Meeting with a Fee-Only Certified Financial Planner, Part 2: Planning Session and Retirement Recommendations

I’m back to share part 2 of my experience with a fee-only certified financial planner. You can read part 1 here. In this post I’ll cover the planning session and the recommendations that were made.

When we left off, financial planner John Gay, of Frisco Financial Planning, had given Mrs PT and I several items to complete and pass over to him. John spent a few days with that material and then was ready to meet to discuss our retirement. Prior to our meeting, John sent us our full planning report, which contained:

  • Asset Allocation and Investments
  • Risk Tolerance
  • Lifetime Income Planning
  • College Education Funding
  • Appendix (fund recommendations, life insurance information, and general info)

I took a quick glance at the report, but I didn’t get much time to do a full review prior to meeting with John. I showed up to John’s office on a Friday afternoon and was prepared to spend a couple of hours going through the nuts and bolts. I dialed Mrs. PT in on conference call, as she had to be home with the little one. John was nice enough to work with us in this capacity. Probably not ideal for him, but he made it work. Anyway, our first order of business was to review our individual risk tolerance scores.

Our Risk Tolerance

If you remember from part one, we each took a risk profile assessment to evaluate our risk tolerance. The assessment was around 25 or so questions. John revealed our scores and also went over some of the questions where Mrs. PT and I disagreed the most.

As you can see by the charts below, I scored in the average range (52), whereas Mrs. PT scored very low (30) with regard to risk tolerance. I knew she was conservative. But man, did I underestimate by how much! Looking back on the survey, Mrs. PT said that there were some financial terms and concepts that she didn’t fully understand while taking the survey and that this may have affected her results slightly.

However, she stands by her conservative stance and feels like the survey had a needed effect on our allocation. Especially based on our current situation: stay at home mom, self-employed income, baby on the way, etc.

Risk Tolerance

The software that John uses takes our combined risk tolerance scores and created an asset allocation that aligns with our feelings toward investment risk. Here are the results:

Proposed Asset Allocation

Asset Allocation and Investments

A more simple way to present this would be to say that we should be investing 60% in stocks, 30% in bonds, and 10% in cash equivalents. John showed us a retirement projection using this allocation, our current assets, and expected future contributions. I don’t have a picture of that chart, but I can tell you that the model produced good results. In most cases, using the new allocation, we’re on track for a solid retirement.

So where are we right now? Well, our current asset allocation is far more aggressive than this. We have most of our retirement assets in stocks, with under 10% in bonds. Our biggest fund is the Vanguard Target Retirement 2040 Fund (VFORX), which has the following allocation:

Current Asset Allocation

Most of our other funds are stock-only index funds. Our total current allocation across all funds is probably somewhere around 93% stocks, 7% bonds. That’s a far cry from the allocation proposed.

What this tells you is that I’ve been making most of the retirement investing choices without much regard for Mrs. PT. It appears as though I have some adjustments to make so that our investments reflect our risk tolerance.

Recommended Funds

John then goes on to suggest some funds for us to achieve the proper allocation (John loves the ETF):

Large Cap Stock Fund – SPDR S&P 500 ETF (SPY)
Small Cap Stock Fund – Vanguard Small Cap ETF (VB)
International Stock Fund – Vanguard Europe Pacific ETF

Taxable Bond Fund – Vanguard Total Bond Market ETF (BND)
Inflation-Indexed Bond Fund – Barclays TIPS Bond ETF (TIP)
Municipal Bond Fund – ishares S&P Natl. Muni Bond ETF (MUB), SPDR Barclays Short-Term Muni Bond ETF (SHM)

Real Estate (REIT) Fund – (VEA) Vanguard REIT ETF (VNQ)

Energy/Commodities Fund – Vanguard Energy ETF (VDE)

Cash Equivalent Funds – Taxable Treasury Money Market Fund, SPDR Barclays Capital 1-3 mo T-Bill ETF (BIL)

John said that for each of our investment accounts that are over $10,000 (in our case, a Rollover IRA) we should shoot to have these investments. For the accounts at or below 10K (our Roth IRAs, a Traditional IRA, and some misc. funds) we should just pick a Vanguard Target Retirement Fund that mirrors the 60/30/10 allocation. Over the next couple of weeks I’ll aim to get this completed.

Other Information

John’s session included a discussion of life insurance and college education funding for our kids. I’ll save that info for another post, but I can tell you that John was spot on with his recommendations for term life insurance and 529 college savings plans.

Finally, John stressed the need to build our emergency fund to a level more suitable for a self-employed, sole bread winner. Basically, we need to do all we can to build up a bigger cash cushion before we progress much further in our retirement investments. I couldn’t agree more. Right now we have around 6 months worth of living expenses saved up. He suggests up to 18 months worth. It’s hard for me to argue against a bigger e-fund.

A huge thanks to John for allowing me to go through this process. I left more confident about our financial future and Mrs. PT and I now have a better grip on how to direct future investments. If you would like to see if his services are right for you, I encourage you to visit him at Frisco Financial Planning.



Last Edited: February 12, 2012 @ 1:25 am The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. Phil, I enjoyed our planning work together and thanks for the write-up.. nice job.

    Also, I don’t have an attorney, but if I did, he’d want me to say this:

    “Note: the planning and investment recommendations, including the specific funds mentioned, are based on an in-depth one-on-one information gathering session and detailed analysis of his personal financial situation. Neither the asset allocation nor the specific funds mentioned are intended to be general recommendations or solicitations to buy or sell securities (those listed or others). Before making any investment decisions you should consult with a competent investment adviser and your tax advisor to determine the appropriateness of such strategies to your individual situation.”

  2. Where did the 9.55% total return come from? Seems high to me given the allocation to bonds.

  3. @DIY Investor – historical return of that portfolio from 1972-2009

  4. All calculations use asset class returns, not returns of actual investments. The average annual historical returns are calculated using the indices contained in this report, which serve as proxies for their respective asset classes. The index data are for the period 1972 – 2009. The portfolio returns are calculated by weighting individual return assumptions for each asset class according to your portfolio allocation. The portfolio returns may have been modified by including adjustments to the total return and the inflation rate. The portfolio returns assume reinvestment of interest and dividends at net asset value without taxes, and also assume that the portfolio has been rebalanced to reflect the initial recommendation. No portfolio allocation eliminates risk or guarantees investment results.
    For more information and the full disclosure supplement, go here: http://www.ffplan.com/docs/mgpdisclosure.pdf

  5. I would suggest a high yield fund for your Roth, for example, JNK. I don’t know why you need a muni ETF unless you’re needing the income now. Put bond funds etc. in qualified accounts and dividend payers in taxable accounts. I’m not sure of the purpose of the target date fund. You’ll be adding to your Roths over the years and that will give you plenty of time to have that diversified by the time you are nearing retirement. Using zero commission funds you can easily diversify. Finally I would suggest a small amount in an emerging markets ETF like EEM.
    IMHO if Mrs. PT is not aware of how markets work over the long term I would hesitate to give undue weight to her risk tolerance in the final allocation. My feeling is that you would be better off somewhere between your original aggressive posture and what the analysis produced given how far you are from retirement.
    I would go 75% stocks and pray for the market to drop over the next several years so I could pick up stocks cheap.
    Understand that if you get 5 investment people in a room you’ll get 5 different suggestions on allocation etc. This is my take.
    You may be interested to know that 1 out of 4 retirees before the financial crisis had at least 90% of their assets in equities. I point this out because the way we answer questionairres is highly dependent on our recent experience. These retirees spent the last 15 months pulling out of stocks and into bonds as the stock market went on a tear.
    And so it goes………………………

  6. What if the best solution for the client is a product that pays a commission?

    The fee only advisor has taken an oath not to provide those products, let alone is most likely to not know about it/understand them…

    How can that always be in the best interests of the client?

    In financial planning there is no “Always” everyone has different goals, resources, comfort levels, beliefs, risk tolerance, and financial responsibilities…

    If someone wanted tax advantages, safety, growth, flexibility, liquidity at any age and/or liftetime income…They wouldn’t get it from their fee only advisor, only from their fee based or commission only based advisors….

    The bottom line as I see it…the most important ingredient between client/advisor is the client trust and confidence in the advisor. Without that, doesn’t matter which type of advisor compensation model being used…In additiona most fee only advisors seem to serve the clients that have$100,000, $250,000 or more in assets, the biggest financial issues/pressures in this country, is facing middle American’s, who is going to help them? (They have to be willing to help themselves, and many aren’t ready for that)…We are facing a disappearing middle class in this country, many have never worked with a financial advisor/planner, the idea is often overwhelming/scary…and an upfront fee is often deal breaker…

    The fee only planner won’t, unless they accept clients with less assets…I always wonder, the people with $100,000…$250,0000…Someone at some point helped them get started…Are we to assume that everyone needs to get started by reading a how to book, going to an employer benefit meeting or watching TV, and then once they have something the professional will be there to serve them?

    There is no absolutes, and absolutely a fee only financial planner, isn’t the only solution, and is often not the best solution anymore, since they won’t provide the products that work best in a market like we have today…volatile and uncertain…

    I look forward to your thoughts…

    Adam Goodman

    Las Vegas, NV

    • Philip Taylor says:

      @agoodman Thanks for your comment, Adam. I’m a believer in a diverse portfolio with primarily stocks for the long-run. I’m a buy and hold, traditional guy. I stick with index funds in IRAs, and that’s what I preach to the readers of my blog. I disagree that simple index funds in tax-advantaged retirement accounts aren’t the best solution. They are an excellent solution for someone wanting to save money for retirement in 20 or 30 years (my audience).

      My challenge to you is to disclose these commissioned-based products that you think are better. Why didn’t you mention them in that long of a comment?

      When you use that as the backdrop to getting advice, then why would I ever suggest anything other than a fee-only planner? They are objective.

      The commission-based advisors have had their run. Now the average investor is starting to wake up to the reality that they’re simply not needed.

      • @Philip Taylor Your welcome, I hope you re read my post, and see beyond the lack of mentioning of a specific product.

        I am not bashing a fee only planner approach, only pointing out, that they may not be the best approach for everyone, as no one is…

        I guess if they see a gap as far as areas the client could improve in like if term life insurance is needed or long term disability policy to ensure a level of lifestyle, an Annuity for lifetime income, a permanent life contract such as an Indexed Universal Life for multiple of reasons…and said to the client, I recommend you look into this, yet I can’t do it for you, because I would receive a commission, and I am sworn to not do that…and here is the name of 3 people I could confidently recommend you talk with in those areas…Then okay…

        The most important thing at the end of the day, is not how the advisor gets paid, it is does the client get the best help they need to navigate the roads of life, and protect what is most important to them (and that differs from individual to individual, and at different stages of their lives)

        I hope you reach your financial goals over the next 20-30 years with your plan for accumulation..Another major area of concern that many people are now realizing, is the stock market based planning approach doesn’t provide the client with a very viable plan for distribution…So if you don’t talk with an insurance advisor for the next 20-30 years, make sure you do when you are wondering how should I take this money out without worrying about outliving it? Regards- Adam Goodman

  7. Mr. Taylor,

    2 Points to consider…

    1) What if the next 10-20 years look like the last 10 as far as stock market performance?

    In that scenario following the traditional approach as recommended to you, and outlined above, would be devasting and set most people on a path they could not recover from, in terms of reaching their retirement and growth goals ie 9.55% annual return…

    2) As a financial professional myself, I understand the potential slippery slope/inherent conflict between the product recommendation being best for the client and the compensation earned when the client implements that recommendation. However think about this, the mantra behind using a fee only advisor/planner is that is the only way to get the most objective/best advice, since they can’t/won’t profit from any implementation. The inherent problem with that is as follows…