Choose your friends (and advisors) carefully

Robert O. Weagley, PhD, CFP^®

Fiduciary is defined in Wikipedia as the highest standard of care in law. A fiduciary is expected to be extremely loyal to the person to whom he owes the duty (that is, the beneficiary): he must not put his personal interests before the duty, and must not profit from his position as a fiduciary, unless the principal consents. This seems simple enough. When in the context of your finances, a financial professional should put you first and not profit from being a fiduciary without your consent.

When I read investorwords.com, fiduciary was defined as an individual, corporation, or an association who holds assets for another party, often with the legal authority and duty to make decisions regarding financial matters on behalf of the other party.

The CFP Board of Standards is responsible for the behavior of CFP® professionals. CFP professionals are financial planners who provide services to the public to help them reach their financial goals. The CFP Board has recently raised the definition of the expected performance of a financial planner from the current duty of "act in the interest of the client" to the higher standard of the "duty of care of a fiduciary," defined as acting "in the best interest of the client."

When we talk about the financial marketplace, how do we know a fiduciary if we see one? Many argue that only those that are fee-only financial planners, with no vested interest in product sales, can be a fiduciary. Others disagree and believe that those who work on commission can work in the best interest of their clients. What matters to you is, “How can you be sure your financial professional, or other person you’re doing business with, has your “best interest” at the heart of their relationship with you?”

According the CFP Board of Standards, following these steps is a good place to start:

a) What is their experience? How long have they practiced? Who have they worked for?

b) What are their qualifications? Remember, the word financial planner is overused. Ask them what makes them qualified. Are they a recognized as a certified financial planner^TM? What are their specialties?

c) What are their services? They must be licensed to sell you products but they can provide investment advice, if they are a registered investment advisor. Some financial advisors only offer advice and no financial products, while others may limit their advice to certain areas.

d) How are they compensated? Some are salaried, with payment coming from an established relationship with another institution. Some charge hourly fees, a flat rate for a service, or a fee that is based as a percentage of your assets that they manage for you.

e) What is their approach to financial planning? Do they work with others that are similar to you? Do they prefer to put together a comprehensive, holistic financial plan for you or are they more comfortable working on a part of your financial picture? Be sure to make sure your advisor’s approach to risk is not to far afield from yours.

f) Who is on the team? Will the financial planner be the only person you work with or will it entail others, in specific areas of expertise? If the planner uses outside sources of expertise, it is a good idea to check out the background of these other team members. (As the client, think of yourself as the owner of an NFL team and the planner as your general manager who hires “players” to work for you. Since they are the ones that “play in the game”, they are important.)

g) How much does the advisor typically charge? Get an estimate of what are the common charges for a comprehensive financial plan or an estimate of the costs of what you need done, based on past work. If s/he charges commissions, make sure you understand how s/he is compensated as a percentage of the price of products you might buy.

h) Are there others that might benefit from the advisors relationship with you? Will these relationships affect his ability to put your “best interests” first? You can remember stories about how some securities firms have been found guilty to have sold products to customers only because that product had the best monetary reward to them. That is not in your “best interest”.

i) Have they ever been prosecuted for ethical or legal violations? If the answer to this is anything other than “NO”, then make like a tree and LEAVE.

j) Will they put these answers in writing? Do they have a written client engagement agreement?

To help you with this choice in the management of your financial success, the CFP Board of Standards has a questionnaire on their website to help you collect information from the financial professionals you interview. (Remember, you own the team. They work for you. So act like an owner and take control of your future, as well as your team. When you get to the Super Bowl, give me a call!)

- Robert O. Weagley, Ph.D., CFP^(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Pay off your mortgage? Look at more than just numbers

In financial planning, the first answer to most questions is, “It depends.” And as frustrating as it is for folks to hear, it’s the truest initial answer for most situations. It’s not the final answer—ultimately there is a "Yes" or "No" that makes sense for the individual. But when it comes to money questions, there's usually a lot more gray in the answers than black-and-white. And much of that gray is created by an individual's financial spirit, as well as situation.

Logic versus spirit
For example, you might come to me for advice and ask, “Should I pay off my mortgage?” Personally, I'd like to be able to spend money on something else other than a mortgage payment and have the security of a paid-off home. I’m willing to forego other things in the near-term, such as replacing an out-of-fashion suit for work or enjoying a night out with my wife, to pay additional principal on the mortgage balance each month.

But we’re not talking about me, we’re talking about you. You go on to tell me that your mortgage has a fairly low interest rate of 6%. Wouldn’t it make sense, you ask, to pay the minimum amount of principal on the mortgage each month, and use any additional money to invest in the stock market, which over the long term has grown on average 10% per year?

At face value, your question is financial and logical: If you borrow money at 6% and invest it at 10%, aren’t you making 4%? On a deeper level, though, it’s spiritual: Should you pay off cheap debt when you can conceivably make more money over the long run by investing it?

Align your strategy and goals
Naturally, my initial answer would be, "It depends." But it doesn't depend on whether stocks will earn more than your 6% interest rate, which may be what you want me to focus on. It depends on why you're asking the question in the first place.

For example, you might want a wealthier lifestyle in retirement that requires you to save a substantial amount between now and then. In that case, directing extra money to the stock mutual funds in your 401(k) plan or IRA can make sense. Or being completely debt-free might be extremely important to you, in which case paying extra on the mortgage would be a good approach.

Stop thinking the right answer has to do with just numbers, where the stock market is going or not going. The right answer is the one that best aligns your strategy with your goals and values--essentially, your financial spirit. Get in the habit of answering questions that way, and you'll improve the odds of having financial success.

But really, just pay it off
In actuality, the answer to the money aspect of mortgage question is fairly black-and-white: Pay it off. Financially speaking, the amount you could gain from the excess return of investing in stocks doesn’t justify the high risk, when compared with the certainty of having a paid-off home.

If you’re making good progress on other financial goals, like retirement or college savings, and still have money left over, paying down your mortgage is a smart choice. The real question to ask yourself is, do you think it’s smart, given what you're trying to achieve?

Step Right Up, Get Your Scholarship Here!

Robert O. Weagley, Ph.D., CFP^®

It is the time of year that students are being sent opportunities to apply for college, trade association, fraternal, or other scholarships. These are great to have in good times and, perhaps, golden to receive at times when the economy seems to be on her death bed. First, I want to encourage readers to look for the opportunities to market your potential to as many responsible scholarships as possible. It is the case, however, that scams exist in the scholarship arena and I ask you to proceed with caution. Perhaps, when is the economy is dragging its knuckles, like the current economy, and indiscriminately bullying everyone on Main Street and Wall Street, we become more susceptible to scams and opportunities to for so called “help”.

Scholarship Scams

· Beware of scholarship offers that require an application fee, however small. Scammers can call thousands of people in a short period of time and collect thousands of dollars in fees. These scholarships, if any, can be small and funded by those very fees – while the scammers make off with the gold.

· Be wary of any offer, including scholarships, that indicate that you’ve won a prize (scholarship). This is particularly true if they require you to pay a fee to receive the scholarship.

· Doesn’t it sound good that, if you pay a company $20 to $30 in the form of an application fee, they will “search their extensive database of scholarships” and find one that fits your profile? You pay the money, submit the questionnaire, and you never hear from them again or, if you do receive a list, the list is worthless.

· Informational seminars for possible scholarships can be very helpful. They can, however, be illegitimate. If they “sell” anything at these seminars be suspicious.

· Lenders who “cold-call” with offers of below market interest rate loans, with the requirement that you pay a fee to receive the loan.

Tips

· Do your homework.

· If you have suspicions, check out scholarship sources with the Federal Trade Commission, the Federal Reserve Bank, or your Attorney General. Report problems as soon as you suspect that you, or a friend, have been ripped-off.

· Get a second opinion about scholarship offers from guidance counselors, your financial aid office, or other public sources of information.

· If an offer seems to be too high-pressure or “too-good-to-be-true” and you feel uncomfortable, do not make a decision. If the source is legitimate, you will be able to contact them at a later date. If it is not legitimate, you’ve still got your money!

· Keep records of contacts by people offering opportunities that seem to be “too-good-to-be-true”. Take notes. Keep a record of phone numbers, email addresses, URLs, and whatever else you think might be useful to a prosecutor.

To Do:

· If you’re interested in looking for scholarships start with your academic institution.

· Visit your guidance counselor, your financial aid office, or a bank/credit union for help.

· Learn more about financial aid at https://webmail.um.umsystem.edu/exchweb/bin/redir.asp?URL=http://www.studentaid.ed.gov, https://webmail.um.umsystem.edu/exchweb/bin/redir.asp?URL=http://www.ed.gov/finaid, https://webmail.um.umsystem.edu/exchweb/bin/redir.asp?URL=http://www.collegeboard.com, or https://webmail.um.umsystem.edu/exchweb/bin/redir.asp?URL=http://www.finaid.org.

Today’s economy makes the benefits of an education even more pronounced. Education is an investment that will very likely pay a positive return. No one, moreover, can take that investment away from you. As such, look for financial help, seek legitimate scholarships and other sources of financial assistance to help you reach your educational goals. They are important. Perform your due diligence (i.e., learn everything you can about the scholarship), however, in the same way you would seek information about an investment or a new car. Be thorough. Remember, financial success rarely arrives on the doorstep of Mr. or Ms. Dupe and, if it does, it doesn’t stay long.

¹Many of the ideas for this article were inspired upon a visit to Tigers Credit Union on the campus of the University of Missouri. Tigers Credit Union is one of four student run credit unions in the United States. It has been helping students finance their needs and protect their money, since 1984.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Back with a new mission

I'm back. Did you miss me? Or maybe even more telling, did you even realize I was gone? (Don't answer that.)

It's been nearly a year since my last post, but I've used the time away well. In fact, by the grace of God, my life's gone through a big change. Instead of writing blog posts this past year, I used the time studying to get my Series 7 and Series 66 licenses, and to pass the very tough CERTIFIED FINANCIAL PLANNER (tm) comprehensive exam. Today, I'm no longer writing about personal finance and investing; I'm working with individual clients and advising them as an official financial planner.

I've been three months on the job and I love it, which is saying something given the financial state of mind of people today. I started advising on October 7, less than a week before the Dow Jones plummeted 11% in a single day. If I can love this job after advising clients in what's been the worst financial meltdown in 80 years, I'm guessing it was a pretty good career choice.

A cool revelation
And this brief time in my new role has helped confirm something in my mind. Financial success comes down to this: You are how you manage your money.

Plenty of books, blogs, videos, etc. exist on how to build an investment portfolio, how to save, how to spend wisely, what vehicles to invest in to reach your financial goals. But I'm realizing more and more that you can know everything there is about stocks and bonds, savings accounts and 401(k)s, and still make poor decisions that leave you poorer.

When it comes to money, the most important thing to understand is you. How you act. How you think. What motivates you, what deflates you. Only by discerning the inner-workings of your own mind, and particularly your spirit, can you effectively create a sensible financial plan. You have to know what fits, what doesn’t, and then what that means in the financial vehicles and strategies you use to pursue your own goals.

It's really what I love about my job, getting to know people, helping them to know themselves, and then applying those findings to their investments . Much to my surprise (and thrill!), being a financial planner is as much about helping people understand themselves as it is about understanding correlation coefficients, betas, and other complex math formulas (which make me say yuck! as much as any non-financial person).

My new mission
And that's what I'm hoping to bring you here at The Coin Jar: Ways to help you think about who you are, how you relate to money, and how you can use those findings to achieve success. It'll be a journey we go on together, because I'm applying these ways in my own life today, as I've written about in the past, and will continue to do so.

So please forgive the lengthy absence. I hope we both find it ultimately rewarding.

Recession: What, me worry?

By Jeffrey Miller and Robert O. Weagley, Ph.D., CFP^®

I had a conversation with an individual the other day about the current recession. During this conversation they asked an interesting question, “How does a recession really affect me?” This is an interesting question and made me think about how many people really don’t know the definition of a recession and how it will affect them. So with this financial tip, I would like to take the time to define a recession and how it affects the average person in three ways: Employment, Retirement, and Career. Your job is to take this information and use it to make choices to reduce the effect of recessions on you. You can improve your financial success with a greater understanding of the world in which we live.

Definition- A recession is a significant decline in economic activity spread across the economy that lasts more than a few months. Declines are visible in real Gross Domestic Product (GDP), real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its lowest point, the trough. Between trough and peak, the economy is in an expansion. Expansion is the “good” state of the economy and most recessions, however “bad”, are brief. Both expansion and recession are normal to economic cycles, although they are hard to predict/prevent. (It is easy, however, to blame others for their existence.) Most recessions primarily exist in a single nation or a group of nations that are economically dependent. Unfortunately, the current recession is world-wide and, thus, more uncertainty exists. (National Bureau of Economic Research)

Employment:

The way employment and unemployment rates are affected by a recession is simple. When the economy slows down, companies sell less, leading them to produce less with fewer workers. As a result, unemployment rates increase. For example; in October 2007, the unemployment rate was 5.4% with 8.9 million Americans unemployed. A year later, October 2008, the unemployment rate was 6.5% with 10.1 million Americans unemployed. This means that 1.2 million more Americans were looking for work last October than one year earlier. So, how does a recession affect you? One answer is simple; you may lose your job.

When people lose their jobs, State and Federal governments lose tax revenues and the effect of greater unemployment expands to be shared by others. Unabated, unemployment creates a downward spiral in the economy until faith in the economy is restored, productivity increases lead to income gains, and expansion begins anew.

Retirement:

When a recession hits, try not to retire. Ask someone 55, or older, how much they have lost in assets over the past few months. Most will probably not answer you but, if they do, it will be somewhere between 30% and 40% of their retirement investments. When people plan for retirement most have an idea of the standard of living they would like to maintain in retirement. So, if we assume they had a plan that was fully implemented and on target, that plan is now 30% to 40% below the target. Retirement goals are directly tied to markets. When a recession hits and stock and asset prices fall, individuals’ retirement incomes are forced to decrease, leading to a decrease in their level of living. Many will chose to work longer instead of accepting this reality. Doing this is a great idea for, mathematically, it reduces the years in which you will need retirement income. (Perhaps, your parents are in this situation. Talk to them about how they feel and what choices they are making as they are facing retirement.

Career:

If you are a college student getting ready to graduate, continue with school until graduation. Then, when you graduate, do what you can to set yourself apart from others. Employment may not be as easy for you to find, as it has been in past years. A student of mine described it as trying to eat with 9 starving people at a table set for 5. All one can hope for is good luck and to try to not get shoved under the table. Importantly, your choices with respect to internships, grades, extracurricular activities, and references will matter more, compared to time periods when everyone is fighting for today’s graduates. When you find a job, you may take a job with a lower starting salary than if you had graduated during an expanding economy and you may take longer to climb the corporate ladder. This slower income growth reduces your lifetime earnings, as well as your immediate cash flow. (Remember, some older employees will not be leaving as planned.)

Not only will it be harder to get a job, but pay raises and bonus are likely to be smaller and you are more likely to change jobs in search of better pay or benefits. According to the National Bureau of Economic Research, it can take 10 years or more to rebound from the losses incurred from a “recession job” with a lower starting salary

Forewarned is forearmed. You cannot control the recession. You can only control how the recession controls you. The financial tip this week is to ask you to understand what choices you can make to reduce the recession’s effect on you. Financial Success is as much about attitudes and understanding as it is about money.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Blatantly Self Serving

For the academic world, the time has come for another semester. For those of us that work in personal finance curriculums, this moment in time is challenging, as well as important, to teach individuals what they need to know to achieve financial success. People are seeking financial education in increasing numbers and, since we’re in the business of education, I want to be blatantly self-serving and inform our readership of the opportunities that exist at the University of Missouri to empower citizens for spring 2009. For those of you that live outside of Missouri, please continue reading and think about how you can implement similar ideas or provide feedback on how we can improve our programming.

I. Resident Courses

a. Personal Financial Planning 1183: Financial Survival (1 credit), Tuesdays 2:00-2:50, 18 Tucker Hall. Examines financial management issues needed to survive the critical college years. Specifically designed for freshmen and sophomores, the course focuses on topics such as credit use/abuse, credit cards, budgeting/planning, financial aid, educational loans, common financial mistakes of students, setting financial goals, and effective use of financial resources. Graded on pass/fail basis only.

b. Personal Financial Planning 2183: Personal and Family Finance (3 credits, math reasoning proficiency approved), Monday, Wednesdays, and Fridays at either 10:00 or 11:00 a.m. in Engineering Building West. Individual and family finance, with particular emphasis on financial planning issues, time-value of money applications, savings, insurance, investments, taxes, use of credit, and financial aspects of housing. This course provides the best overview of the issues related to personal financial planning. Prerequisites: MATH 1100/1120 (College Algebra) with grade of C or above, and sophomore or above standing. Math Reasoning Proficiency Course.

c. Personal Financial Planning 4483: Financial Success (1 credit), Thursdays 2:00-2:50, 18 Tucker. Examines financial management issues needed to survive the critical post-college years - managing educational debt; after-school budgeting; auto, health, and other forms of insurance; purchasing a home, employee benefits, retirement planning and other investment issues; setting financial goals; effective use of financial resources. Graded on pass/fail basis only.

II. MoTax

a. MoTax is a personal tax preparation service, provided through the cooperation of the Office for Financial Success, the Personal Financial Planning Department, and Missouri Extension. Beginning on February 3, PFP students, certified by the IRS, will begin to provide free Voluntary Income Tax Assistance to households with incomes under $45,000 and without complicated tax issues (e.g., sale of livestock). The service is offered most evenings, as well as Saturday mornings, in the Office for Financial Success (62 Stanley Hall). If you are in other parts of Missouri, several sites are provided by Missouri Extension. Please go to http://extension.missouri.edu/hes/taxed/vitasites.htm for more information. For those of you that are not in Missouri, call 1-800-829-1040 to determine the location of VITA services in your area. Last year, our cooperative service resulted in tax preparation savings of around $350,000 for Missouri residents, as well as $2,900,000 in tax refunds.

III. Office for Financial Success programming

a. Financial Counseling – The Office for Financial Success provides FREE financial counseling for MU students. Non-MU students must pay a fee of $50 per hour. Appointments made at http://pfp.missouri.edu/financial/schedule.htm .

b. Financial Education Workshops – Through the Office for Financial Success, Personal Financial Planning engages in providing educational workshops for the campus and the larger Columbia community. Workshop inquiries should be made at http://pfp.missouri.edu/financial/workshop.htm .

c. Teacher Support – Through our new association with the Missouri Council on Economic Education and our support of the National Endowment for Financial Education, we work closely with Missouri teachers. The goal is to help our teachers provide the best education to our Missouri youth, through the now high school graduation, required personal finance course. Our plan is to conduct workshops for regional teachers, as well as to send advisors to schools to work directly with teachers. Importantly, we wish to engage our students in working with students in Missouri high schools, as youth tend to listen to youth a little differently than the listen to us with color-challenged hair.

Well, that is about as self-serving as I can be. Our doors are open to each of you with respect to our teaching and service on behalf of Missourians. We do our best to take the money we receive from both the state of Missouri and Missouri students and to multiply that money through our efforts in economic development for Missouri, through financial education. We have a passionate focus on personal financial management; for we know that it can lead to financial success.

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211

Financial Resolutions for 2009

Several resolutions were sent to me by our readership over the past week. The list follows and it contains some good ideas for positive financial change. The ability to change exists in everyone. (I will admit to doing some editorial work. My comments are in parentheses.)

1) Increase my efforts at work to enable me to keep my job.

2) Invest in myself. Get the most from my past investments in myself or use this time when the economy is sluggish to add to my human capital, either through furthering my education or exercise.

3) Cut credit card debt and track my spending to make sure that what I buy supports my goals. (Update your net-worth statement to see if you are making progress. Making investment gains during 2008, with traditional investments, has been difficult for everyone.)

4) Write down my goals, as a starting point for financial success. (Try to write down dollar amounts and the point in time you wish to achieve each goal. Then, monitor your progress.)

5) Use things I have instead of replacing them - just because I want something different. Eat more leftovers.

6) Saving through my checkbook. The plan is to round up the cost of things I purchase to the nearest five dollars. At the end of the year, the total sum saved will be a gift to myself. For example, if I purchase an item for $3.36, I will record it in my checkbook as $5.00. If I spend $42.15, I round it up to $45.00. Then, on December 1, 2009, I plan to take all of the money that I have saved throughout the year in my checkbook, and do something nice for myself. (Editor’s suggestion: make sure these savings are working for you and not just sitting there without earning interest, while you wait for your “Being Nice to Me” Day.)

7) Begin to make small, semi-monthly payments to index mutual funds throughout the year. I plan a long-term strategy of investing in the stock market, by having $100 a month go into a diversified set of mutual funds. (Try to put your maximum deposit into your retirement account, as well as establish an emergency fund.)

8) Check the expense ratios of my mutual funds to make sure I’m not paying too much for too little.

9) Look hard at major expenses and, if I can defer them to a later date, defer them. Keep driving my old car, while I save for a newer model.

10) Find things in my budget that I can live without. Examples might be: reduce the number of times I dine out, reduce the level of my cable television subscription to those channels I really watch, and/or purchase lattes only on special occasions. (Mondays through Fridays are not typically “special occasions”.

11) Take a hard look at my risk tolerance. Has the past year changed my tolerance for risk? If so, make changes in my lifestyle and investments in order to reflect my true values.

12) Reduce my use of my parents’ money for things that I want and try to limit my expenditures to things that I need. (Sent by a student.)

While far from exhaustive, this is a pretty good list of actions we can consider, as we begin 2009. I found this quote by Epicurus (BC 341-270), “Do not spoil what you have by desiring what you have not, remember that what you now have was once among the things you only hoped for.” Sounds like a good guide for living a life of financial success, regardless of who has the most toys!

HAPPY NEW YEAR!

- Robert O. Weagley, Ph.D., CFP(r)

Chair, Personal Financial Planning

University of Missouri

Columbia, MO 65211