Oct. 31, 2006 - A Step in the Right Direction

I've written before about how the financial services industry makes things very difficult for the average consumer to find and work with an adviser who places the client's interests over his own.

Part of the problem is with the regulatory environment that allows bad practices and part of the problem is with financial services firms taking advantage of the regulations to put their interests ahead of their clients.

One of the ways this charade is maintained is through the ubiquitous "disclosure" documents clients receive when signing up to turn their hard-earned money over to a financial services firm.  These documents are notoriously long, full of legal mumbo-jumbo, and designed to please regulators and avoid litigation rather than inform clients.

Some of that is about to change.

Today's Wall Street Journal ($ subscription only) reports that many of the big brokerage firms are taking steps to make their disclosure documents smaller and easier to read.  The hope is that clients will actually read the documents and understand what they're reading.

Gee, what a novel idea!

This is great news for the investing public.  My hat is off to those firms mentioned in the article who are taking these steps -- Morgan Stanley, Bank of America, Wachovia Securities, and Smith Barney.  Hopefully others will follow suit.

The bad news is that potential clients are still going to have to wade through a lot of legalese just to learn that, in fact, their financial adviser is NOT obligated to act in their best interests.  That hasn't changed.

For example, the article notes that Morgan Stanley is going from 14 documents totalling 136 pages down to a single document with 48 pages.  That's a huge improvement but I have to wonder just how many people are really going to read through a small book just to open an account with a financial adviser.  Not many.

Think about it.

How many of you read completely through those software license agreements that pop up on your computer screen?  I'll bet 99% of us just click "I Accept" and go on with life, never fully understanding or caring what we just agreed to.  In my experience, that's how most folks approach financial service firms' disclosure documents.  

It's one thing to accept blindly the terms which affect only your computer and quite another thing to do the same with your life savings.

My opinion is that all of this is unnecessary.  The only reason the industry has these goofy regulations and convoluted disclosure documents is because there are businesses which want to make as much money as possible off of their trusting clients.  They put their interests ahead of their clients because there is big money to be made by doing so.  The regulatory environment empowers companies to make that money just as long as they "disclose" that fact to their clients.

Your best defense is to read the disclosure documents, review in detail all contracts or other paperwork you must sign, and pay attention to what you're getting into.

It's your money.  You have the power.

Oct. 24, 2006 - The Best of Blogging

My friend JLP runs a top-notch blog over at AllFinancialMatters.  The focus is on personal finance but he also hits upon a number of "fringe" topics from time to time.

What I like most about JLP is that he fosters a sense of community among personal finance bloggers.  This is quite evident in how he takes time to read other blogs and call out the best of the best.  As a large, successful blogger he could just stick his head in the sand and keep to himself but he doesn't.

As a result, he has developed quite a following and gets excellent discussions going through comments.

You can benefit from one such discussion on the topic of prepaying your mortgage where JLP recently asked:

"Should people prepay their mortgage (pay it off early)?

Or, should they pay their regular payment and invest the amount they would have used to prepay?"

This is one of the all-time toughest questions to answer because there are so many variables and the answer depends on each person's circumstances.

The discussion generated by this question is excellent and represents what is best about blogging -- the ability to learn new things from others' perspectives.  I suggest you take a minute and click on over to read JLP's analysis of this question plus all of the comments left by others.  Maybe you'll add your insights to the discussion too!  Then roam around and check out the rest of JLP's blog.  It's a treasure of personal finance knowledge.

If nothing else, you'll at least experience what is best about blogging.

Oct. 17, 2006 - A Better Idea at Ford (Almost)

Did someone over in the "Glass House" at Ford Motor Company catch my recent comment about their 401(k) plan?  Probably not, but the timing looks good so let's run with it anyway.

Here is what I wrote on August 2 in my post Gambling with Retirement regarding the Ford 401(k) plan:

"Off topic note to Ford execs -- It has always puzzled me that a company as large as Ford does not have access to some of Fidelity's top mutual funds.  You can and should bargain for better choices."

So imagine my delight to read in today's Wall Street Journal ($ subscription only) that Ford has decided to slim down its 401(k) by eliminating three mediocre mutual funds:  Fidelity Magellan, Domini Social Equity, Morgan Stanley Global Value Equity A.

A fourth fund that is pretty good was also inexplicably dropped: Vanguard Explorer.  This fund merits a 4-star rating from Morningstar (out of 5 possible) and has performed in the top third of its investment category for at least the past 15 years with an excellent expense ratio of 0.41%.  This is puzzling but perhaps there were other reasons it was dropped.  No matter, it's water under the bridge now. 

Dropping some mutual funds, however, is only half a solution.  The fact remains that Ford's 401(k) plan, which is administered by Fidelity, continues to offer some less than desirable mutual fund options.  Even more incredible is that despite Ford employees having socked away nearly $12 billion in this plan, the company has not been able to add some of Fidelity's better mutual funds to the menu of options.

Isn't there even one executive or honcho in HR that can get this issue resolved and give employees the best options available?  This is low hanging fruit folks.  I can't imagine that Fidelity would not balk at such a request when there's $12 billion on the line.

Removing underperforming mutual funds is a good first step but there's a lot more that can be done.  Ford needs to replace the bad with the best.  If they're going to clean house, then go all the way.

Oct. 12, 2006 - Evaluate Your Finances

My friend JLP at AllFinancialMatters has developed a great crash course to help you evaluate your financial situation.  I highly encourage you to take a few minutes to read his posts and then apply this material to your situation.  You don't need a Ph.D. in economics to do it.  JLP spells it all out clearly and it won't take much time for you to apply what you learn.  Go ahead and check it out by following each link to learn more.

• First, you will learn to create a net worth statement.  Net worth is simply what's leftover after adding up all your assets and subtracting all your debts.  It's important to know your net worth because that's how you measure you're financial progress from year to year.  A net worth statement provides a concise format for listing your assets and debts so you can analyze your financial situation.

• Second, you will create a cash flow statement.  This is a great tool for identifying how your income is spent.  Money comes in, money goes out.  You need to know where it comes from and where it goes so you can make wise financial choices in the future.

• Finally, you will learn to calculate various ratios using the data on your net worth and cash flow statements.  For example, have you ever wondered what your debt-to-income ratio is?  You should know because lenders use this measure to determine whether or not to lend you money.  JLP covers serveral other ratios to help you gain even more insights into your financial situation.

You don't have to be a financial genius to get ahead in life.  However, few people get ahead without understanding their financial situation.  JLP has provided an excellent resource to get you started on your financial self-education.

Oct. 11, 2006 - Jonathan Clements on Kiyosaki

Jonathan Clements is a fantastic personal finance writer for the Wall Street Journal ($ subscription only) and has a weekly column called Getting Going.  I always look forward to reading his column each Wednesday to see what he has to say.

Imagine my delight to see Clements weigh in on the murky financial reality that exists in the mind of Robert Kiyosaki, author of the popular book Rich Dad Poor Dad and a host of follow-up ramblings.  (See my three-part review of Rich Dad Poor Dad for some perspective and context on what you'll read below.)

Clements takes on Kiyosaki's latest goofy tome, Why We Want You to Be Rich, co-authored with Donald Trump.  I love the title of Clements's column.

Rich Men, Poor Advice:

Their Book Is Hot, But Their Financial Tips Aren't

Clements gets to the heart of the matter quickly by noting many of the same issues that plague Kiyosaki's other works of fiction.

• The book is rather simplistic and void of details.
• The book offers very little practical or useful advice.
• The book contains many confusing or contradictory statements.

Typical Kiyosaki fare.  Nothing new here.

The best part is when Clements quotes Kiyosaki:

"Donald and I can beat Warren's (Warren Buffett's) rate of returns on investment.  He may be richer, but we can get richer faster using our own methods and use less money."

That's standard Kiyosaki braggadocio.  This guy is so full of himself that he has to go attacking Warren Buffett's proven track record in order to make his unproven track record appear to be good.  Clements's response is beautiful.

"If Mr. Trump can earn higher rates of return, why does he rank 94th on Forbes magazine's listing of the 400 richest Americans, with a net worth of $2.9 billion, while Mr. Buffett ranks second with $46 billion?"

Good question.  Even more hilarious is that Kiyosaki isn't even on the list, let alone worth anything approaching the bottom of the list.  That must really grind at the king of greed and envy.  He doesn't even qualify to be part of the club, yet he has the gall to criticize a man at the top.

Clements questioned Kiyosaki about some of his assertions and conflicting statements in the book.  Basically, he received many of the standard non-answers, obfuscations, and further contradictions for which Kiyosaki is so famous.

In other words, there's no meat folks.  Kiyosaki has produced another batch of simplistic fodder purporting to show the masses how to get rich -- when it's really him that is making all the money from selling books.

Here's one final item that reveals the shallowness of Kiyosaki's advice.  Clements cites Kiyosaki's favorite investments as "rental real estate, silver, gold, and oil and gas partnerships."  Rental real estate has always been part of Kiyosaki's shtick so no surprise there.  What's interesting are those other investments.

You see, in Rich Dad Poor Dad, Kiyosaki NEVER mentions investments in "silver, gold, and oil and gas partnerships."  On page 89 of that book he takes great pains to list specific "real assets" that he suggests "you or your children acquire."  He then goes on to talk specifically about one of his favorites -- small company startups that he can take public (for which there is no documentation that he ever did).  That's it.  There's nothing about "silver, gold, and oil and gas partnerships."

Why the shift from the investment advice in Rich Dad Poor Dad?  Kiyosaki, lacking any real investing skills, just follows the latest hot invesment fads and trends to make himself sound knowledgeable and look savvy. 

In the late 1990's when Rich Dad Poor Dad was originally published, the hot investments were IPOs, especially small startup technology and internet companies.  (Remember those days when a company with no profits and a back-of-the-envelope business plan could raise billions overnight?)  Silver, gold, oil, and gas were dirt cheap and totally out of favor as investments.  Thus, Kiyosaki made a big deal out of what was hot then (small company IPOs) so he could look like a wealthy genius and be hip.

Fast forward to 2006.  Silver, gold, oil, and gas have had a tremendous 5 year runup and are the talk of the investing world.  Small company IPOs (other than Google) are not exactly in vogue like they were in 1999.  Plus we had the great plunge in the NASDAQ from 2000 to 2002 that burst the bubble of many of those once high-flying small company startups.  So now Kiyosaki trumpets "silver, gold, and oil and gas partnerships."

Gee, what a forward thinking genius.  He follows fads because he is really just a fad himself.

I'm glad to see someone as prominent and respected as Jonathan Clements recognize that there's very little substance behind Kiyosaki's glitz and glitter.

Oct. 5, 2006 - More to Life Than Money

Here's a great story from the October issue of Money Magazine titled, The Second-Chance Family by Paul Keegan.  Yes, it's a story about personal finances but it's also a story about the more important things in life.

Devastation

John and Nancy Wehrle had worked hard as teachers for 30 years and were on the cusp of a happy, comfortable retirement by 1998.  Their world was shattered, however, when the couple's only child, 16-year-old Matthew, died in an accidental fall in their barn in early 1999.  Compounding John's grief was the memory of having lost his only other child (a 14-year-old son from his first marriage) to a drunk driver in the mid-1980's.

The story goes on to relate how the Wehrle's sought refuge from their grief by spending money -- taking trips, remodeling their kitchen, buying a new car, etc. -- but all for naught.  Life was empty.  There was no purpose in living. 

The solution?

The Wehrle's ultimately found peace and purpose by pouring themselves into the adoption of three teenage, Russian orphans.  That's quite a load to take on for a retired couple in their early 60's!  It's also not the way to manage a successful retirement plan from a financial perspective.  The rest of the article focuses on some of those issues and some solutions.

Financial issues are important but not the most important.  The greatest lesson from this story isn't about money, but about people.

Consider three former orphans plucked from a bleak future and being transformed by loving parents.  Consider a heart-broken couple that could have withered away in bitterness but who now have purpose in life.

I don't know if the Wehrle's are Christian or not, but they have applied a very Christian principle from John 15:13:

"Greater love has no one than this, that one lay down his life for his friend."

Sometimes that "life" is in the form of a comfortable retirement.  But what is that compared to three happy children and a renewed sense of purpose for living?  There's more to life than a great retirement plan.  There's more to life than money.

Sep. 28, 2006 - Render unto VISA and to God

The Detroit News ran a great article, The Tithe That Binds, by Brian O'Connor on September 23 that highlights what appears to be a monumental financial dilemma for some Christians. 

The dilemma?

A major oversight in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which went into effect last October, does not make any provision for people to tithe or make charitable contributions under a Chapter 7 bankruptcy or Chapter 13 repayment plan.

In other words, you must pay your creditors first and God second, if there's anything leftover.  That's a problem because most Christians understand that tithing represents what we pay to God first.  As one pastor put it, "Tithers do not see it as discretionary.  They see it as something their faith calls for."

One Woman's Plight

O'Conner's story focuses on the plight of a local woman who has faithfully tithed 10% of her gross income for the last 25 years, plus she gives an extra 3% toward missions.  A few years ago she incurred some debts to help a family member who has now passed away -- leaving her with all the bills which she can't afford to repay.  (A dumb move to begin with, however admirable, but that's a topic for another day.)  So this nice lady is contemplating bankruptcy but she doesn't want to give up her tithing.

Her proposal:  Pay $100/month to her creditors for 5 years to cover a small portion of her outstanding debts.  The rest is presumably forgiven.  In the meantime, she can tithe $300/month to her church over that same 5 years.  God gets His portion while the creditors get the shaft.  (Gee, what a great witness to unbelievers!)  But only if the court will let her.

This story got me to thinking about the right thing to do in this woman's situation.

Is her proposal really fair?  Does this glorify God and bring honor to His name?  Is this the Christian thing to do?  What does the Bible say about it?

No Dilemma Here

After looking into it, I realized there is no dilemma.  The correct thing for this woman to do, indeed for any Christian to do, is to tithe and fully repay all creditors.  No matter how long it takes.  No matter how much it hurts.

Psalm 37:21 states,

"The wicked borrows and does not pay back, but the righteous is gracious and gives."

You cannot cloak yourself in the righteousness of tithing while simultaneously stiffing your creditors.  God's word says that not only are the righteous gracious in their giving, but they are also faithful to repay whatever they borrow.

Failure to do either one is wickedness.

The woman in this story should be just as concerned about repaying her creditors as she is about giving to God.  They are equal tasks.

Eventually Congress will probably fix this oversight in the bankruptcy law so that tithing and charitable giving are allowed.  That will remove the legal dilemma but not the moral one.

The Bible is clear.  A Christian should tithe and repay all debts.  That is what honors God and brings glory to his name.