Sometimes, as I am talking with clients, I realize that there is great confusion over the different kinds of taxes that we pay. Tonight is a brief overview of tax classifications:
Sales Tax--the taxes we pay when we buy something
Income Tax--the taxes we pay on money we earned
Capital Gains Tax--the taxes we pay on passive income, or income we receive but don't actually do anything to earn. Examples of this are bank interest or gains on a mutual fund.
Transfer Tax--some of us will live our whole lives and never pay transfer tax, but it can still be a huge issue for those who owe it. Transfer tax is paid when large amounts of money are transferred from one person to another. Gift tax, paid by the person giving the gift, is one example. Estate tax is another example. A more rare type is generation skipping transfer tax, when a grandparent attempts to avoid gift tax by giving money directly to a grandchild, rather than giving it to the child, who would then give it to his child (causing it to be taxed twice).
April 15 is our deadline to pay income tax, and we'll talk more about that on Monday.
Enjoy the end of the Olympics, and Be Prosperous!
Peggy
Peggy Doviak
Friday, February 26, 2010
Wednesday, February 24, 2010
Death and Taxes
Nothing is certain but the title of this blog, or so people say. Well, it's almost March, and tax day is a mere 45 + days away! I thought we'd talk about tax issues for awhile, hopefully giving you information before you have to file.
Tonight, I want to share my favorite tax research website with you, www.irs.gov. Yes, it's the same IRS you think it is, but the website is well organized, user friendly, and full of good, free information. The IRS publications are great, short books that provide information on different tax topics. Two of my favorites are publication 590, about IRAs and publication 560, about small business retirement plans. There is also a great small business page.
Other sources are available, but you want to be careful that they are accurate. Only trust sources that give you IRS references, like publications or code sections.
Be Prosperous!
Peggy
Tonight, I want to share my favorite tax research website with you, www.irs.gov. Yes, it's the same IRS you think it is, but the website is well organized, user friendly, and full of good, free information. The IRS publications are great, short books that provide information on different tax topics. Two of my favorites are publication 590, about IRAs and publication 560, about small business retirement plans. There is also a great small business page.
Other sources are available, but you want to be careful that they are accurate. Only trust sources that give you IRS references, like publications or code sections.
Be Prosperous!
Peggy
Tuesday, February 23, 2010
Tips to Remember for Retirement Savings
Sorry I haven't been here for a few days! Here is a list of tips to help you with your retirement savings.
1. Time is your best friend when investing. The longer the time you have, the less market volatility impacts you, if you are properly diversified.
2. Spend a little less discretionary that you won't remember in a week, and put it into a retirement account for your future. It's amazing how small contributions add up over time.
3. Learn what type of retirement plan is available at your job, and understand the rules around it. If you don't have a retirement plan, then use some version of an IRA to help you with your retirement savings.
4. If your boss "matches" your retirement account, then participate at least up to the level of the match. It's free money!
5. Try not to use your retirement money as a revolving door of available funds, or it won't be there when you need it!
Be prosperous!
Peggy
1. Time is your best friend when investing. The longer the time you have, the less market volatility impacts you, if you are properly diversified.
2. Spend a little less discretionary that you won't remember in a week, and put it into a retirement account for your future. It's amazing how small contributions add up over time.
3. Learn what type of retirement plan is available at your job, and understand the rules around it. If you don't have a retirement plan, then use some version of an IRA to help you with your retirement savings.
4. If your boss "matches" your retirement account, then participate at least up to the level of the match. It's free money!
5. Try not to use your retirement money as a revolving door of available funds, or it won't be there when you need it!
Be prosperous!
Peggy
Thursday, February 18, 2010
Uses for a penny
On a bit of a dare, I am providing a helpful "heloise-style" tip tonight. And this has something to do with money (sort of)!! If you're going on vacation (or leaving a freezer alone for awhile), begin by freezing a cup of water. Once it's frozen, put a penny on top of the ice. When you return to the freezer days later, check the status of your penny and cup. If the penny is still on top, you know that you didn't have a power outage while you were gone. If the penny has sunk to the bottom, you know the ice melted!
Be prosperous!
Peggy
Be prosperous!
Peggy
Wednesday, February 17, 2010
IRA-based Plans
Two kinds of retirement plans are based around the individual retirement account (IRA). One is the SEP IRA, and the other is the SIMPLE IRA. They are both common in small businesses, and many of you don't have them. As a result, I'm not going to discuss many of the plan details except one very important fact.
When you work for a company as an employee (not an owner), you are allowed to let your retirement account grow until you actually retire, even if you are older than
70 1/2. However, if you have a SEP IRA or a SIMPLE IRA, you MUST begin taking required minimum distributions (RMDs) from them at age 70 1/2, like they were traditional IRAs, even if you are still working for the company. Be careful of this, as many people, and even some advisors, aren't aware of the law. Talk with your financial planner and make sure you are following the rules!
Be Prosperous!
Peggy
When you work for a company as an employee (not an owner), you are allowed to let your retirement account grow until you actually retire, even if you are older than
70 1/2. However, if you have a SEP IRA or a SIMPLE IRA, you MUST begin taking required minimum distributions (RMDs) from them at age 70 1/2, like they were traditional IRAs, even if you are still working for the company. Be careful of this, as many people, and even some advisors, aren't aware of the law. Talk with your financial planner and make sure you are following the rules!
Be Prosperous!
Peggy
Tuesday, February 16, 2010
403(b) Plans
A second very popular company retirement plan is a 403(b) plan. If you are a teacher, you probably have a 403(b) plan, and if you work for a not-for-profit organization, you might as well. Basically, 403(b)'s are the 401(k)'s in the non-corporate arena.
A 403(b) plan works very similarly to a 401(k) plan. There are just a few differences that I will highlight here. One is that 403(b) plans often do not have an employer contribution component, and instead, simply provide a vehicle for the individual to save pre-tax money for their retirement. Second, investments in 403(b) plans are limited to mutual funds and annuities. 401(k) plans don't have that restriction. Finally, in addition to the $5,000 additional deferral for those over 50, 403(b) plans also offer long-service deferral amounts for employees. These rules get complicated, and it's important that you talk with your CFP(r) professional about what works best for you.
Be prosperous!
Peggy
A 403(b) plan works very similarly to a 401(k) plan. There are just a few differences that I will highlight here. One is that 403(b) plans often do not have an employer contribution component, and instead, simply provide a vehicle for the individual to save pre-tax money for their retirement. Second, investments in 403(b) plans are limited to mutual funds and annuities. 401(k) plans don't have that restriction. Finally, in addition to the $5,000 additional deferral for those over 50, 403(b) plans also offer long-service deferral amounts for employees. These rules get complicated, and it's important that you talk with your CFP(r) professional about what works best for you.
Be prosperous!
Peggy
Monday, February 15, 2010
401(k) Plans
Many companies choose to offer a 401(k) plan to help their employees save for retirement. A 401(k) plan isn't actually a plan at all, it's an addition to another plan! A 401(k)cash or deferred alternative is added to a profit sharing plan or a stock bonus plan, so let's start there.
A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.
Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.
Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.
If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.
Be Prosperous!
Peggy
A profit sharing plan is a defined contribution plan where the employer can choose to provide retirement funds if the company makes a profit. (Actually, sometimes a company makes a contribution even if they don't make a profit, but the contribution is optional). They make the contribution is in cash. A stock bonus plan is just like a profit sharing plan except the company makes the contribution in stock.
Many employers choose to offer a safe harbor 401(k) designed to guarantee a level of benefit for the employees and to allow the executives to defer more money. These are qualified plans, which means the government has lots of rules to make sure that the employees benefit from the plan as much as the owners.
Are you still awake? Back to what 401(k) means. It's the employees opportunity to defer additional money into their plan. This year, in 2010, an employee can defer up to $16,500 into their account, with an additional $5,000 allowed if you're over
50. This means you put the money into the account in pre-tax dollars and pay ordinary income tax once you take distributions after you are retired.
If your company has a retirement plan, you're very fortunate. Take advantage of the opportunity.
Be Prosperous!
Peggy
Sunday, February 14, 2010
Staying True to Yourself
I know I missed two days the end of last week. I'm blogging tonight to make up for one of them, to apologize, and to offer a bit of a reason.
The details of my week aren't important. Suffice it to say that I had to make a difficult decision in my business. I opted to stay true to a business principle I established before I even opened rather than compromise. So here I am on Sunday, glad with my decision, and encouraging you to always believe in yourself.
Be Prosperous!
Peggy
The details of my week aren't important. Suffice it to say that I had to make a difficult decision in my business. I opted to stay true to a business principle I established before I even opened rather than compromise. So here I am on Sunday, glad with my decision, and encouraging you to always believe in yourself.
Be Prosperous!
Peggy
Wednesday, February 10, 2010
Company Retirement Plans
Another option for retirement savings is your company's retirement plan. Retirement plans can take many different forms. Tonight, we are going to talk about the two biggest classifications of plans--defined benefit plans and defined contribution plans.
Defined benefit plans are what people informally call "pension" plans. Now, actually, the word "pension" means something else officially in "retirement speak," but we'll talk about that later. A defined benefit plan is what people imagine after thirty years of service and a gold watch. Every month during retirement, the company sends a check of a set amount, and that money is a reliable source of monthly income. Defined benefit plans get their name because the amount of the benefit is defined to the recipient. In other words, you know how much money you get as a benefit each month in advance. If you have a defined benefit plan, you don't have to choose the investments because your employer chooses them, since they are liable for the benefit.
The other kind of plan, which is much more common, is a defined contribution plan. In a defined contribution plan, the company gives you an amount of money, defined by the plan formula, each month or year. All you know is how much money you receive--a defined contribution. The amount of your monthly benefit during retirement depends on your account balance. And the account balance depends upon how well you do with your investments because you are responsible to choose them. Now, I worded the definition kind of strangely because the plan formula could go two different ways--the promise of a benefit each year or a benefit that depends on whether or not the company made enough profit to contribute to the plan. Creatively, this is called a profit sharing plan, and it's a very popular structure.
So which do you have? A defined benefit plan or a defined contribution plan?
Be prosperous!
Peggy
Defined benefit plans are what people informally call "pension" plans. Now, actually, the word "pension" means something else officially in "retirement speak," but we'll talk about that later. A defined benefit plan is what people imagine after thirty years of service and a gold watch. Every month during retirement, the company sends a check of a set amount, and that money is a reliable source of monthly income. Defined benefit plans get their name because the amount of the benefit is defined to the recipient. In other words, you know how much money you get as a benefit each month in advance. If you have a defined benefit plan, you don't have to choose the investments because your employer chooses them, since they are liable for the benefit.
The other kind of plan, which is much more common, is a defined contribution plan. In a defined contribution plan, the company gives you an amount of money, defined by the plan formula, each month or year. All you know is how much money you receive--a defined contribution. The amount of your monthly benefit during retirement depends on your account balance. And the account balance depends upon how well you do with your investments because you are responsible to choose them. Now, I worded the definition kind of strangely because the plan formula could go two different ways--the promise of a benefit each year or a benefit that depends on whether or not the company made enough profit to contribute to the plan. Creatively, this is called a profit sharing plan, and it's a very popular structure.
So which do you have? A defined benefit plan or a defined contribution plan?
Be prosperous!
Peggy
Tuesday, February 9, 2010
Monday, February 8, 2010
IRA Distributions
If you choose to fund a traditional IRA, it's important that you understand when your money is available for withdrawal and when you must take withdrawals. Typically, the youngest age you can take a distribution from your IRA without penalty is 59 1/2. If you take a withdrawal prior to this age, you will have to pay a 10% penalty in addition to your owed taxes. There are a few exceptions to this minimum withdrawal age including funding college, buying a house, or paying for excessive medical bills. If you are facing an extraordinary situation, check to see if it meets the IRS' limitations in allowing an early distribution. Another way to access the funds is through something called Substantially Equal Periodic Payments, (also known in the industry as 72T). SEPPs allow you take money out of an IRA, but there are several hitches. First, you must establish how much money you will be withdrawing, through one of three methods. Then, once you start taking distributions, you must continue until you are 59 1/2 or five years, whichever is LONGER. This can cause you to seriously erode the value of your account, which is intended to help you through old age.
If you save your traditional IRA carefully, the IRS makes you eventually take money out (so they can get their taxes). The maximum age is April 1 of the year after the year you are 70 1/2. Now, originally the answer was easier than that--70 1/2. However, the IRS will allow you to postpone the first payment until April 1. If you do this, be aware you must take two distributions that second year--the postponed one and the one scheduled for year two. Further, if you are employed, and your company retirement plan is a SEP IRA or a SIMPLE IRA, you must take your required minimum distribution on the same schedule as a traditional IRA. This confuses some people because 401(k) plans don't require a distribution until you retire for most rank-and-file employees. If you forget to take your distributions, what's the penalty? 50 PERCENT!!! Don't make the mistake.
Be Prosperous!
Peggy
If you save your traditional IRA carefully, the IRS makes you eventually take money out (so they can get their taxes). The maximum age is April 1 of the year after the year you are 70 1/2. Now, originally the answer was easier than that--70 1/2. However, the IRS will allow you to postpone the first payment until April 1. If you do this, be aware you must take two distributions that second year--the postponed one and the one scheduled for year two. Further, if you are employed, and your company retirement plan is a SEP IRA or a SIMPLE IRA, you must take your required minimum distribution on the same schedule as a traditional IRA. This confuses some people because 401(k) plans don't require a distribution until you retire for most rank-and-file employees. If you forget to take your distributions, what's the penalty? 50 PERCENT!!! Don't make the mistake.
Be Prosperous!
Peggy
Friday, February 5, 2010
Thank You For Your Generosity!
For anyone reading this blog who donated food to the "Extreme Home Makeover" food drive from Ideal Homes, THANK YOU!!!!!!! We compiled 386.7 pounds of food to help toward the goal of 23000 pounds! The generosity of my colleagues, clients, and friends is amazing! If you weren't part of the food drive, please know that there are amazing people in Norman, OK! I'm incredibly fortunate to have these people in my life and grateful for their assistance!
Be Prosperous!
Peggy
Be Prosperous!
Peggy
Thursday, February 4, 2010
Traditional IRAs
When you say, "IRA," most people assume you are talking about a traditional IRA. A traditional IRA may provide you with a tax deduction if you meet certain requirements. You can fund a traditional IRA with $5,000 in 2010, unless you are 50 or older, in which case you can fund an additional $1,000, for a total with six.
If you are not a participant in your company's retirement plan, or if your company doesn't have a retirement plan, then you can get a tax deduction for this contribution. If you do participate in your company's retirement plan, you can only deduct your IRA if you earn less than the phaseouts. If you are single, you can deduct your IRA if you earn less than $56,000. You get a partial deduction if you earn between $56,000-$66,000. You cannot deduct your IRA contribution if you participate in your company's retirement plan and earn more than $66,000. If you are married and file a joint return, your income phaseout is $89,000-$109,000. If you are married and filing separately (not the IRS' favorite activity), then the phaseout is $0 - $10,000. Yes, I really meant zero.
Tomorrow, we'll look at the rules about when you can take your money out easily and the age you must start taking distributions.
Be prosperous!
Peggy Doviak
If you are not a participant in your company's retirement plan, or if your company doesn't have a retirement plan, then you can get a tax deduction for this contribution. If you do participate in your company's retirement plan, you can only deduct your IRA if you earn less than the phaseouts. If you are single, you can deduct your IRA if you earn less than $56,000. You get a partial deduction if you earn between $56,000-$66,000. You cannot deduct your IRA contribution if you participate in your company's retirement plan and earn more than $66,000. If you are married and file a joint return, your income phaseout is $89,000-$109,000. If you are married and filing separately (not the IRS' favorite activity), then the phaseout is $0 - $10,000. Yes, I really meant zero.
Tomorrow, we'll look at the rules about when you can take your money out easily and the age you must start taking distributions.
Be prosperous!
Peggy Doviak
Wednesday, February 3, 2010
Bubbles-Too Good to Be True
Okay, since we are off topic anyway, I thought I would share my latest book acquisitions with you:
Hot off the presses, Henry Paulson, Jr.'s memoir, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System."
Slightly older but still very relevant, Andrew Ross Sorkin's book, "Too Big to Fail."
I have always had a passion for reading books about stock market "bubbles" and the following "busts." Prior to these, my favorite was "Dot Con: The Greatest Story Ever Sold." That was about the technology bubble.
Bubbles are defined as prices that grow higher than the actual value of the underlying item, stock, or commodity. One of the funniest was the Dutch Tulip Bubble of 1637, where citizens became tulip crazy and traded the bulbs at higher and higher prices. The problem is always for the last purchaser before the bubble bursts. They pay the item at an inflated price, intending to sell it. Then, the bubble bursts, the prices fall, and the asset stays in their position, as they are unwilling to let it go at a loss. Often, the loss accelerates, until many times, the underlying asset is worthless.
This happened with the tulips. It also happened with some dot.com startup companies. Fortunately, however awful the housing bubble became, at least the houses still have some value. The problem is that people borrowed money against the supposed "value" of their house, leaving them today with more debt than home value. When this happens to someone, we say they are "underwater" in their mortgage (or other debt).
Bubbles can be seen in advance, but the allure of "flipping" the item can be overly tempting. Just remember, if it seems to good to be true, you're right.
Be prosperous!
Peggy Doviak
Hot off the presses, Henry Paulson, Jr.'s memoir, "On the Brink: Inside the Race to Stop the Collapse of the Global Financial System."
Slightly older but still very relevant, Andrew Ross Sorkin's book, "Too Big to Fail."
I have always had a passion for reading books about stock market "bubbles" and the following "busts." Prior to these, my favorite was "Dot Con: The Greatest Story Ever Sold." That was about the technology bubble.
Bubbles are defined as prices that grow higher than the actual value of the underlying item, stock, or commodity. One of the funniest was the Dutch Tulip Bubble of 1637, where citizens became tulip crazy and traded the bulbs at higher and higher prices. The problem is always for the last purchaser before the bubble bursts. They pay the item at an inflated price, intending to sell it. Then, the bubble bursts, the prices fall, and the asset stays in their position, as they are unwilling to let it go at a loss. Often, the loss accelerates, until many times, the underlying asset is worthless.
This happened with the tulips. It also happened with some dot.com startup companies. Fortunately, however awful the housing bubble became, at least the houses still have some value. The problem is that people borrowed money against the supposed "value" of their house, leaving them today with more debt than home value. When this happens to someone, we say they are "underwater" in their mortgage (or other debt).
Bubbles can be seen in advance, but the allure of "flipping" the item can be overly tempting. Just remember, if it seems to good to be true, you're right.
Be prosperous!
Peggy Doviak
Tuesday, February 2, 2010
"One More Thing...."
Remember how Columbo used to leave a room, stop at the door, turn around, and say, "Oh, yeah, one more thing....."? Well, I have one more thing related to yesterday’s blog! By the way, this was prompted by an article I read over the weekend, published by a pro-brokerage house magazine. I was planning on covering this later, but I got inspired!!
The other thing I want you to talk with you about is broker/advisor compensation.
Now, although I run a fee-only practice, I am not wholesale against the concept of charging a commission. If you have a small amount of money that I put in a diversified mutual fund, we reinvest the dividends, and you dollar cost average into it, I may not trade in your account much. Taking a one-time 5% commission and then letting you hold your money in that fund for four or five years works well for you. You might even save money over my annual fee.
(I actually get around this problem by helping very small future clients open an account at an online firm like TD Ameritrade, Schwab, Fidelity, etc. Then, they can hold that money there and come back to me when it's a larger account. This way, they don't pay the commission or the fee.)
Part of the financial reform involves lowering the annual fees (called 12(b) 1 fees) that brokers receive in the years after they sold you the product. They get the commission in year one, then each year after that as long as you own the product, they get 12(b)1 fees. Not a problem, but the issue is sometimes brokers don't disclose the 12(b)1 fees, or for that matter the amount of commission received.
The issue isn't how you get paid; it's in the transparency of the advisor’s model and how much he or she gets paid.
For example, a common practice is for an advisor to claim he or she is fee based. Now, this doesn’t mean that they don’t take commissions; it means they can take commissions or fees, on different parts of your portfolio. If you want to work with someone who takes no commissions, you need to work with a fee-only advisor.
What do you do? First, ask your advisor how they are compensated: fees, commissions, or both. Then, ask them how much compensation they will receive from any source for the transaction they are proposing. Be careful that they disclose all money received, as annuity companies pay the advisor directly. That’s why you have a surrender period. The surrender period ensures the annuity company gets their money back. Ask how much of an annual fee the investments carry. If the numbers seem high, ask if there are cheaper, equally effective investments. Don’t hesitate to take time to think about it. If you work with a fee-only advisor, you should regularly get an itemized invoice explaining how much fee was charged. Check this amount against your statement to make sure the fees were taken accurately.
This isn’t a “fee versus commission” fight. In my mind, that’s the wrong fight. The right fight is for transparency. The second right fight is to require fiduciary conduct on the part of anyone who manages your money, all of the time. If someone is a transparent fiduciary, how they are compensated ceases to matter.
Be Prosperous!
Peggy
The other thing I want you to talk with you about is broker/advisor compensation.
Now, although I run a fee-only practice, I am not wholesale against the concept of charging a commission. If you have a small amount of money that I put in a diversified mutual fund, we reinvest the dividends, and you dollar cost average into it, I may not trade in your account much. Taking a one-time 5% commission and then letting you hold your money in that fund for four or five years works well for you. You might even save money over my annual fee.
(I actually get around this problem by helping very small future clients open an account at an online firm like TD Ameritrade, Schwab, Fidelity, etc. Then, they can hold that money there and come back to me when it's a larger account. This way, they don't pay the commission or the fee.)
Part of the financial reform involves lowering the annual fees (called 12(b) 1 fees) that brokers receive in the years after they sold you the product. They get the commission in year one, then each year after that as long as you own the product, they get 12(b)1 fees. Not a problem, but the issue is sometimes brokers don't disclose the 12(b)1 fees, or for that matter the amount of commission received.
The issue isn't how you get paid; it's in the transparency of the advisor’s model and how much he or she gets paid.
For example, a common practice is for an advisor to claim he or she is fee based. Now, this doesn’t mean that they don’t take commissions; it means they can take commissions or fees, on different parts of your portfolio. If you want to work with someone who takes no commissions, you need to work with a fee-only advisor.
What do you do? First, ask your advisor how they are compensated: fees, commissions, or both. Then, ask them how much compensation they will receive from any source for the transaction they are proposing. Be careful that they disclose all money received, as annuity companies pay the advisor directly. That’s why you have a surrender period. The surrender period ensures the annuity company gets their money back. Ask how much of an annual fee the investments carry. If the numbers seem high, ask if there are cheaper, equally effective investments. Don’t hesitate to take time to think about it. If you work with a fee-only advisor, you should regularly get an itemized invoice explaining how much fee was charged. Check this amount against your statement to make sure the fees were taken accurately.
This isn’t a “fee versus commission” fight. In my mind, that’s the wrong fight. The right fight is for transparency. The second right fight is to require fiduciary conduct on the part of anyone who manages your money, all of the time. If someone is a transparent fiduciary, how they are compensated ceases to matter.
Be Prosperous!
Peggy
Monday, February 1, 2010
"You Don't Know What You Don't Know"
Donald Rumsfeld sparked ire from opponents when he made this statement about terrorist threats. Yet, I think it’s a very intelligent statement and applies to many different areas. When you are trying to study an issue to make conclusions, what you cannot calculate is what you don’t know. It’s like doing a math problem when you don’t have all the terms. You can get any answer when you don’t know what you’re adding.
I am very concerned that many people also don’t know what they don’t know when it comes to how financial service companies do business. Right now, there is a huge fight brewing in Washington about forcing brokers to adhere to fiduciary standards. Now, that requirement rests only on investment advisors. Do you know that there are two different models that people who manage your investments can choose from? One, the brokerage model, does not require that the broker act as a fiduciary with your money. The other, the investment advisory model, does. What does the word, “fiduciary,” mean? My summary of the definition really boils down to the person who you trust to make decisions with your money needs to be acting in your best interest, not his or her best interest. The “fiduciary” standard is higher than the “suitability” standard that brokers follow, which says the investment is fine for you—it’s suitable. The fiduciary standard requires that the choice be the best for you.
For the record, the brokerage industry hates this and is pouring large amounts of money into the fight to be allowed to maintain their “suitability” standard. However, financial reform legislation is in the works, with an outcome still to be determined. So what do you do?
First, be aware that the term “financial advisor” is generic and is applied to anyone in the financial services industry. Just because they call themselves a financial advisor does not make their firm an “Investment Advisory” firm. It’s a specific business model. Second, ask your financial professional if they are willing to act as your fiduciary in their advice and execution of any trade, and if they will put the fiduciary disclosure in writing. Be very specific about your terminology and your insistence that their response be written. Any financial professional (broker or investment advisor) can choose to act as a fiduciary; many brokers just don’t. Investment advisors must, by law. If your professional won’t agree to this, I can’t tell you what to do, but you need to be aware that he or she won’t make that commitment. Third, begin to follow the national debate about this issue. You need to be informed—it’s your money.
Be Prosperous!
Peggy
I am very concerned that many people also don’t know what they don’t know when it comes to how financial service companies do business. Right now, there is a huge fight brewing in Washington about forcing brokers to adhere to fiduciary standards. Now, that requirement rests only on investment advisors. Do you know that there are two different models that people who manage your investments can choose from? One, the brokerage model, does not require that the broker act as a fiduciary with your money. The other, the investment advisory model, does. What does the word, “fiduciary,” mean? My summary of the definition really boils down to the person who you trust to make decisions with your money needs to be acting in your best interest, not his or her best interest. The “fiduciary” standard is higher than the “suitability” standard that brokers follow, which says the investment is fine for you—it’s suitable. The fiduciary standard requires that the choice be the best for you.
For the record, the brokerage industry hates this and is pouring large amounts of money into the fight to be allowed to maintain their “suitability” standard. However, financial reform legislation is in the works, with an outcome still to be determined. So what do you do?
First, be aware that the term “financial advisor” is generic and is applied to anyone in the financial services industry. Just because they call themselves a financial advisor does not make their firm an “Investment Advisory” firm. It’s a specific business model. Second, ask your financial professional if they are willing to act as your fiduciary in their advice and execution of any trade, and if they will put the fiduciary disclosure in writing. Be very specific about your terminology and your insistence that their response be written. Any financial professional (broker or investment advisor) can choose to act as a fiduciary; many brokers just don’t. Investment advisors must, by law. If your professional won’t agree to this, I can’t tell you what to do, but you need to be aware that he or she won’t make that commitment. Third, begin to follow the national debate about this issue. You need to be informed—it’s your money.
Be Prosperous!
Peggy
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