What makes a “fee-only advisor” different?

Written by Kevin Jacobs on May 31, 2010 in Annuities, broken arrow, Economics, fee based, fee only, Financial Education, financial planner, Financial Planning, Investing, Oklahoma, Security, Tulsa - No Comments

I am frequently asked:  what is a “fee-only advisor” and why should I work with one?  First, a fee-only advisor’s compensation comes directly from the client.  The advisor does not receive any commissions or referral fees from selling financial products (such as annuities, insurance or investments).  A fee-only advisor may receive compensation from assets under management, retainer fees or an hourly rate.  I focus the majority of my business on retainer fees.

In contrast, a “fee-based” advisor receives compensation from both charging a fee for completing a financial plan and from commissions on the products recommended as part of the “implementation strategy.”  Many times the financial plan is offered at severe discount.  Their real profit comes from selling you the products they recommend.  Their belief is that by charging you a fee for their “objective” advice you are more likely to “implement” the strategies they recommend.

A commission-only advisor makes his compensation strictly from selling you financial products that have a “load” or commission attached to them.  In my humble opinion, I tend to trust “commission-only” advisors more then “fee-based” advisors because you know they are only getting paid from what you buy from them and they do not have any ulterior motive in offering you a “plan.”

I personally believe each of these advisors has a place in the financial service industry.  However, the main thing I ask from each one of them is to disclose to the client how they are going to get paid.  The main reason why you should work with a fee-only advisor is they can give you objective, unbiased financial advice free from the potential conflict of interest inherent in product sales.  Yes, the fee-only advisor is still selling to you, although the “product” he is selling is an education and trustworthy advice.

When it comes to your money follow this common sense rule:  “When you know how your advisor is getting paid you will know who he is really working for!”

You may find this article from Money Magazine interesting:  http://money.cnn.com/2007/09/27/pf/planner_advice.moneymag/index.htm

Revisiting Financial Security

Written by Kevin Jacobs on April 5, 2010 in Economics, Financial Education, Investing, Motivational, Security, Tax Planning - No Comments

When I first started this blog, I wrote an entry about defining and achieving financial security.  As I talk to more and more people about their experiences over the last 18 months during what the popular culture has called the “Great Recession,” I am witnessing some common themes of concern:

1.  The stock market is up considerably since its low in March of 2009, but how do we know it won’t “crash” again tomorrow? We don’t know! It used to be common knowledge and belief that you knew you would have some ups and downs in your investments, but in the long run you would achieve profits by investing in market.  From the conversations I have had with many people, it seems like there is this general sense they are waiting for the “next shoe to drop.”  It reminds me of the weeks and months after 9-11 where I was glued to the cable news networks waiting to hear about the next terrorist attack.  I sense an underlying fear in most individuals and business owners.  They are waiting to see how everything works itself out.  The danger of this view is that you become a market timer and try to “guess” what your latest stock holdings and the economy as a whole will do.  The danger is you get so consumed with things you can’t do anything about and fail to make a difference in your life and the lives of those you care about the most.

2.  What will higher taxes do to my future plans? I have been hearing this one especially since the passing of the health reform bill.  There is a general confusion of what is and what is not in the legislation and I think people are skeptical of what may happen to their individual tax situation in the future.  For the clients I work with, I tell them there is one thing for sure:  their taxes will go up!  How much their taxes will go up we do not know yet.  I tell them it is important we continue to plan and make the best tax and financial planning decisions we can at the time with the information available to us.

3.  How do I know I have reached financial security? I hear this quite often.  An individual may also say, “how do I know I will not run out of money?”  These are important questions to address no matter what the economy and the stock market are doing.  Where many people fail in their quest to achieve financial security is they fail to define what financial security is for themselves and instead they allow the “talking-heads” on TV or the magazine covers to define it for them.  Until you define what is most important to you and lay out a plan to achieve it, you will never reach financial security.

So these are some of the concerns people have right now is these difficult times, however, with all the chaos it is important to remember you are in control of your situation more then you believe.  You need to control the things you can, such as how much you save, how much you spend and what you invest in and let everything else take care of itself.

Cash is King!

Written by Kevin Jacobs on January 20, 2010 in Financial Education, Investing, Security - No Comments

One of the greatest risks that I see in a lot of people’s financial portfolios is that they do not have enough cash.  My business serves a wide range of individuals and families and I get to review their financial life from an objective perspective.  I have found some couples, who even after the market downturn in the fall of 2008, still have not learned the value of having “ready cash” and “emergency cash.”  I think some people believe that an “emergency” will not happen to them so why should they keep so much in cash.  My job as a financial planner is to recommend to them what I believe is in their best interest.

I am not against investing and taking risk.  However, I am against investing and taking risk before you are ready.  I do not care how young you are; if you do not have proper cash set aside in the event of an emergency you should not be investing in the stock market.

In my recommendations to clients, I follow a few basic principles that I learned from Bert Whitehead, the founder of the Alliance of Cambridge Advisors.  First, if you are a W-2 employee, you should keep a minimum of 10% of your income in a interest-bearing savings account.  I call this the “ready cash” account.  If you are self-employed or retired you will want to keep a larger percentage of your income in “ready cash.”  Next, I recommend you keep 2 times your “ready cash” inside of your 401k or Traditional IRA* invested inside of a money market or government-backed fund.  However, if 20% of your mortgage balance is higher then 2 times your “ready cash” then you will want to set aside that amount instead.  I know this may seem like a lot of cash but the best feeling your financial plan can offer you is security and if you know you have proper amounts of cash in your portfolio then you have the freedom to take appropriate risk in other areas of your investment portfolio.

*I can hear it already.   You might be asking why I recommend to keep emergency cash inside of a 401k or Traditional IRA.  Well, let’s just save the answer to that question for a later blog entry.

Control the Things You Can

Written by Kevin Jacobs on January 18, 2010 in Financial Education, Security - No Comments

“Control the Things You Can” was written by Tedd Oyler, a member of the Alliance of Cambridge Advisors who practices in Saugatuck, Michigan.  This article was originally published as the second part of a series on how to do a financial check-up.

The lament of the powerless goes something like this: “It doesn’t matter how hard I work–the bills just keep piling up; the stock market and the cost of living are killing me; the politicians are ruining everything.”  You may have had these, or similar, thoughts before.  This is sad, for it is unnecessary to feel like you have no control over your financial future.

Our information culture offers a range of financial data and “advice,” ostensibly to help you take control of your financial life.  Perhaps you listen to daily (or even hourly) market reports.
Perhaps you are concerned that the Fed is changing interest rates.
Perhaps you care about the pundits’ predictions as to what the economy will do over the next quarter, or year, as if what they think matters.  Perhaps you even read books on investing, and there are certainly enough of those.  If we take seriously the notion that we can do something about our financial health, and if we acknowledge that money is but a tool that we can learn to master, then we are ready to look at what things we CAN control in our financial lives.

Read more…

Your Greatest Asset: Yourself!

Written by Kevin Jacobs on August 26, 2009 in Motivational, Security - 1 Comment

What do you think of when you think of your greatest asset?  You may think of your home, investment accounts, vehicles or a family heirloom.  In reality, you have an asset that is far greater than any of the aforementioned items.  The greatest asset you have is yourself and the ability you have to earn an income.

When I worked for a commission-based financial advising firm, we would lead with the first question above to begin the long-term disability sales process.  We have insurance for all of these tangible assets (house, vehicles, etc) but many times we do not have any or we are completely ignoring the need to have insurance on our future income earnings.  I want to look at this question a little differently now, though.  I want to look at the “cap” you may be putting on your future income and future well-being at this very moment.

I work with many entrepreneurs and the successful ones have something in common.  They realize that their income and ultimate success is contingent upon their ability to create something of value and then market that item or service so others will pay for it.  I see a lot of people who have comfortable “jobs” working for someone else are putting a “cap” on their potential earnings.  If you are working for someone else, you are allowing them to tell you what your value is to the company or organization.  If you think you need a raise, what you are really saying is that your services are “undervalued.”  I used to think I would only be able to make XX amount of dollars in my previous career.  The thing I soon realized is that my self-esteem and the value I was giving myself was based on someone else telling me what I was worth.  It was not until I looked at my situation objectively that I realized I could provide tremendous value to others and be compensated fairly for it.

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To Keep or Not to Keep?

Written by Kevin Jacobs on August 19, 2009 in Security - 1 Comment

I was asked by a friend recently to post a blog about what financial documents to keep and which ones not to keep.  She said every month she finds herself at a dilemma of what to keep, to shred or to recycle.  With this blog, I hope to give you some suggestions of how to sort through the pile of papers sitting somewhere in your house right now.

My first suggestion is to buy a durable shredder (do not buy a cheap one or you will regret it).  The majority of the financial papers you receive will need to be shredded.  If it has any type of personal data or information on it the rule is SHRED IT!

Second, get yourself a box near your work space that you can throw all of the magazines and newspapers that don’t need to be shredded into a recycle box.  (Here in Broken Arrow, OK we have paper recycle dumpsters all over town which makes it easy to recycle newspaper and magazines).

Next, you will want to go to www.homefile.com (site is down as I write this blog) and purchase their Financial Planning Organizer Kit.  (I give this to my new clients and we have a meeting where I specifically teach them how to use it.)  This kit is awesome and you will not regret purchasing it, especially if you are a “piler” when it comes to your financial papers.  In our house, I have implemented this system and my wife and I now call it the “love box.”  It has that name because it is an act of love to your spouse or loved ones in the event something devastating were to happen to you.  Let’s say you do not make it home from work today, who in your family knows where all your important papers and documents are located?  If you love them, you will put these documents together for them.  (If you don’t even know, how will anyone else know?)  The Financial Planning Organizer Kit will show what important papers to keep, where to keep them and for how long.  (Unless you have a special attachment to them, you do not need to keep your tax returns for over 20 years like one of my clients has done.)

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Five Fundamentals of Fiscal Fitness

Written by Kevin Jacobs on July 23, 2009 in Security - No Comments

As written in Bert Whitehead’s book Why Smart People Do Stupid Things with Money, here are five fundamentals of fiscal fitness we should all follow:

1.  Save a minimum of 10% of your gross income.

2.  Have adequate cash (10% of income) and emergency reserves (20% of your income or 20% of mortgage balance).

3.  Buy house 2-2 1/2 times income.

4.  Fund available retirement plans as much as possible.

5.  Pay off all consumer and credit debt.

How would you rate yourself on these “fundamentals?”  If you ever want to become “financiallly independent,” then you need to be doing these “fundamentals.”

To Refinance or Not

Written by Kevin Jacobs on July 21, 2009 in Home Buying, Security - No Comments

I was recently asked if I could comment on the feasibility of refinancing.  I thought my response to that question would make for a good blog entry.  Keep in mind my answer will just barely approach the subject and that it is important that you have someone look over the exact facts of your situation to evaluate if you should refinance or not.  I strongly recommend working with a fee-only financial advisor before you meet with a mortgage broker.  A fee-only advisor can be your advocate and help you to better understand if refinancing is right for your individual needs.  A mortgage broker will only benefit from your business if they actually “sell” you the refinance.  Why not get an objective opinion before you move on to meeting with the commissioned salesperson?

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A Frugal Mom’s Definition of Financial Security

Written by Virginia Nolen on June 12, 2009 in Security - No Comments

Written By:  Virginia Nolen, Author of the blog 1184 Square Feet of Bliss

SECURITY

–noun

1.

freedom from danger, risk, etc.; safety.

2.

freedom from care, anxiety, or doubt; well-founded confidence.

3.

something that secures or makes safe; protection; defense.

4.

freedom from financial cares

(courtesy of www.dictionary.com)

Financial security means to me freedom from the prospect of total financial ruin. It means that if my husband loses his job (us being a one income household and intending to stay that way), we’ll be okay until he finds another good one, even if that takes a year. Financial security means that I don’t have to worry whether or not all the bills will get paid this month. It means that I don’t stress about money. Financial security is a happy place! For me, it is knowing that without a doubt, barring a total breakdown of the American banking system, we’re going to be okay.

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What is Financial Security?

Written by Kevin Jacobs on May 31, 2009 in Security - No Comments

I have noticed a trend over the last year with people I have spoken to about their financial situation.  The common theme I keep hearing is safety and security.  Because of this trend, our firm has decided to promote this theme throughout all of the literature we give to prospective and current clients.  It is the theme of financial security!

I think people have been very humbled over the last year.  A paradigm shift has and is occurring and people want to know that everything is going to be okay.  The financial philosophies they used to old true have changed (or they have perceived them to have changed).  The financial professionals and/ or politicians they thought would help them have at many times only made their situation worse.  It is my opinion that people have been forced to take a step back and reevaluate all they thought to be true, especially in regards to their financial life, because of the failure of so many financial institutions, corporations and the government itself.

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