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Educate parents and young adults in practical money matters

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Ladies, First!

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A little more than two months before my due date, panic set in.  Though I had much experience as an aunt and babysitter, and in spite of my life-long fantasies of motherhood, the moment was quickly approaching where my life would change forever.

Change, even joyous change, can be terrifying.  In my case, a difficult twin pregnancy kept very dire possibilities hanging in the balance.  My husband was eerily calm; if I didn’t know better I would have thought he was medicated.

I spoke to my sister-in-law, whose support was always there for me like a welcoming smile.

“Were you scared that you wouldn’t be able to do it?” I asked.

“Childbirth?” she laughed.

“No.  I can’t even think about that!  What if I can’t do this job?” I was near tears.

Every twin book I read described delirium to the point of doubling up on feeding one baby, while accidentally starving the other.  Was this really something I would do?

She laughed and gave me the best advice I have ever received, “Stop reading these books because what they can’t tell you is how you will feel about your babies.  You will throw yourself in front of a moving train for them, and you won’t think twice.  It’s a lot of work and you’ll be exhausted, but your heart will be so full of love that you will be able to do things you never imagined.”

She was right, of course.

Though my sons are no longer babies, that reflex to put their needs ahead of mine is very strong (even when it is not beneficial to them, or me).  I am not alone in having mastered this “talent.”

Perhaps it is biology, or maybe it’s not, but women (in general) are too good at putting themselves second or third.  We would be smart to remember that there are no awards for martyrs — just tombstones.

The data backs it up, of course.  Women earn less than men because their careers have often taken a backseat to caregiving for children or parents.   They have less saved for retirement, because of this — yet they live longer, on average, than men.

Many times I have talked a mother out of funding a college savings plan in favor of contributing to her malnourished retirement account.  The “carrot” is for her to get financially secure and then she can eventually set up a college fund.  It’s obvious, but needs to be repeated:  There are no loans for retirement.

The often-used cliché is true — if oxygen masks come tumbling down on an airplane, parents have to put on their masks first before helping their children.  Here is what this looks like in the world of personal finance:

  • Fund an IRA or Roth IRA (maximum contribution rates are $5,500 or $6,500 for those 50 or older).
  • Participate in your employer’s retirement plan – whether there is a match or not.  If you are already contributing, work towards funding it to the maximum.  My colleague, Bill Sweet, put together a checklist that gives guidance on funding minimums among other useful information that can help you sock away more money and reduce your tax burden.
  • Set aside money every month to pay yourself first.  This can be used for an emergency fund if you haven’t established one.  Make sure any short-term funds (for goals taking place in five years or less) are kept in cash; money for longer term goals can be invested.
  • Pay off high-interest credit card debt.  Unless you have a special 0% financing deal, pay off this debt ASAP.  Reverse compounding is devastating to long-term financial health.
  • Make sure you have adequate TERM life insurance that will get your child through the college years.
  • Do not neglect basic estate planning — have a will, durable power of attorney and health care proxy established.  If your children are minors, make sure that you select a guardian (to raise them in the event of your demise) and a trustee (who will handle the finances).
  • Check the beneficiaries on life insurance policies and retirement accounts to make sure they are current and accurate.

If you’ve tackled this list – congratulations!  Now is the fun part.  You get to plan for your financial future so that your goals are not merely wishful thinking.

Mothers, if you have trouble finding the time and motivation to get started — think of your kids.  Being financially secure is not a selfish indulgence — it is most beneficial to those you care about.  If you’re not sure where to start, check out this blog that I wrote earlier in the year.

By taking these steps, you won’t need to throw yourself in front of a moving train to help your kids.  You might just be there with your feet up and a tiny umbrella in your drink guiding your daughter to be the financially savvy woman you have become.

Tell me where you are on your journey or what questions you have by emailing me: dina@ritholtzwealth.com.

 

 

 

 

Why the “F” Word is so important for Women Investors

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Ladies, it’s time to take charge of your money.  You know you need to; you know you want to.  So what’s holding you back?

According to a 2015 Money Fit Women Study conducted by Fidelity Investments, 92% of women want to learn more about financial planning, and yet only 47% feel comfortable discussing money with a planner on their own.  What is the cause for this insecurity?  Trust.  They don’t trust their own knowledge and they are not sure what professional they can trust.

Here’s the “F” word that can change all that: fiduciary.  Here’s another “F” word – fee-only.  Put them together and you have someone who is looking out for your best interests (fiduciary), who will only receive compensation from you, their client, and not from mutual fund companies, insurance companies, and other financial institutions for selling products.  This keeps their advice conflict-free, since the only criteria for investment selection is what is in your best interest (as opposed to which investment they can sell you that will pay out commissions).

When you work with someone who makes recommendations based on putting your needs first and is paid only for their advice, questioning intentions or motivations becomes unnecessary.  A good advisor will put together a plan that doesn’t revolve around getting in and out of positions, as those actions generate transaction fees and can have tax consequences.  In fact, a good advisor will take the time to educate you about your investment strategy so that you are better able to stay focused on your goals and tune out the panic when there is market volatility and uncertainty.

The traditional brokerage model that dominates the financial industry is often the only model people are aware of.  Perhaps women shy away from seeking advice because, instinctually, they may be worried about being manipulated.  After all, meetings with salesmen can often sound remarkably similar to “You have the most beautiful eyes.”  It’s hard to know if a broker’s recommendations are truly beneficial to you once you know they earn commissions on what they sell and some investments will pay more in commissions than others.

But the answer isn’t to adopt an ostrich “strategy.”  Reaching financial goals takes time and planning.  Ignoring the task at hand is akin to squandering time and opportunities.

Financial planning for women has its own challenges.  For starters, many women have taken some time off from their careers to raise children or to tend to aging parents. These absences reduce contributions to employer-sponsored retirement plans, such as 401K plans or 403B plans, as well as lower social security benefits.  With higher life expectancies than their male counterparts, women are more likely to live longer in retirement, and to be single for at least a portion of their retirement.

Where to start?  The Certified Financial Planner (CFP®) Board has a zip code search to find local Certified Financial Planners.   To earn a CFP® designation, one must go through a stringent process that includes education, exams, professional experience, and ethics screening.   Continuing education is required to maintain their status.

A word of caution, some planners are commission-based or a hybrid of fee-only and commission-based.  This means they can get compensated by other financial companies for selling products to their clients.  Strictly fee-only advisors are never salespeople fronting for product; they are paid solely for their time and advice.  Advisors listed on the CFP® Board site must indicate how they are compensated. Look for “fee-only” advisors as they are not tempted to give advice that might benefit them even just slightly more than you.

Being frozen into inaction is not going to get your financial plan off the ground.  Finding an advisor you can trust is an important first step.  Now that you know about fee-only fiduciaries there’s only one question left: What are you waiting for?

Politics, Investing and Propaganda

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I used to look forward to voting when I was younger as I was certain of what I was doing. My lack of sophistication and naiveté made me see things in very simple terms and it was easier to choose between the “right” candidates and the “wrong” candidates. Now, I am jaded, and I realize that everyone has an agenda and some have better propaganda machines. An advertising budget can do wonders in painting either a shiny, albeit inaccurate picture; or a scathing and unfair one. Many investors fall prey to such manipulation, as well, as their “friendly financial consultant” portrays competence, polish and compassion – often times they are simply charismatic and not much else. I know this from experience. In a past life, I worked near these types; and, in my current life, I get to unravel the damage they have done at the hands of their once trusting (and now former) clients.

While not all brokers are incompetent or misleading, the truth is that their business model is. As long as they act as salespeople – fronting for product, and not for their advice, there is a conflict of interest. When a salesperson is paid by a third party (e.g., mutual fund company or insurance company) to recommend a product to their client, there is temptation to make the investor’s needs subordinate to the salesperson’s need of putting bread on the table. The only products a salesperson will likely recommend are ones that carry high sales charges, because a portion of these charges come back to the broker in the form of commissions (mutual funds that have letters, like A, B, C, etc. after their names carry these higher fees). If the fee is low, there is nothing to compensate the broker with. So even though the low-cost fund is a better choice, it will not be recommended to the investor. And, let’s face it, if an investor purchases something that basically tracks the S&P 500 returns, then the fund that deducts 0.15% of a fee will always beat its counterpart with 1.5% -3% fees. It’s an absolute, basic, numeric truth, plain and simple.
Often times the very established brokerage houses have their own mutual funds and insurance products that compensate their salesforce a little extra. Branch managers are enticed to rev up their sales team to make this a higher percentage of the office’s business. This is how bonuses are shaped – which is no small chunk of change. Again, I speak from experience here as I witnessed this firsthand. Branch managers who let their team sell what they want won’t do that for long when a big bonus is at stake. At best, its coercion; at worst, it’s blackmail. So even if a broker or a manager wants to “do the right thing” they are penalized. The only way to get around this is to break out and become independent – which can be daunting for those entrenched in this system.

Most investors have no idea that mutual fund and insurance companies pay money to have their investment products listed on the brokers’ “preferred list,” or included as a 403b option; everyday trusting investors operate under the false assumption that “preferred “means superior when it simply means deep pockets. Again, this model compromises the broker’s judgment. The investor is blissfully unaware often times, and thinks the broker is making the best possible recommendation, when there is another agenda in the fold. While the investor blindly thinks the broker “knows best” the truth is sales pitches are provided and practiced on how to sell the product and how to overcome investor objections. Again, I know this firsthand as I have witnessed sales training sessions; I have written the sales tips to help them sell; I have promoted the sales contests that give a sales rep a crystal paperweight for besting the sales of the other hungry brokers. I have done this all in a past life I feel compelled to redeem myself from. The truth is, I thought that’s how the business worked with no other options – I had no idea at the time of another (less popular, and less advertised) approach.

In the act of full and fair disclosure, I mention that my husband and I work for a fee-only Registered Investment Advisory firm, Ritholtz Wealth Management (that means we do not accept commissions, and our clients receive a straight-forward bill from us every quarter). This design was intentional – as we guided my Mother in the aftermath of my Father’s debilitating illness and found lots of hungry salespeople licking their chops at getting a piece. We weren’t even in business at the time; I was in my “past life” where I helped brokers hock products, actually. I didn’t want her to fall victim to this model. There was too much riding on this; namely my Father’s medical care and my Mother’s future financial stability. At the end of this project we realized that we could deliver this to the masses; that this service is truly needed; that we can remain true to investors’ goals; and, that we can save them from being someone else’s prey. It is not as profitable to conduct business this way, but it is good for everyone involved; first and foremost, our clients.

Not too long ago, when my husband and I had our own independent firm,  I was approached by an insurance agent who asked me how we handle clients with insurance needs. I mentioned that we advise clients on what type of insurance they need to get, and the amount. He asked me if I had considered getting my insurance license, which I hadn’t. He informed me that if I had that license and didn’t want to sell insurance I could refer all my clients to him, for which I would get a piece of the commission. He estimated he could make me an additional $50,000-$60,000 per year with this arrangement. I know he thought my emphatic “Not interested,” was a Pollyanna response – but we want no part of putting our personal interests ahead of our clients’ needs.
If you are wondering whose side your financial professional is on, go to your statements. The tell-tale signs are easy to spot:

  • Funds with A, B, C, etc. after their names carry higher fees which does not benefit you in any way.
  • Owning annuities in an IRA or other tax-deferred account, such as a 401k or 403b means that you have paid a high expense to have a tax-deferred product in an account that gives you tax-deferral at no charge (think, paying extra to have a belt, when you’re wearing suspenders).
  • Annuities, in general, are very expensive and rarely have I seen this benefit an investor. Occasionally a work-sponsored annuity is paying a very high guaranteed rate – but this is a rare exception.
  • The broker who works for XYZ Company has sold you mainly XYZ funds. Or, the college savings plan (529) you were sold has ties to XYZ in some way.

Investing is like the political campaign process – it’s hard to know what to believe, or what to argue against when you feel like no one is telling the whole story. Unless you are prepared to research and get to the bottom of the issues that are important to you, you will easily be swayed by whoever speaks with more authority on the subject than they may actually possess (your friends, your union, your colleagues, etc.). Until you truly examine the motivation of the person feeding you the information (pride; ego; or worse, profit), it is easy to swing in the breeze while others collect from manipulating you. Now that you have been warned, it is up to you to decide how you want this to end, and who wins your business. Choose wisely.

Skin in the Game

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Today I had the pleasure of meeting with the students at Setauket Elementary School.  I am always impressed with how quickly they can grasp the concept of handling money responsibly, if they are shown the way.  The trouble is, as parents, we are pulled in many directions (as are our children) and  there is always something more fun, exciting or urgent for us to do rather than have a “money lesson.”  But the lessons are all around us, every single day.  If we spend a few minutes to point out some things to our children, they will be the wiser for it.

I proposed to the children that learning about money is like learning to ride a bike.  You can read about it in a book, but ultimately you need to just do it.  In my opinion, the most important step in learning about money is earning it.  At first, the students were a little confused by my opinion, but slowly it dawned on them that money earned is treated differently because a sacrifice of time is involved.  As I pointed out, losing $50 that was a gift is very different from losing $50 earned from 5 hours of shoveling snow.

“Skin in the game” gives kids the stake they need to care long enough to not act impulsively.  If your child wants something desperately (as it is always a desperate emergency) and you tell them they need to contribute to the purchase (or buy it outright) you will find out very quickly just how important this item truly is.

“My money?  Well forget it, then.”  Be prepared to hear this, and often.  If they are determined to earn the money, encourage the effort, but delay the purchase of the item until they have earned it.  Why?  Delayed gratification is an important step in handling money.  Delaying gratification is how savings accumulate;  impulses wait; and cooler heads prevail.

This summer, my husband took this one step further.  Our sons received some gift money that they were prepared to use on sneakers.  I thought $75 was too much to spend, but they were determined to use their own funds.  Tony tempted them with the idea that they should look at buying the stock of the manufacturer of the sneakers or the stock of a company that profits from the sales of these shoes.  If they did the necessary research to make a case for investing in the stock, he would add $25 to their $75 and buy $100 worth of shares for them.  One son jumped all over it and eagerly put together a pros and cons list of why the company may be profitable going forward.  Eventually, our other son didn’t like the idea that his brother would have $100 invested and he would have yet another pair of sneakers that he would soon outgrow.

The next time your child asks you to buy something for the heck of it — take a minute of time not to just buy it, or to quickly snap “No!”; but rather allow your child to earn it or contribute towards the purchase (or purchase an investment instead, and watch it grow).  You will show them that earning things requires sacrifice, if they are up to the task.