Impersonal Finance

To quote Eric Cartman, “No…no, God no!”

What if I told you that every dollar you put in to your 401(k) would still be yours, but you could only access it if you moved to Florida or California? How many of you would still invest in such a plan?

Since no one would enter in to such a plan, I really can not comprehend the fascination people have with 529s and Coverdell IRAs. So, rather than start with any premise at all, let us start from the beginning. To do this well, I will break up the discussion in to two posts: whether to fund education or not and if so, how best to do it.

To fund or not fund a child’s education

What is more likely, that your child can get a scholarship of some kind or that the government will subsidize the retirement of your dreams? It amazes me how often people undervalue how much money they will need in retirement to maintain their current lifestyle. Since this is not a retirement tutorial, let us just assume that you will need a lot of money in retirement. Some people, even maxing out a 401(k) and Roth IRA, may come up short in what they will need to maintain the same standard of living in retirement as they did when they working. We can also assume that most people are not maxing out both vehicles.

Obviously, it is more likely that a child will get scholarships either need or academic based. There are literally 100s of scholarships available and often the money goes unclaimed. The money is there; it just needs to be found. On the other hand, you only get a small window of time to accumulate assets to retire. Once that window is closed, you better have enough or your lifestyle will be changing drastically.

The bottom line is that there are ways to fund a child’s education with dual use options. The idea being that if the money is needed for your retirement, you can access it for that and if it’s not, you have some great tools set up to help with the educational needs of your children. Either way, there is no need to use these governmental programs when other (and better) scenarios exist.

Stay tuned for Part II and “How Best to Fund Your Child’s Education”.

In the financial services industry, look at any agent/advisor’s business card. You might see acronyms following their name such as: CLU, CFP, CFA, JD, MBA, LUTCF and ChFC. This list is by no means exhaustive. There are dozens of designations one can get from various institutions and organizations. I plan on breaking down a few of the more common ones and should people clamor for specific explanations, I will be happy to oblige. The five I will focus on are: CFP, CLU, LUTCF, JD and MBA. I see these most often and they give a nice cross-section of the various educational requirements necessary to achieve designations.

LUTCF (Life Underwriter Training Council Fellow) - To be honest, I have no idea what any of that means. I even took a poll of people in my office with that designation and most had no idea what the acronym stood for. So why do people get it? It’s an extremely easy designation to get and any designation on your business card and letterhead looks good. Agents get this for the sole purpose of inflating their reputation to present and future clients.

CLU (Chartered Life Underwriter) - The American College is the primary institution giving out designations. They claim this is the most respected designation in the insurance industry. I will say this. Most agents who have this designation at least know what it stands for, so I guess that is something. Another reputation builder, no one I talked to could tell me how they planned to use the letters. Most people just banged out one course after another, studying just enough to pass, but nowhere near enough to retain any of the knowledge. Are clients really supposed to be impressed by three unfamiliar letters after your name? American College uses stats to show why it’s a great designation to have and how agents with it do remarkably better. I bet they do since most agents flame out long before they have a chance to take this exam. Agents that achieve this designation are usually successful enough to take the time to pass the courses necessary. It is not a terribly hard designation to get and people should be wary when they see someone with this designation. I would ask said agent what CLU meant and how long did it take to achieve. Probe further and you may see it for what it truly is: three letters and nothing more.

Now, we’ll get to the three designations that have some teeth. We still should not be fooled, but at least there is something behind them.

CFP (Certified Financial Planner) - I know quite a few people, smart people, who took this exam and did not pass. It is tough and comprehensive and requires extensive knowledge in many areas of financial planning. Furthermore, you must be in the industry for a certain length of time and have taken numerous exams prior to sitting for the CFP exam. Here is the problem, as I see it. It is still just an exam. Just because someone scored high on the SATs does not make them smarter than those who didn’t score as high. Some people are great test takers and others are not. I think this is a legitimate designation, but mostly because high net worth people have made it so. It is a designation familiar to many people and as such is almost a necessity if you want to work with wealthy people. Like with anything, I know a few CFPs I would never take advice from in a million years.

JD (Juris Doctor) - A fancy way of saying, “I graduated from law school”. You could finish last in your class and you would still have your JD. In terms of the financial services industry, it only looks impressive to clients who know what a JD is. Otherwise, when you explain what it is, you may get questions about why you aren’t a lawyer or what good is that degree in your field. It does show you went through three years of graduate school, but nothing about your field of study or retained knowledge. Putting this on your business card seems like definite resume padding since most financial advisors are precluded from offering legal advice anyway.

MBA (Masters of Business Administration) - This one baffles me the most. You don’t see people putting BA or BS after their name, so why an extra two years of school make such an acronym appropriate business card material. It’s a shorter and usually easier graduate program than a JD, so if a JD is silly, all the more reason that an MBA after your name is even sillier. If someone has an MBA after their name, what on Earth would make a client think that they have this heightened ability to provide sound financial advice. That’s like going to a Ph.D in Psychology for heart surgery. Yes, they are both doctors, but only one is competent enough to operate on you. If one advisor has an MBA and the other one doesn’t, would you not still go to the one that seems the best, regardless of what comes after his name?

I am not saying designations are bad, per se. I think taking the time to do extra work and furthering ones education are noble goals worth achieving. However, I want you to realize that most designations are done just for resume padding and nothing loftier. Education does not equal knowledge and letters do not equal proficiency.