May 20, 2008

With Bond Funds, Keep It Simple

Bonds are crucial for diversifying your portfolio, but it can be dangerous to invest in a fund full of stuff only a rocket scientist can understand.

By Jeffrey R. Kosnett

One thing is for sure: Many advisers, perhaps most of them, believe that the notion that you should avoid investments you don't understand holds as much for bonds and bond funds as it does for stocks, options, futures or real estate. Tim Brown, of Brown Wealth Management, in Eden Prairie, Minn., likes to use funds, such as those from Dimensional Fund Advisers, that resist fads or the temptation to invent financial instruments. "I won't be a guinea pig and my clients don't want to be one, either," says Brown.

If you invest in an overly complex fund, you're apt to be not a guinea pig but a sacrificial lamb. The way to avoid this is to either buy an index fund that covers a wide variety of bonds without owning derivatives, or to build a ladder of government and high-quality corporate bonds that pay you interest every month (you stagger the payment dates) and are of limited maturity.

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These vehicles can be a useful part of an investor's tool kit, but there are drawbacks. Here are some tips for using ETFs

Beware the Less Popular ETFs

ETFs or Index Funds?

ETFs generally have lower expense ratios than index funds. But investors often can buy shares of index funds without paying a fee, while ETFs are bought like stocks, so investors must pay a trading fee. In other words, ETFs are generally cheap to hold but can be expensive to buy, while index funds are easy to buy but slightly more expensive to hold.

The ETF craze is likely to cool off eventually. The supply of ETFs already may have swamped demand, especially as investors face the prospect of a long bear market. But even if investor enthusiasm ebbs a bit, there's no doubt ETFs—with their convenience, tax benefits, and low fees—are part of a strategy that's here to stay.

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April 2008

What you really want from your money

A growing number of advisers say that until you think hard about that question, you can't have a successful lifelong financial plan. They're right.

By George Mannes

 

Yes, the stock market is down. But you can handle it, can't you? Certainly you could do without the sick feeling you get each time the Dow takes another triple-digit dive.

 

But - and here's a pep talk you've probably given yourself more than once in the past few months - there was a reason you took on the perils of investing in stocks: You couldn't reach your goals without the returns that a higher-risk investment offered. And your goals are worth a little discomfort, right? Right?

 

Of course. Your pep talk has a better chance of success, though, if the goals in question matter deeply to you. "Goals" here doesn't mean only general concepts like retiring by 62 but something bigger and more fundamental: serious dreams that you've taken the time to think hard about and you believe will make your life richer.

 

Granted, pausing in the middle of a scary market to ask yourself grand-scheme- of-things questions might seem like a luxury you can't afford. Shouldn't you be rushing to buy gold or short credit-default swaps, whatever those are? In fact, the self-reflection can actually be a source of strength, helping you to do the right thing - stay calm.

 

"Where you run into trouble is when you focus just on your investment accounts and their losses," says Tim Brown, a wealth manager in Eden Prairie, Minn. "But if you look at the big picture, you'll see that to reach the goals you want, you're going to have to do some tough work, like riding through choppy markets. Having perspective can give you comfort."

 

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November 2007

 

Serving the Middle-Market Delegator

By David Drucker                              

 

Clients and the advisors who serve them have become pigeon-holed over the years.  Advisors decide to serve high-net-worth clients or middle-market clients.  Meanwhile, clients are either “Delegators” or “Do-It-Yourselfers,” sometimes called “Validators.”  In general, middle-market clients are usually do-it-yourselfers, and high-net-worth clients are usually delegators.

 

Of course, there are grey areas on both sides, and that’s precisely the point of this article.  Who’s serving the middle-market delegator?

The big question, though, whether you’re an advisor to high-net-worth clients wanting to swim downstream or an hourly…planner looking for recurring revenues, is what business model structure will allow you to manage the money of the middle-market client profitably?  As with most financial planning services, there are as many ways to provide them as there are advisors.

 

Tiered service works for Timothy Brown, Brown Wealth Management, LLC in Eden Prairie, Minn.  A self-described “Family Wealth Counselor,” Brown offers clients with assets of about $600,000 a “Full Managed Option,” which includes full financial planning and investment management.  For these clients, Brown’s services are more or less like those of most advisors to wealthier clients.

 

For clients with $200,000 to $600,000 of assets, Brown offers the “Managed Lite Option,” which includes (professional investment management and) a one-hour meeting once a year to answer their questions and rebalance assets.  Below the $200,000 threshold, Brown offers the usual middle-market, do-it-yourself service in which he provides financial planning and investment advice, after which the client implements Brown’s recommendations on his own and returns each year for updates…. 

July 29, 2007

 

Now's a good time to check net worth, insurance, your will

By Eileen Ambrose

 

Now that August recess is upon us and many people are about to join congress on vacation, it’s a good time to tackle those financial chores you have been putting off.

 

Maybe you’ve been meaning to organize papers stuffed into shoe boxes or finally order a free credit report to see what creditors say about you.  Or, maybe you have a little down time with no travel plans and aren’t sure where to start.

 

Here is a list of financial exercises you can undertake in your time off.  You don’t have to do them all.  Just doing one or two could put your finances in better shape.  As a bonus, once you complete a task, you’ll find it easier to do the next time.

 

Rebalance your portfolio.  Given the run-up in the stock marker, equities likely make up a bigger portion of your portfolio than you intended.  By rebalancing, you return that portfolio to its target mix of stocks, bonds and cash.  This means you’ll sell some of your winners and put more money into investments that haven’t performed as well.

 

"A lot of people will say, 'Why are we selling emerging markets when it's done so great?' Well, we want to sell high," says Tim Brown, a financial planner in Eden Prairie, Minn. "They really have a difficult time with that."

 

 

January 20, 2007

 

You can pay for advice as you go

Sheryl Garrett says you needn't be a millionaire to have a financial adviser. But you must be willing to pay for one.

By Kara McGuire

Find me a financial adviser who doesn't believe everyone could benefit from meeting with one.

 

Then find me an adviser willing to meet with you -- unless you happen to make six figures or have at least that much for them to manage for you.

 

My No. 1 question from readers is how to find a financial adviser they can trust and afford. My gut response to such queries: Good luck finding one.

 

Fortunately, there are advisers like Sheryl Garrett.

 

Garrett began her career in Kansas City with IDS Financial Services in the 1980s. She loved giving advice but was a terrible saleswoman. "In the second year I made $883," she said during a recent trip to the Twin Cities to speak to the American Association of Individual Investors' local chapter.

 

Keynote speakers aren't typically professional failures, and 44-year-old Garrett is no exception. After her two years with IDS, she spent much of the 1990s making rich clients richer working for a smaller firm doing more planning than cold calling. She was making great money but felt unfulfilled.

 

"When I really stepped back and asked myself why was I in financial planning, it wasn't to help a multimillionaire get an extra 10 basis points of return a year," Garrett said. "It was to help those people who really couldn't afford to make a mistake avoid those mistakes and be on the right path."

 

Like a dentist office

So she opened her own practice, charging $120 per hour, a far cry from the $4,000 minimum yearly fee she was used to. She modeled the fee structure after a dentist's office.

 

"You go to the dentist twice a year, which you've been trained to, and you go if there's an emergency," she explained.

 

"You're talking about spending $200 to $300 a year for your dental health" unless fillings or braces requires additional visits, she said.

 

Some in the planning industry found the concept peculiar and, frankly, stupid. Garrett acknowledged she could have made a lot more money sticking with one of the two traditional ways advisers get paid -- a fee based on the percentage of a client's assets they manage or commissions they earn for selling products and investments. But she was on a mission "to make competent, objective advice accessible to anyone," she said.

 

Despite her location in a Kansas City suburb, word of the 30-something adviser choosing the middle class over the multimillionaires spread across the country, and like-minded advisers came out of the woodwork to ask her how she made it work.

 

Seeing a need, she began to bottle and sell her experience through the Garrett Planning Network in 2000. For an initial $7,500 fee, advisers get training, marketing tools, and the brain trust of the network's 274 advisers. Garrett expects that number to reach 450 by the end of next year, as baby boomers seek advice about impending retirement and the financial world increases in complexity.

 

A tough go of it

The Garrett advisers in Minnesota charge between $150 and $250 per hour and say it's hard sometimes to persuade people to pay for their expertise when a commission-based adviser down the road is telling them he or she gives advice for free. An overall financial plan that goes over insurance needs, savings, cash flow and more can cost as much as $2,500. But a meeting to go over the investment choices in a 401(k) can cost $500 or less.

 

Timothy Brown, a member based in Woodbury, believes in the network's mission but says it's difficult to make work. "My experience with hourly planning is that you cannot make a professional wage doing hourly planning alone," Brown said. "You've got to pump out those plans so fast because that's what you're selling. It's just very stressful."

 

In addition to hourly advice, he now manages client's money for an annual retainer.

 

Paying for advice is a psychological hurdle for many Americans. "They're willing to spend $1,200 a year on their cable bill, but they're not willing to spend that kind of money on making sure their personal finances are as healthy as they should and can be," Garrett said.

 

Perhaps there's a middle ground where advisers are more accessible to more people, and people are willing to pay them at least as much as they cough up to watch television.

 

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December 13, 2006

Still Time for '06 Tax Savings

Here are some year-end strategies investors can use to help trim their bill from Uncle Sam

By Marc Hogan

With December almost half over, it's probably too late to make good on those old New Year's resolutions you haven't quite gotten around to. Those trips to the gym may just have to wait until next year, just like your unwritten novel. But here's some good news: Investors may find there's still plenty of time to help trim their 2006 tax bill.

 

Contributing to a 401(k) or individual retirement account isn't just a wise decision for your golden years. A savvy retirement savings program can also help reduce investors' tax bills in the current year. If you have the cash, putting as much as you can into your retirement plan will lower your taxable income.

 

Investors caught up in the spirit of holiday giving might want to direct some of their largesse to charity. Of course, philanthropy doesn't have to be purely altruistic. Donations of several kinds can ease the tax bite come April.

 

Investors can donate highly appreciated stocks to a church or favorite charity. "This results in the [charity] receiving the full value of the shares, as they don't pay taxes on any gains," says Timothy Brown, a financial adviser with Woodbury (Minn.)-based Brown Wealth Management. Plus, the investor can deduct the gift while getting around the capital gains tax.

 

The holiday season is a hectic part of the year already. For taxpayers hoping to reduce their bills to Uncle Sam, it only gets busier. Pushing up deductible expenses into the current year could be a good way to lessen the tax pain.

 

But there's no need to wait until the last minute to consider tax issues. Investors may want to map out some tax savings strategies early next year to avoid the yearend crunch—consider it your next New Year's resolution. The savings might even pay for that gym membership.

 

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November 2005

Page 15

 

Becoming an Informed Investor

By Anne Field

 

When prices of goods and services rise, the buying power of assets decreases.  The rick is that your portfolio’s growth won’t keep up with the cost of living.  That’s of huge importance when it comes to retirement planning.  In fact, if you’re not careful, even modest inflation can erode your buying power.  An inflation rate of, say, 3% could mean that a couple living on $72,000 today would need about twice as much to live on in 25 years.

 

Your planning has to take into account how inflation will affect your portfolio and how to hedge against it.  “Over time, it will cost more to maintain your standard of living,” says Timothy Brown, a certified financial planner with Brown Wealth Management in Woodbury, Minn.  “For that reason, you need to invest so that your assets beat the inflation rate.”

 

In fact, due to rising inflation, exercising too much caution in your investments can be one of the riskiest moves you can make.  Putting your money only in super-safe instruments with low-interest rates, like certificates of deposit, may prevent your assets from keeping up with inflation.

 

 

July 2005

 

Defying Diversification

By Alyn Ackermann

 

A Wrong Approach

 

Advisors are unanimous in criticizing the stringent proposals as being unfair to the overwhelming majority of corporate executives who are fair and honest people, who could be forced to put their financial futures into jeopardy. Many, they say, already own portfolios that are dangerously concentrated in company stock and options.

 

Timothy B. Brown of Brown Wealth Management LLC in Woodbury, Minn., also finds that appearances within the company loom large for many executives. "If you're a senior executive and you're seen selling that stock, you must be looking for a new job. And the same if you're selling your options. A lot of people have that problem — they don't want to be seen selling that stock," Brown says.

 

From Tax Strategies to Scared Straight

Whether a client is facing a tough new retention policy or has let a concentrated position grow over the years, advisors say the solutions are the same. Recent changes in the capital gains rate and Securities and Exchange Commission regulations can alleviate some of the fears of tax liabilities or regulatory difficulties, while creative — and legal — uses of other strategies can help alleviate other concerns.

 

But advisors repeatedly say that one of their best tools to convince reluctant clients to diversify is to make them more worried about the alternatives. Call it the financial advisor's version of Scared Straight. "I'm pretty blunt about it," says Brown, whose location in suburban St. Paul means that his clients include a number of 3M employees who are fiercely loyal to the company and its stock. "That's what I see, most of these 3M people have 60% to 70% of their assets tied up in their stock options or straight 3M stock or in their 401(k) plans, and they don't want to sell it. It is a strong company, but they think that means it's going to keep going up."

 

Brown cited the case of one new client who came to him with plans to take early retirement. When the client initially balked at reducing his heavy concentration in 3M, Brown walked him through scenarios involving even a moderate decline in the stock's price and told him, "You've just thrown your early retirement away. You have to hold it until it rebounds, or you have to work longer, or you have to live with that lower retirement income."

 

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