Young Parents Checklist

                                                                           Recent trip to Chicago 

As young parents, there is a lot on our plates. With new challenges popping up weekly with our children, in our marriages and at work our finances may fall down the list of priorities. However, if we take the time to create a financial plan now it will have a tremendous positive impact on our family in the near and long term. Here is a quick checklist to prepare for the potential opportunities and challenges ahead.

Update Beneficiary Info: Add or update information for your spouse and children to your IRA, 401(k), Life Insurance, Annuities, and “in trust for” accounts. Instructions in a Will or Trust do not override beneficiary accounts.

Apply for or Increase Life Insurance Policies: Meant to provide short and long-term financial security to your family. Life insurance can help pay bills while your spouse deals with the situation and then fund future expenses such as college and a mortgage. There are two common methods to determine how much insurance you may need: Lump Sum or Income Replacement. We will help you determine the amount of insurance you need and evaluate different insurance companies. We do not sell insurance or receive commissions. 

Contribute to Retirement Accounts: Your 70s will come up faster than you know! Do you know you can contribute to an IRA and a 401(k) in the same year? If you start early you will take advantage of compounding earnings and may be able to put away less each year over your working career. It is smart to plan for less than 100% funding of Social Security when you reach the qualifying age. Contribute to your retirement accounts to avoid being a burden on your kids later in life and to ensure you can live comfortably in retirement. Put contributions at the top of your budget!

Start a College Savings Plan: On average, college costs double every 9 years! You can use different types of accounts to pay for college but some offer additional tax benefits. 529s are a tax-free account and they can help you stay ahead of those rising costs by investing in stock and bond mutual funds. Another plus is the beneficiary can be changed giving you the flexibility to pay for multiple children’s college expenses. In some cases it may make sense to use money from a retirement account to fund college costs in order to still qualify for student loans.

Will: A Last Will & Testament provides a “Guardianship Plan”, trustees for testamentary trusts, and give specifics for who receives your assets. A Will dictates your wishes instead of the courts and can help limit family disputes.

Trusts: Testamentary Trusts dictate when, where and how your children receive money or assets that you own. This can help your children avoid the pitfalls of sudden wealth. Trust assets are neither subject to probate nor disclosure to the public.

Health Care Directive: Names someone as your agent to make medical decisions for you instead of the courts appointing someone. Only becomes effective if you are unable to make medical decisions for yourself. 

Durable Power of Attorney: Names someone as your agent or attorney in fact to make business or financial decisions for you. Powers given to the agent can be very broad or very limited depending on what you specify.

As a young parent myself and Certified Financial Planner, I am equipped to provide relevant advice and educate young parents so they can make wise financial decisions for their family's future.

Spread the Word: Consumer Reports Recommends Advisers Who are CFPs and Fee-Only

Earlier this week, on a nice sunny day, I decided to take a break and walk from my office to the nearby public library. I found a few things to browse through and one of them was the October issue of Consumer Reports. 

As I started flipping through the pages I found an article about the problems with some financial advisers and what type of adviser Consumer Reports recommends. They pointed out how some advisers don't have to disclose conflicts of interests, some earn commissions on top of fees, and cited a recent study that found financial advisers who have conflicts of interest cause $17 billion of losses annually to Americans.

After explaining what type of adviser to avoid, Consumer Reports recommended the type of financial planner/adviser Americans should use.

Excerpt from Consumer Reports:
   "We recommend using financial planners who have the CFP designation. That indicates that she has passed a comprehensive certification examination provided by the board, has at least three years of financial-planning experience, and is committed to continuing education in financial concerns.

   It's also important to make sure you understand how the financial planner you select is compensated. Not all CFPs are fee-only; some are paid by commission or a combination of fees and commission."

   "We recommend fee-only advisers because they offer the most protection from inherent conflicts of interests."

Here is the link to the full article: Consumer Reports

Please remember these important differences about Christopher G. Peterson and Peterson Wealth Advisory:

• Fee-Only
• Attained the CFP designation, the highest designation for a financial adviser
• Disclose conflicts of interest about the adviser and the business
• Work in your best interests at all times
• In Crossville, I am the only adviser who is a CFP and fee-only.

Don't keep this a secret. Share this information with your friends, family and neighbors. Let them know what Consumer Reports recommends and that you know someone who meets that high standard.

10 Things You Need To Know: Hiring a Financial Advisor

There are big differences between an advisor who's firm is solely an RIA and others who work for a broker dealer. Here are the 10 things you need to know before hiring a financial advisor:

1. What Do You Need: Depending on the complexity of your finances, you may need a one time review or ongoing support. Do you need help with one specific area of your finances like investment management? A one time review of your retirement plan or budget? Or someone who will tie your taxes, investments, insurance, estate, and retirement parts together? Make sure they offer all the services you need.

2. Your Best Interests, ALL THE TIME: Only some financial professionals have pledged to act in the client's best interests at all times. These types of advisors are called "fiduciaries." Advisors working for Registered Investment Advisor firms have a fiduciary standard all the time. 

Brokers have a lessor, more vague, standard where they are able to sell "suitable" products for your situation. Advisors that work for companies like Merrill Lynch, Morgan Stanley, and Edward Jones can go back and forth between the two standards to benefit their bottom line and not you the client. 

To me it comes down to loyalty. A fiduciary advisor is loyal to clients where a broker is loyal to the company and its shareholders.

3. Background Check: Do your due diligence to avoid the "bad eggs" in the financial services industry. There are resources to see if disciplinary action has been taken against an advisor or broker. If you are considering a Registered Investment Advisor they must provide a brochure (Form ADV Part 2 A&B) disclosing information about the company and its representatives. Brokers registered with FINRA do not have to disclose all conflicts or how they are paid.

                        Registered Investment Advisors: SEC Advisor Search

                        Brokers: FINRA Broker Check

4. Some Are Pros, Some are Amateurs: Unlike other professions like a doctor or lawyer, anyone can say they are a financial planner. But, that doesn't mean they have any experience or credentials to provide you with quality financial planning. 

Again, check the person and or company at the SEC or FINRA websites. Credentials like the Certified Financial Planner (CFP®) are not easy to attain and show further expertise. Certified Financial Planners have years of experience; extensive knowledge and skill in all areas of financial planning; completed a background check; ongoing continuing education; and they adhere to ethical standards set by the Certified Financial Planning Board governing body.

                         CFP Lookup: CFP Certification

I attained my Certified Financial Planner designation after three years of working as an advisor, studied and passed six pre-tests and then passed a two-day, 10 hour comprehensive exam. This rigorous testing prepared me and sharpened my knowledge to advise client's appropriately for many financial situations.

5. Avoid Fraud: To protect your money you should only work with someone who uses a Third Party Custodian. Companies like Charles Schwab, Scottrade, and Fidelity are examples of Third Party Custodians. They act as a check and balance for clients by keeping your money separate from the advisor and they provide independent statements to verify account balances.

6. A Financial Planner is NOT a Broker: This repeats some of the information above but it is important to emphasize the difference between the two. A true financial planner will provide unbiased advice that is in your best interest. They will look at all of your financial matters, understand what your goals are, work with you to create a plan to accomplish them and be by your side every step of the way. They will not sell you products or move you in and out of investments every month. 

Brokers are all about selling, selling, selling. They have corporate sales quotas, focus on gathering assets, earn big commissions on insurance products and other investments, don't disclose their compensation, and are not required to work in the clients best interests at all times.

7. How Are They Paid: There are three standard ways financial professionals are paid:

     Fee-Only: The only composition earned is directly from the client. It can be a flat dollar amount or a percentage of assets/net worth, or on an hourly basis. A Registered Investment Advisor firm has to disclose how they are paid, the amount or percentage and any conflicts up front. They can not receive commissions or kickbacks. This eliminates any incentive to sell products that are unnecessary or inappropriate for the client. Fee-only is the easiest to monitor and understand how much you are paying for the services you are receiving. Fee-only advisors adhere to the fiduciary standard.

      Commissions: This is a percentage charged on the amount of product sold. They more you sell the more you make. Variable annuities are notorious for high fees with up front commissions of  6% -7% and trailing annual fees of 3%. Load mutual funds like American Funds sold at Edward Jones can charge 5.75% commissions up front plus fees to the manager. That means you have to earn 7% or more to get back to even. And you don't receive any advice on other financial matters. They do not have to disclose any kick backs or revenue sharing agreements which provide incentive to sell one product over the other.

        Fee-Based: The term was deliberately created to seem better than the reality and it has become a great money maker for brokers. In truth, "fee-based" means brokers can charge you commissions and fees at the same time. They hide behind both broker and registered investment advisor labels and use them to benefit themselves. Brokers are able to sell a product with an upfront commission and then place it in an account that charges an annual fee on that same asset. Again, they do not have to disclose any kick backs or revenue sharing agreements that provide incentive to sell one product over the other.  

8. What Tools Do They Use: Is the advisor able to use the best industry tools or are they tied to only what their company allows? Are they technologically savvy so you can communicate or get information when and where you want? Because I am an independent financial planner I am able to evaluate and implement the technology tools I believe provide high value, are easy to use and relevant to my clients. Are they set up for video conferencing, sharing documents remotely, computer sharing, financial planning software with client login?

9. How Do They Invest: History, research and studies show it is almost impossible to consistently beat the market. So why pay an actively managed fund more for something that doesn't perform better? Instead, look for an advisor that uses index funds. They are more tax efficient, have transparent investment holdings and have very low costs. It is also important that the advisor is focused on long-term investing (5 or more years), uses a diversified asset allocation strategy and rebalances.

10. What Advice Can They Give: Brokers can not give advice, only general "guidance", on investments inside 401(k) and other employee benefit plans. They won't give advice on these plans because they have to take on a fiduciary responsibility and that limits how and what brokers sell. 

       RIA firms and their advisors can and will provide advice on all of your accounts and assets regardless of where they are. This gives clients a cohesive strategy across all their accounts so they are working to achieve their goals.

Tax Loss Harvesting: What is it?

Who likes to pay lower taxes? Most do and one way to accomplish this is through Tax Loss Harvesting. 

When you use a taxable account to invest there is the added advantage to use the losses that may occur to lower your tax bill. There are three benefits to Tax Loss Harvesting:

1. Tax losses represent an interest-free loan that defers capital gains taxes you would otherwise owe into the distant future, and can even eliminate them entirely when you die.
2. After offsetting realized gains, you can use any remaining tax losses to deduct up to $3,000 from your regular income taxes each year.
3. Any remaining losses are rolled over into the subsequent years, so each year until your losses are used up, you can defer your capital gains and apply up to $3,000 against your income.

Suppose you had invested $10,000 into an ETF in a taxable account and later that year it fell to $7,000. Using tax loss harvesting strategy, the ETF is sold to lock in the $3,000 capital loss. Since you are a long-term investor you probably want to do one of two things:

  1. Buy a similar but not the exact same investment after selling the ETF for a loss.

    OR

  2. Wait at least 30 days to buy the same ETF again.

If you buy the same investment within 30 days the "wash-sale" rule applies and you will lose the benefits of having a capital loss.

The capital loss is valuable in several ways. Before you pay any capital gains taxes each year, you use your capital losses to offset any capital gains, and pay taxes only if you have more gains than losses. If you have more losses than gains, you can apply up to $3,000 of your remaining capital losses against your regular income. And whatever capital losses are still left over can be carried forward indefinitely into future years. Each year, you get to first apply the carried forward losses against capital gains, and then use any remainder (up to $3,000) to reduce your ordinary income.

Using tax loss harvesting to offset capital gains doesn't actually eliminate the capital gains taxes you would have paid. Instead, it defers those taxes into the future. However, future money is worth less than money today.

Using tax loss harvesting to defer capital gains taxes is like receiving an interest-free loan from the IRS. Also, if you still own the shares when you die, your heirs will receive a stepped-up basis, and you will have gotten the up-front benefit from tax loss harvesting while avoiding the taxes on the back end entirely. Finally, the capital gains you owe in the future will be at the potentially lower capital gains rate, while the benefit you receive today of the $3,000 deduction is at your potentially marginal income tax rate. Remember, tax loss harvesting does not work in 401(k), IRA and other retirement accounts. Only taxable accounts.

What We Do

Some people don't know or are confused about what fee-only advisors do for their clients. Here is a list of some of things we do and don't do. 

What we do:

• Provide advice that is in the client's best interest. This means that if a client comes to me with an idea that doesn't make sense for their situation I have a duty to tell them so and not follow them blindly.
• The heart of what we do is create and implement comprehensive financial plans so client's are prepared to handle all of life's financial needs.
• Fee-only compensation paid directly by the client.
• Disclose all conflicts of interest.
• Disclose all costs.
• Challenge you to think about and answer tough financial questions.
• Help clients complete a budget.
• Worry about things in our control: costs, asset allocation and location, savings, having a financial plan.
• Use diversified asset allocation models with the goal of managing risk and earning returns without extreme ups and downs.
• Evaluate insurance policies to make sure you are protected and possibly save you money.
• Look for ways to limit taxes.
• Consult with the client's CPA, estate planning attorney and other advisor's to make sure we are trying to accomplish the clients goals.
• Be your advocate
• Remind you when you are straying from your goals.
• Help you allocate all your investments including 401(k), 529 plans, IRAs, joint accounts, etc.
• Meet with client's children and grandchildren to pass on your values about money.
• Help you make decisions about diverse subjects including home financing, car purchases, business succession.
• Set up individual and business retirement plans.
• Education funding options and investment savings plans (529s).
• Free to use investments that we believe are best for the client.
• We are free to work with companies that we believe provide valuable solutions to our clients and our business.
• We are patient and do our best to keep emotions out of our decisions and advice.

What we don't do:

• WE ARE NOT BROKERS.
• We don't offer hot stock picks.
• We don't sell insurance or financial products. 
• We don't deviate from our chosen investments. If we are evaluated based on performance then we are going to invest in what we believe in.
• We don't day trade.
• We don't work for a brokerage firm or a bank.
• We don't hide fees.
• We don't receive kickbacks.
• We don't work with one fund company.
• We don't buy stocks or funds based on TV personalities recommendations.
• We don't have managers pushing us to sell one product over another because it pads the corporate bottom line.
• We don't pay referral fees or receive referral fees.