Wealth...Uncomplicated

How Good is Your Advisor?

In an article from FORTUNE, research was exposed that basically says that financial advisors are yes-men and -women.  Having been in the advisor community for over a decade, I can assert that these findings fall in line with my observations throughout my career.  While there are many reasons for this that range from advisors simply not knowing their business to advisors wanting to be well liked by their clients by avoiding confrontation, the bottom line is that advisors say 'yes' far too often.

In the most recent decline, many advisors found their clients' portfolios poorly positioned, following a trend of investors without advisor relationships that invested too heavily in equities.  Obviously this led to a great deal of turnover for advisors as clients sought out more conservative advisors to hopefully 'avoid making the same mistake twice'.  What has actually happened for most of these investors is they've traded one mistake for another.

When the market was moving ever higher, many clients thought their advisors were doing a great job.  When the market tanked, their advisors were worthless.  Those that have changed advisors are doing nothing more than finding another yes-man or -woman to make them feel comfortable.  This is a problem - a big problem.

As the market rebounded, these investors that found another advisor to confirm their beliefs (even if the beliefs are wrong) re-positioned assets into more conservative asset classes.  The result was a missed rebound that cost investors a great deal of money.

So, how good is your advisor?  If he or she was fighting tooth and nail to keep you invested through the downturn and subsequent rebound, give them credit where credit is due.  If he or she had you selling after the market collapse only to miss the rebound, fire your advisor today.  The value of an advisor is not in making you feel good about what's going on, it's about helping you make smart decisions along the way.

When the market's hot, a good advisor will call clients and tell them that the market run-up presents an opportunity to rebalance.  When the market is in free fall, a good advisor will help you to hang on.  The very best advisors are those that educate, communicate, and stand tall in their convictions.  A simple yes-man or -woman is nothing more than an expensive anti-depressant - they make you feel good, but ultimately don't work and cost a lot of money.

Where Overdraft Fees Come From and A Better Process to Eliminate Them

The short answer is that overdraft fees come from spending more money than what is available in a checking account, but in an article from USA TODAY, they had a nice graphic that tells us how these overdrafts are transacted.  It should be no surprise that debit cards were number one on the list - generating 41% of all overdraft fees.  Here's the full list of how overdraft fees are created:

Overdraft Source	Percentage
Debit Cards	41.0%
Checks	30.2%
ACH/Electronic Debit	14.2%
ATM	7.8%
Other/Unknown	6.8%

The evolution of the 'free' checking account owes much of its thanks to the rise in debit card overdraft fees estimated at $15.785 billion last year.  Compared to the old model of checking accounts with monthly fees of $5 to $12, the banks have come out well ahead by offering 'free' checking accounts.

These are certainly big numbers, but what's troubling on this list is the 7.8% of overdrafts created at the ATM.  It seems to me that if there's no money in the account, an ATM should simply decline the transaction.  This is exactly what consumers have been saying for years, and it looks like Citibank, Bank of America, and others are finally coming around to giving up their overdraft fees from ATMs (most of it anyway, you can still opt-in to paying these fees).

By the way, if you want to reduce your overdraft fees, the best things to do are:

1. Pay all bills through your bank's online bill pay service - rather than having a check floating out there that you might forget about, the money is debited on the day the payment goes out.  No more sneaky checks coming through for an overdraft fee.
2. Separate your discretionary spending from your bill paying - if you boil down how much goes out in recurring bills versus how much you need as 'walking around money', you'll see that 70 or 80 percent of your money is gone before it ever gets to your wallet.  Setup a single account for recurring bills and a separate one funded with automatic transfers for your day-to-day expenses.  This way, you can manage a much smaller amount of money and eliminate overdrafts coming from checks and electronic withdrawals (44.8% of all overdraft fees).
3. Use cash instead of your debit card - if you're not using your debit card, you can cut your total risk of overdraft by 41%.  Find a bank with convenient ATM locations and go there instead of using the plastic.

My wife and I have been using this system for a long time, and as you can imagine, no overdraft fees.

The Process at Work

As promised at the outset of this year, it's all about principles and processes.  In this post, we're looking at using a better process in managing cash flows in an effort to eliminate overdraft fees.  If you use your bank's web bill pay, separate your bills from your discretionary spending, and use ATMs instead of debit cards, you can take overdraft fees out of your life.

Data Source:  November 2008 FDIC Study of Bank Overdraft Programs

[America] Preparing for a Long Decline - rufreakingkiddingme?!?

The Simple Dollar is a personal finance blog that I read regularly, and its author, Trent is generally dead on with his advice to readers with respect to personal finance matters.  However, this post has me fired up because I think some of the views expressed couldn't be further from the truth.  Here's what has me troubled:

"My belief is that, for the most part, the standards of living everywhere else in the world will rise rapidly to meet the standard of living in the United States. However, I also feel that our standard of living here will probably never grow at the same rate as it did in the twentieth century. In short, I think our growth rate will be much lower than that of the rest of the world and may in fact be a slow reduction over a long period of time."

While it's unlikely that our standard of living will grow at a pace equal to China's current fever pitch, I couldn't disagree more with Trent's assessment that we may face a "slow reduction over a long period of time [in our standard of living]."  I'll spare you the economics lessons, but let's consider this in some common sense terms.

Myth:  Globalization Hurts America

One of the great myths held by the public today is that globalization comes at the expense of wealthier nations and benefits the poorer nations.  This myth has been perpetuated for years based on the same underlying theme of all great myths - myopia.  Indeed, nearsightedness allows us to focus on the job losses of those here in the United States without seeing the broader landscape.

The manufacturing sector has seen a substantial decline here in the U.S. as these jobs have been moved overseas to places like China, South Korea, and Vietnam.  As a result, we have a smaller manufacturing sector and these Asian countries have seen dramatic increases in their overall standard of living.  In fact, more people have moved out of poverty in the last quarter century in Asia than in any other part of the world at any other time in human history.

This is a good thing, a very good thing.

But what about these American workers?  How have they fared?  Well, in the short-term, they're screwed.  A job that was perhaps a career job (got steel?) in the 1970s may not be available anymore or it might have a seriously shortened lifespan.  Pittsburgh is a great example of short run pain when jobs and even an entire industry sees job losses as a result of globalization.

Guess what?  Pittsburgh is in the midst of a major transformation from a steel mill town to one that is driven increasingly by technology and other services industries.  These new jobs pay more than the old steel mill jobs of years past because they require new and better skills that produce more for the economy.  This transformation is what is gained by globalization.

On a broader scale, the net losses in manufacturing versus the net gains in technology and other services industries is actually a plus for the United States.  If you take some time to look at the research, you'll see that offshoring jobs has created billions of dollars in net benefit for American consumers and businesses.

A Slow Decline?  I Don't Think So

If you do take a macroeconomics course or spend a little time to study the subject, what you will find is that real economic growth (net of inflation) is driven by innovation, and it is this particular subject that America is very, very good at.  In fact, many of these Asian countries send employees over here to learn how to be more innovative.  Much to their dismay, the process of innovation is something that cannot be easily broken down into a 'how-to' book or a formula that can be reproduced on a wide scale.

So what is innovation in economic terms?  It's any kind of change that increases the productivity of workers.  Railroads were a pretty big innovation in the 19th century.  The light bulb and telephone were pretty solid.  That thing called the interweb was pretty good too.  Each of these things allowed us to be more productive workers and the result was an increase in real GDP and real wages (the source of increased standards of living).

I'm not certain that anyone knows what exactly causes Americans to be better innovators than the rest of the world, but I like to think that it has a lot to do with the way our country is setup.  We have tremendous personal liberties.  Our nation was built on concepts that lend themselves well to free thinking and collaboration.  Beyond that, we have some of the most highly developed financial markets in the world.  In short, we thrive on free thinking and have the money to convert those ideas into productive innovations.

A long decline...in America...rufreakingkiddingme?!?  Not while I'm still above ground and sucking wind!

Jeff and Jill Crocodile: Case Study Data

We begin the story of Jeff and Jill Crocodile by gathering information to better understand where this couple is in their financial life.  Among our goals in gathering data is to identify any opportunities or threats as well as better quantify short and long-term goals.  In the Crocodile's case, we have a relatively well off couple that has the resources to become very wealthy as long as they can properly maneuver the financial landscape between now and retirement.

The Basics

First and foremost, let's get to know Jeff and Jill a little better.  He is 30 years old and she is 29.  They have no dependents, own a home, hold undergraduate degrees, and are employed with large firms with combined income of $110,000 annually.  At the end of the year, they expect to have $5,000 available to put to good use.  In short, the Crocodile's are a high potential DINK couple.

Assets and Liabilities

Jeff and Jill have a sizable amount of assets for their relatively young age indicating they are good savers and the absence of consumer debt reinforces this assessment.  Here's the short list of assets and liabilities:

• Checking - $5,000
• Savings - $30,000
• 401k Plan - $30,000, contributing 4% that is matched dollar for dollar
• Primary Residence - $315,000
• 1st Mortgage - $215,000 30-yr fixed at 5.125%

Insurance Coverages

Rather than go down the list, let's just say that the Crocodile's have most of the usual insurance coverages including health, life, auto, and home owners'.  This is typical of most people in their situation, but they do have two significant gaps in coverage - disability and personal liability.  They have no short or long-term disability insurance, and only carry the standard levels of personal liability in their auto and home owners' policies.

Legal Documents

Since Jeff and Jill have no children, they have not seen the need to draft and execute any legal documents like a will, living will, healthcare surrogate, or durable power of attorney for finances.

Saving and Investing

At present, they only contribute to their employers' 401k plans up to the matching amount of 4% and receive a dollar for dollar match.  All other discretionary income is being added to their savings account.  Investment allocations for the 401k are unknown (likely a target date retirement fund).

Goals and Objectives

The Crocodile's have presented two major goals with one being more concrete than the other.  The first is to make financial decisions today that they will feel good about in 20 years.  The second is to be able to retire between the ages of 50 and 55, work part-time until age 60 or 65, and travel.

Question for the Case Study

"Given [our] situation, is it 'better' for [us] to pay off [our] mortgage as soon as possible or use [our] money to make another investment?"

The Difference Between Finance and Personal Finance - the Grand Canyon of outcomes

Arguments in the world of finance often revolve around whether to take action A or action B with each having a unique set of risks and rewards that can be quantified by rates of return and standard deviation measures, respectively.  As an example, you can purchase investment A that will return an estimated 8% annually and will have a standard deviation of 14%.  Investment B has an estimated annual return of 7% and a standard deviation of 10%.  Which should you choose?

Herein lies the difference between finance and personal finance as these alternatives have no context whatsoever.  What if you're in debt?  How about if you're 85 years old?  What would be the decision if you didn't have an emergency fund?  This is the fundamental problem in arguments in personal finance.  Often, people fail to add the personal part of the equation that gives us the necessary context to make better decisions.

The questions above are relatively easy to answer.  If you're in debt, you should choose option C - paying off your credit cards.  If you're 85 years old, you could choose either investment to round out your portfolio.  If you don't have an emergency fund, you should choose option D - cash equivalents.  But what if it's a little more complicated than this?  What about paying off your mortgage early?

And this is one of the great debates in personal finance.  If you speak to an accountant, corporate financier, or other numbers nerd, you'll get the finance answer - leverage your investments by keeping a mortgage as long as possible.  If you speak to a personal finance professional, you'll get a different answer - eliminate the mortgage as soon as possible after making sure you have (1) no other debts, (2) sufficient cash reserves, and (3) maxed out tax favored retirement savings opportunities, among other things.

In this example, the finance experts will tell you to do the math and whatever the math comes to, do it.  The personal finance experts will ask for more information and weigh the decision in light of your overall financial position.  The difference is about the size of the Grand Canyon.  On the one hand, a finance expert will say go this direction, turning a blind eye to the rest of the picture.  On the other hand, a personal finance expert will look around, survey the landscape, and arrive at a decision.

You tell me, which would you rather have?  A blind walk from the edge of the Grand Canyon, or perhaps, one with a little more vision.

Principle:  Personal finance employs the math of finance, but is not subservient to its calculations.

If Air Travel Worked Like Health Care

This was something I saw on BudgetTravel.com.  It's funny and scary at the same time (because it's spot on!):

Prognostications for 2010

Last year brought the end to the Panic of 2007-09 or as many are now calling it, The Great Recession.  The term panic seems more appropriate because that's exactly what happened.   We saw an enormous bubble burst in real estate that sent massive shock waves around the globe.  Credit markets stopped functioning and we found ourselves in a panic to get the financial markets and the economy moving in the right direction again.

Indeed, last year marked the end of a bleak chapter in our capitalist experiment, but this year will be an interesting one.  Unlike last year, there isn't a great value opportunity that jumps off the page like corporate bonds in 2009.  The market has recovered, but still sits 25 percent below peak and valuations still look expensive by historical measures.  Government bonds aren't exciting as yields are still quite low and with the current level of fiscal spending, inflation could crush longer maturities.  The cash markets are a complete snoozer.  So what's the deal with 2010?  In a word - balance.

Here's the short version of 2010:

• Economy - the economy will continue its recovery throughout 2010 and will be helped along periodically with additional fiscal stimulus.  Look for GDP growth in the 2.5% to 3.0% range with a meaningful portion of this generated by government spending of one sort or another.
• Interest Rates - with continuing weak growth numbers and fiscal stimulus, it will be difficult for the Federal Reserve to raise interest rates without potentially killing the recovery and throwing us into a double dip recession.  As a result, short-term rates will remain near historic lows, but don't be surprised to see yields on long-term Treasuries continue to move higher.
• Inflation - without significant growth numbers in GDP and with commodities prices remaining in check, inflation shouldn't be much of a concern for the coming year.  It is low and will remain that way for the year.
• Stock Market - small companies should outpace their larger counterparts, but overall, the market will be modestly higher or lower at the end of the year.  In other words, +/- 10% for the year, but don't be surprised to see increasing volatility as the year progresses.  It would not be surprising to see the market up or down 20 percent at some point during the year only to finish nearer the start.
• Emerging Markets - some developing countries continue to chug along and have recovered since the 2009 lows to near peak prices.  Obviously the prospects for growth are much more enticing for Brazil, India, and China compared to the developed world, but emerging markets may be overpriced.  For investors opening positions in these markets, dollar cost averaging is a good idea.  For those already there, keep an eye on this allocation and rebalance as needed.
• Fixed Income Markets - with the prospects of higher inflation over the long-term, a run up in corporate bond valuations in the last year, and the global economy still unsettled, there are no great values in the fixed income markets.  Of the major segments, foreign bonds should be the top performers as the dollar doesn't look very threatening at the moment.
• Cash Equivalents - high yield FDIC savings and money market accounts will finish second best to I Savings Bonds again this year, but the spread could close towards year end if the economic recovery shows signs of strengthening.

Overall, a well balanced portfolio should be a winner this year.  Exposure to all asset classes will be a plus and rebalancing will enhance returns.  Since a choppy market is expected, staying awake at the wheel is a must.  The only area of the market that should be avoided are bonds with long maturities.

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