CFP Board eNewsletter
January 2007
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CFP Board eNewsletter |
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| Our New Look |
CFP Board's "It's Your Turn" eNewsletter enters the new year with a new look! We heard your comments about the old design and hope you find the new look cleaner and easier to read. We appreciate those of you who took time to complete our reader survey last fall. The survey results showed retirement planning was the most popular financial topic among our readers, and the demographic information provided by survey participants helps explain that concern: 70% of readers are between the ages of 35 and 65 and looking forward to retirement. Rounding out the top three popular topics were investing and financial alerts. We plan to feature more articles on those topics, including a monthly section that will provide you the latest in financial alerts from government agencies. The survey also suggests "It's Your Turn" readers are a well-educated group, with more than 85% of survey participants indicating they hold a bachelor's degree or higher. Many indicated a desire for more "technical" articles, and we're working to include more articles and interviews with CERTIFIED FINANCIAL PLANNER™ professionals who can provide that technical expertise. Our goal for the eNewsletter is to inform you about matters affecting your finances and encourage you to benefit from financial planning, whether you're taking first steps to improve your financial situation or you're working with a financial planning professional. Your comments and suggestions about the "It's Your Turn" eNewsletter are always welcome at mail@CFPBoard.org.
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| Mutual Funds: Focusing on Fees |
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A Dutch merchant named Adriaan van Ketwich set up the first mutual fund back in 1774. He wanted to provide small investors with a way to build a diversified portfolio at low cost. He hit on a plan for pooling people’s financial resources to invest in stocks, bonds and other securities, so called his new fund “Strength in Unity.” Today, more than 80 million Americans are invested in some form of Van Ketwich’s idea, according to the online investment information site Investopedia. Mutual funds are a popular type of investment, but there is a catch — the cost. The charges for managing and administering mutual funds can eat a big hole in your returns, and the fees are often difficult to spot. So here’s a quick guide to identifying and minimizing mutual fund fees. There is good news and bad news when it comes to fees. The good news: The costs of owning mutual funds are at their lowest levels in more than 25 years, according to a study by the Investment Company Institute, the national association of the investment company industry. The ICI found that, in 2005, some 90% of all stock-fund assets were invested in funds with below–average annual fees. The popularity of Van Ketwich’s idea has spurred intense competition among funds, and that competition has led to lower fees. The bad news: Investors still find it difficult to spot the funds with the lowest fees, and many don’t understand how fees erode their rates of return over time. Researchers carrying out a study for the National Bureau of Economic Research asked a mix of Harvard and University of Pennsylvania undergraduates and MBA students to invest a fictional $10,000 among four different funds. Around 85% of participants failed to pick the fund with the lowest costs — even after they were given specific information about fees. Mutual funds are required by law to detail their fees in the prospectus, the document that describes a fund’s background and objectives. But prospectuses are complex and it can be hard to sift out the information on fees. So here’s what to look for. There are two basic categories of fees: those incurred to buy and sell shares and those incurred to manage and/or market the funds themselves. One distinction to be aware of when choosing an investment is whether it is a “load” or “no-load” fund. This may sound at first like truckers’ jargon, but load funds are simply funds that charge a sales commission. There are three types:
The expense ratio, which covers things like administration, advertising and general management services, is usually charged at between 0.2% and 2% of net assets. If a mutual fund has an expense ratio of 0.5%, for example, you will be charged fifty cents for every $100 in assets. (The same ICI study mentioned above found that, in 2005, the average expense ratio for stock funds was about 0.9%.) Because the expense ratio is deducted annually from your assets, it does not affect the amount you invest. It does, however, reduce the rate of return on that investment. Finding your way through the maze of mutual fund fees can be challenging. Fees can always be found listed in a fund’s prospectus, but they can also vary widely—by fund and by the length of time you plan to hold the investment. If you’re in doubt about which fund or fee is right for you, consult a qualified financial advisor. There are also online calculators that can help you compare fees: The Mutual Fund Education Alliance, the trade association of the mutual fund industry, has a Fund Selector on its Web site. The U.S. Securities and Exchange Commission, the government body that oversees the securities industry, also has a Mutual Fund Cost Calculator. NASD, the primary private-sector regulator of America’s securities industry, has its own Mutual Fund Expense Analyzer, too. If you’re looking for a more general introduction to mutual funds, AARP, America’s largest non-profit organization for people over 50, has an overview of Mutual Funds on its Web site as well as an article on Keeping Financial Product Fees Low. AARP's Basic Investing Principles is another source of helpful tips. When it comes to choosing a mutual fund, focusing on fees pays off in the long run. |
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| Planning the Future for Children with Special Needs |
When Karen Greenberg’s son Ricky was diagnosed with autism back in 1990, she had two reactions. As a mother, she was determined to provide Ricky with the best possible care. As a CERTIFIED FINANCIAL PLANNER™ professional, she was determined to provide him with a lifetime of financial support as well, even after she herself had passed away. “In all my years of training and practice, I had never encountered this situation before,” Greenberg recalls. “I realized I had no idea how to secure the future for my son, who would need financial help for the rest of his life.” Greenberg first turned for advice to an attorney. He suggested she disinherit Ricky and leave everything to her daughter, who would then have to assume responsibility for her brother’s care. That didn’t feel right to Greenberg; she didn’t want her son’s care to be her daughter’s burden. So she immersed herself in the local law library to find a solution. She emerged with a comprehensive plan to establish a special needs trust, funded by a life insurance policy and savings, that would provide for Ricky while preserving his eligibility for government benefits like Medicaid and Supplemental Security Income (SSI). Then she did something else that combined her experience as a mother and a CERTIFIED FINANCIAL PLANNER™ professional: She set up Prosperity Life Planning, a non-profit organization that helps families of disabled children and adults in South Florida secure their loved ones’ financial futures.
The disabilities that fall into the category of special needs are diverse, ranging from autism and Down Syndrome to mental illnesses and developmental delays. Yet special needs planning is still unfamiliar territory to many parents. In a survey carried out by MetDESK®, the Division of Estate Planning for Special Kids at financial services provider MetLife, 60% of parents said they did not expect their special needs children to ever be financially independent. Yet 73% of parents had not yet begun setting aside money for these children. The MetDESK® Web site offers a Special Needs Calculator that can guide parents through the process of estimating a dependent’s potential future income and expenses. There is also a page of Resource Links with tips on finding additional information about special needs issues. Together with her husband Jaret Vogel, a financial services professional, Greenberg takes families with special needs children in South Florida through the entire financial planning process. An overview of that process can be found on the Prosperity Life Planning Web site. “I often ask parents, ‘If you were to have died yesterday, what would you want for your family today?’” Vogel says. “Most families are hard-pressed. Caring for a disabled child costs more time and more money, so there is tremendous pressure on the family. It’s hard to think 30 or 40 years ahead when you’re struggling to cope and pay the bills right now. We’re there to reassure families that this is not a black hole. We can help guide them through the process.” A properly designed special needs trust can provide financial resources for the lifetime of a disabled child, even after the parents have passed away. The first step in creating one, according to the Prosperity Life Planning model, is writing a Letter of Intent. Parents are the best guides to their children’s personalities and preferences, so Greenberg and Vogel encourage clients to think about how they would like their children to be cared for if they were no longer around. A Letter of Intent is not a legal document, but a sort of instruction manual. Greenberg and Vogel describe it as “a mini-biography of your child, a ‘User’s Guide’ to explain the unique aspects of your child, his diagnosis, his level of functioning, and your vision for the future.” They suggest that the letter be updated often and that other family members know its whereabouts. The next step is to establish the child’s legal guardians. “One of the things that most shocks people during workshops is that, when a child turns 18, the parents are no longer considered his or her legal guardians,” Vogel says. “For disabled children, that means parents must apply for guardianship in order to make legal, personal or medical decisions for the adult child.” When establishing guardianship, Greenberg and Vogel advise parents to name alternates or successors who agree to serve as guardians in the event of their incapacity or death. Once guardianship is arranged, it’s time to name the trustee, the person in charge of the money in a special needs trust. A trustee can be a sibling, another family member or a friend. Some families are so small that it can be difficult to find someone to serve in this role. In that case, a bank or an attorney can serve as a trustee, for a fee that is normally a percentage of the total assets in the trust. It is also possible to select co-trustees, two people who work together – and must both agree – before any funds are paid out from the trust. The final step is to set up the special needs trust itself, and to decide how to fund it. Trusts can be funded through savings, life insurance policies, investments, gifts and bequests. But anyone with more than $2,000 in assets can be disqualified from government benefits like Medicaid and SSI. That’s why it’s crucial that disabled individuals are not named as beneficiaries in wills, life insurance policies or retirement accounts. This is also the primary advantage of a special needs trust: None of the money is considered as the assets of the disabled person, thus preserving that person’s eligibility for federal benefits. There may also be significant tax savings to some families who use an Irrevocable Special Needs Trust to pay for certain qualified expenses. Special needs trusts are complex, and laws on government benefits vary by state, so it’s vital to enlist the help of a qualified attorney. Prosperity Life Planning, for example, works closely with a group of attorneys with an expertise in special needs planning. The National Academy of Elder Law Attorneys, a non-profit association that assists lawyers specialized in disability legislation, is a useful resource for those seeking legal services for people with special needs and their families. “Most parents are not thinking about the long–term financial futures of their disabled children,” Greenberg says. “And the ones that do think about it are often so afraid of making a mistake that they end up doing nothing.” Greenberg’s expertise and advocacy have taken the fear out of special needs planning, helping families with disabled children take action to secure their loved ones’ financial futures. Online Resources for Special Needs Planning The Arc Internet Resources for Special Children Mental Health America National Academy of Elder Law Attorneys National Alliance on Mental Illness National Dissemination Center for Children with Disabilities Special Needs Alliance
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| Survey: Did You Resolve to Improve Your Financial or Physical Fitness in 2007? |
It’s a new year, and many of you likely started it off with resolutions to improve some parts of your lives. Many of the most popular resolutions involve health or finances. Let us know what promises you’ve made to yourself in 2007.
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| Financial Alerts |
High oil prices have many wondering if the time is right to invest in oil and gas ventures. The North American Securities Administrators Association (NASAA) has issued an alert that describes renewed activities by con artists who are attempting to lure investors into purchasing fraudulent oil and gas investments and provides tips to help you recognize and avoid oil and gas investment fraud. The Federal Reserve Board has also issued a guide to help home-buyers decide if interest-only or adjustable-rate mortgage loans are a good bet. Home mortgage loans come in an increasingly varied range, and it pays to learn about the benefits and risks of different mortgage loan types before you make a loan commitment. Read more about these and other financial alerts.
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| 10 Questions to Ask When Choosing a Financial Planner |
The decision to seek professional financial planning assistance can be one of the most important decisions you'll make. To ensure you select a competent, qualified professional with whom you feel comfortable and whose business style suits your financial planning needs. CFP Board has put together a set of 10 questions to help you interview and evaluate several financial planners to find the one that's right for you. View and print the questions from CFP Board's Web site or request a free Financial Planning Resource Kit, which contains the 10 questions brochure and other brochures to help you learn more about financial planning.
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| About This eNewsletter |
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CFP Board's "It's Your Turn" eNewsletter is sent monthly to those who have subscribed through CFP Board's Web site, www.CFP.net/learn. CFP Board exists to make people aware of the benefits of financial planning and to encourage people to seek out individuals who can help them apply the financial planning process to improve their financial lives. This eNewsletter is designed to provide information about financial planning, financial planning tools and resources, consumer alerts and more. Suggestions and feedback are welcome at mail@CFPBoard.org.
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