Five Ways to Get Poor

Bert Whitehead, M.B.A., J.D ©

 

1)  Stay in a Dysfunctional Relationship.  

I have often described divorce as "mutual impoverishment."  While many different relationships can have detrimental financial consequences, divorce in particular leaves both parties handicapped -- often for their lifetimes.  Our divorce laws are designed to protect the most vulnerable spouse, but seldom can the contribution of a high-earning mate be equalized.  So the dependent spouse who typically embraces the primary parent role at the expense of career development often faces a continuing downward spiral in living standard while the higher earner must start a new financial future from scratch. And while two people living together costs less than living in separate households, the reality is that the costs of living apart after a divorce can be financially devastating if both parties attempt to maintain the marital standard of living.

The lesson here is to be choosy about your mate at the outset! "Till death do us part" states a commitment that embraces the mutual support and teamwork that optimizes the marital relationship. But that is still no guarantee of financial prosperity.

Of course other dysfunctional and financially draining relationships can be non-marital. By definition a dysfunctional relationship is one where maintaining a commitment is detrimental to both parties. This can also include parents and children, abused spouses, and those who continue long-term relationship with an afflicted partner who will not take the steps necessary to achieve recovery.  Often the most committed spouse unwittingly aggravates the dysfunctional relationship through co-dependent support.
 

2)  Develop Some Bad Habits.  

No one is perfect; some are more imperfect than others.  The Seven Deadly Sins (Pride, Anger, Sloth, Greed, Lust, Gluttony, and Envy) are considered by many to be the roots of various addictions (hubris, chronic rage, procrastination, gambling, sexual obsession, compulsive spending, over-indulgence in food and drink, covetousness, etc.).  These bad habits are 'deadly' because they are often considered the origins of many other 'sins' or dysfunctional behaviors that are difficult to change.

My experience is that addiction of one type or other is often at the root of financial distress.  Addictions involve misuse of both personal and material assets, so they are often the harbingers of poverty.  Recovery from financial downfalls due to active addiction is seldom successful unless the addiction is directly addressed and dealt with effectively.

3)  Let Your Skills Atrophy. 

As our global economy grows increasingly complex and competitive, skills we develop in our youth become obsolete much sooner than in earlier cultures and societies.  For example, in the past a journeyman carpenter could be assured of a job for life with very simple tools.  This job today requires considerable computer knowledge and more advanced mathematical capability.  The knowledge of a financial planner and other complex professions is estimated to have a half-life of eighteen months.  Half of our knowledge relating to our profession becomes obsolete in just a year and a half.

It is not only more difficult to get a good job without advanced education, the education that qualified you for a job five years ago is likely to be insufficient in today's labor market.  Paradoxically, the more advanced an education required to get a job, the faster those skills and knowledge become obsolete.  Thus, most advanced professions require more continuing education to maintain licensing.

4)  Put Up a Good Front. 

This is essentially the motive for maintaining consumer debt, such as balances on credit cards.  Typically, someone who lives beyond their means is trying to be someone they're not.  Maintaining this illusion to impress others takes a huge psychological toll, which aggravates the guilt and fear.  Dampening those feelings requires more spending on props to maintain the false facade. The  person is sucked into a vortex of poverty.

There is a distinction between 'good debt' and 'bad debt.'  'Good debt' may include a home mortgage, an education loan, or a car loan for someone starting out.  These can be considered 'good' because they enable a person to get leverage, e.g., get a better job, so they can earn more.  This is relative to their ability to earn, so a $250,000 mortgage, or a $100,000 education loan, or a $50,000 car loan is not appropriate as a 'good debt' for a new college graduate who earns $35,000 per year.

 

5)  Don't Celebrate Thanksgiving. 

Getting poor, or rich, is more of an attitude than a measurement.  Relatively speaking, the poorest 10% in our society are richer than the richest 10% of humans in the world.  "Prosperity depends more on wanting what you have than having what you want." --(Geoffrey Alpert)

 

I appreciate the editorial review contributed by Chip Simon, CFP®, an ACA colleague in Poughkeepsie, NY

Are Financial Planning Fees Worth It?

Bert Whitehead, M.B.A., J.D. ©2012

Pssst. Wanna increase your investment portfolio’s returns by 1.82%?

Then get yourself a good financial planner.

Or so says Morningstar, a consumer-driven investment research firm, in a recent study that measured the value of financial planning to individual investors. Morningstar is considered credible because it isn’t paid by the funds and annuities that it rates. Of course, the end users of Morningstar data are generally investment advisors who earn large asset management fees and they greeted the study with enthusiasm. But the report describes certain factors apart from investment portfolio decisions that add incremental value to financial management -- a major point that lends credibility to the study.

Morningstar Describes the Benefits of Financial Planning

Measured together, these outside factors are called “Gamma” by Morningstar and include: asset allocation, “product allocation” (which seems redundant), tax efficiency, and then withdrawal strategy and “liability-driven investing” (which seems to be akin to withdrawal strategy). So it seems there are really three main factors: asset allocation, tax efficiency (in the portfolio), and withdrawal strategy.

Investment advisors primarily tout their “strategy” for buying and selling individual securities or shifting allocations based on their market timing approach. While they insist that this adds more value to a portfolio than they charge, using this approach alone has been debunked by numerous studies. Simplistic or complex hedged “buy high, sell-low” approaches have lower returns in the long run as taxes, trading costs, idle cash, and emotions undermine performance.

However, many investment advisors feel that the 1.82% Gamma advantage would more than cover the 1.0% fee that they charge. After all, they often consider themselves to be “Financial Planners” who advise clients on their "total" financial situation. Therefore, their services deliver value beyond portfolio management.

“Financial Planners” Usually Limit Their Advice to Investments

It’s my experience that most advisors who hold themselves out as “Financial Planners” are in truth “Investment Advisors.” While they pitch the “total” approach, they focus their marketing and advisory efforts almost exclusively on investments. They charge for “assets under management” (AUM), usually a percentage based on the amount of assets a client gives them to manage.

I find that many AUM clients don't reveal all their accounts (especially retirement accounts) to their advisor to avoid being charged a higher fee. So advisors who claim to manage total assets under this scenario are stretching it a bit. In addition, tax efficiency is a sham if the client’s tax return is never reviewed. And, typically, advisors don't know the important withdrawal details of retirement accounts, even when told about these accounts. As to the withdrawal strategy, it’s problematic when neither client nor advisor knows how much the client spends each month or their other sources of income!

Based on these realities, Gamma is tough to find for most financial planning or investment management clients. And the Morningstar researchers agree. They doubt that most financial plans ever go beyond investment selection to include the Gamma advantage.

Advisors May Understand and Advise Only about Investments

That means that most clients pay too much for AUM advice. A $2,000,000 portfolio brings in a $20,000 fee for the investment advisor who charges 1% of assets under management. And since the business is scalable, it’s pure profit. For that fee the client usually gets asset allocation and rebalancing. But where is the guidance about how much to save, when and how to refinance a mortgage, when to initiate a Roth conversion, insurance needs, and estate planning? Since most investment advisors are not trained or professionally certified to provide comprehensive financial advice, the client is told to obtain mortgage advice or Roth strategies from their tax advisor. The tax advisor however knows nothing about the client's investments or long-term goals so the client gets no advice on the issues that matter the most.

Flat Retainers Are More Cost Effective than AUM Fees

Dalbar, Inc., a leading financial services market research firm, consistently finds that clients want comprehensive financial advice. But how can they find it for a reasonable cost when so much of the industry is geared to “gather assets” for AUM?

It’s my contention that a flat annual retainer fee is the least expensive and best method to obtain unbiased, comprehensive financial advice. In fact, it focuses the relationship on the very same outside success factors cited by Morningstar. There are minimal conflicts of interest and the advisor is motivated to work with the client on a regular basis, handling financial issues as they arise.

Think of it this way…would you rather work with an advisor who is structured to put his arms around your money, or one who is structured to put his arms around your problems? Chances are, it’s the latter.

Many people think that annual retainers are too expensive since they are quoted as an annual dollar amount. In fact, a flat annual retainer fee is nearly always less than an AUM fee….and you know what you are paying for. Clients are generally unaware of AUM fee amounts since they are withdrawn directly from their account and buried in the investment reports.

The right professional advice is worth the price. But the only thing worse than paying an investment advisor 1% of your portfolio annually for investment advice, is paying that fee and expecting to get professional comprehensive advice that is not forthcoming.

Special thanks to those who collaborated on this post: Chip Simon, an ACA colleague from Poughkeepsie, N.Y., and Shari Cohen who was the copy editor.