Estate Planning Practice Blog

Sharing the Latest Money Makeover From Delia.

Delia Fernandez is a guest poster on this blog. Her posts are always very thorough and informational on financial matters. Click here to see her other posts.

Delia was featured in last Sunday's Los Angeles Times as the featured planner for a money makeover involving an AIDS survivor.

Delia Fernandez is a guest poster on this blog. Her posts are always very thorough and informational on financial matters. Click here to see her other posts.

Delia was featured in last Sunday's Los Angeles Times as the featured planner for a money makeover involving an AIDS survivor.

Delia Says: Packing for a Trip? Be Sure to Pay Your Child Support.

From time to time, Delia Fernandez will author a guest post on our blog. [Disclosure:  There is no express or implied relationship or financial ties between Delia's practice and Tredway, Lumsdaine & Doyle, LLP.]

I just learned that if you are in arrears of child support payments in excess of $2,500, you won’t be issued a passport. And since it will take 2-3 weeks for the Department of Health and Human Services to update their records and notify Passport Services, be sure to take care of this well before your trip. For more details, see this link here.

I want to thank Kate Rupley, one of my students in this quarter’s Survey of Personal Financial Planning class at UCI Extension, for this interesting tip.

Delia Fernandez, MBA, CFP®
Fernandez Financial Advisory, LLC
delia@fernandezllc.com
562-594-4454

The Immortal Ponzi

From time to time, Delia Fernandez will author a guest post on our blog. [Disclosure:  There is no express or implied relationship or financial ties between Delia's practice and Tredway, Lumsdaine & Doyle, LLP.]

In the midst of last week’s subprime crisis, a client called to tell me a sad but familiar story. A friend of his in California had just lost $450,000 in what he thought was a currency trading account, but which turned out to be a Ponzi scheme. Worse yet, he talked his friends and family into investing with this guy, so all together they were out about $2 million.

The friend made his decision to invest with the Alabama-based advisor based only on some telephone conversations with the man. He never met him in person, and yet he sent him most of his money to invest. And like all victims of well-run Ponzi schemes, he didn’t initially sense there was a problem. Indeed, he received monthly income payments for a couple of years. But then one day they stopped. That’s when he discovered that the Alabama man had skipped town, leaving him and his friends to sort things out with the authorities.

The kicker to the story? The victim was an attorney.

I was thinking about this case when I picked up this week’s Barron’s and read about another Ponzi scheme promulgated by a Portland, Oregon advisor named Wesley Rhodes Jr. (Read the full story here). Unlike the Alabama crook, Rhodes was a very public figure; he ran magazine ads for his investment firm, sat on charity boards and even had a radio show. He enjoyed meeting and socializing with clients, and most felt he was a family friend. Unfortunately, authorities estimate that over the past 15 years that Rhodes has bilked investors out of $24.6 million or more, spending it on fast cars and sports memorabilia.

Like the victim of the Alabama crook, Rhodes’ victims were educated professionals, making it all the more frustrating a story (one of them was even a financial planner!). They set up a blog to vent about their losses, so I read it to see if I could find some clues to help people avoid this kind of scam. A few things quickly jumped out at me, so I thought I’d pass them along as tips to follow before choosing an advisor:

Be sure your funds are in an account with an established brokerage firm where you can confirm the existence of your investments and account balances. This is critical. Rhodes got control of his victims’ money by offering them a “side” account, what he called an Investment Administrative Account, that he said was better than a mutual fund or other investment that would be held at a brokerage firm. At one point he was even offering these accounts while employed by an actual brokerage firm. Naturally, those side accounts were controlled only by him and could only be verified through him, putting his victims in the dark about their money – which is right where he wanted them. The Alabama swindler separated my client’s friend from his money the same way.

Check your advisor’s record with regulators. Turns out Rhodes had been in trouble with Oregon regulators since 2000 for failing to register as an advisor, selling unregistered securities, commingling client funds and failing to disclose material information. If any of the victims had simply called the appropriate regulator first, they would have found plenty of warning signs. All registered investment advisors are required to give you their form ADV before any engagement, and you can verify their registration and check their record as well as any broker’s record with the SEC or California’s Department of Corporations.

Be wary of vague account statements. Rhodes claimed to run three legitimate investment advisory firms, (only one was actually registered), but his account statements were increasingly unprofessional. One victim complained that typed statements of their actual holdings had become vague, mentioning only “stocks,” “bonds,” “securities” and “convertible debentures” as holdings, without specific company names. In fact, it was a phony 1099 that didn’t look right to one of Rhodes’ clients that led to the recent investigation and conviction.

Rhodes’ victims and my client’s friend failed to diversify their holdings, which is just common sense. Don’t put all of your money into one currency trading account, or one side account, or one stock. That’s too much risk in one place.

Delia Fernandez, MBA, CFP®
Fernandez Financial Advisory, LLC
delia@fernandezllc.com
562-594-4454

OC Register Features Delia Fernandez.

Delia Fernandez is a guest poster on this blog. Her posts are always very thorough and informational on financial matters. Click here to see her other posts.

Delia was featured in Saturday's Orange County Register as the featured planner of the week for a financial makeover entitled "After Illness, They Look Ahead."

You go girl!

L.A. Times Money Make-Over From Our Guest Blogger.

From time to time, Delia Fernandez will author a guest post on our blog. [Disclosure:  There is no express or implied relationship or financial ties between Delia's practice and Tredway, Lumsdaine & Doyle, LLP.] In today's L.A. Time's Money Makeover, Delia is the featured financial planner.

Overspending on a six-digit income
'Frivolous' buying and generous giving put the Newlands in serious debt. Now, it's penny-pinching time.

By Kelly Barron
Special to The Times

April 15, 2007

Helen and Ray Newland don't look like big spenders. The Brea couple lives in a modest, 1,800-square-foot home built in the 1950s. Helen drives a dusty, decade-old minivan, and Ray's Hawaiian shirts have seen better days. Their two children get hand-me-down clothes from the neighbors.

Click here to read the complete article.

The SEC Loses and You Win.

From time to time, Delia Fernandez will author a guest post on our blog. [Disclosure:  There is no express or implied relationship or financial ties between Delia's practice and Tredway, Lumsdaine & Doyle, LLP.] You will see her guest posts from time to time under the aptly named category "Financial Advisories By Delia." Enjoy her wisdom.

Or How the Investment Industry Struggles with the F Word

 A ruling that allowed stock brokers to call themselves investment advisors without being required to act in their clients’ best interests as fiduciaries when giving investment advice has been overturned, giving a big win to all consumers.

 This was a bizarre exception to an important law. Under the Investment Advisors Act of 1940, all investment advisors are fiduciaries. That simply means that we’re required to act in our clients’ best interests when giving investment advice. So if a client consults an advisor and the best thing for them to do is pay off their credit cards and build up a savings account for emergencies, that’s what an advisor is obligated under law to tell them.

 That means that advisors are not allowed to sell you an investment that might enrich the advisor (and yes, which technically might be suitable for your age and financial circumstances, which is what you might get from a broker), but which isn’t in your best interest. I have to believe it’s what many consumers think they have working for them when they sign up for an investment account.

 Unfortunately, up until Friday morning, that was not the case. The brokerage industry managed to carve out an exemption for itself under the law, claiming that aspects of their business weren’t within the intent of the Act, so they didn’t have to register as advisors or abide by the law and the fiduciary standard. 

They just got to call themselves investment advisors to their clients, which to a lot of us in the industry was a huge injustice to the investing public. 

Like a lot of legal issues, this one turned on a technicality. Brokers and dealers of securities are exempt from registering under the Act if, in fact, the investment advice they give is “solely incidental” to their work as a broker/dealer, which is buying and selling securities. 

However, many broker/dealers are claiming to be investment advisors in full-page ads and are also being paid for that investment advice, in the form of regular fees. That would seem to call for them to register as the law is written, but the SEC had said that they were exempt due to a section of the law that says the SEC can exclude others “not within the intent of [this paragraph].” This exemption was commonly referred to in the industry as the “Merrill Lynch Rule” and many broker/dealers took advantage of it and didn’t register as advisory firms. Instead, they had to warn clients in their contracts and agreements that they were not required to act in the clients’ best interests, so the client was duly warned. 

But the court ruled against the SEC, saying that the catch-all phrase describing others not within the intent of the law was for newcomers not foreseen at the time of the writing of the law in 1940, and that broker/dealers had clearly been identified in the Act when it was written and therefore had been already addressed.

The heroes of this story include the Financial Planning Association, which is the entity that sued the SEC in 2004 and that just won the suit on Friday. Other heroes include T.D. Ameritrade, which is the one brokerage firm that spoke out against the SEC decision and supported the FPA in its suit. 

We don’t know what will happen next. It’s possible that the SEC will appeal the decision, which we hope they won’t. Or it could be that those broker/dealers who want to continue to call themselves advisors will step up to the fiduciary standard and register under the Investment Advisors Act. 

In any case, I think consumers have been well served by this decision, and we all should celebrate. And I hope you’ll become better informed about the people who want to give you investment advice, and whether they consider themselves fiduciaries. 

Do keep in mind that there is a professional association of advisors who are fiercely proud of their fiduciary standing, and that’s the National Association of Personal Financial Advisors, or NAPFA. You can find out more about this organization of fee-only planners and fiduciaries, and find a fee-only planner in your area, by contacting www.napfa.org. To learn more about the importance of working with a professional fiduciary, go to here. 

The ruling of the U.S. Court of Appeals for the District of Columbia Circuit and the legal briefs filed in the case can be reviewed online.

You can also view the FPA’s statement to the SEC.

Delia Fernandez, MBA, CFP®
Fernandez Financial Advisory, LLC
delia@fernandezllc.com
562-594-4454

A Real Estate Proposition.

A client just called me with a contemporary real estate dilemma – now that she’s sold her place, when should she get back into the real estate market? She sold for good reasons: the neighborhood was changing for the worse, so her equity/investment was in jeopardy, and her new neighbors were not people she cared to share a county with. Given the slide in home prices, she rented an apartment to sit on the sidelines for a while.

But this is not just a tale about the real estate market – it’s also about the cost of property taxes. That’s because now that my client is 55 she can take her old property tax basis with her to her new place – but the clock is ticking on this deal.

It’s called Proposition 60, and it says that if she sells her primary residence and within two years buy another of the same or lesser value, she may take her property tax base with her. Proposition 60 applies when you do this within your own county, and Proposition 90 is when you move to another county that allows reciprocity (those counties are Alameda, Los Angeles, Orange, San Diego, San Mateo, Santa Clara, and Ventura).

[By the way, if a couple divorces, the first person to take advantage of this deal gets it. The other one loses out].

So should the client wait until real estate prices really fall, but lose out on Prop 60? Probably not. She’s going to look for a new place. Sure, she could rent and live off the equity from the sale of her home, but then she may never be able to afford to buy again. I’ve had other clients lose their Prop 60 opportunity for one reason or another, and now they can’t stand the thought of buying again – the mortgage is doable, but it’s tough to justify the cost of higher property taxes.

The moral of the story: Be sure you know the true cost of buying and selling real estate, especially when it comes to your primary residence.

Delia Fernandez, MBA, PFP

It’s Fire Season: Are You Adequately Insured?

If there’s one weakness I find in most people’s finances, it’s that they don’t have sufficient homeowner’s and auto insurance coverage. Yet it’s the insurance we’re most likely to use, and so inexpensive for what it offers.

I think one reason people are so underinsured is that we are introduced to this kind of coverage when we start driving, a time when we’re young and don’t own anything. So we want the cheapest insurance we can find, and marketers oblige us by touting their product by price. So by the time we have accumulated assets, such as a home, and have something to lose, we’re still thinking like that broke young driver. 

Ideally, you’d have an insurance agent you trust, and you’d sit down with them once a year or so to review your coverage. But most people don’t. I encourage you to find one – ask friends for referrals – and then book that appointment. Take along a net worth statement and a list of special items you own, and be sure to ask the following: 

• If your home was completely destroyed, would the insurance be sufficient to rebuild it and replace all your possessions? I’ve had builders tell me that Southern California homes cost $200 - $250/square foot to rebuild. Apply that amount to the square footage of your own home and then check your coverage. With home prices appreciating over the past few years, most of my new clients are underinsured. The Wall Street Journal covered this in their August 26th issue, and suggested a replacement-cost calculator at www.accucoverage.com which for a $7.95 fee can help you assess the amount of coverage you need. 

• If you were sued for everything you’re worth, do you have sufficient personal liability coverage? This is where the net worth statement really comes in handy. It tells us how much you have to lose, and is a great starting point to discuss liability coverage. It may be difficult for a judgment creditor to tap your retirement funds in an employer’s plan (see my blog entry on Asset Protection and Retirement Plans), but all your other assets could be up for grabs. Once you max out the coverage offered under the individual auto and homeowner’s policies, your insurer can give you additional coverage through a personal umbrella policy, sold in million dollar increments. Don’t panic – it’s really inexpensive, about $200 per $1 million of coverage – and is one of the basic tools in a financial planner’s kit to protect middle class and wealthy clients. What’s more, it typically offers a wider range of coverage than the personal liability offered under your homeowner’s plan. 

• What about uninsured driver coverage? This is the coverage that protects you should you be involved in an accident with someone who does not have insurance. In the past few months I’ve seen a lot of clients with very low amounts of this coverage – say, $30,000 – when we know that auto accidents can cause much higher amounts of damages. Interestingly enough, these same clients have attachments to their policies from their agents, showing that they had to sign a form to acknowledge that they refused higher levels of coverage. Clearly, the industry is concerned about these lower coverage levels. And why would you want to be covered for less if hit by an uninsured motorist? 

Remember, now that you have something to lose, it’s wise to consider whether those things are adequately insured. Only buy the amount of insurance you need…but most people need more insurance than they have.

Delia Fernandez, MBA, PFP

Asset Protection and Retirement Plans

When you see the phrase “asset protection,” you may immediately think of wealthy people establishing offshore trusts. But most of us already have access to something that allows us to protect an unlimited amount of money: our company’s retirement plan. 

This includes 401ks, 403bs, deferred compensation or 457 plans, profit-sharing and money-purchase plans, defined benefit or pension plans and SEPs and Simple IRAs. Thanks to the 2005 changes to the Bankruptcy Act, all funds inside these accounts now have unlimited protection against creditors. 

And under the same law, regular IRAs (including traditional and Roth IRAs) are now protected up to a balance of $1 million, unless we deposit money into them from a qualified plan (more on that later). SEP and Simple IRAs are not included in this amount. 

But before you relax, consider when this protection would kick in. You would have to be sued, and the person suing you would have to win the case and obtain a judgment against you by the courts that says they have the right to pursue your assets. You would decide to file bankruptcy to protect yourself, and thus protect your assets. 

Yes, we’re saying you’d file bankruptcy to obtain this protection. Not an attractive prospect. 

Clearly, the first line of defense against unwanted lawsuits (aside from living a careful life) is having sufficient personal or professional liability insurance. But if you think you might have to rely on these new asset protection laws, keep the following in mind: 

• Manage rollovers carefully. When you leave a job and roll your funds from your employer plan into an IRA, be sure there’s a paper trail. For example, keep the final statement from your employer plan, the first statement from your new IRA rollover, and a copy of the transfer paperwork. I’d also recommend that you keep these funds in a separate IRA from other IRA funds, just to be safe. Remember, if the courts can’t distinguish these funds from your regular IRA, you won’t have unlimited protection.

• Small businesses should be sure their plans are well designed. If you’re not using a master or prototype plan document for your 401k or other plan (e.g., a turnkey plan from a mutual fund or brokerage firm), get a qualified professional’s help in designing your plan.

• Consider rolling IRAs into employer plans. This is a more aggressive strategy that hasn’t been tested yet in the courts, but could be helpful.

Delia Fernandez, MBA, PFP

Identity Theft: A Terrible Plot Twist.

It was one of those calls I hate to receive from clients: A client’s husband had been a victim of identity theft. What’s more, the perpetrator was one of the client’s own children. She learned of the fraud thanks to a phone call from a collection agency, seeking payment.

As sad and frustrating as it is when a kid goes wrong, the worst of it was that the victim had died three years ago.

Identity theft against the dead? Yes. It’s more common than you may think. I’ve had clients experience this before, sometimes within a month of someone dying. And although it seems like the definition of a victimless crime, it can create endless problems for the remaining family.

With cases like this, I turn to the ID Theft Center. It was founded by Linda Foley, Executive Director, and her husband Jay, after Linda had been a victim of identify theft herself.

They’ve put together a great website, with lots of tips and guides for victims. Here’s the link to their guide for the theft of Social Security Numbers and fraud against the deceased; I used it to help this client. What’s more, the ID Theft Center has people available to speak to groups about identity fraud.

The guide explains that families can write each of the three credit bureaus to place an alert on the victim’s credit report explaining that they are deceased (you need to include a copy of the death certificate in your letter). They can also add a message requesting that the creditor call them before issuing credit to someone using that person’s information. But the ultimate solution (no pun intended) is to freeze the credit report completely. California is now one of 12 or more states that allow this.

If you’ve been a victim of identity fraud (and have a copy of the police report you filed) you can freeze your file for free. Otherwise, there’s a $10 fee. The bureaus will freeze your report and give you a password that you’ll have to use to unfreeze it when you want to apply for credit.

I worked for TRW’s credit reporting agency for 12 years, and occasionally we’d receive requests from consumers to freeze their credit report. We used to laugh, thinking what  an impossible inconvenience it would be for the consumer. But in today’s virulent fraud environment, I now think it’s a great idea.

So if you already have the credit you need – home equity line of credit, credit cards, etc. – consider freezing your credit file. That just leaves your existing credit vulnerable to theft. Here’s how to make this happen: California Department of Consumer Affairs’ instructions.

Delia Fernandez, MBA, PFP