Developing plan takes time
It stands to reason that unless a financial planner was born with a very big silver spoon, particularly in light of the expense to operate a business, no one is going to practice financial planning with the liability attached to it, put the hours into a proper analysis to develop a well thought out set of recommendations, “for the love of mankind.” Our society is just not structured in such a way that would allow this form of existence for long. No more than you would expect your physician to perform a complete comprehensive examination with all the tests included free of charge, would a true comprehensive financial plan be able to be prepared for no charge. Physicians can generally charge for an initial consultation with fees ranging from as little as $25 to as much as $500 or more depending on qualifications and the time that the physician spends with you. The amount of time necessary to develop a proper financial plan which takes into account all of the issues having to do with living (education for children, retiring, dying, long term disability, business planning, etc.) is not common knowledge. However, the process takes from anywhere from 50 to over 100 hours to be done thoroughly. This is a period of intense analysis, study, evaluation, review, research, outlining, writing, editing, and re-editing, before it’s ready to be presented to the client. How can anyone be expected to do this for free? There are fee-only planners who strictly do the analysis for you, outline the problems, and propose generic (an answer with no specific company or product recommended) remedies to the question. This approach is preferred by some individuals. The feeling is that they are getting the most objective view of their affairs. The problem with this method is that it’s generally unaffordable by the masses. Because of the amount of analysis that is required in the comprehensive financial planning process, it’s generally targeted to the six figure income individuals. Minimum fees may range from a low of $5,000 to a high of an equation of, or percentage of, your assets and income combined, taking into consideration investments held, business agreements that need reviewing, wills, trusts, etc. I believe this to be the most expensive and unconventional way to go. Moreover, just because you make a lot of money doesn’t mean you have to go to this extent to find the right answers. You still generally are going to have commissions built into them. *Disclosure: Information based on generally-available market data, including Internet...
read moreThe Evolution of Life
An area that confounds even the professionals in the industry that probably had more to do with the birth of financial planning than any other single group is the life insurance business. Many of the methods that have now been refined into the process of financial planning were spawned as techniques used in the sale of life insurance. The needs approach, the estate planning approach, the educational plan approach, and the retirement planning approach were all separate markets that agents would specialize in, all using a similar version of one product, life insurance. The present modern life insurance product that has completely turned the industry around via a “Baptism by Fire”- the Universal Life concept- is the only life insurance product that has ever been approved by an act of Federal legislation. When it was presented to the public by E. F. Hutton it was the most dramatic movement of blocks of premium dollars that has ever occurred in the history of the industry. Heads rolled at the top when the presidents of large, old life companies did not recognize this long awaited change in the basic design of whole life. People just moved their cash value from old whole life plans to new universal life plans. The change was prompted by radical interest rates so high that the stodgy guaranteed interest rates that were built into the old line whole life contracts (from 2 1/2% to 4 1/2% interest) just didn’t make economic sense. In every form of media there was the battle cry heard around the world, “Buy term and invest the difference!” And, they were right. The boys at the top of life industry said it was just another fluke in the economy. Be cool. As time went by, things did not change. Large loans on policies in force were requested more than ever before, and were reinvested in “money markets.” People just loved the idea of borrowing at generally 5% when rates to borrow were over 18%, being able to deduct the interest and reinvest the capital and get, at one time, as much as 20% or more during that frightening period in our economy. Something had to be done, so the life insurance geniuses came out with flexible premium annuities and annuity riders to compete. That worked for a time, but the people started using their annuities like money markets, taking money in and out, causing an administrative nightmare for the companies. It wasn’t working as it was supposed to. The insurance industry knew they had to do something. Then came the answer! A product that was cheaper than term by only charging the actual mortality cost to the policyholder. A product that earned current interest rates. A product that had no set premium payment except the cost for pure mortality, that excess dollars could be put into it in large sums and be sheltered from present income tax on the earnings unless withdrawn. All this was built into one policy and much more, like the increased insurance option that increased the face of the policy every time you made a premium payment, without a physical, which is of great value in particular to growing estates, for estate tax purposes or if the insured had lost his or her health. That was the beginning...
read moreProfessionalism and the Financial Planner
Financial planning has gone through many changes to date. The question of whether it survives as a profession lies with the people that represent themselves as part of that movement. Their interaction with the public plays an obvious, important role. The development of community perception depends on the individual experiences of people with financial planners. What types of experiences occur? A lot of good. Take the family that had a very good income, but had absolutely no fiscal responsibility, and that you were able to convert into ardent savers. They became very excited about their lives all over again, when previously they were cynical, even scared, to look into the future. They knew they had a problem with their finances and needed help. At that point, people are very vulnerable and can be taken advantage of easily. You, as a financial planner,literally have the future of this family in your hands, given the complexities that surround the operation of a family’s finances through to retirement. However, there’s another side as well. There is the professional behavior of the planner when encountering another colleague’s client. What do you do, particularly if the client has a complaint or if he questions your colleague’s opinions, recommendations and strategies. It is impossible to give recommendations without knowing all the facts surrounding a particular individual’s financial affairs. There are also different views as to how to handle a family’s affairs, both right, but different. Healthy competition is important in every profession, however, an effort to aid each other in improving our practices and techniques needs to be clear. Only this way can we ensure the respect that is necessary in our maturing profession. Putting together a financial planning practice, with all the proper tools and the training of staff, takes an enormous amount of time, patience and effort. Most of all, it takes money to survive during those lean years and long hours. Certainly, if all of this is true, we need to help each other whenever we can, to succeed. That includes not going after each other’s already established clients by using ill-directed remarks designed to incite the client into believing that the advice of his planner is incorrect. At times, we all have had clients of other planners come to us because they had concerns about what had been done for them. If we do not know if they have gone to another planner previously, the first question we should ask directly is, “Do you presently or have in the past, worked with any other planner?” The individual’s answer determines the direction of the conversation from that point on. If the answer is yes, we should ask who their planner is and why they have come to you. Usually, the evidence shows from the conversation that there is a communication gap. They are either very uncomfortable with the investments that they are in, have recently lost some money in an investment or are worried as to whether they are getting the best advice. What we should try to do in that meeting is explain to them that without a thorough examination of their financial situation, it is difficult to be certain that there is a problem other than the ups and downs of the investment marketplace. We should suggest, finally, that they...
read moreLoan Co-Signer Worries About Taxes
A reader asks: About 15 years ago, I co-signed with my brother on a mortgage loan. The loan is paid off now. He would like me to withdraw my name so he can put his wife’s name on the house. I have no objection to that, but I worry about the tax consequences. I have no interest in his home nor did I put up any money for the mortgage or payments. Does the IRS consider the removal of my name from the house as a sale on my interest in the property and tax me on it? The problem: Sorting out the taxes that can result from a co-signed home loan. The solution: This is a good question, with generally, a simple answer. If you merely “co-signed,” there shouldn’t be any problem taking your name off the paperwork. You mentioned that the loan is paid off now. Well, then there is truly no problem as long as everything has been done as you have described. Generally, when someone agrees to “co-sign,” it means that if the person who is buying the home defaults on payments, the co-signer will be asked to make things right as far as the indebtedness is concerned. The co-signer appears on the note or mortgage as a cosigner and shouldn’t appear anywhere else in the month-to month mortgage payment coupons. What about the deed to the house? You could have changed that at any time during the life of the loan, and it wouldn’t make any difference to the mortgage company or the indebtedness. You would still be the co-signer and still be responsible for the debt in case of a default. Another place where your obligation as co-signer arises is your credit report. If the loan is paid off, it would be wise to notify the major credit-reporting agencies that your name is no longer on this note and the debt has been satisfied. Contact numbers are: Experian (800) 831-5614; Trans Union Corp., (800) 916-8800; Equifax, (800) 270-3435. Be prepared to offer that the loan has been paid off. That should clear up that end of things. Now, about the IRS. As long as things are as you stated, there are no issues to deal with. But the situation can get complicated when you are actually on the mortgage notenot as a co-signer, but as some type of owner of the property. That’s when you need to clear up matters. For example, did you take any deduction for mortgage interest that you didn’t pay? Or, have you been paying this mortgage all along and your brother has been paying you, etc? Then you need to discuss how this has been handled with the accountant thatfiled the return for all parties concerned. Even so, under the present law (covering sales after May 7, 1997) there may not be a problem with taking your name off as long as it was also your residence during this time and the capital gains were under $250,000 for single or $500,000 for married filing jointly. You must have lived in the home for two out of the past five years, as well. Then there is no reporting to do because there has been no taxable event. However, if you did not live there, then there may be a taxable event, as...
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