Enlightened Financial Planning

Powerful Compounding      September 17th, 2014

Your teenager is in the last month of his or her summer job, and chances are the wages have been collecting in a bank account. What should happen with that money when your child goes back to school?

One possibility is to start a custodial Roth Individual Retirement Account, owned by your teenager. All you need is a custodial account with an adult co-signing (if the teen is under 18). That money can grow for many decades and come out tax-free 30 or 50 years down the road.

How much are we talking about? If the money were to grow at an average rate of 5% a year (which, of course, is not guaranteed, but is in line with long-term averages for a balanced portfolio), then a $5,500 contribution at age 17 would grow to $63,070 by age 67.

If your child continued that habit through college, then the $33,000 saved during those six years (ages 17 – 22) grows to a whopping $336,132 at age 67. Since the $336,132 is a tax free value, the equivalent pretax 401k savings amount using a combined federal/state tax rate of 30%, would amount to $480,000. Quite a nice start to their retirement savings before they even start their full time work career.

Suppose your teen decides to spend some of that summer wage money, or use it for college tuition? Parents and/or grandparents can match whatever Roth contribution the child decides to make, to bring the total back up to $5,500 (annual contributions are limited to lesser of $5,500 or 100% of your teen’s earned income). The money in a Roth or other retirement account doesn’t count toward the Fafsa financial aid form, so you don’t have to worry about compromising the teen’s financial aid eligibility. And having a hefty Roth IRA at retirement might address the possibility that Social Security won’t be around, or as robust, when your kids eventually retire.

Fiduciary vs. Suitability – Why You Should Care      September 3rd, 2014

If you care about you and your family’s financial future, you should care. Doesn’t sound like much of a big deal, but these two words, fiduciary and suitability, are critical to determining the type of care you receive from your trusted financial advisor.  Unfortunately, most people are not aware that a minority of advisors are held to a fiduciary standard while the vast majority of advisors are held to a much lower, suitability standard of care.

Who is held to a Fiduciary standard of care and who to a Suitability standard of care?

Currently, only independent Registered Investment Advisors are required to act in a fiduciary capacity. Brokers or “financial advisors” working for a broker dealer firm or an insurance company are only held to a suitability standard (not a fiduciary standard).  Not sure who’s a broker dealer firm? Two well known firms include Merrill Lynch and Ameriprise.

What is the difference between Fiduciary standard of care vs. Suitability standard of care?

Part of the reason this difference is not well known is that these terms are not easy to describe. And of course, large firms who could afford to spread the word, obviously have no interest in doing so.

Fiduciary standard of care means doing what is best for the client; namely, always putting the client’s interest before the advisors. It also means disclosing any possible conflicts of interest including compensation related to products or referrals.

Suitability standard of care usually means an advisor need only suggest products that are suitable for your objectives, your income level and your age. Also, no disclosure is required for possible conflicts of interest.

Fiduciary vs. Suitability Illustration

Let’s try an everyday example: buying a car. Assume you are looking for a car that costs less than $30,000 and gets over 25 mpg. Those two requirements alone would leave you with a rather long list of cars that would be “suitable” to you. However most of us would do further investigation and consider additional criteria.

For example: Which models have the best safety record? Which ones have the best maintenance/repair history? Which ones have the best resell value? And so on. You work to find a car that does not just meet your basic needs or is “suitable” but one that is “best” for you.

Going one step further, would you feel comfortable making your car buying decision by simply relying on the salesperson representing the car manufacturer? Or, would you feel more comfortable using an independent research organization such as Consumer Reports to help find the best car for you? I think you know the answer. Why not then demand an independent, fiduciary level of care for something of much greater importance, your financial future?

Financial Reform Legislation

The July 2010 Dodd-Frank Financial Reform legislation attempted to deal with the fiduciary issue. The law gave the SEC authority to create rules requiring investment advisors, who provide personalized investment advice about securities, to act in the best interest of their customer. It also allows the SEC to require these advisors to disclose material conflicts of interest and obtain consent from the customer.

Thanks to heavy lobbying by large broker dealer and insurance firms, no action has yet been taken to hold all brokers/advisors to a fiduciary standard of care. It does not appear likely this will happen in the near future. Let’s hope the SEC and Congress do the right thing for consumers by requiring a fiduciary standard for all financial advisors.

In the meantime, ask your current or prospective financial advisor if they will sign a written fiduciary oath requiring them to put your interests first and disclosing any conflicts of interests. If they will not or cannot, ask yourself whose best interest are they working for?


In fairness and following our duty of full disclosure, Clerestory Advisors is an independent Registered Investment Advisory firm in the State of Minnesota and as such holds its advisors to a Fiduciary standard of care for all clients.

Fewer Stocks, Missed Opportunities      August 21st, 2014

Investment pundits and gurus have been pouring over an interesting chart, reproduced here, that was published last year in the Financial Analysts Journal. The chart shows that, despite the recent high returns for stocks, investors, in aggregate, actually held only 37% of their portfolios in stocks at the end of 2012. Follow up research has shown that even with five-year returns of 18% or more since the Great Recession of 2008, that percentage has hardly budged.

If you want to translate these statistics into real money, the research strongly suggests that many people didn’t reap the full benefits of the recent stock market boom, and their portfolios today hold far fewer stocks than in 1959, when the data-set begins.

What’s going on? You can see a few clues from the chart itself. The stock ownership percentage went down dramatically from 1999–when equities made up a near-record 62% of the average investor’s portfolio–to 2002, when the Tech Wreck market decline sent investors scurrying to the sidelines and drove stock allocations below 45%. These timid investors moved back into the market over the next four years, taking their equity allocations above 50%, just in time for the market to crash all over again.

“Twice burned, quite shy” is one explanation for why so many investors have missed out on the strong returns we’ve experienced recently. Many have moved into bonds, which currently make up 57% of the aggregate investor portfolio today.

In addition, an unprecedented number of other investments are competing for space in an investor’s portfolio–certainly more today than in the 1960s or 1980s. Hedge funds and private equity firms now hold 9% of investors’ aggregate portfolios. Gold and commodities have become increasingly popular investments, as have real estate investment trusts.

The markets are impossible to predict, in part because the behavior of people–in aggregate as well as individually–is impossible to predict. But it is possible that the high fees and disappointing returns of hedge funds might cause some investors to rethink some of their more exotic allocations, and any rise in interest rates could startle the investor herd away from their record-high allocation to bonds. One possible future scenario would have the next data point on the chart show a return to stocks. Since higher levels of demand are one engine that drives stock prices higher, we could experience more years of high returns, which could, in turn, bring about one of those cycles that feeds on itself.

Until, of course, the next downturn–which, alas, is also unpredictable. The tragedy is how many people have largely missed out on the recovery returns since 2008. It is the nature of markets that they frighten people off while long-term investors enjoy their best years, and lure people back in as stock prices are just about to go over a cliff. The first part of this unhappy tale seems to have played itself out as usual.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.


A “Guaranteed” Loser      August 13th, 2014

Why would any investment “opportunity” guarantee a negative return to its investors, who happen to be some of the shrewdest minds in the banking industry?

This situation actually exists today–and the story is interesting. The European Central Bank has recently dropped its bank deposit rate to -0.1%. That means that if European based lending institutions invest their assets in the Central Bank’s money fund, they are guaranteed to receive less money when they take it back out again. The fund is a guaranteed loser.

The comparable number in the U.S.–the return offered by the U.S. Federal Reserve to banks that want to park their excess capital in an interest-bearing account–is 0.25%. That isn’t very much, but many banks find it preferable to, for example, giving you a 30-year mortgage at around 4% (current rates, in other words) when the Fed’s own economists expect the Fed Funds rate to reach 4% sometime in the next year or two.  This explains why $4.34 trillion in bank reserves are sitting on the sidelines at a time when our economy sorely needs an investment boost. (You can see a graph of total reserve assets here: http://research.stlouisfed.org/fred2/series/WALCL). And it also explains why people with excellent credit scores are having trouble finding a bank willing to finance their home purchase.

So why has the ECB dropped its own rate below zero? By making it actually painful to park banking reserves, it wants to shake that sleeping money out of its accounts and back where it belongs: into the European economy. The strategy appears to be working; the graph below shows that reserves have dropped–very suddenly, since the announcement–to their lowest point since 2011. This may be the only example in history where billions of dollars were invested in an investment “opportunity” that was absolutely, positively guaranteed to lose money.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and

information for leading practitioners in the financial planning profession.

How to Afford Retirement      August 5th, 2014

What are the factors that you find in those fortunate people who are on track to funding an affordable retirement, vs. those who are not? An ongoing study by a mutual fund organization, drawing on data from 4,100 working adults age 18 to 65, found that the answers might be simpler than we realize.

On average, the study found that households are on track to replace 61% of their preretirement income during retirement–basically living on a little more than half of what they were making before they entered their Golden Years. But the study found that this number (again, on average) jumps to 82% for Americans who are participating in some form of defined contribution (401(k) or 403(b)) pension plan at work, and the average reaches 98%–basically, full lifestyle replacement–for people who are in plans with automatic enrollment and automatic escalation features. The automatic escalation provision takes some of the money that workers receive from future raises and puts it aside in the tax-deferred plan–before that extra money ever hits their checking account.

It is important to note that people earning low wages are replacing those low wages, and high earners are replacing much higher incomes; this study simply talks about replacing the pre-retirement income. But it appears that automated, steady savings over a worker’s lifetime, plus long-term tax-deferral, can have a powerful impact on whether or not people can afford retirement. The study also noted that people who are deferring up to 10% of their total income will (again, on average) actually live better in retirement than before; on average, they will have 111% of their pre-retirement income to spend in their golden years.

By Bob Veres, publisher of Inside Information – the premier publication of financial industry trends and information for leading practitioners in the financial planning profession.