Message from CFP Board

-Eleanor Blayney, CFP^® Consumer Advocate, CFP Board

A few months ago, I advised you, as a reader of It’s Your Turn, how to find a CERTIFIED FINANCIAL PLANNER™ professional to help you chart your financial future. (See “Plan for Your Financial Health” in the April 2009 edition of It’s Your Turn)

The most important criterion is finding a professional who acts as a fiduciary: in other words, a professional who always puts your interests above all else.

But suppose you’ve found a qualified professional: You’ve gone online to www.CFP.net, located a good professional, and have had your first meeting. Now what? Where should the relationship go from here?

As with any budding relationship, you now need to consider "The Rules” of the engagement.

In the beginning, the interaction between you and your financial planner should be intense. Your financial planner will want to know everything about you, what you have, what you’ve done, what you would like to do – with your money and your life, of course. You may need several meetings for this heady process of disclosure and discovery to play out. You should be even more honest with your planner than you might be with a romantic partner: go ahead and tell your planner about every one of your former advisory relationships and your past financial indiscretions. Your planner will love you for being open.

A good relationship will inevitably settle down into something more predictable. If your planner is helping you with portfolio management, a quarterly meeting is the norm. Anything less than annually just will not keep the relationship alive. Be sure to tell your planner what frequency is most comfortable for you.

Money can often get in the way of relationships – this one even more so. If you are paying for the planner’s time, either hourly or on retainer, you may be reluctant to meet very often. On the other hand, if you are paying a fixed fee or an assets-under-management fee, you might be motivated to ask for a lot of time. Keep your focus on the value you are getting from the relationship and not the dollars spent per minute of interaction. If everything is going well, and there is no need to meet, you’re both better for it. After all, this relationship is all about security, both personal and financial.

Sometimes you just "have to talk." A change in your circumstances – a job loss, an offer on a house, or even when you are thinking of seeing someone else. Be sure to talk over these changes in fortune or heart with your planner. The relationship will improve from these necessary conversations or will at least end on a positive note.

As for who calls whom? As we all know, there are ridiculous excuses we women make for men not calling back: his grandmother died, he had to go to Pittsburgh, he’s on dial-up. When it comes to your financial planner, it is a whole lot easier. There are NO excuses for not calling or communicating with you periodically. Market’s down 500 points? There has been a major tax law change? The office has moved and has changed its phone number? It is okay, ladies (and gents) in this case to keep your cell phone right at your side. A good financial planner will definitely be calling you.

If you you’ve put off making the commitment to meet with a financial planner, and are looking for a meaning financial relationship, visit www.CFP.net/search to find a competent, ethical CERTIFIED FINANCIAL PLANNER™ professional who will put your interests firsts. If the first CFP^® professional you contact is not a good fit for you, ask him or her for a referral to another advisor Speaking as a CFP^® professional myself, I know that planners see themselves as being in a helping profession. They are committed to helping you find a solution, even if they themselves do not provide it.
On June 18, 2009, Certified Financial Planner Board of Standards, Inc. Chair Marilyn Capelli Dimitroff, CFP^® outlined CFP Board’s proposals to enhance consumer safeguards for investors who use target date funds, in testimony before a joint Securities and Exchange Commission-Department of Labor hearing.

“Target date funds, appropriately managed, can be beneficial to investors. However, we have serious concerns that these funds are fundamentally misleading to investors because they are allowed to be managed in ways that are inconsistent with reasonable expectations that are created by titles used on the funds,” Dimitroff said.

Dimitroff told the panel that the SEC should amend Rule 35d-1 (the Investment Company Names rule), to include target date funds. She also recommended that the Department of Labor work with the SEC to establish industry-wide standards to stipulate an appropriate range of asset allocations for each date reflected in a target date fund.

Target date funds are investment vehicles that allocate their investments among various asset classes and automatically shift that allocation to more conservative investments as a “target” date approaches. This shift in asset allocation can vary significantly among funds using the same target date. In recent years, target date funds have grown increasingly popular in employer-sponsored retirement plans.

Noting that the use of a date in a target fund’s name carries with it an expectation that the fund would invest in a mix of investments appropriate for someone retiring, or nearing retirement, in the year signified by the name, Dimitroff told the panel that in 2008, the performance of target date mutual funds with 2010 in their name, had losses ranging from 3.6 percent to 41 percent.

“We believe that a loss of up to 41% of assets from a fund labeled 2010 is completely inconsistent with an investor’s reasonable expectation that his or her assets would not be subject to such high market volatility,” Dimitroff said. “It is not an answer to say that misleading fund names can be cured with effective disclosures. We must face the reality that disclosures are very often not read and more often not fully understood. Disclosures are simply not adequate to counteract the reasonable expectations created by a fund’s name,” she told the hearing.

“For these reasons, we recommend that the SEC amend its misleading names rule to provide that a target date fund’s name is a materially deceptive and misleading name unless the fund’s investments fall within an acceptable range of asset allocations consistent with its name,” she said.

Dimitroff went on to say that establishing industry standards for target date funds is especially important because target date funds are often the default investments for many individuals who enroll in 401(k) plans. “Appropriate ranges of asset allocations for target dates, based on reasonably accepted industry practices, can and should be established.” CFP Board has pointed to the Thrift Savings Plan Lifecycle Funds established for federal employees and members of the armed services as an example of the feasibility of setting reasonable industry standards for asset allocation in funds with specific time horizons.

“We urge the Department of Labor to work closely with the SEC to establish industry standards that will ensure target date funds are not misleading to consumers on either extreme – too much cash for the young investor or too much equity for the investor nearing retirement.” Dimitroff proposed that industry standards for ranges of appropriate asset allocations for target dates could be identified and established by a panel of experts in retirement fund allocations, including practicing financial planners who hold CFP^® certification.

If efforts to put such standards into place are not undertaken or not effective, the Department should proceed on its own to regulate target date funds that are used in 401(k) plans, or, repeal such funds’ eligibility as qualified default investment alternatives in employer sponsored retirement plans, Dimitroff said.

Top News Stories

A Personal Finance Workout
Wall Street Journal (06/23/09) Reddy, Sudeep

A key part of the Obama administration's effort to protect the personal finances of Americans applies findings from the science of human behavior to, in essence, put laziness to work. Using tactics ranging from a light nudge to a hard shove, officials are turning theories about behavioral economics into practice to reshape how Americans make personal finance decisions. To help people who don't save, for instance, the government would create accounts - unless they opt out - to redirect part of their salary or tax refund into savings. The fundamental premise behind the approach is to design lending policies and government programs based on how consumers actually behave. "Very strong market incentives exist in the system to take advantage of human failing," says Michael Barr, an assistant Treasury secretary and one of the leading proponents of behaviorally informed regulation. "We're trying to figure out the right regulatory tools to realign the incentives and make abuse in the marketplace less likely." The Obama budget proposal includes plans to require employers who don't offer a 401(k) or similar retirement savings account to automatically enroll workers in individual retirement accounts, siphoning deposits directly from their paychecks. The program is aimed at the half of all working Americans who don't have a retirement plan other than Social Security. Workers would be allowed to opt out of the auto-IRAs. But that would force them to make a clear decision not to save this way, perhaps driving them to think more about their retirement needs. When the government this decade changed the law to encourage employers to automatically enroll their workers in 401(k) accounts, unless they opted out, employee participation shot up. The Treasury is also now considering proposals to direct tax refunds into a bank account automatically to encourage people without a savings account to save more.


Elizabeth Warren on Consumer Financial Protection
New York Times (06/17/09) Rampell, Catherine

Harvard Law School professor and Congressional Oversight Panel Chair Elizabeth Warren developed the idea of a federal consumer protection agency, which is included in President Obama's plans to revamp the nation's financial regulatory system. Warren--who could be appointed head of the new body--says some consumer credit problems are the result of irresponsibility, but she contends that lenders "have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt." The consumer financial product safety commission (FPSC) she envisions would oversee mortgages, credit cards, car loans, life insurance and annuity contracts, and other financial products. The agency would produce guidelines for disclosures, gather data about the uses of these products, assess new financial products, and call for modifications before certain products are made available to consumers. "In effect, the FPSC would evaluate these products to eliminate the hidden tricks and traps that make some of them far more dangerous than others," she says.

Personal Finance News

Savings Game: Pick a Financial Planner Carefully
Salt Lake Tribune (06/13/09) Cruz, Humberto

CERTIFIED FINANCIAL PLANNER™ professionals, registered investment advisers, and other types of financial planners adhere to different standards and may advise their clients in a number of ways. A CFP^® certificant is recommended, as these planners are held to a "fiduciary standard" by Certified Financial Planner Board of Standards that puts the client's interests above the adviser's. Brokers, who are bankrolled by stock exchange member firms and may refer to themselves as financial planners, are self-regulated under the Financial Industry Regulatory Authority, a securities industry group that doesn't hold them to a fiduciary standard. Recommendations made by a broker, or "registered representative," may be suitable to the client's goals and risk tolerance level but do not necessarily place the client's interests first.


Financial Fundamentals: New Rules About Roth IRA Contributions
Shreveport Times (LA) (06/15/09) McCrocklin, Mark

Mark McCrocklin, CFP^®, says in this article that new IRA contribution laws, passed by President Bush and set to take effect in 2010, will raise the salary cap for contributors. An IRA contributor who files either individually or jointly can convert the IRA to a Roth IRA if their income does not exceed $100,000. Holders of a Simplified Employee Pension or a SIMPLE IRA fund may convert these into Roth IRAs now instead of waiting until next year. The rules become complicated for investors who have made both deductible and nondeductible IRA contributions and do not intend to convert the entire sum. Specifically, the nondeductible contributions to a Roth cannot be converted in order to avoid paying taxes at the conversion. Instead, the converted amount is considered a prorated portion of the IRA's taxable and nontaxable dollars.


Do You Have Time to Get Back in the Black?
Wall Street Journal (06/14/09) Kansas, Dave

Investors under 40 have two factors working in their favor: time to see a recovery in the stock market and investment accounts, and the opportunity to save early and earn profit on compounding interest. A large percentage of the growth in coming years is expected to come from developed economies such as Japan and Western Europe, while emerging economies contain greater risk exposures. In the long term, the plunge in stock prices provides an opportunity to snatch up shares at bargain prices. Investors between the ages of 40-55 are transitioning away from more aggressive investment options and are likely maximizing contributions to their 401(k)s as they reach their peak earning potential. In this time, it is imperative for investors not to reduce the amount of money they are investing and saving, and to avoid changing their investment strategy as a result of panic.


What to Look for in a Long-Term Care Insurance Policy
MarketWatch (06/11/09)

Private long-term care insurance, seen by many as a complex and expensive alternative to traditional financing for nursing homes or assisted living facilities, provides a level of protection for prudent purchasers. Without insurance, the costs of long-term care can be as high as $70,000 a year, according to the Kaiser Family Foundation, and Medicaid typically does not cover nursing home expenses until the payor has exhausted their resources. LTCI is framed differently than health insurance and usually has the following characteristics: an elimination period of 60 or 90 days that correlates with Medicare's termination date following an acute health event, after which the policy begins paying benefits; a duration period of three to six years, on average; inflation protection; and varying benefits. For the latter feature, buyers are advised to scrutinize the LTCI contract to see how much flexibility it provides in terms of location and degree of service.


Leaving 401(k) Money With Former Employer Could Protect Savings
Wall Street Journal (06/04/09) Brill, Marla

Under the Employment Retirement Income Security Act, qualified retirement plans like 401(k)s are off-limits to creditors, with the exception of former spouses and the IRS. But if a qualified retirement plan is rolled into an IRA, there may be less protection. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 safeguards traditional and Roth IRAs derived from contributions from creditors for up to $1 million, but only in the case of a bankruptcy. The act also gives unlimited security to rollovers from employer plans in the case of a bankruptcy, says Seymour Goldberg, senior partner at Goldberg & Goldberg. In other situations, however, state law will likely control the level of protection for an IRA from creditors. Many states impose limits on how an IRA can be sheltered from creditor claims. Some states like California rely on a means test to specify how much creditors can attach, but typically states do not use standardized formulas or measures, observes attorney Jay Adkisson. Moreover, if a judgment is granted, account owners might be subject to income taxes or sometimes a 10 percent early distribution penalty.


Face the Numbers With Personal Financial 'Stress Test'
Dallas Morning News (TX) (06/01/09) Yip, Pamela

Consumers should undergo "stress tests" to see if their personal finances could survive various pressures, experts say. These include such things as job loss, a serious illness, or some other unexpected event that would hurt their finances. One aspect of such a test is determining the length of time it would take to replace current income in case of job loss. To do this, a person should divide his or her gross annual salary by $10,000 to get the number of months it would take, according to Todd Mark, vice president of education at Consumer Credit Counseling Service of Greater Dallas. Another thing to consider is if individuals who carry a balance on credit cards were to see their annual percentage rate rise or their mortgage reset to a higher rate, would they have enough to absorb those higher expenses? Mark advises that consumers with a high debt-to-income ratio and insufficient emergency savings make only the minimum payments on their credit cards and save the rest of the money. "I would much rather my cushion be cash in the bank rather than a credit line that I don't know whether it will be there a month later," Mark says.


Tips for the Budget-Phobic
Wall Street Journal (06/01/09) Prior, Anna

The process of creating a budget using spreadsheets or personal finance software can be challenging for some people. One way to simplify the process is "bucket budgeting," a streamlined approach where money is divided between "buckets" that are each assigned a different set of expenses. Although the term is fairly new, "the strategy isn't different in many ways, conceptually, from some older ones," says Eleanor Blayney, CFP^®, a consumer advocate for Certified Financial Planner Board of Standards. A basic budget can comprise three "buckets"--a savings account for future expenses like retirement, a checking account for fixed expenses like mortgage payments, and a second checking account for weekly flexible expenses such as groceries and discretionary purchases. Next, a person needs to identify how much of each paycheck should go toward savings. At this step, the employer's payroll department needs to be contacted to have the paycheck's direct deposit be separated between the savings account and the checking account for fixed expenses. The money in the checking account should be used to pay monthly bills, while the remaining funds can be divided into four segments for weekly automatic transfers to the second checking account. The weekly deposit represents the money a person can spend for the next seven days, thereby forming a more compact and manageable time period for the budget.

Financial Alerts

Medical Problems Could Include Identity Theft
New York Times (06/13/09) Konrad, Walecia

More than 250,000 Americans are victims of medical identity theft each year, according to a report in 2007, the last time such federal data was collected. With the widespread use of electronic records systems and the lack of security measures, the number of victims has most likely increased. Thieves can use stolen insurance information to impersonate someone and receive a wide variety of health services, or medical office insiders can download personal data and sell it on the black market. One medical identity theft victim found a $19,000 bill on his credit report for a Life Flight air ambulance service in a remote area. While there are several consumer protections available for traditional identity theft, medical identity theft measures are subject to the Health Insurance Portability and Accountability Act, which also dictate the privacy of a thief's medical records.


Cyber Crimes Now More Sophisticated and Growing by 45 Percent
SPAMfighter (05/27/09)

Online assaults carried out over email and malware-laden sites are increasing due to more sophisticated attack methods used by hackers, according to data from KPMG and AKJ Associates. A recent joint survey on "e-crime" by the companies found a 45 percent spike in cybercrime incidents. The primary source of online attacks are sites with malware content and malware-riddled spam emails. Most attacks are aimed at finding a user's password, account information, and PIN number for bank accounts. These attacks are difficult to root out because they rely on artificial intelligence that automatically updates when a new version of a malware kit is released. Phishing attacks, which make up 48 percent of all cybercrimes, are becoming more popular in the financial services sector especially. Failure to thwart malicious online activity by users, Internet service providers, and government agencies has many security experts concerned. As a result, analysts say users have little faith in the security of online platforms and content.


Credit Protection May Not Protect
Wall Street Journal (05/27/09) P. D2; Grant, Kelli B.

The economic downturn has more consumers interested in credit-protection plans from card companies that offer to make payments in the event of unemployment, disability, or death; but they need to exercise caution when signing up for such coverage. Card holders first should research the costs of such policies, as most come with monthly fees of 35 to 99 cents per $100 in debt; and some experts believe consumers would be better off saving the money in an emergency account or using it to pay down the balance on their cards. Borrowers also should keep in mind that some disability benefits are paid out only if they cannot work at all, and hardship plans typically cover only the minimum monthly payment while the balance continues to draw interest. Some plans, meanwhile, do not pay out if consumers leave their jobs voluntarily or are terminated due to performance. Experts add that credit-protection benefits generally take a back seat to other insurance policies, so consumers already carrying disability insurance probably do not need credit-protection plans.

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