Are financial plans a waste of time? Is all you’ll ever need is an increasing investment account? Here’s 2 examples where having some kind of a plan in place had a huge impact on someone’s life.
If you’re a smart consumer, you usually ask questions before you spend your money. For example, if you’re hiring a decorator, you usually ask whether you’re paying a flat fee, hourly rate or percentage of what you buy. In the same manner, you should ask—and understand—how your financial advisor is being paid.
Here is a portion of a letter I once wrote to a prospective client. In it, I explain why some advisors who claim they’re not charging you anything may actually end up costing you quite a lot! A financial advisor should be upfront about how you are paying them for their services, so don’t be afraid to ask for the details.
After I met with Pat, she asked me to write you to explain our fee schedule. She mentioned that you two have a friend who is invested through Fidelity who “doesn’t pay anything!” She was wondering why you are paying a fee if your friend isn’t.
Since I am always honest, I feel strongly about clearing the air. Everyone knows that there is no free lunch in life. No company is going to provide services for free. Your friend is paying although he just doesn’t know how a percentage of his investment holdings are paying for the brokerage’s fees.
Let me show you the easy math of fees. A do-it-yourselfer using no-load mutual funds will typically pay 1.25% – 1.50% in fund fees and expenses each year. The investor doesn’t see this charge as a dollar amount (since the fund companies aren’t required to do so) but instead the share price is lower. You and Pat have Fidelity brokerage accounts worth about $786,000. If you apply 1.25% in fees, you would end up paying nearly $9,825 in fees every year! However, your fund fees are only about $3,930 annually the way we invest. In fact, you’re saving $5,895 each year in expenses. If you deduct the money you’re saving ($5,895) from our $10,000 yearly fee, your ‘net’ cost for our services is $4,105. I would like you to think about your fee in the following way:
- Could you recover this over the long-term if there was better investment performance compared to what you might obtain on your own?
- Will we save you this much or more in mistakes we might be able to keep you from making?
- Will you save at least the equivalent in time, energy, worry and recordkeeping?
- Some combination of the above?
Brian Fricke, CFP®
It’s worth spending some time and energy to understand the fee structure of your financial investments. Make this a priority when seeking a financial advisor to work with. For more great advice on planning for your incredible retirement, request a free copy of Brian’s book Worry Free Retirement.
I am frequently asked for my advice about educating kids (or grandkids) about money.
My wife and I developed a set of “money rules” for our two boys. I thought I would share a few more of them with you. For us, these “money rules” were built around making sure our boys understood the value of money and learning how to manage it.
Buying Stocks for Kids/Grandkids
Every year, well-meaning grandparents ask me how to buy stocks or another investment for their grandchildren. I’m just not a fan of this strategy!
It’s a parent’s (not grandparent’s) responsibility to teach their kids about money and finances. But, I do have some recommendations for other ways you can help your kids or grandkids:
- Send the child a check with the payee blank! Give them instructions to make the check payable to a worthy cause of their choosing! You fill in the dollar amount. They decide which charity gets it.
- Find out what the children saved from their allowance in long-term savings during the past year and match it! You don’t have to match it 100%. You could match it with 25% or 50% of whatever they save on their own. This shows that good habits can be rewarded.
Involve Your Family in Your Charitable Giving
If charitable giving is an important part of your life and a legacy you would like carried on by your family, set up your own donor advised fund. Put your children and grandchildren on the grant committee. Every year you can have a family meeting to discuss what causes the family wants to help. I can’t think of a better “inheritance” for you to leave your family.
In this video, Brian helps to answer the question,
How do you know if a lump sum pension buyout is right for you?
The first step is to ask yourself, do you need the income from the pension?
If you don’t, you may want to rollover the lump sum benefit into an IRA account.
If you do need it, find out what the payout amount is and check with commercial annuity carriers to see what that can buy in a lifetime annuity. If the annuity payments are higher, take the payout and then buy your own annuity payment stream. If the pension benefit is higher, keep the pension.
It’s that simple.
Remember, it helps to have a retirement road map so that you can easily answer these questions. Contact us today to meet and discuss your options with a Wealth Manager.