Financial Planning Blog

Jeff Opdyke previously wrote a weekly column called “Love and Money” in the Wall Street Journal and on Wednesday he provided some sound advice regarding money and marriage in “With this Debt, I Thee Wed”. (I’m sure its appearance on April 1 was not an intentional comment on the seriousness of the topic).  The article was adapted from his recent book “Financially Ever After: The Couples Guide to Managing Money.” I haven’t seen or read the book, but in the article he had some good advice for couples, beyond pointing out the obvious fact that finances and the stress of debt can take a heavy toll on marital bliss.

I think everyone agrees that communication on finances is critical for couples.  Jeff gives some very practical things to talk about—specifically what your philosophy is regarding debt and regarding savings?  Of course, the two are intertwined. These are really just part of an overall “financial mission statement” or a set of agreed upon values for the couple to discuss.  (Now this is starting to sound like too much work! Let’s go to the movies, instead.)

His example of this foundational statement was: “We agree to live below our means, not to pursue material wants without the money to afford them, never to use emergency savings for consumer purchases and to take on debt only when it benefits the family’s long-term goals or needs.”  (Sounds pretty good to me.) Of course, more detail on how this affects your behavior, is critical.

A discussion of how you will use debt is pretty standard advice for couples.  For example, discuss and agree on:

• Will we pay by cash, or will we use a credit card?
• Will we pay off our credit cards every month, or will we carry a balance?
• How big a balance a balance are we comfortable with?
• Will we save for large purchases, or can we occasionally overspend and pay them off later?
• When will we use debt, and when not? (He discusses good debt vs bad debt.)

An equally important discussion regarding the use of savings is more easily missed.  However, it is important to get agreement (which may involve a bit of compromise) up-front regarding:

• How big of an emergency fund do we need?
• Will our savings account be available for non-emergencies?
• What defines an emergency? (Hint: a sale at Macy’s or REI is not an emergency.)
• What are our short and long term savings goals?

This isn’t rocket science, but apparently many people go into marriage without this kind of discussion and understanding. Fortunately, pre-marital counseling (e.g. through your church) often helps couples work through these discussions. If not, a couple should be encouraged to read a finance book for couples, or consider talking to a financial planner who enjoys working with those starting out in life.

Some great reporting on the economic crisis over the last year has come from an unlikely source. Many of you are familiar with “This American Life,” the quirky radio show on NPR that generally features a set of stories around a unifying theme. When you try to describe the show to someone, it always sounds extremely boring, but it can actually be incredibly captivating. Who better to tackle the job of explaining how mortgage-backed securities and credit default swaps have brought the free world to its knees? Who better to make the “dismal science” cool?

The initial show “The Giant Pool of Money” from May, 2008 won the prestigious Peabody and duPont-Columbia awards for journalism. The Columbia Journalism School’s website described the show as “A story about the beginnings of the economic collapse told in a way that makes a complex story accessible to a wide radio and web audience. Ahead of many journalists, reporters Alex Blumberg and Adam Davidson gave an outstanding and occasionally irreverent explanation about the current financial crisis in April 2008, months before the global economy began to unravel. Through terrific storytelling and economic insight, the reporters demystify the subprime mortgage meltdown using personal stories to explain terms such as derivatives, tranches, short selling and credit swaps." Obviously a lot has happened since this show originally aired, but it is still worth listening to. After all, it’s not as if we know how the story ends.

The show was so popular it was followed by two more excellent programs. In early October, as things really started falling apart, there was “Another Frightening Show About the Economy”. In February, 2009 “Bad Bank” aired. During this time the NPR crew (Blumberg, Davidson, and others) started up the Planet Money podcast with more down-to-earth explanations of our extremely complex economy. Once you come to grips with the fact that you are listening to an economics podcast from NPR, it’s generally pretty entertaining.

Is your financial advisor a fiduciary?

This is a very important question, but one many consumers don’t know to ask. Although there are many definitions or standards of fiduciary duty, it is essentially the obligation of an advisor to act in utmost good faith and in a manner he or she reasonably believes to be in the best interest of the client. In other words, the advisor has an obligation to put the client’s interests first.

Maybe a more pertinent question is, “Why would anyone settle for anything less from a financial advisor?”

This topic is heating up on a number of levels as the government considers changes to the way to the way it regulates the financial services industry. Jason Zweig, who writes the Intelligent Investor column for the Wall Street Journal, discussed some of the issues in “The Fight Over Who Will Guard Your Nest Egg” a couple of days ago, and it’s worth taking a look at. He explains that a registered investment advisor (RIA), such as Table Rock Financial Planning, is held to a fiduciary standard. However, stock brokers and others who may describe themselves as financial planners or advisors are not necessarily held to the same standard. For example, under Financial Industry Regulatory Authority (FINRA—the self regulatory body that oversees the brokerage industry) rules, brokers are generally required to recommend “suitable” investments to their clients. And, when determining what is “suitable”, cost is not an issue. Zwieg gives the following example to show the difference:

“Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is 'suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.”

Matthew Hougan, writing on-line for IndexUniverse.com also discussed this issue in a recent post entitled “Yes on Fiduciary Duty”. He summarized the difference between the standard for the RIA and for the broker (or “registered representative”) and then stated:

“Think about that for a minute. A registered rep can put their own interests (or the interests of their firm) ahead of the interests of the client. That's absurd, and it explains why a lot of high-load, high-cost mutual funds have been pushed down the throats of the investing public over the years. There are a lot of good registered reps out there: smart people with great ethics who do good work for clients. But come on: This shouldn't be a tough question! Finance is a serious business. You're talking about people's lives, their retirement, their children's education.”

Should your financial planner be required to act in your best interests? I would hope so.