clear that stock picking does not work. No one can consistently pick stocks that will outperform the market.

So here we are today, thinking about how the business has changed for me, and the change is unquestionably better. Today I am truly a non-conflicted advisor. My interests are aligned with my client. I can be compensated either as a percentage of assets or for a fee. I am not selling a product or recommending an investment that my firm manufactures. I am independent; I don’t work for a bank or brokerage firm that even has a product. I meet with clients and we talk about goals and how to best achieve them. We are not talking about whether GE is better than Siemens or if Asian bird flu will affect airline stocks. That is irrelevant to where you want to be. We are talking about real plans: how much money you can live on each month if you stop working at 65; how much you will need to save each month so your child can attend college; and how you reduce taxes and support your philanthropic ideas.

The evolution of the financial services industry has been godsend for clients and the right advisors. We have gone from salesperson to trusted confidant. There are challenges like my client the online retailer faces, margins continue to fall, technology has made investing more approachable but at the end of the day, you cannot replace sitting down, human-to-human, looking into the eyes of your client and understanding the importance of truly meaning, “how can I help?”