CFP Board eNewsletter
January 2008
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CFP Board eNewsletter |
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| The ABCs of Socially Responsible Investing |
When people invest money, they do so for a lot of different reasons. Maybe it is to generate income, to fund their own or their children’s educations, or to save for retirement. Saving the planet is usually not at the top of the list. But socially responsible investing (SRI) offers the potential to meet personal financial goals while also promoting social and environmental sustainability. In the U.S. alone, there is currently more than $2 trillion under professional management in the SRI sector, according to the Social Investment Forum. Socially responsible investors are different because they take their own financial needs — as well as their investments’ impact on society — into consideration when making decisions. When SRI first got started in the 1970s, investors screened out firms involved in alcohol, gambling, tobacco or weapons, for example. Today, investors also screen in companies that best incorporate environmental, social, and corporate governance (ESG) issues into their business practices. If a firm is a big polluter or has a poor human rights record, for example, then socially responsible investors will shun it. But it’s not always easy to decide what qualifies as SRI. Is it ever acceptable, for example, for a socially responsible investor to buy shares in an oil company? That, says Amy Domini, founder and CEO of Domini Social Investments, all depends on the investor. “Some people say, ‘I’m about what’s right and won’t invest in petroleum-based anything,’” Domini explains. “Others say, ‘Hey, I’m fine with oil. I use it every day. As long as you drive a car, don’t tell me not to invest in an oil company.’ There is a spectrum of opinion. The average investor is concerned about human rights and about climate change, and wants the investments to reflect that.” In her own firm, Domini excludes large American oil companies but not the Norwegian oil and gas corporation StatoilHydro, which has strong environmental and social governance strategies. Though each individual will have different criteria and priorities, socially responsible investors generally look to invest in companies (or funds) that make a positive contribution to society. For some, that might mean firms developing green energy technologies like solar or wind power; for others, it might mean firms that emphasize fair trade and human rights. SRI can also involve shareholder advocacy, in which investors actively lobby companies to address issues such as climate change, gender or racial discrimination, or human rights abuses. Contrary to popular belief, research shows that investments in firms that emphasize environmental, social, and corporate governance issues perform competitively against investments in firms that do not emphasize these issues. In Demystifying Responsible Investment Performance, published in October, the United Nations Environment Programme Finance Initiative and Mercer’s Investment Consulting reviewed 20 academic studies of SRI. Of the 20 studies reviewed, 10 showed a positive relationship between ESG issues and portfolio performance, seven reported neither a positive nor a negative relationship, and three reported a negative relationship. “On balance,” the authors concluded, “the evidence suggests that there at least does not appear to be a performance penalty from taking wider factors into account in the investment management process.” Part of the reason SRI performs as well as conventional investing is that environmental and social issues are increasingly seen to have a bigger effect on the bottom line. “People are fed up with Enron-like scandals and poor corporate governance,” says Robert F. Pajak, a Newton, MA-based member of First Affirmative Financial Network, a nationwide group serving socially conscious investors. “It’s not about the lowest wages and the longest hours anymore; it’s about the most sustainable and socially responsible practices. As the results of climate change become clearer, more and more people are going green. And they feel empowered when they understand their values and can actualize them through their investment decisions.” As the popularity of SRI grows, so do the methods to manage and monitor it. The Web site of California-based SRI advisors Invested Interests offers a Mutual Fund Social Screen Tool that allows users to track certain mutual funds against issues such as the environment, human rights, and labor relations. The U.N. has even come up with its own Principles for Responsible Investment, developed to reflect the relevance of these kinds of issues. Institutional investors who sign up to the principles commit themselves to, among other things, incorporating environmental and social concerns into investment analysis and decision-making processes. Domini got her start in SRI in the early 1980s, when she was working as a stockbroker and noticed that some of her clients had begun wondering whether they could meet their investment objectives without violating their moral objectives. Domini launched the first SRI mutual fund in 1991, and she’s still bullish on SRI’s potential. “Revolutionary change can occur in a relatively short period when all the right pieces are in place,” Domini says. “The typical socially responsible investor is an engaged and active idealist. The more people are confronted with issues like climate change and Burma and Darfur, the more engaged, active idealists — and socially responsible investors — there will be.” Online Resources Good Money GreenMoney Journal Social Funds
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| The Meaning of Mortgages III: Reasons to Refinance |
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If you already have a mortgage, you may be wondering if you could get a better deal by refinancing. Or maybe you’re struggling to make your monthly payments and need advice on how to renegotiate the terms of your mortgage to avoid foreclosure. In either case, this final installment of It’s Your Turn’s three-part series on mortgages can help. According to Michael Rubin, CFP®, founder of the Portsmouth, NH-based financial education firm Total Candor and author of Beyond Paycheck to Paycheck, the best time to refinance is when your credit situation and credit score have dramatically improved. (For tips on how to improve your credit score, see “The Credit Report Repair Kit” in the December 2007 issue of It’s Your Turn.) “If you lost your job and are now back in steady employment, for example, or if your house has increased substantially in value, you will pose less risk to a lender and might be able to get a lower interest rate,” Rubin explains. “But it’s important to first assess your current loan for pre-payment penalties that could offset the value of refinancing. You need to crunch the numbers to identify other costs — application and attorney’s fees, credit checks, appraisals, etc. — that could eliminate the benefit of a lower interest rate. And if you see an offer for ‘no-cost refinancing,’ don’t believe it. There is no such thing.” If you’re thinking of making a change, Freddie Mac has a Refinancing Checklist of potential reasons to move your mortgage. There is no single rule of thumb regarding when to refinance or not to refinance, Rubin stresses. Homeowners need to look at their overall financial situation and then determine whether the costs outweigh the savings. “Is It Time to Refinance Your Mortgage?”, available on the Web site of the Housing Education Program, a division of the Consumer Credit Counseling Service of San Francisco, features an overview of the issues to consider when thinking about refinancing. The most important question is, of course: Will I save money? For help in answering that question, you might want to try the Will You Save by Refinancing Your Mortgage? calculator on the financial information site Bankrate.com. It will help you tally up all the costs to see how much money, if any, you can save. Bankrate.com’s article "When NOT to Refinance" runs through some of the circumstances when refinancing might not be the best option. Occasionally, even the most reliable borrowers run into financial trouble. Unexpected events like job loss, health problems or divorce can blow big holes in otherwise solid budgets. If the financial trouble is severe and long-lasting enough to threaten your mortgage payments, prompt action is required to avoid foreclosure, the process initiated by a lender to repossess a house. “There are plenty of good reasons for banks to be flexible when people are in trouble,” Rubin says. “So once you realize you are unable to make a payment, get in front of your lender and let them know the issues. The further behind you fall, the harder it will be for the lender to work with you.” If the financial problems are relatively short term — maybe you’re out of work for a few months due to poor health, for instance — it might be possible to arrange a forbearance agreement, in which the lender allows you to make either lower or no payments for a specific period. A loan modification, in which the terms of the mortgage are changed to make payments more affordable, might be an option if your financial situation has changed more dramatically for the worse. In either case, it is crucial to alert your lender as soon as you anticipate difficulties. If you want some advice on your situation, or would rather have someone else talk to your lender on your behalf, you might consider contacting a housing counseling agency. The Department of Housing and Urban Development provides a list of housing counseling agencies and intermediaries that offer a range of assistance, including counseling, job training, and family support. If debt problems are affecting more than just your mortgage payments, check out the Reducing Debt section of the CFP Board Web site for tips on how to get back in the black. If you had been making timely repayments until your adjustable rate mortgage reset, you may be eligible for FHASecure, a refinancing option offered by the Federal Housing Administration. (For an overview of adjustable rate and other types of mortgages, see “The Meaning of Mortgages I: The Basics” in the November 2007 issue of It’s Your Turn.) To qualify for FHASecure, you must have a non-FHA-insured adjustable rate mortgage, a history of on-time payments, and sufficient income to continue to make payments. For more information, visit the FHASecure Web site or call 800-225-5342. The FHA Web site also features “You Can Avoid Foreclosure and Keep Your Home,” which details the steps to take if you’ve fallen behind on mortgage payments. “Of all the bills coming in, the mortgage is the most important,” Rubin concludes. “Your cell phone service might lapse, Netflix might stop sending you movies, but if you don’t pay your mortgage you could be out on the street. So if you’re struggling to make the monthly payments, look for ways to come up with the cash. Any discretionary spending goes away; cut back to the bare bones. It may not be fun, but it’s far better than foreclosure.” This is the last of three articles on mortgages.
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| Financial Alerts |
When you think of institutions that can help you with your financial planning needs, your local bank may not be the first thing that comes to mind. Banks nevertheless play an important role in nearly everyone’s financial plan and provide a safe place to hold savings and invest in products with relatively low risk. The Federal Deposit Insurance Corporation, Federal Reserve Board and the North American Securities Administrators Association offer guidelines and tips related to some of the banking services and products that may play a role in your financial plan. Certificates of Deposit: Tips for Savers Part of any well-diversified investment or savings plan includes keeping some funds in relatively low-risk investments that can easily be converted into cash. One common way to do that is with Certificates of Deposit (CDs). These accounts have traditionally provided higher interest than regular savings accounts and let people keep their funds the banking institutions they’ve grown to trust. Times have changed, and CDs now come with different features are now offered by brokerage firms as well as banks. The Federal Deposit Insurance Corporation (FDIC) has developed guidelines to help you find CDs that suit your needs, as well as tips for where to turn if you have a complaint about your CDs. Learn more at: www.fdic.gov/deposit/deposits/certificate/index.html Shopping for a CD? Ask the Right Questions to Avoid Disappointment Not all Certificates of Deposit (CDs) are created equal, and “Callable CDs” are significantly different than the traditional CD. While Callable CDs often have higher yields than traditional bank-issued CDs, they may require a 10-, 20- or even 30-year commitment. The North American Securities Administrators Association (NASAA) urges investors to be careful and suggests they may want to use a Callable CD Checklist that provides questions to ask when you’re considering a callable CD, as well as a helpful glossary of terms related to callable CDs and a form on which you can record important information. Read more at: www.nasaa.org/Investor_Education/Investor_Alerts___Tips/293.cfm 5 Tips for Protecting Your Checking Account The Federal Reserve Board has prepared a publication with five tips for making your checking account safe. Read these tips and what you should know about your rights under consumer protection laws at: www.federalreserve.gov/Pubs/checkingaccount/ Read more financial alerts.
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| IRS Considers Restrictions on Tax Refund Anticipation Loans |
Earlier this month, the Treasury Department and Internal Revenue Service (IRS) announced a proposal to place limits on tax preparers who market tax refund anticipation loans (RALs) and other products. Under the proposal, tax return preparers would be prohibited from disclosing or using taxpayer return information for the purpose of selling products such as RALs. The proposal follows much criticism of the interest rates associated with RALs – rates that can be very high in comparison to the value of the loan. In 2006, the National Consumer Law Center estimated that 12 million taxpayers took out RALs in 2004, paying more than $1 billion in fees. For most people, especially those who file tax returns electronically and who request direct deposit of income tax refunds to their checking accounts, the time between filing an income tax return and receiving the refund is only a few weeks. Given that short time frame, the cost of the interest or fees involved in obtaining a refund anticipation loan may seem even higher for the limited benefit offered by the loan. The proposed limits were also crafted in response to concerns that tax preparers who receive financial incentives when their clients to take out RALs may be encouraged to inflate their clients’ refund claims inappropriately. In such a situation, the client may receive a large loan on their anticipated refund. But in addition to the fees or interest they incur to take out the loan, the client may later be subject to corrections and penalties for the inaccurate claims on their tax return. The Treasury Department and IRS have released the proposal for public comment, after which they will consider what steps to take with respect to RALs and similar products. To read the proposal, visit the IRS Web site. If you anticipate receiving a large income tax refund this year, you may want to take time to review your tax withholding. It may feel good to get to the end of your tax return preparation and list a large refund amount. But that means the government has been holding funds you could otherwise have saved or invested during the previous year. Read more from “Tax Refunds Aren’t Found Money: Evaluating Your Income Tax Withholding Rate” in the March 2006 edition of It’s Your Turn.
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| Making Financial Goals Stick |
Making goals is easy to do. Sticking with a goal is another story. If you’re serious about achieving a financial goal, you’ll want to be specific, set deadlines, put it in writing, and assemble a support team to help you along the way. Be Specific: Set Deadlines:
Put It in Writing: Assemble a Support Team: Don’t overlook the value of professional assistance. Adding a CERTIFIED FINANCIAL PLANNER™ professional to your support team can be an important part of reaching financial goals. A CFP® professional will not only help you set specific and realistic goals but will also be able to provide an objective view of how your goals work with the other aspects of your financial situation. And you’ll have expert support on your side to help keep you on track as you reach toward your goals.
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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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