Investing for retirement Using IRA, Roth and 401(k) Plans

Investing for retirement Using IRA, Roth and 401(k) Plans

Investing for retirement Using IRA, Roth and 401(k) Plans

For the past 20 years, most individuals have saved and invested for retirement on their own because company pension plans are largely a thing of the past.  Living on Social Security alone during retirement isn’t appealing for most of us, since the maximum benefit is around $40k/year for 2022.1 But how much and where should we invest for retirement?  The short answer: Most individuals should be saving and investing about 15% of their income into a retirement savings/investment plan such as an IRA or 401(k) or 403(b), or some combination.2

Companies typically offer some form of retirement savings plan with employee contributions coming directly out of their paychecks.  These are many times 401(k) or 403(b) plans but could also be 457 or deferred compensation plans, depending on the employer and type of business.  Many but not all companies will match a specific percentage of their employees’ contributions, which if you’re lucky enough to have this option, you should be taking advantage of it because this is “free money”.  Investment options for these types of retirement savings plans are generally selected by the employees from a pre-defined list of 15 to 50 mutual fund or similar options.  The IRS does set annual contribution limits for the employee portion, which for 2022 is $20.5k for employees under age 50 and $27k for employees aged 50 or older.3

Many but not all companies will match a specific percentage of their employees’ contributions, which if you’re lucky enough to have this option, you should be taking advantage of it because this is “free money”

If you work for a small company, or for yourself as an independent contractor, you may not have a company-sponsored 401(k) or 403(b) or 457 plan available.  In this case, you could set up a Simplified Employee Pension, or SEP, plan if you own your own business or work for yourself as a consultant or entrepreneur.  Small companies sometimes do offer a SIMPLE plan, which operates much like a 401(k) but has lower annual contribution limits and requires employers to match at a specific safe-harbor level.  But if none of those is available, employees can contribute to their own Individual Retirement Account, or IRA, set up directly with a brokerage firm or bank.  Annual IRA contribution limits are even lower than the others mentioned, and sometimes higher income individuals may be prohibited from making contributions altogether (e.g., Roth IRA) or may lose the tax deduction (e.g., traditional IRA).  Investment options in IRAs are virtually unlimited, with most any stock, bond, ETF, or mutual fund available.

when it comes to saving for retirement, sooner is always better than later

But later, in retirement, all monies distributed from these plans are considered taxable income.  The tax benefit comes on the front end when contributions are made.  Once a retiree turns 72 years old, Required Minimum Distributions (RMD’s) apply, necessitating withdrawals be taken according to an IRS table.

In contrast, Roth IRAs do not provide a front-end tax benefit, meaning employee contributions to Roth IRAs are not deductible.  But unlike traditional IRAs, Roth IRA distributions come out tax-free during retirement if the Roth account has been in place for 5 or more years and the employee is 59 ½ years old or older.  Roth IRA tax benefits are accrued on the back end, meaning during retirement when distributions are taken to supplement Social Security income.  Today many employer-sponsored retirement plans also allow employee 401(k) contributions to be designated as Roth.  This is an excellent way to build up a large retirement account which may be available tax-free in retirement.  And because monies inside a Roth account have already been taxed, no RMD’s are generally required.

Which is better – Traditional or Roth?  Both, actually!  Using either or both retirement savings/investing vehicle is better than not saving/investing at all, and when it comes to saving for retirement, sooner is always better than later, and higher contributions are always better than lower.  If I were advising a 25-year-old employee just starting out and making $50k per year, I’d suggest building up the Roth 401(k) and/or Roth IRA as much as possible since a tax deduction now isn’t as critical at this juncture.  But if my client was 58 years old and making $650k annually, I’d suggest they use all the tax deductions they can get right now, because they’re in a very high tax bracket already.  This means using a traditional 401(k) or IRA for this client would be my suggestion.

1 Social Security website https://faq.ssa.gov/en-US/
2 What Percentage of your Salary Should go Toward Retirement?, Investopedia, by Tim Parker, March 30, 2022
3 401(k) Contribution Limits Rising Next Year, by Jackie Stewart and Elaine Silvestrini, Kiplinger, September 23, 2022

More Articles Written By Scott

Scott MCClatchey, CFP®

Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at  scott@wwmfinancial.com .

WWM Financial is an SEC Registered Investment Advisor.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

What is a Financial Plan

What is a Financial Plan

What is a Financial Plan

By Scott McClatchey, CFP®

I’m a CERTIFIED FINANCIAL PLANNER™, or CFP®, meaning I help clients create plans to meet their major financial goals (e.g., retirement, start new business).  The key element is a Financial Plan, which forms a roadmap to and through retirement or whatever financial goal(s) a client has established.

Although many insurance agents and investment advisors claim to be “financial planners”, they specialize in insurance or investment management and don’t have the educational or experiential background required to practice true financial planning, as delineated by the CFP® Board of Standards https://www.letsmakeaplan.org/how-to-choose-a-planner/why-choose-a-cfp-professional .

To create a financial plan, CFP®’s first gather client information such as investment, Social Security, pension, and annuity statements, if applicable, insurance policies, work and tax information, spending profiles, and family details.   Financial plans are goal-centric, meaning client goals drive the planning exercise and ultimately determine retirement readiness and margin-of-safety.  Most clients need help establishing their goals, or at least adding breadth, specificity, and reality.  Consequently, part of my planning process is discussing potential goals with clients and helping them refine and quantify their goals.

The “big-one” is how much retirement income is needed.  This is a critical planning variable and one I look at from a couple different perspectives.  How much is the client spending now, during her/his working years?  Is the client following a budget?  Most aren’t, so I typically improvise by factoring down their pre-retirement income (e.g., plan for 80% of working income throughout retirement).  Retirement income is also one of the many scenarios I run, meaning once the baseline financial plan is established, I vary the level of retirement income to see how various spending levels impact the plan.

In all, I run between 25 and 35 different scenarios, which collectively provides a “stress-test” while helping clients understand their margin-of-safety.  Scenarios vary unknowns like inflation, rate of return, Social Security filing strategies, lifespan, long-term care needs, as well as retirement income.  Each scenario results from running 1,000 simulations – called a Monte Carlo simulator – to determine the probability of success.  Planners have software tools to help run these simulations.  Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.

The “big-one” is how much retirement income is needed.

If the primary goal is a successful retirement, the plan will assess a client’s readiness prior to retirement and form an action plan to get them on track for those who don’t already have adequate margin-of-safety.  Do they need to save and invest more, work longer, reset their income goals, change the way they’re currently investing, do part-time work during retirement, or some combination?  Once someone has retired, a financial plan can still be valuable as a statistical decision-making tool, providing a framework for making important financial decisions.  I’ve developed and applied financial plans to many client decisions over the years, sometimes helping clients decide if they have enough money to move to another state, purchase a boat or RV, start a new business, fund a planned giving program, or retire in another country.

Retirement is considered successful when clients don’t run out of money before running out of time – i.e., they don’t burn through their investments before passing away.

Creating a financial plan can help individuals and families in many ways, transcending retirement planning while serving as a statistical decision-making framework.  If interested in having a customized financial plan developed for you, make sure you’re working with a CERTIFIED FINANCIAL PLANNER™, or CFP®, to ensure you’re getting solid planning and suitable advice.

More Articles Written by Scott

Scott McClatchey, CFP®

Sustainable Investing Becoming Mainstream

Sustainable Investing Becoming Mainstream

Sustainable Investing Becoming Mainstream By Scott McClatchey, CFP® Doesn’t it seem like every advertisement or press release includes the word “sustainable” these days? Everyone is bragging about reducing their carbon footprint or converting to renewable energy...

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Decrypting the Investment Industry Puzzle

Decrypting the Investment Industry Puzzle

Decrypting the Investment Industry Puzzle By Scott McClatchey, CFP® Confused by all the industry jargon many financial professionals like to use? You’re not alone. Equity, fiduciary, wirehouse, robo-advisors, fixed income, and ETF’s are but a few words which may be...

read more

Scott MCClatchey, CFP®

Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNER™ with WWM Financial in Carlsbad, CA, an SEC-registered investment advisor. He can be contacted by phone on 760-692-5190 or by email at  scott@wwmfinancial.com .

WWM Financial is an SEC Registered Investment Advisor.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

The Benefits of a Financial Plan

The Benefits of a Financial Plan

“Failing to Plan is Planning to Fail”

While the prognosis may seem daunting, there’s a lot of truth in this statement, especially when it comes to your finances.

Because there are lots of foreseeable and unforeseeable variables that can affect your finances, it’s essential to have a solid financial plan in place.

But before we discuss the importance of a financial plan, let us first understand what it means.

What is a financial Plan?

Put simply, a financial plan is your roadmap to actualizing your financial goals.

It comprises a budget, an emergency corpus, wealth-building investments, and retirement savings.

A financial plan is critical to helping you manage your daily finances, meet your changing financial needs, stay prepared for potential economic crises, grow your wealth, and save for retirement, while working towards achieving your big (and small) dreams.

Benefits of a Financial Plan

There are many benefits of financial planning which can have far-reaching positive effects on your life.

If you don’t have a financial plan, here are 6 good reasons why you should consider creating one:

1. Helps in Decision Making

A financial plan takes stock of your present as well as your future to provide guidance for action planning and decision-making.

Actions focused and coordinated on specific outcomes are much more effective.

With a financial plan in place, you would not take any wrong decisions that would affect your economic well-being.

2. Cushions Emergency Expenses

Have you ever wondered what will happen to you or your family if a sudden medical emergency, job loss, or roof repair comes knocking?

“Let’s borrow some money from the vacation fund.” There goes the trip to Disneyland you have been planning all those years!

A financial plan will come to your rescue here. It makes room for an emergency and helps you be ready for any curveball life may throw you.

Whether you like it or not, emergencies can arise at any time. Your car can decide to break down on your way to an interview after years of reliable travel. With an emergency fund that will keep you afloat during such an unforeseen crisis, you can restore your quality of life to what it was faster.

3. Improved Spending Habits

Spending more than what you earn is a common thing these days.

Many facilities like credit cards, installment services, ‘buy now, pay later’ schemes, etc., entice you to overlook your budget and spend more than necessary.

Whether it’s purchasing the latest tech or spending on experiences you can afford to save on, you find yourself in a sticky situation at the end of the month when the bills keep pouring into your mailbox.

The growing bills only take you further away from your long-term goals.

A financial plan thus helps infuse discipline in your life. By evaluating your spending habits, you can cut back on unnecessary expenses and save more instead of spending more.

4. You Enjoy a Better Standard of Living

A financial plan will improve the quality of life you live.

From wise investments early on in your career to being able to save on yearly taxes, you’ll be able to save more, grow your wealth, and finance the lifestyle you desire. Thus, you can attain your financial goals without compromising your standard of living.

With a realistic financial plan in place, being constantly broke will be a thing of the past. Money will rarely be tight. All those month-end woes will be history.

A financial plan will also help in ensuring you have access to cash for the smaller pleasures in life without having to dip into your personal savings.

5. You Secure Your Retirement

Most of us hate thinking about what retirement will look like, but a financial plan will force you to.

This is vital as saving up for retirement and potential healthcare costs that arise during this stage of life can make or break your post-working years.

Retirement is inevitable and ensuring you’re prepared for it is a crucial part of the personal financial planning process. At a time when you want to sit back and reap the fruits of your labor, your retirement assets will come in handy.

6. Creates Peace of Mind

A financial plan also encourages mental health.

Compared to people without any sort of financial plan, those with a financial plan are less stressed and tend to be more optimistic about their future.

With a plan in place, finances are less likely to keep you awake at night. Rather, they can provide clarity, thus lessening stress and anxiety while improving quality of life.

DIY Vs. Professional Help

Understanding why a financial plan is important is the first step toward a secure financial future.

While it sounds like an easy document to write, it’s advisable to draft a financial plan with the help of a financial planner or advisor.

Unless you have a strong background in finance, going alone means you could miss some vital components, which can prove disastrous.

For a working individual, insufficient retirement savings can lead to a miserable lifestyle later. For a business, poorly managed tax preparation could result in unexpected debt and a loss of carefully accumulated wealth.

Contact Us

At WWM Financial, we take the time to assess your current financial situation, gain an understanding of your short- and long-term needs and goals, and put together a realistic financial plan to help you achieve everything your heart desires.

For help with your financial plan or to learn more about the services we offer, get in touch with a member of our team today.

WWM Financial is an SEC Registered Investment Advisor.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

What is a Financial Plan?

What is a Financial Plan?

What is a Financial Plan

We all have things that we would like to achieve before we die.

Life goals can include saving for your kids’ college education, owning a beach house, buying a yacht, retiring comfortably, or having more time to spend with family rather than Cara and Peter in the office.

To achieve these goals, you need to be focused and financially organized.

A financial plan helps you make sensible money decisions that can help you achieve your goals in life.

So, What Exactly Is A Financial Plan?

A financial plan is a detailed overview of your current financial situation, (short, medium, and long-term) financial goals, and an in-depth strategy to achieve them.

Besides helping you realize your dreams, a financial plan will make you feel in control and give you the comfort of knowing that your financial life is in order.

To be effective, a financial plan must be:

  • Written down. A financial plan doesn’t exist if it’s not written down
  • Touching every aspect of your finances
  • Realistic and achievable
  • Agreed with your partner (if you have one, i.e.)
  • Regularly reviewed and updated

Depending on your goals’ time horizon, a financial plan can stretch over months, years, or decades.

Benefits of A Financial Plan:

Having a solid financial plan brings forth an assortment of benefits that include:

  • Better management of personal income
  • Clarity in retirement objectives
  • Improved preparation for future expenses
  • Reduced risk of debt
  • Increased likelihood of personal and financial success
  • Decrease in anxiety, worry, and stress levels

Money, if it does not bring you happiness, will at least help you be miserable in comfort.” – Helen Gurley Brown

Components of a Good Financial Plan

Understanding what goes into creating a financial plan can mean the difference in your financial success.

A financial plan is a broad umbrella that covers multiple aspects of your financial life.

To lay the groundwork for a solid financial foundation, it pays to understand what each of the aspects entails.

Here’s a quick crash course on the components of a good financial plan:

Financial Goals

Making a financial plan is useless if you have no idea what you want to accomplish with your money.

So, whether you want to make the plan yourself or work with a professional, it should start with a list of your goals, both small and big.

A good strategy is organizing your goals according to how soon you want them accomplished:

  • Long-term goals are those a decade or more away and can include buying a home or planning for retirement
  • Medium-term goals are those you intend to achieve in the next 5-1- years and can include starting your own business or putting a down payment on a property
  • Short-term goals are those you hope to achieve in the next 5 years or less and can include buying a new car or paying down debt

For each of the goals, specify a dollar figure and a target date. Being specific helps you to measure your progress towards the goals.

Budgeting

A budget is one of the most important personal finance tools, but it can be a scary four-letter word if you’ve never had one before.

Simply put, a budget is a plan for how to spend your finances. By creating a detailed written budget, you can see exactly where your money is going and make better spending decisions.

As you approach retirement, you’re faced with so many financial decisions, and keeping track of everything can seem like an Olympic sport. This can ultimately lead to overspending and debt.

A budget lets you see how much money you have, what you spend it on, and how much is left over.

Once you get a hold of the inflows and outflows of your cash, it’ll be easier to optimize your spending to cut back on unnecessary stuff such as unused subscriptions, morning lattes, takeouts, etc.

Emergency Planning

The bedrock of any financial plan is stashing money away for surprise expenses.

An emergency or rainy-day fund is a go-to pool of cash you can dip into when unexpected expenses come knocking. It will help you avoid tapping your long-term savings whenever the need arises.

It would be best if you tried to save 3-6 months’ worth of living expenses (housing, utilities, transportation, and groceries) in a separate, highly liquid savings account.

Don’t put any of this money into an investment that will be hard to convert to cash at short notice (read immediately).

Also, only dip into the emergency fund when you have an urgent and pressing expense. Buying the latest iPhone is not an emergency expense.

Investment Plan

Your financial plan should include an investment plan/strategy.

If you have a long time before retirement, it may make sense to be more aggressive with your choice of investments.

If retirement is fast-approaching, be conservative in your choices as you build a portfolio.

It would be best if you also diversify your investment portfolio by picking stocks, bonds, and funds that suit your risk tolerance and time horizon.

Diversification means that if one of your investments dips, another will balance things out.

Beware of investment scams that promise you quick returns. The safest way to double your cash is to fold it and put it in your wallet.

Credit and Debt Strategy

Using credit and taking on debt is not necessarily a bad thing.

Generally, there are two kinds of debt: bad debt and good debt,

When you take a mortgage loan to buy a home, you may be taking on a lot of debt, but the lower interest rates and appreciating property value make it an acceptable form of debt.

On the other hand, doing impulse shopping using a credit card with a 20 percent APR without paying it off in full every month is bad debt. This is because you’re purchasing things that don’t grow in value and, in the process paying steep interest.

If you have high-interest debt that contributes to the reduction of your income, you can write it down and determine the best way to pay it off to avoid trouble. In the words of Earl Wilson, “if you think nobody cares if you are alive, try missing a couple of car payments.”

Getting out of debt can be a painstakingly difficult undertaking. You can tackle debt using approaches such as the Avalanche method, Snowball method, and Debt consolidation.

Retirement Planning

With the uncertainty of Social Security and fewer American companies offering full pension plans, it is now more important than ever to start saving and planning for retirement.

Retirement savings should become a priority instead of an afterthought.

The IRS has made saving for retirement more attractive with special tax-advantaged accounts such as individual retirement accounts (IRAs), employer-sponsored plans, and special retirement accounts for the self-employed.

Tax Strategy

Creating an income tax plan is vital for your overall financial plan.

Not planning for taxes can lead to a negative financial impact during tax season.

To minimize the impact, ensure you allocate a fixed amount of income towards tax.

Since tax laws and regulations change every year, your tax plan needs to be reviewed annually. Organize a sit-down with a tax professional to determine the deductions that you may be eligible to take.

Insurance

You have worked hard to build a solid financial foot for yourself and your loved ones. You now need to protect it.

Disasters and accidents can and do happen, and without the right insurance, they could lead to financial ruin. Some of the covers to consider include auto insurance, homeowner’s insurance, life insurance, health insurance, and disability insurance.

But be careful; there’s a fine line between having sufficient insurance and being over-insured. To avoid being over-insured, evaluate your financial situation and ask yourself where the insurance gaps are.

The following factors might affect your insurance needs:

  • Age
  • Health
  • Economic status
  • Family status
  • Profession
  • Assets

Also, review and adjust your coverage wherever necessary to ensure you’re protected against every possibility.

Estate Planning

Estate planning involves arrangements for the benefit and protection of your heirs.

Your estate plan should include plans for how your assets will be distributed upon your death, as well as who will be authorized to make key financial and medical decisions for you in case you’re incapacitated.

Many people put off estate planning either because they don’t want to talk about death or because they think they have plenty of time to do it later. It’s vital to understand that death is inevitable and can happen anytime. In fact, estate planning is essential for anyone above 18 years of age.

Without an estate plan in place, your loved ones may have trouble accessing your accounts. Aim at having at least healthcare and financial powers of attorney in place.

Other documents can include:

  • Durable powers of attorney
  • Wills
  • Living wills
  • Trusts
  • Advance directives

Why is Financial Planning an Ongoing Process?

Often, Americans set up financial plans with good intentions. However, these plans fail to meet their expectations because of the lack of an ongoing review against their original objectives.

Your financial plan shouldn’t be treated as a static document.

Financial planning is an ongoing process because things change and when they do, they can significantly impact the direction your planning may need to follow.

These could be personal changes in your:

  • Personal circumstances like divorce, ill-health, death in the family, change of job, etc.
  • Income – may increase or decrease
  • Expenditure – may also increase/decrease
  • Liabilities – may start, stop, increase or decrease
  • Assets – you may land a windfall or inherit property
  • Change of risk appetite

Or the changes could be outside your controls:

  • A change in the political environment
  • A change in government policy
  • Property market changes
  • Stock market highs and lows

As a rule of thumb, aim at reviewing your plan annually and making changes as needed.

Seek Help

While you can craft a financial plan yourself, it’s a remarkably difficult process. You can instead enlist the help of a professional financial planner.

The most important decision you will make is at the start when you select the professional with whom you’ll co-create your financial plan. Only registered financial professionals can give formal advice. These are regulated and adhere to strict planning and advice guidelines set forth by FINRA and the SEC.

At WWM Financial, we understand that everyone is different, and no two people will have the same needs.

We help you build a unique, solid financial plan by following 6 steps of the financial planning process:

  1. Initial consultation to establish your short, medium, and long-term goals in life
  2. Work out what assets and liabilities you have
  3. Evaluate where you are today relative to your financial goals
  4. Co-develop a route map for achieving your unique goals
  5. Implement your plan
  6. Monitor and review your plan at least yearly and adjust when needed

Our success at WWM Financial has been founded on three simple maxims – professionalism, integrity, and impartiality.

We offer a high-quality bespoke service to our clients over the long term. This ethic has helped us build excellent relationships and earn loyalty from our clients and other professionals with whom we work.

The Takeaway:

Creating a financial plan is undoubtedly one of the best things you can do with your income. Once you implement your plan, attaining personal goals and financial freedom becomes a step closer.

A goal without a plan is just a wish – Antoine de Saint-Exupery (French writer).

If you would like to get started with your own financial plan or have us review your current plan schedule a free consultation by clicking on the link below.

WWM Financial is an SEC Registered Investment Advisor.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. Any past performance discussed during this program is no guarantee of future results. Any indices referenced for comparison are unmanaged and cannot be invested into directly. As always please remember investing involves risk and possible loss of principal capital; please seek advice from a licensed professional.

Decrypting the Investment Industry Puzzle

Decrypting the Investment Industry Puzzle

Decrypting the Investment Industry Puzzle

By Scott McClatchey, CFP®

Confused by all the industry jargon many financial professionals like to use? You’re not alone. Equity, fiduciary, wirehouse, robo-advisors, fixed income, and ETF’s are but a few words which may be confusing if you’re not familiar with this industry. In this article, I’ll hopefully give you a better sense what all these terms – and a few more – mean in simple, understandable language. My intent is to de-mystify the investment industry and provide a sort of “decoder ring” for consumers to use.

If you’re searching for an investment professional to manage your portfolio or need a financial planner to help with retirement planning, the financial services industry offers two very different business approaches. The “wirehouse” model consists of financial professionals who work for a large firm, typically with a national footprint, and receive support and benefits from that firm. Many wirehouses are divisions of the banking conglomerates. Sometimes these wirehouses will feature proprietary investment offerings along with cross-branded service offerings.
The other model consists of “independent” financial professionals working as independent contractors either in conjunction with a broker/dealer or a registered investment adviser (RIA). Independent financial professionals generally own their own computers and office equipment, rent office space, pay their own phone and Internet bills, place their own ads or sponsorships, and purchase wholesale account services to conduct their business. These “independents” are business owners just like locally owned restaurant owners, chiropractors, plumbers, or auto mechanics.

I am an independent advisor, for example, as are the other client-facing advisors at WWM Financial, which is set up as an RIA. In 2007, I co-founded Alliance Investment Planning Group, located in Carbondale, IL, which is affiliated with the largest independent broker-dealer in the U.S. These are two examples of the “independent” model. A notable difference is in naming conventions: Wirehouses have branches of the parent firm located throughout the U.S., all carrying the name of their parent company. Whereas independents generally create their own name – e.g., WWM Financial, Alliance Investment Planning Group, Jack & Jill’s Investment Group, Humpty Dumpty’s Planning LLC.

In terms of the financial professionals themselves, there are different types of professionals depending on which licenses have been obtained and services are being offered, along with the commensurate regulations that apply to each type. For example, a registered representative, which is more commonly called a securities broker or stockbroker, has passed FINRA exams such as the Series 7 exam and is licensed to sell different securities and products such as stocks, bonds, options, and mutual funds. Registered rep’s are regulated by FINRA, the self-regulatory organization (SRO) authorized and overseen by the Securities and Exchange Commission, or SEC, and are transactions-based providers held to a suitability standard which requires brokers to only recommend investment products suitable for a client’s circumstances. Registered rep’s generally follow a more sales-oriented model, charging commissions for the purchase and sale of securities similar to those in a wirehouse.

The other primary type of financial professional is an investment adviser representative, more commonly referred to as a financial advisor or investment advisor. Financial/investment advisors must pass the Series 65 exam (or a combination of the Series 7 and 66 or possess a professional designation such as the CFP® or ChFC®) and are regulated by their state or the SEC, depending on how many assets they manage. Financial/investment advisors counsel clients on investing and financial issues and are held to a higher legal standard (e.g., than suitability) called a fiduciary standard or duty. Most financial/investment advisors do not charge sales commissions for investment products, but rather an asset-based fee for their ongoing investment advice typically expressed as a percentage of the assets under management. The fiduciary duty requires advisors to place their client’s interests above their own, and to eliminate conflicts of interest and properly disclose to their clients all those that are not. Suitability is essentially a subset of the fiduciary duty.

Here’s the really tricky part. Stockbrokers and investment advisors can be found in either wirehouses or broker-dealers or RIAs. In fact, some financial professionals are dual-registered, meaning they can offer financial products on a transactional commission basis as a registered rep, but can also provide ongoing financial or investment advice on a fee basis. So for example, a dual-registered broker/advisor affiliated with an independent broker/dealer could be managing a taxable account for a client set up as a commission-based brokerage account, meaning the broker is held to the suitability standard for this transactional account. That same client may have another account with the same financial professional set up as a fee-based account, which would legally be held to the higher fiduciary standard. Confused? Yes, I understand, it isn’t as easy as it should be to figure out what type of professional you’re working with, how they’re compensated, and what legal standard they’re held to. My advice? Ask, and do your research before hiring someone. The SEC provides a site for consumers to help with that research: www.adviserinfo.sec.gov.

To make matters even more confusing, there are many credentials available and in use inside the financial services industry by brokers and advisors, some very meaningful and others less so. Perhaps the most respected and significant designations are the CERTIFIED FINANCIAL PLANNERTM, or CFP®, the Chartered Financial Consultant, or ChFC, and the Chartered Financial Analyst, or CFA.1 These designations all require college-level coursework, passage of examinations, extensive time commitments, and sometimes an experience and ethics criteria as well. The CFP® and ChFC credentials require knowledge and testing on a broad array of financial topics, including taxes, insurance, investments, employee benefits, retirement planning, educational savings plans, and estate planning. If you want to work with someone who has invested time and effort into their career and has a broad financial knowledge base, it might be worth considering a CFP® or ChFC professional. CFA’s, on the other hand, are more specialized in investments and specifically investment analysis. Many mutual fund or hedge fund managers are CFA’s, generally cutting their teeth as an investment analyst initially before eventually becoming the fund manager. Which is better? It depends on what you’re looking for. If you only need help evaluating investment products, a CFA may be a reasonable choice. But if you’re looking for a financial partner or consultant to help you navigate life’s myriad financial challenges, the CFP® or ChFC designations may be more useful in identifying prospective advisors for you to work with.

It’s important to realize that the credentials are distinct from the type of financial professional you’re dealing with. A few registered rep’s, for example, have obtained a CFP® designation. And many investment advisors do not have CFP®’s or ChFC’s or CFA’s. But more commonly, CFP® and ChFC designations are associated with financial/investment advisors who do business as fee-based advisors/planners acting in a fiduciary capacity. And CFA’s are more common in the fund management world (i.e., mutual fund, hedge fund, endowments) than in the client-facing world (i.e., stockbrokers, advisors). This isn’t a hard and fast rule, but rather an observation on where the industry is today, and where it appears to be headed. Each issuer of these designations provides an online search to determine if your advisor’s designation is in good standing.

To wrap this up, I wanted to quickly cover a few terms that sometimes confuse consumers unfamiliar with the financial services industry. When brokers/advisors refer to “equities”, they’re generally talking about stocks. Whereas when they refer to “fixed income”, they’re generally talking about bonds. Which is unfortunate because bonds do not have fixed returns like bank CD’s, unless the bonds are held to maturity. Investors who sell their bonds in the secondary market before maturity may get more, or less, than what the bond was originally sold for. ETF’s are exchange-traded funds, a security similar to a mutual fund but actually traded on the stock exchanges. Most ETF’s are index-trackers, but not all. ADR’s are American Depository Receipts, which is how American investors can purchase foreign stocks listed on foreign exchanges, since each ADR represents a specific number of shares of a foreign-listed stock. Finally, “robo-advisors” aren’t advisors at all, but rather automated investing services using computer algorithms to build and manage an investment portfolio.

I hope this short article helps decrypt some of the confusing language used by the investment industry.

1 “Four Best Financial Certifications” by Ellen Chang, U.S. News & World Report, August 11, 2020

 

Scott McClatchey is a wealth advisor and CERTIFIED FINANCIAL PLANNERTM with WWM Financial, an SEC registered Investment Advisor in Carlsbad, CA. He can be contacted by phone on 760-692-5190 or by email at scott@wwmfinancial.com .

 

 

 

Disclaimer:

This commentary on this website reflects the personal opinions, viewpoints and analyses of the WWM Financial employees providing such comments, and should not be regarded as a description of advisory services provided by WWM Financial or performance returns of any WWM Financial Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. WWM Financial manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.

Top 20 Financial Planning Hacks,  Tips 16 20

Top 20 Financial Planning Hacks, Tips 16 20

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Scott McClatchey is a CERTIFIED FINANCIAL PLANNER™, CFP® with WWM Financial in Carlsbad, California. Scott can be reached at 760-692-5190 or scott@wwmfinancial.com.

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