As we approach year-end, we should take a moment to consider retirement planning. I urge my self-employed readers to start a retirement plan if one is not already in place. Depending on your current circumstance, a cash balance pension plan (type of defined benefit plan) or a SIMPLE IRA (type of tax deferred employer-provided plan) might be suitable for you. I will discuss both of these (and other retirement vehicles) in future posts. For this entry, however, I'd like to focus on two popular and available options for the self-employed; the SEP IRA and the solo 401(k).
The SEP IRA A Simplified Employee Pension Individual Retirement Arrangement (otherwise known as the SEP IRA), is typically adopted by business owners who seek to provide retirement benefits for the business owners and their employees.
The Solo 401(k) A Solo 401(k), which is also known as a Self Employed or Individual 401(k), is a retirement savings vehicle designed specifically for employers with no full-time employees other than the business owners and their respective spouses. A key element of this particular type of plan is that it covers only the business owners and their spouses, thus not subjecting the 401(k) plan to complex ERISA (The Employee Retirement Income Security Act of 1974) rules.
So how do you choose between the two options? Consider cash flow
Consider timing
Consider features
Best regards, Jason M. Gilbert, CPA/PFS, CFF T: 516-665-1940 E: jason@rgaia.com
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I've discussed the various compensation models that financial advisors use. An understanding of these models is clearly helpful when trying to select an advisor or create your personal finance team, but what about the true impact to you and your portfolio's performance? Do you feel that you have a clear sense of what your investment costs amount to? Are you using a full-service broker or insurance agent to help you invest? If so, you're almost certainly paying too much.
Let's examine mutual funds. These funds are used heavily by large brokerage firms because of the high fees that are generated by them and the ease in which brokers can allocate client accounts. Most broker-sold mutual funds come with a variety of commissions and fee's that are often overlooked by the client. With exception of the trading costs which are listed on your brokerage statement, these other fees are not reflected seperately on the brokerage statement. As a result, many investors are clueless as to the true amount they are spending. Here are some of the most common additional mutual-fund fees: Front-end loads: These are commissions to investment intermediaries as sales commissions upon the purchase of the mutual fund. These sales charges are not part of a mutual fund's operating expenses. In mutual funds with separate classes of shares, these fees are found within Class A shares. Back-end loads: These sales charges are used with mutual funds that have share classes, and are assessed upon sale of the mutual fund. These commissions are paid to a financial intermediary as a sales commission, and like front-end loads are not included in a fund's operating expenses. In mutual funds with separate classes of shares, these fees are found within Class B shares. Level-loads: These sales charges are not assessed at purchase or sale, but rather applied annually as a fixed percentage of a mutual fund's average net assets. Unlike front-end and back-end sales charges, these 12b-1 fees are included in a fund's operating expenses, and are present in class C shares of a mutual funds that have separate classes of shares. 12(b)1 fees: The annual marketing or distribution fee of a mutual fund paid as a reward to selling fund shares. There are many critics of these particular fees as it is currently believed that commissions paid to salespersons have nothing to do with enhancing the performance of the fund -- the initial premise for the creation of this type of fee. Management and administrative fees: to compensate the funds investment advisor for investment portfolio management and administrative fees not included in the funds' "other expenses" category. Trading costs: the cost of buying and selling securities through your broker. These fees can range significantly from broker to broker. While I like to give advisors the benefit of the doubt, I am constantly surprised that most stockbrokers, so called 'wealth advisors'/'financial advisors' with large brokerage firms, and insurance salespersons are unable to provide clients with a clear picture of how much they are paying in total investment costs. I suspect that the reason these individuals are unable to provide such detail is that they probably don't know the answer, and may not have the adequate information information accessible to provide an reasonable response. To calculate the true investment costs paid, one would need to review the investment prospectus for every product in a portfolio, calculate the total cost for each, add sales fees based on each transaction in the account, and then include the asset-management fee charged separately (and usually on a quarterly basis). All of these fees seriously degrade your investment performance. Take an initial $10,000 investment in a mutual fund that has an 8% annual return on investment, a front-end sales charge of 3% and annual operating expenses of 1.25%. Lets say that you pay a $60 commission to purchase the fund and you pay your wealth manager 1% of assets under management, per annum, for investment management services. So, you would pay $300 in commission to purchase the fund and operating expenses of $131 throughout the year. At the end of the first year, assuming an 8% return on investment, you would be left with an account value of $10,345. But we didn't deduct the $60 transaction charge nor the $100 in annual advisory fees paid on this particular account. The net result is $10,185 or a 1.85% return on invested capital. I'm pretty sure we can all think of better ways to generate 1.85% on our money without giving away over 6% of our 'theoretically earned return' to do so. The math gets even worse when you consider that transactions costs, as well as investment management fees are generally deducted in advance (quarterly, in advance, for investment management fees). Mutual fund fees are likely only one of the myriad of ways you are overpaying, however. Have you purchased whole-life insurance policies or annuities with their incredibly high mortality expenses and surrender penalties? What about wrap fees? The list goes on and I'll certainly tackle these items in a future post. So how do you invest with more prudence? For starters, I'm not suggesting that all mutual funds are bad, in fact many of them perform quite well. Be sure to review prospectuses carefully and fully understand how fees are being assessed. If you are managing you own money, look for low cost funds. Vanguard offers funds with an average expense ratio of 0.19%, or 83% less than the industry average of 1.11% (source), and do not come with 12(b)1 fees. If you are looking for more professional guidance and a customized and tactical approach to fit your needs, be sure to work with an independent and fee-only investment advisor who will be sure to keep your portfolio low-cost and true to its intent. Best regards, Jason M. Gilbert CPA/PFS, CFF T: 516-665-1940 E: jason@rgaia.com What do highly successful people have in common? Many of their shared traits have been well documented, as have their behaviors and routines. We've heard of some: waking up early, adhering to a calendar, and making sure to fit in time for exercise. However, what about the activities we don’t read about? I have had the unique luxury of working with some extremely successful individuals in my advisory business and I've observed the evolution ‘the personal finance team,’ as a relatively new and powerful planning strategy. So what is a personal finance team, and why is it so important to highly successful people?
What is a personal finance team? A personal finance team is a small group of professionals who work in collaboration to advise on both business and personal affairs. This group consists of, at a minimum, a financial advisor, a CPA, and often an attorney. Occasionally, a personal mentor or business coach is added to the team. So why build a personal finance team? Centralize expertise A personal finance team can centralize all financial decision-making and provide an efficient and effective way to tackle important issues and keep on track with achieving financial goals. An emphasis on focus In order to stay focused on productivity, highly successful individuals have come to rely on their personal finance teams to handle critically important financial decisions in their absence. A comprehensive viewpoint = better decision-making A personal finance team provides for a comprehensive and holistic understanding of financial circumstance which in turn leads to far better decision-making. Just imagine the value you could derive by having your CPA and financial advisor sit down to discuss a financial strategy for you. An increased sense of control Many highly successful individuals are naturally control centric. They have high conviction in their own abilities, and they find it difficult to delegate responsibly to others. By building a team of highly skilled and trusted individuals, highly successful people are able to feel more in-control of their financial affairs, and feel that they are making more informed and intelligent decisions. So how does one go about building this all-star team? Understand your circumstance and evaluate your needs A good starting point is to select a CPA and financial advisor. You can always add to this core team based on your needs for, say, an insurance broker. If your starting team is strong, you can always ask them for recommendations. Always use referrals I've come to realize, both professionally and in my own personal capacity, that referrals are best. Ask your family and friends for good recommendations, interview the professionals, and make sure they are a good personal fit. Can you see yourself talking about every-day matters together? If you can relate to your advisors on personal matters, it's like you'll be able to discuss business matters. Find someone who understands business and thinks like a business owner This is a pretty important point as many advisors (especially CPAs) often fall into the trap of thinking like accountants. Make sure your advisors understand the specifics of your business and are able to discuss the continuity of your business plan and risks associated with it. Best regards, Jason M. Gilbert, CPA/PFS, CFF O: 516-665-7800 E: jason@rgaia.com We live in a world where information is easily accessible and relatively inexpensive. In this day and age, we can all be curators of information, research analysts, or self-proclaimed experts on just about any topic. Personal finance and investment recommendations abound, and a simple Google search for "how should I invest my money" uncovers dozens of articles touting the very best way to do so. With all of this information at our disposal, how do we determine what financial advice makes most sense for our own individual needs? Which "author" do we trust with the right combination of stock and bond recommendations for our Roth IRA? And should we seek our professional guidance, or simply implement all this free investment advice ourselves?
These are all loaded questions, and there is no "real" right answer when it comes to information you find on the internet. There are a lot of very qualified professionals and academics who use blogging and other forms of paid authoring as an outlet to explore topics of interest, and even supplement their own income. My suggestion is to read as much as you possibly can. Follow authors on twitter and engage in conversations. Ask questions. This process will not only be educational, but it will help you sift through the vast universe of information in order to weed out salesy and biased publications. The same process should be implemented when searching for a professional advisor. If you're in the market for an advisor, learn as much as you can about them, and weed out those who do not appear to have best interests in mind. Get to know the advisors capabilities, credentials, and affiliations. Read any work they have authored, ask insightful questions about their financial planning approach and investment philosophy, and become familiar with how they are compensated. An advisors fee speaks volumes about the advice you can expect to receive from them. I discussed fees in an earlier post, but here is a more complete breakdown of how advisors get compensated: Commission only: These advisors receive commissions on the sale of financial products (such as mutual fund front-end loads, back-end loads, 12(b)1 fees, and trading charges). Commission and fees: This is called fee-based, and is the most popular form of compensation for advisors. These advisors receive a fee for developing a financial plan and then receive commissions (see above) after selling you insurance and investment products recommended in your financial plan. Salary plus bonuses: These advisors are compensated with a salary plus an incentive that reflects any new business the advisor has brought to the business. These advisors may receive higher bonuses by recommending or selling certain products and services over other options. Fee-only: These advisors provide advice and/or ongoing investment management and are not registered representatives of any financial services company. These advisors have no financial stake in the recommendations they provide to you and they are required to advise only products they believe are in their clients financial best interest. So which compensation model do you think yields the most independent and unbiased investment advice? The clear answer is the one whereby the advisor isn't beholden to commissions, and one in which the fee-structure is clear and transparent. A fee-only advisor is incentivized by increasing the value of his or her client accounts. Most operate with a flat fee-structure that bills against a clients assets under management (AUM). By increasing the base (AUM), a fee-only advisor can generate a higher aggregate fee. This alignment of interest between client and advisor is the cornerstone of a sustainable financial advisory relationship. Be sure to keep it in mind when shopping for a financial advisor. Best regards, Jason M. Gilbert, CPA/PFS, CFF Tel: 516-665-1940 Preparing for the arrival of a new baby is an enormous undertaking; mentally, financially, (and sometimes physically). I am fortunate to work with a number of expectant parents at our advisory firm. While circumstances vary and lifestyle/career changes are inevitable, first-time parents can certainly take proactive steps to plan for the financial undertaking that awaits them. While this post contains a far from an all-inclusive list, it can the provide necessary steps to build a terrific foundation for your growing family.
Get your estate-plan in order! I've spoken about wills before. No one wants to think about their own mortality, let alone sit down and actually have to discuss it. This is the time to do some real planning, however, and the sooner you get it done, the sooner you can stop thinking about it. I suggest consulting an estate-planning attorney to help you prepare a basic will, which should contain a testamentary trust (this is a trust created for the benefit of the child that goes into effect only if both parents die). The key is to actually put a will in place. If the path of least resistance is to prepare it yourself using an online website then go for it. You can always redraft a will with an attorney when your budget allows for it. Buy life insurance: Term life insurance is the least expensive and most prudent way to go. I generally recommend that expectant parents shop for these policies early during their pregnancy (and preferably even before getting pregnant) to avoid postponed decisions by the insurance company. Pregnancies can often be complicated and insurance companies may wish to delay coverage decisions as a result. Be sure shop for a 20 or 30 year policy with fixed premiums that does not require additional medical examinations, and one that carries an option to convert to permanent insurance. Get disability insurance: Disability insurance will pay a portion of your salary for a period of time in the event that you get disabled. It is often overlooked by expectant parents, but certainly worth exploring. Group policies offered through your employer typically cover about 60% of your paycheck. If your employer doesn't offer you disability insurance as part of your benefits package, you can secure it independently but it may expensive. Be sure to review policies carefully to ensure that pregnancy and potential pregnancy-related complications are covered. Go easy on the baby stuff: New parents have a propensity to overspend on baby-stuff, like cribs, strollers, and top of the line baby furniture. These items can easily run into the thousands of dollars. Baby gear, especially those high-end items, have very comparable (and most likely better) equivalents in the market. Baby clothing can almost always be purchased on sale. Subscribe to online mailing lists (most retailers have them) and wait for those 30% coupons to arrive in your inbox, you'll be glad you had that little bit of extra patience. Get that emergency fund in order, then contribute to a 529: The emergency fund is a cornerstone of a sound financial plan. It is even more important now that you are providing for one extra person. You may even wish to maintain 6 months of living expenses (rather than 3) in it. Be sure to have this account fully funded, and then start directing additional monies to a 529 plan. This education saving plan can be opened as soon as you have your baby's social-security number. As long as you use the money for higher education you are not required to pay tax on capital gains. Currently, thirty-three states (plus DC) offer tax deductions on the 529 plan and withdrawals are tax free. Best regards, Jason M. Gilbert, CPA/PFS, CFF Tel: 516-665-7800 Personal financial planning can be a complex process that requires discipline, focus, and patience. That said, it is far from rocket science, and most people can be highly successful in implementing a sustainable plan with the right framework in place. While your circumstance may require some modification to items listed below, I think the following personal finance "best practices" encompass just about all of the financial 'wisdom' one needs to stay on the right financial footing.
Save and invest 20% of your income Many advisors advise that clients save at least 10% of their income. I suggest that my clients strive to save 20% of their income. This increased savings goal provides for some wiggle room in months that have additional and unexpected expenses. The other reason I recommend 20% is that the additional savings made today enables you to harness the power of compounding (i.e. this money is invested and its’ earnings are further reinvested year-over-year). It's far better to save and invest more now then try to catch-up later. Keep at least 3 months living expenses in safekeeping for emergencies This money should be kept in reach and accessible, but ideally far enough away that you do not feel compelled to spend it. By emergencies, I am referring to out of the ordinary events that would put a significant strain on your monthly cash flow (for example, your car breaks down, you endure a flood in your home not covered by insurance, etc.). I recommend that this money be put in a high-interest bearing account that has debit-card access. That way, in the case of an emergency, you don't have to rely on a credit card to cover an unexpected expense. Please refer “6 saving strategies you can start using today” for specific bank recommendations. If you have kids: Draft a will and buy term-life insurance worth 10-20 times your household income Protecting your family should be priority #1, and both a Will and term insurance policy provides for the direction and protection to accomplish this goal. If you don't have adequate funds to hire an attorney (wills can cost anywhere from $1,000 and up), you can use sites such as Legal Zoom to draft your own will using a standard template. Term insurance is inexpensive and will provide the security your dependents need. A healthy individual in their 30’s can secure a $500,000 term policy for less than $350/year. You should plan on shopping for policies that cover anywhere from 10-20 times your household income (so a family with combined income of $100,000 should look for between $1-2MM). I tend to recommend higher amounts of term-insurance coverage as there seems to be a natural break point in how these policies are priced. Each incremental dollar of coverage over $500,000 costs less. For example, say a $500,000 policy costs $325/year, a $1MM policy may only cost $475. Stay away from whole life, universal life, or other forms of permanent insurance. These kinds of policies are more appropriate for estate planning once you have already exploited and maxed out your tax advantaged accounts. Put at least 20% down and always choose a conforming loan Avoid paying Private Mortgage Insurance (PMI), a fee you will incur if you put less than 20% down on a property. Also avoid non-conforming loans, which generally carry higher interest rates, additional upfront fees, and insurance requirements. You will accomplish both of these by purchasing a home you can afford. Pay off high-interest debt first and pay your credit card off each month Revolving high-interest debt is a sure fire way to cramp your cash flow, preclude the ability to save, and ensure that you will be making interests payments for a very long time. The best way to avoid high interest debit is to not spend money that you don't have in the bank. This "golden" rule has proven itself over and over again. Those who master it find themselves on far better financial ground. Pay off that high-interest debit first, avoid using credit for “float”, and pay that credit card balance off in full each month. Max the match on your 401(k) and maximize tax-advantaged saving vehicles like Roth IRAs, SEPs, and 529 accounts As I pointed out in an earlier blog post, a match on your company-sponsored 401(k) is essentially free money and it would be silly to pass it down. You should also take advantage of other saving vehicles provided you are eligible to do so. You should discuss these saving vehicles with your advisor or CPA to determine which (if any) is most appropriate for you. Invest invest invest! But pay attention to fees, avoid actively managed funds, and hire a financial advisor who is committed to the fiduciary standard The key to wealth accumulation is to make constructive use of the money you save regardless of your income. Be smart about how you invest and be keenly aware of fees, which are sure to erode your performance. Vanguard target funds are a good DIY approach if you are just getting started out. If you are at the point where professional insight would be of value, be sure to hire a financial advisor who is committed to the fiduciary standard (please read more about this standard on my earlier blog post: "How to choose the right financial advisor for you"). This list is not meant to be all-inclusive, and your individual circumstance may require some more tactical guidance. Be sure to confer with your financial advisor about your specific needs. If I can be of any assistance, please feel free to contact me. Best regards, Jason M. Gilbert, CPA/PFS, CFF Tel: 516-665-7800 There is no doubt that many of us would like some guidance with our finances. Between our busy work days, personal endeavors, and everything in between, our financial goals often get sidelined. Keeping on track with our broader financial goals, and formulating how to best reach them, sometimes requires the help of a qualified professional. But how do you determine which one is right for you?
Here are a few tips to choose the right financial advisor: Consider Compensation: Financial advising is really a pretty general term that encompasses a wide range of different services and compensation models. Some financial advisors receive their compensation mainly in the form of commissions from products and services they recommend. These individuals act very much like sales agents, and they earn their living by making recommendations based on products they consider "suitable" for you. These advisors generally work for large brokerage houses (think UBS, Morgan Stanley, etc.). Others receive a percentage of the assets that they manage for you (so the better you do, the better they are paid). Still others charge hourly fees, or flat rates. In both cases, these advisors are generally called fee-only, and they typically have more transparent free structures. These advisors generally work independent of a brokerage house, and are often found at a Registered Investment Advisor, such as my firm (RGA Investment Advisors LLC). Of course, there are financial planers who receive compensation from both commissions and fees. These advisors are generally affiliated in some way to a broker dealer, and they may also sell insurance products. The key point is to determine how transparent and forthright an advisor is about disclosing his or her fee, and whether or not you feel comfortable with the idea of paying commissions. While I firmly believe that fee-only advisor maintains a compensation program that is more aligned with that of the interests of his or her client, there are certainly very competant advisors who are paid via commission, or through some sort of hybrid method. Consider Credibility There is a myriad of self-proclaimed financial advisors in the United States. Of them, only a small subset of advisors have what I consider to be adequate or credentialed backgrounds. You should vet a potential financial advisor according to their credentials, including what certifications are held, and to which professional organizations they belong. Make sure that the advisor is properly licensed in your state, and that they maintain the proper securities licenses if they will be managing your money and/or selling you products. There are a few professional designations I'd like discuss here, as clients have so often cited their confusion in comparing and contrasting between them:
Beyond these credentials, be sure that your advisor has experience providing guidance for your specific needs. Some advisors have more experience with retirement, while others specialize in business succession planning and self-employment issue. It's not easy to find an advisor that has a comprehensive suite of skills, so be sure to interview around for that perfect fit. Consider Your Best Interest The last point I'd like to make is on whether the advisor acts as a fiduciary or not, that is, whether he or she has your best interests in mind. This is a critical point in making an informed and thoughtful decision in who you will hire to help care for your financial well-being. A fiduciary is a legal and ethical relationship of trust between two parties. The fiduciary is obligated to the fiduciary standard (or fiduciary duty), which is the highest standard of care that anyone in financial services (or law, or accounting, etc.) can provide. It means that an advisor acting as fiduciary is morally and legally bound to act in the best interest of his or her client. This is an important criterion when selecting an advisor. Many brokers, registered representatives of brokerage firms, or financial planners who sell products are not subscribed to this fiduciary standard. Instead, they adhere to something called the 'suitability standard,' which in essence means that recommendations made are consistent with the best interests of the underlying customer. There is wide gap in the requirement of care between these two standards. Be sure that you fully understand to which standard your advisor adheres. I hope this information is helpful. Please feel free to contact me with any questions. Good luck with your search! Best regards, Jason M. Gilbert CPA/PFS, CFF 516-665-1940 We're all told to save for retirement, to save for our children, to save for the downpayment on a home, to save for a rainy day. The list is exhausting not to mention daunting. Most of us fall subject to a game of mental accounting: We mentally spend the money we earn before we actually earn it. This behavior typically works against our best intentions to save, and we are left with too much month remaining after our money is spent. But perhaps a shift in perspective can be helpful in reshaping how we play this game of mental accounting. Maybe with the right strategy in place, saving can be made easy.
Try incorporating these helpful savings strategies today, they will surely pay dividends later: 1) Contribute to your employers sponsored plan at least to the point of the maximum company match. This is free money, don't turn it down. 2) Pay off all high interest (and by the way, non-deductible) debt. This is obviously easier said than done. But just think for a moment: every borrowed, high-interest dollar you owe to your credit card company (or other creditor) is weighing down your savings power at an accumulating rate until that dollar (plus interest) is paid back. By making a concerted effort to pay these debts down, you are creating the possibility of directing future funds to your savings goals. Figure out how much you owe to your high-interest creditors and try to formulate a pay back period of two years or less. Tabulate how much you can pay monthly and sacrifice discretionary/non-essential things to make these payments work. A little struggle today will make for a far more comfortable tomorrow. 3) Keep an emergency fund of at least three months living expenses. I recommend maintaining a high yield online checking account to hold these funds. Check out Capital One 360 or Ally Savings. You can even direct a set amount of money to be withdrawn from your checking account on a specifc and recurring day of your choosing (i.e the 1st and/or 15th of every month), and deposited into your online savings account. The most successful adopters of this strategy implement a recurring deposit program and then "forget" that it is set up. 4) Contribute (at least to the maximum allowed) to a tax-advantaged retirement or health savings account. Not only will th is help you save for retirement or healthcare expenses, but it will help reduce your taxable income each year. In this era of high-deductible health insurance plans, you may very well end up actually using this money and being thankful that you didn't pay tax on it. 5) Establish and contribute to a child's educational savings account or custodial account. Believe it or not but, it will be a lot easier to pay for tuition when your child is young. Earmark some money every month to be deposited and further invested for this purpose. 6) Keep investing. Disciplined and regular investing is the key to ensuring that you have ample funds to fund your future goals and provide for income replacement during retirement. Wealth accumulation is an endurance sport and the best way to ensue that you stay 'in the game' is to systematically add funds to your investment account on a regular basis. Best regards, Jason M. Gilbert, CPA/PFS, CFF (516) 665-7800 |
About JasonJason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients. Categories
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The opinions expressed on this site are those solely of Jason Gilbert and do not necessarily represent those of RGA Investment Advisors LLC (“RGA”). This website is for informational purposes only and does not constitute a complete description of the investment services or performance of RGA. Nothing on this website should be interpreted to state or imply that past results are an indication of future performance. A copy of RGAs ADV Part II and privacy policy is available upon request. This website is in no way a solicitation or an offer to sell securities or investment advisory services. |