Choosing a Financial Advisor and the New Department of Labor Rules

There are some changes coming for financial advisors because the Department of Labor has just issued new rules which govern financial advice regarding retirement plans. There has been a little coverage in the mass media, but like many new rules from Washington, the final rule is complex. The rule, its exemptions and amendments are hundreds of pages long. The financial and consumer press is saying things like “The ‘fiduciary rule’ is a great victory for retirement savers – MarketWatch“, and “New Rule Says Financial Advisers Must Act In Your Best Interest – Consumer Reports“. It’s true the new rules might improve the landscape for consumers and retirement accounts, but how will the rules really affect consumers? How will it affect the process of choosing a financial advisor? In this blog posting I want to discuss some of these issues. Sorry about the length, but the subject is complicated.

What is a Financial Advisor anyway?

The sad truth is that anyone can call themselves a financial advisor. Someone could be selling vinyl siding one day and work for an insurance company as a “Financial Advisor” the next day and there are no laws or rules they would be breaking. A friend of mine in the insurance industry, once told me that its really easy to be hired in his industry. The criteria is: Can you fog a mirror? The situation is slowly getting better. To understand who are the people who call themselves financial advisors, you need to understand who they work for and how they get compensated for their work.
But the most common Financial Advisors work in the following functions:

• Insurance Agent – This is someone who works for an insurance company or agency and typically sells commissioned insurance products. Some insurance companies do more than insurance and do some financial planning. Metlife, MassMutual, AXA, Prudential, and NY Life are all insurance companies with employees who call themselves financial advisors.
• Stockbroker – This is someone who works for what in the industry is called a “wire house”. It is also known as a Broker/Dealer. A Stockbroker is interested in investing your money for you. There are large Broker/Dealers who employ their stockbrokers directly, like Merrill Lynch, Morgan Stanley, UBS, and Wells Fargo. There are also smaller Broker/Dealers who allow RIA Investment Representatives to work with them (see RIA description below). While Stockbrokers primarily are interested in investing your money, some do financial planning and nowadays almost all of them call themselves financial advisors.
• Registered Investment Advisor (RIA) – A Registered Investment Advisor is a company which is either registered with the state (under $100 million in assets under management) or with the Securities and Exchange Commission (SEC). An RIA is often a smaller firm and primarily works with clients for investment management, but often does financial planning and sometimes sells insurance as an insurance broker (meaning they can sell insurance from multiple companies).
• Bank – Remember banks? They were feeling left out of the investment management game and over the past few years have merged with broker/dealers or have created their own. This is really a hybrid of a bank and a stockbroker with brokers working in the bank branches trying to sign up people for investment management. PNC and Wells Fargo do this, being both a commercial bank and a Broker/Dealer. Merrill Lynch is part of Bank of America, and TD Ameritrade is owned, at least partially by TD Bank (itself part of Toronto Dominion Bank). Banks make much more money selling you investment products than CD and savings accounts, so they would much rather have you invest with them in the side of the business without FDIC insurance. While I am sure there are exceptions, banks are very concerned with their own liability and most of them will not offer financial planning. But yes, they also will call their individual brokers “Financial Advisors”.

Are you confused? There’s even more to understanding the Financial Advisor landscape….

How do Financial Advisors Get Paid?

This is an important part of the equation. Everyone wants to get paid for their work and financial advisors are no exceptions. The problem is that the way financial advisors might get paid can set up a conflict of interest with their clients. This conflict of interest is often not disclosed because many advisors don’t need to disclose it. The law allows them not to.

Paid by Commission

Many financial advisors are still paid by commission. A commission is a payment that an insurance company or a Broker/Dealer makes directly to their agent or broker as compensation for selling a product. What is the product? It’s a life insurance policy or an annuity in the case of an insurance agent or insurance broker. It may be an annuity or a mutual fund in the case of a stock broker. Yes, many brokers also sell annuities. Wonder why annuities are so popular today? Its because brokers make a lot of money selling them. Annuities can be good fits for clients, so just because brokers make money selling them doesn’t mean they are not good solutions. The problem is the undisclosed conflict of interest.
One way of selling mutual funds is by commission. A mutual fund commission is also called a “load”. It is an extra fee that is built into the mutual fund price that you pay when you buy (and sometimes when you sell) a fund. And then there is the old-fashioned way that brokers might make money from commissions and that is a commission on every trade. This also creates a conflict because in this model, more trades means a higher income for the broker.

Conflicts and Commissions

So what’s wrong with commissions? There is nothing wrong with commissions themselves except the conflict of interest they create between you (the client) and your advisor. How does the advisor make more money? By selling you products that are best for you (low cost, high performing) or by selling you products that make the advisor the most money (highest commissions)? How do you know? You don’t actually know and that’s the problem. Everyone needs life insurance at some point in their lives and life insurance is almost always sold on commission. You will need to buy life, auto, home, and sometimes disability and long term care insurance on commission. There are really good, low-cost products out there, but you need to understand the conflict of interest of the person selling you the product. Same thing with annuities. An annuity can be of great benefit to the client, but it can also be of great benefit to the advisor who sells it!

Paid by Salary

There are financial advisors who are paid by salary. These are advisors who work for discount brokers like Fidelity or mutual fund companies like Vanguard. You will definitely get low priced investments at these companies, but there are issues with this form of compensation as well. There can be hidden conflicts of interest.

Conflicts and Salary

Salaried financial advisors typically work for large companies. While the advisor gets a salary whether or not they have you as a client, they certainly benefit from having you as a client. These companies are run on metrics, just like most large companies. But the metrics might include number of new clients the advisor signs up or the total size of accounts signed up. Do well on the metrics and the advisor might get a bonus or a trip to the company’s annual sales conference in Aruba. And when these companies sell insurance products (and some of them do sell them), its the company itself which might get the commission. So while the advisor doesn’t get anything directly for selling you an annuity, the company makes money and so the advisor’s boss might ask the advisor why he didn’t sell 10 annuities this week. Clearly selling you an annuity is in the advisor’s best interest even if they don’t get a commission directly.

Paid by Fee

The financial advisor world is moving towards paying advisor by fee. There are two types of fees: a direct fee for services or a fee paid as a percentage of assets under management. Fees paid for services are great because it means the client pays the advisor directly for their services. In this case there is actually no conflict of interest at all. The advice is not tainted by how the advisor is paid because the advisor gets the same fee no matter what he/she advises the client to do. These advisors typically charge an assets under management (or AUM) fee for investment management. The AUM fee is a percentage of the value of the client’s account, typically paid to the advisor quarterly. This is fairly transparent because the client sees what they are paying, but there are still actually some conflicts of interest with this remuneration model.

Conflicts and AUM fees

The conflict with AUM fees has to do with the size of the account. Remember that there are two ways for accounts to grow, one is that the investments do well. If the investments do well, both the advisor and the client benefit. So there is no conflict there. But the other way for the value of the accounts to grow is for the client to put more money into the accounts. While this is often good for the client, sometimes its not. An example is a client who needs money to live on or has some extra expenses. In this case, the advisor’s advice may not be unbiased because the advisor does not want the client’s account size to shrink. There is also a conflict of interest regarding 401k accounts rolling over to IRAs. The 401k may not be under the advisor’s management, but if the client does a rollover into an IRA under the advisor’s management, the advisor makes more money. Conflict! The new DOL rules address the rollover conflict.

What is a Fiduciary?

A Fiduciary is someone who acts in your best interests and holds your best interests above his or her own. Are financial advisors fiduciaries? They should be, right? Well, before the DOL rules (see below) go into effect, the answer is: often not.

Who is a Fiduciary?

First of all CFP® advisors have agreed to be Fiduciaries. This means a CFP® advisor always works in the client’s best interests while doing comprehensive financial planning, whether the advisor works for an insurance agency, wire house, RIA, bank, or any other institution. Advisors who work for RIA firms are also fiduciaries, but often only regarding financial advice, not necessarily when selling products such as annuities if they are also working for broker/dealers. Even CFP® advisors have actually only agreed to be fiduciaries while performing comprehensive financial planning services, not necessarily while selling products. It’s often very confusing to understand when the CFP® advisor is actually acting in a fiduciary capacity.

Who is NOT a Fiduciary?

Insurance agents, stockbrokers, and broker/dealer representatives are mostly not fiduciaries. Instead they work under a “suitability” guideline. So an investment or product does not need to be in the client’s BEST interests, only suitable for the client. It is true that there have been arbitration cases which investors have won based on the advisor selling unsuitable products to clients, but it is a much weaker standard than the suitability standard. CFP® advisors only agree to be fiduciaries while in a financial planning role. There is a grey area about whether they are “planning” when the make a product recommendation. At any rate, a CFP® advisor who is not working for an RIA is only regulated as a CFP® by the CFP® board. So they can be stripped of their CFP® certification, but that is really the maximum sanction if the CFP® does not act as a fiduciary when they are supposed to.

Arbitration

Remember that every time you sign an agreement to open a brokerage account you have to sign a pre-dispute arbitration agreement? It turns out that the SEC and many state securities regulators have stated that they will not accept pre-dispute arbitration agreements for RIAs. This means that you can actually sue an RIA in court for misconduct or not being a fiduciary. The same is not true for brokers and it is also not true for custodians that RIAs use to hold client accounts. But it gives consumers greater protection when dealing with RIAs that they don’t get with many other financial firms.

The new DOL rules

The Department of Labor has just issued new rules and now you have some of the knowledge to understand what they do and don’t do to help consumers when dealing with financial advisors.

Retirement Accounts Only

The first thing to understand is that the DOL rules apply to retirement accounts only. The rules do not apply to taxable brokerage accounts or life insurance or non-qualified annuities. The rules DO apply to any kind of IRA account, 401(k), 403(b), or 457 account. So if you just inherited $100,000 from Aunt Bessie and go to a financial advisor for advice, nothing has changed regarding that advice. The DOL rules do nothing to help you. On the other hand if you are retiring from 40 years of working as a teacher and need help with your pension and 403(b) account, the DOL rules will hopefully help you get better advice no matter who you go to.

Fiduciary Standard for Advice

The DOL rules basically say that anyone advising clients on retirement plans is subject to the more-stringent Fiduciary standard and not the suitability standard. It doesn’t matter who the advisor works for or how the advisor gets paid. It is important to understand that not all education is subject to the rule. So an educational seminar may not be subject to the fiduciary standard, but specific advice about your money or account will be.

Reasonable Compensation

The DOL rules allow advisors to be compensated reasonably by flat fee. Presumably this will cover both direct fees (for financial planning) and Assets Under Management fees (for investment management). There is still a question about what reasonable compensation means. Reasonable does not mean low and it does not mean average. But it is possible that it will mean overall lower costs for consumers.

Best Interest Contract Exemption

The new DOL rules still allow financial advisors to sell commissioned products to clients in retirement accounts. There are cases where this might be appropriate and the DOL did not want to outlaw the practice completely. However, financial advisors now have to prepare a “Best Interest Contract Exemption” document which the client must sign. This document must explain exactly why the commissioned product is in the client’s best interests and explain the conflicts of interest which might lead the advisor to recommend the investment or product. In other words, the client needs to acknowledge that the advisor explained how he/she gets paid and how that affects their advice.
The BICE document will also be used for IRA rollovers. It may or may not be in the client’s best interests to roll money from a 401(k) or similar workplace savings account to an IRA. But as I explained earlier, it is often beneficial for the advisor for the client to roll the money over to an IRA. The BICE document will ensure that clients understand the inherent conflict of interest for this advice and understand the true pros and cons.

Class Action Lawsuits

An interesting part of the DOL rules is allowing class-action lawsuits. Currently, when you open an account at a broker or custodian, you always sign away your rights to any kind of lawsuit. The DOL rules basically say that not only can you sue a broker or custodian, you can bring a class-action lawsuit if the broker’s wrongdoing affected many of their clients. This could be of benefit in cases where the loss to each client is very small, but the overall impact for all the broker’s clients is large.

Implementation Timeline

The DOL rules become law June 7, 2016, but because the rules are complex and might change practices in the financial services industry quite a bit, implementation has been delayed until April, 2017. There is also a transition period until January, 2018 for the BICE exemptions to fully take effect.

Unintended Consequences

Mostly the DOL rules are good for consumers. It should definitely improve practices around retirement accounts and reduce bad practices in the industry. But the DOL rules are complex and it will raise costs in the industry. These costs are likely to be passed on to customers. It is possible that firms will stop working with clients who have smaller amounts of money or move them to an automated system without direct advice. It is also possible that some firms will stop working with client’s retirement accounts. Already some firms have sold their broker/dealers because they have decided they don’t want to deal with the DOL rules.

How are clients of Cereus Financial Advisors affected?

Cereus Financial Advisors is an RIA, so already Cereus is already a fiduciary to its clients for all investment accounts. Additionally, yours truly (David J. Haas) is a CFP® advisor and therefore a fiduciary.  At Cereus Financial Advisors, we generally don’t sell commissioned investment products anyway. We also don’t sell private REITs or other non-traded investments (which was part of the DOL crackdown). We do sell insurance, but not in retirement accounts (other than fixed annuities). In fact the only practice that it will affect is IRA rollovers. There are times where we might recommend an IRA rollover and when we do a rollover for clients, we will need to execute a BICE exemption. So the DOL rules should not affect Cereus clients much at all.

More Information

Here are some useful links to get more information:

• https://www.dol.gov/ebsa/newsroom/fs-conflict-of-interest.html
• http://www.consumerreports.org/personal-investing/new-rule-financial-advisers-act-in-best-interest/
• http://www.letsmakeaplan.org/cfp-pros-their-expertise/selecting-an-advisor

Questions

If you have questions about this subject or any other, feel free to call me or drop me an email. You can always contact me via my webpage: http://cereusfinancial.com/contact/

Medicare Premiums and Other Costs for 2016

Medicare Premiums and Other Costs for 2016

During the past several weeks, you may have seen media reports announcing that Medicare Part B premiums would be rising dramatically for some beneficiaries in 2016. But thanks to a provision in the Bipartisan Budget Act of 2015 signed into law on November 2, affected beneficiaries face  more modest increases next year. Standard Medicare Part B premiums for the majority of beneficiaries won't be rising at all.

What you'll pay for Medicare  Part B in 2016

The Centers for Medicare & Medicaid Services (CMS) has announced that in 2016,  most individuals (about 70% of Medicare beneficiaries) will continue to pay  $104.90  per month for Medicare Part B (Medical Insurance), the same standard premium they paid in 2013, 2014, and 2015. If you fall into this category, your premium won't be rising because you won't be receiving  a Social Security cost-of-living allowance (COLA) increase in your benefit next year, as was previously announced by the Social Security Administration (SSA). Due to a provision in the Social Security Act, you are "held harmless" from Part B premium increases when no Social Security COLA is payable.

Unfortunately,  this is not the case for the approximately 30% of Medicare beneficiaries who are not subject to this "hold harmless" provision. You fall into this group and will pay more for Medicare Part B next year if:

• You enroll in Part B for the first time in 2016.
• You don't get Social Security benefits.
• You have Medicare and Medicaid, and Medicaid pays your premiums.
• Your modified adjusted gross income as reported on your federal income tax return from two years ago is above a certain amount.*

The table below shows what you'll pay next year if you're in this group.

Beneficiaries who file a tax return as single with income that is:	Beneficiaries who file a joint income tax return with income that is:	Beneficiaries who file an income tax return as married filing separately with income that is:	Monthly premium in 2015:	Monthly premium in 2016:
$85,000 or less	$170,000 or less	$85,000 or less	$104.90	$121.80
Above $85,000 up to $107,000	Above $170,000 up to $214,000	N/A	$146.90	$170.50
Above $107,000 up to $160,000	Above $214,000 up to $320,000	N/A	$209.80	$243.60
Above $160,000 up to $214,000	Above $320,000 up to $428,000	Above $85,000 up to $129,000	$272.70	$316.70
Above $214,000	Above $428,000	Above $129,000	$335.70	$389.80

Although substantial, Part B premiums are far less than originally projected for 2016 because of a provision in the Bipartisan Budget Act of 2015 that limited  premium  increases for beneficiaries who are not subject to the "hold harmless" provision.

*Beneficiaries with higher incomes have paid higher Medicare Part B premiums since 2007. To determine if you're subject to income-related premiums, the SSA uses the most recent federal tax return provided by the IRS. Generally,  the tax return you filed in 2015 (based on 2014 income) will be used to determine if you will pay an income-related premium in 2016 (your 2013 income was used for 2015 premiums).  You can contact the SSA at (800) 772-1213 if you have new information to report that might change the determination and lower your premium (you lost your job and your income has gone down or you've filed an amended income tax return, for example).  

Changes to other Medicare costs

Other Medicare Part A and Part B costs will change in 2016, including the following:

• The annual Medicare Part B deductible for Original Medicare will be $166, up from $147 in 2015.
• The monthly Medicare Part A (Hospital Insurance) premium for those who need to buy coverage will cost up to $411, up from $407 in 2015. However, most people don't pay a premium for Medicare Part A.
• The Medicare Part A deductible for inpatient hospitalization will be $1,288, up from $1,260 in 2015. Beneficiaries will pay an additional daily co-insurance amount of $322  for days 61 through 90, up from $315 in 2015, and $644  for stays beyond 90 days, up from $630 in 2015.
• Beneficiaries in skilled nursing facilities will pay a daily co-insurance amount of $161 for days 21 through 100 in a benefit period, up from $157.50 in 2015.

To view the Medicare fact sheet announcing these and other figures, visit Medicare.gov.

Mr. Market says the world is coming to an end! Is it time to panic?

There is no question that the market has changed its character recently and while its impossible to predict the future, the past two days the market has come down fairly hard. There is lots of hand wringing in the media and there are all sorts of explanations: China, Currency Wars, overvaluation, rising interest rates, Greece, etc. etc. etc. If you listen to the pundits, you should get out now. Just sell everything. I am sure that clients are calling their financial advisors in a panic and often, the client has been panicking enough before the call that the advisor cannot talk them off the cliff. Sell it all and put it in cash. It doesn't matter what the investments actually were. It doesn't matter what the tax consequences (you have to pay capital gains tax if you had a gain). Just sell. Sell it all!!!!!!

In this blog posting I am going to talk you off the cliff, although hopefully you aren't actually on the cliff. I'm going to talk to you about how the market really works so you can relax and enjoy the benefits of losing money (seriously!).

First of all, I'd like to introduce you to Mr. Market. He is a gentleman who is perfectly pleasant some of the time, but he has been hiding an unfortunate mental health problem from you. Mr. Market is actually a manic-depressive. He seems normal a lot of the time, but sometimes he is wildly enthusiastic and carries you along with his enthusiasm. And just when his enthusiasm starts carrying you along, Mr. Market goes into a deep funk and becomes so depressed he convinces you that the world is coming to an end and the only thing to do is repair to your pre-prepared bomb shelter. Of course you don't have a bomb shelter so you start making one. As soon as you finish, Mr. Market will come back and ask you what you're doing and tell you everything is fine and there's nothing to worry about. After this cycle, you will definitely decide you've hung out with Mr. Market enough. Oh and Mr. Market has some buddies that just shout out whatever Mr. Market is saying so loudly you can't think. Mr. Market's buddies are the financial news media.

My point with this analogy (and apologies to Benjamin Graham who first came up with the Mr. Market analogy) is that you shouldn't be making your investment decisions based on the rantings of a manic-depressive. You have an investment plan which should be based on your timeframe, your ability to withstand short-term losses, and your innate risk-tolerance. The actual investments in your portfolio should be broadly diversified to reduce non-systemic-risk. In other words, if a particular company (think Apple), sector (think Chinese stocks), or locale (think Detroit) implodes, the impact on your overall portfolio will be muted.

Your portfolio IS going to go down during these episodes. No question about it. Do you need this money today? The answer had better be no or you shouldn't be in the market. If you have a broadly diversified portfolio, chances are the downturn of your portfolio will be less than the overall market AND will last a relatively short amount of time. How short? In a typically correction, you will make it all back and more in 6 months. In a bear market, it might take a little longer, but typically within a year or two.

But, you say, I know the market is going down and everyone says it will be a 20% plus correction or a bear market and I need to sell now to avoid the market going down and preserve my capital. YOU are trying to time the market. You think you can predict when the market is going down, how far it will go down, and when it will go back up. Let me tell you, you are WRONG! In fact, there are no accurate ways to predict these things and the most important thing which is almost never predicted properly is when the market starts to rise again. And this is really important because your biggest gains are actually going to be when the market just starts to go up again and you are going to miss it. Also, you are likely going to decide to sell just at the point where the market has pretty-much stopped going down because that's when the pundits are shouting "bear market". So what you wind up doing is selling near the bottom and buying again after the best gains have already been made. Is this how you make the most money? I think you know the answer.

And by the way, what often happens during market downturns is that sectors which have not performed well become the next upturn leaders. Sectors which have done well previously stay down. So, I am not advocating doing nothing during the downturn. Whoever is managing your money should be continuously examining the investment thesis of each investment and buy or sell based on this investment thesis. So trading during the downturn might be the right thing to do, but its not done in a panic, but with a plan in mind. And staying in the overall market.

The market needs corrections. Corrections allow for the sector rotation which I described previously. It allows valuations which have become stretched to come down and allows undervalued investments to rise. Many people think the current market is long overdue for a correction and this may be one now. But it doesn't mean you going to stop making money, only that there might be a slight pause and some short-term pain.

So what should you do? You should stick with your long-term plan. If your goals and personal situation have not changed, then Mr. Market's gyrations should not affect you. Don't even pay attention to them. Or view them with some amusement. Pretend you are a close relative of Mr. Market. You understand his mental illness, love him anyway, but try not to be too influenced by him.

The IRS is after me!

I am getting calls from the IRS on my cell phone. The calls are coming from a number in the 202 area code, which is the area code for Washington DC. I don't answer calls from numbers I don't recognize, so the the callers have left messages. After first hearing the message, I immediately panicked! Did I forget to file something? Did the IRS decide to audit me? But listening to the message, something about it did not ring true. The woman was speaking very slowly and although she identified herself with a very non-foreign sounding name, her accent did not quite match her name. Also, it sounded like she was reading from a script and she used wording which did not sound genuine: "Do return the call before we take any legal allegation against you". What's a legal allegation?

I have gotten additional calls, and the script is the slightly different, but all the callers talk about vague legal threats and action against me. Often there is background noise on the calls which makes it a little hard to hear. Often, the callers have foreign accents (although there is no reason someone with an accent can't really be working for the IRS).

These calls are all SCAMS! This is a known scam which seems to be happening throughout the USA. The Federal Trade Commission has a web page about the scam here: http://www.consumer.ftc.gov/blog/fake-irs-collectors-are-calling.

So what should you do about it when you receive a call from someone purporting to be from the IRS? Hang up! The IRS will not just call you out of the blue. They will send you a notice in the mail which will indicate how much money they think you owe and why they think you owe it. This notice will invite you to call them to discuss the matter. Unless you are already working with an IRS employee who might call you back, the IRS will not be calling you. They will not tell you that you can pay your bill on the phone with a credit card.

If you have any doubt about the call, you should call the IRS at 800-829-1040. Ask them if they are trying to reach you and whether there is any open notice sent to you.

These calls make me sad. It is very likely that people are really being duped by the callers and paying money to these thieves. I tried reporting the calls to my local police department, but they did not seem very interested. The best thing you can do is to hang up. Don't ask any questions. Certainly don't give out any personal information (not even you name) and hang the phone up!

Topics in Financial Planning: What do Financial Planners do for their clients?

When people meet me and I give them my card which has the title "financial advisor" on it and a company name with "wealth management" and "Registered Investment Advisor" on it, I get some interesting reactions. "I'll come and see you when I get some wealth" or "I don't have any money, so I don't need you" are common reactions. Then I also get "I have a broker who I am very happy with he/she made me xxxx% last year" (usually somewhere around S&P 500 gain for the year).

So I thought it would be worthwhile if I explain what a comprehensive financial planner does for clients and that although many planners are very involved with investment management and the wealthy tend to use them, planners can do many things to help those of more modest means. Investment management is something financial planners do to help their clients, but that is part of a larger function of helping clients.

First and foremost, financial planners help clients formulate, identify, prioritize, and quantify their life financial goals and then the planners create a plan for the client to meet their goals. Some planners might stop there, but most will work with the client over time to implement the plan and change it as goals evolve during normal life changes. The successful planner will become a partner with their client, advising them on financial decisions varying from the best way to buy a car or house to paying for student loans or how to save for retirement, educating the kids, or what benefits to take at work. The planner brings to the table his experience and knowledge to help the client make decisions which are best, not just for the sunny day scenario where nothing goes wrong, but will help the client weather the storms of life, which can include family members going through job loss, sickness, divorce, death, or other unforeseen events.

Sections in a comprehensive financial plan might include:

1. Goals
2. Cash Flow Planning and Emergency Fund
3. Education Planning
4. Retirement Planning
5. Risk Management (Life and Disability Insurance)
6. Employee Benefits
7. Health
8. Tax Planning
9. Buying a House
10. Property/Casualty Insurance
11. Investment Management
12. Estate Planning

A broker does not look at many of the items on this list. A broker cares about  item 11 and maybe items 3 and 5. A financial planner is going to look at all 12 of these items and make recommendations so the client can make good decisions in all these areas.

Over time I will write blog posts which cover all these 12 areas. So everyone can understand the benefits of comprehensive financial planning!

Where do you invest your emergency fund? Be careful what advice you follow!

Disclaimer: This is not specific advice for any individual person or household. All situations are different and should be analyzed as part of a comprehensive financial plan.

One of the core elements of a financial plan is making sure clients have an emergency fund. The Wall Street Journal ran an article on December 4th discussing how to invest an emergency fund. http://online.wsj.com/news/articles/SB10001424052702304106704579135591043205838?KEYWORDS=Andrew+Blackman . Note that you may need a subscription to see this article. Fidelity Investments reprinted this article and you can get it for free here: https://www.fidelity.com/insights/personal-finance/how-to-invest-emergency-fund. Basically the article said that new research from the Journal of Financial Planning says that keeping your emergency fund in cash may not be the best idea, especially for affluent households.

So I thought I would discuss a little bit about why this may be poor advice (in spite of apparent endorsement by Fidelity Investments).

First of all, lets talk about what is an emergency fund. Basically, it is enough money for 3 to 6 months of expenses kept in a very liquid form that will be available in case of an emergency. What is an emergency? It could be an unforeseen need for spending, such as medical expenses, or your car breaking down and needing expensive repairs, or your parent suddenly needing a nursing home with no immediate way to pay. An emergency could also be loss of income due to job loss. Note that an emergency is not suddenly needing a vacation to Monte Carlo. Lets keep this in perspective, folks!

Where do you typically want to invest your emergency fund? Well, the idea of the emergency fund is that it is completely liquid, which means that it can be used instantly and you don't need to do much to get it and that it will maintain its value. Good places to keep your emergency fund include a high-interest money market savings account or simply in a savings account. Bad places include annuities, any kind of stock, REITs (traded or un-traded), or any kind of bond longer than 30 days in duration.

The article says that affluent people should think about keeping their emergency fund in less liquid forms because of the opportunity cost of investing this money. Now I think this is just plain wrong. The idea of an emergency fund is that it is available immediately with no cost or loss of value in liquidating it. Are affluent people different in this need? Look at 2008 and lets say you were a mortgage banker who was making lots of money in the housing boom. Suddenly the boom ended, you probably lost your job, and at the same time even if you were investing smartly, all your investments tanked. You went from affluent to unemployed like you were going 90 miles an hour and hit a brick wall. Your emergency fund would be like fresh water to someone on a desert island. Just imagine if you had this invested in one of those supposedly safe investments and that investment tanked too. Would you care about any opportunity cost of having your emergency fund invested? You would be ecstatic that you had cash that wasn't invested in anything more risky than a savings account.

So, I don't care who you are. Very affluent, or living from paycheck to paycheck. Number 1:you need an emergency fund. Number 2: You need it to be invested completely safely. No risk at all!

Treat Yorself!!! (Gönn Dir was!!!!)

I found this poem while going through my parent's belongings. I thought it was worth sharing. There is no attribution.

The Latin Proverb "Carpe Diem"
Happens to be a real gem
It tells you to make of each day the best
Good work, good play, and a little rest
The days are on a dizzy flight
And life rushes by in a crazy slide
And your money however much you may save
Will not follow you into the grave
So do not collect a tremendous treasure
Enjoy it for what gives you pleasure
Because the ones of you will inherit
May not have so much merit
And decry that they do not get more
And at each other become sore
Full of envy for those who have done better
As made out in the testamentary letter
Their thourghts for you disappear fast
And only rarely over the years will last
So enjoy what you can when alive and rich
And don't worry what comes after you are in the ditch!

Note that you have to already BE rich to have this poem be applicable!