Money Basics

We have all been in a position, at least once in our lives, which required us to trust someone with something very important to us, sometimes by choice, sometimes by necessity. Over the years, I have met many individuals and families who have had that trust broken a time or two. When this happens with a Financial Advisor, skepticism and mistrust can, unfortunately, keep people from taking much needed action with their financial goals.

If you are at a point in your financial life where you are tired of stressing over market performance, are stressed about what current events mean for your portfolio, or simply have financial matters that keep you up at night, then consider working with a financial advisor. Do not let the need for a financial advisor go unmet, due to any of the following myths. 

Myth #1: I Don’t Have Enough Money to Work with a Financial Advisor.

This is the most cited reason why many individuals or families do not seek the advice from a Financial Advisor. While it is true that many advisors will have a minimum amount of investable assets that they require from potential clients, it is also true that many do not. Regardless of how much you have or think you may have; it is important to reach out to different advisors and start a conversation. Not every advisor has a minimum and many are willing to work with you to help you grow. There’s an advisor out there for everyone.

Myth #2: Financial Advisors are too Expensive.

We have all seen the movies where stockbrokers drive expensive cars, fly in private jets and vacation on luxury boats, dare I say: Wolf of Wallstreet? No wonder some folks are afraid of them! One of the major considerations when working with a financial advisor is both how much and how an advisor should be paid. Historically, advisors were stockbrokers and were paid on commissions. As the industry evolved, some financial advisors switched to an asset under management fee, where advisors are paid a fee based on the amount of assets they manage. Now, some advisors are paid on a retainer basis, or even a combination of these methods. While there are pros and cons to each method of payment or compensation, often clients are unsure of how their advisor is being paid. Never be afraid to ask a potential advisor, or your current advisor, how they are being paid and if they are required to put your best interests before their own.

 Myth #3: I Can Reach My Goal without a Financial Advisor.

Absolutely, it is possible for you to reach your goal without a financial advisor but having an advisor can make a huge difference. Why? The simplest answer is that we are all emotionally attached to our finances. Many of us work for years trying to accumulate wealth and it isn’t always so clear what to do with that wealth when you’re emotionally tied to it. Having a trusted, fiduciary advisor to guide you through decisions or make recommendations can be a massive help, especially during stressful times. Additionally, sometimes our financial situations are extremely technical and could use someone professionally trained to make the right decision.

Anthony Corrao | CFP®
Financial Advisor

Simply put, a fiduciary is someone who has a legal obligation to put your interest ahead of their own. A fiduciary financial advisor is a financial advisor who is legally obligated to act in your best interest when providing financial advice. Now, if you are like most individuals, you are probably thinking “That makes a lot of sense. Don’t all advisors make recommendations in my best interest?” Sadly, the answer is… no, not at all.

Something that began to gain a lot of notoriety in the financial industry in the past few years has been the term fiduciary and what it means for advisors and their clients. In 2016, the Department of Labor tried to put in place a Fiduciary Rule. Ultimately, this rule was struck down by an appeals court, but the effects of its message continue to live on. One of the main effects of this rule that continues to live on was the divide between a fiduciary advisor and a non-fiduciary advisor.

Many financial advisors are not fiduciaries. Non-fiduciary advisors are held to a lower standard, the suitability standard. Suitability is a standard in which the advisor only needs to believe that a recommendation is merely suitable based on a client’s financial situation, not in their best interest. Again, if you are like most clients you may be thinking, “I want to do what is best for me, not something that is merely suitable. Why would my advisor recommend something that is suitable and not in my best interest?”

Often, the difference between suitable and your best interest for a non-fiduciary advisor is decided by how much the advisor can make. Consider a client and an advisor weighing two similar investments, one of which pays a higher commission than the other. A fiduciary would be legally bound to recommend the one with lower fees, avoiding the higher commissioned product. A nonfiduciary advisor doesn’t have too. A non-fiduciary advisor can recommend an investment or a product that pays them higher fees even though a less expensive option may exist. That is a massive conflict of interest. Suitability does not require an advisor to place your interest of their own, nor does it require the advisor to avoid such conflicts. Only fiduciary advisors are required to fully disclose all material information and avoid conflicts of interest.

Not all non-fiduciary advisors are bad guys that are out to charge you as much as possible, but it is important to understand, they are legally allowed to do so, and some do. At CPS Investment Advisors, we are fiduciary financial advisors. We do not use any investment products that charge commissions, we only charge a single transparent fee for management. When evaluating potential advisors ask them if they are a fiduciary. If the answer is anything other than yes, or if the advisor says, “We are fiduciary-like”, then run away. You expect your doctor to make recommendations with your best interest at heart, so why don’t you expect the same from your financial advisor?

Michael Scott | MBA, CFA
Senior Portfolio Analyst

Deciding how to invest your savings is one of the most important decisions you will make. Fortunately, successful investing doesn’t need to be complicated. You can make good investment decisions if you understand a few simple concepts and have a financial plan. The two most important concepts investors need to understand are risk vs. reward and asset class diversification.

Risk vs Reward
Investment options range from “very safe” to “very risky”. Riskier investments usually offer the chance for higher returns over the long run. Riskier investments also have a greater possibility of loss. Academic research shows that the most effective way to invest is by blending assets of different risk levels. This process is called diversification and is a key part of building a high-quality investment portfolio.

The three major asset classes appropriate for most investors are stocks, bonds, and cash.

Understanding Cash
Cash is usually considered to be the safest option, along with debt obligations of the US Government, which are often referred to as “Treasuries”. Cash, and mutual funds that invest in cash equivalents like money market funds, have the lowest risk. These kinds of investments also provide lowest potential returns. Often the return on cash is not even enough to keep pace with inflation. Keeping too much cash in your investment portfolio can cause you to lose real purchasing power over time.

Understanding Bonds
Investment grade municipal and corporate bonds have more risk but are still generally considered safe investments. Bonds represent the debt of a company. Bonds are also known as “fixed income” investments. When companies borrow money, they issue bonds. Investing in a bond is the same as loaning money to the company that issued the bond. Bond investors expect to earn interest on their investments, and to have the loan principal paid back at some point in the future. If the company that issued a bond has financial difficulties, they may be unable to make the promised principal and interest payments. This risk is called default risk or credit risk. Investing in a fixed income mutual fund instead of individual bonds can help protect against default risk. Bonds are usually less risky than stocks, but riskier than cash.

Understanding Stocks
Stocks, often called “equities”, are riskier than bonds, but also offer the chance for higher returns over the long run. Stocks represent ownership of a company. When you own a stock, you own a small slice of that company. Some investors choose to buy individual stocks, while others buy mutual funds or exchange traded funds. When you invest in an equity fund, you own shares in the fund and the fund may own stocks. Stocks offer higher potential returns, but also come with more risk than investing in bonds or cash.

There are some kinds of financial instruments with much greater risk than stocks, such as derivatives, futures, and options. These high-risk instruments are not appropriate investments for the vast majority of individual investors.

Which Should You Choose?
The mix of stocks, bonds, and cash is also known as your “asset allocation”. A high-quality investment plan makes use of all three of these asset classes. The right asset allocation depends on factors such as your savings goals, your time horizon, and your risk tolerance. Your financial plan should incorporate all these factors. The right asset allocation is ultimately the one that best supports your financial plan and maximizes the probability of successfully achieving your financial goals.

Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer

If you’re like one third of the world’s population as I write this article, you’re most likely staying indoors to keep yourself and your family safe and healthy due to COVID-19. Besides becoming a master of your streaming digital subscription or DIY home improvement champion, here are a few positive financial tasks you can check off your list with that newly acquired time.

Review Your Expenses

For some, income may be hard to come by as of late, so take the time to review your expenses to see if you can do without them during these slim moments in your life. Cancel that magazine subscription you’ve been putting off. Instead of your morning coffee from that big chain, buy a cheaper cup from a local coffee shop and support small business as the same time. Focus your income draws on the necessities like food, rent/mortgage, and utilities.

Review Your Debts
It is ideal to not carry a revolving debt balance on your credit card, but if you do, consider finding ways to minimize that interest payment each month. Look for 0% interest cards with incentives to transfer that debt to give you time to pay it off without interest. Even with interest rates at low levels, credit card companies are still charging a hefty amount. The same goes for other loans you may have outstanding.

Think About Refinancing Your Mortgage
Mortgage rates are still historically low compared to five, ten or twenty years ago. We could all use a bit more discretionary cash right now. Find a trusted mortgage officer to help guide you through the process of what a refinance looks like, what closing costs you may or may not incur, and how much the refinance would save you on a monthly basis and in the long-run. Other options are now available as well to consolidate a first mortgage and line of credit on your home at a locked in fixed rate.

Update That Resume
Some of us may have been laid off or furloughed during tough times. Updating your resume to begin the search for a different path could create new and exciting opportunities. At the same time, hiring managers are not just looking at your resume anymore. Find some time to go through your personal social media pages for images and statements a new employer might not find as appealing. Remember to be true to yourself, but think twice about posting those pictures from that St. Patrick’s Day party a few years back.

Final Thoughts
Remember that times may be tough now, but know there is light at the end of the tunnel. The economy comes back and it will before you know it. Ensure you’re saving for retirement, spending less than what you bring home, saving that extra amount for a rainy day (or a few months), and take time for personal self-care every once and awhile.

Derek M Oxford | CFP®️
Financial Advisor

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