Fee-Based Vs. Fee-Only Advice: What’s the Difference?

Fees are quickly becoming the norm in the wealth management world but it doesn’t mean all fee arrangements are created equal. When you hear that advisors are “fee-based” or “fee-only” in relation to investment advice, it sounds like just semantics, but they are two totally different payment arrangements. Fee-only means that just that. Fee-only financial advisors won’t accept commissions or incentives from the investments they recommend for you. Fee-only advisors work for you directly, and you pay them directly for their advice. The fees can cover ongoing guidance, a one-time consultation or fixed fees you negotiate. They also tend to the most transparent.

A fee-based advisor still takes both commissions and fees, which again, both come straight out of your pocket. The reality is that there’s no exact definition for fee-based, and there are no guidelines, so you’re flying blind. Since they can receive a combination of fees and commissions, they seem to get the best of both worlds. An advisor can easily claim he’s fee-based when, in fact, he gets the vast majority of his income from commissions. It’s all a matter of what percentage of their compensation really comes from commission. A fee-based advisor who makes 90% of his revenue from advice fees seems to fit the true definition of fee-based, whereas the advisor who gets paid equally from both commission and fees requires a lot more homework. The point is the combination model feels more like that advisor is double dipping. If you’re interviewing an advisor who says he is fee-based, you’ll need to require full transparency on the part of the advisor in order to openly discuss where there are potential conflicts of interest.

Source:  Pam Krueger

Very Bad Decisions That Can Lead You to Financial Misery

“Fake” news: One of the most controversial and trending topics to discuss today.

Who is trolling whom— and what is the real agenda behind all those stories that you see on social media? When it comes to making money decisions, you need to decide what advice is real or fake—or be able to see the agenda behind the latest craze. Making decisions based on bad advice can lead you right into the jaws of misery and regret.

Stock picking or market timing your way to financial wealth. Somehow, the exuberance of youth causes people to latch on to the belief that they can, through careful research, figure out what to buy and when. Often enough, the first trade is successful, adding confidence and swagger. Financial history is littered with the bones of those who believe they found the magic decoder ring to untold wealth. Speculation is fine with dollars that don’t matter, but when you start “playing” with important money, let history guide you to a more prudent course.

Cashing in your 401(k) when you switch jobs. Nothing is easier than grabbing that balance and telling yourself that “it’s only…..” a small amount. But after taxes and penalties, the amount is even smaller and you have taken a step backward in long-term financial success. History has shown that even small amounts can grow significantly over time. Think long—not short!

Following the crowd. The latest craze seems to be buying or selling stocks based on President Trump’s Twitter feed. Proceed with caution: While markets are known to react, they typically come back to fair value based on reality—earnings and profits. Predicting when to buy or sell based on shotgun comments is no different than buying a lottery ticket. Again, […]

Relax: 20k Is Just A Number

The Dow Jones Industrial Average hit 20,000 points and it’s really not that big of a deal.

Catalyzed by the media’s incessant coverage—consumer publications like The Wall Street Journal and Yahoo Finance published live feeds of the Dow chart as the index approached the milestone—and compounded by social media echo chambers, one would think hitting 20,000 points, which sounds a lot like winning an arcade game, should result in sirens, streamers and dancing lobsters.

In truth, the financial services industry, populated by professionals paid to care about this sort of thing, seems to care very little about it.

“My father, an advisor since ’64, still has a pin in his desk that reads ‘DOW 1000,’” said Joshua Austin Scheinker, senior vice president of Scheinker Investment Partners of Janney Montgomery Scott. “Just a meaningless milestone.”

“What hurts the retail investor is all the hype.” Scheinker added, “Now, the 80-year-old income investors want to take on the risk [to] join the masses.”

Not to mention, many feel Dow Jones is an outdated index—conceptualized a century ago and skewed by price weighting as opposed to being weighted by market value like the S&P 500. The argument over whether the S&P or the Dow Jones is the better metric for determining the stock market’s strength persists.

“Much like 20,000 is a sentimental number, Dow Jones is a sentimental index,” said David Schiegoleit, senior vice president of investments at U.S. Bank Wealth Management. “It’s antiquated and sentimental, but widely understood and followed.”

At the very least, there’s no debating that each Dow Jones milestone becomes less and less significant—numerically, that is. The jump from 1,000 points to 2,000 reflected 100 percent growth, while an increase from 20,000 to 25,000 would amount to just 25 percent growth.

If drummed up hoopla makes […]

Money Really Can Buy Happiness

We’ve all heard it said a million times: money can’t buy happiness. Well, I’m here to tell you some great news! It seems money can buy happiness after all. There’s a catch, though. It doesn’t happen in the way you might think. But stop. Let me back up for a minute to share with you how all this started swimming around in my head, and why I can’t stop thinking about it.

Last weekend, I had some precious time to read, and I picked up Jonathan Clements’s book How to Think About Money. The book includes five steps covering “how to think about money.” The first step covers (you guessed it) happiness. Specifically, how to buy more happiness. If you thought it wasn’t possible, Clements offers some valuable food for thought.

First, he points out that we simply aren’t very good at figuring out what will make us happy. That’s probably no news to anyone. So many of us live the majority of our lives doing work we don’t enjoy, commuting way too many hours of every day to get to that work, and then coming home exhausted to a home that costs us way too much time, energy, and money to afford and maintain. Clements recognized the conundrum, and he turned to research on happiness to put the pieces of the puzzle together. Here are just a handful of the things he learned from the academics:
1. “Money can buy happiness, but not nearly as much as we imagine.” 
All of us have purchases that make us happy, but how happy do they make us over the long term? Is buying the new car more exciting than how we feel driving it six months down the road? And how […]

News and Noise

At a time when the 24-hour news cycle and countless pundits feed a frenzy of investment tips – buy this! sell that! – it may be tempting to react. However, savvy investors don’t let the daily noise psych them out – and that gives them an opportunity to come out ahead. That’s because it’s very hard to time the market, and while you may be able to get out at the right time, you also need to come in at the right time. Sitting on the sidelines for just a few of the best days in the market can have a dramatic impact on returns.

Headlines change day-to-day, but your goals generally don’t. While it can be easy to get swept up by trends or market panic, don’t over-react to short-term changes. Staying invested, even in tough times, may help build wealth over the long term.

Source:  BlackRock

D2 Capital 4th Quarter 2016 Report

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A Super Bowl Bust for Investors

For a rare time, the Super Bowl stock-market predictor didn’t work last year.

As tracked by veteran market analyst Robert H. Stovall, the Dow Jones Industrial Average tends to rise in the year that an original National Football League team wins the game, and falls otherwise. Last year’s win by the Denver Broncos, which came from the old AFL (before its merger with the NFL), incorrectly predicted a drop in the Dow for 2016. But the Dow rallied.

Despite the fumble for the quirky predictor in 2016, it still has worked after 40 of the 50 Super Bowls in foretelling the stock market’s direction—an 80% completion rate. Before last year, the totally unscientific indicator had worked for seven years in a row.

Source:  William Power

The ‘January Barometer’ Is a Market Myth

The stock market in January has no special ability to forecast the future.

That may surprise a lot of investors, since a popular urban myth on Wall Street is that the market’s performance in January predicts which direction stock prices will take for the full year. The problem is that there is little statistical support for that belief.

In fact, the January Barometer has been right only 64% of the time since 1972. For a sense of how faulty that is, consider this: If there was a rule that simply predicted the market would go up every year, it would have been right 76% of the time over the same period.

The best advice for most individual investors, therefore, is to buy and hold a diversified group of quality stocks—without regard to whether the stock market is up or down this month. If a correction or bear market would be intolerable, you should reduce your equity exposure now, with the stock market at or near all-time highs, rather than wait until the bottom of a decline to discover that you don’t have what it takes to hold through thick and thin.

Source:  Mark Hulbert

Overestimating the Risks of Investing?

We are closing in on a decade since the 2007-2009 stock market “meltdown”. Rarely a week goes by that someone I encounter doesn’t refer back to 2007-2009 as a period where they “lost 50%” on their investments. Indeed, the S&P 500 Index declined by 57% from the peak in October 2007 to the bottom in March 2009. What is missing in this discussion, however, is that investing is not for a year or two but for a lifetime. If you focused too much on the 17 month long period above, you likely missed out on the subsequent 7 year long bull market which has seen the S&P triple in value from the 2009 bottom.

This dilemma is perhaps the most important (and most vexing) financial planning question that you face as an investor. The ultimate reason for investing ties back to the need to offset inflation over time. Using market history as a guide, it is difficult to see how you can outpace inflation unless you have permanent exposure to stocks.

Stocks are generally a more reliable path for accomplishing financial planning goals. The real risk, therefore, is staying out of the market.

Source:  James Wilson

Important Things to Know about Contributing to an IRA

Individual retirement accounts (IRAs) offer a great way for an investor to prepare for the future.

However, IRAs also can be potentially confusing, while requiring attention from investors who often may prefer to spend minimal time and effort. The following tips are intended to help you and other investors manage an IRA account successfully.

What do you stand to gain by managing a successful IRA account? The simple answer is financial security, but you could also add peace of mind and the ability to help out family members in need to that list.

1. Sources of Income

In order to contribute to an IRA, the IRA contributor or their spouse (if filing taxes as married, filing jointly) must have income from any combination of the following:

‘Earned’ income from employment. This can be found in box 1 (minus box 11 if applicable) of the W2 tax form.
Net ‘earned’ income from self-employment (Schedule C or C-EZ or Schedule F). In the case of a partner or partnership (Schedule K-1), any money made is considered to be “earned” income only after it has been reduced by any contributions to a self-employment retirement plan and reduced by half of the self-employment tax that is deducted on the IRA owner’s form 1040.
Income earned during the year of the contribution
Taxable Alimony or taxable support payments
Non-taxed military combat pay as shown on form W2 Box 12 code Q, when there is no other eligible compensation income.

Note that for a traditional IRA (TIRA) account, any contribution made must be before the year one reaches age 70 ½. Roth IRA (RIRA) accounts have no age limit to RIRA contributions.

2. Types of Direct Contributions Allowed

All IRA contributions must be in cash, although some IRA custodians will allow stock, bonds or mutual […]