Disclaimer: The author of this post is not a finance professional. No financial advice is being given. The statements above are solely for educational purposes. CFP® is a registered trademark of the CFP Board. CFA® is a registered trademark of the CFA Institute.
Finance. Eeew. If you’re like me, a complete right-brained person (artsy, creative), you were likely drawing pictures on your math homework in high school and not-so-patiently waiting for the bell to ring for econ/math/physics to be over. Why, do you ask, would someone like me be giving financial advice? Well, I wouldn’t. And I won’t. But, I happened to marry a financial professional and have learned a thing or two. If I can boost my financial savvy, you certainly can. I have compiled a ‘guide’ to understanding the basics of money management and how it can help you in real life.
Financial fitness is not just saving and investing, it’s also keeping your own personal skills honed.
Why would that matter? In my opinion, your own marketability/career options are a huge asset should the unthinkable happen (death of a spouse, divorce, permanent disability). This is especially important for those of us who are stay-at-home moms. I have heard too many stories of women losing their spouse/partner to death or divorce, only to find themselves in poverty/near poverty in a relatively short period of time due to two things:
- Not being involved with saving, investing, asset management decisions, or even having any knowledge of these things.
- Inability or difficulty finding employment from being out of the workforce for extended periods of time (10, 20, 30+ years) without maintaining professional contacts, licenses, and keeping up with current industry standards and/or not nurturing a hobby that could be turned into a business, should it become a necessity.
Lesson number one of money management: Be your own advocate.
First and foremost, see a financial professional. Even if you think you don’t need to or think you ‘don’t make enough money’ to seek financial assistance, you should.
Here are a few types of financial professionals and what kinds of money management they are qualified to do:
Financial Advisor: This person has a bachelor’s degree in a finance or finance-related field such as accounting. Financial advisors primarily work for a bank and are required to pass a series of tests.
CFP®: Chartered Financial Planner requires a bachelor’s degree in a finance/finance-related field, have worked full time in the industry for two years and completed courses pertaining to investments, insurance, taxation, and estate planning, to name a few and adhere to the ethics standards of their designation. These professionals work at banks as well as investment companies such as Raymond James, Fidelity, Morgan Stanley, Merrill Lynch, etc.
CFA®: Chartered Financial Analysts endure a rigorous testing process in order to achieve this designation. This process involves a series of 3 tests (levels). The curriculum covers ethics, quantitative methods, economics, corporate finance, financial reporting and analysis, security analysis, and portfolio management. The first level is offered twice a year and averages a 40% pass rate, Level II and Level III are offered only once a year and have pass rates of 44% and 52%, respectively. Fewer than 20% of those attempting completion of the program successfully receive the CFA® designation. CFA® members work in various roles: portfolio manager, research analyst, chief executive, consultant, corporate financial analyst, risk management, to name a few. CFA® charterholders primarily work for banks, public companies, private investment companies, and hedge funds.
Which investment professional should you choose?
A novice investor likely won’t need the services of a CFA®, but it certainly isn’t out of the question. Also, if you have a large amount of assets and investments, I would urge you to seek an individual with a CFP® (at minimum) or a CFA® designation. Regardless, it comes down to trust.
Here are some sample questions to ask your existing or potential financial professional(s), provided by the CFP® website:
What experience do you have? Ask for a brief description of the financial planner’s work experience and how it relates to their current practice.
What are your qualifications? Ask about the credentials your planner holds, and learn how they stay up to date with current changes and developments in the financial planning field.
What financial planning services do you offer? Credentials, licenses and areas of expertise are all factors that determine the services a financial planner can offer. Generally, financial planners cannot sell insurance or securities products, such as mutual funds or stocks, without proper licenses. And they cannot give investment advice unless registered with state or federal regulatory bodies.
What is your approach to financial planning? Make sure the planner’s investing philosophy isn’t too cautious or overly aggressive for your needs. Learn how they will carry out recommendations or refer tasks to others.
What types of clients do you typically work with? Some financial planners prefer to work with clients whose assets fall within a particular range, so it’s important to make sure the planner is a good fit for your individual financial situation. Keep in mind that some planners require you to have a certain net worth before offering services.
Will you be the only financial planner working with me? Some financial planners work with their clients directly, and others have a team of people that work with them. Ask who will handle your account, meet them and ask whether the planner works with professionals outside their own practice, such as attorneys, insurance agents or tax specialists. If yes, get a list of their names to check on their backgrounds.
How will I pay for your financial planning services? Planners can be paid in several ways: through fees, commissions or a combination of both. As part of your written agreement, your financial planner should make it clear how they will be paid for the services to be provided.
How much do you typically charge? Although what you pay will depend on your particular needs, the planner should be able to provide you with an estimate of possible costs based on the work to be performed. Costs should include the planner’s hourly rates or flat fees, or the percentage of commission received on products you may purchase.
Do others stand to gain from the financial advice you give me? Ask the planner to provide you with a description of his conflicts of interest in writing. For example, financial planners who sell insurance policies, securities or mutual funds may have a business relationship with the companies that provide these financial products. CFP®and CFA® professionals agree to abide by a strict code of professional conduct and have an ethical obligation to put your interest first when delivering financial planning advice and services.
Have you ever been publicly disciplined for any unlawful or unethical actions in your career? The [CFA® and/or] CFP® Board, the Financial Industry Regulatory Authority (FINRA) and your state insurance and securities departments each keep records on the disciplinary history of financial planners and advisors. Ask which organizations the planner is regulated by and contact these groups to conduct a background check. CFP® [and CFA®]professionals are subject to disciplinary action if they violate board standards.
For more information about CFA® charterholder qualifications and guidelines as well as the CFA Institute, please visit: https://www.cfainstitute.org/.
I, personally, have a few other (slightly unorthodox) methods for determining whether a financial professional is a good fit for money management, in addition to those listed above:
- Ask to see their car keys. Not a joke—I’m serious. If he or she pulls out a set of Ferrari (or similarly super-fancy car) keys, you need to ask yourself if they are making their money from charging you the highest fee legally allowed or if they are simply really good at what they do and have been doing it for a long time.
- What are they wearing? This is along the lines of what kind of car they drive. Are they wearing a Rolex and Ferragamo shoes? Again, is their best interest your investments or their own lifestyle? Similarly, if he or she is disheveled and unorganized, is this the type of person you want handling your hard-earned money?
- This is probably the most important:How do they talk to you? Did they ‘talk down’ to you? Did they seem disinterested/distracted? Did they seem too eager? These are all red flags for me. I want someone who will talk to me at my level and make me feel confident in their abilities without needing to inflate their abilities.
As mentioned, I am not a finance person naturally.When my husband talks to me about finance, my eyes instantly glaze over and all I hear is “whah whah whah whah whah,” à la Peanuts/Charlie Brown.
I have researched and provided a few descriptions of common terms/products to help prevent ‘instant eye glaze’ when speaking with a financial professional:
Securities: Any type of financial asset that can be traded, such as: debt securities (banknotes and bonds), equity securities (common stocks), and derivatives (futures, options and swaps)
Stocks: What does owning stock mean? Essentially, purchasing one share of stock means that you are now a partial backer/owner of the company. The stock value fluctuates based on many factors such as profitability, debt, corporate governance, industry factors, general economy, and interest rates, to name a few.
If you’re interested in investing in individual stocks, do your research:
- How is corporate management?
- What is the company culture?
- Are there any legal issues, pending or impending?
- Is this an established company, a start-up, or a comeback story?
- What are your goals with this stock? Short-term gain or long-term investment?
- Knowing when to walk away. This is tough. My husband reports that novice investors often hold onto failing stocks too long in hopes of a recovery, rather than cutting losses quickly and moving on.
These are just a few money management questions, and by all means not the only ones, you should consider and discuss with a financial professional prior to investing in an individual stock.
Bonds: A bond is a financial instrument where an entity (most often a government agency/state) offers debt notes that can be purchased by an investor and will be repaid after a certain amount of time, with interest or a fixed amount, depending on the terms of the agreement.
Mutual funds: A professionally-managed investment fund that pools money from many investors to purchase securities.
Exchange-traded fund (ETF): An ETF is a fund that holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism (ensure prices do not deviate substantially from fair value for long periods of time) designed to keep it trading close to its net asset value.
Index funds: A mutual fund or ETF structured of varying securities designed to replicate the performance of an index (Dow Jones Industrial and/or S&P 500) and can also be screened for specific criteria (such as social and environmental concerns).
Money market: The trade in short-term loans between banks and other financial institutions.
CD (certificate of deposit): A savings certificate with a fixed interest rate guaranteed at maturity (end date/specific amount of time) which has a minimum investment (dollar amount) requirement.
Emerging markets: Certain funds screen/invest specifically for emerging markets—countries that are becoming more advanced, through technology, rapid growth, and industrialization.
Hedge funds: These get a bad rap. If you saw THE BIG SHORT (the movie about the financial crisis), you know that a handful of hedge funds reaped unparalleled profits as a result of millions of Americans defaulting on their loans and these hedge funds received unprecedented media coverage and public scrutiny. Hedge funds are not innately bad. A hedge fund simply pools money from investors (limited partners, actually) and the manager (general partner) invests the pooled money in a variety of strategies, including alternative investments, to attempt to provide returns higher than market averages. These are higher in risk, but can provide higher returns. Due to the risk, hedge funds require investors to be an accredited investor (a minimum net worth of $1 million, excluding primary residence as an asset, or, income of over $200,000 for the past two years). As such, a high percentage of people do not qualify to participate in hedge funds.
Annuities: A contract between an investor and an insurance company where a lump sum (or series of payments) is paid and the insurance company will guarantee regular payments immediately or in the future. An annuity can be helpful in securing a steady income stream later in life. There are different types of annuities and these can become extremely complex in nature and can involve steep fees and penalties if access to the funds is required outside of the scheduled payments or cancellation of the contract is needed.
Money management red flags to look for:
- Guarantees. Yes, there are certain financial instruments that can offer a guaranteed return (bonds, CDs, money market, high yield savings accounts, annuities and life insurance policies). A financial professional should never guarantee an exact rate of return on your portfolio. It is also important to keep in mind that some of the guaranteed returns from annuities and life insurance policies are not what they seem. Often, these returns are based on the initial investment amount and don’t take into consideration inflation and interest. Always question anything that is guaranteed.
- Not returning your phone calls and/or emails in a timely fashion.
- Not providing the status of your investments in a timely fashion.
Risk: How much risk is right for you? That depends on many factors, as well as with whom you speak to/seek advice.
Treat your finances like you would treat a major illness—very seriously.
Get educated. Seek professional help—by several different people/companies. Just like a medical ailment, you want to make sure you are in the best hands and you’re completely comfortable with the recommended strategy(ies). Different companies and individuals take different approaches; find the best fit for you and your needs.
Trust your instincts. If something seems off, you’re probably right. Ask questions and don’t be afraid to move your assets elsewhere.
If you currently have a financial professional helping you with money management, are you able to answer the questions provided above?
If not, it’s time to schedule a meeting. If you don’t have one, start interviewing. Talk to your spouse/partner (if you have one) about your finances, assets, and investments. Do you know what you have and who manages what? Take time to think about the ‘what-if’ scenarios.
Are you prepared? As the saying goes: knowledge is power. Be proactive. Take the time to get financially fit.Finding a financial professional that understands you and your money management situation is the first step in becoming financially fit.
Take the time to understand your finances and what you can do for yourself, should the unthinkable happen. Trust me, you’ll be thankful you took the time to do so. Please share in the comments what you’re doing to be informed about your personal money management!
