Color of Money Live (October 5)

Oct 05, 2017

Join Washington Post nationally syndicated personal finance columnist Michelle Singletary for an online discussion.

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So glad you could join me today. 

The main topic is retirement, the fiduciary rule and how to find a good financial planner. 

But as always, I'm open to any question about personal finance. And love those testimonies so send them my way. 

Let's get started. 

I would like to find a financial advisor. How do I go about finding a Fiduciary? Is there a professional organization? Are there any questions that I need to be asking once I find one?

Congratulations! You are starting off asking the right question. It is so important to find someone who is willing to act in your best interests, which is what we mean when we talk about a fiduciary. All registered investment advisers are legally considered fiduciaries, but broker-dealers and insurance agents are not. So check to make sure that whoever you are working with is an RIA. Don't be fooled by their marketing materials. Just because someone calls themselves a financial advisor or advertises that they put their customers' interests first, that doesn't mean they actually do. 

Hi Michelle, I'm a loyal reader and know you'd find this interesting - and not in a good way. I own a home in an appreciating market. Got a letter today offering me up to 20% of the house value. This loan-type thing does not come with interest charges. Instead you pay back the full amount plus a % of the increase in the home's value during the time you hold the loan. You can keep this loan for 30 years. I'm not tempted and also I froze my credit. But I'm mildly impressed by the creativity I guess!

I'm never surprised at the creativity when it comes to companies coming up with a way to get people to borrow. 

Wouldn't do it. Besides what if there isn't an increase in value? I bet there is a wicked interest rate in that case. Plus if you took the equity value they want and converted it to an interest rate, what would it be? 

Crazy I bet.

Hi Michelle. Do you have an opinion about robo-advisors such as Betterment and Wealthfront? There seems to be a lot to recommend them. They charge much less than traditional advisors, and I know Betterment invests in Vanguard funds. For a higher fee (but still lower than a traditional advisor), you get access to CFAs. It seems like a good deal, but I wonder if it's worth it. Thanks.

Robo-advisers can be a good option for individuals who have a fairly straightforward financial situation and don't need a lot of hand-holding from a human adviser. They keep costs to a minimum, which is one of the best things you can do to increase your long-term savings, and they take care of things like rebalancing your portfolio that you might forget to do on your own. If you want the ability to consult an actual person, there are hybrids available -- including at Vanguard -- that also keep costs low. Their account minimums are a little higher than you find at most robos, but still serve pretty modest accounts. The good news here is that automation is making it a lot easier for the industry to serve even small investors affordably.

What Barbara said. 

I think there is something out there for everyone. Rob-advisors can work. The point is research, interview potential planners and pay close attention to fees -- any fees because they directly impact your returns. 

I recently heard of another smaller credit bureau where people should add a freeze as well: www.chexsystems.com

This is the system banks used when people are setting up bank accounts. And you can put a freeze on this so a identity thief can't open a bank account in your name. 

What changes or updates in the fiduciary rule should folks be aware of and anything they need to do to make sure they are getting the best retirement advice?

Unfortunately, things are really up in the air right now on the fiduciary rule. The Department of Labor's rule went into partial effect back in June, so the core requirement that financial professionals act in their customers' best interests is now officially the law. But other provisions that make that requirement legally enforceable haven't yet been implemented, and the DOL is proposing to delay them until July 2019. So it is going to vary from firm to firm how seriously they are taking their compliance obligations. That means individuals still need to be wary, particularly when their "advisor" is really a broker-dealer or insurance agent whose compensation depends on what they sell you. 

Meanwhile, both the SEC and state insurance regulators have been looking at revising their rules. If they adopt a strong rule, based on the DOL model, that would be a real benefit to investors. But if they adopt the watered down, disclosure-based standard industry is lobbying for, that would be a real set-back. It's too soon to tell how that is all going to play out, so investors still need to be on their guard.

I'm a victim of both the OPM and Experian hacks (as I suspect so too are a large number of others), so I'm wondering whether the OPM ID theft safeguards are sufficient to cover the Experian exposure? I find it intolerable that the credit bureaus don't have reciprocity when freezing or locking one's credit cards. What a racket: we have to pay the credit bureaus to solve a problem they created.

 

Read Michelle's newsletter on Equifax here.

I know you mean Equifax. Some folks not realizing auto spell have called it Equinox. 

Anyway, if you already have a credit monitoring product in place, especially if it's free, no need to get the one offered by Equifax. They all do the same thing -- monitor.

But monitoring isn't the same as prevention. Monitoring will only tell you something HAS happened.

This is why so many consumer advocates are encouraging people put a security freeze on their accounts. At all three bureaus, Equifax, Experian, TransUnion and a fourth bureau Innovis and as one reader just pointed out at ChexSystems.

My girlfriend works for the government and invests in the TSP. Her dad is trying to convince her to invest in an IRA instead because she'd have more options, but I think she'd be paying much higher costs. Do you have any thoughts?

Your girlfriend has a smart 'boo." 

Her dad is wrong. 

You just can't beat the fees in the government's Thrift Savings Plan (TSP). And the options are just fine. My husband is in the TSP and we've seen great growth plus low fees to all add up to a well-funded portfolio. 

Now, she could find a low-cost growth index fund outside the TSP but why? Again. Fees.

No offense to dad but tell her I agree with you!

There are so many certifications for financial advisors and it's really confusing. I recently met with someone who is a CFP. Is that a good certification? Are there better ones? Worse?

While I can't officially endorse any one certification, the CFP certification does mean something, both in terms of training and experience and in terms of committing to abide by a professional standard of conduct. And, if all goes well, the certification will be even more valuable in the near future. That's because the Board is currently considering revising its professional standards to require certificants to act as fiduciaries whenever they give financial advice to clients. Right now, they are just considered fiduciaries under the CFP code when they provide comprehensive financial planning. The change hasn't been finalized yet, but if the Board does take this step (and I think they will), that will be a huge step forward for the profession and for investors.

I retired on September 1 2017. I am 57 and retired under the CSRS system. I have investments in my Thrift Savings Plan. I have a number of re-investment options, what do you recommend.

This is a good time for you to get good financial advice from a fiduciary. A fee-only one at that because I don't want someone steering you out of TSP to make fees when what you've got might be just fine.

In this forum or any forum I can't give you advice on what to do with your money in terms of where to invest. I would have to be an adviser AND know a lot more about your entire financial situation.

But here are some things to consider

-- Take stock of all your holdings and how long you think the money you currently have will last in retirement.

-- You are under the grand ole, great federal retirement system getting a percentage of your pay, which means steady income. That's huge in retirement.

-- Start thinking about when you might want to take Social Security. I don't happen to think it's a slammed dunk that you wait until 70. Maybe you do. Maybe you don't. All depends on how much retirement income you have and what you want to do.

-- Are you good for long term care costs? In other words, how would you pay for care should you be unable to care for yourself?

-- Please, please tell me you are mortgage-free or have a plan to be in the near future. If renting, do you have a good plan to cover that living expense for possibly the next  30 years.

-- Retirees still need growth because odds are you are going to live a long time, well into your 80s perhaps.

-- Have fun but watch the finances. Pace yourself so that your money lasts.

I hear a lot about fees mattering when it comes to investing, but I find it so hard to figure them out. Is there a website you can recommend that breaks it all down?

You are right to be concerned about fees, and right that they can be terribly complicated to try to figure out. One site that seems to do a pretty good job is FeeX. FINRA also offers a mutual fund analyzer tool that can be helpful in assessing the costs of your different options, once you get comfortable using it.

I meant "Equifax" hack!

I know you did!

Can you explain the difference between a registered investment advisor and a certified financial planner? Is one better than the other? Or do they offer different things to a client?

A registered investment adviser is legally defined as someone who is in the business of giving advice about securities, and they are regulated accordingly under state or federal securities laws. They may act strictly as an adviser, or they may also act as broker-dealer registered representatives or insurance agents. A certified financial planner is someone who was passed the test and otherwise fulfilled the requirements set by the CFP Board. It is a voluntary certification. There's a lot of overlap between the two groups. Many CFPs are investment advisers, for example, but other CFPs work in the brokerage and insurance industries. Basically, they serve different functions. The CFP sets a higher standard in terms of knowledge and expertise than RIAs are otherwise required to meet. But there is a legal framework behind the RIA that can be important when it comes to enforcement. 

No question, just a comment. My husband and I switched from our financial advisers to robo-advisers in part because of the fees, in part because I liked the idea of index funds instead of wondering if I'd picked the right stocks/right funds. The final part that got us to change was because both our financial advisers, whom we assumed were always looking out for our best interests, told us of a bunch of changes, including higher fees, they needed to make to comply with the DOL ruling. If they had to make changes, they couldn't have always been true fiduciaries, so we moved and are super happy with the control we have over making deposits whenever we want to and also super happy without the stress of wondering if we made good choices in funds/stocks because we're with all index funds now. Thank you!

Thanks for sharing your story. Very informative. 

By the way, I'm pretty pissed (I know. It's a strong word and probably shouldn't use it..) that so many financial companies are telling people that the DOL rule is MAKING them charge more. That's hogwash. 

The rule does not dictate they have to change their fee structure. It's primary goal is to make sure companies are doing things in YOUR best interest. So they may be charging more because they don't want to disclose that they were getting commissions, bonuses, etc. on products that you may not have needed. The higher fees are to compensate for fees that were backdoor before. 

Companies can charge whatever they want under DOL as long as what they are doing is in YOUR best interest and that might mean lower fees. It might mean higher fees if they can justified a higher level of service. 

It's like anything you shop for. Sometimes you pay more for better service, product. And sometimes you don't have to pay more because the product, service doesn't need to cost that much.

My husband and I are entertaining an offer from a financial firm to work with us. But we've done a pretty good job retirement saving on our own. Actually very well. So my question to them is what can you do that we haven't done in terms of returns. If we've been getting market average and then some with out little old low-cost growth, small cap, international etc. index funds, what more can they do for us for much more money? 

 

Barbara can you explain more about the "watered down, disclosure-based standard industry is lobbying for."

Why isn't this good enough?

There have been a lot of studies done over the years that show that investors do not understand the disclosures they receive. So disclosing conflicts of interest to investors, instead of imposing a real requirement to act in customers' best interests, isn't going to do them a lot of good. Even if they do understand that their "financial advisor" has conflicts, the vast majority simply don't have the financial sophistication to second guess their recommendations. That's why they seek out a financial adviser in the first place, to help them figure out the best course of action when they can't figure it out for themselves. So, if you are really going to protect investors, you need to require all financial professionals to act in their customers' best interests, and you need to back that up by requiring them to eliminate practices that encourage and reward advice that is not in customers' best interests.

Invest or pay off the mortgage We currently owe $65k on our mortgage which is scheduled to be paid off at the end of 2022. We invest the max in a Roth and we almost max out our 401ks but the fees are high (1-2%). We have no other debt. Should we accelerate our mortgage payments with the $500 per month we have left in our budget or should we invest the money in an index fund such as Vanguard?

I'm not a planner so I'll tell you my husband and I are doing.

Both.

We are aggressively saving for retirement inside and outside our workplace plans (His TSP, Mine a 401 k managed by Vanguard). AND we are taking extra money every month to put on our mortgage principal so we can get that MONKEY off our back by the time we retire. 

I know many financial advisers would tell you to take the $500 and invest. 

But we look at it this way

-- By getting rid of the mortgage sooner, we are saving on interest payments.

-- By the time we retire, we will have gotten rid of the top expense on our budget sheet, which will make living on retirement on our savings, pensions and social security a lot easier. 

-- And most importantly we HATE debt. Hate it. Hate it, hate it. Don't want it now and don't want to drag that mortgage into retirement. 

Thanks for taking my question. My employer is offering a voluntary employee release program. Employees will be offered a severance package based on the number of years of employment. What criteria should I use to evaluate the severance package?

I would have to know more about the program. But be sure you have a plan for getting another job and/or surviving on whatever you have saved and will get until you get another job if you need to get another job.

I've known a lot of folks who have taken such offers thinking the money was really good and they would easily get something else. But the something else didn't happen in time and they ended up struggling.

Now, if you may be separated down the road or you suspect you might lose your job anyway, then it might be worth taking the offer. Just remember taxes take a big bite out of what you get. Don't think of it as a big windfall if you don't have another job waiting.

I voluntarily took such an offer to leave the now defunct Evening Sun in Baltimore to go to The Washington Post. But I would not have taken the offer had I know had a job already on the table. 

P.S. I took every single penny of the money I received and put it on a house to make sure my mortgage was well within reason for me and my husband. 

I have a financial adviser for my retirement accounts. Very happy with this person - fee only and actually has a specialty in single women - but how much can I call upon her? For example, I am gaining a very small inheritance this fall, but can I ask her how to maneuver it with my 401(k), an existing mutual fund, etc. to minimize taxes and maximize investment - or is that sort of thing outside their purview?

While customer agreements may vary, I would expect this to be precisely the sort of question you can take to your financial adviser. And there's no penalty for asking. If it is outside her purview, she should be quick to tell you that.

Michelle- Would you care to comment on this news item? I thought it was satire, but it is in fact true. "Equifax, under fire for data breach, wins $7.25 million contract from IRS BY ASSOCIATED PRESS October 3, 2017 "

I'm without words. 

And by that I mean.

What the heck!

 

 

Shared appreciation loans are not new. They weren't new when I studied them in my real estate finance class in law school in 1991 or 92. They may be more common in commercial real estate financing then in residential, but have existed there too. Nothing new under the sun, really. Sounds like someone wants to securitize what rating agencies will consider a safe income stream. In other words, if someone offers you a loan out of the blue, it is, with very high certainty, a great deal for the arranger and not a great deal for the borrower or the purchaser of the debt.

I think the point is a lot of these products are new to the average consumer. Just like the crazy low-doc loans or the interest-only loans highly marketed during the housing crisis. 

Are either of you aware of good financial education programs in public high schools in the U.S.? Our daughter learned about the power of compounding interest from a poster on the wall of her health class (!) in 10th grade in Montgomery County, MD and has never forgotten it. She's a saver in her mid-20s, but I wish there were examples of schools providing comprehensive financial education that could be copied. Do they exist?

I can't pretend to know what is available everywhere, but I hear a lot of concerns about this from people in the field. My own son got a couple of excellent lessons on personal finance -- one in a JROTC class -- but I think it is pretty hit or miss. It is definitely an area where more can and should be done. You might check with NEFE to see if they know of good programs that could be replicated more broadly.

I've done a few columns on FoolProof. Look them up. They have a free turn-key online study program that I love. Teachers can use it too. 

I'm having a hard time figuring out whether the person who is advising me is a fiduciary or not. I keep asking but can't get him to give me a clear yes or no answer. Is there any other way I can protect myself? For instance, could I ask him to put in writing that he is a fiduciary when he gives me financial advice?

If you can't get a clear answer to this most basic of questions, that's a red flag that the answer is no. And, yes, if you feel you are getting the run-around, you absolutely can and should as that adviser to put in writing. (That's one good thing the DOL rule would do, by the way, is require financial professionals to commit in writing to act as a fiduciary with regard to all retirement investment advice.) Since most true fiduciaries are happy to preclaim it, my guess is you may be looking for a new "adviser" in the not too distant future.

Hi, Im trying to get a handle on a reverse mortgage my now 93 year old aunt received approximately 10 years ago. I searched with her but can find no paper trail for this loan other than one bill that says she borrowed $58,000. My aunt told me she did use $3000 for her air conditioning unit and to replace floors, but other than that, says she has not spent more. We also cannot find a bank that the money sits in. Could you please advise me about where to start with figuring this situation out and ideally getting her free of this reverse mortgage. Many thanks, Ms Singletary

If she's got a loan out there it should show up on her credit reports. Pull all three credit reports.

Also check the land records. She would have a lien against the house for the reverse mortgage. 

Hi Michelle, I just became aware of a service the USPS provides for free called Informed Delivery. Every day, they scan the mail that will be delivered to your mailbox and send you an email with a photo. When you actually get to your mailbox, you can log in and click on any piece that was not actually there. For those who do not have a secured mailbox, this can be a great way to make sure your mail was not stolen.

I had not heard of this. Signing up if I can! It's also a good idea because one way crooks get credit in your name is stealing your mail. 

I'm a financial advisor who always looks out for my clients' best interest. It's offensive you think just because I work for a broker-dealer I don't. Not everyone wants to pay AUM.

Hold up on your offense. I don't believe Barbara or myself said you don't work in your client's best interest. 

But if you do this already, you shouldn't object to a law making sure others do too. 

P.S. AUM guys means you pay based on the money they manage. AUM = Assets under management

 

I am well aware that there are good brokers out there who bend over backwards to act in their customers' best interests. But they aren't legally required to do so, and the financial incentives often discourage best interest advice. The beauty of adopting a uniform best interest standard is that it would free up well-intended brokers to provide the best interest advice their customers want and deserve.

My wife is a teacher and has a 403(b) but the options are really bad. She was in a variable annuity paying over 2.5% and there's still a surrender charge if she sells it. What can she do?

I'm so sorry. I hear this a lot. Really makes me mad that the employers allow such bad plans to be offered to their employees.

She and her coworkers should really work to get them to drop the company managing their retirement plans.

Lobby, lobby, lobby for better choices. Other teacher groups have done this.

Virginia required for several years now (4 or 5 years) that all high school graduates complete a year-long course in Economics and Consumer Finance. AP Economics and IB Economics count, too. My older teen took the Economics and Consumer Finance class, and I thought it was very good. Half was economic policy and the other half about consumer finance. For one assignment, he had to research auto insurance offerings from various companies.

That sounds ideal. It's good to know there are good programs out there, since getting an early start on good financial habits is so important to long-term financial well-being. Thanks for sharing!

I understand the basic concept of the fiduciary relationship. But is there a standard for what constitutes the "best interests" of the customer? One advisor could legitimately feel that inflation is the biggest worry, and another could feel that the economy is heading for a crash. Their advice about asset allocation and other factors would be very different. A fiduciary can still be wrong, right?

Yes, fiduciaries can be wrong. Nothing can protect against honest mistakes. But a fiduciary duty holds the adviser accountable for carefully assessing the available options and doing their best to identify the option that is best for the customer.

There are so many investment products and it's hard knowing where to start. Are there any that are particularly good or bad? Any places you can recommend to learn more?

There's no one investment product that is good for everyone. What's best for you is going to depend on your investment goal, time horizon, risk tolerance, etc. That's why so many people end up turning to financial professionals to help them sort it out. That said, there's a reason mutual funds are so popular for retail investors. They make it possible for someone with even modest amounts of money to get instant diversification and professional money management. And mutual funds come in every shape and size. Some of the direct sold mutual fund companies, like Vanguard, have excellent educational materials on their sites. At the opposite end of the spectrum, about nine out of ten investment horror stories I hear involve either non-traded REITs (real estate investment trusts) or high-cost variable or fixed-indexed annuities. These products are almost always sold by non-fiduciary "advisors." So, while there are certainly good annuities on the market, there's added reason to beware. But that's just scratching the surface. You can look at the investor alerts that the SEC, FINRA and NASAA put out for information on the latest trouble spots. But for most people, keeping it simple and working with trusted investment strategies is going to be your best bet.

So sorry the time is up. But thank you for your comments and questions. 

Please know I read everything. Barbara Roper has offered to answer leftover questions. I'll put her answers in one of my Post newsletters. So if you don't subscribe please do. You'll find the subscription link on the chat page. 

Look forward to talking to you next week. 

In This Chat
Michelle Singletary
Michelle Singletary writes the nationally syndicated personal finance column, "The Color of Money," which appears in The Post on Wednesday and Sunday and is carried in more than 120 newspapers.

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Barbara Roper
Barbara Roper is director of investor protection at the Consumer Federation of America. In more than 30 years at CFA, she has been a leading advocate of strengthened protections for individual investors, including by supporting the Department of Labor’s fiduciary rule for retirement investment advice.
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