All posts by hfhplanning

Why We Can’t Tell if the Market is Half Empty or Half Full.

The “Intelligent Investor” column in the Wall Street Journal this weekend asks the question and then answers it. The reason is that the most used sites to compare holdings (Google and Yahoo) do not include dividends in their charts.
How does that impact on the HFH Planning client? Very simple. The quarterly report shows what the holding returned, including dividends, and then compares the return with a comparable benchmark that also includes the dividend return.
Our clients see how they are doing on both a real and a comparative basis.


Barron’s recently did a rather comprehensive review of annuities. I’m going to discus two types.

The Variable Annuity. A variable annuity is basically a tax-deferred investment vehicle that comes with an insurance contract. Thanks to Congress, earnings inside the annuity grow tax-deferred, and the account isn’t subject to annual contribution limits like those on other tax-deferred vehicles like IRAs and 401(k)s. Typically you can choose from a menu of mutual funds, which in the variable annuity world are known as “subaccounts.” Withdrawals made after age 59 1/2 are taxed as income on the growth portion of the value. So, if you invested $50,000 and the value grew to $60,000 you would be liable for the tax on $10,000. Earlier withdrawals are subject to tax and a 10% penalty.

While these annuities are sold by insurance agents to unsuspecting individuals (the fees may be high) they are valuable to fairly high income individuals.

Who would be a good candidate? The individual (or couple) are living comfortably. They are saving money regularly. They have put as much money into their pre-tax retirement accounts as permitted. They have an account that they can draw from if an unexpected situation arises. Now they may put money into this tax deferred instrument.

Another annuity the article talks about is the immediate annuity. It is exactly what the name implies. You give the insurance company a sum of money and they GUARANTEE you a payout for the rest of your life. Some people worry about the fact that if they die the day after they gave the money to the insurance company the company has a windfall. Who cares? You’re dead. Your spouse continues to be covered (if that’s what you bought) and you already made provisions for the heirs (they will never get this money anyway). And if you live to 120, you’ll still receive the check each month.

There are two considerations to buying the immediate annuity. Strength of the insurance company (they need to bE there when you are 120 and the fees.

What is the difference between an advisor who charges a commission and one who doesn’t?

Barron’s ran a comparison of immediate payout annuities. One of the companies (first on the list) had an income by age 85 of $337,200. Using the same company (insurance companies are not licensed in all states) and going through HFH Planning Inc. your income by age 85 would be $348,660. That’s $11,460 more in your pocket. Of course we would suggest your payout be smaller at the start. Why? Because we would have you add a cost of living rider. If our suggestion were a 3% annual increase in the payout you can see the difference on the attached chart.

Annuity Payout Comparison


Sentiment Survey – 6/23/11
Bullish sentiment jumped 8.5 percentage points to 37.5% in the latest AAII Sentiment Survey. This is an eight-week high for optimism that stock prices will rise over the next six months. It is also, however, the 10th consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially flat over the next six months, declined 1.4 percentage points to 26.8%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped 7.0 percentage points to 35.7%. This is a three-week low for pessimism. Nonetheless, bearish sentiment is above its historical average for the 17th time in 18 weeks.

An end to the market’s six-week losing streak gave individual investors hope that stock prices are stabilizing. Even with the improvement in sentiment, pessimism remains high and is above average for the longest period of time in approximately a year. (Bearish sentiment never dipped below 30% during the 18-week period of from May 13 to September 9, 2010.) The failure of Washington to reach an agreement on the debt ceiling and the slow pace of economic growth remain key concerns for individual investors.

Hourly Only Financial Planner

A recent blog defined the differences between a financial planner and a Certified Financial Planner™. I also differentiated between how CFP®’s may charge. Now I’ll talk about hourly only planning and use HFH as the example/

HFH Planning Inc. is a financial planning firm that charges only on an hourly basis or a rate based on that hourly charge. Why the latter? Some people want the ability to pick up the phone and call us and not feel pressured that each word is costing them. Others just like the comfort of knowing what the annual cost will be and so we (the client and HFH) agree on an annual charge. We also set a fixed fee for the quarterly report. The following then is an example of how our process works.

The relationship generally starts with a no cost, brief (20 to 30 minute) meeting so we can spell out what the client may expect from us as well as what is required of the client.

When the client hires HFH we meet for a period of approximately one to two hours. During this meeting we discover who the client is, from a financial point of view, including their background in investing, risk tolerance, concerns, goals, etcetera. We tell people we get to know more about them than anyone on the face of the earth knows about them.

Having gathered this information we then spend another two to three hours analyzing the client’s situation. Has their tax preparer asked all the right questions and taken all of the available deductions? Was the preparer too aggressive thereby leaving the client with exposure?
We review the client’s insurance coverage. Personal insurance lines to make sure the client is well covered; but not excessively so. The same is true for the health and life insurance lines. While a member of the firm is insurance licensed, we do not sell any policies, we only make suggestions based on our findings.

For the investment area, we do an asset allocation using 5 equity areas, 4 fixed income, and 3 that we think of as inflation indexed categories. We analyze the investments, regardless of where they are held (including the holdings in a corporate 401k), and fit them into the allocation. We only recommend managed mutual funds or ETFs. The funds we use have consistently outperformed their benchmarks.
Additionally, we review estate items such as wills and trusts and living wills and medical powers.

We meet with the client again to present our findings in the all of the areas: taxes, insurance, investments and estate planning.
If the client request that we implement the plan; we will make recommendations regarding specific mutual funds they should own. We choose funds regardless of where the positions are held. We even choose funds for the 401k. We continue to do this working on an hourly basis. I think it is this last part that makes us unique.

Once this part of the relationship is in place we monitor the accounts. This monitoring includes reporting how each fund has performed in the last quarter and 12 months. Further, we compare the fund’s return with an applicable benchmark. In this way, one can see if the return is good, bad or mediocre. The cost of monitoring is $325 per quarter.

How does all this break down in cost to the client? The original analysis is under $2,000. The monitoring is currently $1,300 a year. A firm that charges one percent would have less than $130,000 to manage to be paid equally. Firms that take on clients with less than $250,000 are rare. We have no minimum. Commission brokers, on average, get 4% to 5% on both buys and sells. Buying $50,000 of mutual funds, on average, costs $2,000. Further, clients may use us to asset allocate their entire portfolio, even if a portion is with a broker or advisor with whom they have a long relationship and they don’t want to end that relationship.

Distribution of Misinformation

I read an article recently about a supplier to the fine restaurants in New York City. What struck me was the ignorance of the writer about the subject. It’s really a minor point, but meat comes from the slaughter house in quarters, not halves.

What does that have to do with financial planning? Everything. While I was out at a conference I met the writer, Liz Pulliam Weston. What impressed me was that in order to write about finance she had to be knowledgeable and not get pushed down the slippery slope. She took all the courses needed to become a Certified Financial Planner™. Many financial writers don’t have the knowledge to determine what is fact.

What is the slippery slope? Generalities that are almost taken as gospel by a financial planner. When you talk to a financial advisor, fee based or otherwise, they will tell you one should have 6 months of savings. From the banks point of view that makes sense. Your money earns nothing and they make 6 or 8 times what they pay you. But ask a planner why that is so and they tell you that it is basic. Well yes, if you have a job where the boss can come up unannounced and hand you a pink slip and say good bye. And, you haven’t worked long enough to collect unemployment insurance that myth becomes a reality. Most of us are not in that boat. Yes six months of an emergency fund is needed. However, that should have deductions that most financial planners don’t take into account. What should reduce the amount? Severance pay, unemployment, your partner’s income over his expenses on a Spartan budget all should reduce the required six month figure.

Insurance agents (not a fee only financial planner) will tell you a person should have long term disability insurance. They tell you workers are more likely to have a disabling injury before you are 65 than die. True. But if you are in a position that requires you to use your head, as opposed to your body, does that make sense? I could get to work in a wheel chair and still do my job.
Carrying a mortgage so you can have a write-off. Whether a CFP, fee only financial planner or broker, they all seem to suggest that a mortgage is good. What a ridiculous idea. Maybe in a high inflation environment it makes sense, but generally not. Why?? Let’s use an example. The interest portion on your mortgage is $5,000. At the end of the year you deduct $5,000 on your tax return. You are in the 35% bracket (if you are in a lower bracket the numbers are even worse) and so you get $1,750 back from the IRS. So you gave the bank $3,250, for what?

Last one regarding taxes. Again, a financial advisor of most stripes will caution you about going into the next tax bracket. Why? I don’t know. If you are on the cusp of the next highest rate and you make an additional $10,000 what happens? You pay taxes for that $10,000 at the higher rate and the rest of your income is taxed exactly as it would have been had you not made the extra income. So, if you would be in the top rate for the extra $10,000 you would only come home with $6,500, not the $6,700 at the lower rate. TERRIBLE.

My last peeve is about the attempt to misdirect or put a scientific cover on the projections a financial planner might use. Two terms are used with regard to fixed income (too often referred to as BONDS). The two terms are duration and maturity. Maturity is the date a bond is repaid. For mutual funds an average maturity is used. Sometimes, since duration (a measurement of how long, in years, it takes for the price of a bond to be repaid by its internal cash flows.) is always a lower number, a financial planner may focus on this number rather than maturity.

The use of “Monte Carlo Simulation” which is a problem solving technique used to approximate the probability of certain outcomes by running multiple trial runs, called simulations, using random variables to predict the possibility that you will achieve your desired results. This, in my opinion, is garbage in- garbage out.

A fee only planner, a broker, it doesn’t matter. Many financial professionals want you to believe our art is a science; and journalists who are not well informed aid in this misconception.

Definitions of Planners

I’ve been asked to define terms. So here goes:

Financial advisor or adviser, financial planner, and financial consultant are titles that anyone could give themselves. Unlike, for example, a hairdresser who needs a license, anyone can call themselves any of those titles with impunity. Is there something one may rely on? Yes, the Certified Financial Planner™ or CFP® designation. In order to be a Certified Financial Planner™ one must take courses  which cover:  Taxes, Insurance, Investing,  Retirement Planning and Estate Planning. One must then pass a 10 hour examination and work for three years in the field. Only then may they call themselves a CFP® or Certified Financial Planner™.  They must keep up with what is happening in the field by taking 30 hours of continuing education courses every two years. Two of the 30 hours must be an Ethics course.

As part of the permission to use the CFP® designation, one must agree to abide by the Certified Financial Planner Board of Standards, Inc. rules. An important part of those rules is that you agree to act as a fiduciary in dealing with your clients. A fiduciary is one who puts his clients’ interests first, as opposed to the stock broker’s requirement to only sell something that is suitable. The CFP Board does hedge a bit.  The CFP® must disclose that what he is proposing is being offered because that is what is available to him. So, an insurance representative who is a CFP® may sell you a Variable Annuity (tax sheltered) for your IRA (already tax sheltered) because he cannot sell a low cost mutual fund.  He may do this  as long as he tells you he is selling it to you because that is what is available to him to sell. Confusing? If you need more of an explanation, please email me.

Now about fee based, fee only, and hourly only planners. All of these phrases are descriptive of a negative. All these descriptions apply to planners or stock brokers who do not charge a commission.

A fee based stock broker may put you into a managed program where all trades are done without commission and you are charged based on assets under management. Although that same broker can sell you a bond or a mutual fund and charge a commission on that part of the transaction while still complying with the rules of the CFP Board of Standards.

A fee only planner will not charge a commission. He may do an analysis of your situation, charging on an hourly basis and then switch to charging on an assets under management basis; or, if the assets are large enough, not even charge for the analysis. He may buy and sell bonds, stocks or mutual funds for the portfolio and never earn a commission.  The fee only planner will continue to work for his client charging on an assets under management basis.  The going rate is 1% of assets.

An hourly only planner does what the fee only planner does, but does not work on an assets under management basis. He charges based on the time required to analyze, create, and monitor the client’s situation and charges based on the time required to perform those services.  HFH Planning is such a firm.  There aren’t many. Why?  Because it is the least profitable way of being compensated.

I will provide an example in my next post!



Figures Don’t Lie, but Liars Figure (2)

A while ago I wrote about someone suggesting that if you made more money that your income would be taxed at a higher rate.  That insinuates you would be paying at the higher rate from dollar one.  Bad? Yes, but most people get a report from their tax preparer that show it’s only the next dollars that get pushed into the higher rate.

Jason Zweig in his “Intelligent Investor” column ( points to an even more egregious example.  The comparison of newsletters or trading tip services comparing their returns, with dividends, to the S&P 500  without dividends.

“From Jan. 1, 2002, to April 1, said the email, the portfolio’s “total average return has averaged more than DOUBLE the return of the S&P 500.” An accompanying bar graph showed the S&P 500 returning 15.5%, versus 39.2% for Mr. Cramer’s portfolio.

Incredible indeed, if you include dividends for Mr. Cramer’s portfolio and exclude them for the S&P 500. With dividends, the total return of the S&P over the same period was 38.3%. Viewed this way, Action Alerts PLUS didn’t double the market’s return; it squeaked past by a cumulative 0.9 percentage point. That is before tax and before the annual subscription fee ($299.95 the first year). “

Why is this worse?  Because you do not have an accountant’s report to guide you.  You must go on line and get the values and do the arithmetic.  Something most of us are not inclined to do.

PLEASE, if it looks too good to be true, it probably is false.  Had the Madoff investors followed that rule they would be much wealthier today.

Fee Based Financial Planning – Fee Only Financial Planning

Exactly what is “fee based financial planning?”

It seems to be defined by the negative, which is that the planner does not charge a commission for what he does. [In the remainder of my writing I will continue to use he, and the planner could be of either sex.]  The term wants to differentiate and suggest that fee based is less likely to create a conflict of interest. As a matter of fact, there is an organization of financial planners (brokers) that is highly regarded in the lay world for requiring that those who belong are “fee only” planners.  It is my contention that the premise is false. Why, and what is an alternative?

First is the fact that the planner is most interested in building up the assets under management. Is there anything wrong with him telling you to put your money under his management where he will monitor it and look to give you the best return possible. Maybe, maybe not. With safe interest rates hovering around zero would it be in your best interest to pay off your mortgage? Yes, the return from the stock market may be better. But that is a MAY. If we’re comparing the return against a “safe” return then market speculation* doesn’t enter the picture. But if you pay off your mortgage you will not have a tax deduction. That’s true. But have you ever looked at the logic of the reason to have that tax deduction? You pay $1 to the bank to get 30 or 40 cents of deduction. Where I come from, that’s giving away 60 or 70 cents.
What if you have no mortgage to pay off and you just need income, where is the potential problem. Well, in this interest rate environment short term fixed income securities seem to make the most sense. Interest rates have only one way to go, up. Even though nobody knows when. That means loss of value , with the shorter the term the less loss. (If you send me your email address I’ll send you a chart that describes that in detail.) But interest rates are returning almost nothing. So, in order to not get a negative return, he is going to have to invest in maturities that will both pay you something and permit the firm to get his percentage. Putting you at a greater risk.

I have more to say and will continue. However, I don’t want you to get fed up with all the information, so more later.

*What Does Speculation Mean?

The process of selecting investments with risk in order to profit from an anticipated price movement.

The 30 day Treasury Bill is the standard usually used for “risk free” investments.

Figures don't lie, but liars figure.

A story just came in that drives me nuts.

Clients have begun to ask how they can earn less from work so that their income levels won’t be pushed to a higher tax bracket, a financial planner told a congressional hearing today in Washington.

“For the first time in my 20 or so years, folks actually were asking what they could do to minimize their earnings potential, because they wanted to try and avoid being pushed into the 39.6% tax bracket,” Mark Johannessen, 2008’s volunteer president of the Financial Planning Association, told a House Ways and Means Committee hearing on the implications of America’s complex tax code.

Notice “they wanted to try and avoid being pushed into the 39.6% tax bracket,”

Well did he bother to explain to them that they are not being “pushed” into the higher bracket.  That all the money they earn below that threshold will be taxed at the lower rate.

For persons filing a joint return the first $16,750 is at 10%, then up to $68,000 at 15%, the up to $137,300 at 25% and then 28%, etcetera.  So, a couple who earn $137, 500 will not be paying tax at 28%.  Only the $200 above $137,300 will be taxed at the 28% rate.

Is there a reason he doesn’t explain that to his clients?