Readers want to know about fiduciary standard and more
I am appreciative that so many of you have taken the time to ask financial questions and make comments about my columns. Please keep ’em coming! I’m clearing out the inbox and answering some of the most frequently asked questions.
Q: I currently work with a financial guy at a major bank, but I’m pretty sure he’s a salesman, not a fiduciary. I plan to move to index funds, but would like to consult with a fiduciary adviser before making any allocation decisions. Where do I start?
A: The easiest thing to do is to ask him whether or not he is acting as a fiduciary, meaning that he is putting your best interest before his or the bank's interests. If not, you can easily find professionals who do adhere to the fiduciary standard. The Certified Financial Planner Board of Standards has said that as of Oct. 1, 2019, CFP professionals must act in the best interest (i.e. adhere to the fiduciary standard) of the client at all times when providing financial advice.
Until then, you can ask whether or not any prospective adviser adheres to the standard at all times — many CFPs do. You can find a CFP at letsmakeaplan.org.
Alternatively, you can work with a member of the National Association of Personal Financial Advisors (NAPFA.org), who already adheres to the fiduciary standard at all times and does not collect commissions.
And if you are only seeking portfolio guidance, you may want to check out the myriad online automatic platforms, like Betterment, Wealthfront and Vanguard.
Q: Would you suggest taking money that we have in the bank account to pay off a student loan with a 1.7 percent interest rate and two car loans — one at 2.7 percent and the other at 0.9 percent? Or should I pay off my house or business loans, where the interest rates range from 2 to 4 percent? I need guidance!
A: Presuming that the money in the bank is in excess of your emergency reserve needs (that’s 6 to 12 months of living expenses) and that you are earning less than 1.7 percent on the money, then you may want to pay off the higher interest car loan and the student loan.
Paying off anything else would require a more detailed accounting of what else is going on in your financial life. For example, if you are sitting atop a pile of money in the bank that is earning very little, there's a case to be made for paying off either the mortgage or the business loan, simply for peace of mind.
Conversely, I would not want you to spend every available liquid dollar to pay down debt, just for the sake of getting rid of it.
Q: My husband just turned 62 and due to unforeseen health issues, we have accumulated $7,000 in medical bills, some of which have gone into collections. We live on his small pension and Social Security (about $2k per month) and he has a 401(k) that’s worth $130,000.
Our house is valued at $170,000 and we still have an $89,000 mortgage, with 24 years to go. Should he pull money out of the 401(k) to pay off the medical bills?
A: In a word, yes. Withdrawing the $7,000 from the retirement account will result in an additional $7,000 of income this year, but even with that amount, you would remain within the 12 percent tax bracket (for married couples, the range is $19,051 to $77,400).
Relieving yourselves of the collections fiasco is well worth the tax bill.