Russell Bailyn -

In the world of financial planning, a variety of factors may affect the advice one receives from an advisor. I’ll tell you an obvious one: a company which sells their own products. Without volunteering names, you probably will if you haven’t already, bumped into this kind of business. Be aware when meeting with an advisor or broker that does so, that his/her advice may be slanted towards selling in-house products- which sometimes pay higher commissions to the selling broker. Even if current law requires this sort of incentive to be disclosed, good luck reading through and understanding financial disclosure documents.

On that note- I should point out that the best type of advisor to work with, in my opinion, is an independent advisor, preferably somebody with the CFP designation. Independent advisors tend to sell the products and services of tens if not hundreds of different financial services firms. Independent advisors have relationships with wholesalers from a variety of companies who visit the advisor firms with the intention of educating them on new product offerings which may be beneficial to their clients. It’s the job of a good advisor to match up the products and services which are most appropriate for a specific client’s risk tolerance and investment objectives.

Let me break down the commission system a bit further. Financial services companies are aware that many people don’t like to see up-front sales charges and commissions. They have used this awareness to devise different methods of paying advisors which are more marketable. Perhaps a fund will have higher internal expenses, part of which is used to pay commissions and expenses from within the fund’s total assets. This may be preferable for a client who wants to see their full initial investment deposited into the fund. This may be misleading however- as paying an up-front sales load will often be cheaper over the long run. In fact, if you qualify for breakpoints (lower commissions as your investment increases) up-front sales charges will nearly always come out cheaper.

The most ethical approach as I see it, and the way the financial planning industry has been swaying, is fee-based advising. Why? There is rarely an incentive for a specific product or service to be pushed in your direction. It is less likely you’ll encounter hidden sales charges, and often you can avoid transactions costs (such as trading stocks) as well. Fees are usually a percentage of the total portfolio amount. For example, 1.5% per year is a fairly common advisory fee. In this example, if a $100,000 account increases to $120,000, the advisor’s fee increases from $1,500 to $1,800. If the account dropped to $80,000, the advisory fee would drop down to $1,200.

The fee could also be hourly. Some people would like a one-time portfolio advice and will pay $150-$300/hour to get it. Then, they can implement the advice at their own speed and with their own methods. This could be a great option to take as well if you maintain even a little do-it-yourself attitude.

I think the logic behind the fee-based approach is fairly obvious and will eventually appeal to more and more people. Part of the problem is that the industry doesn’t ‘rush the process’ because they often make money from it. Those are my thoughts on the fees vs. commission debate. If you had an experience you’d like to share or have a different opinion, please feel free to share.

Russell Bailyn
Wealth Manager
Premier Financial Advisors
14 E. 60th St. #402
New York, NY 10022
(212)752-4343 *31
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 05:30 PM | Permalink | Comments ( 6 ) | TrackBacks ( 0 )

Many people don’t understand the differences between stocks and bonds. It occurred to me recently that even those who invest in these types of securities through either personal investment accounts or retirement plans can’t really articulate what the differences are. I’ve noticed that people have a general idea- such as associating stocks more with risk and bonds more with safety, but that’s about the extent of it. While both are types of investments which can earn you money, they are different as night and day in terms of the potential risks and rewards.

When you buy a share of stock, you are actually taking ownership in the company in which you are investing. For example, consider the hypothetical example of Russell’s Fast Food Palace. If it were a publicly traded company divided into 1 million shares and you bought 1,000 of them, you’d be a .001% shareholder of the Fast Food Palace. As a result, you’d share in both the profits and losses of the company throughout the years. You’d probably want to pay attention to news that affects both the Fast Food market and the economy in general. One of the potential risks in buying 1,000 shares of the Fast Food Palace is that it will experience some sort of problem, such as people realizing fast food is very unhealthy. If this news was publicized enough, less people might come into the stores. This could potentially decrease the company’s revenues and, ultimately, the stock price would decline. The opposite would be if my food became so popular that every airport in the United States decided to put a Fast Food Palace inside. This would be incredible news for shareholders because it would generate much more foot traffic, higher revenues, and higher profits.

A bond does not represent ownership in a corporation. Let’s say Russell’s Food Palace wanted to raise money to open 10 more stores, but they didn’t want to divide up the company any further. They might sell bonds instead of issuing stock. Rather than owning a piece of the company, the bondholder becomes a creditor of Russell’s Food Palace who will be paid back over the life of the bond. The difference is that the return you will earn on your money as a bondholder is generally a fixed percentage such as 5% or 7% annually. If the bond lasts for 10 years, you will get interest each year for the 10 years, and then your principal investment returned to you at expiration date. If you buy a bond from a small, risky company, there is the possibility that the company will go under and you’ll never see some of your interest payments or principal investment ever again. This is rare however, and it’s more likely, in the short term, to lose money in the stock market than the bond market.

Which is better investment? Well, it totally depends on where you are in life and what your tolerance for risk is. I’d rather own something for a period of years in hope for growth, then lend somebody $20 and know I’m getting $25 back in 5 years. Thus, I would probably consider myself more of a stock investor. However, the bondholder may very well feel safer and more secure with his/her investment choice. The ideal long-term portfolio would probably have a little bit of each.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E 60th St, Ste 402
New York, NY 10022
(212)752-4343 *231
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 05:41 PM | Permalink | Comments ( 114 ) | TrackBacks ( 0 )

The cost of college funding has taken center stage for financial planners in recent years. The reason for this is the dramatic increase in cost, averaging 8% annually for the past 30 years. The average cost for a private college education, including tuition, housing, books, and spending money is approximately $157,000 for a 4-year private university. The costs for a state school are more reasonable, but still alarming at $68,000. These figures could be lower if alternate plans for housing are investigated. While scholarships, grants, and both state and federally funded loans are available to students and their parents, some people like to pay in advance. For this reason we investigate the savings plans which are most conducive to meeting college costs.

Tuition Stabilization Programs

Some schools will offer the rate for the first year of student’s education for all four years if the sum is paid up front. For example, if tuition for a school in 2005 is $21,000, 2006 is $22,500, 2007 is $24,000 and 2008 is $25,500 – a parent could offer the lump sum of $84,000 (4 x $21,000) rather than $93,000 over the course of four years. This is certainly something to consider if you can gather the lump sum.

529 Plans

529 plans are state-based tax-deferred savings accounts. The administration of these plans may vary from state to state but all have several things in common. Most importantly, they allow for larger amounts of money to accrue tax-deferred if used for educational costs than any other college-savings investment vehicle. Generally, although depending on the state of origination, one can contribute up to $11,000 annually or more to a 529 plan. Further, parents control the distribution of money from 529 plans rather than their children which allows for greater control. Any money paid into a 529 plan grows tax-deferred and will incur no penalty when withdrawn if used for qualified educational costs. This is a provision within the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Another great provision of this act allows the money to be transferred in some situations if the person originally designated to receive the money ends up not needing it. In an emergency, the money is still accessible to the parents and contributors of the plan, but a tax-penalty will certainly result.

Coverdell IRA’s

You can’t save quite as much money in a Coverdell IRA as you can in a 529 plan, but you can still enjoy tax-deferred savings with them. The annual contribution limit for Coverdell’s is $2,000 and withdrawals can be used to pay for any qualified educational expense, not just college.

Custodian Accounts (UGMA & UTMA)

If you’re really ahead of the game, you should also consider how you plan on gifting/giving the funds over to your child to pay for his/her college education. It’s generally a good idea to have funds registered to the beneficiary rather than the adult because of the (presumably) lower tax rate of the child. This can be done under custodian accounts, where the parents contribute money into, and control an account, for the benefit of the child. These custodian accounts generally fit under individual state laws of the Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). The disadvantage to these sorts of accounts is that the beneficiary must be given the right to possession of the property upon reaching age 18. Occasionally, a child will receive this money and choose not to use it towards college. This can happen and should be considered in setting up these sorts of accounts.

Trusts

A trust can also be established to take advantage of the $11,000 annual gift tax exclusion. These terms of these trusts are stated by IRC Section 2503(c), which states that “a gift to an individual under 21 will not be considered a gift of a future interest as long as the property and its income are payable to the child at 21.” The two popular trusts for funding education costs are the current income trust and Crummey trust. In the current income trust, income out annually must go the beneficiary with no control rights for the trustee. This is a nice benefit for the people contributing money into the trust. The money can sit in the trust with no stated distribution age. Under the Crummey trust, gifts can be made for the benefit of the child going to college without tax implications or liability under the trustee’s estate. This ensures that the money get used for the designated beneficiary. One problem with the Crummey is that the trust itself may be responsible for paying some taxes.

Retirement Plans

Often, a provision will exist under a parent’s retirement plan which allows money to be withdrawn for qualified educational expenses. This can be done without incurring the usual 10% penalty (plus taxes) for cracking an IRA before age 59 ½. Look into the details of your plan to see if this is an option.

Russell Bailyn
--
Wealth Management
Premier Financial Advisors
14 E. 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231

Securities and certain investment advisory services offered through: FIrst Allied Securities, Inc., a registered Broker/Dealer. Member: NASD & SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 06:02 PM | Permalink | Comments ( 8 ) | TrackBacks ( 0 )