It's awkward to have "the talk" with your parents. Here's how to get started.
We should all have an ongoing conversation with our loved ones, especially the older ones, about their end-of-life plans. Yeah right. We should, but we don’t.
Because clients dread bringing up the topic so much, some financial planners refer to it as “the talk.”
Thanksgiving gives us a great opportunity to start a simple, direct conversation. READ MORE
“How should a client think about giving money to charity?” was the question my colleague posted on an adviser forum.
I should know this, I thought.
But since I couldn’t coherently answer my colleague’s question, it seemed like a good time to review the latest thinking on the subject and update what I tell clients.
Turns out, there are four steps to giving money away. Even better, they’re pretty easy.
1. Develop a donation strategy.
That’s right, a donation strategy. That might sound like off-putting jargon, but we all have a donation strategy, whether or not it’s fully baked and conscious.
For instance, a lot of people I’ve worked with seem to give money to anyone who asks. A lot of people give money to their college. For some people, the more desperate an emotional appeal, the more likely they’ll give. For most people it’s more hodgepodge than a strategy.
A lot of charities are de-emphasizing outreach that seeks donations by evoking pity. The poverty-stricken face of a child who seems to be saying, “Just donate to this charity and my suffering will be alleviated,” may be on the way out. After seeing enough of these ads, empathy overload kicks and you start to wonder, are these kids being exploited?
Celebrity causes are changing too. This parody is a plea for Africans to send radiators to freezing Norwegians. Hey, frostbite kills, too!
Instead of pity and celebrity identification, charities are trying to appeal to people based on effectiveness.
Develop your donation strategy by asking these two questions:
What problem am I trying to solve?
What do I value?
To make it easier, you probably don’t even have to answer both questions. If one seems easy, just start there.
Next, consider the balance between what’s near to you (your church, your alma mater) vs. what’s far (ending extreme poverty, disaster relief). You might have different ideas for each.
Here’s what Bill and Melinda Gates did. First they thought, and I’m paraphrasing here, “What problems is capitalism crappy at solving?” The thing that bothered them the most was inequity. Globally, they asked, “What’s the biggest inequity?” And for them that it was children dying and/or not getting enough nutrition to develop.
Locally they took a different approach and said, “Okay, our educations really helped us. We want to help alleviate the inequities in the US education system.”
If you want help pinpointing global issues, Philanthropedia has thirty-six different causes. You can weigh the causes against each other and figure out which is most important to you.
Close to home, if you’re looking for ideas beyond what initially comes to mind, it makes sense to check out your local community foundation. These are organizations that help budding philanthropists figure out their donation strategy. You can find them quickly through the Council on Foundations.
2. Figure out which charities will fulfill your strategy.
Next, explore charities that prove they are effective at having an impact in the areas you value.
Figuring out your local charities might be easier than the global charities. When you give money close to home, you can pretty easily get a handle on how effective the organization is.
When you give away globally, it helps to have third parties evaluate which charities are the best. They take out their measuring sticks and examine the numbers. They research: What charities fulfill their missions in the most efficient way?
Three websites that summarize data and report on the effectiveness of specific charities are:
It’s a good idea at this stage to use your intuition as well. Melinda Gates said, “We come at things from different angles, and I actually think that’s really good. So Bill can look at the big data and say, ‘I want to act based on these global statistics.’ For me, I come at it from intuition. I meet with lots of people on the ground, and Bill’s taught me to take that and read up to the global data and see if they match.
“And I think what I’ve taught him is to take that data and meet with people on the ground to understand, Can you actually deliver that vaccine? Can you get a woman to accept those polio drops in her child’s mouth? Because the delivery piece is every bit as important as the science. So I think it’s been more, a coming to, over time, towards each other’s point of view. And quite frankly, the work is better because of it.”
3. Donate and feel good.
Giving money away makes us feel better than spending money on ourselves.
Elizabeth Dunn and Michael Norton report in their book Happy Money: The Science of Smarter Spending, “The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The relationship between prosocial spending and happiness held up even after taking into account individuals’ income. Amazingly, the effect of this single spending category was as large as the effect of income in predicting happiness.”
4. Pay attention to results.
This doesn’t have to include spreadsheets or anything fancy.
Notice the communication you get from the charities. Is it always a pitch for more money? Do they communicate their results?
Do you see where your money is going? Are they fulfilling the mission that you were contributing to when you donated?
Keep in mind that not every donation is going to succeed. For instance, Bill Gates says that his involvement in the attempt to develop a better condom didn’t get the results he was hoping for. He doesn’t detail exactly what was so ineffective about the project, except mentioning with a vague smile, “We got a lot of ideas.”
By Bridget Sullivan Mermel
Originally posted on Money.com
When nonprofessional investors are able to put money into small businesses, everyone can benefit.
I met with Paul on Tuesday. He is the CFO of a business start-up. He’s not sure if the next phase of his company’s financing is going to go through. Although he believes in the business model and the mission of the company, some days he thinks he won’t have a job in three weeks.
I met with David on Wednesday. While he’s a great saver and earns a decent buck, he isn’t wealthy. He wants to invest in small companies so much that we’ve set up a “fun money” account, which is 10% of his otherwise well-diversified, passively managed portfolio. “Fun money” is specifically set aside so that he can make individual investments he believes in.
Because of the way small business investing is structured in this country, the likelihood of Paul and David connecting has been infinitesimally small.
This drives me mad.
It’s not just these two who are missing out. Because small companies drive job and economic growth, the economy of the country loses when Paul and David don’t connect. And because the current system of funding is biased, some small businesses are a lot less likely to get funding despite their worthy ideas.
Recent developments could change all this.
To raise their initial start up money, small business owners typically first use their savings, and then appeal to their friends and family. Next, they go to banks. If they get big enough and have certain ambitions and contacts, they can get venture capital funding or private equity funding, which is what Paul was waiting on.
These sources of capital are all enhanced if you are affluent and well connected. Do your friends and family have extra money to invest in your business? Do you know anyone you can talk to at a bank? What about impressing people in the venture capital world? A lot of people with good ideas are shut out.
Enter the Internet. Raising money got a lot easier.
The Power of Reward Sites
With reward sites, startups with good ideas raise money in exchange for rewards.
Sesame, which opens doors remotely from smartphones, raised over $1.4 million on Kickstarter.com. The reward here was a chance to order the device.
Then there is Lammily, Barbie’s realistically proportioned cousin, whose designer raised almost $500,000 through Tilt.com. The reward for funding Lammily was the chance to pre-order the doll, and sticker packs with stretch marks, cellulite, freckles, and boo-boos.
The reward sites show that companies can raise large amounts of money through small contributions from a large number of people. Research suggests that Kickstarter.com reduces company funding gender bias by an order of magnitude and reduces geographic bias as well. Reward sites cater to consumers who love new products and want to support new ideas.
You may get first dibs on a cool new doll, but sending money to a reward site isn’t investing.
The Risks of Private Equity
Traditionally, to get private equity funding, you have to sell to accredited investors — the richest 1% of the population, roughly speaking.
Accredited investor regulations were set up in in the wake of the 1929 crash, when a lot of people got ripped off because they invested in dubious enterprises. The idea was that people with a high level of wealth are sophisticated enough to understand investment risk. Unfortunately, this leaves the Davids of the world — investors who are sophisticated but wealthy — shut out of these types of investments.
Private equity placements are not always a great deal. When I’ve looked into them for clients, I’ve concluded they are expensive, risky, and difficult to get out of, even if you die. The middlemen who offer these and the advisers who sell these seem to be the ones most likely to make money. The best deals I’ve looked at weren’t hawked by sales people or investment advisers, but came through clients’ friends and family.
The rise of Internet portals set up to connect small companies with accredited investors has the potential to cut down on intermediary costs. Still, the sector remains small.
In 2012, President Obama signed the JOBS act, which directed the Securities and Exchange Commission to devise rules opening up small business investing to non-accredited investors.
Some organizations didn’t wait for the SEC to issue the rules. Instead, they dusted off exemptions in the securities legislation that most of us have ignored for 80 years.
States Get Into the Act
Some states have picked up on crowdfunding to boost their economies. Terms vary, but generally investors are subject to investment limits and companies are subject to a cap on raising money. Each individual, for example, might be limited to investing $10,000; each company might be limited to raising $1 million. Both investor and company are generally required to reside in the state.
This is music to ears of people who want to invest locally. The first successful offering using this type of exemption was in Georgia in 2013, where Bohemian Guitars raised approximately $130,000 through SparkMarket.com.
Village Power is another example of raising money using an exemption. This intermediary helps organizations set up and fund solar power projects. Village Power coaches their community partners to use an exemption in the SEC rules, which allows for up to 35 local, non-accredited investors.
New Rules Open Doors
New rules issued March 25 by the SEC removed a lot of the barriers for companies raising money and for non-accredited investors.
Companies will be able to raise up to $50 million. Non-accredited investors are welcome to invest, sometimes with limits — 10% of their net worth, say, or 10% of their net income.
Although Kickstarter has said that it won’t sell securities, other fundraising portals, such as Indiegogo, are looking into it.
And if all goes well, Paul, David, and I can start looking for the new opportunities in June of 2015.
by Bridget Sullivan Mermel
Originally published on Money.com
Terri and David came in for a meeting with me. They were expecting a baby and wanted to buy a house.
They had their eye on a $500,000 house, and wanted to make a down payment of 5%, or $25,000. Their question for me: “How should we make the down payment?”
David, who had $30,000 stashed in a safe deposit box, wanted to use that cash for the down payment. Terri wasn’t quite sure that was a good idea. Terri hugged her chair nervously.
Their basic problem was becoming clear: David worked in a business that can be largely cash. Terri liked to follow rules. She wanted to know whether showing up at the closing with a pile of $100 bills would get them into trouble later.
It’s at times like this that you need to remember Telly Savalas. That’s right, the actor who played the detective Kojak in the 1970s TV series of that name. He was famous for sucking on a lollipop and saying, “Who loves ya, baby?”
“You’re asking the wrong question,” I said to them.
I had their attention.
“What both of you should be worried about is that you can’t comfortably afford this house,” I said. “I don’t care where the down payment is currently located. Let me be clear: You’re buying too much house.”
“But the mortgage guy said that we could swing it,” said David. “I should be able to replace the cash in a year. I’ve calculated it all out and we can do it before the baby arrives.”
This is when we need Telly Savalas.
The answer to the question “Who loves ya baby?” is not “your mortgage broker” or “your realtor.”
This is a lesson I learned the hard way.
Before I started working as a financial planner, I didn’t know what I know today. I made a big mistake.
I bought a house I couldn’t afford. That’s not what I intended to do. It’s just that I was listening to the wrong people and not to Telly Savalas.
I focused on how much mortgage a bank would lend me. Here’s what my experience taught: The bankers don’t love me. They don’t give a rip about me. All they care about is making the most money for themselves. They got their money, but I was miserable.
I made the decision in a month or two and locked myself into the expenses for years to come.
In retrospect, this was predictable. A good rule of thumb is that a home is out of your price range if it costs more than two or two-and-a-half times your annual income. The house I bought was way over this range of affordability.
Housing costs soaked up my disposable income and made it tough to save. Living paycheck-to-paycheck, I couldn’t afford a decent vacation. When an emergency arose, I didn’t have adequate funds. So I felt the stress of both the emergency and scrambling to pay for the emergency.
All this stress was unnecessary.
If I did it right, I would have bought a condo that cost less than 2.5 times my annual income — say, $150,000 instead of the $200,000 I spent. And I would have saved up and made a 20% down payment, not the 10% payment I made.
Yes, the location wouldn’t have been as nice. And I wouldn’t have had an extra half-bath and an icemaker, both of which I enjoyed having — but which I didn’t really need.
Mortgage people and realtors will tell you there isn’t much of a difference. Let’s run some numbers, though: what I did, and what I should have done.
What I did
|What I should have done|
Monthly mortgage & tax
Total monthly cost
Spending $1,170 a month on housing would have been fine. Spending $1,800 made me feel “house poor.” It wasn’t the mortgage. It was everything else.
My message to Terri and David: David, report your income. Then, Terri, it doesn’t matter if the money is stored in a savings account, safe deposit box, or plastic baggie in the basement freezer. Don’t worry about it. And for the question that you didn’t ask: When buying a house, remember who loves ya, baby!
By Bridget Sullivan Mermel originally published on Money.com
I got an email from Nate, a client, linking to a story about the stock market’s climb. “Is it time to sell?” he asked me. “The stock market is way up.”
If I just tell Nate, “Don’t sell now,” I think I might be missing something.
At a recent conference, Vanguard senior investment analyst Colleen Jaconetti presented research quantifying the value advisers can bring to their clients. According to Vanguard’s research, advisers can boost clients’ annual returns three percentage points — 300 basis points in financial planner jargon. So instead of earning, say, 10% if you invest by yourself, you’d earn 13% working with an adviser.
That got my attention.
Jaconetti got more granular about these 300 basis points. Turns out, much of what I do for clients — determining optimal asset allocations, maximizing tax efficiency, rebalancing portfolios — accounts for about 1.5%, or 150 basis points.
The other 150 basis points, or 1.5%, comes from what Jaconetti called “behavioral coaching.” When she introduced the topic, I sat back in my seat and mentally strapped myself in for a good ride. One hundred fifty basis points, I told myself — this is going to be advanced. Bring it on!
Then she detailed “behavioral coaching.” I’m going to paraphrase here:
“Don’t sell low.”
Don’t sell low? Really? The biggest cliché in the world of finance? That’s worth 150 basis points?
But it isn’t just saying, “Don’t sell low.”
It’s actually that I have the potential to earn my 150 basis points if I can get Nate to avoid selling low. That means I need to change his behavior. Wow. Didn’t I give up trying to change other people’s behavior January 1?
Inspired by Nate and the fact that the stock market is high (or maybe it’s low; the problem is we don’t know), I decided to think like a client might think and do a deeper dive into the research. Why not sell now? Why do people sell low? How can I influence, if not change, client behavior? I’ve got nothing to lose and clients have 1.5% to gain.
One interesting thing I learned in my research: Not everybody sells. In another study, Vanguard reported that 27% of IRA account holders made at least one exchange during the 2008-2012 downturn. In other words, 73% of people didn’t sell.
Current research on investing behavior, called neuroeconomics, includes reams of studies on over-confidence, the recency effect, loss aversion, herding instincts, and other biases that cause people to sell low when they know better.
Also available are easy-to-understand primers explaining why it’s such a bad idea to get out of the market.
The question remains, “How do I influence Nate’s behavior?” The financial research ends before that gets answered.
Coincidentally, I recently had a tennis accident that landed me in the emergency room. While outwardly I was calm, cracking lame jokes, inwardly I was freaked out.
Despite my appearance, the medical professionals assumed I was in high anxiety mode, treating me appropriately. The emergency room personnel had specific protocols. Quoting research and approaching panicked people with logic weren’t among them.
They answered my questions with simple sentences and gave me some handouts to look at later.
Selling low is an anxiety issue. And anxiety about the stock market runs on a continuum:
|Client behavior||Don’t notice the market||Mindfully monitor it.||“Stop the pain. I have to sell.”|
That brought me to a plan, which I’m implementing now, to earn the 150 basis points for behavioral coaching.
During normal times, when clients are in the first two boxes, I make sure to reiterate the basics of low-drama investment strategy.
When I get a call from clients in high anxiety mode, however, I follow a protocol I’ve adapted from the World Health Organization’s recommendations for emergency personnel. Seriously. Here’s what to do:
- Listen, show empathy, and be calm;
- Take the situation seriously and assess the degree of risk.
- Ask if the client has done this before. How’d it work out?
- Explore other possibilities. If clients wants to sell at a bad time because they need cash, help them think through alternatives.
- Ask clients about the plan. If they sell now, when are they going to get back in? Where are they going to invest the proceeds?
- Buy time. If appropriate, make non-binding agreements that they won’t sell until a specific date.
- Identify people in clients’ lives they can enlist for support.
What not to do:
- Ignore the situation.
- Say that everything will be all right.
- Challenge the person to go ahead.
- Make the problem appear trivial.
- Give false assurances.
Time for some back-testing. How would this have worked in 2008?
In 2008, Jane, who had recently retired, came to me because her portfolio went down 10%. The broader market was down 30-40%, so I doubt her old adviser was concerned about her. Jane, however, didn’t spend much and had no inspiring plans for her estate. She hated her portfolio going down 10%.
Jane didn’t belong in the market. She didn’t care about models showing CD-only portfolios are riskier. She sold her equity positions. She lost $200,000!
The protocol would have worked great because we could have worked through the questions to get to the root of the problem. Her risk tolerance clearly changed when she retired. She and her adviser hadn’t realized it before the downturn.
Then there was Uncle Larry.
Like a lot of relatives, although he may ask my opinion on financial matters, Larry has miraculously gotten along well without acting on much of it.
Larry is in his 80s and mainly invested in individual stocks. This maximizes his dividends, which he likes. The problem was that his dividends were cut. The foibles of a too-big-to-fail bank were waking him up at 3:00 a.m. Should he sell?
When he called, I suggested that Uncle Larry look at the stock market numbers less and turn off the news that was causing him anxiety. I reassured him that he wouldn’t miss anything important. We discussed taking some losses to help him with his tax situation.
Although he listened, I didn’t get the feeling this advice was for him. Actually, the emergency protocol would predict this; the protocol doesn’t include me giving advice!
Uncle Larry and I discussed his plan. He ended up staying in the market because he couldn’t come up with an alternative. He also thought, “If I had invested in a more traditional way, I’d probably have ended up at the same point that I am at now anyway. So this is okay.”
He’s now thrilled he didn’t sell and, at 87, is still 100% in individual stocks.
by Bridget Sullivan Mermel
originally published on Money.com