Warren Ward Associates

At Sixes and Sevens

Any one of several things might come to mind when the number six is mentioned. Maybe you think of it as a common package for your favorite canned beverage, the atomic number of carbon, Bert’s favorite number on Sesame Street or the number of geese a-laying. However I doubt that the number of steps in the classic financial planning process is likely to be among the more obvious answers.

As I have written before, it was not my lifelong ambition to become a financial planner. I made a successful mid-career change from engineer to stockbroker in my 40’s. However, after a few years, found myself increasingly uneasy trying to answer people's investment questions outside the context of their entire financial lives. Understanding that I needed to address those concerns, I left the world of selling investments. After several years of study I became a Certified Financial Planner® certificant with Jalene following soon thereafter. During the course of study, we both became believers in the six-step financial planning process.

One of the most common questions we hear is, “What’s the difference between planning and simply investing?”. Hopefully, this article will shed some light on the issue and maybe even provide an answer. There are certainly some financial questions with fairly simple answers so the entire process is not required for all clients. Still, we utilize it whenever we can since it has proven such an effective way to identify issues and help provide answers.

Here are the steps and some thoughts about how each is applied.

Step 1: Setting goals with the client. We try to learn about a potential client’s current situation but, more importantly, where that person hopes to be in the future. There is just no way to develop a meaningful plan without having accurate information about a client’s long-term goals.

Step 2: Gathering relevant information about the client. We usually do this at the same time as Step 1. We ask each client to complete one or more questionnaires to help us learn more about them. Of course, we also review relevant financial documents.

Step 3: Analyzing the information. After seventeen years in the business, I can confirm your suspicion that every person’s situation is unique. Analysis is required so we can understand a client’s circumstances as well as what resources can be brought to bear on meeting the desired goals.

Step 4: Constructing a financial plan. After we have a clear picture of the situation, we develop a personalized strategy to guide the client in achieving his or her goals.

Step 5: Implementing the strategies in the plan. Usually, plan execution is accomplished jointly. For example, we might review and make recommendations regarding the funding of a college education while the client might begin contributing more to his or her retirement account.

Step 6: Monitoring implementation and reviewing the plan. A plan is of little value without some sort of follow-up. No matter how carefully we plan, life doesn’t always follow the script. We schedule periodic follow-ups so we can evaluate how things are going, which also gives us a chance to be sure nothing significant has changed.

Although managing investments is often the reason people come to Warren Ward Associates, it is only one of the services we typically provide. The six step planning process allows us to learn a great deal about our clients, their immediate situation and their long-term goals. While the process is more time-consuming than simply selling them an investment, we believe it greatly increases the likelihood that our clients will be successful in achieving their goals.

Oh and the sevens mentioned in the title? Well, an investor can always decide to simply depend on luck . . .

Ancora Imparo

At the ripe old age of 87, Michelangelo is said to have uttered the words Ancora imparo, which translate as: I am still learning. This seems a remarkably humble sentiment coming from the painter of the Sistine Chapel, sculptor of the Pieta and creator of many other timeless works of art. It serves as a reminder that no matter how long I’ve been working at investments and financial planning, or how well we do for our clients at Warren Ward Associates, I will always be "still learning."

Following ten years of selling investments as a stock broker, I came to believe that being able to place my clients’ investments appropriately within the context of their entire lives was more important than just picking that day’s best stock or bond. That insight eventually led to the "client first" model under which WWA now practices. Clients pay our fees and we represent them exclusively, never receiving compensation from any brokerage firm, investment manager or insurance company that we might recommend.

As simple as that concept might sound, changing the way we did business required developing some new skills, so I earned my Certified Financial Planner certification in 2001. Becoming a CFP® requires completion of five Master’s level courses (Insurance, Investments, Taxes, Retirement Planning and Estate Planning) followed by a two day comprehensive exam. My associate, Jalene Hahn, had already earned her MBA but was not exempted from taking those same courses as she moves toward her own certification. She sat for the exam last November and we learned this week that she is among the 53% who passed. She will become fully "certified" once she has an additional year of planning experience but, in the meantime, she is adding her varied strengths and skills to the practice.

In addition to the process of earning the CFP® certification, WWA also became a Registered Investment Advisor. This means that our practice is now governed by a different set of regulations than brokers and insurance agents: we are obligated to exercise a fiduciary duty of care towards our clients, just as any physician, attorney or CPA must.

Even though Jalene has most recently been enrolled in coursework, I find that I am learning at the same time she is. In addition to keeping up with the bedrock fundamentals, I must also track the everchanging world of investment management and issues related to college funding, not to mention devising the new strategies which seem to be required following every update in laws and regulations. In addition to the books and magazines which have long been available and the conferences we attend to remain current, the internet now gives us access to a constant flow of data. At WWA, we subscribe to dozens of information sources, both printed and electronic. One positive outcome of this information explosion is that it provides us with numerous perspectives to consider as we try to help people with their financial planning needs. Tracking this volume of data is as challenging as it is necessary. At WWA, we strive to meet that challenge so we can provide relevant and up-to-date advice to our clients and friends.

Because things are always changing and there is so much information available, I am certain, at the ripe young age of 60, that I will never know everything and that I will always be "still learning."

Cui Bono

Cui bono, a Latin phrase meaning "to whom the good?" or "to whose benefit?" might be more familiar to readers of detective fiction as "follow the money". Trying to answer the question of who stands to gain from a criminal act is a staple of both fictional and real life crime solving. It can stand us in good stead in our daily lives as well.

Do you think that Expedia exists primarily to save you money on travel? According to its advertisements, it guarantees the best rates for you but, in fact, Expedia is an e-travel agency. It is paid commissions by the companies to whom it refers your business. In our capitalist society, the situation is pretty much the same wherever you look in spite of marketing which implies something different. "We value you!" may be the truth, at least to some extent, but I think most retailers primarily value our willingness to spend our money with them, not us as individuals.

At various levels, governments are involved in commercial arrangements, too. Perhaps you are already familiar with a government entity selling or leasing something to increase revenues without having to raise taxes. Some examples: 

• The federal government sells rights to use the airwaves for transmitting radio, TV and cellular signals. After being paid for by various businesses, these channels are then used to deliver information. We are either charged individually or advertising is sold to cover the costs plus yield a profit.
• The State of Indiana investigated selling the right to build a private toll road. If the plan had gone ahead as contemplated, the state would have received a cash payment from the developer, who would then build the highway and recoup the investment over time through the tolls charged for driving on the highway. My guess is that similar strategies will emerge in the future.
• Earlier this year, the State of Illinois auctioned off the right to manage its 529 college savings plan. The winning bidder was Oppenheimer Funds which paid Illinois $2.1 billion to operate the plan for the next seven years. How do you suppose Oppenheimer expects to earn that investment back? Do you think fees paid by account holders might be involved?

Warren Ward Associates is part of the world of financial planning and investments which includes innumerable sources of free advice. Here’s the "follow the money" question: what’s in it for them? Do these resources exist to help you make money out of the goodness of their hearts? I think it’s more likely that they hope to increase reader/viewer ship so as to sell more ads. Regardless of how entertaining the TV personality, newspaper column or website appears to be, please remember that their business model requires that they attract attention. Those presenters are only able to offer the most generic advice and they could even be taking an unorthodox or controversial position simply to generate "buzz" and attract a larger audience.

All businesses must operate profitably to stay open, including investment-related ones. Any "free" advice provided is simply being paid for in an alternate way. Your insurance agent and stock broker receive commissions for the investment products they sell you. Your CPA and attorney (and WWA) charge a fee for the advice you are given. In every situation where you are a customer, you should understand exactly what you are buying and what price you are paying for it. As important as it is for fictional and real detectives, following the money also can be a very useful strategy in the world beyond crime solving.

Peter Townsend Got Old

Considering the frequent allusions to the music of the 60’s which appear in this space, it may not be surprising to learn that many years ago I was personally involved in that genre, managing local bands and producing rock concerts in and around Indianapolis. One of the few perks afforded by that job was my exposure to lots of great musical groups. One of my favorites was the English band, The Who. Their guitar player, Peter Townsend, wrote the "rock opera" Tommy, as well as the somewhat less famous My Generation, which includes the line, "I hope I die before I get old".

Despite that lyric, Peter is indeed aging just like the rest of us. In fact, he’s reached the point at which he could begin receiving Social Security payments were he a US citizen. Since he appears to enjoy continued touring with his band and since his music is being introduced to a whole new generation as the theme of the CSI TV shows, perhaps he has changed his mind regarding his preference for an early death.

All of us, of course, have the right to change our minds and I have recently done so about a related issue. For years, I have recommended that my clients not purchase long term care (LTC) insurance. My hesitation didn’t stem from any sense that it was never going to be needed but out of a concern that the insurance companies might not have had sufficient experience with people needing to collect on the policies. That lack of data left me uncomfortable with their ability to price the policies accurately. The last thing I wanted was to suggest insurance coverage which would later need to be re-priced to cover claims, making it too expensive for my clients to keep in force just when it was needed most.

As with most of the decisions we make regarding financial planning, this one has been re-evaluated many times over the years. The most recent review led me to a different conclusion. A few of these policies have now been available for more than ten years and I think that enough companies have enough experience to price them appropriately.

The availability of insurance in its various forms makes financial planning much easier, allowing us to help clients choose which risks to face on their own and which ones to share with a wider group. For example, we rarely suggest a policy offering very narrow coverage like cancer or accidental death. On the other hand, we almost always recommend term life insurance for people with children they plan to educate, especially when one of the parents is actively working at raising them instead of working outside the home. Likewise, we think liability insurance is an important component of protection, as we wouldn’t want an accident to permanently alter a client’s life by requiring a settlement which wiped out their assets.

Just as we have previously recommended the judicious use of insurance in these circumstances, we are now recommending LTC insurance for some clients, depending on their specific situation. As with all forms of coverage, the greater the perceived risk, the greater the cost. Thus older (or less healthy) clients tend to pay higher premiums than younger (usually healthier) ones. The challenge, of course, is to find a balance between buying too early and perhaps having to pay too long or buying too late and perhaps having to pay too much.

Helping to determine a sensible balance between such time and price factors is an element of financial planning that we deal with frequently. Our discussions with clients aged 62 and above now include LTC insurance, especially in cases when we hope to preserve an estate for their heirs. If you are not a client of Warren Ward Associates, you might wish to contact your own insurance agent about this issue. Because new companies are entering this market all the time, we would suggest that you shop for insurance coverage, as we do for our clients.

We believe that a good financial plan is one which provides our clients with options as their lives take different twists and turns. Based on our latest review, we think it may be time for more people to consider LTC insurance.

Pa Cartwright, Financial Planner

When I was younger, perhaps because it was still something of a novelty, I watched more TV than I do now. I always made it a point to catch the new episode of Bonanza, the continuing story of a middleaged widower raising three sons on a ranch out West. Courtesy of the show’s writers, Pa Cartwright was always capable of nurturing the distinct personalities of each son while providing sage advice on a wide variety of topics.

One episode I remember had to do with Pa’s leaving his muscular middle son Hoss in charge of things while he was away. In hopes of teaching him something about problem-solving, Pa gave Hoss a bundle of sticks and told him to break them. Strong as he was, Hoss couldn’t do it. Then came Pa’s lesson. He picked up one of the sticks and handed it to Hoss saying “This time, try breaking them one at a time”.

Looking at things from a different perspective can be an important life skill for any of us. Jalene and I are both Certified Financial Planner practitioners and, as fee-only advisors, are free to suggest the solution we believe to be most appropriate in a given situation, whether insurance, bank or investment-based. Yet, sometimes, the most important service we can offer is simply helping our clients break down complicated problems into smaller pieces so they can be understood, then solved. That might mean mentally separating insurance from investments, college planning from retirement planning or taxes from everything else. It might require the “translation” of what appears to be a financial issue into its component questions about life choices, helping with the clarification of goals.

Pa Cartwright made raising three sons while managing a huge ranch look simple. Somehow he was always able to spend quality time with each of them while dealing with the day-to-day stresses of his work. Of course, TV has very little in common with reality. Every day, each of us must balance the requirements of our jobs with those of our families while still finding time to deal with such things as errands and chores.

When confronted with a plumbing crisis, I think most of us are more likely to pick up the phone than a wrench. The same can apply to personal finances. Whether you are wrestling with numerous investment choices in your 401(k), considering changes in your insurance coverage or wondering how you’ll pay for college, we might be able to help. Warren Ward Associates' slogan is: Financial Advice as Individual as You Are. Over the years, we have found that financial issues have a way of splashing over into other parts of our clients’ lives. If that has happened to you, perhaps it’s time to consider professional help so you can deal with that bundle of conflicting priorities one stick at a time.

Swans a-Swimming

In his 2007 best-seller The Black Swan, Nassim Nicholas Taleb assures us that a pair of pure white swans, each from a long line of pure white swans, can produce a black offspring from time to time. He uses this concept of unexpected black swans to help describe sudden changes that take place in our world, especially in the investment world. He worked as a trader on Wall Street and marveled at the lengths that other traders, not to mention newscasters, went to in trying to explain the generally unexplainable events which affect those markets.                                                          

Virtually no one predicted the fall of the Berlin Wall. Yet, in hindsight, it seems so obvious that we are surprised no one got it right. All sorts of media, from newspapers to websites to TV commentators, offer us regular examples of a headline predicting one thing when, in fact, something else entirely takes place. In my experience, no segment of the media has a particularly good record of anticipating interest rate changes, inflation or market moves even though it seems that, with all the information at their disposal, at least some of them should be capable of greater accuracy. Here are a few predictive comments followed by a quick summary of what actually happened:

• Mid-October 1929 - "Stock prices have reached what looks like a permanently high plateau."

Yale economist Irving Fisher, (just days before the market crash)

• Nov. 6, 1982

  - "Sell all stocks. This is a bubble market, not the normal entrance to a new bull market. The recent rise of 37.1% in the Dow average in 12 weeks is the largest bet Wall Street has ever placed on expected economic recovery. It equals the final blowoff rise between June and September 1929."

Technical analyst Joseph Granville, (preceding the greatest upward market run in history)

• March 17, 1999

  - "How high will the market go? Our calculations show that with earnings growing in the long term at the same rate as the gross domestic product and Treasury bonds below 6%, a perfectly reasonable level for the Dow would be 36,000 -- tomorrow, not 10 or 20 years from now."

James K. Glassman & Kevin A. Hassett, in the Wall Street Journal

(the Treasury bond is now below 4.4% and the Dow is trading around 12,000)                                                                                                                                                                                                                                                                      

Keeping focused on long-term goals is the very essence of financial planning. When we become involved with new clients at Warren Ward Associates, the process of planning their investments begins with getting to know them as individuals, evaluating their experience and trying to gauge their comfort level with investing. It is especially important to us to evaluate how much volatility they might be willing to accept before we prepare a plan. These steps lead us to a personalized balance between stocks, bonds, CDs and real estate for each client. The point of this allocation process? To try to minimize the damage to our clients assets as a result of the black swans which the markets will almost certainly continue to have in store for us.

                                                                                                                      

Although our record on behalf of our clients has been good, success has not come through using special insights to predict what is about to happen. We focus on asset allocation in an attempt to avoid significant losses by hedging against those black swan events. When we are able to successfully protect our clients from the worst of the corrections, then the broad market up-sweeps have the ability to provide reasonable overall returns.

Vilfredo Pareto, Financial Planner

Not long ago, I suggested that TV’s Ben (Pa) Cartwright might have made a good financial planner. In one episode, he offered his son Hoss a helpful lesson in problem solving by suggesting that he break a bundle of sticks one at a time. While the idea of breaking a complex problem down into smaller tasks is a useful one, to some extent it begs the question of which stick to break first. Perhaps Vilfredo Pareto can help us with the answer.

Pareto was born in 1848. The well-educated son of an Italian father and French mother, he is generally considered the first person to state what is now commonly known as the 80/20 Rule when he said "Twenty percent of the population of Italy owns eighty percent of the property". He and many others had expanded upon it by the time I first learned of its usefulness while working as a mechanical engineer in the 1980’s.

As a profession, engineers had become concerned with the level of quality that our plants were producing. We began to understand what now seems obvious: making good parts the first time is almost always going to be cheaper than fixing poorly-made ones later. We learned to conduct a Pareto Analysis and were thus able to rank the various problems from most to least common. That suggested the order in which we would try to solve them, allowing us to make the most impact in the least time. Achieving Six Sigma quality is now the goal of all serious manufacturing operations and Pareto’s techniques are "still a part of the toolbox" as a Six Sigma Black Belt friend recently told me. This type of analysis can be profitably applied far beyond the world of manufacturing. We see it used by businesses of all kinds, across virtually all departments and around the world. In Columbus Indiana, it was recently applied to the "Book Buddies" program which pairs volunteers with poor readers in elementary schools. It is even used by financial planners.

One of the reasons people turn to a professional for financial planning help is that they have become overwhelmed by numerous issues which impact their wealth and their well-being. Some are quite serious, others less so. Yet each problem is clamoring for attention. We often hear that there’s so much going on that no progress is being made on any of them. Although Pareto is not a well-known name in the planning profession, the approach he developed is a useful tool and is often among the first to be employed at Warren Ward Associates.

Our years of experience in financial planning would be of little use to anyone unless we were able to provide individualized solutions in specific situations. While we do hear the same questions from different clients, we rarely hear them asked in the same order, so getting to know people and understanding their specific situation is where all our planning relationships begin. We subscribe to several testing services, including one which helps us understand how our clients’ feel about money and another which helps us evaluate their tolerance for risk. Although we serve our clients in many ways, we really can’t do anything for them until we have learned what is most important to each of them and why.

The challenge of helping people realize their dreams is what brings us to work every morning and keeps us looking to earlier "planners" like Cartwright and Pareto for tools to do the job well.