The Key to Financial Planning - Your Financial Objective

The key to any investment planning is starting with a financial objective. What exactly is the financial goal?



All to often people care more about return or safety when considering investment options. What should be considered first and foremost is the needs of the investor. What is this money being saved for? How long will it be before the money is needed?

Potential returns and risks of individual investments are irrelevant until the investors objectives and goals have been clearly defined. For instance a S&P 500 index fund that will most likely avg 12% over the next 15 years sounds much better than a money market fund that will average 3% over that same period. This will hold true for many investors but not the high school student saving for college who will need the money in 18 months. That student may very well be disappointed when they withdrawal the entire account that has lost money because they bought in on a market down cycle. The student is better off with something safe because they can't risk a loss. On the other hand the recent college graduate who just found a job and wants to start saving for retirement will be better off in the stock market.

Determine Your Financial Objective

Understanding investor objectives can be tricky. Here are some great questions to answer when coming up with the objective of financial planning.

1. How much money is needed?
2. When is the money needed?
3. What is the likeliness that an emergency or other need will come up and the money will be needed early?

Basic Fundamentals of an Investment

When most people talk about an investment they most commonly are referring to a financial decision to commit financial resources to a current use with the expectation of receiving back the financial resources committed as well as a return or reward in the form of financial resources as profit. Investments are generally thought of as involving money but can involve any sort of resource that is of value.



Fundamentals of an investment:

Investments are measured in terms of risk and return. The higher the risk, the higher the corresponding return. Investments are primarily valued and tracked as a function of time and rate of return. The longer the investment takes to yield a return, the longer the rate of return is applied.

Types of Investments:

Investments come in all shapes and size’s and countless different risk levels. However all investments generally fall into one of two different categories:

1. Real Investments
2. Financial Investments

Real Investment

Real Investments involve the commitment of real assets.

Real Assets - These are inputs that can be owned. Do help you understand see the list below of common examples of real assets.

• Property such as real estate
• Equipment and machines
• Labor
• knowledge and education
• Software
• Natural resources like oil

Real Investments are not nearly as liquid able as financial investments. Real investments are used to create real assets that are more valuable then the real investment that were used as inputs.

Financial Investment

Financial Investments involve commitments of financial assets.
             
Financial Assets - These are claims often contractual claims or paper representing the value of a real asset, ore even the claim on the ownership of a future real asset that may not yet exist. Refer to the list of financial assets below to get a better understanding.

• Cash
• Loans or bonds
• Stock or other forms of equity
• Stock options
• Commodity futures

Now if that did not get your blood pumping then you are most likely normal except for the fact that you were able to get through it.

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Pay for Financial Advice

The Key to Financial Planning - Your Financial Objective

Hire Personal Finance Help - Analyzing How and Why to Buy Financial Advice

One of the most obvious personal finance mistakes that I have observed the every day consumer and average Joe make over and over is how they go about hiring the advice of a financial adviser.

When people think of financial advisers or why people need a financial adviser most people will typically think of investing needs and investment planning.

This is, in most cases, why people hire a financial adviser. But in my opinion this should only be one of many reasons to seek the guidance of someone who understands the world of finance and the many many financial products that the every day person come to depend on.

Think about it. Mortgage. Taxes. Real Estate. Mortgage Assistance. Banking. Investing. Large purchases. Loans. Loans, and more loans.

Most people will have someone assist them with the decisions that come with obtaining some of these products and services. However they don't always and they should. Even more importantly people hire the wrong people for the right reasons. The latter has always been and most likely always will be the aspect of financial services and how consumers go about purchasing these financial services.

There are three ways to hire advice in the world of finance. The first and most common is by paying a indirect commission. The second is by paying a direct commission or percentage of the assets being invested or rather managed. The third is by paying a direct fee per hour or unit of time.

Before I get into which one is best let us take a close look at all three ways to hire financial advice.

The 3 Ways to Hire Financial Advice

Indirect Commission

This is the most common. The way it works is a agent helps the consumer select financial products such as mutual funds, loan products, stocks, bonds, annuities, and the like.

The commission is technically not charged to the customer but rather to the company who pays the agent based on what product and what volume was purchased by the consumer. This may sound a lot like how a car salesperson gets paid.

This is an accurate observation.

Percentage of Assets Managed

The way this works is pretty simple and straight forward. A firm agrees to help you manage your money and investments in return for a set percentage of the total assets being managed. So for instance if the firm charges 2% of what ever they manage and you have 1,000,000.00 dollars being managed then that firm will charge 20,000.00 dollars.

This model is commonly used for high end account management and by mutual funds.

Fee per Hour or Unit of Time

This is the same concept as hiring a defense attorney. You pay a fee for every hour that the adviser spends on your account. So if for instance, you hire a firm that charges 200 dollars per hour and they spend a total of five hours on your account then you will get charged 1000.00 dollars.


Which is the Right Way to Buy Financial Advice?

So now that we have taken a look at how each way to buy advice works which one would you choose. Well most of you whether you know it or not hire via a indirect commission.

Is an indirect commission the right way to pay?

As long as you don't mind putting your advisers money and your advisers interests before yours, don't mind paying them to do it, and given that you don't want your decisions based on your needs; then yes this is a great way to purchase financial advice.

Hmmm...

Think about it... you are not talking to an adviser you are talking to a sales person. How can they have your interests in mind if they make money based on what you purchase and you have to purchase what ever they can sell.

When you buy financial advice this way you are not really buying advice.

Is Purchasing Financial Advice Based on a Percentage of Managed Assets a Good Idea?

Though this method has merit I am not sold on the notion. I will say that it can certainly simplify things in certain situations. For instance a manager of a mutual fund will often get paid this way. I believe that if used along with performance incentives it can work for the mutual fund model. However not for personal advice.

There are to many areas where personal interests from the adviser can get in the way. For instance there can be side deals, also there is a conflict of interest when it comes to looking at options such as paying off debt, or whether to use any leverage. This is because using leverage will make the adviser more and paying off debt will pay them less.

Is Paying a Flat Fee per Hour a Smart way to Buy Financial Advice?

Yes.

Paying an adviser a flat fee to advise you what to do with your money is overwhelmingly the best way to purchase financial advice.

Why?

Because it is the only way that does not involve a conflict of interest. The adviser is going to make the same amount of money whether you use all the money to buy this or that or pay off debt or whatever. they are not selling you anything but time and thought. They have an incentive to try and do the best they can so that you will be back next time you need some advice.

Pay someone 200 an hour if you want to know how to invest your money or whether or not to make some sort of large purchase. it just makes sense.

Ironically this is the least used method of purchasing financial advice.

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Reform or Refrain - What Will Become of the Push to Reform the Financial Markets

It is no secret that the financial markets have not performed at there best. The free market by default will always be on the move, sometimes up, and sometimes down.

The last few years has been a bit skewed if we go by the history of the financial markets. We have not seen performance this low since the Great Depression.

Should the government reform the financial markets and current regulatory practices?


The federal government has already stepped in and bailed out or contributed to the financial stability of most of the large financial institutions and banks who are in large part the reason for the economic down turn of the economy. Just as the the government has reasoned that they needed to step in and aid the financial institutions so to do they believe that they need to step in and take a bigger presence as a government regulatory force in the broader financial markets and financial services industry. However as one might imagine there has been some negative feedback from the financial institutions and from many politicians.

Shouldn't the government step in and play a larger role given the fact that they already have stepped in the form of financial aid to these very same institutions? Many say yes. However just the many say no. The argument and rebuttal to this proposal is that regulators and the government will have a negative impact on the markets as they will increase artificial constraints and will increase the degree of uncertainty for investors.

This seems a fair argument as regulatory bodies will make mistakes as they are only human in the end. plus there is also room for the unseen and unintended consequences that seem to always pop up when Uncle Sam gets in the way and these blunders are not easily changed if they don't work. Plus it is arguable to say that the regulatory bodies have done a mediocre job thus far in enforcing the current line up of rules and regulations that are already in place for financial markets and the business world.

On the other hand there does seem to be a obvious problem with the markets at this given point and time. Also to be fair to the regulatory bodies such as the FED and the FDIC there are some loop holes that need to be fixed so that these guys can have the control they need over non bank deposit financial institutions whom leverage up to obscene levels and add systemic risk to the downside for everybody. Such institutions are not subject to the same liquidity or capitol levels that the typical savings and loan bank is held to. Thus these guys potentially can take things to far and as of now it seems as if they have.

Given these above notions I would like to hear what people think. Should there be added regulation to the world of finance?

If yes what do you think should be done?

GM Insiders bail out - Idiot Investors buy Pink shares over the counter

May 2009

This post is just to share the sec fillings of 6 insiders at GM who have bailed on there own company as they see there stock holders getting wiped out. The six insiders dumped all there shares entirely. If you own this stock sell it.

I am not sure why folks seem to feel the need to speculate amongst the pink slip shares that barely exist for a company that is being split up and left with debt while the business side of the company becomes a new entity... yet people still want to buy the over the counter mucus for a dollar or so a share... I don't get it.

That is simply not smart finance.

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