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What's Your Plan?

Take their advice: No matter what your age or financial status, smart financial planning is one of the best moves you can make.

When it comes to financial planning, today’s bleak reality is that you’re on your own. And that may not be such a bad thing.

Back in the day when people worked for the same company for decades, they assumed their retirement account was growing enough to take care of their long-term needs. “What happened is the employee became apathetic about their plan, picked something and never looked at it again,” says Mary Fox Luquette, a finance instructor at UL Lafayette. “Most of the time the employee looked at [their retirement or 401k report] and threw it in a drawer.”

Typically, they started paying attention about the time they were ready to retire, only then realizing they wouldn’t have near enough money to continue their lifestyle. “At your retirement is not the time to start looking at it,” Luquette says. “It’s too late.”

Often times your employer will have an outside adviser who can help you or even an in-house consultant. Luquette recommends that you utilize those resources.

If that’s not the case and you’re left to your own devices, you should strongly consider seeking professional help (and we mean that in a good way). It may also be a good idea to supplement the advice you get from your company’s consultant. Now here’s where it can get a bit tricky. Financial advisers come in a variety of stripes, including financial planners or consultants, accountants, stockbrokers and lawyers.

So who do you turn to? Education is important, says Luquette, who has an MBA and is also a chartered life underwriter (CLU) and a chartered financial consultant (ChFC), well-respected designations in the life insurance and financial planning professions, respectively. One can also be a certified financial planner (CFP), the most common designation among professional financial planners today, or registered investment adviser (RIA). The list goes on. Most of the financial designations came about in the 1980s when there was a big influx of financial planners in the market, according to Luquette, so anyone who was practicing before that time may not necessarily have a designation behind his name. “Proof that they were successful and do indeed know about finance and financial planning is in the fact that they are still in business,” she says.

The series of tests to earn these designations are difficult, and ongoing educational work is required to keep them current. “These exams are grueling. They are not a piece of cake, any of them,” Luquette says. In a nutshell, liken financial planners to other professionals: doctors have to have medical degrees and lawyers must pass the bar, so you at least want someone who’s certified or licensed and adheres to strict industry regulations and high ethical standards.

Another key point: You should like your planner and feel as though he or she is someone you can work with.

It may also be a good idea to talk to two or three different planners before deciding on one. Even if you fall in love with the first one, explore the market. Inquire about their credentials. Size up their initial recommendations and ask a lot of questions. “The decision could depend on how that person answers specific questions,” Luquette notes. “For example, how long has that person been in business, what stock is most prevalent in all their portfolios and why.”

The big question, of course, is how to tell whether this person who wants your business truly has your best interests in mind from a planning perspective, or just wants to sell you this or that mutual fund flavor of the month. Be wary of anyone who doesn’t seem to want to talk about fees, which they should be willing to openly discuss.

Some advisers advertise themselves as “fee-only,” meaning they don’t sell anything that’s commissioned-based. Others are “fee-based,” which means they charge a fee for services but might also offer products on commission. Fee-only would seem more pure because it avoids potential conflict of interest in a planner selling you a product because that’s what he sells.

Selling a “commissionable product” is fine as long as it’s called for and the planner discloses what’s going on. Fee versus commission should depend on what’s most appropriate for a client’s individual needs.

You may prefer the fee arrangement to avoid someone having an incentive to move you to another commissionable product two or three years down the road. Fee-for-service is an ongoing fee, so your interest and the client’s interest tend to be same — to see that account grow. There’s no financial incentive to move you around.

Rob Hines, a finance instructor and department adviser at LSU, says commissions aren’t necessarily bad. To be safe, he recommends going with a fee-only adviser, whether it’s a flat fee or percentage-based. That way, any doubt about who’s working for whom is eliminated, he says.

Of course, there are planners out there on commission doing a good job making money for their clients and doing so ethically. There’s also no guarantee a mutual fund sold to you by someone on commission won’t beat the pants off a fund recommended by a fee-only adviser. All the same, Hines is a fee-only man for philosophical reasons.

“I’m paying them to tell me what to do as opposed to another company paying to guide me into other investment fields,” he says. “I’ve always been a fan of just paying it up front.”

When shopping for mutual funds or other entities, it’s important to know how much they cost to operate, Hines says. Such information is contained in the fund prospectuses that can be found on a variety of investment Web sites. Look for something called the gross fund expense ratio. There’s no single ideal ratio, since each fund is unique. But a good financial adviser should take this data into account before recommending a particular fund.

What might seem like a miniscule difference between one fund and another can add up significantly over 15 or 20 years, according to Hines. “If they’re having to pay fees to get people to invest, it’s going to increase that expense ratio,” he says. “That’s going to cut into your fund earnings. If this fund is paying out in commission, it may be influencing your return on investment.”

It’s also smart to vet an adviser you’re considering by checking complaint histories at the National Association for Securities Dealers and the Better Business Bureau.

Whitney Bank’s Margaret Ritchey, western regional manager for the bank’s wealth management division, isn’t as suspicious of planners making a commission off a product.

“I don’t have that same bias because I don’t have that same distrust,” she says. “But I have a real strong antenna when somebody’s pushing a product.”

What makes her antenna quiver is when a planner only pushes one product and doesn’t lay out any other options. If the single solution that planner is pushing is also the solution he happens to sell, walk away.

Whitney’s wealth management services are free to the bank’s more affluent clientele. That service naturally includes offering clients products and services that Whitney itself sells in cases when it’s appropriate.

Ritchey lays out the four phases of comprehensive, top-to-bottom financial planning: profiling, analysis, recommendation and implementation. The first phase is often the hardest since it requires clients to reveal a lot more than most are comfortable revealing — including family difficulties that might impact the estate.

“The only way a financial adviser can be of value is if they know everything, and that’s a huge step for people to disclose everything,” Ritchey says.

Clients won’t spill everything until trust is established, she says. Only with all relevant information in hand can the adviser do an accurate analysis, which will dictate recommendations and, ultimately, how well the client is served by the adviser. Which makes trust a fundamental feature of a successful client-planner relationship. If you don’t trust your planner, you’re unlikely to get unsatisfactory results.

“I always go in with nothing but an empty legal pad, and I always make sure I give feedback along the way,” Ritchey says. “If they see the feedback, they see where this process is leading and say, ‘I want more of that.’”

For anyone looking for financial planning advice, Acadiana has an abundance of resources, so we decided to help jump-start your search with a few tips from four reputable local professionals with varying backgrounds, experience and education in financial planning: Lisa Heath, CFP, is managing partner of Financial Partners of Louisiana; David Strother, CFP, is financial services director at DSF Wealth Management; Fred Werner, who has more than three decades of experience, is a senior partner at Summit Financial; and Amy Hayes is vice president of investments at UBS Financial Services. We asked each of them for simple advice that just about anyone can benefit from. Here are some tips from the pros. If you want more, however, you’re just going to have to pay for it.

Before you pay anyone else — yes, anyone — pay yourself each month. You will save more if you force yourself to use discipline with your income. “Rather than paying your mortgage company, the utility company and phone company first, pay yourself first by setting aside a fixed amount every month,” Werner says. “With a little adjusting, almost everyone can save at least $100 a month. It’s amazing how even a small monthly savings can add up to a large investment.” For example, at age 40, $100 a month in savings could grow to $76,000 by retirement at age 60, assuming a 10 percent tax deferred return. At age 30, the same $100/month savings could grow to $227,000. “There are many millionaires living in Lafayette who do not fit the stereotype,” Werner says. “They are teachers, plant workers, and just everyday people who saved by paying themselves first and thinking long-term.”

“This is money you set aside for emergencies, minor catastrophes and for peace of mind,” says Heath. The amount needed varies for each person’s lifestyle and line of business. “The planning rule of thumb is to have six months of fixed expenses for bills that have to be paid whether you are working or playing. For a young person the amount may be $2,000 to $4,000, a couple with kids and a mortgage that amount may be $20,000 to $30,000, and for a small business owner that amount might be a much as $100,000 or more,” Heath continues. “The purpose of this money is not to try to make a killing in the stock market but to allow people to know they’re going to be OK if things get rough financially — like the last 12 months.”

If you’re like most investors, you probably react to daily market ups and downs, buying and selling without a clear investment strategy — or just letting the fickle nature of the market affect your mood. Stop it. “In today’s complex marketplace, this could be costing you money or exposing you to undue risk,” Hayes says. “Every investor deserves a personalized investment strategy, strategic portfolio allocation and ongoing consultation. Just remember to circle back and revisit your long-term goals and don’t make quick decisions during these volatile times.”

Heath suggests that you leave this worrying to the professionals. “They have the resources, expertise and discipline to keep your financial plan on track when short-term volatility makes you want to throw yourself under the train,” she says.

“This happens starting around the middle of all bull markets and is most intense toward the bull market’s end,” explains Strother, noting that when a person has euphoria about something his reasoning and ability to access risk are greatly diminished. He thinks that the level of appreciation will cure whatever risk there might be. “Naturally, in hindsight we always learn that this is not the case,” he says. “When we are happiest with an investment, usually only because it has done so remarkably well relative to one’s other investments, is ironically the time when that investment has the most risk.” The discipline of diversification is hardest to coach at this time, he maintains, when one sector may be trouncing all other investment asset classes. “The notion of risk goes out of the window,” Strother says. “This is a very dangerous time.”

When everyone is talking about buying, you should probably be selling — and vice versa.

If you are a do-it-yourselfer, buy what you know. “I bet Tiger Woods could pick some winners in the golf club making business but might struggle to pick a hot stock in the biotech sector,” Heath says.

Don’t allow what you paid for something to motivate you to hold or sell it. Treat your investments with complete, rational thought — and think long-term.
Strother says investing for yield rather than total return is particularly dangerous for those near, entering or in retirement. “We are the first generation looking at 25 to 30 year retirements,” he says. “Our parents on average had 10 to 20 year retirements. Our grandparents had five to 10 year retirements.” When your assets have to last five to 10 years, the loss of purchasing power to inflation is not that big of a deal. But for a 25 to 30 year retirement, this risk of inflation or losing purchasing power is a person’s biggest threat. “No longer is market risk the retiree’s primary enemy — now it is longevity risk, the risk of outliving your money,” he says, noting that equities are the one asset that can keep up with inflation.

In retirement people are hard-wired to want no short term volatility, which Strother says they achieve through bonds. “But if we live long enough at 3 percent inflation, then that 1974 stamp that we easily paid 6 cents for in 1974 is a major purchase for 42 cents in 2008,” Strother explains. The loss of purchasing power through inflation can be a real dilemma for a retiree who is invested primarily in fixed income. “So with our older clients we must balance short-term volatility concerns, which we address with bonds, with long-term threats to purchasing power, which we address with equities.”

Know what you are investing in and understand the risks. Many people don’t discover the risk in their investments until after it’s too late and they’ve incurred a substantial loss. “Before you invest, visit with a professional and discuss your lifetime goals, not just how much money you want to accumulate but what your objectives are,” Werner says, “like paying for your children’s college education, providing for your basic income needs, or growing assets to build an estate.” He suggests trying to meet your objectives with the least amount of risk, what’s called the “Sleep Factor.” Of course all investments have risks, he says, but what amount of loss, either temporary or permanent, would cause you to lose sleep at night? Think of that loss in terms of actual dollars, not a percentage of your portfolio and write down a number less than that — your Sleep Factor. If and when the day comes, you can remind yourself this was an anticipated event that you can handle.

While your investment strategy is tailored specifically to you — after having analyzed how long you’ll likely be in retirement, your spending habits, travel plans, education funding needs, estate planning objectives, etc. — it is critical that you review and evaluate the plan on a regular basis, according to Hayes. “Everyone should at least have their portfolio reviewed on an annual basis, but depending on the complexity of the individual’s financial situation, they may want to review the financial plan on a quarterly or semi-annual basis,” she says.

Common designations

CFA: Certified Financial Analyst

CFP: Certified Financial Planner

ChFC: Chartered Financial Consultant

What to ask when choosing a financial planner:

1. What experience do you have?

2. What are your qualifications?

3. What services do you offer?

4. What is your approach to financial planning?

5. Will you be the only person working with me?

6. How will I pay for your services?

7. How much do you typically charge?

8. Could anyone benefit from your recommendations?

9. Have you ever been publicly disciplined for any unlawful or unethical actions in your professional career?

10. Can I have it in writing?