Figuring out how much help you need with your investments can be difficult but here’s some guidance to get you started.

In the first article we listed the important tasks for successful investing. A check list was provided to help aide you in determining which task you were able to do yourself and identify which areas you might need some help in order to improve your investing outcome.

The 5 different investing choices or methodologies were presented and include:

1. Doing it all on your own.
2. Advisor provides advice to you on an hourly basis or as part of a financial plan.
3. Advisor and you “co-manage” your investments on an ongoing basis.
4. You turn the management of your investments over to a “money manager.”
5. You get “advice” from a salesperson that sells you an investment or other product.

Now, click on the link below to see a chart of which tasks are to be handled by you or others under the 5 investment choices. Keep in mind that an RIA is a Registered Investment Advisor and BD stands for a Broker Dealer representative.

• Investing Options Table

When most people compare their checklist from Part 1 of this article to the chart above, Option 2 or 3 are more often than not the best fit for most people.

• Invest on your own (Option 1) is not usually a good option since few people have the time, tools, knowledge and/or motivation to do it all by themselves.
• 
  As needed assistance (Option 2) is a good choice for those individuals who have the ability to implement the recommended suggestions from the professionals but may not have enough assets to consider a higher level of service as one might obtain under Options 3 or 4. These investors typically need only an annual tune up.
• 
  Collaborative or Co-Management (Option 3) is well suited to those individuals who want professional advice and the benefits derived from having their portfolio monitored on a periodic basis. They are comfortable knowing that the professional will proactively reach out to them if an issue arises. This option is better suited to those investors with a higher asset base and who wish to be part of the “process” (being educated and involved in the decisions).
• 
  Investment Management (Option 4) is best suited to those investors who prefer to sit back and let others do it all and they are more than happy being an observer to the process.
  At first glance, there is little difference between Option 3 and Option 4 but psychologically there is a big difference. Many people believe that no one could possibly care as much about their money as they themselves do, so in that instance they feel better being part of the process and choose Option 3.
• 
  Buy investments from Broker Dealer (Option 5) is the antiquated and duplicitous approach made (in)famous by the big names in the financial services industry whereby the industry representative “pushes” a product and makes suggestions that are often better suited to the sales person and their company rather then you, as the investor. This clearly is not a good option for any investor.

Cost of each option

• Option 1 – (Do it Yourself) Many people would assume that there is no cost to doing it yourself. On the contrary, without even taking into consideration the many man-hours it takes to accomplish all of the required tasks, the costs for the Do-It-Yourself option continue to mount. There is a great deal of evidence, which shows that most investors greatly under perform the markets. Let’s say that an investor had $200,000 of investments and underperformed the market by 2%. In essence, they “lost” or failed to earn $4,000 that year as a result. If they underperformed by just 2% every year, over a lifetime, their assets would be 56% less than what they could have been, i.e. $1,000,000 versus $440,000. That is very costly, indeed.

• Option 2 – (Hourly Advice) You pay by the hour ($150 to $300 per hour based on location and experience) or as a part of an overall financial plan that covers many other financial topics ($1,500 to $3,000 per plan, again depending on location and experience).

• Option 3 – (Co-management) The cost of this option could be based on a retainer, which is a set dollar amount each year. Alternatively, the cost could be based on a percentage of the amount of assets that are being co-managed; typically, that might be between0.8% and 1.5% of the assets under management. In some cases, this could be done on an hourly basis but that seems to be rare.

• Option 4 – (Investment Management) The cost under this option is usually based on a percentage of the assets being managed.  It can also be based on retainer as a set amount each year.  In reviewing the various ADV forms, it would appear that the big brokerage houses such as Merrill Lynch, Morgan Stanley and Edward Jones start their fees at 2%, though 1% is much more common in the industry. The fee usually decreases as the amount of assets go up.

• Option 5 – (Commissions) The percentage paid in commissions varies by the type of investment being sold. Bond funds can generate a commission of between 2.5% and 3.5 % of the sale price while mutual funds that invest in stocks can generate a commission of as much as 5.5%. Some annuity products have the highest commissions, often 7.5% or more. Given those commission rates it’s not hard to understand the high-pressured sales pitch, though that doesn’t excuse them.

So the question is which option is best for you?

Hopefully, you are now better equipped to make a sound decision as to the investment approach that will help you reach your goals.

To talk to a non-commission-based advisor near you or to discuss the best investing approach for you, contact NAPFA or Garrett Planning Network.

Investing: Gender-Based Differences

The more you know about yourself, in particular, and investing, in general, the more likely it is that you will obtain a better investing results.

The intent of this article is twofold: primarily, it is to raise your awareness of certain gender-based investing tendencies and secondarily, it is to make you a better investor given what you now know about gender-based tendencies. It is not the intent state that the differences are genetic, cultural, and sociological or some combination of the three that cause these measurable differences.

The following is a summary of data gleaned from numerous articles and papers derived from a variety of independent sources. It is important to remember that the following are merely tendencies and not absolutes. In other words, out of a large sample of both sexes, there are measurable gender-based differences, but by no means should that be construed to suggest that all women do this while all men do that.

Risk

Men tend to be less risk adverse; in other words, men are more comfortable with investing risk. Women, in general, tend to be more risk adverse or less comfortable with investing risk. Men tend to take more risks even when they shouldn’t. Women, on the other hand, take considerably less risks, even when they should.

Investing Knowledge

Men generally describe themselves as being more knowledgeable about investing than women describe themselves. Men also report that they spend more time learning about investing then women report that they do. When it comes to investing, men are more apt to believe that they know more than they really do while women often do know more then they believe they know.

Investing Information Processing

Women tend to rely on others for investing information and once that investing information is in hand, they are better at integrating or processing it. They are also better at deciphering even contradictory information. Men prefer to collect their own investing information and they are more likely to disregard outright any conflicting information.

Investing Confidence

Men tend to be more confident and as a result are far more susceptible to the risks, which come with overconfidence. Women are less confident and thus much less susceptible to the risks, which inherently come with overconfidence. To some extent, this is why women are more likely to use a financial advisor than men.

Investing Patience

Men are less patient for a positive outcome from their investments and more likely to modify their portfolio if they view it is underperforming. Over time, women are more patient with their existing investments, and if they consider a change to their portfolio they are also more likely to consult with a financial advisor first.

Investing Time Frame

Women tend to live longer than men of the same age yet they also tend to have less in their retirement accounts than men. As a result, women need to be certain that they make the best financial decisions. In general, men can tolerate poorer investment decisions since they tend to have more money to begin with and do not need to hold the assets as long.

So what does all of this mean? On the face of it perhaps not much, as it may seem to be little more than an eye-opener. But that was, in fact, the goal of this exercise; to make you, as an investor, aware of possible gender-based traits. And while it is unlikely that any single investor can lay claim to all of the identifiable gender-based traits, it is important that everyone, man or woman, have good “self-awareness” when it comes to investing. To that end, you should:

1. Be aware of the gender-based tendencies in both you and your spouse or partner. When you are aware of your specific tendencies, you can make conscious decisions to offset any negative behavior.
2. Become more aware of your investing goals – write them down
3. Understand your current portfolio, i.e. what is the expected return, what is the level of risk and what is the level of diversification.
4. Have a plan, or what is commonly referred to as an Investment Policy Statement.
5. Get professional advice if needed but be sure that the advice comes from a fee-only advisor. This means that the advisor does not sell you investments and does not make a commission on any sales. You are much more likely to get objective advice from a Register Investment Advisor than a sales person.

For a list of fee only advisors near you go to NAPFA website go to the Garrett Planning Network.

What is the main reason that most people fail to invest successfully?

Is it a lack of information, too much information, a lack of time to devote to investing, a lack of investing knowledge, lack of tools, or just plain old bad luck?

In most cases, the main cause of poor investment return is the person looking back at you in the mirror. It is our behavioral tendencies that we as humans use when making investment decisions.

The field of behavioral finance attempts to identify what it is that we do in our heads that negatively impacts our investing outcome.

The Academy of Behavioral Finance & Economics website lists over 100 on these tendencies or traits.

Here are just some of the mind games we use or are impacted by when it comes to making investment decisions.

Which ones have impacted you?

1. Fear of change, which results in the status quo
2. Fear of making an incorrect decision
3. Greed or the strong desire to get rich
4. Overconfidence in thinking we know more than we do or more than what other people know
5. Loss aversion, strongly prefer avoiding losses to acquiring gains
6. Herding is the tendency for individuals to mimic the actions of others, which is based on the social pressure of conformity and is supported by the belief that it’s unlikely that such a large group could be wrong
7. Hyperbolic discounting is when people want a “payoff “sooner than waiting for bigger “payoff” later
8. Anchoring on irrelevant data rather than concentrating on more relevant data
9. Overestimating or underestimating possible outcomes based on recent memorable data or experiences
10. Reluctant to admitting mistakes or judgment errors
11. Believing that investment success is due to wisdom when it was most likely due to a rising market
12. Confusing familiarity with knowledge
13. Elective thinking is the process by which one focuses on favorable evidence in order to justify a belief, ignoring unfavorable evidence

What is an investor to do to avoid these types of pitfalls?

The answer is to have a structure or a methodology in place that can prevent a lot of the mind games people otherwise may allow to impact their investing.

1. Know your investing goals
2. Have a written plan that dictates the method of how the investments will be managed. This is often referred to as an Investment Policy Statement (IPS)
3. Design the portfolio using a prudent methodology
4. Monitor the portfolio
5. Rebalance the portfolio based on the IPS guidelines
6. Change your investment allocation over time

The reality is that most people do not have the time, the motivation, the tools or the knowledge to properly invest properly.

The question is, “Are you are hindering your investing success?” If you are or if you do not know, you may well be better off having a professional help you.

To find a “fiduciary” investment advisor (always keeps your interests first, unlike a sales person) go to the websites of the National Association of Personal Financial Advisors or The Garrett Planning Network.

In over 25 years for helping people to preserve, protect and grow their assets, many publications have crossed my desk. All were designed to help those approaching or in retirement. Perhaps the best one ever is from the Ca Dept of Corporations and is free. “Protect Yourself from Fraud” is easy to read, well written covers a large variety of topics and should be a must read for everyone.

The Dept of Corporations is the States’ Investment Financing Authority. It protects consumers by regulating companies and individuals that offer investment advice, securities, and consumer loans amongst other things.

The Department is committed to making the public more aware of the types of fraud and schemes that are being committed against consumers but particularly seniors.

Common Investment scams are reviewed including seminars with ”Free Meals”. It is always amazing the number of people who do not know that there is “no free lunch” and those that are advertised as free always have a hook.

Several telephone scams are reviewed including those telling you that you must return a call to “area code 809” for what appears to be a legitimate reason, only to discover the toll charges to the Virgin Islands could be hundreds of dollars per minute.

Other common scams involve con artists posing as a Charity or home repair while others go so far as to use a distraction and actually commit a burglary.

With the recent events in the housing market, there are increased scams with predatory mortgage lending. There are also companies preying on those that are behind in their mortgage payments and trick the unsuspecting into ”jumping from the frying pan into the fire”.

The publication has a good section on how to check your credit, protecting your credit and what to do if your identity is stolen.

One of the best tips that I wish everybody would listen to is to “Investigate before you invest and not after”. It could be your bank, insurance salesman or a call over the phone that tells you about a product/ investment that sounds to good to be true. If you only had read the fine print or asked for a second opinion (from an expert who is not selling) before you write the check, you would be better off.

There are other sections on important topics such as reverse mortgages, annuity purchase, end of life paperwork, and things you can do when you have financial difficulties.

Elder abuse and financial elder abuse are increasing in frequency as there are more people living longer every year. Unfortunately financial abuse often goes on without the victim’s knowledge. The exploiter can often be a family member or trusted personal attendant. If you experience, witness or suspect elder abuse immediately contact Adult Protective Services.

Lastly is a wonderful “resource section” that lists the contact information for a number of agencies that are designed to help safeguard those that would be intended victims.

I encourage everyone to pick up the phone and call 866-275-2677 and ask that you be mailed the booklet entitled “Protect Yourself from Fraud”. Do not miss this very worthwhile free publication.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advice.

As a financial planner, I work with clients of all ages and income levels. The basis of good financial planning is great communication between the clients and the planner. Clients are always encouraged to ask any question that pops into their mind. Recently, a young newlywed who is expecting her first baby was in the office and said: I have a very basic question: What is the difference between “saving” and “investing”?

That is a great question because many people think saving and investing are one in the same. In reality they represent two distinct ways of managing your money for the future. Not understanding the difference can be costly.

When you are “saving”, your intent or goal is to preserve the principle and not subject it to loss. Savings are also typically used to fund goals or needs in the immediate future (less than 5 years). Using a bank savings account, money market fund, US treasury bills, certain annuities or certificate of deposit are commonly used for saving. The downside to the “stability of principle” is that these savings options usually offer low returns when compared to other “investment” options.

Investing, on the other hand is when you place your money into vehicles that give you a greater potential for gain. But with the greater upside comes a potential for loss of principal as well. When you “invest” your intended use of the funds should be more than 5 years away. Having a long time frame is why most people invest in stocks, bonds or real estate, (or mutual funds investing in stocks, bonds or real estate) within their retirement accounts.

Different investment vehicles have different levels of risk. In general, bonds are thought to be less risky than stocks. It is important to keep in mind that some bonds are in fact more risky than some stocks. Having the correct mix of asset types is key to controlling risks, which is a whole other topic.

There are pitfalls when individuals “invest” for the short-term. This was very apparent to some with the recent downturn in the market. If you were intending to buy a new car with cash and you had it parked in a savings account, it would be there when you went to buy the car. If, on the other hand, you had invested the money in the stock market with the intent of buying the car in the summer of 2009, you would have lost part of the money for that new car and you instead might be buying a used car.

There are also pitfalls when individuals “save” for the long term. Saving vehicles rarely provide enough after tax return to exceed the inflation rate. Therefore, over time you will lose purchasing power and either need to start cutting back on your lifestyle needs or start spending principle.

In conclusion, savings is for the short term, where the return is low but there can be little possible loss of principle. Investing is a type of money management that seeks a higher return while knowing there is the potential for loss of principle. Investing is appropriate when the funds would not be needed for at least 5 years. Not understanding the difference is a common money management mistake.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advice.

The media is full of stories about investment fraud and sales abuse. Wells Fargo was sued by the State of California for selling investments that were not as safe as reported. Bank of America was sued for involvement in a Ponzi scheme. Ameriprise paid a fine for selling products unsuited to clients retirement accounts. And of course the Bernie Madoff hedge fund scandal where people lost millions.

Now is a great time to review some methods to protect yourself from possible investment fraud and misrepresentation.

1. If an investment salesman uses the phrases such as; high rate of return, risk-free, your investment is guaranteed against loss, you must invest now, you should be wary and be extra careful.

2. Security laws protect investors by requiring companies to provide investors with specific written information about the company. Unfortunately, this information is very detailed and is buried amongst dozens of pages of the prospectus. Security laws safeguards are of no value if you don’t read the information prior to the purchase.

3. Be aware of the risk associated with an investment. Most people know that a certificate of deposit at a bank is less risky than investing with someone who contacted you by phone or investing with someone you know through your church or a friend. Many people do not know how to assess the risk of bonds, mutual funds or stocks.

4. Suppose a friend tells you about an investment opportunity that has earned returns of 20% during the past year. Your investments have been performing poorly and you’re interested in earning higher returns. This person is your friend and you trust them, however you should not invest until you call your securities regulator to see if the investment has been registered to be sold legally. It would be wise to get a second opinion from an investment professional who is not selling the investment.

5. When making an investment, do not rely on testimonials of others, advertising and news stories in the media or on the Internet, or technical data that you don’t really understand. You should rely on information that has been filed with your securities regulator. If you don’t understand it don’t buy it.

6. The best way to protect yourself from investment fraud includes; read all disclosure documents about the investment, be skeptical and ask questions and never write a check for investment in the name of your salesperson. The NASAA recommends investors seek the advice from an independent objective source (a professional who is not selling the investment).

7. When dealing with an investment salesperson who you consider reputable, you should; request copies of opening documentation to verify your investment goals and objectives are stated correctly, evaluate your salesperson’s recommendations by doing your own research before you buy, review all correspondence and account statements when received, and never allow the salesperson to manager assets as they see fit.

8. Numerous investments have been used to defraud the public including; short-term promissory notes, deeds of trust, offshore investments to avoid taxes, Nigerian advance fee letters amongst others. If it sounds too good to be true it probably is!

9. If you work with the an investment salesperson and he or she asks you to invest in a product that they are really excited about but the recommendation is different from financial products you have previously invested in, you should be sure to check with your security regulator to see if there’s any information on the investment product and that the salesperson is authorized to sell that product.

10. Do not assume an investment is legitimate just because the promotional materials and company website look professional, have a prestigious office location, other investors report quick upfront returns or the company has an official sounding name. Make the decision only after completing your due diligence.

11. Remember, no one insures you against investment loss. Make sure that your investments are appropriate for your risk tolerance (your ability to mentally handle the ups and downs) your risk capacity (your financial situation) and your goals and timeframe.

12. Whenever the sale of investment generates a commission for the salesperson, there is a possibility of misrepresentation or that it may not be as well suited to your circumstance and situation. This is the reason investors are wise to get a second opinion from an investment professional who does not sell product but only provides objective advice.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advice.

Congress is reportedly attempting to improve the safeguards for the investing public. Sweeping financial services reform legislation was approved last week in the House of Representatives. But there were some evidently last minute changes inserted into the bill by lobbyists to benefit big Wall Street Broker Dealers such as Charles Schwab.

Registered Investment Advisors give investment advice and they have a fiduciary duty to always do what’s in the best interest of the client. Broker dealer representatives are not responsible to do what’s best for the client and operate at a lower standard of what is called “suitability”. They only have to do what is suitable for the client, not what is best.

Some financial advisors are registered as both investment advisors that operate under the fiduciary duty and also representatives of the broker dealer and operate under the lower suitability standards. These double licensed individuals change from the White hat of investment advisor to the Black hat of the salesman. It is impossible for clients to know which hat the advisor is wearing and whether they are getting advice or being sold a bill of goods.

It was the Security and Exchange Commission’s recommendation that all individuals who give financial advice should operate with the client’s best interest in mind at all times. The head of the committee that produced the bill, Barney Frank, agreed that investors should be projected by the fiduciary standard.

So how is it that the House of Representatives passes legislation, if enacted, would require the Securities and Exchange Commission to write rules that would establish a fiduciary duty for brokers to provide investment advice but the bill adds a qualifier to that requirement saying,” nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing the personalized investment advice about securities.”

Consider the example. You go to a financial adviser and pay a fee to analyze your investments. As a result of the analysis, it is recommended that you buy $10,000 of an emerging market fund, $15,000 of a small value fund and $25,000 of an intermediate bond fund. Ideally the advisor then would present the best, lowest cost funds of each type. However this legislation would allow the adviser at take off his “fiduciary duty hat” and put on his “suitability hat’. The salesman is then free to sell his company’s high priced funds in each of the general categories.

This provision that was inserted, with virtually no one knowing about it, would render the fiduciary duty of brokers useless and therefore the public would have no safeguards, as was the intent of the Securities and Exchange Commission recommendations.

This is yet another example of how money from Wall Street goes into the lobby industry’s pocket to influence legislation that is not in the best interest of the public but is in the best interest of Wall Street.

If you as an individual want objective unbiased investment advice that is always in your best interest, it is essential that you seek advice only from Registered Investment Advisors that are not representatives of a Broker Dealer.

The simple test is to call your advisor and ask if they are a “representative of a broker dealer”. If they say yes, you have the wrong advisor.

For list of fee-only advisors check the website for the National Association of Personal Financial Advisors (NAPFA) or Garrett Planning Network.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

Many people do not fully understand what Financial Planning is all about in the first place so they cannot really know if they would benefit from a plan.

In a nutshell, Financial Planning is a method of achieving the type of life that you plan for. Unfortunately many people do not plan and they end up not getting what they wanted.

Everyone’s financial plan is based on his or her own unique situation. But most plans address the following elements:

Current Financial Situation – Both you and the planner need to know where you are at financially which includes a net worth statement ( list of assets and liabilities) as well as a cash flow determination (income and outgo). This is important to identify areas of potential savings and have an ability of judging progress over time.

Investment Risk Tolerance and Capacity – It is crucial to understand these areas before attempting to determine whether your current investments are appropriate for your situation.

Investment Analysis and Recommendations- It’s important to know what investments you have currently prior to determining whether they are appropriate for your situation (based on risk tolerance, risk capacity and goals). Only than can alternative recommendations be appropriate.

Investment Policy Statement - Many people get off track in their investments because they don’t have a clear game plan. An Investment Policy Statement clearly outlines the objectives of your investments, expected returns, possible gains and losses based on historical data, and provides guidance for managing your investments going forward.

Retirement Planning – This element identifies the goals that you have now and in the future, takes into account current and future income and assets and then determines the likelihood that you do not run out of money before the end of the line.

Estate Planning - This is about having the proper documentation so that you are cared for the way you want should you become incapacitated as well as passing on your assets when you are gone in the best possible way.

Risk Mitigation -Bad or unexpected things can occur if life and there should be a plan to deal with them as they occur. How would you; handle a 3 million dollar health problem, are sued for 2 million due to a car accident, die prematurely, need long term care. Risk mitigation planning is avoiding some risks, transferring some risk with insurance and retaining the risk in some areas. If insurance is part of the plan you want to make such you have the right type in the right amount and at a good price.

Debt Management - While this does not apply to everyone, some people need help in recognizing good and bad debt and having a plan to decrease both in the best manner.

Tax Planning – The less you pay in taxes, the more that’s left in your pocket. Identifying ways of decreasing taxes can be to your benefit. This planning often involves your accountant, CPA or enrolled agent.

Regardless of your age, financial planning can help you live the life you want through the proper management of your finances and risks.

Based on their education, experience and ethics, those advisors who are Certified Financial Planners ® would be a good choice to analysis your situation and craft a written financial plan to address the above topics

Michael Chamberlain CFP®
CC Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340
This article is for informational purposes and should not be taken as legal, tax or investment advises.

In the last several years, numerous mutual fund companies have developed Target Date Retirement Funds (TDR) that are based on when people plan to retire. The longer away the retirement date, the more aggressive the allocation (more stocks) and it gets more conservative (more cash and bonds) as the retirement date nears.

The idea is that with one fund you get exposure to domestic and international stocks as well as corporate and government bonds and the allocation automatically adjusts over time.

These companies realize investors often do not pay attention to their asset allocation of their investments. People tend to put money into mutual funds but do not monitor them over time.

These funds are designed to fix that but there are some issues that you should be aware of if you are considering this type of an investment:

1. The proper mix of asset types within your portfolio should be based upon your tolerance for risk (your mental ability to deal with volatility), your capacity for risk (your financial situation) as well as your goals including your time frame. The problem with these retirement date funds is they look only at a point in time to determine the allocation and totally disregard your risk tolerance and capacity. The result could be an allocation that is not appropriate to your situation, which could be greater volatility or under performance of your investment.

2. Each investment company has a different philosophy as to the allocation for a given retirement date. How is a person to know which of the 100’s of funds is best suited to their situation? Note the difference in allocation amongst these funds:

There can be as much as a 50% difference, which has a huge impact on risk and expected return.

3. The target date funds often do not provide great enough diversification across different asset classes. Value style funds, small-cap funds, emerging market and REITs are usually underrepresented. This lack of diversification may increase volatility and provide smaller returns than a more properly allocated portfolio.

4. A recent study has revealed there are many misconceptions amongst those who have invested in these funds.

a. 40% think that the fund has a guaranteed return- NOT TRUE

b. 40% think they get higher returns than the stock market in general- NOT TRUE

c. 60% think that they will be able to afford to retire on that date of the fund-NOT TRUE.

5. The fees associated with these accounts vary dramatically and are a huge revenue stream for some companies. The commissions and operating expenses can be a drag on performance. People may be better served with those funds with no commission and lower operating expenses.

If you are invested in these types of funds or are considering them, you should find out their allocation and determine if the mix of asset classes in the fund is really suited to you and to be sure that your fund has low fees to help increase your return.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

Ok, you have gone ahead and retired. Now you are wondering, “What should I do with my 401K; leave it where it’s at or convert to an IRA?” Unfortunately, it’s not a simple question to answer. It depends upon the choice of investments as well as the ongoing costs of the 401(k) compared to that of an IRA. Other factors to consider are your age and whether you would need the funds before 59 1/2 as well as the amount involved.

Advantages of the keeping the 401(k) include:

• You can borrow money from the 401(k) without penalty, as long as you pay it back.
• If you’re less than 59 ½, you can withdraw money in your 401(k) under certain circumstances such as needing to pay medical bills. The qualifying expenses would have to be tax deductible and would exceed 7 ½% of your adjusted gross income.
• If you become disabled before 59 ½, you can make early withdrawals from the 401(k).
• Management fees of the funds within the 401(k) at very large companies are sometimes less than those of an IRA.
• If the amount involved is small, you may get better diversification amongst different asset classes since the 401(k) often does not have a minimum account size.

Advantages of the IRA include:

• Greater selection of investment options.
• Management fees of the funds within the 401(k) at small to mid sized companies are often more than those of an IRA.
• More freedom to switch investments with greater frequency.
• The IRA may provide easier to deal with than dealing with a 401(k) and an existing IRA. There is less administration and record keeping with one account rather than two.

Once you have established that none of the advantages of the 401(k) would benefit you and that you understand the costs of the 401(k) compared to an IRA, converting to an IRA could allow for a better asset allocation than your 401(k).
Having the correct asset allocation of different investment types is perhaps more important then deciding to convert from the 401(k) to the IRA. The proper mix of asset classes can decrease your risk and increases your return. The allocation should be based upon your tolerance for risk, your capacity for risk and your goals including your timeframe.

Most people need some professional assistance to determine the proper allocation. Many financial publications recommend people use a “Fee-Only” advisor who does not sell products for objective advice that is free of conflict of interest (similar to a doctor or CPA).

If you convert to an IRA, considering using low-cost mutual funds and or exchange traded funds (ETF’s) to keep your investment costs low.

The time when it DOES NOT make sense to move your funds from a 401(k) to an IRA is when you are getting recommendations to buy a product that has commissions and high fees associated with the IRA. Unfortunately most financial advisors sell product and the commissions of 3 ½ – 7% can come right out of your account. Most retirees do not have the experience to fully understand the fees involved and the long-term impact on their nest egg.

If you are considering your options for converting a 401(k) to an IRA be sure to talk to a financial advisor who is not going to try to sell you the IRA.

Michael Chamberlain CFP®
CA Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.