Category: Estate Planning

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Should You Use a Financial Planner or an Investment Adviser?

couple-meeting-financial-advisor-916x516From 1998 to 2013, the number of Fortune 500 companies offering pensions to their employees fell from 60% to 24%, according to The Washington Post. With the decline of unionism and loss of employee bargaining power, corporate managements have aggressively replaced pensions with profit-sharing plans, essentially transferring the risk of retirement planning and investment management to their employees. It is possible that the Social Security program will be similarly transformed, making retirees responsible for investing funds through private accounts. However, the truth is that few people are prepared to manage their own retirement funds – as Howard Gold writes in MarketWatch, “Most investors have no idea of what they’re doing.”
 
In the last half-century, the financial markets have become increasingly complex with new products, new markets, and changing tax laws. Technology makes it possible for investors to remain informed 24-7 about events that may affect their stock positions and to enter trades from the comfort of their home. At the same time, they must compete with robo-trading programs that react to news and market activity faster than any human can. As a consequence, according to Rosalind Resnick writing in Entrepreneur, even people capable of managing their own capital should carefully consider whether a go-it-alone approach to investing makes sense.
 
Whether due to a lack of training, interest, or time, many individuals are turning to professional advisors to help them navigate the perilous waters of personal finance. In some cases, advice covers the entire spectrum of financial services, ranging from budgeting, to creating specialized trusts and estate plans. In others, the consultant’s primary responsibility is limited to a specific need, such as managing a portfolio of investments or developing effective tax strategies.
 
Seeking and finding the perfect advisor is not always easy, especially in an industry filled with confusing acronyms. According to the Financial Industry Regulatory Authority (FINRA), there were more than 160 different professional designations. In addition, terms such as financial analyst, financial advisor, financial consultant, and wealth manager are generic titles and can be used by anyone without registering with securities regulators or meeting educational or experience qualifications. To add further confusion, many consultants add multiple titles and designations to their resumes, making it difficult to determine which services they actually provide.

Do You Need Financial Planning Advice or Portfolio Management Services?

While the terms “financial planning” and “investment advice” are often used interchangeably, they refer to different skill sets. As a consequence, two of the more popular designations – certified financial planner (CFP) and registered investment advisor (RIA) – are regulated under different authorities.
 
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The Rise of the Robot Investment Advisers

online investingIn the past five years, a new type of financial advisor has emerged to compete with traditional investment advisory firms. Funded by venture capitalists, these new advisors exploit the latest technology to offer competent investment advice in exchange for drastically reduced fees.
 
Just as technology changed the full-service brokerage industry by lowering transaction costs and enabling online trading, it will also ultimately change the practice of investment advisors by automating portfolio management and investment advice. According to Grant Easterbrook, analyst at Corporate Insight, “These newcomers offer average Americans access to low-cost advice and investment solutions with fewer potential conflicts of interest and greater performance transparency.”

The Rise of the Virtual Advisors

Automated online portfolio management services – what many have dubbed “robo-advisors” or virtual advisors – have been available for the past decade. They offer convenient, transparent portfolio management for accounts both large and small through easy-to-use websites – and all for 20% to 30% of the cost of traditional advisory firms. According to Institutional Investor, Corporate Insights estimates that this group currently manages almost $17 billion in U.S. assets.
 
Robo-advisors generally share a common philosophy of money management:

Passive Investment Strategy

Based on the concepts of Nobel Prize-winning economists Eugene Fama (Efficient Market Hypothesis) and Harry Markowitz (Modern Portfolio Theory), robo-advisors do not attempt to “time the market” by projecting its direction up or down. Nor do they try to pick “winners” and “losers” of individual stocks. They invest in broad sectors of securities or market indexes—exchange-traded funds (ETFs)—to diversify risk and secure average stock market returns.

Algorithm-Based Advice

Robo-advisors rely on proprietary software to automatically create and maintain portfolios of index funds. These portfolios are designed to fit broad client investment goals, and are tailored to factors such as age, risk tolerance, expected retirement date, and so on. For example, the criteria to select a specific portfolio might be based upon a goal, such as retirement, to be achieved by a certain future date, with the ratio of equity to debt securities based solely on the time-frame between the investor’s current age and retirement age.

Extended Investment Term

According to Betterment, an analysis of the Standard & Poor’s 500 Stock Index between 1928 and 2014 indicates that the longer people stay invested, the less loss they risk and the greater their possibility of gain. For example, about a quarter of all one-year investment periods between 1928 and 2014 experienced losses in value, while less than a tenth of the 10-year investment periods resulted in a loss. Similarly, the median cumulative return was substantially greater for 10-year holding periods than one-year periods. In other words, the longer you stay fully invested in a broadly diversified portfolio, the greater your chances of gains.
 
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How to Write and Update A Will

will1While you can’t take your property with you when you die, you can direct how your assets will be distributed by making a will. Unfortunately, some people never get around to the task, and instead die “intestate” – a legal term dictating how all property greater than the sum of your enforceable debts and funeral expenses, in the absence of a will, is distributed. Surprisingly, almost half of all adults die without a will, according to a 2012 Rocket Lawyer survey. In such cases, state law determines who gets what – including custody of minor children.
 
It is not just the poor and uneducated who die intestate. Celebrities such as Howard Hughes, Pablo Picasso, and Sonny Bono all failed to have wills, as did Swedish author Stieg Larsson, best known for “The Girl With the Dragon Tattoo” series of novels. As a consequence, distribution of their property to loved ones and business partners was delayed and expensive.
 
Unfortunately, even those with the foresight to prepare a will often forget to update its provisions as their circumstances change over the years—the birth and maturity of children, accumulation or divestiture of assets, or changes in personal responsibilities, for example. Therefore, the transfer of their assets may be inconsistent with their final wishes, overly expensive, and a source of emotional pain and frustration for their loved ones. In the worst circumstances, the estate passes (escheats) to the government, an undesirable result for almost all people.

Creating a Will

Some people elect to postpone or avoid writing a will because they falsely believe that taxes and administrative expenses may reduce the amount of funds (what lawyers call the “corpus” of the estate) that will be distributed to their heirs. However, a will does not complicate the distribution of an estate, but is intended to facilitate the passage of assets and maximize the benefits of the parties. Failing to write one only complicates matters for those who will be left to pick up the pieces.
 
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