Passive VS. Active Account Management:

Ever since the inception of the first “index fund” – a fund that tracks a particular index, such as the SPY ETF that seeks returns equal to the returns from the S&P 500 index – the debate over “active” versus “passive” asset management continues to rage on. 

“Active management” refers to any portfolio management strategy in which the manager “makes specific investments with the goal of outperforming an investment benchmark index.”

Picking individual stocks, for example, represents “active management.”

“Passive management,” on the other hand, refers to investment strategies that seek to match a particular stock or bond index – the idea being that by investing directly in index funds, trading costs are minimized, and there is essentially no risk of “underperforming” relative to the corresponding.

Many financial advisors take a stance on this issue, and there are compelling arguments on both sides.

On the passive management side, proponents point out that, “Over the last ten years, 82% of all money managers in the large-cap universe under-perform the market averages.”

Several advisors that support passive management believe that picking individual stocks, or investing in actively-managed mutual funds, is futile; they cite the relatively high management costs that come with actively managed investments, as well as the fact that approximately half of all mutual funds do not outperform their respective benchmark every year.

On the “actively managed” side, advisors will point out that, “the returns of funds with well-known managers that have outperformed the market significantly, and may argue that there are inefficiencies in the market that make certain stocks more appealing than others.”

They may also point to the recent recession, during which “passively managed” funds typically plummeted.

So how does one choose between “active” and “passive” financial advisors?

1) First of all, costs and fees are very important; even if a certain fund outperforms the market consistently, it most likely charges high fees that aren’t reflected in its return figures.

2) Secondly, the line between the two camps doesn’t have to be absolute; financial advisors may invest directly in indexes (passive investing), as well as picking individual stocks and funds as well.

Asking a potential advisor about his or her view on this topic is always a useful indicator of their investment philosophy and strategy.

We hope this helped.  Thanks for visiting AllFinancialAdvisors.com

 
There is an ongoing debate in the securities industry about the extent to which insurance agents are qualified (and should be sought out) to provide investment advice.

Because of products like annuities – which are financial products that accept investors’ money in exchange for securing a steady future (or immediate) cash flow, and are often used for retirement saving – fast-talking insurance agents have been known to blur the lines between financial advisory and insurance.

While annuities can be an excellent addition to any investor’s retirement plan, let’s face it – insurance is a business driven by sales commissions.  Insurance agents are definitely NOT financial advisors. 

Insurance agents will often tout and/or promote the insurance products that charge the highest fees and generate the greatest sales commissions – NOT products that an independent advisor would likely recommended, especially if those financial advisors are bound by a fiduciary duty and are seeking the best interest of their clients.

So when making your retirement decisions, or if you’re considering purchasing an annuity product, we recommend you work with independent financial advisors whose primary goal is to protect and grow your wealth.

While insurance or annuities may be a part of your financial plan or investment portfolio, your finances and retirement planning should not be left to an insurance salesman.

In addition to investment expertise, and ideally objective advice, financial advisors will be able to advise you on the most appropriate insurance or annuity products, and can often provide insight regarding those products that are safest and have the lowest fees.

We also recommend choosing 2-3 financial advisors to interview before selecting one to work with.  This will allow you to see the various expertise each advisor has and give you choices to base this very important decision on.  A decision that will most likely be one of the major ‘partnering’ decisions in your retirement years… 

We hope this helps!  Thanks.  The AllFinancialAdvisors.com team.

Getting Started and Taking a Step Back: Financial Planning

In our world of ubiquitous financial information, it is easy to get caught up in short-term trends when thinking about our money:
* What are the hottest stocks?
* Which mutual fund managers have the best performance this year?
* What is Jim Cramer telling me to sell today?
* What is Suze Orman telling me to do this week?

However, turning your hard-earned cash into more cash is only the tip of the iceberg. 

Knowing how to manage and budget your spending, income and saving is crucial, and in the long run trumps returns of any size.  This is where financial planning comes in. 

Think of stars like M.C. Hammer, Michael Jackson, and Mike Tyson.  Each of these individuals made tens (if not hundreds) of millions of dollars, and had access to high-end investment solutions – yet managed to wind up broke and bankrupt before the middle age of 40.  Why? Because of a lack of financial planning!

Contrary to popular belief, the easiest way to become rich is not to start a company or win the lottery, but instead to start saving from an early age and create a financial plan that maximizes tax efficiency and suits your lifestyle needs.

If you begin saving for retirement at 25, putting away $2,500 per year, you will have an astonishing $700,000 by age 65 (assuming annual growth of 8%).  By contrast, if you put away $2,500 per year, but wait until age 35 to start, you will have only $306,000 by age 65 (assuming the same growth rate). That is the magic of compounding and saving – or as Warren Buffet likes to call it, the “snowball” effect.

So… instead of chasing the latest financial trend, start by choosing a financial planner or a financial advisor who provides this service.

Financial advisors or a financial planner will examine your situation individually, create a customized financial plan, and help you achieve the future you desire.  Financial planners typically charge an hourly or fixed fee for their services; some financial advisors offer financial planning solutions in-house as well. 

Don’t expect this kind of personalized help and service from a mutual fund!

NOTE: Experts recommend contacting 2-3 financial advisors or financial planning firms, in order for an individual to contrast and compare each financial advisor or firm; thus making the best-qualified choice for their unique situation.

AllFinancialAdvisors.com is an online resource of financial advisors, financial planners and wealth managers.  It is a independent 3rd party directory of Registered Investment Advisors (RIAs) managed by FINRA and the SEC (United States Securities and Exchange Commission).

Financial Advisor Accountability and Incentives: Performance-Based Fees

Performance-based fees have always been a staple of the hedge fund industry, providing wealthy investors with the comfort of knowing that their money managers have a personal incentive to outperform the market.

The famous “two-and-twenty” fee structure refers to hedge fund managers taking 2% of assets under management as a base fee, and in addition taking 20% of all returns that exceed or outperform a given benchmark (such as the S&P 500) or a “high water mark”  (the highest net asset value previously seen at the end of the fiscal year). 

Mutual funds and financial advisors, for the most part, do not embrace the performance-based fee structure, and simply take a fixed fee based upon clients’ assets under management [AUM] – meaning they charge the same fee regardless of whether their fund (or investment) tanks or beats the market.

Given the obvious and mutually beneficial value of employing such a fee structure, more and more investors are seeking out financial advisors and investment advisors that offer performance-based fees.

Why shouldn’t ordinary investors be able to invest the way the wealthy do?

After all, there is a certain feeling of injustice in knowing that your financial advisor or money manager is raking in the same amount of fees win or lose. Performance-based fees help ensure that your financial advisor is sharing the profit – and the pain – of the investments they are making on your behalf.

While performance-based fees appeal to all investors seeking a financial advisor, there are currently restrictions on what types of investors can be charged such fees.

Under the Advisers Act of 1940 (the Advisers Act), RIAs (Registered Investment Advisors, which include most financial advisers) can only charge performance-based fees to “Qualified Clients.”

“Qualified Clients” are currently defined (under Rule 205-3) as clients who have assets under management with the RIA of $750,000 or more, and clients who have a net worth of $1.5 million or more.

However, as the demand for performance-based fees increases among investors of all types, we can expect that in the future, performance-based fee investments may become available to a wider range of investors.

We hope this helps.  Let us know. 
Thanks — The All Financial Advisors Team

 
Financial advisors have varied educational backgrounds, work experiences, and specializations.  Finding the right financial advisor, wealth manager, money manager and/or financial planner takes the right research. 

It requires Trust in the source. 

We are an independent 3rd party database of high-quality financial advisors and financial planning firms and if you have noticed… there is NO advertising on this directory.  That’s not what we are about.  We are about helping our consumer base find the best financial advice for their particular situation.  That’s you!

Every person has uniqueness to their financial landscape along with their unique goals.  Financial advisors gain credentials in a wide variety of specialized areas in order to serve their client’s specific needs.  We feature select financial planning professionals, wealth managers and financial advisors across the US from which to choose. 

The AllFinancialAdvisors directory is a “matching service”  so that consumers and investors alike can find the right match for their unique situation.

It’s really easy.  Just Start by entering your Zip Code.

NOTE: Experts recommend contacting 2-3 financial advisors or financial planning firms, in order for an individual to contrast and compare each financial advisor or firm; thus making the best-qualified choice for their unique situation. 

This online resource of financial advisors is a directory of independent, Registered Investment Advisors (RIAs) managed by FINRA and the SEC (United States Securities and Exchange Commission).

Many of the financial planners within our directory explain how their financial planning process works within their profiles.  Our financial advisors take fiduciary oaths and pledge to uphold the highest standard of ethics. 

After reviewing their profile pages, you can request more detailed information, their fee schedule and/or a meeting.   You can have us make that match if you prefer.

Many of our advisors are members of the National Association of Personal Financial Advisors (NAPFA: the nation’s leading organization promoting Fee-Only comprehensive financial planning) and the Financial Planning Association (FPA).

Excerpts written by Ara Oghoorian, CFA: ACap Asset Management
(Beverly Hills, CA).

If you’re like most Americans, ringing in the New Year also means resolving to change old habits, or start new ones. Year after year, getting one’s personal finances in order consistently ranks as one of the top 5 New Years resolutions.  As with any resolution, the hard part is not making the promise, but actually putting it into action – consistently.   

Monitor Your Credit Rating / Credit Scores
A good credit score is the single most important factor in getting a bank loan to buy a home or a car, among many other things. Therefore, it is crucial to check your credit report; one overlooked mistake can cause havoc when you least expect it. Under current laws, you are entitled to a free copy of your credit report each year. Put a reminder on your calendar to check your credit every January.

Put Your 401K and Other Savings on Auto-pilot
If your employer has a 401k (403b, 457, etc.) plan, contribute the maximum amount while still maintaining a manageable lifestyle.  If you have maxed out your 401k and can still save some more, open either a Roth IRA (if you qualify) or a non-deductible IRA and contribute any additional savings. While your current income is finite, your future needs are infinite. If you would like to save for your child’s college education, only do so after you have saved for your own retirement. As I tell my clients, you can always borrow for college, but you can never borrow for retirement.

Pay Off Credit Cards
If you carry a balance on one or more credit cards, select the one with the highest interest rate and begin aggressively paying down the balance. If you can only make the minimum payments on your credit cards, begin cutting non-essential monthly expenses to devote more funds to paying off the debt.

Meet with a Fee-Only Financial Advisor
You don’t need to be a millionaire to benefit from working with a competent financial advisor.  A Fee-Only financial advisor can help you: identify or sharpen your financial goals; develop a detailed written plan to help keep you on track; identify an appropriate asset allocation that is commensurate with your circumstances; minimize your taxes; and most importantly, put your plan into action and provide you with detailed updates.  A Fee-Only financial advisor is like a doctor for your finances.

SUMMARY: Executing on all four (4) of these steps and you are certain to see tangible improvements in your financial health.  May your 2011 be a prosperous and healthy year for you and your family.
***

AllFinancialAdvisors.com: Many of our advisors are members of the National Association of Personal Financial Advisors (NAPFA: the nation’s leading organization promoting Fee-Only comprehensive financial planning) and the Financial Planning Association (FPA).  Using the services of a qualified financial advisor and/or Wealth Manager (to help you identify the strengths and weaknesses in your financial picture) will ensure you can retire comfortably!  NOTE: Experts recommend contacting 2-3 financial advisory firms, so that one may compare/contrast each firm, thus making the best-qualified choice.

Financial planning is not much different for military families than it is for civilians, but there are some areas where service members and their families should take care — particularly if they’re likely to be deployed.

Fortunately, there are some fantastic resources (and many knowledgeable financial advisors) available to help with the big three: Saving, debt reduction and building wealth over time.

The military handles estate planning and group life insurance exceedingly well. If there’s a chance you’ll be deployed, make sure you max out the service member group life insurance that’s available to you. It’s not expensive, and it will give you peace of mind while you’re away from home for an extended period of time.

You’ve probably heard of the emergency fund. Now is the time to create one for your family. You should have at least six months’ expenses saved, but if you’re going to be deployed, be as aggressive as possible with your savings.

Keep a secure file with all your financial information in it, including account numbers, monthly bills, insurance policies, etc., and make sure your spouse knows where it is in case you’re deployed.

There are some fantastic financial resources available to you as a member of the military, and we encourage you to look into them. SaveandInvest.org is a free project of the Financial Industry Regulatory Authority (FINRA) Investor Education Foundation; 50% of the site is solely for service members and their families. You can go there for free, unbiased information and get answers to your questions about saving and investing.

MilitarySaves.org is another solid resource. It, too, is non-profit; it’s operated by the Consumer Federation of America and sponsored by the FINRA Investor Education Foundation. MilitarySaves.org is dedicated to helping you save, reduce debt and build wealth over time. The site has an impressive list of resources to help you with financial planning.

If you’re not comfortable handling your finances alone, if you don’t have time to take on financial planning, or if you’d just like some additional guidance, look through the All Financial Advisors database to find a financial advisor who’s experienced in working with military families.  You can also read our blog post about questions to ask when evaluating financial advisors and read through the All Financial Advisors FAQ to get a better feel for what financial advisors do and how to choose a financial advisor.

And finally, thank you for your service to our country.

401K and 403(b) Plans Explained

Company sponsored retirement plans, such as the 401K, are becoming an increasingly important component of the retirement planning process.

Has your current financial advisor explained to you the various components of your 401(K) or 403(b) plan?

401(K) plans are one of the most common retirement plan types. A 401K plan offers eligible employees an opportunity to establish an investment account and allows the employer to deposit funds deducted from employee paychecks. Once deposited into the account most plans offer a variety of money management choices such as mutual funds, stocks, bonds, and cash. At the employers discretion a plan can operate pre-tax as a Traditional 401K or post-tax as a Roth 401K.

Additionally, employers have the option to make contributions into employee accounts in the form of matching contributions (for active participants only) or non-elective contributions (all eligible employees receive same contribution).

Collectively, these contributions can add up to a substantial amount and creates a tremendous amount of tax savings.

Just to clarify, a 403(b) plan is also a qualified retirement plan that is offered to employees of hospitals, higher-education institutions, and non-profit companies and organizations.  Each 403(b) plan can be compared to various 401(K) plans, because they share similar characteristics: i.e. contribution limitations, various tax exempt rules, withdrawal penalties, and investment alternatives.

It is highly recommended to conduct an annual review [at the very least] of your company’s retirement plan with your financial advisor or financial planning firm — to learn how to get the most out of your plan.

Thanks for visiting AllFinancialAdvisors.com & we hope this article helped.

Investing With A Conscience: Faith-Based And Socially Conscious Investing

If you want to put your money where your ideals are, you’re not alone: More people than ever are following their consciences and their faith when it comes to investing.

In fact, socially conscious and faith-based investing currently accounts for a little over 10% of the U.S. investment marketplace.

The prospect of following through on your commitment can be daunting, though. Where do you start? How do you know which companies are in line with your ethics–and which ones are supporting, either directly or indirectly, activities that conflict with your beliefs?

Begin by evaluating every company, mutual fund and portfolio that catches your interest as a potential investment.  You’ll want to look for things they’re doing that are in line with your values, as well as for things they’re doing (or not doing) that conflict with your beliefs. For example, do they own any part of any operation that is harmful or oppressive to vulnerable populations (or to anyone, for that matter)?  Do they support clean technology and conflict-free goods? Look at their financials and see where their money goes.  When they’ve met your criteria, look for one more thing: Are they profitable?

There are other ways to invest in a brighter future.

You might also consider community investing, where you can invest capital in small businesses that serve low-income populations; in businesses and individuals in communities that are not well served by the financial services sector; and in community banks as an alternative to large, multinational banks. You can even choose to take part in making micro-loans available to start-up businesses in developing countries through organizations like FINCA® International.

If you’re solely interested in supporting companies and investments that do not conflict with the basic tenets of your faith, the process is basically the same as outlined above for social investing. In your due diligence, check to make sure a company and its supply chain do not invest in or support any activities that are in opposition to your beliefs. Because so many people today want to invest in line with their faith, there are a wide range of faith-based financial advisors, mutual funds and money managers to choose from. As with socially conscious investments, make sure your faith-based investments are profitable and offer the degree of risk acceptable to you.

Socially conscious and faith-based investing is a rewarding way to grow your portfolio.  It takes additional effort though, and only you can determine is it worth it!  Most people who go this route say: “YES IT IS!”

By choosing to put your money into companies that live up to your ideals, you’re helping to make the world a better place.   And that’s not such a bad reason to invest.

Setting Your Financial Goals

Goals are the foundation of your financial plan!  Without knowing exactly where you want to go, you can’t take any action.  Setting financial goals gives you a destination, and your financial advisor can help you get there.

If you’ve never set financial goals, good news: It’s not a mystical, complex process. In fact, it’s fairly simple.  Still, to start with, devote a generous amount of time to sitting down by yourself, with your spouse or significant other and thoughtfully talking about exactly where you hope to go in life.

When considering your goals, think about what you want to accomplish short-term (up to one year), mid-term (one to three years), and long-term (five or more years out).

Short-term goals might include, for example, paying down smaller debts, establishing an emergency fund, or saving for a vacation.  Mid-term goals might include saving for a child’s orthodontia or a new car, starting a business, or paying off bills. Long-term goals could include saving for college and paying off a mortgage.  The goals are all yours, so take a close look at your life today and dream about where you want to be in the future.

As you’re coming up with goals, write them down.  Don’t worry about the order for now; just get them all, from the smallest to the largest, on paper.

Once you’re sure you have all your goals written down, it’s time to prioritize.  Decide which ones are the most important and which of the short- and mid-term goals need to happen in order for you to reach your longer-term goals.  If they seem too big and lofty, break them down into smaller, more realistic steps, and prioritize those.

Next, figure out how much money each goal will take.  This step may look daunting, but don’t get discouraged.  Remember, your goals are only the first step to creating a comprehensive financial plan that will allow you to reach them.

You’ll also want to realistically calculate how much time each goal will take to achieve.  Give yourself plenty of time for each one: You don’t want to underestimate how long it will take you to reach your very first goal and feel defeated early on.

Will you need to change any habits or behaviors to reach your goals?  Many people will.  Write those down, too.

Then comes the good part:  Work with a financial advisor to come up with a plan to achieve your goals.  This will be your roadmap.  Review it regularly (at least twice per year) to make sure you are still on track. As you begin reaching some of your short-term and mid-term goals, revisit your goals and your plan. Life inevitably changes, and a good financial advisor will help you keep your plan flexible and workable.  Best wishes!