Today was a day in which, among other things, the Russians and the Saudis decided to really screw with each other over the price of oil (the good news: getting those two to kiss and make up and just all get along is something the current administration should be not-terrible at). It was also a day when people living in a portion of Northern Italy representing one quarter of Italy’s landmass — which is a lot, but it’s even more when you consider that the people living in those areas generate two-thirds of Italy’s economic output — was in quarantine. And making it all so very, very much worse, it was also a day when the worst president of all time continued to make light of the unfolding epidemic and continued to let us know, in so, so many words and actions, that he really doesn’t want to test people for the virus because that would make him look bad.

But I digress. I’m here to talk stocks ‘n bonds and such and, more specifically, Friedman’s Law of the Backtrack.

* * *

One of the very best ways to judge the severity of a stock market downdraft following a generally up-trending market is to figure out the “backtrack” — that is, how long ago was the earliest point in time that the stock market first reached the levels the downdraft is reprising?

The answer to that question today is December of 2017. That’s the first time you could have bought into (or sold out of) the American stock market at a pricing level similar to today. So, if you ignore dividends (the cashflow that a stock portfolio generates) and look only at prices of stocks themselves, everything that happened in the stock market from 12/2017 until 3/9/2020 has pretty much amounted to a hill of beans . . . flattened by an ocean liner anchored off the coast of the Bay Area, full of people whiling away the hours while sitting in quarantine.

Picture it this way: if you had thought about buying into the market in December of 2017 but didn’t, and have regretted it ever since as you watched the market climb climb climb, regret no further because the market has retraced itself all the way back to that level and you can now do what you regretted not doing way back then.

To just go there, feast your eyes on this five-year chart of VTI, which is Vanguard’s Total Stock Market fund in its Exchange Traded Fund wrapper:

So you see those faint vertical gray shadings alternating with similar white shadings (or vice versa, depending on how you see things) (oo-wee-oo)? They represent six-month chunks of the calendar. And you see the blue squiggly line? That represents the closing daily prices of VTI shares for the past five years — from considerably less than $100 in early 2016 to more than $170 about three weeks ago.

I chose VTI here because it serves as the most fundamental of all building blocks for people investing in stocks in America because VTI, in a very sophisticated but outwardly quite simple way, represents the entire American stock, and it does so proportionally, so, if, e.g., the value of all shares of Apple stock equals 4% of the value of all publicly traded stocks in the American stock market, then 4% of the portfolio of VTI would be invested in AAPL shares, etc.

And you see that horizontal dotted line? I snapped that, chalk-line like, with my mouse, and did my utmost to make sure that the right-most part of the dotted line would intersect today’s price of VTI just a few minutes shy of the end of the day. As it happened, that line is at $139.78, and the last price for VTI today was $138.50, so the line is actually a bit higher than the price of VTI at the close of the market at 4pm Eastern/1pm Pacific (yup, it was so ugly a day in the markets that the last five minutes served to add insult to the already quite egregious injury).

And you see the leftmost point where that blue line and the horizontal dashed line touch? It looks like it’s right around 12/31/2017 or 1/2/2018. But I went ahead and looked up the intraday prices of VTI in late 2017 and it turns out VTI had an intraday high price (as opposed to the closing prices shown in the chart) on December 18, 2017 of $138.68 — a bit more than a bit higher than the close today.

And that’s the answer to the backtrack question: the American stock market has backtracked a few days less than two and a quarter years, and is (un) partying like it’s the Monday a week before Xmas during the 2017 holiday season. I remember it well . . .

Given that this is 2020, that kinda sounds something like three years. You know what else has been going on for something like three years?

* * *

Two last things:

First, yes, I did expand two and a quarter years into three years and added in an implication about something that’s been going on for about three years and a couple of months (or a bit more than three years and four months, depending on how you count). Fluffing up numbers is appropriate given the aim of my fluffing, who, among other chiefly things, is the NDIC — the Numbers-Distorter-in-Chief.

Second, don’t @t me for using Yahoo Finance. In the early days of the Internet, when dinosaurs roamed the earth and the Internet was almost purely a force for good, Yahoo Finance was totally great for grabbing charts, so it’s where I built up my charting chops. Admittedly it hasn’t been great at that for years, but it still does a better job than other charting tools — for me anyway (and did I mention that This Old Dog is one of my favorite TV shows?).

The post Black Monday 2020: the Stock Market Backtracks to 2017 appeared first on John Friedman Financial.

The Problem Defined.

Hourly fee billing is tough on the people on both sides of the billing process. For those charging hourly fees there’s the tyranny of the clock and the unhappy chore of doing your billing each day (or week or month, depending on how you do it), while for those receiving the bill there’s the big reveal as, with heart racing and a decidedly Doc, how bad is it? mentality, they search for the one number among the many numbers they most care about.

So I stay away from hourly fee billing as much as I can. Most of the time I can stay away from it entirely, such as when I do a comprehensive financial planning project and charge a flat fee for the entire project. In that context I can charge a flat fee because, after a few conversations with a prospect, I know within a pretty close approximation the amount of work that’ll be involved (setting the floor price) and how much value I am likely to be able to deliver to the client (setting a ceiling price) and, within that range, I can come up with a flat fee that I am confident has a good chance of reaching what I call The Goldilocksian Ideal — being neither too high nor too low, but just right and capable of fostering a good long-term commercial relationship between the client and me.

But when I do consulting work, which by its nature is much more ad hoc than a comprehensive financial planning project, I can’t predict how much work is involved and how much value I can deliver, so I fall back on billing at an hourly rate. Lawyers, CPAs and others — please welcome financial heath advisors (me, anyway) into your hourly-fee world!

* * *

The Solution to the Problem.

Last fall I started using cloud-based software in my business (for those curious: I went with Google Suite, because I thought that, after three and a half decades of captivity in the Microsoft world, from MS-DOS to Windows 10, I’d give something new a try; plus, my tech clients and their employers tend to be somewhere well north of 80/20 — GOOG to MSFT — and that always seemed like a great datapoint to keep in mind).

Once I got far enough up the Google Sheets learning curve (not an easy task after all those years of doing things the MSFT way), I immediately knew that, except for a few clients who prefer the traditional approach, I was going to stop sending pdf’ed hourly-rate bills at month- or quarter-end, and was instead going to start using real-time billing, with the client’s up-to-date hourly bill accessible to the client any time s/he wants to see “where the bill is.”

What I didn’t initially envision is that I would end most meetings writing up the entry for that meeting with the client present, watching me type it up and listening to the main topics from the meeting (and sometimes the main decisions from the meeting as well). This is the step that puts the “radical” into the concept of “radical real-time” hourly billing. It’s also the natural way to do it if you’re aiming for true real-time billing — and the full-tilt transparency that it enables.

I’m about three months into this new process, and so far so good.

* * *

The Expanded Context: Selling and Misinforming vs. Advising and Informing.

When I first went into financial planning I worked for a financial planning firm that was part of a life insurance company. The people there had a lot to teach me and others about selling generally, and about selling fixed-price life insurance products and mostly fixed-price investment services specifically. There is, after all, that truism that preaches if you can sell life insurance, you can sell anything.

That firm had no experience, however, with pricing professional services and they had very little experience with pricing financial plans, so they mostly didn’t know what to make of me when I came in with clients who wanted to pay me for financial plans and weren’t so interested in buying insurance products or investment services (this is the main reason I went out on my own after working there less than two years).

One day, though, they had someone talk with us about pricing in contexts in which there was some pricing leeway. The thing I recall this fellow saying was that we should price $1k-and-up offerings at $1.7k, $2.7k, $3.7k, etc., and never ever never-ever at $2k, $3k, $4k, etc. According to this fellow, there was something magical about ending a price with “$700” because (a) that’s far enough below the next thousand-dollar upward increment that the prospect wouldn’t round up, and (b) that anything lower would mean you’re leaving money on the table, which is his single-play, single-play, make-the-sale-and-move-on mentality was a tragic outcome.

In short, he advised that people didn’t perceive that $700 increment accurately, and that we could use that to our advantage.

I followed that advice for a couple of years, until the day it dawned on me that I didn’t want to start off my client relationships by pricing my services in a way intended to foster mis-perceiving. After all, I’m trying to build long term trusted relationships, so I have a repeat-play, make-the-bond-and-continue-building-trust-every-chance-I-get mentality. So now my pricing is the very memorable and easy-to-perceive-accurately $2k, $3k, $4k, etc. No rounding needed!

* * *

I close this piece out with a quick, somewhat related story.

The first time I took a personality test aimed at finding natural-born salespeople, the sales manager from the company having me take the test sat me down with the results and told me I needed to re-take the test, and that this time I should answer the questions the exact opposite of how I had answered them the first time through — and, by golly, I passed that salesperson test with flying colors the next time.

The post A Better Solution to Hourly Billing Practices: Radical Real-Time Hourly Fee Billing appeared first on John Friedman Financial.

That was a little more than a month after she turned on her hospice care and about three hours after I dashed off a short piece about how, all of a sudden, she seemed determined to exit this mortal plane quite quickly. Little did I know when I wrote that piece just how determined she was as, throughout that early morning, one moment she wouldn’t be showing a given sign of impending death, and then the next she’d’ve gone through that sign plus the next two signs that came after it — going through her death transitions quickly indeed.

She is now in the process of actively dying, the hospice nurse whispered to me.

Not long after that, Maxine Friedman exhaled for the last time. As before, with but one exception mentioned at the end of this piece, I won’t go into detail here about those particular death transitions or her particular process of actively dying; you can learn all about the general lay of that land quite nicely online.

*  *  *

I flew a dawn-eye flight into Chicago on Saturday the 14th.

I arrived and immediately headed back towards her room.

As I walked the hallway I heard the hum of the air pump that kept her mattress inflated just-so, to counter all those teeny-tiny holes designed into the mattress to let a comparable just-so amount of air out, all the better to give a bed-bound patient a deluxe ride. The hum grew louder as I approached.

Hi Mom!

She smiled back at me the most wonderful smile I think I’ve ever seen from her: those blue blue eyes of hers, her mouth a little pinched and not all that facile, giving a different cast to her smile.

She was just shy of silent when she tried to respond (and would stay that way through to the end) but that smile spoke a love and warmth that I’ll remember for as long as I possibly can.

Once I settled in (dawn-eye flights do exact a price, no matter how many times you fly them) and got into the flow of the caregiving, it seemed pretty clear that she was nearing the end of her life. The previous month we’d been jarred — stunned, really — by the doctor’s assistant’s suggestion of a months-not-years time frame. Now it was looking like she had it in mind to skip over weeks-not-months and fully embrace days-not-weeks.

Sometime the next day I realized that she’d arrived at not-even-a-week, and I put out an all-hands-on-deck to my sibs.

At her caregiver’s suggestion, we kept the room well lit so she wouldn’t be disoriented if she were to open her eyes and look around. There came a time soon when that had happened for the final time.

Along the same lines, I decided that either the caregiver or I would be with my Mom at all times. That meant that I would sleep on that lousy joke-of-a-bed sofa-bed next to my mother for what turned out to be the final nights of her life, going to sleep in the wee hours of the morning, waking every hour and a half or so to check in on her, and then waking up at dawn because, hey, there’s plenty of time to get some good sleep some other time and I’d be seeing her for only so long.

Those wake-ups remain with me, as precious quiet moments she and I shared in the dwindling middle-of-the-nights of her lifetime.

Wednesday the 18th at dawn it was pretty obvious that she had a day or two left at most. And that’s when she started to sprint through her transitions. As it turned out, she had just a few hours.

*  *  *

I’m glad I was able to be there that much. It was, I believe, helpful to her and, I know, profoundly important to me.

I highly recommend that you, if at all possible, be fully present in that way when a loved one lays dying, for lots and lots of reasons, three of which I’ll mention here.

First and most importantly, people I trust and who are knowledgeable on these matters are quite certain that your loved one knows you are present and is understanding what’s happening in the room — maybe not in every single instance, but in most (e.g., perhaps not when your loved one is dying as a result of severe physical trauma, but quite likely in hospice settings). Assuming you and your loved one get along, then, your loved one would benefit greatly from your presence — much preferable to dying with only medical staff present.

Second, if your loved one is in hospice, and since hospice providers vary quite a bit, your presence might be needed to get the hospice provider to do the right thing. The hospice folks my Mom used came highly recommended by a favorite doctor, but they were much better at providing equipment and meds than they were at providing humans when we needed them (don’t even ask about how good they were at providing humans who knew anything about my mom’s case).

Third, experiencing the hours leading up to your loved one’s dying moment,and then experiencing your loved one’s dying moment, can be a very positive experience for you. It’s helpful to draw a distinction here between death and dying — between experiencing the fact of a loved one’s death on one hand, and experiencing the events leading up to and including a loved one’s dying moments on the other. Experiencing death happens when, for example, you see your loved one in an open casket and understand more directly than ever that the body s/he once inhabited is now uninhabited; cold, stiff, unmoving (though you might think you’re seeing your loved one’s chest going up and down just a little, taking breaths in and letting breaths out). You also experience death in the days and weeks after, as you realize over and over again that things you once shared with your loved one will now have to be shared, if at all, with someone else, and you find yourself regularly confronting differences — gaps even — in how you’re experiencing life. And the list goes on and on and on as your life is filled with constant reminders of your loved one’s death.

Experiencing the events leading up to and including your loved one’s dying moments is something else entirely. Experiencing dying is to see life leave a body — going through those steps I mentioned above and, again, will not detail here. But to accompany your loved one as s/he takes those irreversible steps is to experience something unlike anything else — the most sorrowful, and the most this-is-life-and-this-is-not-life experience possible. And if you’re lucky, it can be among the most loving gifts you’ll ever bestow upon your loved one — the ultimate I’m here for you, the ultimate I’ll be with you when the deal goes down. It’s your pronouncement that you will help your loved one traverse this difficult span, without looking away, without reference to self, and without any concern other than for your loved one’s safe passage/safe journey. Zero other concerns.

Do so, though, only if you are at least pretty darn sure that it’ll be good for you to experience a loved one’s moment of dying. It’s not good for everyone. You should expect it to really pack a wallop — to leave a mark that just might stay with you for the long run. And it’s definitely not good for young people. I leave it to you to determine whether a particular young person in your life should experience a loved one’s moment of dying. I was in my 40s the first time I directly experienced dying, and that was plenty old enough for me! But I’m not sure it would’ve been good for me to experience it when I was in my 20s.

*  *  *

Depending on how you count, my Dad had a decade-long exit from this mortal plane. His was a slow decline with the logical conclusion. By the time he exited he’d used up every single ounce of his life and was totally spent — in a good way. He totally ran through the finish line and then essentially collapsed. His official cause of death was failure to thrive, and that was indeed the case.

My Mom had an 18-month exit from this mortal plane, with a clear moment demarcating the moment her healthy life ended and her not-healthy life began. By most reckonings those eighteen months were difficult but worthwhile. Her world was pretty small during that time, but she gave and received lots of love, and was able to be at home with ’round the clock caregivers for all but a few weeks of that time. And when the time came, she, like my dad, required about four days to go through the process of dying, and then it was sweetly, peacefully, over.

*  *  *

I break now from my “no details about her dying” approach mentioned above to note one extraordinary thing my mom did in the final minute of her life: she shed a tear from her left eye — the caregiver and the two hospice folks and I saw it plain as day, and I dabbed it from her cheek — and then about half a minute later another tear flowed exactly the same way and it, too, I dabbed up.

I have to say that these tears have stayed with me, and given me quite a jolt, mostly in a good way but also in a pretty darn painful way at first.

How perfect is it that tears mark both happy and sad things in our lives? None of us will ever know for sure, but I think my mom was saying, Thank you kids for being here and taking good care of me, it’s been wonderful and oh my how I would like to continue in this loverly ol’ world of ours but alas it’s not to be so I bid you adieu, both fondly and sadly, both madly lovingly and closed-throatedly sorrowfully.

Mom, we will miss you very much. You were really something. And you wrote a great last chapter for yourself and for your loved ones. Thank you.

The post Death and Dying, and Two Tears appeared first on John Friedman Financial.

He was always a very verbal guy. Many thought he was a quiet one, but among loved ones he was not (they said much the same thing about my fave fab four, George).

My mother is proceeding differently. She has, quite determinedly, gone about her tasks of making her life come to a close — quickly gone through the transitions, they say — and had nary a word to say along the way. To paraphrase the nice line from the hospice booklet, she is no longer in need of the heavy, nonfunctioning vehicle that is her body, and will soon be free of it.

A woman of actions not words!

To be continued . . .

The post Further Last Acts of Love appeared first on John Friedman Financial.

*  *  *

After a big medical event, the occupational therapists and physical therapists — the PTs and the OTs — work with the patient in discrete chunks of time throughout the day. There are others Ts around (speech therapists, for instance), but the PTs and the OTs are the main Ts that’ll be coming through.

If you’re like most people, you’ll be confused about what the OTs and PTs do and which is which.

There’s a simple shorthand. Now, please use caution, Will Robinson, when using this simple shorthand, because, in my experience, most OTs and PTs are not in love with this simple shorthand, but it surely is a good place for you to start understanding what they do. The simple shorthand is that OTs are arms and PTs are legs, so OTs are more about fine motor skills and PTs are more about gross motor skills. Or if you really want to raise a ruckus and maybe get on the bad side of the PTs coming through, you can use this one: OTs are fine and PTs are gross.

Another way to think of it is that occupational therapists help patients get better at the things that occupy their time, such as brushing their teeth, combing their hair, etc., while physical therapists help them get better at doing anything remotely like what you would do in gym class (aka physical education), such as walking.

Either way, when they’re not around and you’re keeping an elder parent company, I’ve found that it’s a good idea to push your parent to do things on their own which they might not initially want to do. They want a drink of water from a cup on the tray in front of them? You can pick it up and put it to their mouth, but maybe you should think like an OT and ask them if they can pick it up and put it to their mouth? Gentle requests like that can get your parent into the mode of trying to push against the physical envelope in which they find themselves unhappily confined, and that in turn can help them start to feel a bit of empowerment and accomplishment. At least in my experience, even when they fail — and make no mistake about it: taking a sip out of a cup can be a very big deal after a medical trauma — they find something valuable in the effort.

PTs and OTs are experts at this part of the healing process and, in my experience, they as a group tend to be very lovely people — gentle, loving and caring, but ultimately forceful and wise about how to get patients to find profound healing powers dwelling deep down inside their traumatized bodies.

So yay for OTs ad PTs and thanks for doing everything you do.

The post Occupational and Physical Therapists: What Do they Do and Which is Which? appeared first on John Friedman Financial.

Why is it, then, that so many of us cede control of our email existences by choosing to rent rather than own our email addresses? That’s a major relinquishing of control, isn’t it?

I bring this up here because this blog is just about always about smartening up, and because there are smart ways and not-so-smart ways to put together your email life. At the extreme not-so-smart end of that spectrum you’ll find people merely renting their main email addresses, and at the other, yes-very-smart extreme of that spectrum you’ll find people owning their main email address. Down below we’ll take up that spectrum, beginning with a merely-renting approach that is so very not-so-smart as to fall all the way into the category of being just plain ol’ dumb, and then we’ll move on through various levels of renting that look more and more like ownership, until we arrive at the promised land of outright, unconstrained, all-encompassing Capital-P Capital-O Private Ownership. So please do read on to see how smart or not-so-smart you’ve set up your email existence, and what you might want to do to improve it, OK? And thank you for your interest.

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The Plain Ol’ Dumb Way to Set Up Your Email Existence: Using the Email Address You Have with Your Employer as Your Only Email Address.

The worst way to set up your email existence is to use the email address you have through your employer as your be-all and end-all — as your everything-all — email address.

Two big problems (at least two . . . ) arise when your everything-all email address is owned by your employer.

First, if you ever leave your job, then your email address will be yanked away from you and, worse still, if that leaving is brutish and out of the blue — getting fired is, after all, a part of life, and often a good part, too! — then your loss of access to all your emails will also be brutish and out of the blue, as in: someone walks up to you, asks you to leave the premises, and you’re not allowed to ever touch your computer, ever again. So ya know all those emails from friends you cherished? They’re gone. And you know that address book that took you years to build up? That’s vamoosed too — with no time to say goodbye, and no time to move all those cherished digits to somewhere else, where you can still enjoy them, as in buh-bye valuable, irreplaceable info, I will never know your warm, helpful caress again.

Second, mooshing together all your business emails with all your personal emails is just asking for trouble because mooshing together separate things is just about always asking for trouble. For instance, what if your friends send you a ton of graphics-rich emails every day, each ten megs or more in size, and you do the same? How will that go over with your IT department? They *are* watching, you know, and they in all likelihood have no qualms about reading your emails. Or how about if your nemesis at work one day is walking by your workspace and notices over your shoulder that you’re reading something just a touch risqué that some stranger-who-knows-a-distant-friend-of-yours sent to you and a thousand other people, at which point your nemesis takes the next week or so to hang you out to dry in a perfectly-excruciating, slow-steady-tortuous Machiavellian way? It *has* happened. And then there’s also the risk of accidentally sending an email you meant to go to, for example, your “Dad” to instead go to, say, “Dan” who — ouch — just happened to be the brunt of your venomous ridicule that particular day which just happened to be the main topic of that particular mis-addressed email which you just accidentally sent to Dan (gee, who knows, maybe deep down inside you actually wanted Dan to know what you thought of him . . . ?).

It’s kind of like that saying about what *not* to do too close to your drinking water. It’s also what lawyers are thinking about when they advise against putting two different things into one single box, as well as what database people think when they see that someone has merged two discrete sorts of data series into one overall data field, knowing that some day soon someone will no doubt need to use one of those data series in its pristine, de-merged form, which will require some poor database person somewhere to perform a non-trivial task. In all of these examples, the M.O. is simple: keep separate things separate. Avoid future needs to parse and tease-out disparates!

So please, if you use your employer-based based email as your main email address, remember: you are a mere renter of that email address and everything held within it. And, worse still, you don’t even rent it on a day-to-day basis: you rent it on a moment-to-moment basis. So just like how you’re likely an at-will employee, subject to being fired at any time for any reason, good or bad or nonexistent, so, too, is your email address an at-will email address, subject to being shut off whenever someone-not-you just so happens to feel like shutting it off.

And you know what happens then? You will have to let everyone in your world know that you have a new email address — a truly heeeyyyoooooooojjj PITB, to say the least. And to make matters worse, you are combining your non-work email life with your work email life, and that is a combo upon which many a good Hollywood murder mystery plot could be based.

So, bottom line, using your employer-based email address as your main email address is a bad, very bad, really very bad, really most terrible idea. Don’t do it. Only use it for your employer’s business.

The Next-Least-Smart Way to Set Up Your Email Existence: Using the Email Address You Have from Your Internet Service Provider as Your Only Email Address.

It’s always been suspected, and now it’s at least somewhat official: Comcast and Time Warner Cable are the most hated companies in all of America, with AT&T and Verizon, as well as those faded brands that mostly only exist in email-land such as SBC and PacBell and such, no doubt not too far behind. A lot of those negative feelings come from feeling like Comcast et al. have a lock on us — that they’re the only game in town, so we’re locked-in to their service — and that they provide a service that is fitting for a (cough cough, monopoly, cough cough, monopoly) business that knows it has its customers locked in and therefore chooses, at least subconsciously and sometimes perhaps quite consciously as well, to under-invest in the customer satisfaction parts of its business, thereby taking customer satisfaction down into the abyss, while all the while having its profitability — usually the harsh governor that makes companies care mightily about customer satisfaction — actually increase because its customers have nowhere to turn. So, true-dat, the customers hate the service, but true-dat again, they’re also staying with the service and paying their bills. At least for the time being . . .

So why is it, then, that so many Comcast et al. customers allow themselves to be locked-in further, by renting their main email addresses from companies they so dislike? If that’s you, then that monopolyco email address of yours represents just one more nail in your free-will coffin, making it just that much more difficult for you to up and leave when (not if) that business done treats you wrong. Do you really want to be a bit further locked into this commercially abusive relationship? And do you really think ISPs will ever provide, voluntarily, an email-forwarding service like the postal service has always provided (though sometimes not so skillfully . . .)? Why, that would be giving up a big chunk of their much-beloved customer lock-in, wouldn’t it? So that ain’t ever gonna happen, is it?

On the brighter side — and the reason an ISP-based email existence is not as bad as an employer-based email existence — it’s also true that, unlike an employer-based email address, an ISP-based email address is likely to remain yours for as long as you [air-quote] choose [close air-quote] to remain a customer of the ISP. So, yes, you are renting it, but at least you are renting it through a lease in which the landlord, at least so far in the history of the world, has shown zero inclination towards unilaterally evicting you.

The Pretty Smart Way to Set Up Your Email Existence: Using Free Web-Based Email Addresses Like Gmail, Yahoo! Mail, etc.

Gmail, et al. offer a much better alternative — but still not the best (that comes one more chunk below). These sorts of addresses are free to use, and come with quite a bit of free online storage built in to boot (a full terrabyte of storage for Yahoo! Mail and — gosh Google, can you ever give a simple answer to anything anymore? — it looks like most people have 15 gigs built into their gmail addresses). True, if the product is free then you are the product, and in gmail’s case, this has meant that you will see ads when you log into your gmail-based email address via a web browser, but if you view your gmail-based email through most desktop software or mobile-device apps, in my experience those ads are easily avoided and sometimes downright not there. True, also, having Big Data like that hold your emails is to some extent making a pact with something not entirely benevolent, but, hey, it works pretty well. And I have to say that I love love love how the new gmail app and the rest of the new native-Android stuff looks on my phone. They call it Material Design.

The Totally Smart Way to Set Up Your Email Existence: Using Email Addresses that You Own for All Time

Ah, at last, our journey from dumb to smart is now complete; we are now all the way at the smart end of the spectrum. Feels good to be here, eh?

It probably comes as no surprise to you, given this rent vs own dichotomy I’ve set up in this piece, that the hands-down best way to set up your email existence comes from owning your email address, lock stock and barrel, from the git-go and from now until the end of time and throughout the universe amen. Going this route means that, once this email existence of your is fully up and running, you’ll never need to tell all your friends that you have a new email address, you’ll never be mooshing together business and personal emails, you’ll never have an IT person or a gmail intelligent ad-serving bot reading your emails and probing your psyche, etc.

And the good news is that it’s easier to do this than most people think!

The most direct and obvious way for you to own your own email address is for you to own your very own Internet domain. For instance, I own the Internet domain “JohnFriedmanFinancial.com” and, through that ownership, can set up any number of email addresses that use that domain for everything after the @ sign in the address. And as is true for most kinds of ownership, that also means that no one else can own an email address ending with JohnFriedmanFinancial.com (though it can be spoofed). It’s mine-all-mine and not-anyone-else’s. So if I wanted to, I could (and actually just did . . . ) set up an email address of You-Should-Own-Rather-Than-Rent-Your-Email-Address@JohnFriedmanFinancial.com. And it would be (and now it totally is ) mine, all mine, forever more. My precious . . .

I’ll leave it to the Internet to guide you in how to set this up — there are far better how-to’s out there than I could ever produce. But I will talk a bit about what this approach costs.

Owning a .com domain usually runs less than $15 a year and is often free or close-to-free the first year (yup, there’s that lock-in approach again . . . ) — unless, that is, you choose to use something like Network Solutions, which used to charge way too much for this stuff (and perhaps still does but I can’t say for sure because the Network Solutions website does not make it easy to see how much NSOL charges for domains.

Then you also need to have someone/some-company “host” your domain, or at least the email part of it, with plain vanilla hosting service usually running less than $10 a month and with hosting of the email part of it usually running about $2 or $3 a month and often thrown in for free along with the domain registration (though the email service that’s thrown in for free usually comes without many bells and whistles you might find important).

In this way, owning your own private island, so to speak, on the Internet — and with it, owning your email address forevermore — is totally doable, and probably doable at an annual cost that is, ballpark, in the neighborhood of the monthly cost you might be forking over to your cable company or Internet Service Provider or mobile phone service provider.

*  *  *

So, please, if you can, stop renting your email address, buy your own domain and, with it, your own slate of email addresses, and then start changing over all your contacts, slowly but surely, to your very own, shiny, new, untouched, as-yet unspammed, email address. Better to do it now, at your own pace, rather than later when you might have to do it on zero-moment’s notice.
 
* * *
 
Much financial health to you, and may you enjoy continuous success in improving it . . .

The post You Should Own Your Own Email Address, Not Rent It appeared first on John Friedman Financial.

This year the Monday of All Mondays — I speak here, of course, of the first Monday of the New Year, when many of us first go back into our normal day-to-day routine following the holidays — fell (and for many it did indeed fall) on January 5th, but it can fall on pretty much any day in the first week or so of January.

On that Monday of All Mondays, many folks first saw their FWoJT email as they awoke to lift their heads from their pillows to grab their phones to scan their email notifications (that’s the very first thing many of us do now upon waking, yes?) and were reminded that, as happens every year on that very day, Friedman was advising them to just go there —  to just go ahead and, for a brief moment, ask themselves how it felt to be back in their day-to-day routines after the holidays.

Moans and groans (and worse) went up across the land, along with, from the lucky few who have reached their Exquisite Balance, a few wahoos and giddyup-doggies and sweet-[deity or non-deity of their choosing]-a’mighty-I-am-happy-at-lasts.

I hope you found yourself among the lucky few!

* * *

If you haven’t the foggiest what I’m talking about, please take yourself back to that moment — role-play yourself back into the mind you inhabited at that very moment — and please read on, as The First Week of January Test email awaits you below!

Monday January 5, 2015
at 3:30 a.m.

Greetings Human Being Animals!

It’s the first Monday of a new year, and that means that you have a short task before you, which is to very quickly and without editing yourself whatsoever, write down the first thing that pops into your head as you’re reading the following question:
 

How’s it feel to be
climbing back into your
day-to-day weekday routine?

 
Go ahead, write down the first thought in your head, and then stick it into the equivalent of a bottle that you toss into the sea and which, a year from now, washes up onto the beach at the feet of your future self, to be read and enjoyed as you and your future self see fit!

Yes, I’m advising you to write the modern equivalent of a little message in a bottle to your one-year-older self — a message spanning time rather than space — telling yourself a year from now what it was like to be you, embarking on a brand new empty-vessel of a year, with something just a bit shy of 365 days waiting for you, to have your way with, and to fill up in in your own inimitable way.

* * *

I’ve been asking folks to answer this question — how does it feel? — on the first Monday of each year for nine years now because the answer to that question on that day says more about a person’s financial health at the non-numeric level than any other single question I know. Because it’s true, isn’t it, that a well-designed financial life is one that helps us live day-to-day lives that we are excited to be living, yes? And because it’s also true that no day in all of 2015 smacks us upside-the-head with the gloriousnesses and/or the ingloriousnesses of our day-to-day lives more than this one which through yonder window breaks, right?

So, please, do write your thoughts down, and return to them at the same time next year, to see what you’ve done, one year later, to improve your overall financial health at the non-numeric level, won’t’ch’ya? Also, some folks in the past have wanted to share with me the thoughts they’ve written down, and, if that’s you, then please do send them my way. [There are plenty of ways to contact me on the — you guessed it — Contact Page.] I’d be honored.

* * *

To read more about this idea — including a discussion of numeric and non-numeric financial health and the interplay between the two, and how this First Week of January Test fits in with the financial health framework I’ve developed over the years, please see this piece:
 
An Exquisite Balance
 
From there, if you want to read something far more ambitious in scope (and therefore necessarily far greater in length as well), then for you there is this:
 
Financial Health Defined
 
And please do let me hear from you if you’d like further pointers to pieces on the general topic of improving your overall financial health. I have quite a few to share with you!

* * *

Thank you to all who have encouraged me to start sending group emails again. 2015 will likely be the year when I send regular emails out to the list. As always, you can opt out — see the information below — and if you would like to forward this to someone else, please do!

And a wonderful, exquisitely in-balance 2015 to you!

John

The post First Week of January Test (2015 Edition) appeared first on John Friedman Financial.

It’s understandable. After all, the arena in which financial planning and taxation come together is far too complicated and way too pernsickety to not lose something when going from the highly specific and technical to the general purpose and lay.

Nonetheless, here goes:

If you are self-employed and have zero employees, then
you should set up an individual 401k plan before the end of the year.

This sort of retirement plan — also called a “solo 401k plan” or “self-employed 401k plan” and recently, in an apparent attempt to give them that Jobsian glow, sometimes even called a “i401k plan” — is the bees’ knees for folks who work for themselves and have zero employees, so setting one of these up is just about always a good idea in that situation.

And why are these things so great? The answer is many-fold, but the first two folds are (1) because in most self-employment situations you can sock a lot more money away in these plans than in most other plans you might set up, and (2) because these plans can have both tax-deferred and tax-paid contributions (aka “traditional” and “Roth”). Explaining both of those characteristics would take some doing, so I’ll leave the explanation to another day/another conversation. For now please just take it on faith that the first characteristic is all about arithmetic and how more tax benefit is better than less tax benefit, while the second characteristic is all about you having a very nice choice to make whenever you put money into your plan.

*  *  *

Do It Before the End of the Year.

The blanket statement above also talks about setting your plan up before the end of the year. This is because, even though you’re free to never put any money into your plan if it turns out that that’s the way you want to go (you can treat it as something sitting on the financial health shelf, so to speak, waiting to be used if and when the situation is right), and although even if you do decide you want to put money into your plan, you don’t need to put that money in until very much later in the following year — often as late as September or October of the following year for folks using various tax filing extensions — it’s also true that if you want your plan to be able to impact your tax situation for the current year, then the plan itself has to be in existence no later than 11:59:59 pm on New Year’s Eve of the current year.

Aside about time-of-day conventions: I might even go so far as to say you need to get it into existence at midnight of that day, but which midnight? The one at the start of New Year’s Eve or the one at the end? It’s just a bit prone to ambiguity, isn’t it? And that’s why, in the persnickety world of finance, “midnight” just about never exists. It is, for instance, a foreign concept in insurance contracts, which, in a classic application of the drafting rule that says, if the word can be construed to mean two different things, use a different word, always refer to the start of coverage in terms of “12:01 a.m.” on a given day.

So for these things to be effective for this year, they need to exist — if only as an empty shell — before we are all living in the now-foreign but soon-enough-to-be-commonplace space-time thing called next year.

But why wait until the last moment?

If you answer that question in your head by thinking, “um, because I’m human?” I hear you, believe me, I hear you. But try being just a skoshe better than human for this task, and, instead, getting your plan set up now; that way you won’t ever find yourself rushing to meet the deadline. Plus, you can, if you like, put some money in there now and have that contribution be effective for the current tax year.

*  *  *

Setting Your Plan Up is Easy.

Setting one of these things up is a tad more complicated than setting up a plain vanilla IRA — it’s a somewhat longer form — but it’s also much, Much, MUCH simpler than setting up a group 401k plan (setting up a group 401k plan is like a totally different universe in terms of complexity).

Usually you can set one of these up via a fifteen-minute phone call with a customer service rep for the investing platform you want to use — most of them offer these sorts of plans — during which you do some form filling-out, followed by you getting the form submitted to the platform.

This is important: when filling out any form for a financial services company, have a customer service representative take you through every single line — every single line — in real-time, and then when you’ve done that, go through it with the rep again quickly, making sure you got it all right. Doing so significantly increases the odds of having the form accepted the first time, rather than having it get kicked back to you for being NGO — which stands for not in good order. Yes, that is the parlance.

And if you’re a caring soul, not wishing to put people out, then know that the rep and the platform actually appreciate you asking them to do this because they far prefer taking that half hour and gathering your assets quickly over having to NGO you, which delays their gathering of your assets and is time-consuming and therefore rather expensive for them to boot.

And if you get NGO’ed on, say, 12/30/20xx, the odds are high that you are not going to get this thing established in time to be effective for the 20xx tax year (it’ll be good for the 20xx+1 tax year instead). And it’s always nice to keep your options open.

*  *  *

Links to Three Places that Can Help You set Up Your Individual 401k Plan, and Two Places that Can Help You Further Smarten Up

To just name and then point to three obvious candidates for where you might want to set one of these up, here is Vanguard’s page for this sort of plan:

Full URL: https://investor.vanguard.com/what-we-offer/small-business/individual-401k?Link=facet
Shortened URL: http://is.gd/QykUDE

And here is Fidelity’s:

Full URL: https://www.fidelity.com/retirement-ira/small-business/self-employed-401k/overview
Shortened URL: http://is.gd/RSN8Zg

And here’s Schwab’s (a small dollop of opprobrium on Schwab for having such a long URL):

Full URL: http://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/individual_401k_plans
Shortened URL: http://is.gd/q2dujl

If you have one of those platforms in your life and are happy with it, use that one. And if you do not, then go with Vanguard, OK? I’m on record for thinking that most people should have Vanguard in their lives.

Also, if you want to know more about these plans, then please read the Wikipedia and Bogleheads entries.

*  *  *

OK?

So, please, if you’re self-employed and have zero employees, go git it. You can do it, and the odds are quite high that you’ll be favorably impressed with what this new place for putting your hard-saved money can do.

And much financial health to you, and a great 20xx and 20xx+n to you too.

The post If You’re Self-Employed and Have Zero Employees, You Should Set Up an Individual 401k Plan Before the End of the Year appeared first on John Friedman Financial.

Please allow me to explain.

*  *  *

The Design of 401k Plans.

401k plans are all alike in some ways, and all one-off’y in others — all of them generic appendages and overall precipitation, but each unto itself a one-of-a-kind fingerprint and snowflake.

The basic design of most plans — the chassis let’s call it — is quite standardized. That chassis emanates from the documentation establishing the plan, which contains a lot (100-plus pages usually) of mumbo jumbo legalese, most of it included there to help the plan obtain the IRS’s blessing of the plan as a legit 401k plan, capable of providing the 401k tax advantages that we all know and (sometimes to the point of rote obliviousness) love. That documentation creates a legal entity — a very specific sort of legal entity — that is the 401k plan.

Supplementing the chassis is something I call the plumbing, which consists of the virtual pipes that tap into the company’s payroll process, through which a just-right amount of each participating employee’s payroll dollars are siphoned away, pronto, from going to the employee’s bank account to help support his or her current lifestyle, to instead go to the employee’s 401k account to be used later on to help support the employee’s future lifestyle, and in the meantime to stew and marinate as investments.

These components of a 401k plan are all highly standardized one plan to another and, for all but the most curious and activated plan participants, entirely out of sight.

Riding on top of those components and also mostly standardized, but very much something that even the most apathetic and lethargic plan participant butts up against, is a set of decisions which any company offering a 401k plan must make about how generous it wants to be, such as (a) which employees are eligible to participate in the plan (e.g., those who are at least 18 years old, have at least one year of service, and work at least half time), (b) what kind of employer match to provide, if any (e.g. 50% of each dollar the employee contributes, up to a max of 3% of any given paycheck) and (c) how long an employee has to be with the employer before the employee is entitled to those employer match dollars even if the employee stops working for that employer (e.g., three years, with the turn of phrase being, “the match dollars vest in three years”).

Within each of these decisions, employers have a range of generosity to consider, with the constraint on the miserly side coming from tax law (go too miserly and the plan will not qualify as a 401k plan for tax purposes) and, on the saintly side, the constraint coming from general economics and business self-preservation motivations (go too saintly and the 401k plan could suck enough cash out of the business to kill it).

So those are the standardized components: the chassis and the plumbing, out of sight and out of mind, plus the generosity decisions riding on top, creatures, all, of the taxation and retirement systems we as a country have created via our government.

*  *  *

The FSIC Part of 401k Plans.

Once those mostly standardized components are in place — the chassis, the plumbing, the generosity decisions — you end up with a socket into which an entirely different component must be plugged. The component that plugs into this socket is not at all standardized, and, for plan participants, is the most salient part of the plan because it’s where their decision-making most comes to the fore. And rather than being a creature of the tax and retirement systems we as a country have created via our government, this component is very much a creature of the part of our world often short-handed as Wall Street, which I call the Financial Services Industrial Complex, or the FSIC for short.

I refer here to the investment menu of the plan, i.e., the limited number of investments, primarily mutual funds, that plan participants are allowed to purchase with the dollars they contribute to their 401k plan.

Every 401k plan has but a single menu, and that single menu might have, say, as few as a dozen to as many as a handful of dozens of investments to choose from, with most menus these days falling in the middle of that range (depending on how you count . . . ). For every single 401k plan, then, there is, somewhere out there, a person or a committee responsible for selecting those dozens of mutual funds appearing on the 401k plan’s investment menu from among a universe of many thousands of mutual funds.

So how do you suppose those selections get made?

Hmmmm . . .

*  *  *

Assessing the Design of a 401k Plan at the Investment Level.

The first thing I look at when getting to know a client’s 401k plan is whether the investing menu looks like it was designed with the interests of the plan participants in mind, or was instead aimed at furthering the interests of the person or people designing the investment menu of the plan. The former sort of menu tends to contain mutual funds that charge relatively low management fees (less than, say, 0.75% per year), while the latter tends to contain mutual funds that charge high management fees (more than, say, 1% per year). Those fees, which come straight out of the employees’ investment holdings via lower prices of their mutual fund shares, tend one way or another to lead back to someone’s pocket — often the person who sold the plan to the employer, who is often also the person most or entirely responsible for deciding which funds are on the menu.

The second thing I look to is how easy it is for the participants in the plan — who, by and large, are NFs (Normal Folks) with neither the time nor the inclination to get deeply involved in ongoing investing decisions — to be smart when making investment decisions using that menu. Does the menu nudge, at least a little bit, plan participants to dial in investment selections that are smart and apt to increase their overall financial health regardless of their level of attentiveness? Or does it instead nudge them towards choosing investments that are apt to come back to bite them, such as investing their contributions big-time in their employer’s stock (Enron be thy name) or some mutual fund that is both wicked expensive to own and full of super-concentrated risk (Janus be thy name)? Or, more idiomatically: does the menu make it easy for participants to shoot themselves in the foot, or would they have to walk a mile to do so? Or, more coarsely: how idiot-proof is the menu? It’s a long way to retirement, after all, and some sorts of investments are much more likely than others to need to be jettisoned sooner or later, so mightn’t it be a good idea for 401k plan investing menus to emphasize investments that are likely to work well as simple buy-and-hold investments?

The third thing I look for, related to and in many way subsuming the two characteristics above, is whether the menu allows plan participants to pursue a well-diversified passive investing approach — over and above the target date funds most funds offer these days (a target date fund is a mutual fund designed to auto-pilot an investment portfolio from mostly stocks to mostly bonds, to fit well with a targeted retirement year, e.g., a 2020 Target Date fund is designed for people planning to retire in 2020). To receive a positive review from me on this characteristic, the 401k investing menu must offer, at minimum, two stock index funds — one that tracks the entire US stock market and the other that tracks the entire non-US stock market — plus one bond index fund that tracks the entire US bond market.

I just about never see menus with this third characteristic. In this day and age, what with passive investing now being totally mainstream and Vanguard, its long-term proponent, the biggest mutual fund house of all, why is this? Also, given that many (most?) money managers assert that smartly managing an investment portfolio requires the services of an expert actively attending to the portfolio and the overall investing world on the day-to-day level or at least week-to-week level, and given that nearly all 401k plans are managed by the plan participant without nary a glance from anyone with anything even approaching investment expertise, why then do folks putting together investment menus often shy away from mutual funds that take the passive approach to investing?

Hmmmm . . .

*  *  *

The Selling and Pricing of a 401k Plan.

Every 401k plan is sold. For every single 401k plan, then, there is, somewhere out there, a person who was primarily responsible for selling that particular 401k plan, and someone, within the particular employer, who was primarily responsible for buying that particular 401k plan.

Let’s first look at the buyer. In large companies, the person buying the plan is usually part of a multi-person department focusing on group benefits, and has some, or a lot, of expertise. We can assume, then, that the buyer in a large company can for sure negotiate a great deal for the company and, if the company so wishes, a great deal for the plan participants as well (the same sorts of employer motivations that play a role in the generosity decisions mentioned above come into play here as well).

In the SMB market, though (SMB = small and medium business, a new, to me anyway, abbreviation making the rounds these days), the person inside the company responsible for buying the plan is usually an office manager or a human resources generalist or a controller, so the buyer in the SMB space sometimes (oftentimes?) has little or no expertise, and therefore might not be able to negotiate a good deal for the employer, let alone for the employees.

Now let’s look at the seller. People who sell 401k plans ran the gamut from young stockbrokers just starting out and struggling to make a living, to Wall Street interests already quite gargantuan. All along that spectrum, though, asset gathering is the seller’s main goal, and assets under management fees the seller’s main economic motivation, because, any which way you slice it, the more dollars inside a 401k plan, the higher will be the fees it generates (since assets under management fees are calculated as a percentage of assets).

It happens, then, that many (most?) sellers of 401k plans dial in what I would call an override — a vig, a slice — on top of all the other expenses the employer and the plan participants pay, mostly as compensation for the sale itself, and also for helping out a bit with the ongoing participant education piece that companies providing 401k plans are obligated to provide, plus steering the investment menu plus helping the employer be smart about offering the 401k plan. That override might be, say, 0.25% to 0.5% (sometimes more) and typically lasts forever.

Presumably employee headcounts increase over time, as do investment values, so it is easy to imagine that, ten years down the road, the asset base against which that override is calculated has increased three- or four-fold. Indeed, if headcount and asset prices both double over that time (about a 7.2% annual rate of increase), you’re looking at a double-double, which is a four-fold increase of the asset base inside the plan. Assuming that the override percentage stays constant, then ten years later that override has grown into a four-fold larger payday. At that time, though, the closing of the sale is a distant memory, and the ongoing services required of the seller of the month-to-month sort are essentially nil, while the annual services have probably stayed roughly constant (though increased headcount can increase the eduction burden).

I, for one, have a hard time seeing any alignment between, on the one hand, the value being delivered by that seller ten years out, and, on the other, the compensation the plan is generating for the seller. I also think it’s wrong for Normal Folks to be footing the very real bill stemming from that misalignment. Wall Street, the FSIC and the world in general, as currently constituted, do not, however, agree with me.

Indeed, that’s business as usual; the rock star coveted by the microwave oven salesman in Mark Knopfler‘s Money for Nothing is an absolute piker by comparison.

It’s actually even a bit worse than I’ve mentioned so far, because I’ve only talked here about two kinds of fees (the internal costs of the mutual funds inside the 401k, and the seller’s override); quite often there are other fees layered on and spirited away as well.

And, yes, all you politically oriented folks out there who’ve been wondering: these layers of fees and costs and big-numbers-for-not-very-much-value compensation and pricing arrangements were indeed one of the main arguments against privatizing social security back in 2005.

*  *  *

The Beauty and the Ugly of 401k Plans.

401k plans can be beautiful things. They mostly play to our strengths and submerge our weaknesses.

That’s important, because we human beings are fallible things, and nowhere more so than when it comes to squirreling money away for a later time. As a result, the you-can’t-spend-what-you-don’t-have mantra underlying all 401k plans — the siphoning away of our wages, away from our bank accounts and towards our long-term retirement investments — is a stupendously helpful thing for most people’s financial health.

Into that beautiful thing, though, a sometimes very ugly other thing comes, which is the part of us human beings that just loves to get paid for nothing, the more the better, period, the end. It is sometimes the case (often the case?), then, that 401k plan investment menus tilt heavily towards investment choices that are on the menu at least in part (in large part?) on account of the rich compensation they kick out, year after year, to a bunch of people plan participants never know. It is also sometimes the case (often the case?) that, on top of that fund-derived compensation going to a group of people, there is an override to boot, compensating the person or people who sold the plan to a buyer who, especially in the world of small to medium business, might not have been all that sophisticated and might have gotten a not-good-at-all deal.

Put it all together and you have this beautiful structure helping people save for their later years, but sometimes within it (oftentimes?) an ugly core sucking the good out of that structure — an ugly core in which dozens of folks within a single 401k plan (or hundreds or even thousands) pay a lot of money for something that has little or no value to any of them, with some of that money (a lot of it?) sometimes going to a single person (oftentimes?). So it’s from the many to the one, where the “many” are Normal Folks and the “one” is some human being well ensconced within the FSIC.

It needn’t be this way.

*  *  *

Towards Better 401k Plans.

Our collective self, in the form of our government, has recently lent us a hand, by requiring a greater level of disclosure from 401k plans about the expenses and fees built into the very structure of the plan itself. My impression, which many share, is that the new requirements are mostly a swing and a miss. For one data point, I haven’t talked with a single 401k plan participant who has read, let alone understands, these disclosures. This might be because the disclosures tend to be quite opaque and because they tend to obscure a lot of the good stuff, e.g., who is getting paid, and in exchange for what.

The FSIC as a whole loves it best when people pay for stuff without even knowing that they are paying for it, and, absent that, will settle for leaving people with the impression that, sure, they’re paying for something, but, hey, it’s all good, because they’re getting fair value in return.

My hope is that in the coming decade more and more folks responsible for buying 401k plans in businesses — the HR folks, the office managers, etc. — will make sure that their plan participants have better access to passive index funds in their 401k plans, and will also nail down the services the plan will receive, over the long-run, in exchange for any override the seller of the plan is getting paid. My hope is also that participants in plans will come to know, more and more, that by buying index funds, they have the power to keep more of their hard-earned retirement dollars for themselves, while at the same time de-powering, at least a little bit, the beastly part of the FSIC — the part of the Financial Services Industrial Complex that relies on salespeople to get unknowing people to pay too much for far too little, and pays a handsome ransom to those salespeople in return.

*  *  *

In a much discussed Senate subcommittee hearing on April 16, 2010, during the depths of the Great Recession/Little Depression, Carl Levin, a six-term Democratic Senator from Michigan who will be retiring on January 3, 2015, made the 24-hour news cycle big-time when he confronted Daniel Sparks, head of the Goldman Sachs mortgage department and the person within Goldman primarily responsible for, and presumably most directly benefiting from, the selling of CDOs.

If you haven’t the foggiest idea what CDOs are, then you’re normal; Normal Folks have never heard of these things. Luckily, for our purposes here, you really don’t need to know anything about what collateralized debt obligations are, other than to know that they’re rocket-science sorts of financial products — derivatives riding on top of derivatives riding on top of mortgages, and, yes, that is two layers on top — that were emblematic of many of the excesses that led to the financial crisis of September the 15th, 2008.

The particular CDO in question during that hearing, named Timberwolf I, lost 80% of its value within half a year of being sold — an outcome, it appeared upon investigation, not at all surprising to some within Goldman Sachs (many?).

Senator Levin’s newsworthiness came primarily from his repeated use of the phrase “shitty deal”, as he repeatedly sought Mr. Sparks’s thoughts about an email he received from another manager at Goldman Sachs, which included the sentence, “Boy, that timeberwof [sic] was one shitty deal.” Without getting into the meaning of that email or the extent of Goldman’s culpability, I can, quite neutrally I believe and hope, say that, ever since then, the term “shitty deal” has taken on a life of its own, reinforcing the idea that there are some financial services professionals out there (many?) who will sell anything to anybody in order to make any number of dollars.

To paraphrase, then, and to add just a pinch of Midwestern innocence dressed up in appropriate business attire, so to speak, when I look at all too many 401k plans, I find myself shaking my head and muttering, Gosh, that’s one rotten deal.

The post Beautifully Designed 401k Plans: Rare as Hen’s Teeth appeared first on John Friedman Financial.

What’s that you say? You’re wondering what that nasty looking little squirt and a half of letters and numbers all strung together in that first paragraph means, are ya?

Please allow me to introduce . . . er . . . translate it for you, as we take another trip into our continuing series, Language Fail in the Land of Financial Planners, and, in doing so, hopefully help you understand how the concepts of financial planning and investment advising became so thoroughly bollixed-up and so inelegantly hotchpotted.

*  *  *

In approaching this string of letters and numbers, let’s sneak up on it from behind, shall we? Yes, let’s do a reverse Julie Andrews and start at the opposite end of the very beginning: the “IBD” in “FP50IBD.”

As you might expect, lots of folks and businesses and concepts out there lay claim to an I followed by a B followed by a D.  Why, it’s a veritable gimme an I, gimme a B, gimme a D free-for-all out there!

First and foremost, IBD, to most people in financial services, stands for “Investor’s Business Daily,” which is a daily financial newspaper that competes with the Wall Street Journal (which today is, I think it’s fair to say, a Rupert-Murdochian-pummelled shadow of its former self) and the Financial Times (it of the salmon-pink newsprint, and all three being raaaaather conservative to say the least).

Second, as anyone who care-took a cat well into said cat’s late teens, as I once did, IBD can also be veterinarian-speak for “pukes a lot” or, to line things up with the abbreviation itself, “irritable bowel disease” (aye, laddies and lassies, t’was some long-bygone era now, but I doth vividly remember what it was like to be care-taking Sir Pukes-A-Lot all throughout yonder day). But in all seriousness, irritable bowel disease can be a very big deal for humans as well as for beloved pets; if you’re a human being, then, you really don’t wanna have IBD and you really don’t want your pet to have it either, and, likewise, if you’re a pet, do you and your caregiver a favor and stay away if you can from IBD.

As you can guess, the IBD in use here has nothing to do with either of those things, or, for that matter, with “isolation by distance” genetic analytical tools (tools based on the idea that, the more geographically isolated one population is from another, the more different their genetic makeups will be) or with the “Independent Bike Dealers” association (which has probably fared far better than the IBookD parallel association) or with the “International Business Development” department at the Haas School of Business (my alma mater), all of which Google would have us believe are much more relevant to many more people than the IBD in play here in the FP50IBD.

In fact, the particular IBD in play here — the one having to do, as we will shortly see, with financial services — was nowhere to be found on any of the numerous search result pages I saw, even though The Google Machine’s knowledge of me presumably goes way deeper than the very easy-to-know fact that I am in financial services.

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Short numeracy detour (skip this numeracy section if you prefer to not think of the numeracy ramifications here, but please do also fold back to the last sentence of this section if you need a hint on one of the abbreviations in the first sentence of the section that follows):

The way I figure it is that (a) 26 cubed equals 17,576, and (b) 36 cubed equals 46,656, which (c) assuming that all 26 letters and all 26 letters plus all 10 single-digit numbers are equally attractive in TLA-land (a simplifying, though very wrong, assumption, yes?), means that (d) there’s plenty of room for everyone to find their own unique set of letters and numbers within the universe of three-letter abbreviations, isn’t there? I mean, can’t we all just get along? Yet everywhere we look there is overlap. (So what’s that you say? You don’t know what the “TLA” in “TLA-land” stands for? Why, TLA is the best, most perfect-est of all three-letter abbreviations, and in fact I scooted the answer to your question past you once already in this paragraph. Given that perfection, though, I’m pleased to present it again, this time much more directly and in all its simple, mind-thwacking, logic-imploding beauty: “TLA” stands for “three-letter abbreviation.”)

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So let’s get to the IBD TLA we care about, shall we?

Since The Google Machine probably won’t tell you, it looks like it’s up to me to tell you that “IBD” as used in “FP50IBD”stands for “Independent Broker-Dealer.”

Now, a detailed discussion of what IBDs of this sort are all about is way beyond the scope of this piece, so here I’ll just say that a “broker-dealer” is what people usually think of as a “stockbrokerage” and that an “independent” broker-dealer is one that is . . . independent, i.e., not part of a huge financial services Goliathan mega-store of a financial services behemoth, and one that instead simply serves people or businesses that need a stand-alone broker-dealer. So think of an IBD as being like the stockbrokerage part of a big financial garganto like Morgan Stanley, but with that part disconnected from all the other parts of the company, and you’ll have a good enough definition for our purposes right here and right now.

And then the “50” part is tres easy: it means a list of the top fifty IBDs.

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In turn, that list of the top fifty IBDs is compiled and published by a trade rag called “Financial Planning” which is what the “FP” in “FP50IBD” is all about. So here we have a trade magazine about financial planning focusing considerable effort and reader attention on . . . of all things . . . stock brokerages, and the Top 50 of those that are independent.

So what’s up with that, eh? I mean, aren’t financial planners supposed to be as different as night and day from stockbrokers? And people lookin’ for a financial planner don’t want no stinkin’ stockbroker, right?

Hmmmm . . .

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For the beginning of an answer to these questions, let’s look at how FP mag describes itself on its About Us page:

Since 1970, Financial Planning’s mission has been to deliver the essential information that independent advisors need to make informed decisions about their business and the clients they serve. We are the only website dedicated to the needs of the independent financial planner. Our loyal audience consists of powerful and action oriented financial advisors who rely on us to provide news, opinion, expert advice and practical business building ideas that independent financial planners need to be successful. Their primary concerns are their clients (building relationships), their practice (building and managing their business) and managing their client’s portfolios.

Let’s look at the language soup in that quote, shall we? And let’s first look at it from an inside-baseball perspective (not to worry: I’ll help with both the baseball part and the inside part), and then relate that inside perspective to how NFs —  normal folks — who aren’t playing this particular game of baseball hear things.

The first thing to note is that the word “advisor” comes up a lot in FP Mag’s description of itself. To an inside-baseball ear, the word “advisor” has a pretty specific meaning (though we can’t seem to decide the specifics of how to spell it, with most of us going with the O version of “advisor” but some preferring the E version of “adviser”). That pretty specific meaning stems, I believe, from the Investment Advisers Act of 1940, which is, when all is said and done, mostly about . . . you guessed it, investments! So within the industry the word “advisor” usually echoes within the “investment advisor” hall, so to speak, and usually means “having to do with investments.”

Seen in that light, it’s striking to see the willy-nillying and the seesawing and the back-and-forth’ing in the quoted language, switching between language that is unmistakably about financial planning and language that is similarly unmistakably about investment advising (not to mention toggling between the singular and the plural and between the second and third persons . . . ).

Indeed, the first two sentences of that quote seem to use the phrase “independent advisors” and “independent financial planner” essentially interchangeably (emphasis added by moi):

[FPMag’s mission is to] deliver the essential information that independent advisors need to make informed decisions about their business and the clients they serve. We are the only website dedicated to the needs of the independent financial planner.

And then the last couple of sentences talk about what the people reading FP Mag care about, which boils down to two facets of taking care of business (building and running their practices) and but a single core activity undertaken on behalf of their clients (managing portfolios). So when it comes down to specific outward-facing services, FPMag seems to be thinking in terms of investing.

This carries through to the second and final paragraph of FPMag’s description of itself:

We also produce podcasts, conferences, custom publications and eNewsletters—all covering in-depth analysis and planning advice. Whatever the medium, our purpose remains the same: to provide advisors with the most up-to-date information and cutting-edge analysis on investments, client relationships and business management. Our mission is to help advisors run a thriving business.

Again, the language vacillates between financial planning and investment advising sorts of things, but if either tends to dominate, it is, to my ear anyway, the investing side of things.

And so it is throughout the investment advising/financial planning landscape. Financial planning and investment advising are all smooshed together in one ill-defined, ill-conglomerated, often-conflicted gnarl-mass. Public confusion ensues.

*  *  *

Elsewhere in this blog I talk about how investment advisors differ from stockbrokers (see here, here, here, here and here, to name just a few). I’ll briefly summarize much of that discussion by noting here that (a) human stockbrokers ruled the investing roost some decades ago, until about, say, 1990, but were (b) largely forced to change their approach when the online stock brokerages successfully drove the prices of stockbrokerage down by more than 90%, which (c) persuaded/forced many stockbrokers and industry newcomers who formerly would have been primarily stockbrokers to become primarily investment advisors, particularly if they worked mostly with WFs — wealthy folks — because investment advisors could charge a percentage of assets under management fee, typically in the neighborhood of 1% of assets managed per year and because investment advisors hadn’t seen much, if any, loss of pricing power (and, for that matter, still haven’t . . . ).

And just like that — voila! — the pricing world-of-hurt occasioned by the rise of the online stockbrokerages was avoided and, lo’, those fleeing doth saw RIA-land, and what they doth saw they doth did likee very much, as in, Hey you guys, don’t all run to the Registered Investment Advisor side of the boat at the same time!

So in many ways, you can think of investment advisors as the modern version of stockbrokers .

And I quickly add: yes, I know these are fighting words to many of my friends, but the way I and many, many people see it is that investing is investing is investing is investing, so people who are providing and being paid for investing services are all doing the same thing, even if they are doing so within very different milieus. More specifically, yes, I know the standard of care is quite different between stockbrokers and investment advisors (the former owe their customers the same minimal standard of care as a shoe salesperson, while the latter owes the Full Monty of a fiduciary standard of care, punctilios and all), as are the revenue models they use (interesting flip: old crooked stockbroker behavior was churning, while new crooked investment advisor behavior is reverse churning!). Yadda, yadda, yadda and etc., etc., etc.: yes, I know them’s was fightin’ words in that single-sentence paragraph up above this one.

And, yes again, I’ll up the fightin’ ante by noting a positive on the stockbroker side of yore in that, when they paid themselves out of their customer’s money, they at least used a mechanism which allowed their customers to easily know how much they were paying (a trade confirmation showing, unmistakably, the add-on commission), while many investment advisors seek, as best I can tell, to limit the attention their payments to themselves elicit in their clients (often burying the debit in a dozens-of-pages-long monthly statement).

I call it getting paid in the background, while Michael Kitces, if memory serves me, uses the very apt phrase in this context of low saliency payment mechanism. Investment advisors are every bit the world-class masters of low saliency payment mechanisms that gyms and cable companies and mobile phone companies are, with Wall Street taken as a whole (a/k/a the FSIC, a/k/a the Financial Services Industrial Complex) the long-standing master of getting paid without most folks even knowing they are paying.

*  *  *

I know for an anecdotal fact (whatever that is . . . ) that very few people, when they first consider working with a financial planner, are seeking out the modern version of a stockbroker. And I also know for a fact that when those people realize that most financial planners make their livings by managing client investments, they are a bit bummed because that is not really what they had in mind. Rather, they want someone to help them figure out how to get from where they are to where they want to go, and they wish to receive that help in an investing-agnostic way. That is, they are amenable to using investments to help them get them from Point A to Point B, but they don’t want their advice to be biased towards (locked into?) an all-investments-all-the-time approach to that journey. And they certainly don’t want their commercial relationship with their planner, at the compensation level, to be determined solely by the number of dollars they have invested through their planner, particularly when that number is driven largely (and, over time, largely driven larger) by market events having nothing to do with the skill or effort or wisdom of their planner . . . er . . . investment advisor.

And when the financial planner says, “Oh, don’t worry. We’ll do a plan for you and help you keep it current, but what you are going to pay us for is managing your investments,” I think a lot of the listeners continue to be bummed, with the plaintive wail understood to be: can’t I just hire you as a planner?

Some financial planners will say yes; many will say no.

*  *  *

What’s a person to do? What’s our industry to do?

My answers stem from this notion: you are what you get paid for. If a financial services provider gets paid assets under management fees, then that FSP is an asset manager. If an FSP gets paid for helping people plan for how to get from where they are to where they want to go, then that FSP is a financial planner.

They are not the same thing. Most fundamentally, their playing fields are differently shaped and sized.  Asset managers work with one-third of a balance sheet. That is, their work pertains directly to assets, but does not pertain directly to liabilities or (strange as it may seem) net worth. By contrast, financial planners work with an entire financial life. Their work pertains to anything and everything within that financial life, i.e., all three parts of the balance sheet, plus both sides of the income statement, plus all the non-numeric flesh that the numeric skeleton of a financial life — consisting of all five of those numeric components — carries upon it. So, yes, there’re lots of numbers involved in financial planning, with some of those numbers clearly being numbers about investments, but there’s also a whole lot of all the other stuff of which a good life is made: love (family, children, friends, community), endeavoring and accomplishing (hope, fear, ambition, disappointment, good luck, bad luck, good times, bad times), and everything else.

And from that it follows that all who purport to be of service with respect to all of that for a given client should not pay themselves based on a formula tied in with one-third of the balance sheet inside that client’s financial life. That glove just does not fit.

I see no valid reason to tie financial planning/entire-life sorts of services to an asset management/balance-sheet-only sort of revenue model other than (a) it is an absolutely off-the-charts fantastic revenue model, right up there with Microsoft’s DOS revenue model, and (b) it lives within the core of what Wall Street understands, which is, at its heart and all the way on down to its bedrock historical foundations, stockbrokerage, plain and simple. Neither of those factors has anything to do with the person receiving the services and, indeed, both tend to run against the interests of the person receiving the services.

As a first corollary to this central idea of AM’ing <> FP’ing (that’s a “not-equal” sign to all you non-Excel formula types out there), I further propose that, if an FSP wants to do both asset management and financial planning, then s/he should be required to charge separately for each.

And then as a second corollary, this one aimed at the more general ill of intentionally low-salience payment mechanisms, I also propose that FSPs be required to disclose, on at least a quarterly basis and on a single letter-size piece of paper or single email each with no more than two basic lines of information and zero lines of legalese (the legalese can live elsewhere and be incorporated into the document via reference), to each customer and client, the total compensation the FSP generated via the services the FSP provided to that particular customer or client, separated into (here come the two lines of information) (a) the amount the customer or client paid, and (b) all other amounts the FSP received arising from or in any way connected with the services the FSP provided to that particular customer or client.

Clearly, this solution would not be great for investment advisors. Some (most?) would have to disclose business practices that, for various reasons (e.g., embarassment, shame, fear, skullduggery) they would prefer to remain un-seen and de facto secret. Some (most?) would make less money, which might not be a bad thing for the country as a whole; the retirement security of the overall population might well increase! Also clearly, and exceedingly so at that, powerful interests don’t want anything like this to happen. So I don’t expect it to happen anytime soon.

But I do think the investment advisor piece can be handled at the robo level quite satisfactorily, and that that would leave a large opening for pure financial planners to establish a beachhead where the population as a whole slowly but surely comes to an understanding that paying directly for financial planning services can be terrifically cost-effective, and can generate a truly wonderful, life-changing experience, while paying for financial planning services indirectly by purchasing asset management services with some financial planning services thrown in for good measure can be a terrifically inefficient, discombobulated approach, generating a very curious and mysterious experience, leaving people wondering what they are paying for and whether they have exceeded the “thrown in for good measure” amount of financial planning service requests over and above the asset management services they’ve directly purchased.

And then it is on us pure financial planners to figure out how to make our services terrifically cost-effective. That means affordable, and it also means that the services must produce observable positive outcomes over time, which will usually take the form of observable changed behaviors and observable changed numeric financial health.

It’s not easy, but I, for one, think I am a nice big chunk of the way up the curve on figuring out how to do that. Yay.

*  *  *

I close with a bald assertion that brooks no exceptions — an assertion that is very much a part of the conceptual framework set out above, so a fitting end-cap for this piece — and then ask for your help in thinking on it, to see if you can brook that cross and find one or more exceptions.

Here is the bald assertion: every single aspect of your life has a financial component to it.

And here is the ask: please think about whether there are any exceptions to that bald statement, i.e. whether you can think of something in your or anyone else’s life that was or is entirely devoid of a financial component.

If you can think of one, please do let me know! For more than a decade, I’ve been asking people to find an exception to this statement, and so far it’s been nothing but silence.

It’d be fantastic if you or someone else contacted me with a great exception for me to think on, and then it’ll be on to figure out — or not figure out! — how that exception fits in with the ideas set out above.

Having heard no exception thus far, though, this pure financial planner can so far say, without hesitation, that pure financial planning work pertains to a person’s entire financial life, and, therefore, to a person’s entire life, period, dot, the-end. And that makes the work very interesting indeed, and most pleasing to a generalist such as myself. And very profound for everyone involved.

The post Language Fail in the Land of Financial Planners: The Smooshing Together of Financial Planning and Investment Advising appeared first on John Friedman Financial.