OK, the word benefit may be too happy of a word for the bloodbath that took place yesterday. A better way to phrase the headline would be, How To Take Advantage of the bloodbath! Your probably thinking how can I ever do that? There is a way, the Roth Conversion.
By converting your Traditional IRA or 401K to a Roth IRA or Roth 401K when the value of those investments has dropped, the tax due upon conversion will be lower. Here is an example.
Suppose you have an IRA that was worth $20,000 on June 30, but this morning the value is $15,000. If you were thinking of converting a a quarter of the IRA, which is $5,000 of the $20,000, the taxes due would be $5,000 times your marginal tax rate. If your marginal tax rate is 28%, the tax would be $1400.
If you procrastinated and decide to do the conversion today, a quarter of the value of the IRA ($15,000) is $3750. $3750 times the tax rate of 28% is $1050. So you would save $350 in taxes.
Converting your Traditional IRA or 401K to a Roth is not appropriate for everyone and the amount you choose to convert is up to you, there are no amount restrictions. If you are interested in doing a conversion or have questions about it, please contact me and we can analyze the suitability.
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Please take a few quick minutes of your busy day and contact your elected officials, imploring them to come to a compromise regarding the debt crisis. The fact that this has not been settled is unbelievable. The damage that it may cause could be felt for years to come.
Just find your elected officials website – they all have a email contact. It will take 3 minutes. Please pass this along to get the word out.
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This week I’m posting links to two great articles on the debt issue. The first, by Rick Newman, Chief Business Correspondent with U.S News and World Report, correctly lays the blame for our debt everywhere. The second link is to an article by Mark Zandi, chief economist at Moody’s Analytics. He shares his opinions, in the Washington Post, on what to do and what will happen if the President and Congress don’t come to an agreement. You might need a log on Id to view the Post article, I recommend you get one if you don’t.
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This blog contains parts of an email I sent to my clients on June 10, 2011, when the DJIA was at 11,951, off from the high in early May of 12,800
“I don’t think the economy was as good as people thought when the market was 12,800 and I don’t think it’s as bad as people think now. I still believe it is growing, even if only slightly which makes both good and bad news get magnified. The one thing that has surprised me is that inflation has not spread to other parts of the economy besides the gas tank, which has even gone down a bit over the past month.”
Since then, the market has gone back up. The DJIA has gone up to 12,600, the price of gas has continued to drop, Greece is quiet, for now, and the economy is still in a good news/bad news cycle. Next up is the debt ceiling, which should take up the news for the rest of July. So expect more swings in the market and when the debt ceiling is settled I’m sure there will be something else causing the market to have jitters.
The point here is to not look at the market on a daily basis or watch CNBC. They want eyeballs watching their programs so they use optimistic and pessimistic hype to scare you into thinking you’ll miss something. Tune out the trash and just keep thinking what are my goals and how are the investment in my portfolio going to get me to those goals.
Below is the DJIA chart from the beginning of the 2011 from Yahoo Finance.
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Last week in Part 1 of How to Select your Financial Advisor, I discussed background and compensation. This week I go over the questions to ask to deteremine the firms level of service and philosophy.
Services
First, you need to consider what are your needs? You want a long-term relationship with your advisor, and remember, your current needs will be different than what your needs will be in 5, 10, or 20 years. Can your financial advisor handle the different situations that will arise during your lifetime?
We can break down service into two subsets; financial planning and investment management.
Financial Planning
What type of services does your firm provide?
Are there areas in which you’re an expert?
Are their areas in which you’re particularly strong or weak and if you cannot cover a particular need of mine, how will this situation be handled?
Comprehensive financial planners provide various services to their clients. Your financial life isn’t limited to investments – your advisor shouldn’t be either. By providing planning services for estate, insurance, investment, retirement, and tax planning to name a few, chances are your advisor will have the knowledge help you. Advisors that handle only investments may not see the whole picture.
Investments
May I see a sample of the work that you have performed?
Obviously, personally identifying information would need to be removed, but this tells the advisor you mean business.
What do you think of index funds and ETF’s?
If they are commission based you want to find out what they think of index fund and ETF investing. The biggest chunk of many advisor’s income is sales charges from non-index mutual funds (remember this is bad!!!). If the advisor lists reasons why he doesn’t think index and ETF’s are a good option, then look for another advisor.
How frequently would you tend to make new recommendations or adjustments to my plan?
99.9999% of the time there are not significant changes to portfolio on a year to year basis. Yes, there is reallocating and changes to due economic conditions, but generally you should be wary of any advisor that moves you in and out of investments on a daily, weekly, or even monthly basis.
How will you track my portfolio’s performance, risks, tax exposure, etc?
It’s important to know that your advisor isn’t putting your portfolio on autopilot. At J.H. White Financial monthly statements are sent from TD Ameritrade and we send quarterly statements that provide portfolio performance since we’ve managed the portfolio. The rest of the answer to this question is in the next one.
Can I see a copy of the Investment Policy Statement?
If they don’t have ‘em, don’t use ‘em. It’s a simple, yet important, document that lays out the objectives, goals, needs, wishes, specifications, allocation, and anything else for the portfolio. No fluff, pretty charts, graphs, or typical pictures of a retired couple enjoying their fortune, (disclaimer – I have pictures like that on my website – but give me a break I’m a financial planner I still need to project that image of success somewhere!!) just the facts. There are no surprises or questions on why or how your money is being invested. All advisors worth anything should have an Investment Policy Statement.
Philosophy
How often do you contact and meet your clients?
Good financial advisers check in and meet with their clients periodically. We require an annual meeting at a minimum. Typically we see clients 2 or 3 times per year and communicate further with them through email/phone.
Are you a Fiduciary?
What the is a Fiduciary? It’s when the advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest which will or reasonably may compromise the impartiality or independence of the advisor. The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client’s purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client’s business. Find out if your advisor is one, you would be shocked at how many aren’t.
I’ll say this again, please share this information with friends and family. It could save them a lot of aggravation, time, and money.
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The Fisher Cats lost a heart breaker in extra innings of the semi-finals on Saturday to end a very successful and enjoyable season. It was their second game of the day and it was very hot and humid! I and the other coaches are extremely proud of how hard they worked, the respect they showed their opponents, teammates and coaches, and the positive attitude regardless of the outcome. Thanks for a great season!
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This is a big decision. You’re entrusting a significant amount, if not all of your life savings to this person. How can you know if this advisor is putting your best interest first or if they’re right for you? By knowing what questions to ask and how to interpret the answers, you’ll have the necessary information to make an educated decision.
I break the information that you need into four categories.
In the first part, I’ll discuss what question to ask to gather info on the advisors background and compensation.
How are you different than any other advisor?
Look for something unique. It could be they have a specialty, a different approach to service, availability to meet on weekends, or they’ll conduct meetings through web chats. Whatever it is, if an advisor cannot come up with something compelling that sets them apart and most importantly be excited about that difference, start thinking about looking elsewhere.
How many times have you changed firms and why?
Since most advisors are commission based (please insert boo/hiss soundtrack) they often switch firms for better commissions (boo/hiss). Find out how many times they have changed firms and the reason. If they switch often, look for another advisor, this one probably puts their interest before their clients.
Are you a CERTIFIED FINANCIAL PLANNER™?
If you see the CFP® mark behind your advisors name you know that this individual has put forth a significant amount of effort to obtain this respected certification. It is the gold standard. Look, you’ll see all kinds of initials after advisors names. The majority of them mean very little. The CFP® professional has demonstrated a level of financial planning knowledge, experience, and an oath to a client centered code of ethics. If your advisor is not a CFP® certificant, ask them why and then start looking for one.
Can you give me some references?
Checking references is the best way to learn more about an advisor. They should gladly provide them. If not……I don’t think I need to say more.
How are you compensated?
Generally financial advisors operate under one of three basic compensation structures:
Commission-Only Advisors earn their income by selling financial products such as insurance or mutual funds, or may also earn a fee for trades that they execute.
Fee-Only Advisors earn their income by charging fees. Some common methods include an hourly rate, an annual retainer fee, or a percentage of investments under management.
Fee-Based Advisors earn their income using a combination of fees and commissions.
J.H. White Financial Services is Fee-Only. That allows us, and all Fee-only advisors to provide objective recommendations. 90% of advisors use commissions (ouch!). Not only does that have the potential to create an unhealthy business relationship, but the costs to you are significantly higher and somewhat vague.If you see any of the following words; commission, sales charge, or fee-based, keep shopping around for an advisor.
Do your family and friends a favor and forward this to them. Even if they choose not work with J.H. White Financial, by just giving them the knowledge to select an independent, fee-only, CERTIFIED FINANCIAL PLANNER™ you will save them potential grief, a significant amount of excessive fees, and greatly increase the chances that they get a comprehensive advisor that places their needs first.
Next week part 2 will discuss services and philosophy.
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Been a while since I blogged….I need to get more consistent.
Over the last several years, I’ve begun to prefer Exchange-traded funds (ETFs) over mutual funds. There are several reasons why, but before I get into those let me explain ETF’s.
The best way to describe an ETF – it is a mutual fund that trades like a stock. That’s it. The holdings are very similar to a mutual fund. In some cases, especially Vanguard, the ETF’s holdings mirror their corresponding mutual fund.
Why do I now prefer to use ETF’s?
The fees are minimal. I generally use low cost mutual funds, but ETF’s have even lower fees then those. With their very low charges and management fees, ETFs give you a cheap and convenient way to build a portfolio of index funds. The annual expenses of an ETF (which come out of dividends) range from 0.1-0.65%.
Critics like to say that although fees are lower, there is a commission charged for each purchase. Luckily enough, the majority of ETF’s I recommend do not incur any fees to purchase through TD Ameritrade.
They trade like stocks. Unlike a conventional mutual fund, ETFs trade throughout the day. They can be bought or sold at any time of the market day. This can really pay off when the market is in a steep decline and you want to sell some holdings before the market falls further that day. Compare that to mutual funds – you can only redeem them at the end of the day.
Tax efficiency. ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.
You can see what’s inside. The transparency of an ETF is really appealing. When the market is volatile and a stock drops like a rock, you can easily find out if your ETF holds those shares or not. When does the typical mutual fund tell you what it holds? Once a quarter.
Although I cannot use an ETF for every asset class I employ to build a solid, well diversified portfolio, it seems every week there is a new ETF. I expect within the next few years to be able to exclusively use ETF’s.
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Welcome to the renovated J.H. White Financial website! Check it out and tell me what you think. One of the new features is my blog. I’ll be sharing my thoughts, interesting items that may be of use, debating some financial issues, and anything else I can think of.
Be sure to subscribe so you can keep up to date with the latest information. You will receive an email when I post something new. Don’t worry you won’t be inundated with multiple emails each day. I only plan to post once a week or so.
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Armageddon, the perfect storm, or whatever term you want to use will be a good description of what may take place in January 2013 when tax and spending laws expire and the national debt will be nearing its legal limit. … Continue reading
