Of all the business relationships you have in your life, there may be none more personal than that between you and your financial advisor. It speaks to both the deeply practical and emotional relationship each of us has with our money. When considering working with a financial professional, there are many questions you should be asking and a number of things your advisor should be providing.
- What investment allocation is suitable for my risk tolerance, current and future obligations and goals?
- Where will my money be invested? With third-party money managers? In mutual funds, ETFs, individual stocks, bonds?
- Why have you selected these investments?
- What are the total fees associated with these investments?
- To what extent will you explain these investments and other choices to me?
It’s important to be completely educated about all aspects of this relationship and that your advisor offer to provide investment education along the way, should you desire. I believe complete transparency in this relationship is paramount to success and that an educated client is a partner in the financial planning process.
If you’re not satisfied with your current relationship with your investment firm due to any of the above factors, call your advisor to discuss them. If you don’t get good answers, it may be time to find a new advisor. Demand full transparency – it’s your money.
Prior Month in the Markets
Given the deluge of corporate earnings, uncertainty in Ukraine/Russia, and the Fed’s continuing policy to taper it’s quantitative easing program, the markets did a whole lot of, well, not much really. We continued our ups and downs as investors tried to figure out the future of interest rate policy, as well as sort through ongoing mixed-economic data. Companies and economists alike blamed any shortfalls in corporate earnings and lackluster GDP growth on the hard winter that just passed, but that excuse goes away as we move through spring into summer.
The S&P 500 and the Dow Jones Industrial Average were essentially unchanged for the month of April, while the tech and biotech heavy Nasdaq Composite lost 3.6%. Investors continued selling high flying tech stocks as earnings were mixed.
Overall, we’ve still not seen a broad-based market correction of 10-20% as many investors are watching for given the age of the bull market going back to 2009. Some feel that as the Fed unwinds its bond-buying program by the fall, we may see a correction then as we move to more normal Federal Reserve policy in which the federal funds rate once again becomes the main tool for dictating economic policy.
Still, the Fed has indicated that even after the end of quantitative easing, interest rates will remain low for some time to come as economic growth remains tepid. As a result, the benchmark ten-year Treasury interest rate fell below March’s close to end at 2.65%.
One-month chart of the 10-year Treasury yield (click here for chart)
Saving for College Using 529 Plans
The degree to and way in which people save for their children’s college education can vary. Some use generic savings or checking accounts or plan to rely on loans, but if at all possible, you should really be taking advantage of a qualified tuition plan or, more formally, a Section 529 Plan.
Investments in a 529 plan grow tax-free, typically in a selection of mutual funds, and the money can be withdrawn tax-free as well, as long as it is used to fund higher education expenses. If you have more than one child, the beneficiary can be changed if the first in line decides, for example, not to go to college or receives a scholarship. Any money not used for higher education expenses may taxed at your income tax rate plus a 10% penalty depending on the circumstances (for example, the penalty is waived if the child receives a scholarship), so it is important not to overfund the plan. To balance that risk, consider those savings with the potential for scholarships, financial aid and other sources that may be used to pay for college.
One of the best things about 529 plans is that there are no limits on contributions (though there are some important considerations), and anyone can fund this type of savings plan for any beneficiary including relatives, friends or even yourself. Note that gift taxes may apply to yearly contributions if the amount, along with other monetary gifts, exceeds $14,000 in 2014. For more information on the plan and the types of expenses that qualify, please see this IRS site and give me a call. I can open this type of account for you, and together we can determine how best to fund it, taking into consideration the number of children or beneficiaries, your time horizon, and how much you’re able to allocate from your income