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What Your Investment Advisor Should Be Doing to Protect Your Confidentiality

by Financial Alternatives on 4/2/2018

Here are some things your investment advisor should be doing to protect your client confidentiality.

Silence and privacy are the most undervalued assets in a client’s portfolio. We say this to acknowledge an often overlooked facet of investment management and financial planning: client confidentiality. This is something that many financial advisors and even their clients don’t pay enough attention to until it is too late. Is your advisor doing what your advisor should be doing to protect your confidentiality? Read on to figure it out. 

The Affluent Person’s #1 Fear is Being Discovered 

Anyone who has been taken advantage of financially knows too well that wealth can sometimes attract unsavory types and bring out the greed in people. Most affluent people live in fear (and in fact it is their #1 fear) of having others in their lives –including some of their friends and relatives – know how much money they have. They could end up being judged or criticized and the awkwardness it creates may be harmful to relationships. 

Aside from the social fears, there are real risks to having the public know how much money you have. You face a higher risk of being kidnapped or robbed. And that leads to the affluent person’s second biggest fear – losing it all.  

The Advisor Should Care More Than The Client 

It is the responsibility of the financial advisor to know more and care more about protecting the client’s confidentiality than the client his or herself does. While this may sound extreme it is the only way to make sure that safety is on the advisor’s mind at all times.  

Some advisors are prepared to do this, and some aren’t. For example, certain designations such as the CFA® designation have an ethics section in which exam takers are presented with scenarios and asked to choose which one is misappropriation of client information.  

Not all advisors take confidentiality that seriously. For example, we know of one advisor who routinely gave the key to his office to the 23 year old marketing associate so that she could lock up the office every night that he left early. This potentially could cause all sorts of issues.  

Clients, when evaluating an advisor, should ask themselves whose hands their private information will be in at any given time. The level of privacy is only as high as it is at its lowest point. In other words, the level of security is only as good as the weakest link in the chain.  

What Your Investment Advisor Should Be Doing to Protect Your Confidentiality 

Here are a few examples of what your investment advisor should be doing to protect your confidentiality. This list is not exhaustive. 

  • The advisor should take precautions to physically secure the premise. This means segregating employees so that only employees who are authorized to be privy to client data are permitted to enter the investment or trading sections of the office. In the age of “open floor plans” this can be difficult to do.  
  • You should ask yourself who will have access to your data. Remember that your privacy is only as secure as the weakest link in the chain. Whose hands are your account statements going to be in? If you’re not pleased with the response then don’t ignore your instincts. 
  • Don’t forget about the flow of your information in and out of the office. Does the advisor deposit outgoing mail in secure collection boxes or is it thrown into a communal open bin that everyone on the floor has access to? 
  • There should also be virtual safeguards in place. Is access to the client part of the server restricted or does any employee have access?
  • Does the advisor conduct a background check on all employees? These technical security factors should be reviewed periodically.  
  • The flow of data should be examined at the end of the lifecycle as well. Don’t forget that even if you erase the files, the data persists on your hard drive. Does your advisor turn in old computers to places like Target or Best Buy where they’ll just “wipe” the drive> Will they then refurbish the machine? A skilled hacker can crack into that. Or, do they employ a professional service whereby the drive is shredded to a fine powder that no thief can use to his or her advantage.
  • Does the office securely shred paper documents?  

Situations When An Advisor Can Give Out Your Information 

There are certain situations when an advisor just can not avoid having to release your information to a third party. Let’s say that they are executing a transaction on your behalf, or working with another financial institution on a matter related to your account. Obviously they may have to disclose some of your personal facts but even in that situation, the advisor should be careful and use judgement. Only “need to know” facts should be given out. 

An advisor may be required to hand over your information to comply with law or regulations, or if there is a court order to do so. This is a rarity but it does happen. 

Lastly, it would be appropriate for an advisor to give out your information to any person that you have authorized to receive it. The advisor should have asked you to furnish the names of these individuals in writing. Just saying the words can lead to confusion. The advisor should request this information in writing and also discuss it with you to ensure that no misunderstandings are happening. 

Summary of Client Confidentiality 

Confidentiality is binary; either the information is completely safe from harm, or it’s not safe at all. The tiniest crack can be pried open to spill the entire contents of the treasure chest, so to speak. 

There is no “in between” or “sort of” when it comes to keeping your information secure. 

It’s not glamorous but it’s one of the things that separate the elite advisors from the mediocre ones. If you have questions or doubts that your advisor is keeping your information safe, it’s not something to take lightly. Consider changing to someone who cares enough to take the time to make sure that he or she is doing what an advisor should be doing to protect your confidentiality. 

posted in BlogGeneral

Beware the Ides of March: Are You Your Own Retirement’s Worst Enemy?

by Financial Alternatives on 3/7/2018

The Ides of March commemorate Julius Caesar, the Emperor who significantly expanded the Roman Empire — only to meet his demise by a conspiracy carried out by his own people.  Just as Caesar’s fate turned to misfortune as a result of his tragic flaw, we see people who are their wealth’s worst enemy. If you’re making these retirement planning mistakes, it’s best to seek counsel before the bright day brings forth the adder.

Making Emotional Decisions

In our decades of experience, we’ve seen examples of perfectly rational, logical people who make emotional decisions that lead to their finances becoming compromised. Unfortunately, being called in to be the independent voice of reason after the fact is a step too late.

A common emotional trap that people run into when managing their own money includes holding on to company stock or an inherited position for nostalgia reasons. This can lead to dangerously undiversified portfolios.

Timing the Market

Very few people get this right. Most of the time, trying to sell at the top of the market and buy when the market has dipped creates more trouble than it prevents. Even professional money managers can’t successfully time the market.

Choose an advisor who will balance your needs for principle protection, income, and growth against market conditions. This approach, rather than one of reactive trading, is the best way to create long term growth.

Being House Poor

Buying a house that is beyond your means is a common retirement planning mistake.

The American Dream can turn into a nightmare if you’re living beyond your means with your real estate. People’s eyes being bigger than their wallets turned against us a decade ago when the real estate bubble burst, causing the largest systematic failure of the banking system that our country has ever seen.

While the crisis has passed, some families are still getting themselves into trouble by spending beyond their means, incurring too much mortgage debt, and limiting their financial flexibility.

Several years ago, we worked with a couple who continued to maintain a poorly performing rental property because they had already sunk so much money into it. They also kept holding on to it for sentimental reasons. We evaluated the property and had them make a realistic outline of cash flows, demonstrating how it affected their tax planning and retirement goals.  This helped them make a difficult choice in a more informed and prompt manner.

Cash flow and budgeting are just one part of financial planning. A complete strategy should be designed to help you with all aspects of your financial life, not just house purchases.

Not Enough Insurance or Estate Planning

Everyone with dependents knows that they need to manage the risk of an untimely passing, but very few people actually wind up with the right amount of insurance protection. This is because many insurance agents are not diligent in conducting an analysis prior to selling the insurance. People often have way more or, more commonly, way less than they need.

One of the important parts of how we work together with clients is our insurance analysis. Your advisor should go through such an exercise with you as part of your planning.

We also help clients work with an attorney to draft will or trust documents which make sure their dependents are taken care of correctly in the case of their passing. People tend to shy away from this as nobody likes to think about dying. It can also be a bit intimidating to work with a lawyer who bills by the hour. We help our clients navigate this challenge and put a will or trust in place that will last throughout time.

We had a client a few years back who was having difficulty with their estate planning because they had accumulated various residential properties over the years and had a hard time deciding how to fairly transfer ownership to their children – while limiting any cause for infighting or resentment. We conducted several meetings to help the client get a clear picture of what they wanted. Then by encouraging open family meetings and collaborating with a qualified estate planning attorney, we were able to set up a plan that will appropriately handle the future ownership and management of their properties.

Working with the Wrong Planner, or No Planner at all

In our experience, working with the wrong planner or no planner causes some things to end up slightly wrong, while other things end up totally wrong.

We recently worked with a married couple that had been sold several different annuities and life insurance policies over the years. The products were not managed after they were sold and the commissions had been paid. These annuities and life insurance no longer served a clear purpose that the client understood. We helped evaluate the merits of each annuity and insurance policy; we showed how they fit into the clients’ plans and what alternatives were available. Afterwards, we assisted the client with replacing and surrendering their expensive annuities; we also helped them fit their life insurance into a broader estate plan.

As this example illustrates, commission-based reps can burn you and lock your money into high fee products that aren’t in your best interest. We recommend that you hire a Fee-Only financial planner who works only for you, not for a financial institution. Such a professional should be committed to a systematic, detailed, and integrated process.

For more insight on how to do this, please read our blog post entitled, “How Are Your Financial Institutions and Advisor Compensated? It’s Important” by clicking here.

Some people can do a decent job of managing their own finances but most of the time it takes a qualified professional to really do them justice. In our experience, we’ve found that most people who are DIYers lack the time to pay attention to all the details. It takes just one beneficiary designated incorrectly to spoil an entire estate plan. It takes one incorrect tax move to ruin an entire decade of tax efficient investing.

Even if you want to be in the driver’s seat, you should at least have a Plan B who can step in if something were to happen to you. And, you should regularly consult with this person to get a second opinion to ensure that you’re not making any major mistakes.

Summing It Up: Retirement Planning Mistakes to Avoid

The Ides of March happen once a year, but poor financial decision making is unfortunately present in the lives of many all year long. If you would like to know how well your decisions align with your long term goals, please contact us for a fiduciary review.

The case examples above are for illustrative purposes only and are intended to demonstrate the capabilities of Financial Alternatives, Inc. They are not intended to serve as individualized legal, investment, accounting or other professional advice.

posted in BlogGeneralPersonal Finance

How Are Your Financial Institutions and Advisor Compensated? It’s Important.

by Jim Freeman, CFP® on 1/19/2018

Wells Fargo is the latest example of a financial institution harming its clients by creating a compensation structure that incentivized employees to act contrary to their clients’ best interest.

Regulators found over 3.5 million fake credit card and bank accounts created by Wells Fargo employees who were pressured by managers to meet unrealistic sales goals. Wells Fargo was also caught selling nearly 1,500 renters and term life insurance policies to clients without their knowledge.

How in the world could this ever happen?

Some Wells Fargo customers said bank employees lied to them saying they were giving them a quote when in fact they were unknowingly being signed up for a policy.

When these issues were initially uncovered, Wells Fargo fired thousands and tried to lay the blame on these rouge employees. But as the truth came out, it was obvious that the problem lay with management’s incentive compensation structure. In reality it was the leadership who had put extreme pressure on employees to sell products in an effort in increase profits and thereby increase bonuses.

Misguided Incentive Structures Are the Rule, Not the Exception

Some people were surprised at what Wells Fargo was up to. I was not in the least bit surprised.

In general, financial institutions and their salespeople exist to maximize the profits of the corporations they work for, and hence compensation. To generate higher profits you need to sell products that have higher profit margins which are naturally more expensive to clients.

Let’s take a look at a simplified example to show how powerful these incentives really are.

For our simple example, let’s say an investor walks into a financial institution with $1,000,000 that they just inherited and need to invest  into a long term investment.

The financial salesperson discusses two options for this investment. The first option is an annuity plus a private REIT (real estate investment trust). The second option is a portfolio of low cost no load mutual funds. Remember this investor is relying upon the sales person to tell him which option is the best option for him.  In most cases, the unsophisticated investor will go with whatever the professional’s recommendation is.

Now let’s look at how the compensation works in both scenarios:

  • If the prospective client goes with option one, the financial institution will earn a commission of $50,000 or more as soon as the investment is made and then a much smaller trailing commission each year thereafter.
  • If the prospective client goes with option two, the financial institution will earn a fee of $2,500 as soon as the investment is made and then they will be paid roughly $2,500 a quarter, increasing each quarter as the value of the portfolio increases going forward.

As you can see, it would take over five years for the compensation paid from option two to even begin to approach option one. The incentives to sell option one are enormous.

Even if the broker feels that option two is a better one for this client, the pressure from his manager and company to sell option one will be severe because the rewards to the institution are so much higher.

Step 1: Hire a Financial Advisor Who Works Only for You – Not for a Financial Institution

You can beat these self-serving, conflict-ridden financial institutions simply by hiring an advisor that is 100% compensated by you and 100% loyal to you. Such an advisor is known as a 100% fee-only advisor.

The advisor must be free and independent of all financial institutions. Because such an advisor is only paid by you, he or she will naturally be completely loyal only to you.

It makes sense because now your advisor is being paid to work for you rather than for a financial institution. Your advisor is being paid to research, know and introduce you to the best financial institutions and financial strategies without an ulterior motive of selling you products that will boost some financial institution’s bottom line.

They will introduce you to institutions known for their low cost and solid performance such as Vanguard Investments and Dimensional Fund Advisors.  If you need insurance, your advisor is now being paid to help you find a carrier offering the least expensive (yet highest quality) insurance products without an incentive to steer you in any particular direction.

Hiring a 100% fee-only advisor can transform your financial and investment planning.

Step 2: Hire an Advisor Who is Committed to a Systematic, Detailed & Integrated Process

To get the absolute most out of your fee-only financial advisor, be sure to select one that is committed to a systematic, detailed & integrated financial & investment planning process.

Your advisor’s process should integrate and coordinate all areas of your finances, and your advisor should work in concert with your other advisors such as your CPA and estate planner. If you select your advisor well, you should look back years from now and feel that this was one of the best decisions that you ever made.

If you would like to know if your advisor is truly acting in your best interest, contact us for a fiduciary review.

posted in BlogPersonal Finance

What High Earners Should Know About the Tax Cuts and Jobs Act

by Ellen Li, MSBA, CFP® on 1/5/2018

Understanding the implications of the 2017 Tax Cuts and Jobs Act is important for any high earner, or high earning family, who wants to maintain its financial success.

As illustrated below, the recent tax reform will modify the tax rate for high income earners. But that’s just where it begins. High earners should also be aware of how the tax code will significantly impact the decisions you are making about your healthcare, business, and gifting decisions.

Table Source: “Highlights of the Final Tax Cuts and Jobs Act, “ by Tim Steffen, 2017 (
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posted in BlogGeneralPersonal Finance

5 Year-End Tax Planning Tips for 2017

by Chris Jaccard, CFP®, CFA on 12/1/2017

Here are a some tax-planning techniques and strategies you can still consider in the last few weeks of the year:

1. Watch out for large mutual fund distributions this year

Many mutual funds have realized large gains and typically distribute those gains in November and December.  Don’t buy a mutual fund in your brokerage account right before it makes a 10%, 20%, or 30% (of NAV) distribution – it just turns part of your purchase into a taxable event!  Look for widely published estimates, and if expected to be large, make sure you buy shares after a fund’s ex-dividend date.

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posted in BlogPersonal Finance

Stock Returns – The Uncommon Average

by Jim Freeman, CFP® on 11/10/2017

The US stock market has delivered an average annual return of around 10% since 1926 (as measured by the S&P 500 Index through 2016). But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

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posted in BlogInvestments

Embracing Retirement by Making the Right Housing Decisions

by Ellen Li, MSBA, CFP® on 9/22/2017

As a busy financial advisor and  mother, I like to balance myself with the practice of yoga. To me, yoga is more than just the practice of body movement, it’s  also an exercise of mental discipline.  Recently one of my favorite instructors used “embrace change” as our mantra and it really resonated  with me both  professionally and personally.

At Financial Alternatives, we recently helped two clients make new housing choices in their retirement years — one client remodeled their house and redesigned the living space on the first floor to make living there safer and more comfortable. The second client decided to move to an assisted living facility. In both cases, it was a transition, a new change that our clients embraced with courage and wisdom.  Stories such as these show the importance of making the right housing decisions  during your retirement years. These decisions could  have a tremendous effect on you  both financially and emotionally.

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posted in BlogGeneralPersonal Finance

5 Steps to Take After the Equifax Breach

by Chris Jaccard, CFP®, CFA on 9/14/2017


Now that some of the dust has settled on one of the worst cyber security breaches in history, we think everyone should go through the 5 steps listed below.  Why everyone?  Because there is no way to be certain if you have been affected by the Equifax breach or not.  I entered false info to test Equifax’s verification site including a last name of “test” and a SSN of “123456” only to find that it positively identified me as a person impacted by the breach.  [9/16/17 Update: Equifax’s Chief Information Officer and Chief Security Officer are “retiring” and their internal investigation continues.]

Also, please make sure everyone in your family has taken these steps including your spouse, kids in college, domestic partner, and perhaps even minor children.

Step 1: Review Your Credit Report

Use the Annual Credit Report site to review your credit report from at least one of the three listed credit reporting agencies (“CRAs”).  By law, you are allowed one copy every 12 months, so we suggest you request a report from one of the three CRAs every 4 months.  Check for rogue activity or inaccuracies, and contact the CRAs to address the issue.

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Thank Vanguard for Lower Investment Costs. What Makes Them Different?

by Jim Freeman, CFP® on 9/5/2017

Most investors do not know this but The Vanguard Group is radically different from all other investment firms. What makes them different is that they are owned by the funds they manage – a unique arrangement that eliminates conflicting loyalties.

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posted in BlogGeneral

Thoughts on S&P’s decision to exclude non-voting stock from indexes

by Chris Jaccard, CFP®, CFA on 8/3/2017

This week the company that maintains the S&P 500 index announced that they will start excluding companies from their indexes that issue multiple classes of shares.  So newer issues of stock from companies like Snap Inc. (SNAP) – that do not have voting rights – will not be included in many popular indexes.  This follows similar statements from FTSE Russell and MSCI earlier in the year.

These announcements highlight a couple of key reminders for investors.  First, there is a significant human element even with indexes that claim to be strictly rule-based.  Second, although index providers and professionals agree that corporate governance matters, there is no consensus on how to encourage better practices while still maintaining indexes that represent public companies.

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posted in BlogInvestments

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Posts are general in nature and do not constitute the rendering of legal, investment, accounting or other professional advice.