Advisors aim to rein in risk-hungry clients

By: Andrew Osterland, Special to CNBC.com, March 19, 2014

Stocks are about the only thing that people don’t want to buy on sale,” said Mark Cortazzo, certified financial planner and senior partner at MACRO Consulting Group. “Back in 2009, when the environment was a lot less risky than today, people didn’t want to take risk. Now, when there’s much more risk in the market, people want to take on more risk,” he said. “It’s counterintuitive.”It’s a function of human nature that people prefer taking risk when they see others being rewarded for doing so. The behavior holds particularly true when it comes to the stock market.

And it is potentially catastrophic to your investment portfolio, financial advisors say.

With the S&P 500 index up more than 30 percent last year—having nearly tripled since bottoming out in May 2009—risk in the stock market has risen dramatically in the last five years. Plenty of individual investors, however, are eager to either get into the market—if they feel they’ve missed the boat—or let the good times roll despite the mounting risk of an arguably overdue correction in the market.

“A market run like this is a bit like financial pornography. It’s shiny and distracting,” Cortazzo said.

“People might be able to achieve their wants by being more aggressive, but they also risk not being able to meet their financial needs,” he added. “I try to put these things in perspective for them.”

Financial advisors, as a rule, are all about providing perspective, and most are trying to talk their more aggressive clients out of increasing risk levels in hopes of capturing higher returns.

Tim Maurer, certified financial planner and director of personal finance at the BAM Alliance, has some advice for investors who rode the U.S. stock market up last year with a heavy exposure to domestic stocks: Congratulate yourself and take some money off the table.

“I remind them that you almost never get 30 percent annual returns back to back in a market,” Maurer said. While he isn’t necessarily expecting a big decline in the market, Maurer reminds clients that the last 15 years have been among the most volatile in the history of the market.

“Very few people, no matter how aggressive they are, can comfortably endure a 50 percent decline in their investment portfolio,” he said.

Like virtually all financial planners, Maurer believes in the value of a diversified investment portfolio. While investors were not rewarded for diversifying last year—as a wide swath of the bond market posted negative returns, and U.S. stocks significantly outperformed most other equity markets around the world—the long-term value of diversification remains intact, he said.

Maurer never recommends a portfolio of 100 percent stocks; if investors insist on investing only in equities, he advises them to at least diversify within the asset class.

“Small-cap and international stocks might be more volatile than large-cap domestic stocks, but adding them into the mix for an investor only in large-cap domestic stocks can reduce overall volatility in their portfolio,” he said.

Ric Edelman, who runs one of the largest registered investment advisor firms in the country, takes a hard line with clients looking to chase higher returns.

“We have a strict policy with clients,” said Edelman, chairman and CEO of Edelman Financial Services. “If they come to us with investment ideas and expect us to act on them, the relationship is over.

“I’m not Burger King,” he added. “If you become a client, you don’t get it your way.”

Edelman suggested that advisors who cater to clients’ gut feelings about the market are doing them no favors.

“It’s not serving the client’s best interests [and] will result in higher turnover, higher costs, greater risks and, ultimately, lower returns,” he said. “I change allocations for clients because of a change in their financial circumstances—not because of what’s happening in the market.”

When stock indexes are posting 30 percent returns in a year, the job of keeping clients’ expectations reasonable gets all the more difficult. “At the beginning of last year, most people would have taken a guaranteed 10 percent return, and now they’re disappointed if they had a 15 percent return,” Cortazzo said. “It’s the behavioral science aspect of this.”

Cortazzo continues to advise all his clients—including the most aggressive—to stick to their financial plans, regardless of how they view the markets. The downside of dialing up the risk when markets are hot can be painful.

“It comes back to realizing how this can affect your life,” he said. “People have to understand what chasing higher rates of return can mean to their financial security and achieving their goals.”


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


What States have the highest and lowest income taxes?


If you hate paying taxes, pay attention to where you live. Residents of the nation’s lowest-tax states pay less than one-quarter of the levies contributed by those in the highest-tax states. And that’s even when they earn the same amount and spend the same amount on everything from housing to beer, according to an analysis by personal finance site WalletHub.

The site looked at 10 different taxes, from property and state and local income taxes to those on vehicles, food, alcohol, fuel, telecommunications and sales. The total tax hit was based on a hypothetical individual earning $65,596, with a $174,600 home, a $17,547 car and who spends a set amount — the national average — on everything from groceries to gas.

The result: This individual pays $9,718 in state and regional tax levies if he lives in New York. That’s nearly 15 percent of his income. But he pays just $2,364, less than 4 percent of gross income, if he lives in Wyoming.

It’s worth noting that the WalletHub study differs from other research on the highest tax states because it does not factor in average wages in the various states. The Tax Foundation, for example, also does a ranking of highest tax states. But it attempts to gauge the average tax hit by using state-specific wages. This analysis holds wages and spending constant, allowing Americans to consider just how much or little they’d pay if they picked up their current lifestyle and moved a few states away.

Under this analysis, a resident of Connecticut would see that if he moved across the border into Rhode Island — and had no change in income, housing or spending — he’d save $2,195 annually in taxes alone. A Californian moving across the border to Nevada, meanwhile, would save $6,139.

10 states with the lowest average annual tax burden:

1. Wyoming, $2,365
2. Alaska, $2,791
3. Nevada, $3,370
4. Florida, $3,648
5. South Dakota, $3,766
6. Washington (state), $3,823
7. Texas, $5,193
8. Delaware, $5,195
9. North Dakota, $5,588
10. New Mexico, $5,822

10 states with the highest average annual tax burden:

1. New York, $9,718
2. California, $9,509
3. Nebraska, $9,450
4. Connecticut, $9,099
5. Illinois, $9,006
6. Wisconsin, $8,975
7. Vermont, $8,838
8. New Jersey, $8,830
9. Iowa, $8,788
10. Maine, $8,622


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


How Side Income Helps You in Retirement

In addition to the financial security, side income often provides social and personal benefits for retirees.


By David Ning US News and World Report, March 19, 2014

Continuing to earn income is probably the last thing you want to do in retirement. But a freelance side business is a great way to spend time in retirement. There are many benefits of working in retirement, even if you don’t need the money:

Managing business activities keeps you active and engaged. It’s extremely easy to start sitting around once you are no longer forced to get out and about every day. Some people manage fine, but many retirees start to lose the spring in their step a few years into retirement. A side income can keep you feeling productive and energized throughout your golden years, which is good for your physical and mental health. At the very least, you will have an interesting response if someone asks you, “What do you do all day?”

Extra income can reduce anxiety. Even if the math says you have enough saved, the future is unpredictable. You may be spending so little relative to your assets that every retirement calculator says you’ll be fine throughout retirement, but it’s hard to imagine not feeling nervous if another crash like the great recession trashes portfolio values again. Obviously, side income won’t completely eliminate financial worries,but every dollar you bring in is going to make you more comfortable.

Save on taxes. A side business allows you to deduct many expenses on your tax return. The income you earn also gives you the ability to contribute money to tax-advantaged accounts, which will further reduce your tax bill either now or in retirement.

Keep your skills current. Continuing to work makes it much easier to jump back into the workforce if you get nervous about the market and believe you will need full-time income in the future. It’s not easy to find employment at an advanced age if you’ve been out of the workforce for years, but a resume entry about being the founder of a small business sounds much better. If your business takes off you may even be able to expand your side business to replace your former full-time income if you need to.

Beginning to earn a side income can be difficult, and generally involves planning, work, skill and luck. But the Internet has opened up a huge window to make at least a small side income. You’ve spent decades accumulating skills and experience. Leverage this to make a little extra cash in retirement.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


What Widows Should About Know About Financial Advisors

Experts recommend taking these steps to make the inevitable time of transition easier.

After losing a spouse, women tend to stick with their financial advisors.

By Joanne Cleaver, US News and World Report, March 20, 2014

Women tend to stick with their financial plans, and, it seems, stick with their financial planners, even after losing a spouse.

A survey of women, one set in their 40s, the other age 67 and older (baby boomers were not included), which was sponsored by Russell Investments, found that 78 percent of the younger women and 93 percent of the older women believed they would continue with their current financial advisors if they became widows.

This expectation tests the truism that the newly bereaved should wait a full year before making any big decisions, including selling their homes, moving, making career changes and plunging into new relationships.

Jaylene Howard, consulting director for Russell’s U.S. advisor-sold business, says the findings indicate women are more personally invested in their relationships with advisors than in past years. Before the global financial crisis of 2008, women tended to ride their husbands’ coattails in conversations with advisors. Now, she says, they are more assertive and take the view that they and their spouses each have a relationship with the advisor.

The advisors who retain widows are those who have considered both spouses as clients right from the start, says Kathleen Burns Kingsbury, author of “How to Give Financial Advice to Couples,” and consultant to financial planners. “They are the ones who have provided the couple what they need, based on his needs and her needs,” Kingsbury says. “If the advisor has helped the couple navigate difficult times in their lives, then he has a firm relationship with that widow to help her in her time of transition.”

The Russell survey found that what women want most from an advisor is active listening skills. If you are currently dissatisfied with your advisor, now’s the time to switch, Kingsbury says, so that you have a solid working relationship when the unexpected occurs. “A skilled advisor can ask questions about what would your life look like. What would your expectations be, if you were widowed?” she says. “It’s the responsibility of the advisor to develop a relationship with both spouses.”

And it’s the responsibility of each spouse to speak up in meetings and voice his or her financial priorities. The Russell survey found that 27 percent of midlife women and 36 percent of retired women felt their advisors really understood the scope of their financial goals. Those who thought their advisors understood them were much more likely to expect to stick with that advisor.

Meanwhile, experts recommend taking several steps in advance to make the inevitable time of transition easier.

“There should be a system or plan in case of the unexpected or expected death,” Howard says, “and processes in place to carry out when you probably can’t make rational decisions.”

Advisors agree that both spouses should know how to find and activate:

  • The will
  • Insurance policies
  • Social Security benefits
  • Trusts
  • Financial accounts
  • Passwords and access information to accounts

Pam Villarreal, a senior fellow with the National Center for Policy Analysis, says as the fog of grieving starts to clear, widows can build a new context for their financial decisions that reinforces their new independence.

The first step she recommends is to benchmark the portfolio’s performance against norms for the key investment categories. “There’s no point in changing if things are going well,” she says. One important point of research is to understand exactly how all advisors and agents make money from the relationship so you can understand at least some of the motivations for any recommended changes.

Choosing a financial companion is a powerful proactive step in advance of an expected death, such as that of an elderly or terminally ill spouse. Introduce adult children to the financial advisor to build rapport. Agree on which adult children will accompany you to the first meetings with the advisor after the death.

The first couple of meetings should concentrate on just a few essential decisions, and the companion’s role is to note the to-do list. Difficulty concentrating is a normal part of the grieving process, Kingsbury notes, so it is critical to have another set of ears in that meeting.

“This is not a time to be technical. It’s a time to take things slow,” Kingsbury says. “If you feel overwhelmed, be prepared to assert your boundaries.”

Experts agree that couples intuitively avoid wading into the topic of survival benefits and subsequent financial resources and expectations. But the reality is actually “a relief,” Kingsbury says. “When you do talk about it, you find out some interesting things about your partner and about how the financial advisor can help, and it makes you feel as comfortable as you can be with the fact that someday you may be sitting in this office alone.”


To Your Successful Retirement!

Michael Ginsberg, JD, CFP®