The Index Card: Why Personal Finance Doesn't Have to Be Complicated

by Helaine Olen

It doesn’t matter. Your friendly neighborhood brokerage or bank is not a place to go for nonconflicted, fiduciary financial advice, any more than an appliance store is the best place to ask whether you really need a 3-D TV.

IF YOU WANT GOOD ADVICE, PAY FOR IT Do you work for free? Neither do financial advisors. If you want unconflicted financial advice, you almost certainly have to pay for it.

If someone is truly working to advance your financial best interests, why create an additional incentive to mess with your investments?

BEWARE THE FEE-BASED ADVISOR

Beware of the term “fee based.” This is another one of the junk terms littering the financial advice industry. It means the advisor in question can charge a flat rate, but he or she might also work to commission. Some non-fiduciary brokers will also charge their clients for their advice, leaving t...

You want to seek out an advisor who works on a fee-only basis. This means the advisor is paid by you—and only by you. That payment can take a number of forms: Percentage of assets under management: This is an annual fee based on the amount of assets you are seeking advice on. The percent can range from as little as 0.15 percent for some of the online advisory services to 2 percent. (By the way, we think 2 percent is way too high a price to pay for financial advice.) Many advisors charge a sliding scale, with the percentage charged falling as the amount gets greater—for example, 1 percent charged for the first $500,000 and then 0.5 percent on the rest of the sum. Flat fee: This is the financial advisor equivalent of a prix fixe meal. The financial advisor agrees to charge you one rate for a package of agreed-upon services. Perhaps that includes a budget review and overall financial plan. Or maybe it’s a get-out-of-debt package. Hourly rate: You sit down with a financial advisor. He starts a clock. You pay by the hour for the advice. This can cost as little as $50 an hour for a financial coach, the sort of person who doesn’t make investment recommendations but can help you devise a budget and get-out-of-debt plan, to $250 to $500 an hour for someone with a certified financial planner credential. If you’re used to getting a service “for free,” it’s hard to pay real money for it. We understand that. But it was never free advice. You only thought it was a complimentary service....

HOW DO YOU FIND A FIDUCIARY? So what is a fiduciary? These are credentials that indicate someone is almost certainly working to the fiduciary standard: certified financial planner (CFP) registered investment advisor (RIA) fee-only advisor

Do you work to the fiduciary standard at all times? This last part, “at all times,” is important.

Putting Your Interests First I believe in placing your best interests first. Therefore, I am proud to commit to the following five fiduciary principles: I will always put your best interests first. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional. I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts. I will avoid conflicts of interest. I will fully disclose and fairly manage, in your favor, any unavoidable conflicts. ADVISOR FIRM AFFILIATION DATE

Someone who is legally obliged to act in your best interests is almost certainly going to be happy to share that information with you.

CONSIDER USING ROBO-ADVISORS Robo-advisors are the newest advisors on the block. Less than ten years old, these companies use computers in place of the human touch. Instead of sitting down with an advisor, would-be investors answer a series of questions about their financial history, goals, obligations, and risk tolerance. The algorithms then suggest a series of investments.

No matter how good it sounds, you still need to ask if a robo-advisor is a fiduciary.

FIDUCIARY OR SUITABILITY, YOU STILL NEED TO DO DUE DILIGENCE Finally, we need to add a disclaimer. Seeing a fiduciary and paying for your own financial advice are no guarantees. You will still need to do due diligence. But you are more likely to be on firmer ground.

BUY A HOME FOR THE RIGHT REASONS

OWNING A HOME IS NOT SOMETHING WE’VE ALWAYS DONE

HOME PRICES DON’T ALWAYS GO UP Home prices can go up, or they can go down. Yet many people don’t quite believe it. Even after the Great Recession’s housing bust, Americans identify real estate as the best long-term investment.

HOME OWNERSHIP: AN EXPENSIVE AUTOMATIC SAVINGS PLAN? In the best-case scenario, owning your own residence works as an automatic savings plan. You find a home. You put the traditional 20 percent cash down. You get a fixed-rate fifteen- or thirty-year mortgage, which you faithfully pay month after month. Once you have paid off your mortgage, you own a big asset. You never once thought you were putting money in a savings account or investing it. But that’s exactly what you did.

KNOW HOW MUCH HOME YOU CAN AFFORD

HOMES ARE FOR THE LONG RUN Home ownership, like stock investing, works best as a long-term proposition. It takes at least five years to have a reasonable chance of breaking even on a housing purchase.

20 PERCENT DOWN IS BEST It’s hard to save up to 20 percent of the purchase price of a home, especially if you live in a high-cost market. But the closer you can get to 20 percent, the better. Why? The more money you can put down toward the initial purchase of a home, the lower your monthly mortgage payment.

WHAT ABOUT A FIFTEEN-YEAR LOAN? If you are looking to turbocharge your home equity, you might consider a fifteen-year loan instead of the conventional thirty-year loan. Fifteen-year loans come with a lower interest rate—usually by half a percent or so. The shorter lending period allows you to build up your nest egg faster, making for a better automatic savings plan.

PLAIN-VANILLA FIXED RATE IS BEST If you have good reason to believe you won’t own the home for more than five or ten years, or if interest rates stay quite low, an adjustable rate mortgage (ARM)—that is, a mortgage that begins with a lower interest rate but can increase after a set period of time—might sound appealing. The same is true for interest-only loans, which are sometimes available to people with high income and net worth.

YOUR EMERGENCY SAVINGS ACCOUNT COMES FIRST

your emergency fund is absolutely not your down payment.

Neither our houses nor our lives are fixed. Be prepared. Finance your emergency fund. Then think about purchasing a home. If you don’t have an emergency fund and do own a house, chances are good you will someday find yourself in financial turmoil.

GET YOUR DEBT UNDER CONTROL BEFORE HOME BUYING

SHOP FOR A MORTGAGE

Comparison shopping is essential. Bank officers and mortgage brokers often have an interest in steering you toward one particular mortgage. They don’t have a fiduciary duty to exclusively pursue your own financial interests.

RESEARCH REFINANCING OPTIONS

FLIP PANCAKES, NOT HOUSES

Don’t go there. Your house is your home. It is not a speculative investment. Real estate speculation is best reserved for gamblers and the pros.

HOME BUYING—A CHECKLIST We want you to buy a home if you think it is right for you. Harold owns the house he lives in, and Helaine loves her co-op. If you follow the basic rules below, it can be a smart financial decision: Get your debt under control, and save up your emergency fund. Save up as close to a 20 percent down payment as you can. Shop around (and get preapproved) for a fifteen- or thirty-year fixed-rate mortgage. Consider what you really want and need in a home, and stay consistent with your budget. Location, location, location. Enjoy your new home.

WHEN BAD THINGS HAPPEN TO INSURED PEOPLE

Insurance is a complicated but necessary evil. Few people have enough cash lying around to cover a lengthy hospital stay, loss of a home, loss of a loved one, or loss of income from a family member’s illness. In exchange for a monthly premium, insurance can protect us from the financial fallout of tragedy.

LIFE INSURANCE What would happen to your family and loved ones if something suddenly were to happen to you? Would your spouse be okay? Your children? Or maybe your elderly parents are counting on you to help them out in their old age. When money is tight or you’re healthy, it’s easier (and a lot less stressful) to not think about these kinds of questions. Yet if something goes wrong, not being prepared for it will truly be the biggest financial blunder you’ll ever make.

The best type of insurance to protect your loved ones, at the least cost to your pocketbook, is called term insurance.

Our advice: Get a thirty-year level term life policy, even if you are not convinced you will need the policy for that long. Why? Because if you guess wrong, there is no guarantee you will be able to get another life insurance policy or a policy at a price you can afford. And of course, you can simply cancel the policy after twenty years if you decide you no longer need it. It’s a rental after all. You can move on at any time.

One last point that should be obvious: The younger and healthier you are, the cheaper your life insurance bill will be.

SOCIAL SECURITY DISABILITY ISN’T ENOUGH

Many people can obtain disability insurance through their employer. If you are one of these people, run, don’t walk, and sign up now. No one plans to become so disabled that they cannot work. But it happens, and it happens more often than you realize.

PLAYING THE INSURANCE TRIFECTA—RENTAL, HOMEOWNER, AND AUTO

Here’s one pro tip: Go for the high-deductible options. You won’t be using this insurance very often unless you are a fantastically unlucky person.

So what is adequate liability insurance? It’s at least twice the amount—and maybe more—of your net worth.

THE SIX GOLDEN RULES OF INSURANCE When it comes to life insurance, stick with term. When it comes to property insurance, the higher the deductible the better. Always double-check that your hospital and doctor are on your health insurance plan. Adequate liability coverage is at least twice your net worth. Avoid complicated annuities. Keep an emergency fund.

But we need to be honest: Budgeting, saving, low-cost investing, and otherwise doing the right financial thing can’t protect us from everything. Because sometimes . . . WE ALL NEED A LITTLE HELP

THE GOVERNMENT—YOUR LAST-RESORT INSURANCE Let’s be clear: Social Security is a government program. So is Medicare. Student loans come from the government, as does unemployment insurance. When you take a mortgage deduction on your income taxes, that’s also a result of federal government largesse.