TheMoneyGeek Unplugged

Are you thinking about loaning to or borrowing money from a friend or family member?  Perhaps you’re considering co-signing a loan for someone.  Maybe you should reconsider and make a gift instead.

While sometimes you don’t have much of a choice, loaning to or borrowing money from family or friends is fraught with problems.  The transaction immediately changes the dynamic of the relationship because you are no longer just friends or family members; you are now entwined in a business transaction.  This is a business transaction that probably doesn’t observe many, if any, of the formalities of business loans, lest those formalities taint the relationship.  You’ll make excuses like “She’s my friend” or “He’s family, we don’t need formal documents, I trust him.”  Oh but you do.  You really do.

Sure, while payments are being made on a timely basis and everyone is playing by the rules, everything’s just cool.  But once a payment is late, or not made at all, both parties begin to feel uncomfortable in each other’s presence.  Should you say something, ask about the money, or should you just wait a few more days?  Sure, he was just too busy, and probably forgot.  The lender starts making excuses for the borrower so she doesn’t have to confront him.  Then the borrower loses his job, has a catastrophic loss, or otherwise falls ill.  Days turn into weeks, and weeks into months, and maybe into years, but no payment surfaces.  The lender musters up the courage to mention something about it at one point, and the borrower offers excuses for not paying, and promises to pay soon.  You both feel bad about having to discuss it.  The promised day comes and goes without a word or a payment.  The borrower starts to avoid the lender.  Resentment starts to fester.  A confrontation eventually ensues; it’s not good.  The relationship is forever tainted, both parties are resentful.  The borrower is resentful because he can’t believe that the lender doesn’t trust him long enough to pay her back.  The lender is resentful because she trusted him to keep his word, pay on time, and avoid any confrontations.

The above scenario plays out quite a bit, I’m sure.  People want to believe that their friends and loved ones don’t need written documents to pay back money they owe.  They want to believe that life isn’t messy, that the borrower will be healthy and fully able to pay them back with no hassles and no delays.  But that’s not realistic.  Lives change, people change, they move, they lose jobs, they change relationships, and, when they get into trouble, justify why they should not have to pay the money back.  “He doesn’t need it”, “I did her so many favors”, “I’ve fallen on hard times, so I’m sure that she understands” are a sampling of the justifications people use.  In many cases, they don’t take the time to talk to the lender to try and work it out.  Instead, they avoid the subject, hide, and hope the problem will just go away.

In most cases, it simply makes more sense to just give a gift to the friend or family member and not expect repayment.  Whether we’re talking about $20 or $20,000, you really have to ask yourself what would happen if you loaned the person the money and they did not pay it back.  Depending on the amount, you can probably count on the fact the the relationship is forever tainted, if not over.  So when that friend or family member asks to “borrow” some money, depending on your financial ability and the amount requested, you might just want to give it to them and tell them that you don’t expect repayment.  If they do repay it, then great.  If they don’t, then you weren’t expecting repayment so the above scenario does not play out.  For smaller amounts, this just makes sense.

If you’re the borrower, then also think twice about asking a friend or family member for money.  If a bank or other 3rd party lender won’t loan you the money, there’s a good reason for it: they probably believe that you’re just not going to be able to pay it back, and therefore you’re not worth the risk.  Going to a friend or family member for the money just puts them on the spot, and sends the message that although you weren’t a good enough credit risk for a legitimate lender, that they should trust you to pay them back.  That’s not fair to your friend or family member.

Similarly, if someone, or anyone, asks you to co-sign a loan, don’t do it. Ever.  Odds are very high that you will end up paying off the debt.  Again, the bank is saying that the borrower’s credit is not good enough to get the loan, and therefore they don’t believe that the borrower would be able to pay it back.  So having a qualified borrower co-sign it just means that the co-signer is equally liable for the loan, and the lender can go after her for the full amount when the primary borrower does not pay.  Sometimes the co-signer doesn’t find out that the borrower has defaulted, especially if it’s a long term loan and the co-signer has moved or changed phone numbers and cannot reach the co-signer.  By then, the co-signer’s credit record is tarnished and collection agents are searching for her.

If you must loan friends or family a rather large sum of money, then you have to protect your family and yourself.  Once you are married or have kids, you have a primary responsibility to look out for their best interests and ensure that they can recover the money if something should happen to you.  If the borrower balks at using paperwork, then you already have your answer and have just saved yourself a bit of money and headaches down the road.  So here’s what you need to know to do it right:

1. Make sure that you draw up the proper loan paperwork.  Get legal help to draft the documents, especially if collateral or real estate is involved.  Any office supply store can provide a simple loan form, or search for one on the web.  For a small fee, go to Virgin Money to set up the whole thing.
2. Charge a reasonable rate of interest.  This is an IRS requirement for loans between related parties, or they will impute additional taxable interest income to the lender, and the borrower will likely end up with more non-deductible interest expense.  Go to the IRS web site for more information about applicable federal rates and loans between related parties.
3. Spell out as many of the terms of payment (time, place, form) and remedies for default in the loan documents.
4. Follow up and communicate on non-payment early and often.  It’s better to stay on top of it and let the borrower know that you still expect payment.  Seek legal advice about collection rights and responsibilities if necessary.

When it comes to loaning and borrowing money between friends or family, learn to just say no if you value the relationship.  Perhaps you can help the would-be borrower by pointing them to other peer-to-peer lending sources such as Virgin Money, Prosper, or Zopa. (1)   If you end up with a deadbeat borrower, then you’ve probably lost a friend or close relationship in addition to your money.  Alas, this is the price of mixing friends and money.

(1) I have not performed any due diligence on the the listed peer-to-peer lending sites and cannot vouch for their services.  TheMoneyGeek does not endorse them nor receives any compensation for mentioning them.

St. Petersburg Florida – The last day of the NAPFA 2009 Investments Conference finally brought warmer temperatures to go along with the beautiful Florida sunshine we’ve been seeing; of course, it showed up just in time to for us to head home.  The day kicked off with a presentation by Moshe A. Milevsky, Ph.D, Associate Professor of Finance at York University entitled “Are You a Stock or a Bond?” The quirky title notwithstanding (it’s his book title), this presentation proved to be today’s highlight and perhaps the highlight of the conference.

Moshe has a dynamic presentation style that makes you want to sit up and pay attention.  As he flashed numerous press clippings of more employers dropping defined benefit plans (estimated to be one large company freezing its benefits every 10-14 days), he explained how we are all becoming responsible for creating our own personal pension plan.  With longevity risk increasing every day (over 2 million people in the U.S. are over 90 years old), companies are turning corporate liabilities into personal liabilities under the guise of increasing shareholder value.

Moshe went on to explain that, for most of our lives, the most important asset on our personal balance sheet is often never listed or estimated–that is, our human capital or earning capacity.  When we are young, our human capital far exceeds our financial capital.  As we age, our financial capital begins to exceed our human capital until we retire and rely exclusively on our financial capital.  In asking “are you a stock or a bond”, Moshe encourages us to try to estimate the value of our remaining human capital and attempt to classify it as a stock or a bond, and factor it into our asset allocation.  Depending on the nature of your work, you may classify yourself as a bond (e.g., a tenured professor) or as a stock (e.g., an investment banker in this economic environment).  He goes on to explain that we often ignore this asset in our portfolios to our detriment, even though we may classify defined benefit pensions as fixed income instruments.   In addition, workers often over-invest in sectors or industries they know well (e.g., investment bankers investing in financial stocks), when they should really diversify to sectors they don’t know much about (e.g., technology.)

Next up were Paula Hogan CFP®, CFA and Scott Witt, FSA, MAAA to co-present “Income Protection – Immediate Fixed Annuities vs. Variable Annuities with Living Benefits”.  The two had worked up an extensive comparative case study using a 60 year-old male investing in a 15-year period certain immediate annuity (with inflation protection) versus a variable annuity with guaranteed living benefits of 5%.  The retiree invested 20% of his portfolio in the annuity.  As you might expect, the conclusion was that the benefits of the 15-year period certain annuity were greater than the variable annuity even though the variable annuity had the potential to generate far greater income for the retiree.  Paula explained that “most people care about maintaining their standard of living more than the wealth that they accumulate.”

Scott MacKillop of Frontier Asset Management got the next to last presentation slot and discussed “Outsourcing Investment Management”.  As you can imagine, he discussed the many advantages of outsourcing and the CEG Worldwide studies which concluded that advisors who use turn-key asset management programs (TAMPs) generally have more revenue, better margins and better results.  Scott cautioned advisors to look to see who funds these types of studies and make sure that they’re not funded by companies that have a vested interest in promoting investment management outsourcing.  He also observed that many TAMPs are pretty much available for sale even before they start business, citing the example of Genworth Financial purchasing two large outsourcers recently.  So obviously you want to ensure that the provider you may be considering is not just setting up shop to sell itself in short order.

The conference ended on a high note with a panel discussion entitled “Comparing Investment Management Procedures” including Cheryl Holland of the Abacus Planning Group, Janet Briaud of Briaud Financial Advisors, Frank Moore of Vintage financial services, LLC and moderator Palmer Jones of Palmer Jones & Associates, Inc.  Palmer peppered the panel with various questions about how they run their investment management practices including the type of research resources they used, the software employed, their investment philosophy, and their asset allocation approach amongst others.  I was surprised to hear that Janet had pared down all her clients’ allocation to equities to around 25% in 1999 in anticipation of a long bear market.   I was equally surprised that she had done that with all of her clients, young and old.  Her thinking was that a downturn was coming and of course, it did happen, and she admitted that perhaps she was a bit early.  At this point, Janet has sold off all Treasuries given that she believes that the downside is far greater than the upside.

Some of the reading resources the panel used in their practices included The Economist Magazine, Financial Times Newspaper, John Mauldin’s Frontline Thoughts, Woody Brock’s Economy Newsletter and Dan Ferris’ Extreme Value Newsletter.  All of the panelists indicated that they read for about two to four hours per day to keep up with changes in the industry. “What may be more important is what you don’t read” added Janet.  Most of the panelists acknowledged using Morningstar Principia or Workstation for fund research.  Palmer indicated that he used the Investors FastTrack system, but did not elaborate.

The interesting question came at the end when Palmer asked the panelists about their worst and best decisions made in their firms.  Cheryl said that the worst decision she probably made was to add certain asset classes too early, or perhaps before she had performed adequate due diligence on them.  Her best decision was to hire a Chief Investment Officer and purchasing iRebal.  Frank said that his worst decision was probably to not pay enough attention to the cash situation, that is, letting his clients manage their own cash needs in certain ways.  Janet indicated that purchasing a closed-end tax-free bond fund at the wrong time was probably her worst decisions.  All agreed that they everyone in this business makes mistakes; the key is to make more good decisions than bad ones.

I would rate the Conference as a great success and want to thank the Committee and the NAPFA staff for putting so much time and effort into putting it on.  While I had hoped for a bit more nuts and bolts “how-to” sessions, I was pleased with the conference.  I hope that they decide to put it on again next year, and maybe, just maybe, it will be a bit warmer.

St. Petersburg Florida – Day two of the NAPFA Investments Conference brought a parade of presenters, some better than others.  Here are highlights from the sessions that I attended:

The first session I attended, “Sharing Investment Research Resources” was put on by conference chair Carolyn McClanahan and member Nancy Bryant.  It seems that they, along with three other NAPFA members, have been sharing mutual fund research responsibilities and picks.  Each member has a particular sector of mutual funds to research and report on via a monthly one-hour conference call.  One member maintains the list of preferred funds and they all weigh in on the choices.  No one member is bound to use all the funds, and anyone can keep any fund that is dropped from the list.  The benefits in time and effort saved is obvious.  The purpose of the presentation was to encourage the formation of more groups of five around the country.  Watch for further details to come from NAPFA in the near future.  A conference call is planned along with the maintenance of a list of interested members.

Next I enjoyed a lively presentation by Doug Poutasse of the National Council of Real Estate Investment Fiduciaries entitled “Direct vs. Indirect Investments in Real Estate”.  Doug mostly discussed commercial real estate and the many ways to invest in them: directly, via REIT’s, via open-end funds, and via closed-end funds.  Closed-end funds, as you might imagine, are the least liquid of all types of real estate investments and keep your money invested for as long as they need it–there is no set timetable for return of your funds.  Open-end funds allow you to get your money at certain intervals, though they are less liquid than direct investments in real estate.  That was a surprise to me since I would have thought that direct investments were the least liquid of all.  But liquidity does not necessarily equate to profitability–you can get out anytime, but at what price?

After a break, Rudy Aguilera of Helios LLC presented a fast paced “Insulating Your Clients from Volatility.”  Rudy discussed how using options can protect the downside risk of many portfolios at a very low cost.  With several examples, he showed how porting just a fraction of the investment can improve the return while reducing the volatility of the overall investment.  I can’t profess to have understood everything he explained, but several of the examples made sense.  He also showed an example of how he could legally convert a long term capital loss into a short term capital loss using the wash sale rules to your advantage.

Our (rubber chicken) lunch presentation by Michael Sharmer of Skeptic Magazine did not disappoint and was the highlight of the day.  Michael gave a lively presentation about human behavior and how we tend to follow the crowd and how easily our brains can be primed to give the desired results.  He demonstrated his points with numerous multi-media examples showing, for instance, how our extreme focus on one thing can lead us to literally miss the gorilla in the room.  In one example, we were asked to count the number of rebounds made by a pair in a video wearing white shirts.  While that occurred, a man in a gorilla suit appeared and danced across the screen for several seconds, but most of us didn’t even realize it because we were focused on counting rebounds.  At a minimum, it makes a convincing case why texting while driving is a bad idea.

“Building Your Own Alternatives Fund” was a panel discussion presented by Giles Almond of Matrix Wealth Advisors, Sheila Chesney of Chesney & Company, Brian Farmer of Hirschler Fleischer, and  Jonathan Self of Compliance LLC.  The panel discussed the advantages of and the due diligence that goes into building your own pool of (say private equity) funds ultimately managed by a registered investment advisor.  Since most clients don’t qualify for private placement of equities due to high minimums, this can be a way for firms to offer these alternatives to your clients.  The work involved was by no means short or easy.

Continuing the alternative investments theme, Sheila Chesney continued with her presentation entitled “A Roadmap for Investing in Alternative Assets” and described how her firm went about developing their own alternative investment fund.  “The affluent are not looking for just another mutual fund shop” Sheila explained.  The key here is to perform extensive due diligence, diversify amongst alternate investments, and educate clients about the risks involved.  “And just because it’s new and different doesn’t mean that it’s necessarily riskier.”  Sheila stressed that setting up one is in no way a turn-key solution.

The day wrapped up with a nice reception at the St. Petersburg Museum for Fine Arts.

Please come back tomorrow for highlights of the third and final day of the conference.  For live updates, please follow my Twitter feed.

On a blustery cool day in St. Petersburg Florida, as the nation got ready to inaugurate a new president, a couple hundred members of The National Association of Personal Financial Advisors (NAPFA) gathered for their first ever conference dedicated exclusively to investments.  Chaired by Carolyn McClanahan, the 2009 Investments Conference is also one of the first conferences that was mostly coordinated by NAPFA staff with the help of the committee.  All indications are that they’ve put together a winning lineup (see agenda).

Held at the historic Renaissance Vinoy, two three-hour pre-conferences kicked things off: one was a bond investing workshop and another entitled “The Business of Managing Money”.  I attended the bond investing workshop presented by David Summers CFA,  Managing Director of YieldQuest Securities.  The material flew by so fast that it probably would have taken two days to cover the material adequately.

Despite being a CPA, I never realized that municipalities actually issue fully taxable municipal bonds (that is, not just subject to the alternative minimum tax.)  David suggested that this is an excellent time to be investing in investment grade municipal bonds, though his (very expensive) Bloomberg terminal gave him more data on muni’s than we could ever get our hands on.  He also cautioned us to watch out for certain exchange traded funds (ETFs), specifically some commodity and currency funds, that might not be issued by registered investment companies, and may surprise investors with a partnership Schedule K-1 rather than a 1099.  As always, read the prospectus prior to investing to avoid surprises.

On such a historic day in our country, it would have been a shame to miss the inauguration of President Obama.  There was no need to miss it since the committee factored this in and set up lunch in a room with a large screen for everyone to watch.  I don’t have to tell anyone who watched it how special and moving President Obama’s speech was.  I felt so proud to be an American on this very emotional day for our nation.

Next up, with a tough act to follow, was Zanny Minton-Beddoes, Economics Editor for The Economist Magazine speaking on the economy after the credit crunch.  Even in her heavy British accent, Zanny’s message could not disguise the somber truth about the grim economic outlook for 2009 in the United States and around the world.  While far from Great Depression conditions, many statistics point that industrial production is way down, unemployment is way up, and global trade will contract for the first time since 1982.

As always, choosing between breakouts is always tough when you have two great topics: “Investment Opportunities in Microfinance”, and the one I attended, “Navigating the ETF Landscape” presented by John Hyland, who is Principal and Business Development Officer with Barclays Global Investors iShares division. While presenting mostly basics and some advanced concepts about ETFs, the key take away for me was the implicit costs of investing in ETFs.  Most people know about the commissions and expense ratio, which are explicit costs, but many do not realize that there are trading spreads, rebalancing costs, and tracking error costs.  Check the ETF provider’s web site or talk to your ETF provider about these costs and make sure that you are looking at total costs when comparing ETFs.

“Investing Today-Navigating Through the Headlines & Positioning Your Portfolio for a Slowdown” presented by Alison A. Deans, Chief Investment Officer of Neuberger Investment Management, was the day’s closing general session.  The title of the session was a bit misleading, since she really didn’t discuss much in the way of portfolio structuring, but instead discussed the state of the economy and how Neuberger managers viewed the environment.  She indicated that corporate bond yields were attractive, and, in response to a question, indicated that if they invested in fixed instruments issued by beneficiaries of the Troubled Asset Relief Program (i.e., financial institutions), it would be for maturities of no more than 18-24 months.

While not rivaling an inaugural ball, the day was capped off with a very nice reception with the exhibitors.

Tomorrow’s agenda is a full one with a much anticipated lunchtime presentation by Dr. Michael Shermer, who is the Founding Publisher of Skeptic magazine.  For highlights of Day 2, come back tomorrow.  For live highlights, follow my Twitter feed at http://twitter.com/themoneygeek.  Thanks for reading!

With millions of blogs out there, of course the answer has to be no.  So why am I doing this anyway? Because I am a writer and want to share my experience, insights and tips with the rest of the world.  In becoming a financial planner, my objective was mainly to help people reach their dreams and enjoy financial peace of mind.  Of course, that’s the mission of my financial planning and registered investment advisory firm YDream Financial Services, Inc. (YDream when you can plan?)  Our web site, which I’ll admit is in serious need of revamping, is at http://www.ydfs.com.

Please bear with me for now as I learn the about the various features of this blogging platform and how to make the site more inviting and navigation easier.  For now, this gets me up and running quickly and it will have to do.

I’m a financial guru of sorts and a self-proclaimed technogeek.  Hence, the name I elected for myself is TheMoneyGeek. The purpose of this blog is to share my thoughts with you in hopes that I can help you make those all important decisions to help you reach your dreams.  I’ll also write about tech trends and products that will make your life easier, save you money or are just plain fun.

As a fee-only financial planner with the Certified Financial Planner® designation and CPA, I’ll share my 28 years of tax, financial planning, investment and retirement planning expertise.  To understand what fee-only really means and why you want a fee-only planner working for you, please visit http://www.napfa.org, the membership organization that I’m proud to be a member of.  I’m also a member of the American Institute of Certified Public Accountants (http://www.aicpa.org) and the Financial Planning Association (http://www.fpanet.org)

My purpose is to inform and instruct, and, as financial expert Dave Ramsey says, I have the heart of a teacher.  I promise this won’t be just another sales site, though I hope that you’ll consider us when you’re ready for professional help from an unbiased and unconflicted planner.  My name is Sam Fawaz and I thank you for taking the time to stop by and hope you’ll find the content compelling enough to come back and that you’ll tell your friends about us.  You can e-mail me at shf at ydfs dot com.

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