Basics for Financial Caregivers

November 21, 2016

If you’ve ever had to manage someone else’s money, you know it can be highly stressful. The responsibilities for managing a parent or other family member’s finances may have fallen on your shoulders suddenly or perhaps you had time to prepare to be a financial caretaker. It might be a responsibility you don’t even want or feel equipped to handle. Here are some resources to learn more about what your responsibilities entail and where you can turn for help.

What it means to be a fiduciary

Whether you have a power of attorney for finances or are a court-appointed guardian, a trustee, or a government fiduciary, you are required to act in the best interest of the person whose money you are managing. That’s called being a “fiduciary,” and it comes from the Latin word, “fiducia,” meaning trust. A fiduciary must act for the benefit of another person in a financial relationship and not for their own personal gain. The four basic duties of a fiduciary for a parent (or other person) are:

  • Act in your parent’s best interest;
  • Manage your parent’s money and property carefully;
  • Keep your parent’s money and property separate; and
  • Keep good records.

The first thing you must do is clearly understand the scope of your new position. Practically speaking, you’ll need to be very careful to follow the rules. For help, the Consumer Financial Protection Bureau (CFPB) offers guides for four types of fiduciaries managing someone else’s money. They can all be downloaded here.

What’s a power of attorney?

A power of attorney for finances is a legal document that gives someone (called the “agent”) the legal authority to make decisions about your money and property. Generally, that legal authority kicks in when the person who granted it is sick or injured. CFPB help for agents under power of attorney can be downloaded here.

What’s a court-appointed guardian?

If a parent or other family member with diminished capacity has not made advance plans via a power of attorney and a judge finds that the person cannot manage their money and property alone, it may be necessary to ask the courts to intervene. Different states have different names for this, but the person appointed to take financial authority is often called a conservator or guardian. CFPB help for court-appointed guardians of property or conservators can be downloaded here.

What is a trustee?

A trust is a fiduciary relationship in which a person gives another person, the trustee, the right to hold title to property or assets for the benefit of a beneficiary (or beneficiaries). The grantor (e.g., your parent or other family member who sets up the trust) transfers money and property into the trust, which lays out the circumstances under which a trustee can step in to manage property and pay bills when the grantor is no longer capable. CFPB help for trustees under revocable living trusts can be downloaded here.

What is a government fiduciary?

A government agency may appoint someone to manage someone’s benefits if that person needs help. That person only manages the recipient’s benefits checks but not other financial affairs. The Social Security Administration calls that person a representative payee. The Department of Veterans Affairs calls that person a VA fiduciary. CFPB help for representative payees and VA fiduciaries can be downloaded here.

Look for signs of financial scams, fraud or abuse

Be on the lookout for sneaky business when you take over the finances of an older parent or family member, especially if it’s sudden or unexpected. Do you or your parent think that there is some money missing? Has your parent tried to send money to someone you don’t know? Are they not able to pay a bill they would normally pay, such as for the mortgage or electricity? Has a caregiver been informally handling their money or bills without full disclosure or legal authority?

Saying “yes” to any of those questions could indicate potential problems. As a fiduciary for your parent, be aware of financial scams and take steps to prevent them. Download the CFPB’s guide to preventing financial exploitation here.

Managing money for a parent or family member can feel like a huge responsibility, but it’s one you don’t have to face alone. Local and state agencies can also help provide resources, referrals, best practices and training. Start with the CFPB guides mentioned here and your employee assistance program to steer you in the right direction.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

 

 

 

Don’t Let Financial Advisor Speak Confuse You

April 29, 2016

“You have to get off the plane. I have the feeling that something is wrong with the left phalange”… “Oh my GOD…there’s NO phalange!”

That was Phoebe from Friends talking about her fear right before a plane took off. She had no idea what the parts of the plane were called and picked a fun word to say. Having broken a few phalanges in my life, I learned that word was a fun one in my youth. But what’s not so fun is having a professional, in any profession, talk to you in words you may not fully understand. When I’ve busted up parts of my body, I’ve asked the orthopedic surgeon to “dumb it down” a bit for me and explain the surgery in clear and simple terms.

When it’s your health or your money at stake, don’t be afraid to ask for an explanation of terms in real English, not industry jargon, so that you can make informed decisions. Recently, I had my kids (17 & 14) listen to a webcast about the “basics of investing” given by a local financial advisor. Here are some terms that the advisor dropped during the webcast that he thought everyone on the webcast would understand, but instead they had him lose kids who hear their dad and his coworkers talk about financial planning on a fairly regular basis:

Asset Allocation: This advisor must have used this term about 20 times and spoke of it as though everyone in the room would understand it. A few people did, but at one point a participant asked him what that meant and my kids said “Thank you!” very quietly. They have gone to my office and heard my end of work-related phone calls since birth, but they were confused by this one. The advisor believed it was universally understood. Asset allocation is simply how your money is divided between different types of investments like stocks, bonds, cash, real estate, etc. .

Diversification: This one goes hand-in-hand with asset allocation. Diversification simply means not having your eggs all in one basket. What diversification ISN’T is owning 6 different CDs at 6 different banks or 5 different S&P 500 (is that jargon, too?) index funds.

ROI: The advisor talked a few times about meeting with your advisor (who he hoped would be him!) to review your ROI frequently. My kids didn’t realize it was a 3 letter acronym. One thought it was something like “Ahroweye” and they had never encountered that word before. ROI, for those who aren’t sure, is “return on investment” or in English – “how much money did I make?”

Fiduciary: The advisor mentioned that he always acts as a fiduciary for his clients. That made me smile, but I know what that means. He talked about being a fiduciary about a dozen times, but never took it a step further to explain what that meant. After the formal presentation, one of the participants asked what that meant because he had said it so often. Sadly, most of the participants dropped off before he explained that a fiduciary MUST legally put his clients’ interests first, rather than his own.

It’s sad that this concept has a term that requires it to be done. Most clients of financial advisors would be shocked to know that the advisor isn’t required to put their interests first in most client/advisor relationships. That’s the way the world should work, but that’s not the way it actually works…unless the advisor is acting as a fiduciary. This is a very important term that the advisor simply assumed that the audience would understand.

There are a whole lot more terms that I hear advisors use with regularity that the general public wouldn’t understand initially. I will throw some more of them out there in a future blog post. Whether you’re talking about phalanges, uvulas, or hedge funds, the key is to make sure that the professional having this conversation with you slows down and makes sure you understand and don’t allow yourself to say “yes” to a surgery or an investment until you are completely confident that you have all the information you need to make the best decision possible.

 

 

The F Word In Financial Services – And Why You Need To Know It

April 04, 2016

Should financial advisors have to act in the best interest of their clients? Absolutely yes, according to the U.S. Department of Labor. The Office of Management and Budget will soon release the final version of the DOL’s fiduciary rule, which will require more of those who provide retirement investment advice to put their clients’ best interests first by expanding the type of retirement investment advice covered by fiduciary protections. What does this mean, and how will it impact employees saving for retirement?

The term “fiduciary” comes from the Latin word, “fiducia,” meaning trust. A fiduciary must act for the benefit of another person in a financial relationship and not for their own personal gain. Fiduciaries must disclose all conflicts of interest, and have a legal obligation to take into account the beneficiary’s circumstances, goals, risk tolerance, time horizon and investment experience. In other words, when you hire a fiduciary, he or she is legally and ethically required to act in your best interests.

The practical implication of this is that when choosing between two otherwise very similar investments, a fiduciary would choose the one with the lower costs. This is very helpful as the structure of much of the financial services industry is full of inherent conflicts of interest that don’t always favor consumers. A fiduciary can’t charge you ridiculously high commissions on an investment just because they have a mortgage to pay on their second home or their broker-dealer has a current sales promotion with a favored mutual fund company.

But wait…Aren’t all financial advisors supposed to do that anyway? Not to the same extent.

Many financial advisors operate under something called the “suitability standard,” which states that the advisor must have a “reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through reasonable diligence.”  This is why a financial advisor can sell you a mutual fund with a 4% up front sales charge, recommend investment strategies with lagging performance or encourage you to roll over your 401(k) into a higher fee account when you leave a job. Fellow Financial Finesse planner Erik Carter wrote about this conundrum for financial advisors recently in his Forbes column.

Thankfully, there are some financial advisors already follow the fiduciary standard, such as registered investment advisors (RIAs) and certain retirement plan advisors under ERISA, the law that governs employer-sponsored retirement plans. Fee-only financial advisors who are members of the National Association of Personal Financial Advisors sign a Fiduciary Oath as part of their membership. According to the CFP Board, “CERTIFIED FINANCIAL PLANNER™ professionals providing financial planning services also must abide by the fiduciary standard,” acting “solely in the client’s best interest when offering personal financial planning advice,” and the Board has been very active in promoting adoption of the DOL rule and a uniform standard. However, some CFP® professionals work for big financial services firms who have not yet adopted the standard. So what is the new DOL rule likely to mean for retirement savers?

Lower fees

More types of retirement investment advice are covered, including for IRAs and individual work-sponsored retirement plan accounts. This could mean that certain types of investments are less easy to justify selling to retirement investors, such as high fee mutual funds, and may put downward pressure on fees overall. The DOL estimates that expanding who must provide fiduciary advice will save investors up to $40 billion in fees over the next ten years.

Less pressure to rollover your retirement plan to an IRA

According to a recent Wall Street Journal article, the new DOL rule will make it harder for advisers to recommend a rollover of your work-sponsored retirement plan if you leave your job, “as they will have to clearly document why it is in a client’s best interest. Additionally, once the money is in an IRA, advisers would generally have to avoid payments, including commissions, that create incentives for them to select one product over another.”

Rebuilds trust and confidence

The most consumer-friendly aspect of the expanded fiduciary rule is that it aligns the interests of retirement financial advisors and their clients. This eliminates conflicts of interest and gets financial advisors and clients on the same side of the table when it comes to retirement investing. If you know that your advisor is legally looking out for your best interest and not just looking to make a sale, this makes it more likely that you’ll consider his/her advice carefully.

More transparency should rebuild trust and confidence in financial advice. That is good for investors and good for financial services. The DOL rule has prompted the SEC to begin looking at adopting a Uniform Fiduciary Standard for all investment advice, not just retirement advice.