Thursday, December 27, 2007

Winners and Losers II (Wash Sales)

"You never count your money,
When you're sittin' at the table,
There'll be time enough for countin',
When the dealing's done."
- Kenny Rogers ("The Gambler")

If you sell investments at a loss in a taxable investment account to offset gains for 2007, be aware of the wash sale rule. Basically, the wash sale rule says that if you buy an investment within 30 days before or 30 days after a sale of the same investment, any loss you realize on the sale will be disallowed. Let's review a simple example:

You own stock in XYZ Corp and you have an unrealized loss of $100 - e.g., if you sell the stock you will have a realized $100 loss. You sell the XYZ stock on December 28, 2007 so you can take the loss on your 2007 tax return. A week after you sell the stock you see a news story that leads you to believe XYZ stock is going up, maybe way up. You feel like a sucker for selling, so you buy XYZ stock again. You have just created a wash sale, and your loss on the original purchase of XYZ will be disallowed by the IRS. The wash sale rules will not apply if you buy XYZ stock on the 31st day after the sale of the original shares.

A wash sale is not the end of the world, but it catches many unaware investors. All it means is that you can't deduct the loss on the original purchase and sale of the same investment. And, if you buy back the investment you sold and it skyrockets, you probably won't care much about the loss being disallowed.

There are a couple of ways you can take your loss and eat it too, so to speak.

The wash sale rule applies to identical investments. You can't buy back XYZ stock within 30 days and deduct the loss, but you can maintain some exposure to XYZ or its industry while deducting the loss on your original purchase. You do this by either buying another stock in the same industry or sector as XYZ or by buying a mutual fund or exchange-traded fund that invests in the same industry or sector that may include XYZ as one of its holdings. In either case, you won't have perfect exposure to XYZ, but your tax loss will still be deductible.

As always, tax advice specific to your situation should be sought from a tax professional.

Saturday, December 22, 2007

‘Twas the Night After Christmas – or - Santa’s Last Stand-Up Routine

[this was our family "Christmas Letter" in 2005 - I think it's pretty funny, but then I wrote it...]

“Is this thing on?” [tap tap schreeeee] “Hey Mr. Sound Man – fix this mic wouldya? Don’t think I don’t know what you did last summer, ‘cause I do. Well, well, well boys and girls. I just flew in from Baghdad and boy are my arms tired. [cymbal crash] How many times you think I’ve used that one? Ho-ho-ho.” [scattered laughter] “Whatever.” [takes a flask out of his pocket] “A little hair of the dog ya know? It’s been another back-breaking season.” [takes a long swig] “So…what’ll it be tonight? Sugarplums? Fairy dust? Rudolph? The old routine gets kinda stale when you have such a limited range of topics. Hmmm…how about a little game I call “Santa FAQ”? You ask all the questions you’ve always wanted to ask and I answer ‘em – OK? Keep in mind that just because I know everything [sing-song voice: (“…he knows when you are sleeping, he knows when you’re awake…”)] doesn’t mean I can answer – the Patriot Act, ya know. You there, in the back.” “Uh, how do you get to the homes of all the little boys and girls in one night?” “I have a sweetheart contract with FedEx with overflow provided by UPS. Next?” “Do you really eat all the cookies and drink all the milk?” “No. Most of it goes in the sleigh to feed the elves at the North Pole. Boy, do they get sick of cookies and milk.” “What about the carrots for the reindeer?” “Yeah they eat ‘em – how you think they see in the dark?” [takes out the flask and takes another long swig] “How do the elves make all those toys?” “Since I instituted the best management plan on earth, they’re afraid not to. Who do you think Wal-Mart learned from? You wanna make money in manufacturing or in retail? Come to “Santa’s Management Workshop” (Ó Santa, Inc., all rights reserved). Keep ‘em hungry, underpaid and scared of getting fired. My record speaks for itself.” “Hey Fatso! How do you keep your suit clean after going down all those chimneys?” [raises his hand to his mouth and speaks into a microphone hidden in his sleeve] “Security?” [points to a man in the third row, stage right. An elf runs out from backstage and zaps the guy with a cattle prod] “Oouuuuugh! Ok, sorry!” [elf zaps him again before returning back stage] “Ouuuch!” [speaks into the hidden mic again] “Note to self: add that man to the Permanent Naughty List.” “How do you really know who’s been naughty and who’s been nice?” “I have contracts with the CIA, the FBI, MI6, Scotland Yard, the KGB, and several other organizations that are so secret that no one (no one who’s alive anyway) has ever heard of ‘em. By the way, 9/11 really helped in that regard – I was able to put over half the world on the Permanent Naughty List.” “What about the members of the Miller Family?” “Whoa.” [takes out the flask, drains it] “Let’s see, hmmm…Sean’s at the University of Hawaii, taking classes in Independent Living and struggling with a bad case of Island Fever, Kelly is in NYC, studying fashion design and making plans to live in Europe, Andera is happily married to Ray in Connecticut, Diane is taking an intensive Bachelor’s Degree program in Nursing at the U of W with plans to graduate in June and Kim is going thru the CFPÒ (“registered trademark of the College for Financial Planning” – the lawyers always make me add that) curriculum, preparing to take the certification exam in July.” “Yeah, but have they been Naughty or Nice?” “Uh, that information is Classified and requires a Top Secret clearance.” “What about President Bush?” “Ho, ho, ho – are you kidding? EVERYone knows which list he’s on.” “Uh, who shot JFK?” “I told you there were some questions I can’t answer.” [speaks into the hidden mic] “Security? You know what to do.” [elf runs out from backstage and zaps the guy with a Taser. 3 more elves appear and drag the guy out, still twitching] “Ladies and gentlemen, it’s been a pleasure. I’ll be back here next year - same day, same time. Until then – Merry Christmas. I’m outta here.”

Friday, December 21, 2007

Word o' the Day: Asset Allocation (ABC's of Financial Planning)

Well, today's word is actually a phrase, but just play along, ok?

Asset allocation is the process by which you (should) decide where to invest your money. Research indicates that something like 90% of investment returns are determined by asset allocation - i.e., being in the right type of asset, rather than security selection, i.e., the individual stocks or bonds you bought. Investments are placed into "classes" based on inherent characterisitcs. It's akin to your grade school teacher having you line up by height, or calling roll alphabetically by last name - she (they were almost always "she", right?) was classifying you by a common characteristic.

For example, stocks are classified as "Large Cap", "Mid Cap" and "Small Cap" and then further into "Growth" or "Value", etc. So you get further refinement into "Large Cap Growth", "Large Cap Value", etc. "Cap" refers to Market Capitalization which is the number of shares of the company times the price per share. It is a measure of the size of a company. A good example of a Large Cap company is ExxonMobil (symbol XOM) the largest U.S. corporation as measured by market capitalization, currently at $510 Billion. Stocks are classified according to their market cap because the stock of companies of similar market size exhibit similar behaviors. Kind of like your grade school teacher assigning detention to "everyone in the back row" based on their (similar) classroom behavior.

Here's a list of some asset classes:

Large Cap Growth/Value/Blend or Core
Mid Cap Growth/Value/Blend or Core
Small Cap Growth/Value/Blend or Core
International Growth/Value
Foreign Growth/Value
Investment Grade Bonds
High Yield Bonds
Corporate Bonds
US Treasury Bonds
Mortgage-backed Bonds
Real Estate
Real Estate Investment Trusts - U.S. and Foreign
Precious Metals
Industrial Metals
Agricultural Products
Natural Gas
Money Market Funds
Bank CDs
US Treasury Bills

And the list goes on and on.

The theory of asset allocation is based on the benefits of diversification. The basic tenet of diversification is "Don't put all your eggs in one basket". Pretty profound, huh? Spread them around. The more baskets (asset classes) you have eggs (investment positions) in, the better your chances of a positive return. At the same time, diversification reduces risk through a mechanism called "correlation" - something we'll talk about at another time.

Many investors think they are diversified because they own stock in several different companies. What they don't realize is that those stocks might be all in the same asset class e.g., Large Cap Growth. They are practicing security selection ("I'm going to buy this stock because I think it's going up.") , not asset allocation.

Smart investors (since you are reading this, you are a "smart investor") use asset allocation to design their investment portfolios. A good financial planner can provide you with the tools.

Since it is a holiday weekend, class is dismissed and as a special gift, no homework is being assigned. Extra Good News: December 22nd is the Winter Solstice - from here on out the days get longer!


Thursday, December 20, 2007

Winners and Losers

"You gotta know when to hold 'em,
Know when to fold 'em,
Know when to walk away,
And know when to run."
- Kenny Rogers ("The Gambler")

When reviewing one's run of luck - or lack thereof - at that poker table in the casino known as The Market, think about your taxes for a minute. If all your card-playing takes place in tax-deferred accounts like IRAs and 401ks, you can skip this post, because none of it will apply.

In a taxable investment account, you will have winners and losers. Some things you own will have done well and others not so well. A smart investor (since you are reading this, consider yourself a smart investor) will review his taxable account/s before the end of the calendar year with the idea of matching gains and losses. Depending on the extent of either, it is possible to sell stock (or bonds, or mutual funds, etc) at a profit and have no income tax liability because the (realized) gains can be offset by (realized) losses. The key here is "realized" which means the investment has been sold. Gains or losses existing solely on paper i.e., investments that are not sold, are "unrealized". Here's a simple example:

Jane has a taxable account with two stocks: Micro and Macro. She paid $100 for Micro and $110 for Macro. Micro is now worth $200 ($100 gain) and Macro is now worth $10 ($100 loss).

Jane could realize both the gain and the loss by selling the stocks and pay no taxes on the $100 gain in the Micro stock. The loss on the Macro stock offsets the gain in the Micro stock. In the real world of course, results don't necessarily work out so neatly as in our example, but the concept is the same. Gains and losses are reported on the IRS' Schedule D of Form 1040.

You should be able to easily determine if gain-loss matching will provide any benefit for you if you track your account/s at any of the on-line services or custodians. Your financial advisor should be able to provide the information if they include portfolio management in your service package.

For 2007 tax planning purposes, the sales must occur before the end of the calendar year. Nobody likes to fold 'em, but like the poker player, ya gotta know when it makes sense.


Standard Deviation and Funding the Cost of College

The cost of a college education continues to increase faster than the cost of living.

Here in Washington State, tutition costs for the University of Washington (UW) and Washington State University (WSU) have increased an average 7.1% over the last 15 years. (If I was smarter at this 'puter stuff, I'd insert the chart you can see at:

The US Consumer Price Index (CPI) for the same period averaged +3.9% (derived from CPI data at

Tuition increases got so out of hand here in Washington - +16% in 2002 - the Legislature passed a law limiting annual increases to 7% (until 2017). Guess how much tuition has increased each year since then (see the chart above)?

So what's the best way to pay for college?

Like we say a lot in the financial planning business - "That depends." But we can talk about that some other time. Our purpose today is to illuminate the standard deviation of college funding as it relates to the cost of college.

Standard deviation is a mathematical construct that measures the variation of an event over time around its average variation. In the investment world, standard deviation is used to measure risk - or the variation of the return of an asset over time around its average return. I usually explain it as the difference between the return you received on an investment compared to the return you EXPECTED to receive on the investment.

When planning for college expenses, the big question goes something like this: "How can I be sure the choices I make today will cover the costs I expect tomorrow?" The short answer is "You can't".

But - you can get close if you accept the premise that the cost of tuition in Washington State (UW, WSU) will be representative of the cost of tuition for your student, wherever they choose to attend. Check out the cost of tuition at schools around the country:

If you accept the premise that the cost of tuition in Washington State (UW or WSU) will equal the cost for your student, the Washington State 529 Prepaid Tuition Plan - Guaranteed Education Tuition (GET) should be your first choice. Why? Because the standard deviation of the GET program, vis a vis future tuition costs at UW or WSU is - for all practical purposes - ZERO. The State of Washington guarantees - with the "full faith and credit" of the State - that each GET unit will buy an equal amount of future tuition regardless of the future cost of tuition. The GET units you buy today will return exactly what you expect in the future - even though we don't know today what that will be.

The State considers the GET program to be such a "good deal" - i.e., the State is on the hook - that they limit purchases to 500 units per child (100 units equals one year's tuition). Two final words: either the GET account owner (mom, dad, grandparents, other relative) or the account beneficiary (student) must be a resident of Washington State at the time the account is opened, and, you are not limited to attending a school located in the state - if the student attends out of state, the GET units are converted into cash at the then equivalent tuition.

Enrollment for the GET program is open from September to March each year. The current cost of each unit is $74. Website:


Wednesday, December 19, 2007

Spend It Now

If you participate in your company's Cafeteria Plan (technically, a "Section 125 Plan") and you have unused funds - find a qualified expense and use them - NOW. Any unused funds in your account as of 12/31/07 can be kept by your employer.

Year-End Gifts

"Time Is Tight"
- Booker T and the MG's.

(Being an instrumental, "Time Is Tight" has no lyrics to quote...)

Today is December 19th - only 6 shopping days 'til Christmas. More importantly though, there are only 13 gifting days left in 2007.

What? Why does this matter?

Believe it or not, the US government taxes gifts we make to other people (other than our spouses). Yes, it's true. Most people aren't familiar with the gift tax because of the "Annual Exclusion" and the "Lifetime Exemption". The Gift Tax is related to the Estate Tax, but we won't go there today.

Annual Exclusion Gifts
The IRS Code contains a "de minimis" exception for gifts of less than $10,000 per donee, per calendar year. This exception is called the "Annual Exclusion". For 2007, the Annual Exclusion is $12,000 as the original $10,000 was indexed for inflation starting in 2002. What this means is that any person ("donor") can give any other (non-spouse) person ("donee") cash or property worth up to $12,000 in any calendar year without incurring gift tax on the transfer and without using any of their Lifetime Exemption. Married couples can "gift-split" - a technique that essentially allows double gifting per donee. Thus, a married couple can give cash or property worth up to $24,000 in a calendar year without incurring gift tax or using any of their Lifetime Exemptions.

Lifetime Exemption
The Lifetime Exemption (for Gift Tax) is the amount of cash or property a donor can give a donee/s during their life without incurring Gift Tax. The current Lifetime Exemption is $1,000,000.

Why This Matters Now
The Annual Exclusion is not cumulative from year to year. Use it or lose it. Here's an example that might prove helpful in understanding:

Let's say Grandma and Grandpa want to help fund their grandchild's college education. They decide that a 529 College Tuition or Savings Plan - such as the Washington State GET program - is the best way to do that. They have a $40,000 CD that just matured. If they put the entire $40,000 in the account in 2007, they will reduce their Lifetime Exemption by $8,000 each ($16,000 total) - the amount that the gift exceeds their combined Annual Exclusions.

Here's the solution: they "gift-split" and put $24,000 ($12,000 each) into the account before the end of 2007 and then put the remaining $16,000 in the account in January 2008. By staying under the Annual Exclusion amount, they will not use up any of their Lifetime Exemption.

Here's another reason to stay under the Annual Exclusion amount: if the amount is exceeded, you are required to file a Gift Tax Return (Form 709) with your income tax return.

There are three major exceptions to the gift tax: 1) gifts between married couples are unlimited, 2) tuition expenses - paid directly to the school - and 3) medical expenses - paid directly to the provider of services. You can pay tuition or medical expenses for another person without limit i.e., neither the annual exclusion nor the lifetime exemption apply as long as such expenses are paid directly to the school or the provider (hospital, doctor, etc). The exception does not apply if you give the money to someone and they use the money to pay their tuition or medical bills.

If you are thinking of making a gift in excess of $12,000 ($24,000 if married) seek out ways you can spread the gift over two or more calendar years to take advantage of the Annual Exclusion.

Happy Gifting!


Why Did My Mutual Fund Share Price Go Down?

If you own mutual funds, you may notice a decline in the share price this month that is not related to the decline in the market. What happened?

Dividends and capital gain distributions were paid, and this is a good year for capital gains. The fund paid out assets to shareholders, thereby reducing assets, so the share price must adjust to account for the payouts. This is true even if your distributions are re-invested in the fund. If you check your statement, you should find the "per-share" amount of the distributions. They are usually shown separately for dividends, short-term capital gains and long-term capital gains. Add up the total per-share amounts and you will find the amount by which each share was reduced on the date the distributions were paid.

If you own stock in a company that pays dividends you will see the same accounting adjustment occur every quarter when the dividend is paid.

Many mutual funds pay out capital gain distributions in December so that is why you will see share prices go down this month. Capital gain distributions tend to be larger than dividends - particularly in a bull market year like 2007, so the share price adjustment may seem large - that's why it got your attention.


Tuesday, December 18, 2007

You Can't Always Get What You Want

"You can't always get what you want,
But if you try sometimes, you might find, you get what you need."
- Jagger and Richard ("You Can't Always Get What You Want" from "Let It Bleed")

My childhood memories of Christmas are dominated by the Sears Wish Book - their annual Christmas catalog. The catalog's toy section was every kid's destination. If a toy wasn't in there, we didn't know about it. Living in a small, somewhat isolated town in Washington, it was our window on the world of commerce beyond the pathetic collection of local retail shops.

I remember making a list every year of those must have items and then investing as much of my intellectual capital as I could spare into wishing it all to happen. More than once, I even filled out the order form, thinking I would make it easy for Santa to take care of business. Of course, it never worked out like I planned - having 6 siblings tended to spread the Christmas Cheer rather thinly. The Wish Book was the entire Christmas Present Experience - marketing, advertisement and fulfillment wrapped in one package.

Of course, the Christmas Present Experience has changed dramatically. No longer do we spend hours poring over the Wish Book, but spend hours being bombarded by advertising, surfing the web, walking the shopping malls and driving from one category-killer store to another. When your world of choice was pre-packaged and compressed into a few catalog pages, it was easy to become obssessed. It seems that the intensely covetous dreams of childhood, curled up with the Wish Book on the living room floor, have been replaced by an obssessive process, a seeking for "Just the Right Gift".

So here's my financial advice for the Christmas Present Experience. Spend less money and less time on the whole process. Reduce your gift list to those closest to you. Go to one of the many off-beat Christmas shows, or attend your local production of A Christmas Carol. Don't obssess. Bake cookies. Don't let yourself feel like a failure because you don't "deliver". Give money to charity. Get involved in micro-finance Host a holiday open house. Help out at the local feeding program.

Don't buy gift cards in a last-ditch attempt to get "something" - more than 10 percent of the $58.3 billion in gift cards bought this year won't be used, according to Needham, Mass.-based consulting firm TowerGroup. (10% of $58.3 billion = $5.83 billion). Corporations are counting on you to buy gift cards - it adds to their profits.


Monday, December 17, 2007

Gen X or Millenial?

You heard it here first:

Start now on saving for the future! If you have a 401k plan at work - sign up now! Even if you can't put in very much - just do it. Get started TODAY.

I was talking to a 27 y.o. man last week about this very topic. When I said "If you sign up to put in $100 per month, your paycheck will only go down by about $80 because your tax withholding goes down too." He said "Really?" NO ONE HAD EVER EXPLAINED IT TO HIM. So here it is:

If you put money into a deductible retirement account at work - 401k, 403b, 457, etc. the contribution comes "off the top" BEFORE federal income tax withholding. The contribution (technically called a "deferral") reduces your taxable income. Lower taxable income equals lower tax withholding. Your HR person should be able to show you how your paycheck would change with a given contribution amount. Pretty easy to ballpark it for yourself though:

  1. Pick up your last paycheck stub.
  2. Find the amount for Federal Income Tax withholding.
  3. Find the amount of your Taxable Income.
  4. Divide the withholding amount by the taxable income amount (as my mom used to say: divide the "little number" by the "big number" to get the ratio). The result will be close to 10%, 15%, 25%, 28%, 33% or 35% - these are the withholding rates.
  5. Take the result and multiply the amount you will put into the retirement plan by that percentage.
  6. Subtract that number from the contribution.
  7. The result is the amount by which your net paycheck will decline.
For example, if your withholding ratio is 25%, then for every $100 you put into the plan, your paycheck will decline by $75.

The point here is that it doesn't cost $100 to save $100.


A Few Words About Inflation

Inflation is a fact of life in any economic system. In the U.S., we think (well, the Federal Reserve thinks) that if inflation is ~3% or lower that it is “acceptable” and “under control”. But even at “just” 3%, prices will double in 24 years (Rule of 72). People now in their 50’s will live long enough to see prices double. But inflation is not linear and every person’s inflation experience is different because we aren’t all buying the same goods and services.

Another problem with inflation is that the government cooks the numbers. Imagine that!

· You may have noticed over the past few years that when inflation figures are reported that you typically hear two figures: "headline inflation" which is the overall inflation figure and “core inflation, excluding volatile energy and food”. This is such a crock. Can you think of anyone you know who does not purchase energy and food? Energy and food are certainly part of my core basket of goods and services. It's like a shell game in that the government and media try to divert your attention from the total inflation figure by getting you to focus on the core inflation figure - "See how much lower the number is when we take out volatile energy and food?"

· The application of so-called “hedonic adjustments” was initiated during the Clinton years. Hedonic adjustments are concerned with the effect that the march of technological innovation has on prices. As an example, personal computers have gotten cheaper and cheaper over the years. The government decided that this improvement should be reflected in the calculations for inflation, thus the price of personal computers have essentially a negative impact on the official numbers.

If you are curious about how the figures are manipulated, check out

And finally, probably the least-understood impact of inflation is the purchase of goods and services that do not yet exist! Think back 10 years – how many people had cell phones? How many people had MP3 players? How many people had a broadband internet connection at home? Did you ever imagine that you would want to – let alone need to - purchase a personal paper shredding device? We could go on for several pages with examples. The point is that we don’t know what we don’t know. What will all these unknown items cost us? All of these unknown goods and services will be things that we will want to buy or for which a need will be created (e.g., identity theft = personal shredders).



What is "it"?

Almighty Dollar, bankroll, beans, boodle, bread, bucks, cabbage, capital, cash, chips, coin, dinero, dough, ducats, filthy lucre, funds, gravy, green, green stuff, greenbacks, hard cash, jack, kitty, legal tender, long green, loot, lucre, money, pay, pesos, resources, riches, roll, scratch, silver, skin, sugar, treasure, wad, wampum, wealth, blah, blah, blah.

There are probably more names for money than could ever be compiled. There are essentially only 5 things you can do with your money:

  1. Spend it -
  2. Give it -
  3. Save (invest) it -
  4. Protect it -
  5. Leave it -

A financial planner can help you with any or all of these:

Spend it - budgeting, cash flow management, debt management
- What can I do to maximize what I have?
Give it - charitable gift planning
- What are the best ways of helping others?
Save (invest it) - savings and investment vehicles
- What are the best ways for me to save some of what I have?
Protect it - risk management
- What do I need to do to protect what I have?
Leave it - estate planning
- How can I make sure my wishes are carried out?


Thursday, December 13, 2007

Financial Cartography

"One day Alice came to a fork in the road and saw a Cheshire cat in a tree. Which road do I take? she asked. Where do you want to go? was his response. I don't know, Alice answered. Then, said the cat, it doesn't matter."

-Lewis Carroll

OK, remember the last time you took a long trip in your car? What was that one thing you made sure you had before you left? A road map, perhaps? "Here we are at Point A, and here is our destination at Point B."

You knew exactly where you were going.
You checked the route ahead of time.
You carried a reference guide with you.
You had a pretty good idea of how long it would take.
You made note of any sight-seeing opportunities.
You packed a first-aid kit.
You packed food and drink.
You checked your car's maintenance items.
You gassed up on the way out of town.
Etc, etc, etc.

The point is - you did everything you could think of to ensure that the journey would be as pleasant as possible and that you would arrive safely at your destination.

Is there any other journey in your life to which you should apply the same level of preparation?

Financial Planning Is...

- a process, not an event - because (drum roll please) - your life is a process, not an event!

Wednesday, December 12, 2007

Off to See the Wizard

"If ever, oh ever, a Wiz there was, The Wizard of Oz is one because -
Because, because, because, because, because -
Because of the wonderful things he does.
We're off the see the wizard - The Wonderful Wizard of Oz!"
- "Follow the Yellow Brick Road" (from "The Wizard of Oz")

Wouldn't it be grand if we could all visit the Wizard and have our problems solved? Of course it would. If only financial planners were Wizards! We could dress in grand robes (no more ties!), project our countenance on a giant screen, make proclamations, issue decrees, pull the wool over the eyes of the masses! Oh the satisfaction to be gained in wielding such power!

Reality check. I think financial planners are more like the "man behind the curtain" - not in the sense that we hide our true selves from view, but in the sense that - like Professor Marvel (the man behind the curtain in the film) - what we really provide is practical, down-to-earth solutions to the very real problems of our clients.

Scarecrow needs a brain?
- We bring the needed thinking power to bear on the problem.
Tin Woodman needs a heart?
- We remind clients that they do have one - they just need to listen to its beating.
Lion needs courage?
- We take the lead on the path through the woods.
Dorothy wants to go home?
- Click your heels three times...uh, we'll have to work on that one - but we do help clients define where "home" is - or where it will be.

So while an audience with the Wizard might seem like the solution to our problems, keep in mind that it is the "man [or woman] behind the curtain" who is pulling the levers and doing the necessary dirty work.

Wednesday, December 5, 2007

What does a Financial Planner do?

“How do you catch a cloud and pin it down?”
- Rogers and Hammerstein (“Maria” from “The Sound of Music”)

Like the nuns singing ”Maria” in group therapy mode attempting to “solve a problem”, the public struggles to pin down the financial planning profession. Are we sales people hawking the latest hammer for all the nails we find? Investment managers with our pie charts and x-y graphs? Lifestyle gurus spouting new age “Be One With Your Retirement” mantras? For edification, we provide the following framework.

A financial planner performs the duties of a/an: counselor, stockbroker, confidant, insurance broker, investment manager, investment consultant, divorce counselor, consultant, communicator, fiduciary, 2nd opinion provider, scout, therapist, budget analyst, quarterback, credit counselor, alchemist, cryptographer, fireman, grief counselor, ship's captain, cartographer, intermediary, psychologist, sooth-sayer, trail boss, guidance counselor, bad-news deliverer, good-news deliverer and many others. Each role has its place in the planner-client relationship and comes with its own emotional costs and rewards. Good planners will naturally assume the role that is required of them when it is needed (subject to legal restrictions regarding certain unauthorized practices).

Maybe a better answer to the question is "It depends on what needs doing" - and until we open up the jigsaw puzzle box that is most people's financial lives, we don't know exactly what that will be. Most jigsaw puzzles come in a box with a picture of the completed puzzle on the box top. If the picture is missing, the job of completing the puzzle is a lot harder – which is the situation many prospective financial planning clients find themselves in. They have a box of puzzle pieces but the picture – or a large part of it - is missing. Good planners will guide clients in creating a picture for their puzzle box.

Financial planning deals with six general areas: 1) cash flow and budget management, 2) risk management, 3) investments, 4) income taxes, 5) retirement planning and employee benefits, and 6) estate planning. While some of the areas overlap, not every client needs help initially in all six areas. Good planners will thoroughly review all the areas and work with the client to determine those areas requiring attention.

Feedback to and from the client is essential to the process. We can’t just take all the data, feed it into our “black box” and then dump a report on the desk. We have found that a “preliminary findings” report - or two - helps tremendously. Through client feedback, the preliminary reports are hammered into the finished plan that most closely adheres to the client’s vision. Good planners provide findings and solicit client feedback during the planning process.

Once the financial plan is completed, the plan must be put into action. The best financial plans are constructed in such a way that the client can put the plan into action without engaging the planner who helped create it. Good planners deliver a comprehensive plan document that thoroughly reviews all areas of the client’s financial life, provides understandable analysis and includes clear recommendations.

Since we have prefaced “planner” with “good”, we should provide contextual definition: a “good” planner is that person or firm that stands ready to provide clients with a standard of care that rises to the definition of fiduciary.

Like the nuns in “The Sound of Music”, financial planners can’t answer the existential questions, but they - the “good” ones anyway – do help clients determine what the questions are and stand ready to help build the framework within which answers can be sought.