CFP Board eNewsletter
May 2009
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CFP Board eNewsletter |
| Changes Coming to It's Your Turn |
The next edition of It’s Your Turn will have a new look and a new format, one we hope you will enjoy and which will provide you with more useful information about financial planning. The newsletter will include a collection of newsbriefs, short stories that summarize selected articles from an extensive range of print and electronic media. Because the summaries will come from a variety of publications, you will be exposed to a greater variety of viewpoints and expert advice. The newsletter’s current popular features will remain. CFP Board's Consumer Advocate Eleanor Blayney, CFP® will continue to provide her monthly insights on financial planning. The financial alerts section will continue to provide you with an “early warning system” to defend yourself against schemes and scams designed to separate you from your hard-earned money. And you’ll be among the first to hear about upcoming events like CFP Board’s series of free Financial Planning Clinics.
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| Choosing for Better, and Not for Worse |
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A friend of mine, now single after several relationship attempts and marital near-misses, complains that she has a “busted picker.” She goes on to explain, “Put me in a roomful of available men and it happens every time. I ignore all the nice guys and make a beeline to the one and only jerk there.” A weakness for fatal attractions is not just a problem in our love lives. It can also happen in our financial lives. Ask any of Bernie Madoff’s clients, and they undoubtedly feel like they have “busted pickers,” too. Indeed, most Americans in search of a trusted advisory relationship are worried about similar judgment malfunctions. They have reason to be. But their problem is a bit different from that of my friend. Rather than avoiding the one bad apple in the bunch, their challenge is finding the good one. There are over 300,000 individuals in this country who claim to offer financial planning, but fewer than 20 percent are CFP® professionals who have passed an examination, subscribe to an ethical code and are qualified by experience and education to practice the carefully-defined process of financial planning. So the first step is to look for the CFP® certification and not just the descriptor “financial planner,” which anyone can use. The immediate next step is making sure that the CFP® professional has no history of disciplinary actions or professional sanctions. You can go to www.CFP.net to check this out. If you have the name of the professional’s firm, go to the SEC’s Web site and continue your background check there. You are now in the position of a car-chasing dog. Once you’ve caught up to what you are after, what do you do with it? You’ve found a CFP® professional who looks good on paper, but what then? You still don’t know if this professional is the right one for you. You continue by asking lots of good questions and not asking the useless ones. Here is a question that everyone asks, but probably shouldn’t: “What is your investment performance?” While financial planners certainly do help individuals with their investment portfolios, good planners customize their advice to their client’s individual needs and circumstances. They will not have a single “performance” number. If they did, it may mean they are treating their clients all alike – not a good sign. Here are some questions which no-one asks, but probably should: Are you a fiduciary? A good CFP® professional will know exactly what you are talking about – you are asking if your interests as a client will come before the professional’s. Ask for examples as to how the professional exercises and demonstrates his or her fiduciary standard. Are you a fiduciary? A good CFP® professional will know exactly what you are talking about – you are asking if your interests as a client will come before the professional’s. Ask for examples as to how the professional exercises and demonstrates his or her fiduciary standard. Who is your ideal client? Not only does the professional need to be right for you, you need to be right for him or her. You don’t want to be the professional’s biggest, smallest, richest, poorest, oldest, or youngest client. You want to be right in the middle of the professional’s sweet spot of expertise. You want to be treated uniquely, but look pretty similar to his other clients, in order to get the best advice possible. What would the end of our relationship look like? Ask anyone who has drafted a pre-nuptial agreement: it’s a downer to begin a relationship anticipating its end, but it’s vitally important to think about this. What you are really getting at are the terms of the engagement. Is it for a specific project, a specific time period, or to attain a specific goal? Is it open-ended and ongoing? If the latter, what circumstances would terminate the engagement? If the professional leaves, or retires, or sells his business, what then? Remember you are talking to a planner whose job it is to prepare you for the future. A final bit of advice for those who really do worry that their “pickers” are not the best: be sure to make eye contact with your prospective CFP® professional. In other words, sit down and talk with him or her first before you start to do business. I am still stunned at the number of Madoff clients who never, in fact, met the guy.
Eleanor Blayney, CFP®
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Welcome to the Real World: Preparing Your First Financial Plan |
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Elaine King, CFP®, vice president, Wealth & Well-Being Director with Gibraltar Private Bank & Trust in Miami, likes to host her own version of Jeopardy at the end of the financial planning presentations she does for young people. Following the format of the popular TV game show, she provides some answers and her audience has to supply the right questions. One answer, for example, is 36%; the corresponding question is: What is the maximum percentage of your income you should spend on housing? Another answer is, beneficiary statements on pension and insurance policies; the corresponding question is: What financial documents need to be updated when you get married? King throws in this true-or-false question, too: Most millionaires inherit their money. That statement is false, King says: “Most make it on their own. And that is the theme of this whole course—You can make it on your own.” And that is a message members of Generation Y, those individuals currently aged between 21 and 32, need to hear. A recent survey by MetLife found that 53% of Gen Y employees live paycheck to paycheck, compared to 44% of older workers. In addition, some 73 percent of Gen Yers are worried about making ends meet, a far higher percentage than Gen Xers or Baby Boomers. The recession could end up hurting Gen Yers more than other groups, too, since they have had less time to acquire the financial protections that can take some of the pressure off during tough times. Given these statistics, and the troubled state of the economy, King could easily add another topic to the Jeopardy section of her presentations. Answer: a financial plan. Question: What is the best way for Gen Yers to secure their financial futures? King calls her presentation “Welcome to the Real World. Now What?” Intended for young people who are just leaving college or just entering the workforce, the half-day workshop covers everything from earning money to protecting it. Tax is one of the topics King addresses, and it is the one that gets the most surprised looks, she says: “Parents never really tell you about tax, so when you get your first paycheck you wonder, ‘What happened to the other 30%?’ Many young people are not aware that the money they earn as salary is not the money they will actually take home. So you need to plan your budget on 30% less.” When looking at salaries, King advises Gen Yers to keep in mind that benefits—in the form of health insurance, for example, or retirement contributions—should be regarded as part of their salary. “Don’t just look at the dollar figure,” she says. “A portion of your salary can be in the form of benefits, such as paid vacation days or pension matching funds.” Gen Yers do, in fact, seem to be factoring benefits into their calculations. The MetLife survey found that 71% of Gen Y employees said insurance benefits affected their loyalty to their employers. King also stresses the importance of establishing credit-worthiness. “Lots of 21-year-olds think they will never buy a house, but they do need to buy a car,” King says. “Their monthly loan payments can be way different with a good credit score. If you have weak credit, your insurance premiums will be higher. Some employers might even run a credit check as part of a job application.” King urges Gen Yers to keep their credit scores strong by paying their bills on time and being especially careful with credit cards, which can have a big impact on your score. For more information on your credit score and how to improve it, see How to Keep Score of Your Credit in the September 2008 issue of It’s Your Turn. Budgeting is also a crucial part of the real world, so it is part of King’s presentation, too. Her advice is simple: “Keep track of everything that comes out of your wallet. Look at your fixed costs—utilities, rent, cable and cell phone subscriptions—all the bills for which you can't say, ‘I’ll pay you next week.’ Then look at your variable costs. Eating out is a big one for many people, and people in their 20s tend to spend a lot of money on iTunes. Some people never know how much they spend on things like this, so it’s important to give yourself a monthly allowance and don’t spend any more than that.” Once you’ve got a handle on your budget, King suggests, start building an emergency fund, a sum of money set aside for unexpected expenses or as a cushion against job loss. For more information on how to start an emergency fund, see In Case of Emergency, Use This Fund! in the September 2007 issue of It’s Your Turn. “The emergency fund can be the most overwhelming thing in a first financial plan,” says Aaron Brachman, CFP®, senior financial associate of RBC Wealth Management’s Washington Wealth Group. “Twenty- and thirtysomethings have lots of cash-heavy events—getting married, having kids, buying a car, buying a house, going to graduate school—that can suck savings out of the household. But having three to six months of emergency savings is something to strive for. Don’t be overwhelmed by that number.” The goal of any young professional should be to “make their financial lives boring,” Brachman says. And the first step towards doing that is risk management. That is why an emergency fund is so important, since it can help deal with risks like unemployment or sudden healthcare costs. Risk management is also why Brachman thinks adequate insurance should be an essential part of every first financial plan. “No matter how great your financial plan is, how much you’ve accumulated in retirement savings won’t matter if you become disabled,” he says. Most people don’t start thinking about insurance until they are ready to buy a home or an engagement ring or a first child is on the way. But Brachman suggests getting an earlier start on insurance: “Take out insurance while you are young and healthy, because you don’t know what could happen as you get older.” How much insurance you need depends on variables like how much you earn, the amount of your outstanding debts, how many children (if any) you have, and whether your parents or others depend on you for financial support. Brachman also advises Gen Yers to take out disability insurance, which provides an income should you be unable to work due to illness or injury. “Young people in particular think they will never be disabled, so they never think about disability insurance,” he says. “But it’s essential to have this kind of catastrophe protection in place. Never skimp on risk management; it could affect the rest of your life.” For more information on essential forms of insurance, see Don’t Scrimp on Your Insurance Coverage in the March 2009 issue of It’s Your Turn. Another essential part of financial planning is estate planning, what happens to an individual’s assets after he or she has passed away. Estate planning can be especially important to Gen Yers since as they enter what could well be the most cash-intensive period of their lives—buying a home, starting a family—their parents are aging and could be facing major expenditures of their own, such as healthcare costs. “If you’re in your 30s and your parents are in their 50s or 60s, that’s the time to open a dialogue about estate planning,” Brachman says. “It is difficult to confront your own mortality and potential problems down the road, but things go much more smoothly for families that have open discussions about estate planning.” Part of that discussion, according to Brachman, should involve examining long-term care insurance to cover your parent’s healthcare needs in later life. For more information on long-term care insurance, see Try a Little LTC: A Guide to Long-Term Care Insurance in the April 2007 issue of It’s Your Turn. Brachman also says a will is essential, both for Gen Yers and their parents. For more information on preparing a will, see Why You Need A Will in the December 2008 issue of It’s Your Turn. The bottom line for Gen Yers, says Brachman, is to think ahead. “Many young people have never dealt with complex financial situations before, and so they tend to deal with problems after they have already occurred,” he says. “But these things require years of planning, so it’s important to plan in advance. Seek professional advice instead of trying to do it on your own.” If you want some professional advice on preparing your first financial plan, you can locate a CFP® professional in your vicinity through the Search for a CERTIFIED FINANCIAL PLANNER™ Professional page on CFP Board’s Web site. To see a Webcast of Elaine King’s presentation in Spanish, Planificación Financiera para Jóvenes Profesionales, and a Webcast of Aaron Brachman’s talk, Young Professionals: Launching Your Financial Plan, go to the Consumer Webcast page on CFP Board’s Web site.
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How to Talk with Children about Money |
Allan Roth, CFP®, and his 11-year-old son Kevin do something fun together every Sunday. On the way back home from their Sunday excursions, they were in the habit of stopping at open houses in the neighborhood to see what properties were up for sale. They don’t do that so much anymore, since the recession has meant that not a lot of people have been buying homes. Roth, founder of investment advisory and financial planning firm Wealth Logic, didn’t have to explain this to Kevin. It was, in fact, Kevin who explained it to his dad. “There are no more open houses,” Kevin said, “because people can’t afford to buy them.” Kevin has had such a thorough grounding in the basics of personal finance because his dad is a CERTIFIED FINANCIAL PLANNER™ professional. Roth has even written a book, How A Second Grader Beats Wall Street, about how simple investing lessons helped Kevin—and can help anyone—meet financial goals. Kids don’t necessarily need a lecture on the subprime mortgage crisis, but talking with them about money is always a good idea. And the recession, as bad as it is, is also an excellent opportunity to educate young people about thrift, budgeting, planning, and the other basics of sound money management. According to one recent survey, parents are getting those conversations started. Some 60% of respondents with children under 21 had discussed the topic of saving money with their kids in the past month. The best way to get the ball rolling, in Roth’s view, is to make the subject of money a natural part of parent-child interactions. “The topic should just kind of come up,” Roth says. “Kids should know what’s going on in the economy. Look for little moments of awareness, teachable moments that reinforce the importance of frugality and saving.” Roth gives the example of taking Kevin out to lunch at the local Subway sandwich shop. Instead of ordering separate meals, he and Kevin decided to split a foot-long sandwich, saving a few bucks in the process. It was a simple but powerful lesson in money management. “As kids get older, it’s important for them to know what things cost, especially during times like these,” Roth says. “It’s a mistake not to mention it at all or to say something like, ‘We’re going to be homeless!’ You want to make them aware that times are hard but not say anything to take away from their sense of security.” The trick is not to minimize the situation or to overplay it. The goal, says Roth, is “to get a buy-in from your kids so they understand why you’re cutting back.” For kids who may be getting ready for college, Roth suggests that more in-depth financial conversations might be appropriate. If the recession has hit your college funding plans, then a discussion of student loans or scholarships may be in order. “The closer kids get to the real world, the more real you need to be with them,” Roth says. “Be as up front as you can. They have to understand what happened to your 529 [college savings] plan and what that might mean for which colleges you can afford. Talk about scholarships, loans, and the possibility that your child might have to consider a less expensive college.” For more information of scholarships, see Smart Ways to Pay for College in the August 2006 issue of It’s Your Turn. For more on 529 plans, see Saving for College with a 529 Plan in the April 2008 issue of It’s Your Turn. The most important thing to keep in mind when discussing financial issues with children, Roth says, is that you’ve got to walk the talk: “If you keep saying, ‘We have to cut back, we have to cut back and, by the way, here’s my new Lexus,’ that’s not going to work. Kids need to be aware that people have lost their jobs, that maybe they can't buy all the things they used to buy. Parents need to be aware that it is crucial to lead by example.” It’s Your Turn has published a series of four articles on kids and money, presenting tools and tips to help parents and children get a handle on personal finance. To find out more, read:
Kids and Money I: The Early Years
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Financial Alerts |
Class-Action Lawsuits Generate Scams The class-action lawsuit ruse has re-emerged to take advantage of today’s economic troubles. In this scam, consumers are notified out of the blue—usually via incoming e-mail or an unsolicited telephone call—that they are entitled to thousands of dollars because of a recent settlement. The catch, you must pay a fee in advance in order to collect the settlement. To read more about protecting yourself and your hard-earned cash, visit the AARP Web site.
Privacy Choices for Your Personal Financial Information Read more financial alerts.
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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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