Category Archives: Financial Planning – General

Retirement Income Planning – Spend early or make it last?

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During our working years we plan for retirement or financial independence in part by saving maximally and investing in assets that are likely to appreciate.  While we are working and saving for retirement we are in the accumulation phase. As we approach retirement (within about 5 years) we continue accumulating assets and begin the process of distributing those assets to sustain our chosen lifestyle throughout retirement. When we use an income stream from our assets we have entered the distribution phase.

During the accumulation phase we all focus on portfolio returns and tolerate some volatility. We can weather market fluctuations and lack of liquidity since we are not dependent on the portfolio and have our earnings to support our lifestyle. The main objective is to pay required taxes, support our lifestyle, save, and establish a life that encourages us to flourish.

As we approach the time when our assets alone will be used to support our lives, it becomes essential that we address the nuances of how the assets will be deployed – this is termed Retirement Income Planning.

Retirement Income Planning addresses in a pro-active manner how to create a stream of income for our remaining days (using accumulated assets) once our income from work no longer fully supports our lifestyle. Since the retirement time horizon is unknown, we must marry wishes for early retirement or plans for having larger income distributions with having assets last through an unknowable lifespan.

Running out of money is never an option in retirement but leaving money behind is also not acceptable, if it limits your lifestyle. This balance becomes a challenge as lifespans extend and health preservation becomes more successful and expensive. The latest survey shows that couples aged 65 have more than half probability (56%) of at least one spouse living to age 92. Despite these findings many feel they will not live past 80 and yet, if healthy and productive, they might feel very differently once they reach 90. Planning effectively for longevity is essential and must be weighed against the benefits of early spending.

For Retirement Income Planning, we also need to manage tax liability since we want to be sure that assets last as long as possible, particularly tax-deferred assets that are taxed at ordinary tax rates on withdrawal.

A market downturn can more greatly impact a portfolio early in retirement or just before the distribution phase. In retirement, unlike in the accumulation phase, it is much more difficult for the portfolio to recover from a market downturn. A robust retirement income plan must include ways to deliver the needed income regardless of market behavior.

The new reverse mortgages are income distribution tools that retirees can use to access home equity as part of a retirement income plan. For some, they provide at least three advantages early in retirement: reduced tax liability, longer investment time for the portfolio, and enjoyment of their home until retirees are ready to downsize.

For all retirees preserving their purchasing power (not just preserving the dollar amount) is an essential part of an income plan. Failure to include inflation protection is evident when retirees hold little to no significant equity portfolio and the consequences are dire. Though annuity and pensions are useful income distribution tools they fail unless combined with a strategy that protects against inflation. Sustaining purchasing power is even more significant when considering healthcare expenses. Keep in mind that healthcare costs grow due to inflation and also as a percent of annual spending as we age.

Scenarios that use all available tools to address how to best deploy retirement income will provide each retiring person with confidence to spend early and throughout retirement without fear of outlasting their assets.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Should you be a landlord in retirement?

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As you would expect, we often think about ways to supplement client retirement income and diversify a client’s finances beyond their market portfolio.

Owning one or more rental properties (commercial real estate) can provide a steady source of income and cash flow during retirement, with the added advantage of building owner equity (owner wealth). Once established, rental properties can also be a great resource to meet both planned and unexpected life events. And since they can be depreciated on your income tax, rental properties can provide a significant tax advantage while the asset actually gains in value. All this said, owning a rental property, let alone more than one, is not for the faint of heart. Without regular attention and constant re-appraisal, they can become a major headache and a huge liability.

The path to becoming a commercial real estate investor (a fancy way of saying “landlord”) often begins, innocently enough, with owning a single family home and then, for whatever reason, deciding to convert it to a rental. In this case, the property may need to be adapted in some fashion to accommodate renters. Others will approach a real estate agent with the deliberate intention of purchasing a rental property, in which case the property may be “turn key,” requiring little, if any, alteration. Whichever way you start out, the following are just some of the things you need to take into account before you commit to becoming a landlord in your golden years.

Commercial real estate requires at least 20%-30% down payment and an ongoing source of cash flow to fund expected and unexpected expenses. This means your equity will be locked in your property and only available through the available cash flow stream.

Real estate can be a great addition to an investment strategy, but rarely prudent as a sole investment. Unlike your portfolio, which will have fixed expenses, be liquid and globally diversified, your real estate will be impacted by local conditions with unexpected expenses and periods of poor liquidity. Expenses that are predictable include mortgage, taxes, landlord-specific insurance policies (both property and liability). Less predictable expenses are maintenance and repair costs as well as tenant related expenses. For those in control of their family cash flow, it is this difference that makes rentals a good consideration as a secondary investment and as part of their financial plan.

Like all investments it takes time and due diligence to generate a stable positive cash flow from rental properties – luck alone will not suffice. The price you set for rent is all important as are the expenses you incur. You need to be sure to cover your operating expenses which can include mortgage, property tax, insurance, maintenance, bookkeeping and accounting fees, utilities and if you use a management company you must also include their fee. In addition, the rent must provide you with a reasonable return based on cash flow, not just property appreciation, since you can’t sell the property to pay for ongoing expenses. The property must remain competitive with the local rental market and your cash flow able to cover expenses that may not be deductible in the year they are spent (a roof is an example of an expense that is depreciated and not deductible).

In addition to the financial considerations cited above, you will have legal obligations that are based on local laws and regulations pertaining to rental housing. A broken water pipe, furnace or refrigerator? Round-the-clock availability for emergencies is your responsibility. You can, of course, assign or pay for someone to take care of such things, but the legal responsibility will still be yours (always have sufficient liability and property replacement insurance). You are likely to be held liable for tenant or visitor injuries if due to unsafe conditions, especially in the common areas. Safety and habitability is paramount. On a regular basis, you must make sure structural elements are safe, the electrical, potable and wastewater infrastructure is sound, that trash containers are provided, that any known or potential toxins (such as mold or asbestos) are properly managed, that rodents or other vermin are kept clear off the premises.

However you come by your rental property, you will have to choose whether you should be your own property manager (directly overseeing and paying for maintenance yourself) or to take a more arms-length approach by contracting with a property management firm. Some clients hand these tasks to a family member who wishes to work part-time while others hand it over to a professional. A property manager can help those who wish to limit their day-to-day responsibilities, especially if you aren’t the handy sort or aren’t physically up to the task, but then you will have to cover the additional expense. Property managers, in simple terms, are hired to find tenants, maintain the property, create budgets, and collect rents. You will want to hire someone who knows about advertising, marketing, tenant relationships, collecting rent, maintenance, plus local and state laws in the location that you have the property. As the property owner, you can be held liable for the acts of your manager. It’s prudent, therefore, to hold the rental property in an entity that can provide some legal protection. Costs for contracting a property manager will usually run about 8% of rental income for management and about the same for engaging new tenants—this can eliminate your profit but if properly priced will provide you with a sustainable model well into retirement.

Finding reliable tenants is always a challenge, even if you employ a property manager. Tenants need to be able to pay their monthly rent, keep the property in good condition, and follow policies in the lease or rental agreement. You’ll find it easier to find good tenants if you select a property in an area experiencing low vacancies and high demand. Unfortunately, this means the property will also cost you more.

You should be prepared to have to deal with (or have someone deal with) evictions, wear and tear on your investment, unauthorized sub-lets, termination without proper notice, smoking, illicit drugs, pet odor and damage, parking and waste management issues, advertising, noise (including sometimes difficult neighbor relations), and other eventualities. Or, you can get lucky and find perfect long-term tenants! Realistically, as you age these tasks may become too stressful, eventually requiring you to hire a property management company or engage a (younger) interested and motivated loved one to take on this role. Either way, you must put this in writing as part of your purchase plan—including when you want this to happen, who this person should be, and finally, when the property should be sold.

During retirement some will love the ability to work part-time at managing their properties (even if only in a limited manner) whereas others will find it too complicated for their ideal retirement life. Invariably a well-managed property can generate ongoing income and create owner equity that will be a godsend in retirement or as an alternative to your market portfolio. Unfortunately for some, the process can become too complicated and stressful. So much so, that they avoid the tough decisions and derail their entire retirement plan. Being a landlord is very much an individual decision.

The bottom line is that rental property cash flow can generate a stable income during retirement, and can provide needed equity to fund contingency plans (such as disability, long-term care, health care needs, legacy) but profiting requires planning and annual review. It is a business that needs your ongoing attention or it will become a major liability. Even with the help of a property management firm, you may wonder in what way you can really consider yourself “retired” owning and managing rental properties.

Like any other financial investment, do your homework, and moreover, make sure it fits with your long-term financial goals and vision for a rewarding life.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

HARP and Traditional Refinance

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Refinancing your mortgage may seem ideal and particularly pressing when you are contacted by a “HARP specialist” anxious to point out that the rates are better than ever and the deadline to apply fast approaching. If you are considering such a move, let us first check to see if refinancing makes sense AND if you even qualify for or should use the HARP program.

Let’s begin by reviewing when and why we would take the time, make the effort, and incur the cost of a refinance. Refinancing is often done with the intention to lower interest paid, lower the monthly payments, or to change the terms of the mortgage. You may not realize that refinancing also restarts your amortization and could cost you in hidden ways by having you pay more interest over the mortgage period. A refinance is really a new mortgage where the new mortgage pays off your old mortgage and you work with the new product. The refinance may be ideal for the lender, but not always appropriate for you.

Traditionally refinanced mortgages are either for the balance of the previous mortgage OR for a higher balance by taking cash out. These are referred to as a “simple” or a “cash out” refi. Every time you do a refinance, your finances have to be in tip-top shape and you must select the right lender. Too often clients, for convenience, will use their current bank to refinance their mortgage, which may not offer the best terms or the easiest process. Regardless, you will be asked to verify your income. Moreover, you must have at least 20% equity (home-to-loan value, or LTV) if you don’t want to pay the mortgage insurance. The process for ALL refinancing will require that you gather documents and find the right lender, then submit an application, which the lender must respond to within 3 days with a good faith estimate (citing all costs). Once you accept, it may feel like ‘hurry up … and wait’ since the lender now has 2-3 months to respond. They will often come back to you for more information or clarification, so it turns into a back-and-forth experience. Eventually, you’ll lock-in a rate for another 30 days while verifying the final paperwork.

In the 2008-9 crisis, properties were valued lower (in most areas) and in some cases homes were worth less in the market than the mortgage debt (i.e., “underwater”). Since this was only a paper lose, it was only a problem for families with high-rate mortgages, an immediate need to sell, and with strained budgets. Sadly, these home owners were often denied a refinance to take advantage of much lower interest rates, reduce monthly mortgage costs or provide a more stable fixed-interest mortgage. It was to address this stressful financial situation that several programs were created. One, discussed below, is the HARP program.

“HARP” is the Home Affordable Refinance Program, a federal-government program established after the last housing crisis to assist homeowners with refinance (at today’s lower mortgage rates) even if their current mortgage is underwater. The goal of the program is to allow borrowers to refinance into a more affordable or sometimes a more stable mortgage product.

The HARP program ends December 31, 2016 and, as happens often before a deadline, we find an increased flurry of lenders trying to convince every home owner that they are the ideal candidate for this government program. HARP mortgages are not for everyone.

The first version of HARP had too many limits and in 2012 the HARP 2.0 program was created eliminating some of those limits. Notably, the underwater limits were removed, appraisals no longer needed, the refinance process streamlined, some fees for being ‘underwater’ eliminated, and allowance made for less stringent verification of income (to include not just W2 statements but also 12 months of saved mortgage payments).

The biggest difference between the traditional and HARP mortgages is that you don’t have to have an LTV ratio lower than 125%—the HARP program eliminated this limit. You could obtain a lower rate mortgage even if your home is still worth much less than your own mortgage.

As I’ve stated, HARP is often used to reduce mortgage interest and reduce monthly payments, but others use HARP to convert adjustable rate mortgages (also referred to as ARM-loan) into a more predictable, fixed-loan program (usually 30 years) or if it fits within your budget, a 15- year mortgage that helps you build equity faster.

HARP was never intended for individuals who are near bankruptcy or who have not paid or can’t pay their mortgages. Rather, it is intended for those who have managed to stay current on their mortgage payments, and yet, are not able to change to lower rates since they no longer qualify for a traditional refinance either because of lower income or decreased equity.

In my experience, HARP is a difficult option to pursue because the home owner not only needs to be current on their mortgage, the mortgage needs to be under Fannie Mae or Freddy Max and therefore must be “conforming.” Conforming loans have maximum limits of $415K to $625.5K depending on the location of the single family dwelling. Most Bay Area homes have mortgages that easily exceed these values. They are also only valid if the mortgage was acquired by Freddie Mac or Fannie Mae before June 1, 2009 (an arbitrary date stemming from the crisis).

Because the regulations are rather document heavy and include many exceptions, some lenders have adopted their own versions, so you may need to change your lender to obtain the best HARP loan. Even though the process was to be streamlined, implementation fell far below expectations. The lender’s representative often lack enough knowledge, causing a great deal of frustration to an already stressed individual/family. For example, clients thought they had to use the same lender and that it only applied to their primary home—this is not the case. You can use any lender and HARP can be used on any mortgage that is backed by Fannie Mae and Freddie Mac. The goal is to support those underwater because of the 2008-9 crisis.

Regardless of whether you are considering refinancing through HARP, other government programs or a private lender, you must always examine the total costs AND the purpose for the refinance. If you’ve recently completed a refinance then you need to have a really compelling reason before considering yet another refinance. If you need to increase cash flow then look for low closing costs but expect you’ll pay more interest in the long term. BUT if your purpose for the refinance is to cash out equity or to change some other aspect of your mortgage, then the upfront closing costs may be acceptable. At times, clients appear interested in refinance every few years largely because of lender contacts or advertising. Refinancing every few years can be a costly mistake. It is important to remember that each time you refinance you are starting with a brand new mortgage which will restart the amortization. Restarting amortization is good for the lender, but, not always good for you.

There are a couple of lessons here. First, to truly take advantage of opportunities like HARP you need to be on top of your finances. You also need to understand the product/plan that is offered. Ask yourself is this good for my financial situation? If unsure, drops us a line and we’ll check out the product and provide you with a product neutral opinion that is appropriate for your financial plan.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Medicare—Surprising facts and critical changes

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The goal in retirement (or financial independence after age 65) is to be able to support our lifestyle using accumulated assets, Social Security and Medicare. It has become evident that Social Security and Medicare had to change to continue to sustain future retirees. The loss of the Social Security ‘file and suspend’ strategy for anyone who is not 66 by the end of April, 2016 has received a lot of media attention. Yet, major changes in Medicare have garnered much less publicity although no less important to retirement planning.

From our retirement planning vantage point, we believe the new Medicare changes will add a significant wrinkle to what is a already a very fine balance between distributions from portfolios, income tax liability, and funding our client’s ideal retirement lifestyle.

This short educational article outlines a few surprising (even shocking) facts that everyone should know about Medicare. For more details (particularly those approaching 63 or are two years from switching to Medicare from employer plans), I recommend that you read, in detail, the annually released official US Government Medicare Handbook. The 2016 version of this booklet is available at https://www.Medicare.gov/pubs/pdf/10050.pdf

  • Medicare Alphabet Soup (A, B, C, D) are not all free – The 2.9% current premium paid to Medicare on your earnings while employed only provides for free Medicare Part A coverage. Part A only covers hospital insurance, not comprehensive health insurance. Medicare Part A participation, however, does provide access to the other Parts that, when taken together, can constitute a comprehensive health insurance plan able to meet specific needs. Part B is basic medical insurance. When combined with Part A it is termed “Original Medicare.” A and B combined isn’t enough to cover everything you’ll need. Part D is a premium paid for drug insurance. It is incredibly complex as specific drugs fall in and out of favor within each plan. On the other hand, Part C is an integrated health plan that usually includes Part A, B, and D. It is often called “Medicare Advantage.” Finally, you may encounter Medigap coverage (which has its own alphabet soup) to cover areas missed by Medicare A, B, C or D.
  • Basic Costs: Average costs are difficult to estimate and are often not as low as many expect. Part B would seem very well priced at less than $1,500 per year and yet in the real world we seldom find these ideal rates. Instead, we find health insurance through Medicare averages around $4K-6K per person per year. Moreover, rates are expected to rise significantly in 2018 because of surcharges.
  • Enrollment in Medicare is not all automatic and requires strict attention to timelines. Timelines appear long (for example, 7 months for the initial enrollment) but to avoid penalties and loss of coverage you will need to act early in the timelines (most wait until their birthday month and may find that they have a gap in insurance coverage even though they make the enrollment timeline). To avoid penalties, initial enrollment into Medicare is 3 months before your birthday month and extends to three months after. If you have approved coverage (for example, from an employer health plan) and need to transition to Medicare you will have a “Special Enrollment Period” with its own timelines that must be initiated prior to leaving your employer approved health coverage (excluding COBRA).
  • There are hefty penalties that stay with you for life if you miss an enrollment timeline – Penalties for missing enrollment timelines into Part B are currently an additional 10% of your normal premium cost for every 12 months delayed. Part D penalties are 1% per month delayed. These penalties continue throughout your enrolled life, meaning that you’ll pay more for the same coverage. For example, if you enroll 3 years later than required, the premium you pay for the same Medicare Part B coverage is 30% higher. If you also missed enrolling in Part D, the premium is 36% higher.
  • Once you enroll in Medicare you can no longer make H.S.A. contributions. Once you begin collecting Social Security you are required to enroll in Medicare Part A, which eliminates your ability to participate in certain plan features. For example, it disallows the annual tax-free H.S.A. contributions.
  • There is free personalized health insurance counseling. You should use it to design the best plan for yourself and to fully understand what you need to do each year to make the most of the health care plan you chose (given your expected annual health care needs). In addition, work closely with your Wealth Manager to ensure that you distribute your wealth in the least costly manner given your lifestyle and available assets.
  • Not all health insurance plans are available in all locations. When planning your Medicare health plan, use the community you are planning to retire into to get the most accurate list of health plans available. There is also a 5-Star rating website, provided by Medicare, to help you choose the best available plan in your area.
  • Since 2007 Medicare has been MEANS tested (i.e., dependent on income). Additional income-based premiums can come as a surprise, but what is perhaps more shocking are the new income limits that will begin in 2018. For the moment, surcharges to Medicare premiums begin at $85K and $170K MAGI (Modified Adjusted Gross Income for those filing as single or married filing jointly). Currently, the surcharges top out at $390/month or $4,700/year for Part B for those with MAGI greater than $214K and $428K (single versus married filings). Separate surcharges apply for other Parts. But take note—starting in 2018, the surcharges will apply to a lower MAGI. The largest surcharges will be for those with MAGI over $160K and $320K. An additional surprise is that the earnings that will be used to calculate your Medicare Premium surcharge (also known as the annual “Income Related Monthly Adjustment Amounts” or IRMAA) will be based on your income tax filing from two years earlier. For example, if you enroll in Medicare in 2018 they will use your 2016 taxes to estimate your IRMAA (there is a process to appeal surcharges).
  • The income included in determining additional premiums is based on your adjusted income PLUS any tax-free income (such as Muni bond interest) – MAGI (in these scenarios) includes all ordinary income (work earnings, pre-tax withdrawals, pensions, etc.), plus 50% of Social Security collected, plus tax exempt interest. It doesn’t include H.S.A. or Roth distributions or loan proceeds. Annual distribution will now need to be tightly connected to your MAGI.
  • A “cost of living” gift from the ‘Hold Harmless’ rule – For some, the “Hold Harmless” rule provides additional premium savings. This benefits those who have their Medicare Part B deducted directly from their social security. This rule prohibits increases in Medicare Part B premiums when there is no similar increase in Social Security benefits. The ‘Hold Harmless’ rule evaporates for anyone not deducting their premiums from Social Security, or if they pay additional premium surcharges (because of income limits), or if it is their first year in Medicare (plus a few other exceptions).

These changes to Medicare (and likely new changes in the future) will make it essential that your accumulated wealth be deployed in a manner that will allow you to have the necessary cash flow for your chosen lifestyle while maximizing the various MEANS adjusted benefits.

It has always been our recommendation that clients have more than just pre-tax savings, Social Security, and a pension to support their retirement distribution. Going forward, Roth and H.S.A. savings will unquestionably become even more powerful adjunct retirement planning tools since they are tax free and not part of Medicare MAGI Means testing.

Know the facts about Medicare. An educated consumer is better equipped to make sound choices leading up to retirement and much more likely to secure the retirement lifestyle they have in mind.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Start of the Year Planning

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I’m often asked “how do I make sure that I (and my family) stay on track with
our finances?” Following are a few pointers to start the New Year off right.
Keep in mind, this isn’t about making resolutions (we all know how that goes), but
rather, building sound financial habits that will set you, and your family, in
good stead, now and in the future.

(1) TAKE STOCK. If you haven’t done so already, the first place to start is to
take stock of what was actually accomplished in 2015. This will be easier if you combine it with your preparations for filing your income tax. As a family, tally all of your statements (we send you a summary of the investments we manage but we’re willing to help you summarize your other assets as long as you send a year-end statement). This shouldn’t just be one person’s job – the point is to use the opportunity to enhance everyone’s awareness of how the money was earned and spent last year. It is also a time to see how well the reality matched the goals set at the start of 2015. Before you move forward you need to take stock of those items you can control. Don’t get too hung up on performance—the markets behave as they will and you’ll come out ahead as long as you have a low cost, high quality, diversified portfolio. Once you have such a portfolio, it is MORE important to determine how well you enjoyed the year than just
analyzing your spending habits.

Was this a good year for you? If so, what made it good or what made it less
enjoyable? As a family, what would you keep and what would you avoid
earning/spending if you had a choice? Life is about learning from what we do
and what we value but it should be based on your reality and your values.
Come away knowing how the year met with your expectations for a good life.

(2) DON’T GO IT ALONE. Think about how you can include others in this
process. This is particularly important in families where one person takes a
larger share of the family’s financial responsibilities. This “Start of the
Year” planning is an opportunity to develop closer communication
with anyone who is important to your financial future. First share
what was accomplished in 2015 and then decide what the family might want
or need in 2016. Do not forget that once you have set your goals you might
want to include financial professional(s) to ensure that you maximize and
implement all that is available. The power of building a strong financial
rapport over years will become evident during annual planning and when life
reveals unusual financial challenges.

You might also want to use this opportunity to share relevant annual decisions
and your process with any dependents so that they become participants in
helping the family attain goals for each year. For children this can be an
excellent learning experience and evidence of how finances are discussed and
handled in a family.

(3) GET BUY IN AND ACCOUNTABILITY. It is best to commit to
writing what was accomplished in 2015 and what you are targeting
in 2016. You should set a quarterly check-in to be sure that everyone is
committed throughout the year to what is decided at the start (this is most
important for the first couple of years and until this process becomes habit). The aim is to keep everyone on track and to determine if the goals and objectives are indeed
attainable.

(4) TRACK YOUR PROGRESS. Ideally you’ll let us help you track your
progress throughout the year by checking in with us, but we also encourage
you to make it a habit in your home.
Making financial decisions can be challenging at the best of times, if only
because they tend to have a ripple effect that isn’t always predictable.
Remember—when taking stock and making plans, it helps to keep the lines of
communication open, control what you can and target those things you value.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Fiduciary Advice – an update

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Financial Decisions Driven By What is Best for You

I read volumes on how banks, insurance and brokerage firms are providing their clients with ‘cost free’ financial plans.  It never fails that when I review these ‘cost free’ or ‘low cost’ financial plans that they are, at best suitable but never the best choice for that client.  I’ve yet to review a financial plan that was ‘free’ or ‘ low cost’ and yet addressed fully and appropriately what was critical in their entire financial life.

Today I read an article by Ann Marsh that agrees with my position and highlights that the CEO of the largest Registered Investment Advisory firm is now a fiduciary evangelist.  (Maria Elena Lagomasino in Florida was highlighted in this article at http://www.financial-planning.com/news/genspring-family-offices-takes-fiduciary-approach-to-family-office-2676764-1.html ).

Lagomasino and others in this article speak about the unfortunate number of “planners at large banks and brokerage houses that run their business to benefit themselves as much, or more, than their clients.” She adds some startling statistics and says, “about 90% of the investors out there think they are talking with somebody who is an advisor, and instead they are really talking to a broker who is not working under that standard.”  She points out that the prevailing ‘suitability standard’ is not enough and that all advisors need to follow the fiduciary standard.

It is encouraging to hear others describing my belief, that all investment advice should be first and foremost ‘best for the client’ and not just suitable for the client.  It is for this reason that we don’t accept commissions and offer multiple ways to work with clients. I want the client to know that we are different and are driven to follow what is best for them not just sell them something suitable.  Although commission and assets under management are the common ways to offer financial advice we provide our services through hourly, project retainer, or assets under management models.  Under each model our goal is to always help our clients make the best decision for their specific situation while charging a reasonable amount for our services.

The fiduciary model requires that we sometimes tell clients what they don’t wish to hear.  For example, the markets are volatile and will likely remain so in 2012.  If clients do not understand that cash remains an asset class then it is time that we educate them.  If they are told by others to invest in alternative potentially high yielding investments it is our role to evaluate and tell them why this may/may not be appropriate for them.  What I know to be the best answer for them today should drive my advice and there should be no temptation to modify that answer with what may be suitable but good for our bottom line.

I have a passion for financial education, transparency and freedom of choice.  I strongly believe that an educated investor when provided with transparent choices will make the best choice for them.  If advisors all acted in a fiduciary manner then I would no longer review plans that land clients in positions that are not appropriate for their situations and who thought they had been paying for advice that was tailored to their specific needs.

If you are an advisor I challenge you to create a fiduciary based advisory process and evaluate your success, at least partially, on whether your clients reach their goals.

I always recommend that individuals learn as much as they can and seek advice from someone who practices under a fiduciary model that always puts a client’s best interest before their financial bottom line.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com