Can You Talk to Your Advisor?

Maybe you’ve seen those speed dating commercials where it’s clear in 30 seconds that the couple doesn’t click and it’s time for them to move on and keep searching for love. Chemistry is important with your financial advisor, too. Let’s face it, you have to be comfortable enough with your advisor to share your hopes and dreams -- as well as your fears.

That essential chemistry begins when you find an advisor with good listening skills. And that doesn’t mean sitting across the desk from someone who consistently nods like a bobble head doll when you talk. Really listening to clients involves inviting them to open up, taking to heart what they say, asking some follow-up questions, and helping place their goals or worries in context of their bigger financial picture.

In my book, that intangible, know-it-when-you-feel-it good chemistry serves as the foundation for problem solving. That’s because feeling comfortable with each other enables us to ask each other questions and work together to find answers.

Finally, because the planning process requires some work and it’s a relationship we hope to enjoy for the long-term, it’s worth it to put the time and energy in upfront to ensure that the financial advisor you select is someone you like. Of course, you want an advisor with the expertise and skills to manage your wealth, but it sure helps if that person is also someone you honestly enjoy meeting with.

Just as satisfaction with your co-workers affects your overall job satisfaction – and your overall happiness, so, too, can an enjoyable relationship with your advisor positively impact both the planning process and your general sense of well being.

(Note:  For a discussion of the six core characteristics--Six Cs--an advisor should have read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)

You Can Do Better with an Advisor

In Our Ridiculous Approach to Retirement, Teresa Ghilarducci, a professor of economics at the New School for Social Research, writes that the 401(k)/individual retirement account model, a “do-it-yourself pension system,” has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. She asks, “What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”

The statistics Ghilarducci cites in her article certainly illustrate American workers’ inability to save for retirement: Seventy-five percent of workers nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Almost half of middle-class workers will be living on a retirement food budget of about $5 a day. And, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will enjoy a comfortable retirement. (Twenty years ago, that number was close to 75 percent!)

Ghilarducci writes, “To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less.”

If you work with an advisor, you know your retirement “number,” but Ghilarducci’s blunt talk will come as a surprise to the many individuals not working with a financial advisor. Equally distressing will be her insistence that simply working longer is not a solution for folks who have not saved enough. She stresses that the Boomer generation’s plans to “never retire” are particularly unrealistic and risky given current high unemployment rates for older workers.

The bottom line is that today’s self-help, “I can find the answers I need on the Internet” applies to personal finance just about as much as it does to dentistry or electrical wiring. Certainly, you can read and educate yourself about the issues, but when it comes to constructing and executing a retirement plan, you are in better hands with an advisor – someone who operates as a fiduciary. In fact, a 2010 report from the ING Retirement Research Institute, Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence, found that investors who seek advice from an advisor tend have higher retirement balances, more discretionary income, and feel better about retirement. And in this uncertain economic environment, it is undoubtedly more beneficial than ever to have a professional in your corner.

Slim Thug's Advice

It’s tough trying to reach the next generation with money advice. If all else fails, you might encourage them to check out the advice from Slim Thug in his new book, How to Survive in a Recession. Marketing himself as “the black Suze Orman,” you’ll find Slim’s book listed in the “Humor” section on Amazon. However, some of Slim’s advice could land the book in the “Personal Finance” section as well.

Here’s some of what the rapper shares about money management:

1. When u get a check put at least 50% up.
2. Never buy a house with unnecessary space.
3. Never have Bentley bills with a Benz salary.
4. Never spend a lot of money on things you can't get money back from.
5. Never buy a car that will have you working overtime to afford.

Slim is a rapper and the youngest of seven children. Born Stayve Jerome Thomas in Texas, Slim says he learned many of these the lessons as part of his modest upbringing. Today, it’s estimated he’s worth $2 million. Asked in an interview about the biggest money mistake people tend to make, Slim responded, “They forget that they have to pay taxes and what the check says isn’t really what they have.”

According to Slim, one of his most important and easy-to-apply rules is: “If you can’t buy it 3 times over, you can’t afford it.” However, infusing humor into finances, he also admits in the interview, “I myself am even guilty of rapping about spending money in careless ways.”

Just What is the Fiscal Cliff?

The ominous term “fiscal cliff” has crept into our lexicon, but just what does it mean? The fiscal cliff is a perfect storm of disastrous events that could push our recovering economy back into recession. First, there’s the scheduled expiration of the Bush tax cuts at the end of this year. Additionally, our economy will need to absorb automatic cuts to the federal budget, including significant reductions in defense spending mandated by last summer’s agreement to raise the U.S.’s debt ceiling. Finally, our national debt continues to spiral out of control and Congress finds itself stymied by partisan gridlock.

Focusing on doom and gloom, magazine covers feature pictures of the Capital Building slipping off the cliff. But this is not just media hype. Last week, the nonpartisan Congressional Budget Office (CBO) issued a report warning that the economy will indeed enter a recession next year if the country goes over the so-called fiscal cliff. According to the CBO, the economy would contract by 0.5 percent in calendar year 2013 if the Bush-era tax rates expire and automatic spending cuts to the federal budget are implemented. Further, the CBO estimates that unemployment also would rise from 8.2% in 2012 to 9.1% next year.

Federal Reserve Chairman Ben Bernanke has underscored the dangerous impact of the fiscal cliff, warning that “there is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset that effect on the economy.” Notably, over the course of the last few months, Chairman Bernanke’s warnings have become more dire. In April, he noted that “a sharp fiscal tightening could occur at the start of 2013” that could lead businesses to defer hiring and investment. Yet, minutes from the Fed’s July 31-August 1 meeting describe “a sharper-than-anticipated U.S. fiscal consolidation” as a “significant downside” risk to our economic outlook.

In the CBO report, Director Doug Elmendorf urges Congress to act in September to avoid the fiscal cliff, reasoning that the sooner uncertainty was resolved, the better for our economy. However, Congressional action is highly unlikely given the magnitude of the task and the distraction of a polarizing Presidential campaign. I hope that one day soon the importance of our nation’s fiscal health can transcend politics and that Congress and the President can reach an agreement. And for the sake of our fragile economy, let’s hope that day comes sooner rather than later.

However, despite this news an investor should not abandon their long-term investment strategy.  The pundits have been wrong before and it is more rational to stick to one's long-term plan than to abandon it on what "might" happen.  Furthermore, once an investor abandons his or her plan he or she must decide when to reactivate the plan.  And by the time that decision is made most investors would have been better off if they had stuck to the plan.