Why Work With a Fee-Only Financial Advisor?

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When you accept professional advice on how to invest, save, and grow your hard-earned money, you have certain expectations from your financial advisor: expertise, professionalism, ethics, and independent, sound financial advice. If you’re not working with a Fee-Only Financial Advisor, you may not be getting what you bargained for. Why?

According to the Bureau of Labor Statistics, in 2008 there were over 208,000 financial advisors in the United States, with that number expected to rise to 300,000 by 2018. However, of those, only 2,000 are Fee-Only and members of the National Association of Personal Financial Advisors (NAPFA). Unlike transaction-based financial consultants who make their money on commissions earned from selling financial products, Fee-Only financial advisors do not sell any products, nor do they work on commissions. Instead, they are paid a flat fee by the client for independent financial advisory services they provide, rather than from the investments recommended. Let’s break it down:

No Sales / No Commissions
Many financial advisors are “Commission-based” which means their income is directly linked to the financial products and investments they sell you. Make no mistake, they are selling; these individuals may call themselves financial advisors, but they are really just financial salespeople. Here’s why: It is more lucrative to recommend certain investment products over others because of the commissions they earn. Therefore, it is very difficult for you, the client, to evaluate whether the “advisor’s” particular investment recommendation is most appropriate for your portfolio, or if it’s most financially lucrative for the consultant himself. By contrast, Fee-Only financial advisors do not sell any products nor earn commissions; their only source of income is from their clients. Therefore, clients understand that Fee-Only Advisor works only for their clients’ best interest, and are not wed to any investment company, product, or even insurance company. As a result, advice is unbiased and independent, with no conflicts of interest – they are free to recommend investments and products that are in the best interest of the client rather than the company’s bottom line. It’s important to determine whom your financial advisor is really working for: you or the company whose products are being recommended?

Fee-Based
In recent years, the term Fee-Based was introduced by the large investment firms in response to the growing demand for Fee-Only. Buyer beware: Fee-Based is not the same as Fee-Only. Fee-Based financial advisors can collect both fees and commissions, and they may also be incentivized to recommend certain products endorsed by their sponsoring firms.

Fiduciary Standard
A fiduciary is a financial professional who is held out in trust, and is legally obligated to put their clients’ interests above their own. Fee-Only financial advisors are the only financial consultants who operate under a fiduciary standard; transaction based financial consultants operate under what is known as a suitability standard, which is a much looser standard. In addition, Fee-Only financial advisors are highly regulated by either State or Federal regulators. If your financial advisor is unwilling to sign a fiduciary oath committing to put your interests above his/her own, then it’s time to work with someone who is Fee-Only.

Solutions Based vs. Product Based
A product-based approach is whereby a specific product is recommended or sold to the client, sometimes irrespective of the client’s particular financial circumstances and goals. Transaction, Commission, and Fee-Based advisors are typically trained on only the products they sell and/or recommend, thereby taking a product-based approach to their clients’ portfolios. The problem with the product-based approach is that providing comprehensive financial advice should be a process with multiple steps, integrating the client’s holistic financial and non-financial reality. Fee-Only Financial Advisors always take a holistic approach with each client, and offer more objective advice on a plethora of investment options. As part of the holistic approach, Fee-Only financial advisors recognize that they can not work in financial silos, but rather in coordination with the client’s other professional consultants such as CPAs, attorneys, and estate planners. In this way, clients can rest assured that all actions taken related to their finances are commensurate with their overall needs and circumstances.

Moral of the Story
Always do research and ask a lot of questions before you enter into a professional relationship with a financial advisor. Whether you have $10,000 or $10 million to invest, your financial consultant should be paid only by you, commit to a fiduciary standard, and be free from any conflicts of interest. Fee-Only financial advisors fulfill all of these requirements.

ACap Asset Management is an independent, Fee-Only Investment Advisory Firm. At ACap, we believe in investing, not speculating. Our goal is not to speculate on the direction of the market, but rather to achieve a healthy rate of return that allows our clients to reach their financial dreams without exposing them to unreasonable risk.

Our clients rely on ACap as their trusted and independent financial expert because we are committed to upholding the highest measures of financial knowledge, objectivity, and ethical practices. Whatever your financial goals may be, ACap can help you reach them.

The 7 Baby Steps of Financial Peace

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In this age of “information overload,” many Americans possess the knowledge to develop and maintain successful financial lives. Through a quick online Google search or by listening to so-called “financial talking heads,” Americans have access to split-second information to answer most any financial question. Yet regardless of easy access to financially sound advice, many are burdened with crippling debt, habitual overspending, and scarce savings. Perhaps the more recent financial ills of Americans may be attributed to the following financial choices made by consumers: (1) The lack of a monthly budget manifests into reactive buying habits instead of proactive spending habits. Put more succinctly, the average consumer might say, “Money just slips through my fingers and I don’t know where it all goes.” (2) Easy money through savvy financial marketing of credit offers facilitates unaffordable buying power. It’s also likely not an accident, that we have all grown accustomed to being referred to as “consumers.” It begs the question: Why are we not referred to as “savers” or “investors?” The very connotation of the term “consumer” assumes that Americans will buy and spend and not restrain and save. Since the main-stream American has easy access to information pertaining to sound financial choices, yet so many have not followed these principles, an apparent disconnect appears to exist between financial knowledge and the application of that knowledge into every-day financial lives. So it would appear that Americans perhaps suffer from a case of too much information and too little financial education. As an example, read about John, an 18-year old who is ready to depart for college.

Like many teenagers, John’s primary financial education has been nearly non-existent in the school classroom. Rather, John’s financial education has been shaped through marketing advertisements from print, online, and television media-which has bombarded him with messages of affording the unaffordable through so-called “easy” financial terms. Our story begins with John on-track to graduate with honors from high school. He is accepted to several colleges but forgoes a full in-state scholarship to attend his out-of-state choice, UNC Chapel Hill. To afford his dream college, John takes out $12,000/year in subsidized student loans. In his eyes, John’s choice was quite simple: He could stay close to home to go to college or attend his dream college at UNC Chapel Hill. Because of easy access to extreme amounts of student loan debt, John’s unaffordable dream is transformed into reality. And because the acquisition of debt is made so easy through student loan programs, the debt is not a major deciding factor in John’s choice. Before John leaves for college, he also buys a new car. The easy financing offer includes 72-month financing and no money down. His Dad cosigns the loan and Dad’s rationale is that he is helping John “establish credit.” In 4 years, John graduates from UNC Chapel Hill and his debt total is $58,000 ($48,000 from student loan debt and $10,000 remaining on car loan). John is keenly aware of his debt load and he also knows that his student loan repayment will begin promptly 6 months after graduation. So needless to say, he looks forward to his first paycheck.

Through his connections at UNC Chapel Hill, John lands a good first job but his excitement is turned to shock when he looks at his first paycheck. He takes the paystub to H.R. and asks, “Who is FICA and what did he do with my money!” Regardless of the hard lesson in taxes, John is excited to have his own money and he wants his apartment to look good. John visits the local furniture store and charges $3,000 to the store credit card-which promises 12 months “same as cash.” John has also grown tired of his “college car” and decides to trade it in for a new one. He learns what it means to be “upside down” when he goes to trade-in his college car but through the liberal financing terms of the dealership, he’s permitted to roll the negative equity of his trade into the new car loan. Whereas many of John’s financial decisions to this point have resulted in debt, John realizes that he needs to save some money as well. So he’s quite happy to learn that his company offers a matching contribution through a 401k plan. John signs-up and feels good that he’s saving money for the future and getting “free money” in the way of a company match.

But 6 months after graduation, the bills come due. John is faced with starting student loan repayments but in order to keep the payments low and afford his auto and credit card payments, John chooses the interest-only option, as advertised by the student loan company. The result of all this debt spending is that in only 4-5 years following high school, John’s financial condition is quite poor. But life seems fine to him-thanks in large part to the promise of easy financing of an unaffordable lifestyle.

Our story continues as John meets Mary, the girl of his dreams. They quickly fall in love and decide to get married. Rings and the honeymoon are bought on credit as the parents pay for the wedding (by taking out a loan on their own 401k plans). John and Mary also find the house of their dreams and are happy to learn that the financial terms of the mortgage company include no down payment. Even the closing costs are rolled into the mortgage-meaning John and Mary won’t even have to write a single check to move into their dream home. With their incomes stretched paper-thin, John and Mary decide to temporarily opt out of their health insurance plans. They plan to restart their health plans when their income increases from expected salary raises. With the accumulation of a mortgage payment, student loan repayments, credit card bills, and car payments, John and Mary begin arguing over their finances. Unable to afford all their minimum payments, John cashes-out his 401k but he elects not to have any taxes withheld upon withdrawal (401k withdrawals are subject to taxes and a 10% IRS penalty). When he files his tax return, he doesn’t have the money to pay the taxes and penalties. And to top it all off, Mary has news for him. She’s pregnant.

After reading John and Mary’s financial plight, this story may sound quite familiar as many stories have been written of homeowners who have been foreclosed or been forced into bankruptcy. And these occurrences were magnified during the Great Recession. The overuse of easy financing facilitates an unaffordable standard of living. And this “house of cards” easily crumbles through financial emergencies such as job loss. As mentioned earlier, it would appear that a lack of financial education, not financial knowledge is at least partly to blame for financial challenges faced by our young couple, John and Mary.

With the apparent need for financial education in our country, a man by the name of Dave Ramsey has heeded the call through his solution, known as Financial Peace University (FPU). FPU consists of a 13-week class taught through churches and community centers across the country. And the most important elements of the FPU class focuses on Dave Ramsey’s 7 baby steps. The following is a brief summary of the 7 baby steps taught through Dave Ramsey’s FPU class. But this summary is no substitute for attending FPU, which is highly encouraged.

Baby step 1 recommends a $1,000 savings for an emergency fund. This first baby step is the most important in my view. It represents a “line drawn in the sand.” It is a conscience decision to recognize that financial emergencies will occur again. Yet, with a $1,000 saved for emergencies, the emergencies perhaps won’t seem as pressing. Perhaps even more important, Dave Ramsey encourages the development of a preliminary, first-time budget. And he recognizes that the first-time budget is likely to fail. But through trial and error, he emphatically addresses the need to create a budget in order to faithfully plan how to spend and account for every dollar before pay-day arrives. Through diligent trial and error, Dave will encourage you to review the budget every month, especially between married couples. This type of systematic planning may eliminate many arguments over money-because both partners must first agree on the budget each and every month.

Baby step 2 recommends debt pay off using the “debt snowball.” This baby step constitutes several commitments. As the old saying goes, “If you find yourself in a hole, stop digging.” Regarding credit card debt, consider for a moment that your plastic credit cards symbolize the spade on the end of a shovel. Every time you use credit cards, that shovel digs a deeper financial hole. The solution is simple, but many resist this solution. Dave recommends that you cut up your credit cards. That’s how you “throw away the shovel” and stop the madness of digging a deeper financial hole. Dave believes that until you’ve made this commitment, your steps to financial peace will be made in vain. I agree that this concept may seem radical to some, and also, some “talking heads” are adamantly opposed to eliminating the use of credit cards. But it’s hard to argue with the sound financial principle that if you can’t afford something, you shouldn’t buy it. Eliminating credit cards and so-called “easy credit” offers from your financial life also eliminates the tool that facilitates an unaffordable lifestyle. Once you have cut-up credit cards, Dave then encourages you to begin your “debt snowball.” The debt snowball concept recommends that you pay off the lowest balance first. And once you have eliminated one debt, apply that payment to the next debt in order to pay it off more quickly. Through his FPU class, Dave claims that the average family eliminates $5,300 in debt while building $2,700 in savings (Source: Dave Ramsey’s Financial Peace University class). At the successful completion of the debt snowball (all non-mortgage debt paid off), Dave Ramsey encourages the use of an envelope system for your daily spending. So if you follow his teaching, your everyday spending should consist of: cash, automatic payments (for monthly bills) debited from your checking account, and lastly, a debit card.

Baby step 3 recommends saving 3-6 months of expenses. The age-old advice of saving 3-6 months of income is not a new concept. But rather than just state the obvious and leave it at that, Dave continually encourages the use of a budget in order to systematically accomplish any and all goals, including step-by-step savings to fully fund baby step 3. Regarding the 3 to 6 month question, I believe a good rule of thumb is to review the security of your employment to determine how much should constitute your emergency savings. A government job, for example, is generally more secure than a private sector job. For example, with a married couple, if the husband is a school teacher and the wife works for a technology firm, I would encourage them to split the difference and work to save the equivalent of 4 months of household expenses.

Baby step 4 recommends investing 15% of income into Roth IRAs and Pre-Tax Retirement Plans. This is where investing with a financial professional may be most advantageous. For some financial advisors, being assigned the #4 priority through Dave’s FPU class might not sit well. But it makes good sense. I’ve learned that long-term investment accounts such as 401ks and IRAs are raided when clients fail to save sufficiently for emergencies. But if baby steps 1-3 were fully implemented, then long-term investing using retirement accounts might better serve its purpose. I won’t spend time in this article detailing why Dave Ramsey encourages Roth IRA and Pre-Tax retirement plan investing, but I fully agree with this point and I’ve advised clients on this type of investing for my entire career. So rest assured that the benefits of retirement account investing affords tax advantages that may be financially beneficial to the investor.

Baby step 5 focuses on college funding. It’s quite important that college funding by parents/grandparents is ranked below other vital financial priorities. But it goes against the grain when compared to the media messages that are conveyed. Even colleges have a formula which dictates to parents how much they are “expected” to contribute to their children’s college education. So according to Dave, college funding may commence only upon successfully completing baby steps 1-4, and no sooner. On that note, there are several different investment account types designed for college funding, including the Coverdell Educational Savings Account (ESA), Uniform Transfer to Minors Act (UTMA), and 529 College Savings Plans. Each account type has advantages and disadvantages and prior to opening any of these type of accounts, a conversation with your Financial Advisor and CPA is warranted