Protecting Elderly Family Members – What Can You Do?

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA®
Senior Financial Advisor

Fact: We are all getting older. Unfortunately, there are many ways that the elderly can be targeted and taken advantage of financially. We are seeing increases in fake phone calls and emails and IRS fraud as scammers and the technology used becomes more and more sophisticated. There are some steps you can take to help ensure that you and your family are protected from fraud or inadvertently making a transaction that you cannot reverse. I have heard several stories about caregivers, even family members, who did not have good intentions, managing to take funds from the elderly.

If you feel your elderly parent, spouse, or friend is having cognitive difficulties but is not considered medically incapacitated, some of the steps below may also be helpful. It can be hard for someone to relinquish control over their finances, especially when they have been accustomed to handling their affairs for decades, so for some people this may be a sensitive subject.

There are several options that can be easily put into place if you think you or your loved one may be at risk.

  1. Trusted contact forms: Most custodians such as Vanguard, Schwab, Fidelity, TD, etc., offer trusted contact forms, where you can list a trusted friend or family member who can be contacted if there is any suspicion of financial exploitation. This person has the right to confirm your contact information, health status, and the identity of any legal guardian, trustee, or power of attorney. The trusted contact will not be able to view your account information or execute transactions. You would probably want to make sure this person knows that they are listed as a trusted contact.
  2. Set up view-only access: You can set up view-only access for accounts so that a family member can log in and monitor activity. You can also set up a family member or friend to receive email alerts and notifications regarding the account. Paperwork would need to be signed by the account owner to allow viewing access. Keep in mind that these notifications (similar to receiving duplicate statements, which may not catch fraud immediately) may not be timely enough in case of an incident such as a wire transfer.

This action, along with the trusted contact form, are two steps that provide a basic layer of protection. Technologically-savvy family members could also be authorized to download the custodian’s app on their phone and set up notifications. For example, some credit card apps send alerts every time the card is used, and they pop up on your phone.

Having viewing access is also a good way to monitor your loved ones’ spending habits – usually, an unexpected or unexplained change can indicate a potential problem.

  1. Advisor notifications: If you work with a financial advisor, the advisor is usually set up to receive notices on any delinked accounts, accounts being transferred out, contact info changes, deposits, and withdrawals on a daily basis, but again, these notices may not be timely enough if a wire is initiated and money has already left the account. Your advisor may also be able to contact the custodian or a family member if there is suspicious activity in the account.
  2. Add a power of attorney: Adding a power of attorney will allow another person to conduct transactions on the account, view the account, sign paperwork, etc., depending on the extent of their power-of-attorney privileges. This document will not prevent an elderly family member from making transactions or requests – it will just add another person to the account who also has this ability. This step will not prevent the account owner from calling up and wiring funds or moving the account. You should discuss this with your estate planning attorney before adding this document to make sure it matches your intentions.

The most restrictive steps you can take, which can prevent the account owner from doing anything inadvertently, are as follows:

  1. Resign as trustee: The ability to resign as trustee on a trust will depend on the language of the trust. If you resign, the successor trustee(s) will take over. You may need to prove you are incapacitated by providing doctor’s letters stating your health condition before this can be done.
  2. Conservatorship or guardianship account: This step requires an original court-certified conservatorship/guardianship order, which will then be reviewed by the custodian of the funds. The custodian will then decide what type of additional paperwork is needed for the specific type of account, such as a new account application that may have to be filled out to add the guardian. This route will prevent the account owner from being able to do anything on the account. You would probably not choose to go to this extreme unless the account owner is incapacitated and can no longer manage their financial affairs.

The worst-case scenario may be if large wire is accidentally or unintentionally sent, since this can be impossible to get back once it leaves the account. Usually there is paperwork to fill out and sign, as well as security questions to answer, but if the account owner is able to provide all this information there is not much that can be done to stop the transaction.

If you have concerns about someone in your family, you may want to discuss these steps and possibly reach out to their attorney or financial planner to discuss the best options based on the situation.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com 

For more information on financial planning visit our website at www.Evensky.com

My Own “Jiminy Cricket”

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Whether you are working with a doctor, lawyer, or financial professional, you need to be aware of who is watching over you. It’s not enough to simply assume that they are on your side. When someone gives us recommendations, we want them to be like the Jiminy Cricket character in Pinocchio—a trustworthy person who is looking out for us and helping us make good decisions. Let’s look at an example to help frame this discussion.

You go to the doctor’s office complaining of muscle pain, and the doctor offers you a choice of medications. He hands you Medicine A and you walk out the door, feeling comfortable that he gave you the right medication that will make you feel better in no time. Why are you so at ease with the doctor’s recommendations? The short answer is that you trust the doctor. You believe that they will follow the Hippocratic Oath, which says in summary “above all, do no harm.” You have come to expect that they are providing you with advice that is in your, the patient’s, best interest. What if I told you that the financial profession doesn’t work that way? Surprised? Confused? If you’re like most Americans, you’re not alone.

According to a recent study by the RAND Corporation, commissioned by the SEC, most Americans have trouble distinguishing between advisors and brokers. As the study’s authors note, “Our analysis confirmed findings from previous studies and from our interviews with stakeholders: Investors had difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers.” When a financial professional can have dozens of different titles, ranging from investment advisor to wealth manager to financial planner, it’s not hard to see why consumers are confused. One of the major differences comes down to a popular buzzword in the industry that every investor should understand: the term FIDUCIARY.

What is a fiduciary?

Quite frankly, one of the first questions you should ask your investment professional is this: Are you a fiduciary and do you acknowledge this in writing? (If you’re already working with someone and are unsure of their status, it’s a good idea to call them up and ask them.) A financial advisor held to a fiduciary standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated, elimination of any significant conflicts of interest to the extent possible, and full disclosure of any remaining significant conflicts of interest. In other words, the financial advisor must place their client’s interests first.

Our website specifically states, “As a fee-only financial advisor, our revenues derive solely from fees paid directly to us by our clients. We have no potential conflicts associated with commissions or proprietary products.”

Our firm charges fees based on the amount of money that we are managing for our clients (i.e., assets under management). If you are a client of our firm and are interested in paying off a mortgage to free yourself of the debt, we acknowledge the potential conflict of interest that exists in you withdrawing money from the portfolio and the resulting drop in our fees, but we will help you make the right decision. In fact, over the last few years, we have helped many clients pay off their mortgage. It’s with this peace of mind that they can sleep comfortably knowing that we are on their side.

Let’s say that you just found yourself the recipient of an inheritance or a large bonus check and are thinking about possibly investing it in your portfolio. Without this fiduciary relationship, the answer would be simple: invest everything, because the more you invest, the more fees the firm will reap. But that’s not how we answer the question. We would want to know whether you expect to make any significant withdrawals from the portfolio during the next five years. We do not believe any investor should invest money in the market if they expect to need it back within the next five years. If you’re likely to need funds annually to supplement other outside income, we would make sure that you have enough cash set aside in case the markets go down so that you don’t have to sell anything in the next year and you know exactly where your grocery money will come from. Once again, the decision is not how to maximize our short-term profits; instead we are looking to make smart decisions that will benefit our clients.

On the other hand, brokers and other commission-based advisors are held to a “suitability” standard, which states that they must recommend a product that is suitable for the client, but that may not necessarily be the best recommendation for that person. For example, you’ve probably seen situations where a representative from XYZ Company recommends buying the XYZ Bond Fund, the XYZ Large Cap Growth Fund, and the XYZ International Fund. Is it really likely that XYZ Company could have the best mutual fund in every category?

Fees, fees everywhere

Some firms charge an annual rate, some charge based on assets under management, and some build the fees into the stock and bond transactions. None of these are inherently unfair as long as you know exactly how the advisor is getting paid, whether the fees are reasonable, and what their duty is to you (i.e., business standard or fiduciary). There may also be additional fees—such as mutual fund expenses, transaction fees, account opening or closing fees, and such—so it’s important to know how much those fees are and who receives those fees. At our firm, we use no-load mutual funds and exchange-traded funds. As there are no commissions involved, these investments have relatively low expense ratios, and fees are paid directly to the fund companies. There are small transaction fees as well, and these fees are paid directly to the custodian. We are paid only by our clients, who receive a bill each quarter with the calculation and amount of those fees. Performance is calculated net of fees where possible so that it’s in our best interest and the client’s best interest to limit all fees as much as possible.

You should always be aware of conflicts of interest as they pertain to fees. Will buying the mutual fund, annuity, or life insurance contract primarily benefit you or the person selling the product? The type of legalese you might look for is something to the effect of “Your account is a brokerage account and not an advisory account. Our interest may not be the same as yours … We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.” (Italics are my emphasis.)

For example, a representative at the XYZ firm may recommend a high-yielding bond to their client. What the client doesn’t know is that the firm is trying desperately to sell the bond to everyone it can so that it doesn’t have to keep the bond on its books due to expected losses (I have taken this example from the book Liar’s Poker by Michael Lewis, a nonfiction book describing his experience as a bond salesman in the 1980s). Who is the best prospect to sell the bond to? Their client, of course. They can do this because as long as the client asked for income in their portfolio, this investment would be suitable.

None of this by itself implies that there is anything wrong with compensation by way of commission. The bottom line is that you, as the client, need to understand how the advisor is getting paid, whether they are being held to a fiduciary or suitability standard, and whether these details are in writing. If in doubt, simply ask your advisor if they will sign a statement similar to the following:

  • In our relationship I will always place your interest first.
  • I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  • I will not mislead and will provide you with conspicuous, full, and fair disclosures of all important facts.
  • I will avoid conflicts of interest.
  • I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

It’s time that we break down the confusion surrounding investment professionals so that the public understands who their Jiminy Cricket is.

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@Evensky.com

For more information on financial planning visit our website at www.Evensky.com

 

 

Unexpected Expenses When Buying a Home

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

Buying a new home can be an expensive process, and if you are not careful, you can end up paying for items you don’t need or have already paid for.

Loan Costs

When applying for a mortgage and receiving quotes from various mortgage companies, make sure you are comparing apples to apples. You will want to find out the average closing costs in your state or county and compare them to what you are being offered. There are some costs which are fixed, such as recording fees and transfer taxes, but there are other costs you can shop around for, such as title and insurance fees. These numbers can vary quite widely depending on the lender.

If you get a quote for a fixed-rate mortgage and have it locked or remove escrow, make sure you don’t see points added to your closing statement that you didn’t agree to. Paying points may not be worth it unless you plan to keep the loan for a long time. Points do lower your interest rate and your monthly payment, but it takes some time to break even.

For example, assume the monthly payment difference between paying 1.125 in points vs. no points is $64 per month, which is $768 per year. If it costs roughly $6,000 to pay points, it will take you around eight years to break even. Paying points may make sense over the long term provided you plan on living in the home indefinitely or possibly keeping it and renting it out in the future. If you think you are going to sell and move in less than eight years, paying points is more expensive.

You probably should avoid escrow if you are disciplined about setting aside funds. Paying escrow gives the bank extra funds to hold on to for you to pay taxes and insurance when you could be earning some interest on those funds in the interim.

Check your closing statement in detail and make sure everything you have already paid is included in the calculation. You may be surprised to find that the numbers sometimes don’t add up if you plug all the line items into a spreadsheet. You may save yourself from overpaying if you happen to find a mistake. You will sometimes be asked to pay a good-faith deposit when moving forward with a lender. This deposit is usually applied toward the appraisal or other fees, so make sure you are not charged twice.

Quick mortgage checklist:

  1. Compare interest rates and closing costs being offered. Are points being paid? What is the percentage difference between variable rates and fixed rates?
  2. Make sure lenders do not tack on points after they have locked your rate (unless you intentionally want to pay points and agreed to this in advance).
  3. Make sure any items you have prepaid are not included again in the closing costs.
  4. Make sure the lender does not add escrow unless you want it.
  5. The buyer has the right to use their own attorney or title company – you may be able to lower title costs if you shop around.
  6. The lender may ask you to pay a good-faith deposit, which they usually use for appraisal, etc. Make sure you get that back as a credit.
  7. Check your property tax calculation against the property appraiser’s website or property tax bill.

 

Homeowners associations

If the home is covered by a homeowners association, read the condo documents to make sure there are no rules and restrictions that you cannot live with, such as rules against pets (if you have them) or alterations you are planning to make. Pay attention to the association’s financial statements, since this will give you clues on potential assessments, whether there are enough reserves for large repairs, or if you will have to find a lump sum when the roof needs to be replaced or the house painted. You will also want to find out if there are any outstanding lawsuits or liabilities against the association.

Inspection and property disclosure

You are not obligated to use the inspector recommended by the realtor, title company, or lender. It is usually best to shop around for someone you trust who is independent from all the other parties that have interest in the deal. Some inspectors just go through the motions and miss checking the smaller problems, which can end up costing you money later on. You want to make sure the appliances are all in working order and that you are aware of when the air conditioner and water heater, etc., were last replaced or serviced. The inspector should check all the electricals and plumbing to make sure everything is in working order. It is advisable to verify that all permits have been closed out and that new construction meets code if the previous owner made any major renovations.

Homeowners insurance

Insurance is sometimes included in the mortgage estimate and is usually quoted higher than you would actually pay on your own. Shop around and don’t assume the number they state is what you will ultimately have to pay. You will need to purchase homeowners insurance prior to closing. Find out if the association covers any of the insurance costs, as this may be included in your maintenance fees. This lowers your costs of insurance, since you only have to insure contents and fixtures.

Homestead and property taxes

Property taxes are usually paid up once the sale goes through. Closing agents make estimates on the property taxes, which may be higher than the actual taxes stated on the county property appraiser’s website. Check the closing statement to make sure the taxes match what needs to be paid and that you are not overpaying. You should only be responsible for the portion of the year you own the home. For example, if you close on October 31, you should only be responsible for the days in November and December. If taxes are $8,500 for the year, then a rough calculation would be $8,500/365 = $23.28 per day x 61 days = $1,420.

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@Evensky.com

For more information on financial planning visit our website at www.Evensky.com

 

 

The Family Information Organizer

Josh Mungavin

Josh Mungavin CFP®, CRC® Principal, Wealth Manager

“There is in the act of preparing, the moment you start caring.” —Winston Churchill

A longtime friend named Dana called me one day because she needed help. Her father had just passed away and she didn’t know what to do. Although I’ve helped clients’ children through similar situations many times, something occurred to me as I saw her left lost and alone with a scattered paper trail and no instructions to help her through: Having all essential information in one place makes a challenging time easier and leaves a legacy of respect and security. This book was created to help your family members navigate loss while also making sure you have everything you need in times of emergency or natural disaster. Receiving this book gives you a good reason to begin gathering your information now, rather than wait for a crisis to act.

Before helping Dana, I had taken our firm’s emergency planning benefit for granted because we have records of family finances at our fingertips. Our clients get an elevated level of care because we work with the professionals in their lives and have made the investment in tools, employees, and education necessary to create an objective and tailored plan to manage risks, simplify financial lives, maintain wealth, and provide for heirs. Most people don’t have that level of care, and while this is not a replacement for services we provide, it is our attempt to help our clients and those who don’t have the support we offer. This book was created to help you take care of your family through emergencies by having all essential information in one place (extra pages, which can be duplicated, are at the back of the document to provide enough space for all of your information).

For the book as a fillable PDF visit the following link:  www.EK-FF.com/Organizer.pdf 

For the free eBook click one of the following links:

AMAZON

BARNES & NOBLES

Feel free to contact Josh Mungavin with any questions by phone 305.448.8882 ext. 219 or email: Josh@Evensky.com 

For more information on financial planning visit our website at www.EK-FF.com.

 

 

Six Things You Need to Know to Make You a Better Investor

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Click the following links to view Harold R. Evenskys, CFP®, AIF® Six Things You Need to Know to Make You a Better Investor presentation that was held at the Coral Gables Art Cinema on Tuesday, June 12th, 2018.

To view the entire seminar: Click Here

To view in segments click the following:

Part 1: Squaring the Curve

Part 2: Returns (No Control)

Part 3: Volatility Risk & Luck

Part 4: Real People

Part 5: Market Timing

Part 6: Knowing Where the Buck Stops

 

Feel free to contact Harold Evensky with any questions by phone 1.800.448.5435 or email: Harold@Evensky.com

For more information on financial planning visit our website at www.EK-FF.com

The Value of a Financial Planner

John_Salter2012

John R. Salter, CFP®, AIFA®, PhD Wealth Manager, Principal

Financial planning is the process of determining how you can meet your financial goals by managing your financial resources. Probably you have already thought about your own financial planning. Maybe you have thought about working, or already work, with a professional financial planner. Whatever your situation, we wanted to discuss the value of working with a financial planner.

Financial planners provide advice on how to achieve financial goals. The quality of the advice should be measured by whether you attain those goals. The value of financial planning lies in the development of a plan specific to your goals, but just as important is the guidance you get along the way.

Below are just a few ways financial planners provide value to clients.

Creating a Financial Plan

One well-documented fact about our lives is we are likely to spend more time planning a vacation than planning for our retirement. And why not? The vacation seems much more fun! However, the vacation is a one-time event, whereas issues related to your financial life have a lasting impact on your future (and your ability to take vacations, for that matter!) A financial plan maps out the steps you need to take in the areas of spending, saving, investing, managing risks, and handling bequests in order to attain your financial goals.

A financial planner provides the analysis and can outline the steps needed to meet your current and future financial goals.

Being a Sounding Board

Should you pay off your mortgage? Should you buy or lease your car? What about buying a rental property? Were you pitched an annuity at a free dinner? A financial planner can help you answer all these questions and more, either through an analysis and/or by providing the details you need to make an informed decision yourself. You can probably think back to times you have contemplated a decision, seemingly to no avail, when an objective opinion could have saved you time.

A financial planner is there to help.

Optimal Investing

Investing should be boring. We should focus not only on achieving returns, but also evaluate the risk we are willing to accept to reach those returns. This “risk” refers to how much your portfolio might drop in a short-term bear market, but also the risk that you might not be able to meet your future financial goals. Our investments should be diversified; we should not have all our eggs in one basket. The best portfolio should arise out of the overlap between your risk tolerance, your financial capacity to take risk, and the risk and return needed to meet your future goals.

A financial planner helps determine your optimal portfolio.

Staying Disciplined

Long term, we are likely to be our own worst enemy in terms of keeping our financial plan on track, both in terms of performing the financial planning tasks we need to undertake and sticking with the investment plan. One notable example is estate planning, which seems to be the last item on everyone’s to-do list. Sometimes we need simple “nudges” to make sure these tasks are completed. Financial planners also help stay on track with our investments. When the market’s down, you want to adjust and make it more conservative, and then get back in when it is up. This is the easiest way to lose money long term. Ongoing management includes rebalancing or bringing the investment mix back to target. In general, this is selling the winners and buying more of what hasn’t done as well recently, and of course assumes long-term investment values will rise. Does short-term market volatility get you worried? Why not have your financial planner help you stay disciplined through the ups and downs of the market cycle, which are inevitable, simply by reaching out to you during rough markets?

A financial planner helps you stay disciplined through the financial planning process.

Managing Behavior

We are human, and therefore we are hard-wired to make terrible financial decisions. We want to be in the market when things are going well, and out when things look bad. We should do the opposite. We focus too much on the short term; we want to make decisions based on short-term noise rather than long-term analysis. We want to be in the winners and out of the losers, whereas being spread across winners and losers (being diversified) is the best long-term strategy. We want our investments to be exciting and sexy, but they should be dull and boring. We want to chase the investments that did well in the too-recent past, but they are likely those that will falter in the short-term future. We make decisions based on simple rules of thumb because we cannot perform complex math in our head. Our behavior, based on the emotions tied to our money, prevents us from reaching our future financial goals.

A financial planner helps manage your behavior and separate emotion from your money.

Tax and Cost Efficiency

In a world of lower return expectations, and given that we cannot control the markets, the ability to control and take into consideration tax and cost efficiency becomes even more important. Many financial planners have access to the universe of financial products. This means they also have access to the range of costs of products and may be able to implement a plan more cost effectively compared to a retail solution. If a financial planner can access a mutual fund for 0.5% less, that is 0.5% more staying in your portfolio. Tax savings produce similar benefits. A financial planner can not only make long-term tax-efficient recommendations but can also strategically position your individual investments in certain accounts to minimize current taxable income. A solution which decreases the tax you pay also results in more money accumulated or available.

Keep on Track

A financial plan is important to meeting goals, and maintaining and monitoring the plan are the check-ups required for progress. Annual meetings with your financial planner provide the opportunity to review your goals and see progress toward meeting them. Of course, we all know life can change at any moment, so updating and monitoring financial plans takes account of the ebbs and flows of life.

So, what is the quantifiable value of a financial planner? Many studies have addressed this question. These examples include many of the topics above, such as the financial planning process, portfolio construction and investment selection, rebalancing, and tax efficiency. The answer? Studies have concluded the value of a financial planner and the financial planning process can add an upwards of 3% in returns per year.

Below are links to a few of these studies.

https://www.fidelity.com/viewpoints/investing-ideas/financial-advisor-cost

http://www.envestnet.com/sites/default/files/documents/ENV-WP-CS-0516-FullVersion.pdf

https://www.vanguard.com/pdf/ISGQVAA.pdf

https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf

No matter how you might value a financial planner, the true value comes from the benefits listed above and from following and keeping on track with the financial planning process. Value goes beyond simple products or investment choices and returns. A financial planner is your partner in meeting your future financial goals.

Feel free to contact John Salter with any questions by phone 1.806.747.7995 or email: JSalter@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Intergenerational Planning: Time to Start Planting Seeds

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

It takes the average recipient of an inheritance 19 days until they buy a new car.1

                Over the past several years, some of our clients have participated in client advisory boards in which they tell us what they want and what keeps them awake at night. One of the biggest challenges is bringing up finances and financial planning with their children. They are not alone. Intergenerational planning, in which families look at long-term financial needs together, is sorely missing. But to the surprise of many, it’s not just the parents who want this connection—it’s the kids as well. A study from MFS Investment Management reports that more than one-third of those in the “sandwich generation” (people ages 40 to 64) worry about aging parents’ financial issues in addition to their adult children’s financial issues.2 It’s about time to get everyone involved.

                According to the same study, less than half of the sandwich generation has prepared a list of assets, created a durable power of attorney or living will, purchased long-term care insurance, or established a trust. Further, even if they have checked off the boxes for these basic estate-planning tools, many have not communicated this information to their children.

Given that the older generation has been reluctant to have needed discussions, should we be surprised that the sandwich generation is concerned about their parents’ finances, yet hasn’t done anything to prepare their own children for what’s to come? All too often, the burden of managing a parent’s deteriorating health or financial situation falls to an adult child, who must step into a parent’s shoes at the last minute and try to cobble together information to form a basic plan. If a parent doesn’t discuss their specific assets with their adult children, and if no one knows they exist, those assets may not be used for their care. Assets may wind up being claimed by the state or federal government, adding to the more than $58 billion in abandoned property. Recent statistics suggest that 70% of families lose control of their assets when an estate is transferred to the next generation and 90% of the wealth is spent by the third generation. Why? About two-thirds of high-net-worth individuals have disclosed little about their wealth to their children, with the most common reason being that they do not feel that the next generation is financially responsible enough to handle an inheritance. Parents can head off this asset transfer problem, while at the same time avoiding divisive and costly family feuds, by taking the lead in these transformative conversations.

                The good news is that many of our clients have become more organized while working with us, and a lot of this information is in one place. But unless this information is disseminated to adult children, it remains stressful for everyone involved. Parents should suggest a family meeting with all their children at the same time to help ensure that their message is received uniformly. Having these conversations one-on-one may cause family members to fight, harbor grudges, or get confused, with the result that the discussion has the opposite of the intended effect.

For instance, parents may choose to leave money to their children in a trust, much to the dismay of the children, who may believe that this is being done to prevent them from having unfettered access. But perhaps the parent is trying to protect the children from creditors, due to having litigious jobs. Another reason could be a desire to protect money from a child’s former spouse. There could be estate or income tax reasons to form the trust in a certain way. Or it could be as simple as wanting to make sure that their frivolous-spending children do not run out of money within the first few years of receiving the inheritance. Parents may think that they are encouraging hard work by not disclosing their financial situation to their children, but they may in fact be fostering ignorance and anger.

These joint meetings may help a parent spell out their reasoning for how they are dividing their assets (including the house and personal belongings) and how they have decided who will be the estate’s executor, have durable power of attorney, or be the primary caregiver for minors. It’s much easier to understand what a parent wants to accomplish with their estate plan if they’re still around to explain it to their family. This doesn’t mean that specific numbers have to be included and that full disclosure be given, but it’s up to the parents to start the conversation and share what they are comfortable sharing.

In other cases, the parent is more interested in handing down values than money. Perhaps all that’s needed is a simple conversation about the importance of having a financial team—consisting of a financial planner, estate attorney, and accountant—establishing a financial plan, saving and investing money, and giving back to charity. So often we hear from clients that a discussion early in their childhood about money formed the foundation for their lifelong financial habits. If the situation is more complex, a family facilitator might need to be hired, someone who can broach difficult, personal, and possibly painful subjects, with the end result being a unified family that is more aware of each other’s feelings and goals. These conversations can be done at the 30,000-foot level if not everyone is comfortable sharing information, or they can be very specific. No one wants a child to feel entitled to expect a large inheritance, but as a parent, do you want your children completely left out of the loop?

                Our firm can help parents review their long-term financial plan with their children, discuss where accounts and important documents are located, and provide contact information for the parents’ financial team. The family should review the will/trust and communicate their wishes about health care preferences to avoid squabbles (who will ever forget the Terry Schiavo situation?). Getting everyone in the same place keeps the message consistent and unequivocally removes any doubts that may have been building. It’s not going to be the easiest of conversations, and all parties may start off anxious, but reticence about the subject will surely backfire. If parents are concerned about their children and children are concerned about their parents, doesn’t it make sense to get everyone together in a room to talk?

1 The source for cited statistics is a Time article, available at: http://time.com/money/3925308/rich-families-lose-wealth/

 

2 The source for cited statistics is an MFS study available at: http://www.mfs.com/about/news/press_080296.html

 

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Thoughts before Funding a 529 Plan

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

The new tax law was amended to allow tax-free distributions of up to $10,000 per year from a 529 plan for elementary and high school costs starting in 2018. This is an added benefit and can be an advantageous tax break for parents starting to save for their young child’s education.

College costs have outpaced inflation. According to The College Board®, the average 2014-2015 tuition increase was 3.7 percent at private colleges and 2.9 percent at public universities. However, looking back at the last decade, the 10-year historical rate of increase has been approximately 5 percent.

529 Basics — Opening a regular savings account/custodial account for your child is an option, but this comes without the benefits of a 529 plan such as the tax-free growth on earnings if the funds are used for qualified college expenses. Deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion (for 2018). You can also front-load your investment in a 529 plan with $75,000 ($150,000 if joint with your spouse) and use this toward your gift tax exemption for five years providing there have been no other gifts to that child — this is not possible for a regular savings/custodial account for your child (you would only be able to gift $30K jointly). By adding a large amount up front, you allow the lump sum to grow over a longer time horizon vs. making smaller contributions over time. Contributions to a 529 plan do not have to be reported on your federal tax return.

Contributions to a 529 plan are not tax deductible (although some states do offer tax benefits), but the earnings grow tax free and are not taxed if used to pay for education. Another advantage compared to a custodial account is control; the named beneficiary has no legal rights to the funds, so you can ensure the money will be used for education.

A 529 account owned by someone other than the parent (such as a grandparent) is not considered an asset for financial aid purposes. Also, the value of a 529 account is removed from your taxable estate, yet you retain full control over the account.

How to choose a 529 plan? Research the underlying expenses of the mutual funds and review the investment options available compared to other plans. The age-based models may be the easiest to manage as the plan shifts to more conservative investments as the student gets closer to college age. You can choose any state plan no matter where you live, but if you reside in a state that provides tax breaks for using your state plan, you would likely want to start there. For example, New York residents get tax benefits for using their state plan. Keep in mind that you have the ability to move your 529 to another provider, but only one rollover is permitted per twelve-month period.

How much to fund? The amount to contribute to a 529 plan depends on several assumptions such as whether your child will attend a public college or a private college, the returns during the investment time horizon, and future college inflation. Funding varies widely depending on what you would like to achieve and the assumptions involved — and of course there is no right answer. If the beneficiary does not go to college, you can transfer the 529 plan to a sibling in the future or to another family member such as a cousin or grandchild. If you don’t have any eligible family members, the worst-case scenario is that you would have to pay tax and a 10% penalty on the earnings to take the money out for another purpose. Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (subject to a 10 percent federal penalty and taxed at the income tax rate of the person who receives the withdrawal). If the beneficiary gets a scholarship, then the penalty is waived.

Avoid overfunding the 529 if possible as “qualified education expenses” do not cover all expenses related to college. Qualified expenses include tuition, on-campus room and board, books and supplies, computers, and related equipment. It may also make sense to save otherwise for expenses such as travel, cars/transportation costs, insurance, sports or club dues, and off-campus housing, etc., which are not considered qualified expenses but can easily add up.

Considerations if you have more than one child — If you have several children, it may make sense to fully fund the first plan for the oldest child and if the funds are not used, they can be transferred to the next child in line. You probably want to avoid fully funding all the plans in the event one child does not end up going to college, gets a scholarship, or starts a business. Some schools and some trade schools/programs do not qualify for 529 funds (for example, if a grandchild wants to go to a specific acting or cooking school). You can find out if your school qualifies by using this link: http://www.savingforcollege.com/eligible_institutions/.

http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php

https://www.npr.org/sections/ed/2018/01/08/575167214/congress-changed-529-college-savings-plans-and-now-states-are-nervous

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@EK-FF.com

 

What Constitutes the Art of Practicing Financial Planning?

The below chapter is from “The Art of Practicing and the Art of Communication in Financial Planning” (Click here to purchase the book.)

Matt McGrath

Matthew McGrath, CFP® Managing Partner Wealth Manager

Why would one use the word “art” when describing the practice of financial planning?  The most highly qualified planners have gone through rigorous education and testing in order to acquire licenses and certifications.  They use a methodical process to establish the client-planner relationship.  This process includes gathering data, analyzing and evaluating the client’s status, developing and presenting recommendations; as well as implementing and monitoring those recommendations.  They use sophisticated software to run complicated analyses and they stay abreast of laws and regulations affecting a wide array of financial issues.  Where is the art?

The art of practicing financial planning can be found when professionals deploy a fundamentally sound process while injecting experience and judgment to develop advice in the best interest of the client.  Financial planning involves altering human behavior which presents unique challenges each and every single time.  It includes navigating an ever-changing body of knowledge and applying it to individual circumstances in order to arrive at a recommendation appropriate at that point in time.

Let’s start with the people.  At its core, financial planning is a “people” business.  Clients are looking to planners to guide them on some of the most important decisions of their lives.  Establishing trust and maintaining effective communication are crucial to the successful execution of the financial planning process.  Being technically proficient (i.e. “book smart”) does not necessarily translate to successful advice.  The ability to communicate the relevant details to clients in a way they understand and embrace is the key to effective planning.  Successful financial planners channel their inner teacher to convey facts, figures and details in a way that is easy to comprehend.  Many clients are intimidated by financial matters, and it takes skill to break through those emotional barriers and establish a level of comfort.

Of course, before attempting to communicate any advice, a good planner needs to start by listening to their client.  Understanding what is truly important to a client is crucial to establishing trust and rapport.  The last thing a client wants to hear is generic advice regurgitated from a book; they can find the information in countless places using any internet connected device.  What they want is someone who understands their personal concerns and goals and develops recommendations specific to them.  If a planner is doing all the talking in client meetings, then I would argue that they are not engaging in true financial planning.  Listening must always come first.  Meetings should involve meaningful two-way conversations, not a one-way presentation.

Keep in mind, when working with people, every situation is unique and emotions play a big part in the process.  People do not always behave in a rational manner.  It is not unusual for a client to come to tears during a meeting.  Money, finances and the future can be very emotional topics.  Therefore, the right advice on an issue may not necessarily be the one with the maximum financial outcome.  Client biases, fears and preconceptions can all have an influence on the ultimate advice.  A good planner will try to guide the client to a rational decision, but also has to acknowledge that a client needs to be able to live with the outcome.  Empathy is critical, as is the ability to interpret and understand the motivations of each client in order to develop advice appropriate for them.  The “people” side of financial planning can be very complicated and the ability to interact with others is a necessary ingredient in the art of practicing financial planning.

It is also essential to understand that financial planning is a journey, not a destination.  Changes occur every day.  Planners deal with a wide array of issues such as marriage, divorce, recessions, market crashes, retirement and, sadly, death.  Successful planning keeps up with these changes by adapting to the new circumstances in a way that keeps the client on the path to accomplish their goals.  Success is not measured by dollars or annual rates of return; nor is it defined by the creation of a beautiful comprehensive financial plan that goes in a drawer never to be seen again.  Rather, it is defined by the ongoing achievement of goals throughout one’s life.  It is an organic process that, for each client, takes on a life of its own.

The planning process often involves evaluating questions that have more than one potential answer.  Part of the art of financial planning involves evaluating those answers and helping someone choose the best one for their personal situation.  At the end of the day, the planner’s objective is to enable clients to make informed decisions.  I once had a client ask me if he should take his kids out of private school and I told him that’s not my call.  I can walk through his financial plan with him and help him understand the consequences of different decisions.  But in the end, the clients need to take ownership of their decisions and their lives.  Planners who cross this line are doing a disservice to their clients and robbing them of their true financial freedom.  A planner’s role is not to tell someone what they should do; it is to empower them to make appropriate decisions within the context of their unique lives.

The art of practicing financial planning exists in the less tangible aspects of the process.  This involves listening, assessing, analyzing, communicating and ultimately recommending a course of action.  Experience, judgment, trust and communication are crucial to the successful implementation of a financial plan.  Information is everywhere, but knowing what to do with it to help an individual achieve their specific goals is absolutely a form of art.  Like other forms of art, it is predicated on an underlying body of knowledge that must be successfully interpreted and executed under specific circumstances.  And like good artists, good planners will be greatly appreciated by their clients.

Feel free to contact Matt McGrath with any questions by phone 305.448.8882 ext. 206 or email: MMcGrath@EK-FF.com

Lagniappe: Some Final Takeaways

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

I couldn’t resist using one of my favorite words—lagniappe. It means a little something extra, given at no cost, somewhat like the thirteenth doughnut in a baker’s dozen. Because there are so many topics and issues I could not cover in the previous chapters, here’s my lagniappe.

Small and Ugly May Be Beautiful. If you need more returns. One possible strategy, supported by decades of research, is to overweight a few market factors in your portfolio. Based on the original research of two well-known academics, Gene Fama and Ken French, you allocate some of your stock holdings to small companies and value stock. Over the long-term, you’re likely to be rewarded with a few extra percentage points of returns.

Maximize Quality of Life, Not Returns. It’s confusing, but after having designed many hundreds of retirement plans, it’s obvious that if you’re near or in retirement and depending on your portfolio to provide cash flow for your lifestyle, a higher allocation to bonds is likely to increase your likelihood of success at the cost of reducing the likelihood of making more money.

Hot Stocks Pay. If you’re an active trader in hot stocks, the activity will pay your broker but not you. Remember two old jokes: 1) Broker to a new client pointing out the window of his beautiful office overlooking the bay. “See that yacht; that’s my partner’s. The one next to it is Mark’s—he’s the broker next door—and the one next to that is mine.” The wise prospect asks, “Where are the clients’ yachts?” 2) How do I make a $1,000,000 in the market? Start with $2,000,000.

Safety versus Certainty. My friend Nick Murray shakes his head when he hears people talking about safe investments. He says (and he’s right): investors confuse safety with certainty. Putting your nest egg into insured CDs may offer the certainty that when they mature, you get your principal back with the promised interest; however, assuming you’re like most of us and find your expenses going up with inflation, over time your safe investment is likely to buy you less and less of the goods and services you need. This is called purchasing power erosion and it’s one of the biggest risks retirees face. The solution is to plan on a safe portfolio—one with bonds and stocks—and avoid the certainty of losing purchasing power with a safe investment.

It Doesn’t Cost You Anything Don’t You Believe It. Unless you’re the kind of person who believes in fairy tales. No professional can afford to work for free. Good investment advice is valuable, and people providing advice deserve and expect to be compensated. So it really angers me when an investor says they were told a service shouldn’t cost them anything.

 Two prime examples are bonds and variable annuities. When purchasing a bond, it’s true that you’re not charged a commission. That doesn’t mean you’re not paying compensation. Bonds are sold based on something called a spread. You might be offered a $10,000 bond at 102.5. That means your cost would be $10,250. The broker may have been told by his bond department: “This bond is available at 100.5. How much do you want to add?” To which the broker responds, “Two.” And the trader says, “Fine. Done at 102.5.” The result: you’re purchasing a bond with a 2 percent markup. The markup is the fee to the broker and brokerage firm. Again, there’s nothing wrong with paying a markup, but make sure you’re told how much it is. The good news is that you can check by going to  http://finramarkets.morningstar.com/MarketData/Default.jsp , a website that provides the details of most bond trades.

A Variable Annuity (VA) is another investment product that, unfortunately, a small minority of unscrupulous brokers use to take advantage of clients. The line is: “Don’t worry. It doesn’t cost you anything. The insurance company pays me.” Although factually true, it’s massively misleading because it ignores the reality of where the insurance company gets the money to pay the broker. The money comes from you, the annuity purchaser. The practice is particularly egregious because VAs typically pay relatively high commissions to brokers and they have no break points, unlike mutual funds. On mutual funds the commission drops as the purchase size gets larger. The broker gets the same percentage on a VA no matter how big the purchase.

Duration, Shmuration. Who Cares? You should. You probably know, or at least have heard (especially if you read Chapter 7, “Getting Your Money Back”), that bonds are subject to interest rate risk. That’s the risk of being stuck with a poor investment if after having purchased a bond, interest rates rise.

Consider John, new owner of a $10,000 ten-year bond purchased when it was paying 4 percent. Five years later, interest rates are up and a new five-year bond of the same quality now pays 7 percent. If John wishes to sell his bond, he would be offering his now five-year bond paying 4 percent. There is no way someone will pay him $10,000 for a bond paying 4 percent when the buyer can purchase a similar quality bond paying 7 percent. So if the owner, John, wants to sell, he’d have to sell at a discount.

That discount is interest rate risk. Most investors equate this risk with maturity—they assume a ten-year bond has significantly greater risk than a five-year bond. Sounds reasonable but it’s not necessarily true. The problem is that focusing only on maturity leaves out an important factor—the coupon, which is how much the bond issuer pays annually. The higher the coupon, the sooner the investor has some funds back to reinvest at the new, higher rate so a high-coupon bond might have less interest rate risk than a shorter-maturity, low-coupon bond. For an approximate guide to the level of interest rate risk a bond has, ask about the bond’s duration. That number will provide a very rough guide to the potential loss in value if rates rise. The measure is 1 percent for every year of duration. So a bond with a five-year duration might be expected to lose 5 percent if rates go up 1 percent or 10 percent if rates rise 2 percent. Not a perfect measure but far better than maturity.

I’ll Keep an Eye on It. When I caution clients about the risk of a heavy concentration in a single investment, they often respond, “Harold, I understand, but I keep a careful eye on it.” That sounds wise. Unfortunately, as Professor Sharpe taught us about the unrewarded diversifiable risk, that’s false confidence. It’s a risk that can blindside you.

Think about the fact that many years ago a crazy person who put poison in some Tylenol bottles threatened the business of Johnson & Johnson or consider the Gulf oil disaster that almost buried BP. Years ago, I used to use as the example of a company building a major manufacturing facility over what turned out to be a toxic waste dump. Well, one day, using that story to persuade my clients to reduce their exposure to the stock they held in the company where they had both spent their careers.

Their mouths dropped open and they said, “Good Lord! You’re right! We’ll sell out.” It turned out that just a few years earlier their company had, in fact, developed a major research facility over what later turned out to be a toxic dump and it almost bankrupted the firm.

It doesn’t matter how blue the blue chip is, the risk is there. Many years ago I warned a trustee that a portfolio allocation to AT&T stock representing about half the portfolio value was a significant risk. Unfortunately, I wasn’t very persuasive and the trustee scoffed at my warning—after all, it was AT&T. About a year later the value dropped over 50 percent. The drop had nothing to do with my having a crystal ball; it might just as well have doubled in price. The point is that the risk is real.

Counting on Gurus to Predict the Future May Be Hazardous to Your Wealth. No question about it: when doing investment planning, you need to have some opinion about future market returns. In my office, I have all of the important elements, including extensive databases, sophisticated analytical software, an expensive crystal ball, and a Ouija board. The future is mighty cloudy and surprises even the best of us.

The moral? It’s not Buy and hold, it’s Buy and Manage. Make your best estimates about the future and be prepared to change. Just don’t put too much faith in any guru’s ability to tell you where the market’s going, no matter how confident he or she may be.

This blog is a chapter from Harold Evensky’s “Hello Harold: A Veteran Financial Advisor Shares Stories to Help Make You Be a Better Investor”. Available for purchase on Amazon.