Frequently Asked Questions
According to the National Association of Personal Financial Advisors there are three main ways for a financial advisor to be paid:
- Through a commission-based model
- Through a commission & fee model, known as "fee-based"
- Through a Fee-Only model known, appropriately, as "fee-only"
Commissioned and fee-based advisors receive a compensation based on the specific financial products they sell to you. This creates an inherent conflict of interest for the advisors. Fee-Only planners are compensated directly by their clients for advice, plan implementation and for the ongoing management of assets. By definition, fee-only planners do not accept commissions for their work. As a result, a significant source of conflict of interest is neutralized.
Fee-only financial advisors may be paid hourly, as a retainer, as a percentage of assets (AUM), or as a flat fee, depending upon the planner you choose and the nature of your needs. At Insight Financial Strategists, we are fee-only planners.
Another good source of information on the difference between Fee-Only and Fee-Based can be found at the Fee Only Network.
The 4% Rule proposes that someone withdrawing 4% annually from their retirement funds would probably not run out of money in their lifetime. It is a popular rule of thumb to estimate a person's sustainable lifestyle in retirement.
Bill Bengen initially proposed the 4% rule in an article published in 1994 in the Journal of Financial Planning. Bengen used data up to 1992. Many retirement planning practitioners and academics have replicated the study using different data sets. My conclusion from reading several of the studies is that the "rule" works best with a defined set of assumptions. Once a plan deviates from these assumptions, the "rule" may no longer work.
In particular, assuming longevities longer than 30 years, future market returns instead of historical returns, a variable spending pattern instead of a fixed pattern, all contribute to disappointing results.
As much as we would like them to, magic bullets that solve all our issues are rare, if they exist at all. It is usually best to have a plan designed for your individual circumstances, one that allows dynamic spending and that takes into account realistic projections of returns.
How can I learn more about Finance?
There are many classes that are available online and used to be available in face to face settings. Hopefully, the face to face classes will come back soon. In the meantime, online classes can work well.
Coursera offers many high quality college level courses. According to the description on the site, Finance for Non-Finance Professionals offered by Rice University covers much of the material that is covered in a MBA level introductory finance class. Excellent classes are also offered at Edx. One of the most intriguing one is Financial Markets on itunes. This class was offered by Robert Shiller to Yale undergraduates in 2011. Shiller went on to earn the Nobel Prize in economics.
I should note that there is a difference between learning about Finance and learning about Personal Finance. That is the subject of a future post.
When Should I Get Off The Sideline?
According to academic studies, timing the market reliably is pretty much impossible for human beings. There are just too many variables to analyze.
And our emotions get in the way. Too often, people will want to sell when the market is low and buy when the market is high. That's a recipe for losing money.
In our opinion, the best way to handle uncertainty in the market is to have a financial plan that establishes your goals and your risk tolerance and to invest accordingly.
What is Asset Allocation?
Simply put, asset allocation refers to the strategy of dividing your investments across different asset classes such as bonds, stocks, real estate and others. The aim of asset allocation is to control risk by diversifying a portfolio. Depending on the goals of an investor, a portfolio can be allocated for more or less risk.
What is "Risk" in finance?
In everyday financial life, we think of risk as the possibility of losing money in our investments, especially of losing it all.
In academic finance, "risk" refers to the probability that the returns of an investment will be different than expected. In finance, risk is often measured by "standard deviation", a statistical measure of the volatility of a value compared to its historical average. it is possible to dial the risk in a portfolio to achieve specific goals.