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CFP Board eNewsletter | December 2006
Taking Aim at Price Targeting
Going for the Goals
Adding Up the Value of Your Credit
Learning More about Titles Financial Planners Use
Recent Financial Alerts
About This eNewsletter
Taking Aim at Price Targeting

Tim Harford says he's discovered a "secret cappuccino" at Starbucks. It's not on the menu and not in any of the leaflets describing the company's range of beverages. It's not skinny or grande, and it doesn't come with any fancy whipped creams or flavored syrups. It's just an ordinary 8 oz. cappuccino and Harford says if you ask for it, you will get it. Why would Starbucks-or any other coffee bar, for that matter-go to all the trouble of offering a certain type of drink and then not bother to tell anyone about it?

According to Harford, it's basic economics-Starbucks' bigger, more expensive drinks are far more profitable, so it would obviously prefer that customers buy more of those. But since the firm is in the business of selling coffee, it also wants to cater (albeit quietly) to those who just want the no-frills 8 oz. cappuccino. "Starbucks wants to offer less expensive drinks to those who care enough to ask about them," Harford says. "Otherwise, it would be losing customers. But it doesn't want to offer them so widely that it starts to lose margin on the other drinks." This tactic is called price targeting, and you can see it at work every time you step into a shop or supermarket, buy plane tickets or health insurance.

Price targeting is a simple technique retailers use to get consumers to show how sensitive they are to the cost of a product. It is one of the topics entertainingly explored in Harford's book, The Undercover Economist. Harford, a journalist for the Financial Times in London, specializes in revealing the invisible hand of economics at work in everyday transactions such as buying a cup of coffee-or a bag of potato chips.

Imagine you're at the supermarket and want to buy a bag of chips. If you tend to be an impulse shopper, grabbing the first thing you see, you'll likely end up with the most expensive chips available, conveniently placed at eye level by the supermarket's thoughtful management. If you're bargain conscious, however, a brief scan of the shelves will reveal cheaper chips tucked away closer to floor level. By offering similar products at different prices, the supermarket can make everybody happy: the impulse shopper gets her chips, the bargain hunter gets his bargain, and the supermarket maximizes profits from both types of customer. "In price targeting, customers pay what they are willing to pay," Harford says. "It doesn't depend on being a sucker. It's even a good thing because if companies weren't able to target, then nobody would get the lower prices."

For companies, the trick of price targeting is to keep the higher- and lower-price markets separate. If everyone willing to pay a higher price for potato chips suddenly started buying the least expensive brand, the supermarket would see its profit margins on that product plummet. Harford shows how retailers try to discourage less price-conscious shoppers from opting for cheaper alternatives.

Ever wondered why supermarkets' own range of 'no-frills' products look so, well, unappealing? "These products seem to be packaged for the express purpose of conveying awful quality," Harford says. That's not because the company couldn't afford to hire a designer, Harford suggests, but because it doesn't want these products to appear too alluring to customers willing to pay more.

Every purchase we make says something about where our price targets lie. If you buy organic instead of non-organic produce, for example, you're signaling that you care about your health or the environment, or both-and that you're willing to pay extra for them. If you opt for business instead of tourist class on your next flight, you're informing the airline that comfort and service are worth the additional cost to you. And if you choose a high deductible to get a lower monthly premium on your health insurance, you're telling your insurer that you don't expect to make many claims and are willing to risk the high deductible to save money on the premium. Companies can use this kind of information to offer you improved service-and to sell you more stuff.

Whether you're buying airline tickets or potato chips, Harford says, "You can almost always save money." He's convinced that simple observation is the consumer's best weapon: "Try to shop cheaply. Similar products are very often priced similarly. An expensive shopping trip is often the result of choosing products with a high mark-up rather than shopping at an expensive store. If you care about the price, take a moment to look at your options." In other words, always ask for the secret cappuccino.

- James Geary

Going for the Goals

The holiday season is here, and it's time to start thinking about those pesky resolutions for the New Year. The most popular resolutions consistently include losing weight and getting fit, drinking or smoking less, spending quality time with family and friends, doing more charity work-and, of course, saving money and getting out of debt. These are timely resolutions no matter when you make them. And to help make your money-related resolutions last, here's a brief guide to setting (and achieving) financial goals.

"Setting goals is the most important thing you can do," says Dan Candura, a CERTIFIED FINANCIAL PLANNER™ professional, member of CFP Board's Board of Governors and president of the Massachusetts investment advisory firm PennyTree Advisors. "It's even more important than choosing an investment, because it's something you can't delegate. You have to figure out what you want to do with your life, and how much money you'll need to do it. Otherwise, you won't have the motivation to achieve it." Candura is quick to distinguish between goals and dreams, between things you can make happen and things you wish would happen. "Goals are things you do while you're awake," he says, "dreams are things you do while you're asleep."

MsMoney.com, a personal finance Web site with a special focus on women and families, offers a step-by-step process to Goal Setting that begins with establishing short- and long-term goals. A short-term goal is one that can be accomplished within about three years, and might comprise things like buying a house or paying off a student loan. A long-term goal can take up to 10 years or more to accomplish, and might comprise things like paying off a mortgage or buying a second home. MsMoney has a handy Goal Formulation Worksheet to help you get started, as well as tips on identifying and achieving Short-Term and Long-Term Goals.

Having too many goals, however, is not a good thing since your efforts and resources can be too thinly spread. The risk is that by trying to achieve too much you end up achieving too little. So Candura urges prioritization. "Usually people feel very strongly about their first five goals or so, and after that things get blurry," he says. "Knowing your priorities is important because, should your investments not perform well for a period of time, you'll know which goals to accomplish first and which ones to cut."

The next steps are to make your goals specific and actionable. A goal that goes something like 'I want to have as much money as possible in my 401(k) by the time I retire' is not specific. Consequently, there is no way to know if you are achieving it. Get real with your goals by putting specific numbers on them, as in 'I want to have $1 million in my 401(k) by the time I retire.'

Once you've got a measurable goal in mind, then take concrete steps to achieve it. If you want $1 million in your 401(k) by the time you retire, figure out what percentage of your salary you have to lay away each month to reach that number-and then do it immediately. "It's good to make implementation as automatic as possible," Candura suggests. "If you want to save a certain amount every month, have that amount automatically deducted from your bank account. Take the decision-making out of it. The more automated your action plan is, the more effective it becomes."

The next step is to write down your goals, review them regularly and seek the support of family and friends in achieving them. "Financial planning is an ongoing process," Candura emphasizes. "A lot of people spend more time planning their summer vacations than they do planning their financial lives. But to be effective, your goals should be revisited regularly. Check them once or twice a year to see what's the same, what's different, and whether you're still on track to hit your targets."

If you're married or in a long-term relationship, Candura also suggests reviewing your goals with your partner. "Partners can have very different goals from each other without realizing it," he says. "One may want to retire in Hawaii, while the other wants to be near the grandchildren in Michigan. They don't know they have different goals because they've never discussed it."

MsMoney's final step is crucial: Don't give up. If things aren't working out the way you planned, change your action plan to fit with the changed circumstances. There's plenty of help out there, should you need it. The Savings Fitness publication on the CFP Board Web site has valuable information about setting financial goals. And in keeping with the holiday spirit, FirstGov.gov, the U.S. government's official Web portal, sports tips on keeping Popular New Year's Resolutions, including getting out of debt and saving money. If you need more help, you can always consult a CERTIFIED FINANCIAL PLANNER™ professional or other qualified financial planner. These resources should help you ring in some new resolutions while you're ringing out the old the year.
Adding Up the Value of Your Credit

Credit is part of the American lifestyle. Even if you're lucky enough not to receive random credit card applications in the mail, you're likely hearing the phrase "with approved credit" several times a day in advertisements for cars, furniture and other big-ticket items. References to credit are everywhere, and while that may seem a reflection of too many companies offering credit and encouraging overspending, it also reflects the important role credit and your credit report play when it comes to many financial decisions.

Your credit report is what businesses use to evaluate your applications for credit, insurance, employment or a lease. It contains identifying information, your credit history, financial-related public records such as bankruptcies, tax liens, as well as a list of companies and banks that have asked to review your report. Lending institutions take a look at the information in your report and decide if you seem likely to repay a loan on time and in full. Having a good credit report makes it easier to get a loan with lower interest rates. The lower the interest rate, the smaller your monthly payments and the smaller the overall cost of the loan will be.

Lending institutions have access to all of the information on your credit report, but they often rely heavily on credit reporting agencies to give them a quick evaluation of your credit-worthiness. That's done through a credit score, which credit reporting agencies calculate by assigning numerical values to the information on your credit report. Your score tells lenders of the likelihood that you'll pay your bills, and therefore reflects your risk as a potential debtor. While there may be close to 1,000 different credit scoring models, the FICO® model developed by Fair Isaac Corp is perhaps the most well known and most popular with lenders. A FICO® score can range from 300-850. The higher your score, the lower the interest rates you'll get.

Until recently, the three national credit reporting agencies - Equifax, Experian and TransUnion - each used its own version of the FICO® model, which could result in three different FICO® scores for one consumer. To eliminate some of this variability in score calculations, the three bureaus created VantageScoreSM, a uniform scoring method by which all three use the same scoring formula. VantageScoreSM uses a scale of 501-990 and a grade system of ABCDF: 901-990 = A, 801-900 = B, 701-800= C, etc. The purpose of the system's design is to act as an easier-to-understand learning tool for the consumer.

Although the specific formula used to calculate your credit score is trade secret, it is helpful to know some of the factors that are considered in determining your credit score, and to what degree. Compare, for example, the FICO® and VantageScoreSM models:

FICO® VantageScoreSM
Payment history - 35%
Amounts owed - 30%
Length of credit history - 15%
New credit - 10%
Mix of credit - 10%
  		Payment history - 32%      
Utilization - 23%
Balances - 15%
Depth of Credit - 13%
New Credit - 10%
Available Credit - 7%

Be sure to ask your lenders which score they use - FICO®, VantageScoreSM or any other - since a good score in one model may be just average in another.

Even if two agencies use the same VantageScoreSM calculations, the information they put into those calculations may not be the same and will result in different credit scores. Any disparity in scores is related to the information contained in a credit report; creditors choose which, if any, credit reporting agencies they want to subscribe, so the information in your credit file at each of the national credit bureaus will vary in content. That disparity can be increased by misinformation in your report. Some estimate that approximately 80 percent of credit reports contain erroneous information ranging from the wrong birth date to an omitted credit card account in good standing or accounts that were not applied for. Knowing you pay your bills on time and pay your credit cards off in full is not enough to ensure that your credit report is error-free and properly reflects your financial responsibility.

Certain errors may result in your credit score being lower than it should be. Say one of your credit cards with a $10,000 limit and a $0 monthly balance doesn't show up on one of your credit reports. Without that line of credit on your report, it appears that you have $10,000 less in total credit than you actually do; consequently, it will appear that any balances you have on other cards occupy a higher percentage of your total credit than they actually do. This will affect what is known as the "debt utilization ratio"-the portion of available credit being used.

The good news is that inaccuracies on a credit report can be disputed and fixed; this is especially important for fraud-related errors such as delinquent revolving accounts opened in your name, information in the public records section that doesn't pertain to you, such as a foreclosure listed on the report of someone who has never had a mortgage. Credit reports may also contain information that can make you aware of fraudulent activity; you could be a victim of identity theft and not know it. Contrary to what some companies and services claim, accurate negative information cannot be erased from your report and may be reported for up to seven years - ten if it's a bankruptcy.

The not-so-good news is that a creditor has 30 days to respond to a charge of an error, and that dispute will be on your report so long as the charge is in dispute. So, if you're looking to purchase a home or a car, for example, make sure you review your credit reports well in advance - some experts suggest at least three to six months - to allow enough time to resolve any discrepancies with creditors.

In last month's "It's Your Turn" newsletter, we asked how long it had been since you last checked your credit report. Nearly 16 percent of our survey participants said "never." If you're one of those who have never viewed their credit reports, or if it's been a while since you've taken time to review your credit reports, you'll be happy to learn that viewing your credit report has never been easier, and what's more, it's free. Under the federal Fair Credit Reporting Act, all Americans have the right to a free copy of their credit reports from each of the three national credit bureaus every twelve months. While it's easy to assume a copy from just one of the three bureaus will suffice, it will not. Contrary to common belief, credit reports are not all the same. For this reason, it's best to request and compare all three reports at the same time-as opposed to reviewing them at different times throughout the year - so that you can dispute any discrepancies and mistakes worth addressing.

While you can get free copies of your credit reports once a year, access to your credit score is not free and can be as much as $9.95. Not everyone needs to know their current credit score, but if you're considering a loan for a major purchase such as a car or a home, knowing your score will help you determine what type of interest rates - prime or sub-prime - you'll be eligible for. If your lender is a mortgage lender, your FICO® score is the score you want to know, as VantageScoreSM is not used by the mortgage industry.

USEFUL RESOURCES AND LINKS
Visit www.annualcreditreport.com to request your free credit report from each of the national credit reporting agencies.

Visit the Federal Trade Commission's Web site on Credit for more credit-related information and resources.

If you find you need to dispute inaccurate information on your credit report, you may find it helpful to review a sample credit report dispute letter.

Read about weird things that can affect your credit.

Read 11 myths about credit reports.
Learning More about Titles Financial Planners Use

Making the decision to seek professional financial planning assistance is an important step in protecting your financial future. When you've made that decision, you've likely taken time to educate yourself about the benefits financial planning can provide you and have taken time to learn how to choose a planner that's right for you. When you begin interviewing individual planners, your learning curve may not be over. You're likely to run across financial planners who use different titles that represent different licenses and professional certifications.

It isn't surprising that financial planners use many titles. After all, the financial planning process covers a wide range of financial issues and can touch many parts of your life. It involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans. A competent financial planner will be able to provide you with advice about general budgeting and debt management, insurance and risk management, investments, employee benefits, income tax, and retirement and estate planning.

Many financial planning professionals begin their careers specializing in one of the areas that comprise financial planning. You'll find accountants, for example, who begin with tax practices and then expand the range of their services to include financial planning. You'll also find investment and insurance professionals who have developed their knowledge and professional services to cover the other areas of financial planning. Some of the more common titles you'll find financial planners using are listed below.

Investment Advisers
Many financial planning professionals are registered as "Investment Advisers." Individuals or firms providing securities advice for compensation as part of a regular business of giving investment advice must register with the Securities and Exchange Commission (SEC) or the appropriate state securities agencies as an investment adviser, unless they fall under a specific exemption. An "Investment Adviser Representative" is an individual associated with an investment adviser firm who provides investment advice to clients. Investment advisers and their representatives have passed tests designed to ensure basic competency in providing advice about investments, and they may recommend stocks, bonds, mutual funds, partnerships or other SEC-registered investments to their clients.

The services provided by many investment advisers are limited to providing advice, as the sale of investment products often requires additional registrations, and they often charge for their services with an hourly fee or a set fee for specific activities. Financial planners who identify themselves as providing "fee only" financial planning are likely to be registered as investment advisors. They are required to provide their clients with a Form ADV disclosure document that provides details about their business structure, compensation, educational and professional experience, and whether their background includes any disciplinary action. An investment adviser is required to provide a "fiduciary" standard of care, which basically means their advice must be impartial and in the best interest of their clients. Complaints about investment advisers may be investigated by the SEC or the states in which an investment adviser is registered, and information about disciplinary actions taken against an investment adviser may be found through the SEC's Investment Adviser Public Disclosure program.

Broker/Dealers and Registered Representatives
Broker/dealer is a term used to describe an individual or a company that is licensed to buy and sell investment products for or to clients. Some broker/dealers are large companies that sell securities that they own (thus, the term "dealer"), while others are firms that only buy and sell securities on behalf of investors (thus, the term "broker"). To be in the securities business, an individual or a company must be a broker/dealer or an individual must be affiliated with a broker/dealer as a registered representative.

A registered representative, also called a stockbroker, is affiliated with a stock exchange member broker/dealer firm, can recommends to clients which securities to buy and sell. Depending on the type of securities in which a registered representative wishes to deal, he or she must pass securities examinations administered by NASD as well as any securities exam(s) required by the states in which he or she does business. All registered representatives, including any financial planners who execute buy or sell orders for mutual funds, stocks, bonds, commodities or other securities on behalf of clients for compensation, must be registered, and their compensation is typically based on or includes commissions earned on the sale and trading of the investments they recommend. A registered representative is required to disclose to clients basic information about the compensation they receive, and they are required to recommend and sell only investments that are "suitable" for their clients' needs. Information about disciplinary actions taken against registered representatives may be found through NASD's BrokerCheck.

Insurance Agents
Insurance plays an important part in protecting a person's financial well-being, and many insurance professionals have broadened their services to provide a broader range of financial activities in addition to insurance advice and sales activities. Many financial planners are licensed to sell or give advice on insurance products. Other financial planners might identify insurance needs for a client, but turn to a licensed insurance agent for recommendations about which existing insurance products best meet the client's needs.

"Independent" insurance agents sell products for two or more insurance companies; "exclusive" insurance agents represent only one. Insurance agents are licensed in the states in which they do business, and you can find information about disciplinary actions taken against insurance agents from state insurance commissioners.

Accountants
The two principal types of accountants in the United States are Certified Public Accountants (CPAs) and public accountants. CPAs have passed a national examination, completed educational and supervised experience (in most cases) requirements, and are licensed by the various states to practice public accounting (e.g., auditing) as CPAs. Public accountants are generally accountants who began their practice before most states required all new accountants to be CPAs. Accountants perform one or more of the following services involving the use of accounting or auditing skills: issuance of reports on corporate and individual financial statements, consulting, preparation of tax returns and the provision of tax-related advice. They typically charge an hourly fee or a set fee for specific services.

Many accountants have broadened their activities in recent years into computer systems analysis, management advisory services, corporate or individual tax planning or other areas of financial planning, such as investment planning. CPAs who specialize in personal financial planning can earn the Personal Financial Specialist (PFS) designation offered by American Institute of Certified Public Accountant's (AICPA) by being a member of the AICPA in good standing and meeting its exam, experience, and learning requirements. Accountants are registered in the states in which they do business, and those state licensing agencies have regulatory authority over them.

Attorneys
More and more attorneys are providing financial planning services, usually specializing in estate and tax planning. In the context of financial planning, a planner may ask an attorney to provide specific legal advice for a client, particularly in the areas of taxation or estate planning. An attorney may also be called upon to prepare the legal documents necessary to implement recommendations in areas such as wills, trust documents or business ownership planning. Attorneys are licensed by the states in which they practice, and the state bar associations have authority to investigate complaints and impose discipline.

CERTIFIED FINANCIAL PLANNER™ Professionals
CERTIFIED FINANCIAL PLANNER™ professionals are individuals who have completed requirements set by Certified Financial Planner Board of Standards (CFP Board). The requirements for CFP® certification include education, examination, experience and ethics requirements, in addition to ongoing renewal requirements that include continuing education. The group that holds CFP® certification includes many investment advisers, registered representatives, insurance agents, accountants and attorneys; all those who hold CFP® certification have completed requirements designed to demonstrate mastery of the nearly 100 topics that are considered essential to financial planning. All CFP® professionals have the knowledge to lead you through the entire financial planning process, but not all CFP® professionals provide services that cover all financial planning areas. If one CFP® professional does not provide all the financial planning services you need, she or he should be able to refer another qualified professional who can.

All CFP® certificants have voluntarily submitted to the regulatory authority of CFP Board and agree to abide by CFP Board's Code of Ethics and Professional Responsibility and Financial Planning Practice Standards. Those standards require CFP® professionals to provide services that are in the interest of their client and to recommend only investments that are suitable for their clients. The standards also require CFP professionals to disclose information about their compensation, which may range from services for a fee to commissions generated by the sale of investment products or insurance. CFP Board actively enforces its ethical standards and even takes certification away from those found to have engaged in serious misconduct. Information about any public disciplinary actions taken by CFP Board against a CFP® professional can be found by viewing the individual's listing on CFP Board's Web site.

 

These titles are only a few of the many you may find on a financial planner's resume - there are many more types of financial advisors and financial services credentials out there. A financial planner with the right education and experience can take you through the financial planning process, regardless of the titles you find on a financial planner's resume. But when you select a financial planner, you need to feel confident that the person you choose to help you plan for your future is competent and ethical. Before you begin interviewing financial planners, it pays to review some of the common financial planning titles and learn what those titles say about the standards to which those financial planners are held.
Recent Financial Alerts

NASD has issued a new consumer alert about the 529 plans that have become a popular savings tool for parents wanting to pay for their child's university education. 529 plans are not all the same, however, and the tax benefits of a 529 plan will vary depending on what state you reside in. In this alert, NASD reviews 529 college saving plans - including information on fees, expenses and out-of-state plans - and provides eight lessons to help consumers choose a 529 plan wisely.

The National Association of Insurance Commissioners (NAIC) has also issued a consumer alert that explains how insurance companies use one's credit score and how a credit score can affect auto and homeowner's insurance premiums.

Read more about these and other financial alerts.
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