Financial Planning Helps You Make Your Money Count For The People You Love

One of the biggest mistakes I’ve seen people make when it comes to financial planning is to ignore it completely or put it off for so long that the big benefits of financial planning expire worthless. The earlier you start planning the more bang you’ll get for your buck, however, financial planning is valuable at any age.

Most people put off thinking about planning because of misconceptions about what the process involves or how it can benefit them. As part of its public education efforts, Certified Financial Planner Board of Standards Inc. (CFP Board) surveyed CFP® professionals about mistakes people make when approaching financial planning. The survey showed the public’s most frequent mistakes included:

· Failing to set measurable financial goals.

· Making a financial decision without understanding its effect on other financial issues.

· Confusing financial planning with investing.

· Neglecting to re-evaluate their plan periodically.

· Thinking that planning is only for the wealthy.

· Thinking that planning is for when they get older.

· Thinking that financial planning is the same as retirement planning.

· Waiting until a money crisis to begin planning.

· Expecting unrealistic returns on investments.

· Thinking that using a planner means losing control.

· Believing that financial planning is primarily tax planning.

Make Your Money Count with A Plan

To avoid making the mistakes listed above, realize that what matters most to you is the focus of your planning. The results you get from working with a planner are as much your responsibility as they are those of the planner. To achieve the best ROI from your financial planning engagement, consider the following advice.

Start planning as soon as you can: Don’t delay your financial planning. People who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good financial planning habits, such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.

Be realistic in your expectations:Financial planning is a common sense approach to managing your finances to reach your life goals. It cannot change your situation overnight; it is a lifelong process. Remember that events beyond your control, such as inflation or changes in the stock market or interest rates, will affect your financial planning results.

Set measurable financial goals: Set specific targets of the results you want to achieve and when you want to achieve them. For example, instead of saying you want to be “comfortable” when you retire or that you want your children or grandchildren to attend “good” schools, quantify what “comfortable” and “good” mean so that you’ll know when you’ve reached your goals.

Realize that you are in charge:When working with a financial planner, be sure you understand the financial planning process and what the planner should be doing to help you make your money count. The planner needs all relevant information on your financial situation and your purpose (what matters most to you). Always ask questions about the recommendations offered to you and play an active role in decision-making. Being in charge means your financial planner doesn’t take all the responsibility for every decision.

Understand the effect of each financial decision and the big picture: Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are will impact the big picture of your overall plan. This is where the skills of a professional financial planner can make a big difference.

Re-evaluate your financial situation periodically: Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you can stay on track with your long-term goals.

Successful planning offers many rewards in addition to helping you Make Your Money Count and achieving what matters most to you. When CFP® professionals were surveyed about the most significant benefit of financial planning in their own lives, the top answer was “peace of mind.” Over my career, many clients have told me that their purpose for financial planning is the same – peace of mind. When you invest the time and money to work with a competent and trustworthy planner, you are far more likely to go to bed at night knowing you did everything possible to make your money count for the people you love.

World’s Financial System in Limbo – What to Expect!

In my recent article about investor protection and financial market size, I emphasized the world’s financial system being made up of a cluster of market-based and bank-based financial systems. I reiterated that whilst the U.S. and U.K. financial systems are predominantly market-based, that of Germany and some other European countries are bank-based. Now, whatever system is dominant in a country, market-based and bank-based systems form the main source of financial capital for investors, governments and individuals.

In other words, the interaction and integration of the two systems is what constitutes the financial systems of countries. The extent of their integration has promoted the situation where any failures or setbacks in one system permeate the other system. During the recent economic downturn, the world witnessed initially the failure of the market-based financial system of U.S. which had a spillover into the bank-based and market-based financial systems of the rest of the world. This confirmed the inseparability of market-based and bank-based financial systems and the global nature of the financial system.

Quite recently, there has been much talk about the urgent need to protect investors, customers, markets and banks with regards to both types of financial systems through government intervention. Government intervention is primarily to deal with what is called “agency” problems in finance and economics. Unfortunately, even as immaculate protection of these entities is impossible and unfeasible, inordinate protection can lead to inefficiency of the financial system, or what is called “deadweight” in economics.

Agency problems are inherent of financial system and it is not possible to completely eradicate them. Government regulations may improve transparency in the financial system and help also restore confidence in a country’s global competitiveness, but it cannot abate completely the agency problems which emanates from the discrepancy between the management’s self-interest and investors or stakeholders interest. Now, the federal government’s expansion of power through regulations into the management of a country’s financial system in order to deal with agency problems has its ramifications. The regulations may be towards the avoidance of the repeat of the financial meltdown and the rooting of potential “Madoffs”; however, care should be taken to avoid the production of “mechanical” managers and curtailing of “innovative” managers. For the proper functioning and sustainability of the world financial systems, there is the need for strong ethical moral innovative managers and not ethical moral mechanical managers. Ethical moral innovative managers are endowed with unlimited power and they would act in the interest of majority of stakeholders in the presence of external stimuli influence.

Contrarily, mechanical managers are those with limited discretion and who take decisions in response to problems based on an external stimuli or influence. As a matter of fact, mechanical managers do not have the freedom to make decisions that are in conformity with their own interests and that of the investors or stakeholders. Thus, an action plan by governments in the form of regulations should avoid providing a stringent documentation of regulations encompassing what managers, CEOs and those in higher authority should do or not do. This is because it would impede the existing deregulation in the world’s financial system.

Most importantly, the regulations should avoid telling the managers what they should do. Such an action plan has the potential proclivity towards the production of mechanical managers. Meanwhile, any government pursuit of extra transparency which is very important in a market-based bank-based systems should be applauded and commended as it would offer an appreciable level of protection for investors, markets, banks and stakeholders in general. The regulations should seek to prevent scandalous activities, promote compensation of managers tied to earnings and stock price methodology whilst preventing socialistic tendencies of government’s ultimate interest and control of the systems. Judiciously, the trajectory of government’s intervention should be towards transparency, accountability (that is better accounting disclosures) and probity to ensure sound financial practices in an atmosphere of flexibility in financial operations. Anything more than this, infringes on economic or financial freedom of the system.

The days when companies in the financial system paid huge sums to managers, CEOs without regards to earnings and stock prices are over. The future demands ethical moral innovative managers to promote transparency, accountability and probity in the financial system and to prevent a repeat of the meltdown. Now, too much legitimate power from the government can exacerbate the situation by turning innovative managers into mechanical managers. This is prevalent in most socialist and communist countries. These managers can be effective and efficient if they can collaborate with the government on the regulations whilst both parties make conscious effort to avoid the production of mechanical managers. Technically, efficiency and effectiveness is what distinguishes an innovative manager from a mechanical manager. For it is possible to be efficient without being effective and vice versa. By definition, efficiency is a measure of how well or productively resources are used to achieve a goal.

Effectiveness is a measure of the appropriateness of the goals an organizational entity is pursuing and of the degree to which the entity achieves those goals. Mechanical managers may have effectiveness because of complete subjection to governmental control but lack efficiency due to absence of creativity and innovativeness. They may operate under too much of government control and so lack the freedom to be innovative or creative. Such managers cannot reconcile organizational goals with government regulations for efficiency. Consequently, they are not able to use the resources productively to achieve organizational goals. Production of mechanical managers has often resulted in wastage of human or intellectual capital over the years in several countries.

In spite of the efficacy of ethical moral innovative manager’s positive impact on a financial system, there are associated negative dimensions. First, the setback in the government’s regulations with respect to innovative manager’s production is creation of utilitarianism-oriented systems — a system with principles that advocates for the greatest good of stakeholders — in that it supports the option that provides the highest degree of satisfaction to stakeholders. Secondly, this principle focuses on the results of our actions and not on how we achieve those results. The fact is that stakeholders have wide ranging needs and values and it is almost impossible to satisfy all these needs and values. If utilitarianism is to hold in this case then these innovative managers may be compelled to engage in unethical behaviors and decisions to attain results that seem ethical to some stakeholders (for example the government and some people of higher authority).

Thus, what is ethical is relative with regards to stakeholders. This is also analogous to a contravention of the “public choice” theory in that the government’s interest may not be the interest of the majority of stake holders. If the government seeks to regulate the financial market it would have to enact policies that are not totalitarianism-oriented but somewhere in-between egalitarianism and utilitarianism.

Egalitarianism principles advocate equality among all peoples socially, politically, economically and civil rightly. There are various forms of egalitarianism which includes gender, racial, political, economic, religious and asset-based. However, economic and asset-based egalitarianism would be of prime importance in the financial system. Egalitarianism is hard to achieve now because the economic inequality gap based on Gini coefficient analysis worldwide continues to widen due to the recession. This is also precursory that economic inequality is insurmountable in future. Though utilitarianism is dominant now, the best shot of government intervention is to produce policies that are in between the two principles. Why? Because utilitarianism has failed the system and there is the need for modification. Indeed, the recent financial meltdown is the result of utilitarian principles that have prevailed in the financial system. That is to say governments were focused on the results or positive outcome in the financial system and not on how the results were achieved. Consequently, the “smart” guys in the room took advantage of the situation and produced the worldwide financial mess.

Another underrated defect of government regulations is curtailing of financial innovation. Unfortunately, any unreasonable regulation may also create an incentive for banks or financial sectors or “gurus” to get around the regulation if it is unfavorable for business. They argue that it is financial innovation that has brought products like credit cards, debit cards, CDs, ATMs, internet billing, automatic banking transfers and determination of variable rates for transactions (mortgages, loans e.t.c). Thus, there is the tendency that government regulation that seeks to put a cap on how banks or financial institutions do business with clients would create an incentive for these institutions to act otherwise. These institutions would look for ways to get around it indirectly producing unpleasant financial innovations such as uncalled for penalties, unjustified fee charges and interest rates, bonuses and the likes whilst maintaining or declaring the needed profits. For example, one should not be exasperated if rates on ATM transactions increases as a result of a government regulated financial system.

Another example could be the conversion of fixed rates into variable rates on loans, credit cards, unjustified declaration of bonuses for managers, CEOs based on market oriented explanations. All these are forms of unpleasant financial innovations which is possible under a regulated system. The fact is that the financial institutions are constantly seeking for ways to improve services as well as earn larger profits by lowering the cost of doing business and increasing the returns from their transactions. These institutions assert that they need financial capital to support their huge investments and assets and would try to get around these regulations in order to stay in business and do that.

These developments lead to two questions. Is the world to be worried about regulations? No. Is the world to be worried about the repercussions? Yes. The world is not to be worried about regulations because it would seek to promote transparency, accountability and probity. However, the world is to be worried about the repercussions because of the response of the financial system to the government regulations if the regulations are unfavorable and most importantly infringes immensely on financial freedom and innovation of the system.

In conclusion, the government regulations should seek for transparency, accountability and probity and not an imposition of stringent measures on the financial system. The government should redefine these terms of transparency, accountability and probity for the sector without inhibiting favorable financial innovation or creating an incentive for unpleasant financial innovations. Redefining transparency, accountability and probity should produce a documentation of guidelines and regulations established by consensus. Such redefinition would cause the financial sector to be cautious in their transactions knowing that at the end of the day transparency, accountability and probity would have to be met. There is the tendency for collusion with contention resulting in a situation that forces the two parties into what is called “Nash equilibrium” in economics where there is an incentive for one party to default. In this wise, the documentation should include a frame work that prohibits contention and promotes collusion besides any unwanted spillovers to stakeholders. Let’s not forget the proverbial saying that “when two elephants fight, it is the grass and the ground that suffers.

Methods of the Financial Statement Analysis

The variety of methods can be used to evaluate the current position and effectiveness of the company, based on the financial statement data. Most important are ratio analysis, vertical and horizontal analysis, year-to-year change analysis, competitors comparison, etc. These methods are used to discover the turning points, which are specific events and trends that signal changes that can influence future financial performance of the company.

Ratio analysis is an efficient method of the firm’s performance evaluation, making it possible to approach the company’s financial condition from different angles. Depending on the needs of an analyst, financial ratios may be a tool of measuring the company’s liquidity, financial sustainability, activity or profitability (these are the main existing ratio categories). Applying ratio analysis to the company’s financial statements can be a base for different conclusions on the business health, as well as for the prediction of possible future development trends. It is useful for a wide variety of users: from the company’s owners, searching for the ways of improving their business efficiency, to the existing and potential investors, considering the ratio analysis as their risk management tool.

Liquidity ratios provide the measurement of the company’s ability to meet its current obligations. Objects of the liquidity ratio analysis mainly are the company’s current assets and current liabilities. The ability to pay the short-term debt is an important indicator of the financial stability of a business. The main ratios included to this group are cash ratio, quick ratio, current ratio and others.

To measure the financial sustainability of a firm, debt ratio analysis is being applied. It indicates the ability of a firm to carry its debt in the long run. Normally greater debt means greater bankruptcy risk; that’s why it is important to understand if the company has enough sources of finance to meet its long-term obligations. The main ratios of this category are the debt ratio, times interest earned, debt to equity ratio, etc.

Activity ratios measure the efficiency of the company’s asset utilization. It indicates the level of the company’s asset management efficiency. If the company’s use of its inventories, fixed assets and accounts receivable is effective enough, the activity ratios will reflect the positive trends. This group of ratios includes total asset turnover, accounts receivable turnover, cash conversion cycle and others.

One of the most important measures of the company’s performance is a group of profitability ratios. These ratios measure the ability of the company to earn profit, which is the key goal of the business. Most commonly, profitability ratios are being divided into margins (showing the firm’s ability to transform money from sales into profits) and returns (measuring the ability of the company to generate returns for the stockholders). Key ratios of this category are net profit margin, return on assets and others.

All the data needed for the above-mentioned ratios computation can be obtained from the company’s financial main statements (balance sheet, income statement, etc.). Normally, even if a set of the same ratios calculated for the different periods doesn’t provide enough information for a precise analysis, it still will reflect a positive or negative trend in the firm’s development. To avoid misleading conclusions, it is necessary to compare all the computed ratios with main competitors and with industry averages.

Vertical and horizontal analysis provide insight into the structure and dynamics of the company’s assets, sources of financial resources and financial results. Vertical analysis shows the weight of different elements and helps to understand if they are well balanced. For example, the high share of trade receivables means that clients are distracting part of capital from the operational process. This can lead to the rise of cost of the attraction of additional financial resources. Vertical analysis of the equity and liabilities helps to understand if creditors are well protected. Given a high share of equity, one can assure that in case of insolvency providers of financial resources will receive their money back. Vertical analysis of financial results shows how important different revenues and expenses are for the company and what their role in a profit earning process is.

Horizontal analysis presents the change of the same element value over the period under review. As a part of the horizontal analysis, year-to-year change analysis helps to predict future performance based on the financial information of prior years. Considering industry and macroeconomic trends, an analytic can assess financial risks of the company. For example, year-to-year shortening of working capital can lead to the liquidity loss. A strong trend of losing equity means that company may become a bankrupt.

It’s important to notice that financial conditions differ among industries. For example, the automation software industry is on its rise, while gas-extracting companies have problems related to the low price of fuel on the global market. That’s why the comparison with its major competitors is needed. Companies are working in the same conditions, so it helps better to understand management effectiveness. Better performance on the same market means higher financial effectiveness. An analytic can also compare indicators of the studied company with industry averages.

Overall findings of the company’s financial analysis should reflect the result of every used method. An analytic can emphasize financial strengths and weaknesses and give its opinion on the prospects of the company. Depending on the financial statement analysis goal, one can answer following questions:

1. How effective is a company?
2. How strong is its current position?
3. What is a value of the net assets?
4. How well are the creditors protected?
5. Are there any threats to the company’s financial sustainability?
6. Are there any changes that will influence future performance?

Choosing a Financial Advisor and the 4 Rules of Financial Institutions

When choosing a financial advisor, it is very important to understand that financial advisors represent financial institutions. These institutions are the insurance companies, banks, mutual fund companies, stock brokerages, mortgage companies, etc. They are simply the companies that provide the product your financial advisor will be using in building your financial plan. Since financial advisors are heavily influenced by these institutions it is important to know the 4 basic rules by which they all operate. This information will help dramatically when you are choosing a financial advisor.

The 4 rules are:

1. Get Your Money

2. Get It Often

3. Keep It As Long As Possible

4. Give Back As Little As Possible

At first glance this list may seem offensive, like you are under attack by these institutions. In reality, they are simply running a business and trying to make a profit, and if you were in their shoes, you would follow the exact same list. So let’s look at each of these a little more closely and discuss how you can use this knowledge when choosing a financial advisor.

1. Get Your Money

Imagine you opened a bank today. What is the first thing you would need to do to get your bank up and running? You would need deposits, right? And how do you get those deposits? By offering your prospective clients something they want in return for their money.

All financial institutions rely on getting clients to place their money with the institution. All of their advertising and sales are based on attracting people’s money. The financial advisor is part of the sales arm of the institution and his primary role is to get money for the institution.

This is not a bad thing. Done properly, every party in the transaction wins. The institution gets your money to work and profit with, you get a higher interest rate or higher possibility of gain than you had previously, and the financial advisor makes a commission for finding a new client.

Just be aware of that dynamic when choosing a financial advisor. The advisor represents the financial institution and will get paid by them for bringing you in as a client, but he also must be truly acting in your best interests and do what is right for you. A good financial advisor understands that by doing what is truly right for you, he also is doing what is in his own and the financial institutions best interest.

2. Get It Often

Imagine again that you are the bank president. How often do you want people to deposit their money into your bank? As often as possible, and on a very regular basis, right? How do you accomplish this? What if you could create a way where people automatically deposited their money with you every single month on a regularly scheduled basis?

That is why direct deposit and automatic billing were created. It is also why the IRS has automatic withholding for your income taxes. And you thought it was simply created as a convenience for you.

Yes, these things are convenient, but their true intention is to get your money on a regular basis every month without you having to put a lot of thought into it.

Understanding this puts you more in control of the situation when choosing a financial advisor and when working with financial institutions. You do not have to blindly do what they tell you. You can use this convenience to your advantage when you understand its underlying philosophy and purpose.

3. Keep Your Money As Long As Possible

Think like the bank president again for a moment. Once clients have put their money in your bank, when do you want them to take it out? Never, if possible, correct? The longer you, the bank, keep their money the more opportunity you have to make a profit with it.

This is the reason all of your qualified plans (like the 401k and IRAs, as well as many Annuities, and Variable Life Insurance policies) have long withdrawal penalty periods. The qualified plans, with very few exceptions, cannot be touched without penalty until age 59 and a half. It is not uncommon to have 15 year withdrawal penalty periods in the Variable Life Insurance and Annuity contracts.

These long withdrawal penalty periods are in place simply so the financial institution can use your money longer.

Be aware of this rule when choosing a financial advisor. Make sure you know the exit provisions of any financial product you are discussing.

4. Give Back As Little As Possible

Think like the bank president again for a moment. When it comes time to actually return the money to your depositors, how much do you want to give back to them? As little as possible, right? What would you do to discourage them from withdrawing that money in one lump sum, or better yet, to leave the money in your bank even longer? Create rules for withdrawal? Tax it? Penalize it?

The way many of these plans are taxed is designed to keep the money inside the plan for as long as possible, thus allowing the financial institution to keep using that money indefinitely.

Financial Institutions want to keep your money as long as possible. Recently there has been a surge of new ideas and products about passing the money inside qualified plans on to succeeding generations to avoid paying the taxes on the money. Essentially, you leave the money locked inside the plan forever.

Great idea, but for whom?

There you have it, the 4 Rules of Financial Institutions. All financial institutions, and thus the financial advisors who represent them, operate on these rules. They are not necessarily bad rules. When you were thinking as the bank president in each of the examples, you too would have acted in the same manner and followed the same rules.

Choosing a financial advisor is no small matter. Interacting with the financial institutions behind the financial advisor is no small matter either.

If you understand the rules of financial institutions you can use them to your advantage because you know the game they play. You will also choose a financial advisor and products that are in line you’re your goals and ambitions for life.

You must understand and use the 4 Rules of Financial Institutions to create a financial model that truly benefits you.

Why Work With a Fee-Only Financial Advisor?

When you accept professional advice on how to invest, save, and grow your hard-earned money, you have certain expectations from your financial advisor: expertise, professionalism, ethics, and independent, sound financial advice. If you’re not working with a Fee-Only Financial Advisor, you may not be getting what you bargained for. Why?

According to the Bureau of Labor Statistics, in 2008 there were over 208,000 financial advisors in the United States, with that number expected to rise to 300,000 by 2018. However, of those, only 2,000 are Fee-Only and members of the National Association of Personal Financial Advisors (NAPFA). Unlike transaction-based financial consultants who make their money on commissions earned from selling financial products, Fee-Only financial advisors do not sell any products, nor do they work on commissions. Instead, they are paid a flat fee by the client for independent financial advisory services they provide, rather than from the investments recommended. Let’s break it down:

No Sales / No Commissions
Many financial advisors are “Commission-based” which means their income is directly linked to the financial products and investments they sell you. Make no mistake, they are selling; these individuals may call themselves financial advisors, but they are really just financial salespeople. Here’s why: It is more lucrative to recommend certain investment products over others because of the commissions they earn. Therefore, it is very difficult for you, the client, to evaluate whether the “advisor’s” particular investment recommendation is most appropriate for your portfolio, or if it’s most financially lucrative for the consultant himself. By contrast, Fee-Only financial advisors do not sell any products nor earn commissions; their only source of income is from their clients. Therefore, clients understand that Fee-Only Advisor works only for their clients’ best interest, and are not wed to any investment company, product, or even insurance company. As a result, advice is unbiased and independent, with no conflicts of interest – they are free to recommend investments and products that are in the best interest of the client rather than the company’s bottom line. It’s important to determine whom your financial advisor is really working for: you or the company whose products are being recommended?

In recent years, the term Fee-Based was introduced by the large investment firms in response to the growing demand for Fee-Only. Buyer beware: Fee-Based is not the same as Fee-Only. Fee-Based financial advisors can collect both fees and commissions, and they may also be incentivized to recommend certain products endorsed by their sponsoring firms.

Fiduciary Standard
A fiduciary is a financial professional who is held out in trust, and is legally obligated to put their clients’ interests above their own. Fee-Only financial advisors are the only financial consultants who operate under a fiduciary standard; transaction based financial consultants operate under what is known as a suitability standard, which is a much looser standard. In addition, Fee-Only financial advisors are highly regulated by either State or Federal regulators. If your financial advisor is unwilling to sign a fiduciary oath committing to put your interests above his/her own, then it’s time to work with someone who is Fee-Only.

Solutions Based vs. Product Based
A product-based approach is whereby a specific product is recommended or sold to the client, sometimes irrespective of the client’s particular financial circumstances and goals. Transaction, Commission, and Fee-Based advisors are typically trained on only the products they sell and/or recommend, thereby taking a product-based approach to their clients’ portfolios. The problem with the product-based approach is that providing comprehensive financial advice should be a process with multiple steps, integrating the client’s holistic financial and non-financial reality. Fee-Only Financial Advisors always take a holistic approach with each client, and offer more objective advice on a plethora of investment options. As part of the holistic approach, Fee-Only financial advisors recognize that they can not work in financial silos, but rather in coordination with the client’s other professional consultants such as CPAs, attorneys, and estate planners. In this way, clients can rest assured that all actions taken related to their finances are commensurate with their overall needs and circumstances.

Moral of the Story
Always do research and ask a lot of questions before you enter into a professional relationship with a financial advisor. Whether you have $10,000 or $10 million to invest, your financial consultant should be paid only by you, commit to a fiduciary standard, and be free from any conflicts of interest. Fee-Only financial advisors fulfill all of these requirements.

ACap Asset Management is an independent, Fee-Only Investment Advisory Firm. At ACap, we believe in investing, not speculating. Our goal is not to speculate on the direction of the market, but rather to achieve a healthy rate of return that allows our clients to reach their financial dreams without exposing them to unreasonable risk.

Our clients rely on ACap as their trusted and independent financial expert because we are committed to upholding the highest measures of financial knowledge, objectivity, and ethical practices. Whatever your financial goals may be, ACap can help you reach them.

No Sales + No Commissions = No Conflicts of Interest