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How To Select A Financial Advisor: The Least You Should Know (Part 19 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 19 In eBook Series)

Chapter 19: Retirement Accounts

Most of the information in this book regarding diversification, fees, and working with a fiduciary can be applied to retirement accounts, such as 401(k)s, 403(b)s and IRAs. The following brief discussion identifies a few other things to keep in mind.

For many, retirement accounts represent a very large portion of their investment portfolio. Deferred taxation, as well as generous company- matching opportunities through which to acquire company stock, make vehicles such as 401(k)s very attractive.
There are, however, many rules governing retirement accounts that you and your financial advisor should be aware of. For instance, the rules regarding required minimum distributions (RMDs):

1. What if your spouse passes away and you inherit their 401(k)?

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How To Select A Financial Advisor: The Least You Should Know (Part 18 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 18 In eBook Series)

Chapter 18: ODDS AND ENDS

Two investment vehicles which have not been discussed thus far:

1) Exchange-traded notes

2) Non-traded Real Estate Investment Trusts (Non-traded REITs)
Exchange-traded Notes

Exchange-traded notes (ETNs) can be easily confused with exchange-traded funds (ETFs). ETNs appear to be very similar to ETFs. They are traded on an exchange just like an ETF; however, an ETN is simply a contract between the issuer and the purchaser. The return of the investment may be designed to track the stock or bond market as a whole, certain segments of the stock or bond markets, certain commodities or currencies. The purchaser typically accepts credit risk or counter-party risk from the issuer—a bank or brokerage firm, for instance.
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Ask Ed: Financial Planning Questions And Answers

Ask Ed: Financial Planning Questions & Answers

Ask Ed: Financial Planning Questions & Answers

Question: If I have a rollover from a 401-k to an IRA, does the rollover count toward the  $1,362,800 cap?

Answer: No

Question: What amounts are protected against general creator protection as opposed to bankruptcy, which is governed by the bankruptcy code?

Answer: The non-bankruptcy protections vary from state to state.

Question: What treatment is applied when a claim is brought against an investment inside the IRA? An accident by a customer of motorcycle rental business owned by the IRA for instance?

Answer: Generally, if an LLC was established as owner of the business inside the IRA, the IRA claim can be mitigated.

Have a question? Contact Ed Mahaffy.

A GIFT FOR YOU!

Complimentary Copy Of eBook: How To Select A Financial Advisor
(Includes All Graphic Charts)

How To Select A Financial Advisor: The Least You Should Know (Part 16 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 16 In eBook Series)

Chapter 16: Separately-Managed Accounts

Separate accounts—also known as separately-managed accounts or “separates”—are segregated individual accounts with one or more investment managers. Unlike mutual funds, your investment is not co-mingled. Many investment managers participate in the separate account programs offered through major brokerage firms and other institutions.

It is expensive to access investment managers through a brokerage firm. A brokerage firm directs your money to one or more investment managers who manage a separate account for you. The investment manager charges an ongoing management fee, perhaps 0.75 percent. Then the brokerage firm charges what is known as a “wrap fee,” which is an ongoing fee that is wrapped around the investment manager’s fee (the folks who you are already paying to actually manage your money). The brokerage firm collects both fees each quarter, pays the investment manager, and keeps the rest.

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Ask Ed: Financial Planning Questions And Answers

Ask Ed: Financial Planning Questions And Answers

Once I read Ed Mahaffy’s book titled “How To Select A Financial Advisor: The Least You Should Know”, interviewed him, reviewed his video library, I knew we had the right person for this special financial planning series. On Fridays, TaxConnections presents questions often asked of a Financial Planner.

Kat Jennings, TaxConnections, CEO

Ask Ed:  Financial Planning Questions And Answers

Question: What personal financial issues will your services address for me?

Answer: Many financial professionals loosely use the term “comprehensive” to describe their range of financial planning services. At its best, comprehensive financial planning covers a wide range of both short-term and long-term financial issues and addresses your personal goals, objectives, and significant life cycle events, but many advisors who say they are comprehensive do not really offer more than investment advice. Find out, in detail, what services your advisor is offering, because the broader the range, the more likely you will be getting truly comprehensive financial planning.

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How To Select A Financial Advisor: The Least You Should Know (Part 15 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 15 In eBook Series)

Chapter 15: Actively-Managed Mutual Funds

As we learned in Chapter 6, investment fees can make a huge difference in your long-term success. Management fees, sales charges and administrative fees are strong headwinds for all shareholders to overcome.

Actively-managed mutual funds may have annual expenses of 2.0 percent or more. This does not include friction costs—any commissions as well as price slippage—incurred when large buyers or sellers move a stock up or down when buying or selling stock.

However, if you read a fund’s prospectus, you are more unlikely to see the true annual expenses because such friction costs are not included. Also, you will not see an estimate of the short-term capital gains liability that you face from the “turnover,” or frequent buying and selling of securities in the fund’s portfolio. The following illustration depicts the annual turnover experienced in various categories of mutual funds.

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How To Select A Financial Advisor: The Least You Should Know (Part 14A In eBook Series)

How To Select A Financial Advisor - Ed Mahaffy, Little Rock, Arkansas

Chapter 14: Variable & Equity-Indexed Annuities

An annuity is the generic term for a financial product that will make a series of payments to an individual over time. These are known as fixed annuities. The level of payments, the amount of time, and the rate at which payments will increase (if at all) are part of the offer of the specific annuity. They are unique for each individual, but they are based on factors such as how much is invested in the annuity, the annuitant’s health and age (that is, anticipated years of receiving the annuity). Annuities meeting this description
are a source of steady income (cash flow) during a time when the stock market has been very volatile.

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Ask Ed: Financial Planning Questions And Answers

Ask Ed: Financial Planning Questions And Answers

Once I read Ed Mahaffy’s book titled “How To Select A Financial Advisor: The Least You Should Know”, interviewed him, reviewed his video library, I knew we had the right person for this special financial planning series. On Fridays, TaxConnections presents questions often asked of a Financial Planner.

Ask Ed:  Financial Planning Questions And Answers

Question: Other than receiving my permission to have your custodian debit my investment account for your fee, do you take custody of, or will you have access to my assets?

Answer: Allowing an advisor to debit your investment account for his/her fee is standard practice in the financial services industry; however, that should be the only direct access for withdrawals that the advisor should have. You should avoid permitting an advisor to have physical “custody of your investments assets” or the ability to make withdrawals or transfers from your account(s) without express specific prior consent to each such withdrawal or transfer. Generally, Fee-Only advisors will not expose their clients to these “custody” type situations. When you use a Fee-Only advisor, an unaffiliated brokerage firm will usually maintain physical custody of your investment assets.

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How To Select A Financial Advisor: The Least You Should Know (Part 14 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 14 In eBook Series)

Chapter 13: Bonds and Bond Funds

Most individual investors include bonds as part of their investment portfolios. Typically, bonds are the “safer” (or less risky) part of the portfolio. Essentially, bonds are loans to the government or a corporation, which are then paid back to the lender or bondholder over time. To simplify, a buyer of a bond has a contractual right to interest payments on a regular basis, and then the return of the principal. An exception would be a zero coupon bond (zeros), which has no coupon. Zeros are purchased at a discount to the par or face value. Upon maturity, the bonds are worth par or 100. The difference between 100 and the purchase price is your return. By purchasing bonds from highly-reliable issuers, a bondholder can have a very safe stream of income in the future.

Bondholders are protected. Usually, if a corporation goes bankrupt, bank debt is paid first, then secured bondholders, then unsecured bondholders. Only after those obligations are paid will excess funds be distributed to the holders of preferred and finally common stock.

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Ask Ed: Financial Planning Questions And Answers

Ask Ed: Financial Planning Questions And Answers

Once I read Ed Mahaffy’s book titled “How To Select A Financial Advisor: The Least You Should Know”, interviewed him, reviewed his video library, I knew we had the right person for this special financial planning series. On Fridays, TaxConnections presents questions often asked of a Financial Planner.

Ask Ed:  Special Financial Questions 

Question: The financial challenges of Covid 19 can no doubt cause reductions in retirement contributions. This makes cutting retirement plan expenses even more important. Let’s assume Annual expenses amounting to 0.75%. This may not sound like much but cutting this expense can make a huge difference over time. How much?

Answer: Assume $10,000 annual contributions for 40 years earning a 6 % annual return. Reducing fees by 0.50% could save this participant well over $100,000. It pays to stay on top of your plan expenses.

Question: Is the 60/40 (stock/bond) portfolio asset allocation portfolio still viable with interest rates so low?

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How To Select A Financial Advisor: The Least You Should Know (Part 13 In eBook Series)

(How To Select A Financial Advisor Series – Ed Mahaffy) Request Copy of eBook In Its Entirety With Charts

SECTION 5 INDEX FUNDS

Chapter 12: Index Funds

An index fund is a bundle of stocks. The stocks that the fund holds are the same stocks, with the same weightings (percentages) as the stocks represented in a particular index, such as the S&P 500 index. You cannot own an index. You can own the same stocks as the index—an index fund.

The only time a stock in an index fund is bought or sold is when the publisher of the index makes a change in its lineup. For instance, if the S&P 500 expels ABC Company and replaces it with XYZ Company, then any index fund tracking the S&P 500 will do the same thing. This is mutual fund investing in its simplest form.
Index funds are said to be “passively-managed” because there is really not much to manage, which is why the costs are so low. As it turns out, more intense managing does not equate to more money for mutual fund shareholders, only more money for Wall Street.
Index funds do not buy or sell stocks often because changes to the underlying index do not often occur. This keeps capital gains tax liability low. The index fund avoids the expense associated with a lot of buying and selling—such as high-priced analysts, costly research, and the expense of conducting numerous transactions. The savings enable these funds to compete very effectively with mutual funds that are trying to beat the market.

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How To Select A Financial Advisor: The Least You Should Know (Part 12 In eBook Series)

How To Select A Financial Advisor: The Least You Should Know (Part 12 In eBook Series)

Chapter 11:The Importance of Proper Asset Allocation

The way in which you allocate your assets among asset classes, such as stocks, bonds, and cash will have the greatest impact on your investment results. Studies show that up to 88 percent of the variation in returns is explained by one’s asset allocation, not by individual security selection, fund selection or market timing.

What Is Asset Allocation?

Asset allocation is the process of combining asset classes such as stocks, bonds, and cash in a portfolio in order to meet your goals.

A financial advisor, whether a retail broker or independent investment advisor, can add value by helping you make the important decision about how to allocate your investment assets. Essentially, asset allocation is the concept of proper diversification—not putting too many eggs in too few baskets, and of seeking the most efficient balance of the perceived risk and expected return.

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