Which is Better: Traditional Financial Advisors vs. Automated “Robo” Financial Advisors

I’ve come across several articles lately about the emergence of online sites (sometimes referred to as “Robo-Advisors”) which customize and automate the investment process for individuals.   These sites are totally separate from discount online brokerage firms which allow you to buy and sell stocks at low rates.  Robo-Advisors create investment portfolios, most often by utilizing securities which replicate broad market indexes.  They collect fees for this service, generally is the form of annual fees  taken as a percentage of invested assets (approx .15% – .50% per year).*  The asset mixes are generally created after analyzing personal data including age and risk tolerance.  While people in the financial services industry have fairly strong opinions about these websites – some think they will fail over time while others fear they may capture a serious portion of the traditional business – I think it’s clear that the investment advice industry has plenty of room for both traditional wealth managers and the many online solutions which are popping up.  Let’s look at both sides of the debate:    Continue reading

Retirement Decisions: Lump Sums vs. Income Streams

Americans love getting big checks.  The instant gratification of dramatically increasing one’s liquid net worth is far more desirable for most people than the comfortable but far less exciting feeling of getting a check every month for the rest of their life.  Ironically, taking the lump sum option is most often the wrong decision.  People mistakenly believe they can better manage funds on their own than leaving it in the hands of experienced pension managers and insurance companies.  It’s not so hard to understand why people make this choice – if you were 65 and deciding between $500,000 or $3,000/month for life, I think many people would take the lump sum.  Why?  You can buy a house with $500,000, or pay for a college education, or buy a boat, or take many incredible vacations.  However, $3,000 per month doesn’t allow for any of those large and highly gratifying purchases.  That last point is exactly why we want to pass on the $500,000 and take the long-term income stream instead.

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What Kind of Life Insurance Should I Have?

Picking the right life insurance is tricky.  Should you go with the absolute cheapest coverage, term? Or is it better to buy a cash value policy such as whole life?  What other choices do you have (such as return of premium) which may work better in your situation?  Like many personal finance decisions, the right type of life insurance depends entirely on your individual needs.  The purpose of this article is to help you assess your needs and find the right type of insurance.  As always, feel free to contact me directly if you seek professional help with this.

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5 Tips for Financial Success and Independence

Save Early and Often – It’s some of the most popular financial advice out there – start saving in your 20’s, and yet so many people don’t do it.  I understand that people have other obligations such as paying off debts and getting established in their careers which can interfere with implementing a savings plan.  However, most people don’t properly prioritize saving.  If you treat saving like paying a bill and you make it totally automatic, you’ll forget you’re doing it.  Create an automated savings plan when you’re young and get started.  Even if the amounts are low at first, it’ll be easy to increase the amounts as your income level rises and your debts disappear.

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Analyzing the Value of Life Insurance as an Asset

One of the more challenging aspects of advising clients about life insurance is helping them to recognize that life insurance is an “asset,” rather than an “expense”.  For many people, this view is a bit of a foreign concept in a world where other types of insurance (auto, homeowners, health, and liability, just to name a few) merely reimburse the policyholder for a contemporaneous, out-of-pocket, economic loss that the policyholder hoped would never occur – leaving the policyholder in the same economic position as he or she was in before the loss took place.  Life insurance is unique in the sense that it covers a loss that is certain to eventually occur:  It is not a question of whether the policyholder will have a claim, but instead when.  As long as the policy is maintained, the stream of premium payments will ultimately result in the policyholder’s receipt of the death benefit – which allows for a rate-of-return calculation that is inapplicable to other types of coverage.

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Simple Ratios and Rules of Thumb for Financial Planning

I often get asked quick questions such as “how much house can I afford?” or “how much life insurance do I need?”  Personal finance is a very subjective science and the answers can vary widely depending on who is doing the asking.  That said, it’s nice to have some basic rules of thumb which can be used to make sure you’re not totally off base when making a quick financial estimate.  Below are a few of these rules which apply to saving, spending, housing, and insurance.  Enjoy!

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3 Reasons to Rollover Your 401K

I’m a big fan of rolling over 401K plans into IRA accounts.  For many people, a 401K plan will represent one of their retirement income ‘prongs’ along with after-tax savings, pensions, and social security.  Many workers of various ages have money in 401K plans because they’ve learned that salary reductions into 401K plans will reduce one’s taxable income and grow those funds on a tax-deferred basis until those funds are withdrawn during retirement.  It’s a very widely used retirement savings vehicle.  So why not just leave those funds in your 401K if you switch jobs or retire?  I’ll give you my take on this below:

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2014 Mid-Year Market Recap and Outlook

2014 is looking smooth right now for stock and bond investors.  The year didn’t start off that way with a fairly steep decline in February, but like all the dips of 2013, it was ultimately another buying opportunity for those able to look past the noise.  Just this past Wednesday, Janet Yellen reiterated the Federal Reserve’s intent to end quantitative easing by this Fall – removing the economy’s training wheels –  and even talked about reducing the economy’s longer term “target interest rate” to 3.75% from 4.00%.  That’s good news for stocks and housing, and hopefully for the unemployed as well.

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Building a Standard for Financial Advice

There was a good article in Research magazine last month about the business of financial advice and how it needs improvement.  Research is an industry publication so it’s not the sort of article which would be distributed to the general public.  That said, I’ve read articles in consumer publications which comment on many of the same points.  Part of the problem is that the financial advice industry doesn’t really have an official designation, perhaps one that is state-issued, required for  inclusion in the industry, and that has a rigorous set of practice standards.  Accountants have the CPA, financial analysts have the CFA, lawyers have the JD, etc.  Some might say that people in the business of giving financial advice have the CFP (Certified Financial Planner) designation, which they do, but that isn’t a requirement for inclusion in the industry.   In fact, many people don’t know about or distinguish between the various financial planning designations which exist.

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