Monday, August 30, 2010

Is a College Degree Worth the Cost?

If you are paying college tuition, watching your bills increase faster than the rate of inflation, you might be asking yourself this question. Over the course of a working life, it’s been estimated that college grads earn from $900,000 to $1.6 million more than workers without a degree. Yet, according to the a study conducted by PayScale for Bloomberg Businessweek, the dollar value of a college degree may be a lot closer to $400,000 over 30 years -- and varies wildly from school to school.

Of course, there’s the unquantifiable and undisputable personal value of a college degree, but if we seek to determine the true economic value, rather than simply factor in the extra earnings, we need to consider the debt many students take on in college. I recently read a compelling article by Randy Proto, the President of the American Institute, in the online publication The Huffington Post. His thoughtful analysis supports those who argue that a college degree is still worth the cost, even in today’s uncertain job market.
  • The median debt owed by a Bachelor's degree graduate is about $20,000, according to a College Board study -- less for a public university, more for private schools. Proto compares that to the average debt level people assume when they buy a new car: $25,396, according to Experian Automotive. I agree with his conclusion that a college degree -- with its lasting economic, social, and personal value -- is worth far more indebtedness than a car, which begins to depreciate the day you drive it off the lot.
  • While post-secondary education adds significantly to lifetime earnings, the economic argument makes even more sense once you examine who's been losing their jobs in the current downturn. According to data produced by Economic Modeling Specialists, eight out the top 10 occupations that lost the most jobs from 2007 to 2009 were ones that didn't require a degree.
  • Finally, as Proto points out, according to UNESCO, post-secondary enrollment worldwide has increased by 53 million people from 2000 to 2007. In an increasingly global job market, that's a lot of competition for jobs.
For those saving for college in tax-advantaged 529 plans, your homework is about to get easier. Starting this fall, Morningstar will offer published reports on the 50 largest 529 plans. The reports will include a Morningstar qualitative rating, analyst commentary, and data on some of the largest options within the plan.

Monday, August 23, 2010

The “Giving Pledge” to Ignite Philanthropy

A few weeks ago, more than three dozen billionaires signed up for The Giving Pledge, an effort by Bill and Melinda Gates and Warren Buffett to encourage wealthy people to give at least half of their fortunes to charity.

According to Patrick Rooney, executive director and professor of Philanthropic Studies at the Center on Philanthropy at Indiana University, the idea has both potential and challenges. He estimates that if everyone on the Forbes 400 fulfilled the pledge, $600 billion would go to charity. That's about double the total amount of Americans' current annual charitable giving, meaning that some careful planning will need to accompany the generosity.

With such a massive increase of dollars into charitable organizations, it’s incumbent on donors to work with their advisors and charities to structure gifts effectively in ways that can make the greatest difference. Some of the smallest nonprofits, for example, simply may not have the administrative capacity to manage large gifts.

However you intend to express your philanthropic interests, I suggest sharing your thinking -- and your charitable volunteer work -- with your children. You will find this can both enhance your family relationships and lay the foundation for a rich legacy of giving.

If you are looking for more inspiration, you may want to read: The Ultimate Gift by Jim Stovall, The Giving Family: Raising Our Children to Help Others by Susan Crites Price or The Financially Intelligent Parent: 8 Steps To Raising Successful, Generous, Responsible Children by Eileen and Jon Gallo.

Tuesday, August 17, 2010

What’s Different About a Fiduciary Advisor?

I recently read a post by Kate McBride regarding the differences between an advisor held to a fiduciary standard and a broker held to a suitability standard.  It was short, accurate and to the point.  Therefore, I credit her entirely for the comments below:

What’s so different about a fiduciary advisor as compared to an advisor who meets the minimum requirements of the suitability standard?

It’s the legal duties to the client.

The suitability standard is a business standard, similar to the standard of a salesman, where you know you have to look out for yourself.

The fiduciary standard requires an advisor, like your family doctor, to be loyal and always put the client’s best interests first. This best interest requirement has practical consequences for investors. The fiduciary (best interest) standard means advisors must:
  • Use the judgment of a professional to only select and recommend products in the investors’ best interest
  • Either avoid or disclose and manage conflicts of interest
  • Describe, before beginning work, all compensation, incentives, commissions, and expenses
  • Ensure expenses are fair and reasonable
  • And, of course, do only what’s best for investors.
An advisor only required to meet the suitability standard is not required to do any of these things.

Monday, August 16, 2010

In Fund Selection, Is It Wise to Reach for the Stars?

How often have you seen headlines on personal finance magazines touting Five Star Mutual Funds? You may figure that list generated by Morningstar constitutes great shopping ground. In fact, many professional financial advisors begin their analysis by evaluating those five-star funds.

It is human nature to be comforted by the idea that the investments you are buying are highly rated. The problem is that when we buy a “Five-Star” fund, we blindly extrapolate that the star rating translates into superior future performance. In fact, nothing could be further from truth. The Burns Advisory Group’s recent research paper, Star Gazing: Five Star Funds Revisited, went back to 1999 to study the subsequent 10-year performance of Morningstar’s five-star funds. The results were enlightening.

Burns found that of the 248 funds rated Five-Star by Morningstar on December 31, 1999, only four were still receiving that rating a decade later. Of the original sample, 87 had ceased to exist. And of those still existing, all had been downgraded to an average of just under three stars. And if this was not bad enough, the average performance for the five-star funds over this 10-year period was worse than the average for all funds in all categories except international stocks.

So what should you consider in making an investment decision? Clearly, a Five Star rating is nothing more than a starting point. You need a more broad-based evaluation, focusing on factors within your control. You might ask:
  • Are the risks being taken related to return?
  • Are those risks targeted in a reliable, consistent way?
  • How diversified is the fund?
  • What are the costs of the fund, i.e., expense ratio and turnover?
  • Does it make promises it can't keep?
  • What is more important - individual judgment or clear processes?
  • Are the underlying strategies driven by forecasts?
  • Does the fund take account of costs and taxes in its decisions?
  • Does the fund manager communicate in a clear and consistent way?
While many of these attributes can lead to good outcomes, they cannot guarantee positive returns every year. However, the above characteristics can give you comfort that your money is being invested in a consistent, transparent way that ensures that when the targeted premiums kick in, you are positioned to receive them.

The bottom line is that we believe you should construct portfolios not around short-lived Five Star ratings, but based on the time-tested, enduring principles of asset allocation, broad diversification, passive management, and low costs.

Reaching for the stars today could mean you find yourself clutching at straws in the future.

Monday, August 9, 2010

Controlling Risk Mandates a Long-term Care Insurance Review

A note from a client thanking me for providing a complimentary long-term care (LTC) insurance policy review prompted me to think how a LTC review would be useful for many others.

Although you may have always figured your nest egg could cover your healthcare costs in retirement, the recession and continued volatility may require a re-evaluation of that assumption. With growth prospects low, LTC insurance may be an attractive risk-reduction strategy. Ironically, however, as consumers’ need for LTC insurance has increased, the recessionary environment has prompted insurance companies to re-assess their own risk levels, making the coverage more difficult and expensive to obtain.

Long-term care refers to the help you receive for a chronic illness, disability, or cognitive impairment that leaves you unable to care for yourself for an extended period of time. These services can be provided in a nursing home, assisted-living facility, or in your own home. Typically not covered by your health insurance, LTC can be expensive. In fact, a recent study by Genworth found average costs to be $74,208 a year, or $203 a day. Of course, these rates vary by region of the country.

So, should you buy LTC insurance and, if so, when? Cost has long been the reason for putting off purchasing LTC insurance until a decade or two before retirement. However, in this financial environment, the reasons for acquiring LTC coverage earlier in your adult life are compelling. In the midst of market uncertainty, adding a LTC policy can provide inflation-adjusted, guaranteed income for your healthcare needs later in life.

If you’re interested in determining if it’s still reasonable for you to self-insure or whether your existing LTC policy still meets your needs, please contact me. The LTC market is in constant flux and our consultant, Allen Hamm, is well-versed in everything from the newest riders to the financial stability of the insurance companies. In addition to ensuring you understand the coverage you are buying, Allen is also available to act as your advocate to protect your rights as a policyholder should you ever have a claim.

Monday, August 2, 2010

Looking for a Summer Time Read?

We’ve all asked ourselves questions like “Why do smart people make foolish choices?” In Sway: The Irresistible Pull of Irrational Behavior (Doubleday, June 2010) the authors, Ori Brafman and Rom Brafman, examine the reasons for our irrational behavior and suggest how we can make more rational choices.

According to Brafman, the most surprising element of researching Sway was finding out that most job interviews are terrible predictors of actual performance. They found that interviewers often form a quick opinion of a candidate and then ignore any evidence that contradicts their initial impression. I don’t know about you, but I have been there and done that.

“Because we’re so likely to misdiagnose, a much better alternative to the normal job interview is to prepare pre-scripted questions that focus on a candidate’s actual experience,” says Brafman. “Questions like ‘Where do you see yourself five years from now?’ and ‘What are your greatest strengths and weaknesses?’ aren’t very useful. Instead, focus on specifics. If you are hiring a web designer, does her portfolio match the style you are looking for? Is she up to date with her knowledge of web standards? What are her Dreamweaver skills? It is assessing those on-the-job skills that helps hiring managers stay on focus and not make irrational decisions based on initial gut reactions.”

Try that the next time you are conducting a job interview. If you are interested in learning more, check out this weblink for an interesting Question and Answer interview with Ori Brafman.