Financial Frontlines®

As some of the financial turmoil slows down (we hope), you might be thinking that you need the help of a financial advisor or that you might need a new financial advisor.  You may not know it, but just about anyone can call themselves a financial advisor or some variant of that term – financial planner; wealth advisor; etc.  But there are some differences between them.  Today, I’ll examine a very important part of that…”standard of care” and how it affects you.

There are basically, two different types of financial advisors:  Registered Representatives and Registered Investment Advisors (RIA).

 Registered Representatives are regulated by FINRA (Financial Industry Regulatory Authority) and they are normally associated with a Broker/Dealer – commonly called a Stock Broker.

On the other hand RIAs are regulated by the SEC (Security and Exchange Commission) or the State Government depending on the size of the firm.  Generally speaking, RIAs operate independent of any Broker/Dealer, though they may still place trades through a Broker/Dealer.  These two different types of advisors have different “standards of care.”

A Registered Representative must meet what is known as a Standard of Suitability.  What this means, in essence, is that a recommended investment must be appropriate for your goals and risk tolerance.  Expenses or fees do not necessarily enter in the equation.  In fact, a Registered Representative can recommend one suitable investment over another, even if he makes more money off the recommended investment.

A RIA is required to meet a Fiduciary Standard which is generally accepted as acting in the client’s best interest.  A RIA cannot make a recommendation that benefits him at the client’s expense.  Again, a Fiduciary must always act in the client’s best interest.

This is all a little confusing, and it may not be easy to tell if you are dealing with a Registered Representative or a RIA (although if you ask, a potential advisor should tell you).  If after asking a financial advisor if he is a Registered Rep or RIA  you are still confused a questionnaire that I recently received may help you sort it out.  (Disclosure:  I received the questionnaire at a NAPFA conference.  NAPFA promotes fee-only financial planning and a fiduciary standard).  The questionnaire was provided by John Ritter of Ritter Daniher Financial Advisory, LLC in Cincinnati OH.  I’d recommend you ask any potential financial/wealth advisor/planner these questions before you start a planning engagement.

1)      Are you held to a fiduciary standard in all dealings with me and my financial affairs?

2)      Do you disclose all conflicts of interest, both actual and potential, that exist or might exist in my relationship with you?

3)      Do you forego any type of commission-based compensation in favor of receiving all compensation via fees that are fully disclosed in dollar terms?

4)      Do you provide full service, comprehensive financial planning services as well as investment advisory services?

5)      If you provide full service, comprehensive financial planning services, are these services performed by individuals that have obtained the Certified Financial Planner (CFP^®) certification?

While neither designation as a registered representative or RIA guarantees competence, knowing the “standard of care” may help you choose amongst various advisors.  If you have further questions on what a fiduciary standard means, check out the following website:  http://www.focusonfiduciary.com/.

NOTE: Since drafting this article, the administration has introduced legislation in Congress that will require both registered representatives and RIAs to meet a fiduciary standard…we’ll see how it works out.

The IRS extended the First-Time Homebuyers Credit from last year and improved upon it. For homes purchased under the 2008 program, the credit was worth up to $7500 and it was actually an interest-free loan. The $7500 had to be paid back over the next 15 years.

For homes purchased under the 2009 program, the credit is worth up to $8000. Unlike last year, this credit does not require repayment unless the home ceases to be your main home within 36 months of purchase. The credit amount varies. You can claim the smaller amount of 10% of the purchase price OR $8000.

The program applies to:

• First-time home buyers. “First-time” home buyers are people who did not own any other main home during a 3-year period prior to your home purchase.
• Home purchases in the U.S. between April 9, 2008 and before December 1, 2009.

A “main home” is one where you live most of the time. It can include single family homes, townhouses, condos, houseboats, house trailer, or other types of residences.

The credit does have restrictions. The credit is phased out with income on line 38 of your Form 1040 of $95,000 for single filers or for married filing jointly, $170,000. See the IRS web site for more information and disqualifying rules; http://www.irs.gov/newsroom/article/0,,id=204671,00.html.

Wow, this program has caused quite a state of confusion and for good reason.

The tax withholding reduction (up to $400 for individuals or up to $800 for couples) applies to “earned income”–people still earning a paycheck with an employer.  They will have their payroll taxes reduced and at the end of the year receive a tax credit for the reduced amount.  So you pay fewer taxes now (more pocket money) and won’t owe the tax later.  Each wage earner in the family may have this reduction applied to them by their employer.  However, the dual income family can apply only one tax credit at the end of the year for up to $800 per joint tax filing. 

Retiree checks are not eligible for this program.  However, retiree checks use the same tax withholding tables as paychecks.  So our retiree checks will reflect the tax withholding decrease.  That means you either increase your withholding to compensate for the withholding reduction or be ready to possibly owe more taxes when you file your 2009 income tax returns.

If you also receive Social Security and/or VA Compensation, you will receive a one-time lump sum amount of $250 in one of your monthly checks in the next few months.  If you also work and receive either VA or SS checks, that means you receive the payroll tax withholding reduction AND the $250 lump-sum HOWEVER the $250 will be subtracted from your payroll tax withholding credit. 

IRS site: http://www.irs.gov/newsroom/article/0,,id=204447,00.html

DFAS My Pay site for tax withholding changes: https://mypay.dfas.mil/mypay.aspx

Hope this helps.

Remember when it was a big deal to have a credit card?  You had to apply and prove you were a good credit risk.  You waited like a kid before Christmas day until you heard whether you were approved.  Then that day came when in the mail your Sears or Montgomery Wards or Phillips 66 card arrived.  Holy cow Batman!  With a credit card came awesome responsibility.  Well credit is reverting back to the norm.  The days of easy credit are gone.  Protecting and building your credit score has become a big deal again.

Ways to protect and build your credit scores include:

• Paying your bills before they are due.
• Paying off balances each month.
• Managing the amount of credit you have open at any one time and knowing your balances.
• A high percentage of credit used to credit available–not so good.
• A low percentage of credit used to credit available–good.
• Get a copy of your credit report to see what’s on it.  You may be surprised to find open accounts you have long forgot about.
• Don’t use credit just because you have additional credit available.
• Know your current credit score so you know where you are.
• Don’t share credit with poor credit risk people–’love’ doesn’t trump a person’s bad credit record and chances are they won’t change.
• Get help if you have credit problems.  Check out http://nfcc.org/ or call your Better Business Bureau.

Now if only that 25¢ gas would come back.

The Fair Credit Reporting Act allows military members away from their normal duty station to place an “active duty alert” on their credit report.  This program is designed to minimize the risk of identity theft while you are deployed.  It works by forcing a business or credit agency to verify your identity before any credit can be issued in your name.  The alert is good for one year and can be cut short or lengthened if need be.  For details on the program and how to establish your alert, check out this Federal Trade Commission web site:  http://www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt147.shtm.