Category: Blog

3 reasons why you may need an estate plan and what may prompt you to have it reviewed.

So, you may be sitting there, or maybe even Googling, “Do I really need an estate plan if I’m not ultra-wealthy?” The answer really boils down to what matters most to you.  However, we are here to tell you, that getting a solid estate plan in place is a really smart financial move.  It brings immense peace of mind (at least in our opinion).  We know it is not the most thrilling topic or way to spend time; however, the hardest part is doing the initial plan.  Once that is completed it will take little work to maintain.  

To start we will define what an estate plan is.  Then we will explore three reasons why you might need one, and wrap it up with a few situations that could prompt you to revisit your estate plan in the future.

What the heck is an Estate Plan? 

Before we dive into the why, let us clear what an estate plan actually is.  No it is not just a fancy word for the ultra rich.  An estate plan is a collection of legal documents. These documents outline what happens to your assets when you die or if you become incapacitated.  Typically it will include the following: 

• A will
• Power of attorney for healthcare
• Power of attorney for finances
• Potential trust documents

Well that was painless! 

Now on to the 3 reasons why you may need an estate plan.

1.You have children.

If you have minor children, protecting them is crucial especially if you are no longer here to do so yourself.  Your will can appoint a guardian to care for them if something happens to you.  You can even designate a secondary guardian as a backup to be extra prepared.  I know it’s hard to imagine not being there for your kids. Hence why it is so important to have that plan set up just in case you cannot be.

If you do not have children you are not off the hook! It is still important (if not more important). Why? Because, we imagine you would still want to be the one to determine who inherits your estate.

2.You work hard and have accumulated assets.

It is hard work and sacrifices that you have made to accumulate your assets. Pat yourself on the back first. And second give yourself the gift of deciding what would happen to those assets if and when you pass.  An estate plan allows you, to determine what happens to your hard-earned money and assets.  You get to have a say in the decisions and an attorney will help map it out for you.  

What if I do not have a plan or will?

What would happen if you did not have a will or designated beneficiaries?  Without one, your assets would go through probate and the government would decide who inherits your estate. At the very least, update your accounts, and any policies you own with your designated beneficiaries. 

_{*Health Savings Accounts have unique tax situations for beneficiaries. Checkout our blog for more information- What is a Health Savings Account (HSA)?}

3.Providing clarity in a time of stress.

Your estate plan will provide clarity for your family during a very stressful time. Death and/or sickness really puts a strain on families. Without a clear plan, loved ones may end up fighting over your estate. We have seen cases of this where it causes permanent rifts within a family unit that did not have one before.

An estate plan allows you to specify who controls your assets and finances as well. This is especially important if you have unique or complex family dynamics.

With your estate plan you can get a change to offer creative ways of providing additional support to certain family members that need it while allowing different type of support to others. It is a good way to what we hear often, “be fair but not necessarily equal”.

4. A Bonus reason for an estate plan- Healthcare decisions!

When setting up your estate plan, you’ll appoint power of attorney for your healthcare.  This person will help to make decisions on your behalf if you are unable to.  You can also outline your wishes for end-of-life treatment, palliative care, and specific medical procedures, etc.  While this topic is even harder and not pleasant to think about, knowing you have made these decisions can help you rest easier when the “what ifs” start creeping in. 

In reality there are more than just 3 reasons for an estate plan!

While estate planning might not be the most exciting task, it is an essential one.  It protects your loved ones, ensures your hard work benefits those you choose, and can provide clarity during difficult times. 

Ok, we have shared 3 reasons why you need an estate plan, now we will share two common reasons people avoid it.

Uncomfortable

We understand. These are not light car ride conversations. They take time and a bit of commitment to see the conversations all the way through.

Cost

We have heard a reason not to complete it is due to the cost and we get it, it’s not an exciting expense.  However, it’s probably less than 3% of your total assets (and that’d be high), so a really small piece of your net worth when you think of the bigger picture it provides. 

The 3 reasons for an estate plan moved you to action, now on to maintenance.

Finally, remember when we said once it’s done it does not take a ton of maintenance?  Well here are just a few common reasons why you may need to have your estate plan reviewed after completing it.

Your net worth changes.

Maybe you receive a large inheritance, or win the lottery and it significantly changes your life.  This would most likely be a situation where you’d want to have your estate plan reviewed to confirm it still aligns with your needs.

New laws pass.

Keep an eye out for this as new laws come out quite often that could change what an estate plan can or can not do.  We help our clients navigate this by suggesting reviews when new laws pass. 

Family changes.

A recent change of marriage, divorce, death, special needs, kids, grandkids, etc. Any time you have a big family change you will most likely want your estate plan reviewed to confirm it still aligns with your situation.

Wrapping up why you need an estate plan.

When you  have your estate plan reviewed it will cost money; however, looking at the bigger picture it’s a small percentage of your overall net worth and provides immense value in our opinion.  We would advocate for you to work with a professional to complete your estate plan.  There are online sites for the DIY-er; however, they typically are going to be a draw due to their simplicity and low cost.  Which truly may not be where your needs are at.  

In summary, the 3 (well technically 4) reasons you need an estate plan are you have minor children, you have worked hard and accumulated assets, you want to provide clarity for your family and you want to make your own healthcare decisions! Easy enough, now have fun planning.

It’s a really common question and one that tugs at the heartstrings. Should I save more for my retirement or more for my kids’ college?

Hint-Remember Put Your Mask on First!

Our retirement or their college?  Remember, SAFETY FIRST!

You’re just about to take off to the trip of your dreams, and the flight attendant comes on and goes through the safety procedures.  You hear-put your mask on first, and then assist others.  Did you know that was some of the best financial advice?

Okay, we may be stretching this a bit; however, it really hits home-this idea of taking care of your financial situation before assisting others with their financial situation.  

• Is it a battle?
• Your mask first
• Retirement Solutions
• College Solutions
• Final Word

Is it a battle?

Yes, it is a battle because we want to save more for retirement and at the same time more for our kids’ college!

We know what you’re thinking, this is a waste, it’s not a battle for me.  News flash, if you’ve had to decide how much to put towards your kids’ college savings it has been a battle.  Why, because you made the choice to put money towards their college and not your personal retirement or other financial goals.  If you have a significant other it also might be a battle because you both may not be on the same page.  (hint hint, we feel you on this one!).  We are here to help you through this challenging battle and to confirm there can be two winners (hooray!).  

Your mask first.

Save more for retirement.

It’s a simple statement, your mask first, period.  Restated, save more for your retirement before saving more for your kids’ college. You are going to tell me but, I don’t want my child to have debt from school.  But I don’t want them to have to pick between going to school and not getting educated.  But I don’t want them to not be able to, BUT BUT BUT.  And my heart hears you, it’s a battle between your heart and your brain.  Just remember safety first and your mask HAS to be on and functioning for you to even be able to attempt to assist another.  By no means are we saying not to save for your kids’ college, we are just saying to make sure your financial/retirement “mask” is SECURE and properly functioning before funding someone else’s. 

If you are curious on options to save for retirement, check out our blog-All Things 401(k)

Retirement Solutions.

Still not convinced? Let’s say you chose to fund your kids’ college and didn’t check to make sure your retirement was fully funded first.  Fast forward to your retirement years.  Your kid is happy, they have no tuition (woohoo), so that makes you happy.  You are ready to retire, until you realize you haven’t saved enough (less woohoo). 

What other solution is there to fund your retirement expenses?  This is the hard truth, there ISN’T one.  Your retirement savings is on YOU!  No one else will fund it for you.  So, should you save more for your retirement or for your kids’ college?

College Solutions.

You can still help with your kids’ college!

So let’s replay that scenario.  You chose to fund your retirement fully and unfortunately it didn’t leave much left to fund their college.  They get to college and have to take out massive amounts of loans (bummer).  However, you are ready to retire and realize you can do it comfortably!  In fact so comfortably you have extra money to send their way monthly to support them while they are in college or to help pay down their loans.  Or maybe, you’ve built quite a bit of equity into your home and can utilize that to help pay for college. 

When kids get to the point of going to college there are solutions to help fund their goals.  Loans are not ideal; however, they still have the option to attend.  You on the other hand would have no other option than to reduce your retirement dreams and just live with the basics. Or worse yet, your only option could be to work longer if your retirement wasn’t funded. 

Save more for retirement or kids’ college?

Final Thoughts.

We know your mask is important; however, we know your kids’ mask is equally important if not more (depending on which parent you’re talking to).  We do believe there can be a middle ground between saving for yourself and for your kids.  Our job is to help you understand if your mask is on properly and is functioning for your needs and then our second job is to understand how to put on your kids’ college masks as well. 

At the end of the day there is no secret on what to do, we just have to find balance and understand the risks and rewards at play.  So please, bring that battle to our battle field and we will help position your masks!

This is not going to be a “how to” blog.  This is more of a “get you to think” blog.  We discuss financial goals planning quite a bit with our clients. What we have noticed, is more often than not, most people have not thought about their financial goals. And worse yet, have not put pen to paper on their financial goals.  Believe it or not, this is a hard topic. Why, because there are no correct answers and it puts us in a very vulnerable state. 

Start pondering your financial goals.

Right now, if I asked you what is your purpose? What do you want to be remembered for? What are your financial goals? You’d be speechless, right? (Don’t worry so were we when we started out). It is a mind boggling thought and could take years to truly understand what that is.  And then with the blink of an eye your perspective can change and that purpose or goal no longer serves you.  

Let’s say your financial goal or your purpose is to work your way up to CEO of a company.  It gives you immense joy thinking about running a company. The CEO salary helps to fund your financial goal of purchasing a $3 million dollar mansion with an outdoor oasis.  Becoming CEO takes many years of hard work. Let’s say during year 6 of working towards CEO, you are diagnosed with a life changing medical condition. Just like that, with a blink of an eye your purpose and financial goals change.  You no longer want the stress of the CEO role. And the $3 million dollar mansion does not align with your current needs.  You completely shift your goals to find a job that pays substantially less. With this shift, it gives you flexibility to spend more time doing the things that are more purposeful to you.  

As you can see from this fake scenario-purpose and financial goal setting is fluid.  They most likely will change multiple times in your life.  And that is ok.  We help our clients dream, and dream bigger.  And then we help when those dreams change we help them ponder and dream again.

Put your financial goals on paper.

Even with knowing there will be changes to your purpose, dreams, and financial goals, don’t be afraid to write them down.  One of our families favorite activities is after the first of the year looking back at our goals. We start the year wrigint down our 6 month, 1 year, 3 year, and 5 year goals. At the end of the year or start of the new we go through and read each one. If we met it we cross it out and discuss how we achieved our goal. If we did not, we decide if it still does or does not align with our purpose and financial goals.   Try this activity and you will be surprised how many goals you had forgotten about, yet achieved. It’s your subconscious doing the work!

The stages.

When you look at your financial goals, think of multiple stages.  We like to have 6 month targets, 12 month targets, as well as 3, 5, and 10 year targets.  That’s a lot!  We get it.  This takes practice so get your pen and paper out and start thinking of a few.  We bet you’ll think of a few more throughout the weeks to come.  

Please don’t skip the short goals!  If you only write down your 5, 10 year goals you may start to feel a little defeated as you look back on them.  It is too easy to give up when you are starting to feel defeated or have the “it is impossible” attitude. So the shorter goals give you the “heck yeah!” excitement along the way. 

If you really want to get crafty you can take a 10 year goal and break it down into smaller chunks.  Going back to the $3 million mansion example; you may have as a small 6 month chunk to start an account specific to the mansion and set up monthly savings towards that goal.  Then your 3 year goal may be to have saved $750k in that account.  Your five year goal may be to have saved $1.5 million in that account.  And so forth.  This helps you stay excited and aligned with what you want to achieve long term.  If you want ideas on where to save extra cash check out our blog-Where Should I Save Extra Money?

Write them down.

You HAVE to write them down.  Life is busy and there are one thousand other things at any given moment that will steal your time and attention.  If those thoughts only live in your head, your head will forget them and years will go by without progress.  We recommend putting the target dates on your calendar.  When that date arrives it’s fun to see if you’ve accomplished a few of the goals and also it’s fun to laugh at the ones where you are like, “what was I thinking”.  

Goals are written, now what?

Find joy.

Find joy in living your life and adjusting daily habits to help achieve goals. Or find joy in adjusting your goals to keep certain daily habits that take away from your goals. It’s too easy to say I’m going to save every penny for retirement and then wake up one day in retirement and wish you would have enjoyed your years prior a little more.  We want you to find happiness in living for today while knowing you also have a roadmap to get where you want later on in life as well. 

It’s ok to change.

Once you have your goals written down, don’t be surprised if all of a sudden your mind shifts and things that you thought brought you joy no longer do.  Going back to the mansion example again.  Let’s say you spend $100 a week on lunches. You mindlessly spend it everyday until one day you are eating that delicious sandwich that cost $15 and are dreaming of your mansion.   Quick math-buy lunch 52 weeks out of the year times $100 a week  and you spend roughly $5,200 a year!  You think about it and realize ok, $5,200 a year isn’t going to move the needle a ton but every penny counts.  So you decide to eat out every other week instead and are able to save the extra into your mansion account.  The funny thing is, you will probably find more joy in eating out less often, so it’s a win-win!  

Lean on us.

It’s not easy to achieve your goals alone. Lean on financial advisors who care, like us, to help craft roadmaps to achieve your personal goals.   Do not let fear of failing hold you back from achieving a more purposeful life!

Ps. When we say dream big, we don’t mean it has to be something that costs a lot or something someone else would find as big. We just mean step out of your comfort zone and think bigger than today.

Health Savings Accounts (HSA) are specific accounts for healthcare savings and expenses. They have multiple benefits like tax advantages, healthcare savings, and potential retirement benefits.

Let’s take a quick dive into Health Savings Accounts (HSAs or HAS if your autocorrect is on!). 

• What are they?
• Why should you care?
• What are some of the nitty-gritty details?
• Short story time

What is a HSA? 

Think of a HSA as a special savings or investment account tailor-made for healthcare expenses.  They are a fantastic way to manage medical costs if you have a high-deductible health plan (HDHP).  Unfortunately, you have to qualify for a health savings account by having a high-deductible health plan.  The determination for a high-deductible health plan is dependent on a few factors, so make sure to verify your health plan meets the definition.  Usually, a HDHP means you are paying lower monthly premiums but would have to tackle higher deductibles compared to the standard health insurance deals.  Essentially, you are taking on more upfront costs in exchange for the sweet, sweet savings on your premiums.  

Why should you care? 

Let’s rephrase this: you should care if you’re eligible, and here are a few reasons why. 

First, tax perks. 

Do I even have to say more?  HSAs come with some serious tax benefits.  When you save money into your HSA, it’s like snagging a tax break because typically your contributions are tax-deductible.  That means you can trim your taxable income by the amount you put into your HSA.  Don’t get overly excited, as there are limits to how much you can add!  The limits are dependent on multiple factors, so we would be able to help determine how much you can contribute.  

Second, tax perks. 

Yes, it needed to be said.  When you contribute to your Health Savings Account and your money is invested in an asset, any interest or investment earnings you rack up are tax-free.  When we work with clients that have had HSAs prior to our advice, they have had all their contributions sitting in cash and not earning any additional income. They missed a big opportunity.  We will work with you to determine what that looks like in your situation, with lots to consider, like big medical expenses coming up, risk tolerance, retirement, the current emergency fund balance, etc.  

Third, tax perks. 

Promise, this is the last time!  The best part is that you can use your HSA funds for all sorts of medical needs, like doctor visits, prescriptions, dental care, vision checkups, and more.  The tax cherry on top?  When you use your Health Savings Account for qualified medical expenses, the distributions are tax free!

So essentially, the HSA is a tax jackpot three times over! 

What are some of the nitty-gritty details?

Hold on, there are some details you need to consider before running out and starting your own HSA.   

Eligibility.

 Remember, you have to qualify to open and fund a Health Savings Account.  One factor is that you need to be on a high-deductible health plan (HDHP).  You cannot have any other healthcare coverage except what is permitted. If you are enrolled in Medicare or are claimed on someone else’s tax return you are not eligible. You also need to have coverage for the time period you are contributing (these rules are complex, so ask us). 

Contributions.

 They are limited depending on eligibility, type of HDHP coverage, your age, your employer contributions, and when you became eligible and when eligibility ceases. If you are more career experienced, i.e., 55+, you do have additional catch up contributions. Contributions must be in cash, meaning you cannot contribute stock or property (sorry, no real estate for you real estate lovers).  You have a few options on how to contribute, the easiest is through your employers payroll services.  You can also contribute on your own without it being through your employer.  Contributions can be made throughout the year and up until the tax filing date for that calendar year.  Generally, you can claim contributions you make as a deduction (not employer contributions).

Distributions.  

Generally, paid medical expenses that have not been reimbursed are qualified distributions from your HSA.  If you paid for the expense, you would take a distribution to reimburse yourself.  You can receive tax-free distributions from your HSA for qualified medical expenses that were incurred after you established your HSA, not for expenses incurred before. 

If you take distributions from your HSA for any other reason, you will be subject to income tax and may be subject to an additional 20% tax—avoid at all costs.

Keep all records to show that a distribution was exclusively made for a qualified medical expense.  Keep these records with the tax return associated with the year the distribution took place.  If you’re one of the lucky ones and don’t end up needing your HSA for healthcare, you can take distributions starting at 65 without the penalty; however, income tax will still apply similarly to a traditional IRA distribution.         

Typically distributions cannot be used for insurance premiums as they do not qualify.  However, there are a few exceptions to this rule.  Qualified long-term care coverage, COBRA, and Medicare premiums are exceptions and are considered qualified distributions.  Keep in mind that Medicare premiums qualify; however, supplemental Medicare (Medigap policies) are not qualified distributions.

Now who has to have the expense for it to be qualified?  Another great concept to understand.  Qualified medical expenses can be paid on behalf of the HSA owner, spouse, and/or beneficiaries.  So if you the Health Savings Account owner can pay for your spouse’s expenses and they will be a qualified expense even if they are not covered under the high deductible health plan. 

One more important thing to remember, if you were reimbursed for that expense or deducted that expense it is no longer a qualified medical expense!  No double dipping!

Investing. 

Typically, you can invest your Health Savings Account dollars; however, it depends on your Health Savings Account provider.  Healthcare will most likely be one of the bigger expenses you’ll have throughout your life, so investing these dollars could make sense to achieve your goals. 

Portability. 

Your Health Savings Account is all yours.  It is not tied to your job or health care plan.  So, even if you switch jobs or insurance plans, you keep your HSA.

Flexibility.

It is not a use-it-or-lose-it account.  If you don’t use any of the money by the end of the year, that’s ok; your funds are yours and can roll over from year to year.  So stashing this account and letting it ride until a big expense or retirement is a solid, smart plan.

Death of HSA owner. 

There are some very unique rules when it comes to the death of a Health Savings Account owner.  You are the HSA owner and you pass, your spouse is your beneficiary- the spouse will inherit the HSA and the account will stay as a HSA.  No tax occurs (until they take out money). 

Now if you have a non-spouse beneficiary elected, when they inherit the HSA it will NO longer stay as a Health Savings Account.  Meaning the account will be liquidated as a full market value taxable event.  It is taxable to the non-spouse beneficiary-ouch!  If the HSA is inherited by a Revocable Trust /Estate the HSA is again liquidated (it does not stay a HSA) and the HSA owner is taxed on their final tax return for the full market value of the account-double ouch!  You can elect a charitable organization and it would not be taxable to that organization.  

You need to be very mindful of who you elect as a beneficiary. 

Short story time.

Yogi is a small business owner, he came to us wanting to make sure he was tracking well on his financial goal of a work optional lifestyle before age 50.   This was his 12th year in business and had been very successful the last few years with excess cash to save.  After looking at his tax return and getting information on his healthcare plan it was obvious he had a HDHP and was eligible for a health savings account.  Unfortunately, he had never been advised to open a HSA and of course never have heard of that type of account.  What a huge opportunity we were able to uncover and now he sleeps better knowing he is starting to rack up those smart healthcare monies!

Today we are jumping into all things 401(k)-well maybe not all things since that’d probably be an entire day read. So we will keep it simple and take note of the worthy points.

• What is a 401(k) plan?
• Some pros (in our opinion)
• Some cons (in our opinion)
• Story Time

What is a 401(k) plan? 

It’s an employer sponsored retirement plan where it allows employees to contribute a portion of their income into their own 401(k) account.  Your own 401(k) plan means that your name is directly tied to the account.  This is different from the pension plans of years past…most of us aren’t lucky enough to have one of those anymore.  The name 401(k) is after the section from the Internal Revenue Code.  There are different types of 401(k) plans that employers can choose from.  Today we will focus on the traditional 401(k) plan that you often see.  

The pros/positives/the high fives (in our opinion)-

First and foremost you get to contribute your decided amount into your 401(k) plan-with a limit of course!  Your contributions are deferrals from your income and are always 100% vested immediately.  This just means that if you left your employer the next day the money you contributed is still yours in your 401(k) account.  You are in control of the management of your 401(k) or another way to put it, is that you have the responsibility to invest your money.  Don’t get overly pumped as most of the time you are still beholden to the investment options your employer plan allows, and well let’s just say they ALL aren’t great. There are limits to the amount of money you can contribute to your 401(k) plan.  The good news is you have control on how much or how little you put in.  And in most plans you are able to change that amount often.  Another positive is, if you have 50+ years of living on this earth you are rewarded with a catch-up contribution each year-experience pays off!  

Positively exciting is the tax advantages, ehh it may not be super exciting for everyone.  You may be asking yourself, why don’t I just keep all of my income and go save money somewhere else?  Good question.  One advantage (again depends on your situation) is your contributions to your traditional 401(k) are not taxed as income for federal income tax purposes, so that’s a nice treat.  Again, don’t let your excitement get away from you as the income is  still subject to Social Security, Medicare, and federal unemployment taxes.  But, back to the positives, you essentially are reducing your taxable income now, and deferring the tax on those wages to a later time.  Now, let’s say you are in a fairly high income tax bracket, and you expect your income tax bracket to be lower when you take your money out (in retirement), then deferring those taxes could be advantageous-high five for that!

One more high five-you typically will have a matching contribution from your employer.  Yes that’s good icing on the cake as it is additional money!  Each employer is different in their matching so you have to pay attention to the details.  Please make sure you are contributing enough to receive the match as you are forfeiting hard earned money if you do not.  Now remember how I said there are different plans?  This comes into play here as each employer plan will have a different vesting schedule for their lovely matching contributions.  So pay attention to the details again, or don’t and let us handle that for you.  

The cons/negatives/no high fives (in our opinion)-

Being able to contribute is a big positive; however, the shortfall is there are limits.  Each year the new limits are given and the limit could be a pretty small percentage of your overall compensation.  If you are a good saver, it may leave you with a gap on where to save more (super easy con to fix by the way).  Another, is you have control of how much you’re putting away for YOUR retirement. In other words it is up to you to have the discipline to set money aside for yourself.  Your employer is not going to force you as they do not necessarily care what your retirement looks like.   Do not panic if you have not set this up yet; that’s why we are here,  to help you get comfortable with whatever amount helps get you to your vision.  

The not so exciting stuff, taxes.  Now we know we just got done telling you how the tax deferment is a positively exciting advantage.  We didn’t lie, it’s just that it may not be advantageous for everyone.  Let us look at a simple example.  Say you are contributing $1,000 of your income into your 401(k) plan and your overall income tax rate is 5% (these are made up numbers for simplicity sake).  If you had not saved that money into your 401(k) you would have paid $50 in tax (again, real life is not this simple).  Now let’s say when you retire and decide to take that $1,000 out of your 401(k) your overall income tax rate is 20%- you now have to pay $200 in tax.  In this scenario it would not have been advantageous to defer that income.  Don’t go freaking out on us, there are so many other factors to take into consideration before you stop 401(k) contributions.  This is just to get you thinking that your 401(k) plan is technically yours; however, there is a chunk of it that will go to tax (ie. isn’t yours anymore).  

Some more not so exciting stuff- taxes on withdrawals.  Not paying tax on that deferral income feels so so good, until you take it out and have to pay tax on it.  Then it doesn’t feel as nice.  Withdrawals from your 401(k) will be taxed unless it’s a qualified rollover (topic for another day).  That means all the contributions, gains, and interest you may have earned are going to be taxed as well,  when you take it out.  Another downside is you should wait until 59 ½ at least before you take withdrawals.  Generally if you take it prior to that age, you will pay a penalty in addition to the income tax.

Now for the no five!  You remember the employer match, and how nice it is to have that.  Well there could be a vesting schedule, meaning you have to stay working there for a certain amount of time before it’s truly your money.  Let’s put it another way.  If you left the company before the vesting period is complete you forfeit their employer matching contributions.  Still, not a reason to not contribute to your 401(k); however, gets you thinking about that job move and timing. 

Now that we have the basics down let’s look at a story.  

Yogi started working with us a few years back.  When we sat down with Yogi he was contributing 4% to his 401(k).  We asked why he chose the 4%, in which he said that his employer would match 100% of his contributions up to 4%.  Great job, Yogi, right?  Well, after reading through his benefits plan we found his employer is a rare company and matches dollar for dollar …..meaning they will match 100% of his contributions!  What a find!  He said he heard the 4% when he first started and never thought anything of it.  This is not extremely common where the gap is so large; however, we do see that most people save into their 401(k) whatever they hear is a good amount and will go years without double checking if that is still appropriate for their financial goals.  We are here to help take that research off your plate and confirm you are doing the right thing, for you and your family. 

If you read our last blog you are somewhat familiar with the different ways financial advisors make money ie-collect fees.  We will go into a bit more detail on each way an advisor can make money.  

Transparency is very important.   You should know what you are paying your financial advisor and how you’re doing so.  

When you start to look at the ways advisors get paid you’ll notice there are commissions, fee-based, and fee-only.  Before we jump into the nitty gritty around compensation, let’s get a few common terms defined for you-assets under management,  conflicts of interest, and fiduciary.

Let’s start with assets under management (AUM).  This means the fee that is being charged, is for the assets (accounts) that the financial advisor is managing the investments on.  An example of this would be if you set up an IRA with this financial advisor and they are deciding on the investments inside this IRA, then most likely this account would be included in the fee for assets under management.  Now, let’s say you have a 401(k) and the financial advisor is NOT managing those assets, then this account would most likely not be included in the fee for assets under management (always confirm this is the case). 

Conflicts of interest are well, pretty straightforward, or are they?  A conflict of interest is a situation where the advisor’s personal interest could compromise their judgment, decision, or opinions on a client’s situation.  You get it? We agree this one definitely needs a few examples.  Let’s say a financial advisor gets paid $5 for using XYZ companies’ annuities and gets paid $10 for using ABC companies’ annuities.  Well this creates a conflict of interest as it could create a situation where the advisor doesn’t share XYZ annuity with the client because they will get paid more for the ABC annuity.  This does not mean that the higher commissioned product is bad,, it just means that the advisor should disclose this conflict of interest and share information on both annuities and let you, the client, decide. 

Let’s go through one more example to really make this clear as mud!  Investment advice could be a conflict of interest.  Let’s say a financial advisor is managing your investments and uses all RST funds because they pay a commission to the advisor.  Again, does not mean that RST funds are bad, it just means that the advisor should be disclosing this conflict of interest with an explanation on why they use these funds.  

Fiduciary-you hear it often; however, do you really know what it means?  A financial advisor who is a fiduciary is legally obligated to act in the best interest of their client at all times.  Another way to put this is that your interests (the client) are ahead of the financial advisors interest.  Fiduciary Financial Advisors have a duty of care and duty of loyalty to you, the client. Duty of care means the advisor takes in consideration all aspects of your (the client) situation before making recommendations.  Duty of loyalty means the advisor acts as a fiduciary at all times of engagement with the client and to disclose any conflicts of interest that may arise.  

Ok, now that you are a guru with understanding AUM, conflicts of interest and fiduciary, let’s move on to the Double F in fees. Fee-Based and Fee-Only.

What are the differences? 

            Fee-Based are typically financial advisors who charge fees for their services, and who may also earn commissions or other forms of compensation from the sale of products to clients.  Commissions can be on investment products (ie. mutual funds), or financial products such as annuity or life insurance contracts.  These commissions are paid by third parties, such as institutions or product providers.  

            This is not necessarily wrong or bad; however, it is something you as the client should be aware of.  Why?  Because it can cause some conflicts of interest between you, the client, and the advisor.  It’s best to ask the advisor to disclose all conflicts of interest so you can understand what conflicts arise by being their client.  An example is if you are working with an advisor who recommends an annuity product and only presents an annuity product from one company.  This could be a case where they are beholden to the product company and therefore cannot recommend outside product providers which may have better products to suit your needs.

            Fee-Only are typically financial advisors who are compensated only by the fees they charge their clients for their service.  These fees can be charged in different ways.  For example you could be charged hourly, a flat rate, or a percentage of the assets the advisor manages (AUM).  Essentially any of these fees are paid directly by you, the client, to the advisor.  The advisor does not earn any commission or any other form of compensation from any financial institutions or product providers.  

This tends to reduce the amount of potential conflicts of interest because the advisor has no incentive to recommend certain products over others based on the commission they would earn from that product.  It also creates transparency as you, the client, knows exactly how much you are paying for the service you are receiving.  Typically, you will find this type of arrangement aligns well with the client’s best interests as their compensation structure is not tied to specific financial products. 

The other compensation model to understand is commission based. 

            Commission based compensation means that the advisor is going to be compensated with a commission on the product or investment they sell.  An example would be an insurance policy.  Let’s say you purchase a life insurance policy from a financial advisor who is not fee-only.  The financial advisor is most likely earning a percentage for the sale of this product.  You, the client, do not pay this out of pocket, the insurance company pays the financial advisor.  Another example could be investment related.  The advisor sells you a certain mutual fund and earns a percentage of that sale. 

To be completely honest no fee structure is perfect in our opinion.  What matters the most is that your financial advisor is a fiduciary at all times, that you understand how you are paying them for their advice, and any conflicts of interest are disclosed.  Once you have all of this information you can make an informed decision on if that aligns with your needs.   

Check out the diagram below for an easy to digest breakdown of Fee-Only & Fee-Based.  As always, reach out with any questions and don’t let the world of fees overwhelm you. 

So you are looking for a financial advisor and come to a worldwind of acronyms and confusing titles?  We will try to break down all the buzz words to help you get a better grip on what to look for. 

1. Financial Advisor/Wealth Advisor/Financial Consultant/Financial Professional–what are the differences?  

            It’s a little complicated since there are no regulations on who can use the above titles and in our opinion it’s one downside to our industry and can get very confusing when you are searching for someone to help you with your finances.  There tend to be trends on who uses what title; however, it definitely is not a good indicator on what they provide or what distinguishes them from another advisor.    You will want to do a little digging to find out what type of licenses and designations the person has.  The biggest thing you’ll want to determine is if the advisor is really going to help with full comprehensive financial planning, or are they going to sell you a product-whether it be insurance or investment-, or are they only managing investments ie. asset collectors.  Neither of these is necessarily bad; it’s just you wouldn’t want to go to an asset collector if you are looking for someone to help guide on social security strategies.  Or you wouldn’t want to go to an insurance salesperson if you are looking for investment advice.  

2. This is the lowdown on designations that make an advisor stand out from another.  The designations below make a big difference, at least in our book.

Certified Financial Planner® (CFP®)-this is one of the more comprehensive designations for individuals in personal financial planning.  The designation coursework and continuing education covers a robust list of topics-insurance (both property & casualty, and personal), investing, taxes, estate planning, and retirement.  

Enrolled Agent (EA) or Certified Public Accountant (CPA)-advisors or planners who acquire these designations are ones who hold tax as an important topic for clients.  They are going to be experts in accounting and tax issues.  Some could offer tax preparation services as well.  A CPA is going to be the superhero of the accounting world.  They’ve gone through real rigorous training, have passed some pretty tough exams, and are licensed to handle a whole bunch of accounting matters.  Most are going to be all-around experts in accounting, tax preparation, audit, and maybe even consulting.  An EA might not be the superhero of the accounting and tax world; they are more like the ninja of taxes.  They really focus on tax matters and are enrolled to represent taxpayers before the Internal Revenue Service.  They go through some rigorous training and pass some tough exams as well.  EAs can prepare tax returns, offer tax planning advice, and represent clients in front of the IRS.  Both are awesome in their own rights, and can tackle different aspects of the financial tax world. 

Chartered Financial Analyst® (CFA®)-this one is definitely considered to be one of the most difficult designations to acquire.  It really focuses on investments and portfolio design.  

Fiduciary-the buzz word that keeps on buzzing!

            This is like the advisor titles, it’s used more often than not and is not regulated.  Essentially what this breaks down to is if you are acting as a Fiduciary you are legally obligated to put your clients’ interests before your own.  Ie-work in the interest of your client, not yourself.  Typically you would have seen this with advisors that charge a fee to manage their clients investments in which they would put their clients investment interests ahead of their own.  Now you are seeing this commonly used with commissioned (sales) advisors.  We are not here to judge; however, we find it hard to understand how it’s possible to put your clients’ interest first when you have products with some being the more costly ones providing the highest commissions.  Again, not always wrong, just an opinion.  It can be advantageous to confirm a few things from your fiduciary advisor.  Are they acting as a fiduciary 100% of the time, or does the advisor sometimes fall under the suitability standard? The suitability standard requires the advisor to recommend investments or products that are suitable for their client at the time of sale.  Also ask are they earning a commission for any of their product sales?  Again, not necessarily a bad thing; however, you need to know prior to making a decision.  Asking this question leads us to our next topic-fees- how fun!

3. How are advisors paid? 

Fee-Only

            This means that a client is paying the advisor for the advice that they give.  The advisor is not collecting commissions or fees from the types of investments they offer.  In our book, this provides the least amount of conflicts of interests between client and advisor.  We have seen this term used incorrectly, so make sure to confirm that the advisor is not also earning commissions.  

Fee-Based

This can be misleading and you will need to ask follow up questions.  Most likely the advisor is charging a fee for the assets they manage; however, they can also earn commissions, awards for selling specific products, bonuses for hitting sales targets, etc.  Again, not necessarily a bad thing; however, it could lead to a few conflicts of interest.  Make sure to ask the advisor on all the ways they get paid and explanation on what types of conflicts of interest exist.  

Commissions

Essentially, similar to fee based.  You earn a commission on a product you sell whether it be an insurance or investment product.  Some examples could be life insurance, annuities, mutual funds, etc.

*if you haven’t yet, check out our blog on “The Double F in Fees” for a more detailed explanation.  

4. What are the services provided-the value to you?

Comprehensive Financial Planning

      This is a holistic approach to planning and it means that the advisor will utilize the following topics to create and maintain your financial plan- your financial goals, risk management (insurance planning), investment planning, tax planning, retirement planning, savings/debt (cash flow) planning, and estate planning.  You are going to get the most value out of comprehensive planning as each topic will play into another topic.  You wouldn’t want to set financial goals and then have your investment planning going in a completely different direction.  Usually when you are working with an advisor who is doing comprehensive financial planning you are touching on all of these topics throughout the year; however, it could be a situation where no big life changes are happening and your retirement plan for example doesn’t need big updates.  

Investment Management Only

     This is when an advisor is only offering advice around investments.  Usually you’ll see your advisor once a year and the conversation will mainly focus on your investment planning.  You may touch on other topics but you don’t typically dive deep into how each topic coordinates with the other.  

Designations, fees, and what the advisor’s services are all very important factors; however, another big one is someone you feel comfortable with.  If you are dreading meeting your financial advisor at any point, that is a red flag.  You should be excited to see them and feel a sense of relief after your meetings-at least that’s what our clients say!