The Fiscal Cliff

The fiscal cliff has kept markets on edge and caused huge up and down swings to the S&P 500 in the last month of 2012. Democrats and Republicans have sparred publicly over deals that have been proposed, and so far they haven’t made much progress. The problem has been simmering for 50 years and a positive a solution is required to keep this country from becoming the next Greece.

The fiscal cliff refers to large tax increases and spending cuts that will be enforced at the end of the year unless some agreement is made before then. The fear is that a recession will occur unless something is done. Contrary to popular belief, going off the cliff would not be a terrible thing. American politicians have failed to understand how to complete a very simple task that most were taught in high school: How to balance a checkbook. The automatics tax increases and spending cuts would solve this problem as it simply forces the politicians to do what they were supposed to do a long time ago. Balance a budget! The politicians simply do not have the economic intellectual capacity to make the right economic decisions, and they have proved this over the last 10 years.

It is never that simple though. Nobody wants to see tax increases for 98% of Americans that really can’t afford to pay those taxes right now. But if we had to we could deal with it and we could get by. A mild recession would likely occur, but our budget issues would be on a course of repair, which has proven to be a great thing for the stock market in the past. Both sides of this issue are making critical mistakes and assumptions and the right answers lie somewhere in the middle of what both are proposing. The right answer is moderate tax increases and moderate spending cuts. One side doesn’t want to raise taxes enough and the other doesn’t want to cut expenses enough. A moderate approach would help avoid a short-term recession and improve our long-term debt levels.

Warren Buffet made a quote about a year ago describing how easy it would be for him to solve all of these issues. Essentially he said if the deficit reached a certain level related to GDP that all present members of Congress would not be eligible for re-election. It sounds harsh but could be a necessary cure for the spending sickness the politicians have. If you’re invested in this market and are a long-term investor, nothing should be changed because of the fiscal cliff. In the end going off the cliff could be a better for this country in the long-run, so don’t spend too much time worrying about bickering politicians who don’t understand the economy. If you are retiring soon, you should have been meeting with your financial advisors long ago in order to reduce your risk.

Marc J. Morrow, CFP®
Chief Editor

Are Financial Advisors worth the 1% management fee?

Most investors with investable assets over $100,000 use a financial advisor that charges a 1% management fee. This service usually includes quarterly meetings with your advisor, account statements with economic reports, and a broad selection of mutual funds to choose from. This arrangement is viewed as beneficial as the advisor has financial incentives to grow your account as compared to the commission sale where the advisor has little incentive to help the client after the transaction.

I propose that in most cases the 1% management fee is a waste for the investor. The primary reason is that there are a large number of advisors that are simply not qualified to do their job. It is difficult and unfair to blanket my profession so I want to be very specific here. There are over 300,000 advisors in the United States and there are only 66,187 CFP’s. There are roughly the same number of CFA’s out there but most do not practice individual financial planning. My argument is that most advisors that do not carry one of these certifications do not possess the required skills to effectively manage client portfolios. Many have not experienced a recession as an advisor and many have been in the business for less than 5 years.

I’m willing to submit that over 50% of financial advisors do not know what a Rank In Category means. Personally, I have only met three advisors that did not have a CFP or CFA that knew what it meant, and none of those used an Investment Policy Statement (IPS), another critical piece to the investment management process. I routinely here stories from new clients explain how they lost 45% or more in 2008, when the S&P 500 was down 37%. Part of the problem is poor training. Part is poor education. Part is because some of the best advisors at sales often have the lowest personal finance skill sets. Lastly, if you work for a broker dealer, you are required to do what is in the best interests of the firm, not what’s in the best interest of the client, as required by a CFP.

There are a few companies out there that do mutual fund selection, quarterly rebalancing, and reporting for a 1% fee on an automated basis and some advisors are moving to this platform. An advisor that is a personal friend recently admitted to me that he did not have the ability to properly manage client portfolios before this service was available to him. Another advisor that has been in business for over 10 years admitted that he had never heard of an IPS.

The process of mutual fund selection is already becoming automated, and soon there will be services available that will be automated, cheaper, and more effective than paying an advisor a 1% management fee. There are plenty advisors out there that are more than qualified and deserve a 1% management fee, but you have to choose your advisor carefully to get your money’s worth. Clients will still want to meet with an advisor face to face so that market will never go away. The consumer who has been burned in the past will have new options in the future that will be more cost effective and will be able to do it without a financial advisor.

Marc J. Morrow, CFP®
Chief Editor

Morrow Money Saver Tip #7- Cars

Purchasing a car is usually the 2nd biggest financial transaction you will make outside of your house. The mistakes that can be made are numerous and the decisions endless. The folks at www.intellichoice.com have made things a lot easier. There are links below to these topics that will help you out. Follow these guidelines and you should save thousands off every car purchase.

A great part of this site is that you can see the 5 year estimated costs of owning a vehicle. The value here is tremendous. You may be comparing two cars and find that one is $1,500 cheaper than the other. After using Intellichoice, you may find that the 5 year costs of ownership are actually $3,000 more with the cheaper car. To use this feature, click on either new or used cars from the home page and begin selecting criteria for cars you are interested in and compare the five years costs of each.

Buy Vs. Lease

In short, leasing sometimes is better but is usually a bad deal overall. Click here to see why.

Pay cash or take out a loan?

Usually paying in cash is better. Click here to what IntelliChoice says.

New or Used?

Generally buying used is a better deal. Click here for an explanation.

The topics are endless and include:

Alternative Fuel and Hybrid Vehicle
Is an Electric Vehicle Right For You?
Trading In Your Old Car
The Golden Rule of Car Buying
Why Ownership Costs are Important
Preparing for Negotiations: Knowledge is Power
Getting Ready to Negotiate
Value Defined: An inexpensive car to buy could be expensive to own
Standing vs. Running Costs
What is a Good Value?
Used Car Research Overview
Certified Pre-Owned Program Overview
Don’t Get Soaked Buying a Used Car

If you saved $2,000 every time you purchased a car, and bought a car every 8 years, you would save $10,000 over 40 years!!!

Marc J. Morrow, CFP
Chief Editor

Investing for Yield with Real Estate

A major investment dilemma is developing within portfolios due to the low yield that bonds are paying and the potential for a bond market bubble explosion. Abby Joseph Cohen of Goldman Sachs recently stated that owning bonds may be more risky than owning stocks in this market. The danger is that interest rates will eventually begin edging back up, resulting in a loss of principal to your bond portfolio. The simplest way to view this is that it is an inverse relationship. When interest rates go up, bond prices go down. The Federal Reserve has stated that they will not increase interest rates until 2014, meaning that the only way rates are going up from here is if the market pushes them there.

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What is Wrong With America and the Economy?

Technically we are 3 years out of the recession, but most American’s are still struggling and do not feel confident about our future. There are several reasons why we are in the position we are in, and there is a lot of blame to go around, yet there is still time to fix these problems. Politicians on both sides of the aisle have continued to make things worse and have failed to realize that the direction both parties have taken is doing nothing but hurting our great country. The politicians also do not appear to have the necessary skills to fix the problems or are flat out corrupt, and it will take a political solution to fix our economic problems.

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