Paying the Price for Bad Advice

 The most important question you can ask when hiring a financial advisor is, “How are you paid?”

From day one, we at New Perspectives committed to being a fee-only advisor. That commitment has resulted in clients who trust that our advice, as fiduciaries, is centered on their needs and not our bottom line. Our client is the ONLY one who pays us which ensures that their interests align with ours. 

In the financial industry, there are 3 models of payment for advice:

• Commissions
• Fee-Based
• Fee-Only

With the commission model, compensation varies depending on the product/investment recommended. Lucrative (for the salesperson) commission-rich products such as annuities and insurance products may not be in the best interest of the client. While commission brokers are required to disclose that compensation, it is often buried in a prospectus or some other fine-print contract. Most clients do not know what they are paying. In some cases, payment comes off the top. In other cases, it comes in smaller, annual increments that impose penalties on clients who move their funds before full payment has occurred. 

Your “advisor” is being paid by someone else to do something that may not exactly be in your best interest. Commission brokers typically are NOT fiduciaries. They are held to a different standard called suitability. That means they only need to show the recommended product is suitable, even though it might not be the best product in that situation. It is a system rife with conflicts of interest.

The fee-only model is clear. Clients are required to sign a contract with costs detailed. In this case, clients may pay an hourly fee or they may pay based on a percentage of their assets that the advisor manages. Mainly, we charge a management fee of 1% of assets managed, but we still conduct some consultations under the hourly arrangement. The percentage of assets model aligns our interests with those of our clients. When our clients’ portfolios increase, our compensation increases.

Expect fee-only advisors to be Registered Investment Advisors operating as fiduciaries. This is the highest standard in the business and requires these advisors to put their clients needs above their own.

The fee-based model is a hybrid one, further clouding the picture of compensation. These advisors charge a fee for their advice, but they also recommend commission products. As long as these advisors steer clear of commission products in accounts where they also charge fees, they are operating like fee-only advisors. In some cases, they may offer commission products to a set of clients who are not under a management arrangement.

For any client, the ultimate goal is to find an advisor who adds value to your financial situation. That means getting sound advice that isn’t weighed down or tainted by hidden fees. That means having an advisor with expertise in all areas of the financial picture—investments, tax policy, estate issues. It also means having someone you can trust to put your needs first. For us at New Perspectives, the fee-only arrangement fits our values and our belief that giving our clients the best advice makes for good long-term relationships.

So ask the question, and understand how your advisor is being paid. No one should ever pay the price for bad advice.

Is your money safe?

With the collapse of Silicon Valley Bank and Signature Bank of New York in recent weeks, you may be wondering if your deposits at any bank are safe.

The short answer is probably yes.

In the wake of the collapse of those two banks, the Federal reserve, Treasury and FDIC came together with very strong support of depositors nationwide. Tighter regulation in the past decade has generally led to safer banks, but no bank could withstand the extraordinarily high level of withdrawals that SVB and Signature faced in their final days.

The past weeks brought two significant changes to support depositors:

The first thing that was done to support depositors was an expansion of FDIC insurance. FDIC insurance exists to ensure depositors that they will always have access to their money, even if their bank fails. The current limit of $250,000 per depositor, per FDIC-insured bank, per ownership category covers most individuals. What the crisis at SVB revealed was that companies that may keep millions in the bank are still at risk, and that puts their employees payroll and vendor payments at risk. FDIC extended insurance to all depositors in that case.

Will they do this again for your bank? Maybe so - Treasury Secretary Janet Yellen is very careful with her words, but does say they will provide similar support for other institutions when there is a risk of contagion. 

The second thing that was done to support depositors was an expansion of lending between the banks and the Federal reserve. Banks do not always have all of the cash they need to meet deposits on hand, so they sometimes borrow cash from other banks. Commonly, they use secured loans, posting high quality assets as collateral in exchange for the cash they need. The newly established Bank Term Lending Program offers more generous terms for banks to borrow from the Federal Reserve. The bank puts off Treasuries or other qualifying assets and receives cash to meet withdrawals.

Banks are in the business of managing risk mismatches. They must keep savings and checking accounts immediately accessible at all times with great surety. However, they make loans that are not due back immediately, or are to borrowers of less than certain credit. The Bank Term Lending Program is designed to help banks manage the maturity mismatch that has been exacerbated by the sharp rise in rates and corresponding decline in value of bonds.

We expect our banks to be safe, but risks still do exist. If your deposits exceed FDIC insurance limits, you may consider other cash-like investments like Treasuries. The IntraFi network also offers deposit swapping, allowing your bank to divide your deposit between other insured banks, without you having to go open accounts yourself.

Do You Have Enough Home and Auto Insurance?

 The following blog post was written by our interns, Mauria Ferrell and Brady Gray.

Do you have enough insurance to cover your home or car if something unexpected were to happen tomorrow? Today we are going to look at the homeowners and auto coverage and help you determine if you would be covered. 

When starting to talk about insurance, there are some basic concepts you should understand. Your policy has a regular premium to keep your insurance in effect and your deductible is the out-of-pocket expense that you will have to pay in the event of a claim. Generally, having a higher deductible would mean having to pay more out of pocket before the insurance kicks in. The advantage to that is it would result in lower monthly premium payments while lower deductibles would make your monthly premium payments larger. 

Have you reviewed your homeowner’s policy lately? If not, it may be crucial that you update it. Make sure you are insured for at least 80% of whatever it would cost to replace your home so your insurer will pay out appropriately. If your home is not insured for correct amount, it may cost you more out of pocket if an unforeseen event occurred. 

A straightforward way to estimate your home’s value would be to take the market average per square foot and multiply that by your home’s square footage. For example, if your home is 2,500 sq. ft. and the market average per square foot is $150, then your home would be worth about $375,000. Therefore, your homeowner’s policy should cover at least $300,000. It is also important to note that external structures, such as sheds or fencing, may not be covered within most policies.  

Next, we’re going to look at auto insurance. Do you know your states requirements for auto insurance? In the event of an accident in Mississippi, your limits for bodily injury are $25,000 per person, with a maximum of $50,000 for bodily injury per incident. It also covers up to $25,000 if you damage another person’s property. It may show up on your auto policy as $25,000/$50,000/$25,000. One important thing to remember is that you should not have auto coverage that exceeds your car’s value. Some car insurance companies offer tracking devices that monitor your driving, giving you a discount based on how safely you drive. Knowing you are fully covered should an accident happen, can ease your peace of mind. 

It is a good idea to consider purchasing liability coverage with higher limits. Remember, if you are at fault in an accident, liability coverage will only pay up to your limits of insurance. You will be responsible for any damages over that amount. Most insurers will offer an umbrella policy that can give you much higher liability coverage that can cover your home and your automobile on top of your existing coverage. 

We’ve all heard the commercials about bundling your home and auto insurance to help save money. According to a study from InsuranceQuotes.com, combining home and auto insurance saves the average consumer 16.1% on their premiums. Combining your insurance has many advantages. With just one insurer for multiple policies, it will be easier to keep track of your accounts. If there is an incident that damages both your home and vehicle, some insurers will only make you meet one deductible before it pays out. If your insurance wasn’t bundled, you'd need to pay two deductibles to two different companies.

The best way to know if you’re fully covered is to hire help from an independent licensed insurance agent. Shop around for different offers and be sure to consult a financial advisor.

Should I Pre-Pay for My Funeral and/or Final Arrangements?

The short answer to this question is yes - paying for or arrange your funeral in advance will save your family from a lot of trouble, confusion and financial worry at time when they are not ready to handle it. 

The major reason for planning your financial future is to benefit your family. Making arrangements for your final expenses should be part of that. Not the most pleasant of tasks, but vital nonetheless. For full disclosure: I was a caregiver for multiple family members for 13 years in total. My husband is a funeral director. I worked in a hospital/healthcare facility for 15 years. I feel very strongly about everyone having their final wishes in order. I once heard an exercise guru say "Your good health is a gift you give others." So true. Also a gift is making a difficult time easier. Also, let me encourage you not to wait until your golden years to plan for your final wishes. Many people don't live to see their golden years. Death is a part of life and life happens to us all.

First, many funeral homes sell policies or trusts. These are considered insurance and most are regulated by the insurance commissioner. You may have a funeral home that your family normally uses. Or maybe you've never stepped foot inside one. Either way, choose a funeral home whose contracts are regulated by the insurance commissioner because, should the funeral home go out of business or should you decide to use another one, you want to make sure your policy/trust is transferrable to any facility your family chooses.

Second, ensure that you are locking in today's prices (preferably discounted) in your policy/trust contract. Why? Because prices will only go up in the future. So, if the funeral you want costs $10,000 today, and your policy/trust discounts it to $7,000, then you pay (or make payments on) the $7,000. Once you've paid your $7,000, you are covered. So, if you die in 20 years, when the same funeral you want then costs $20,000, you don't owe anything else. You don't pay the difference. It's done. Plus, your family doesn't have to worry about how to pay for it.

Third, if you choose to set aside money or to purchase a life insurance policy to cover your funeral expenses, be sure these funds will cover everything on your wish list. Your wish list will probably cost more in the future than the amount you plan for today (see above paragraph). Also, ensure that the funeral home you choose will take assignment, if you are using a life insurance policy. Some funeral homes will not take a payment plan on charges incurred at-need, and they require payment in full at the time services are rendered. Some life insurance companies will take time to send your family a check. If your family is trying to have your funeral and get you to your final resting place, they don't have time to wait for the life insurance company to get around to paying them. It's important to remember that funeral homes are businesses, too, not charitable organizations. A harsh fact, but still a fact. 

Fourth, be aware that many items or services we see at funerals are outside charges that are unrelated to the funeral home and their scope of responsibility. Examples would be:  Flowers; vault and graveside set up; specialized cosmetology (if you prefer that your regular beautician prepare your hair and makeup, this is an outside charge); opening and closing of the grave/burial plot; decorative urn; musicians and singers for the service; clergy; family transportation. You can also expect additional outside charges if you die out of your home state, or if you plan to be buried in a state that is not your state of residence. 

Finally, however you decide to handle your final expenses, perhaps the most important thing is to make your wishes known. Tell your family. Give written instructions to your funeral home of choice. Leave a file of instructions in your home to be read upon your death. Please do not include your funeral instructions in your will, as your will is likely to be read much later than your funeral - then it's too late to carry out your wishes. Make sure someone knows what you want and how you intend for them to pay for it. During such a difficult, emotional time, this will be a great gift to your family. You are taking the burden of business away from them and just allowing them to grieve as they need. What a great legacy!

HELOC vs Cash Out Refinance

The following blog post was written by our interns, Mauria Ferrell and Brady Gray in response to a question we received on a recent Money Talks show. You can listen to the episode here. 

If you need money to consolidate debt or for any other financial goals, there are ways you can access money from the value of your home. Two of the most common ways to pull equity out of your home are through a home equity line of credit (HELOC) or through a cash out refinance. 

A home equity line of credit or HELOC is a line of credit that is tied to your home as the second loan on the property. You are able to take the money out as needed. Think of it as an on-demand loan. HELOCs often come with a floating interest rate tied to the prime rate plus whatever the bank is charging. This could pose an issue for some borrowers as your monthly payment will almost always be different. 

HELOCs work similarly to a credit card by letting you borrow as much as you need, whenever you need it, as long as you do not exceed the set limit. Most banks loan up to 89.99% of the value of the property minus any existing loans. Be sure to shop around at different banks because HELOCs often come with different terms based on the lender. Banks have different borrowing terms, usually around 60 months for HELOCs. When the term is up, you can pay off the loan completely or apply for a new HELOC. 

It is important to remember that this is by no means a conventional mortgage. Lenders have discretion on who they loan to but there is a general criteria that borrowers must meet. Some common requirements are a credit score of at least 700, and a debt-to-income ratio that is under 45%.

When using a cash out refinance, you are refinancing your home to free the equity you have already paid into the home. In this process, you would take out a new mortgage to replace your current mortgage. Let’s take a $500,000 home that has a remaining mortgage balance of $250,000 as an example. You could do a cash out refinance for $400,000 paying off the old mortgage and leaving $150,000 in your pocket. 

Applying for a cash out refinance may be a little harder than getting a HELOC because you are getting a new mortgage instead of a second mortgage. Applicants should have a debt-to-income ratio of 36% or less and have a credit score of no less than 700 and as it increases you will get a better interest rate. Also, it is important that you need to have at least 20% equity in the home to qualify. This type of home equity loan offers fixed interest rates and longer terms creating an easier payback schedule. Keep in mind that closing costs are higher for cash out refinances. 

Deciding which loan is better for you can be hard. Home equity line of credit (HELOC) is a second mortgage that requires an additional monthly payment. Banks are usually more lenient because it won't require appraisal under a certain amount. Cash out refinance replaces your original mortgage with a new loan that is greater than what you currently owe. Interest rates for cash out refinance are typically higher than HELOC because with cash out refinance you are paying back more interest. 

Keep in mind that all banks are going to have different requirements and terms, so be sure to find the option that works best for you. Also, consult a financial advisor to see what fits your needs!