‘Finglish’ Is the Problem

All the headlines about “financially illiterate” Americans miss something important. The language financial professionals use can be incomprehensible.

In this humorous video, David Saylor, whose job is basically “word consultant” for Invesco Van Kampen Consulting, walked around downtown Chicago and asked people to define industry terms such as “dollar-cost averaging” and “beta.”

One person got one answer right. (After watching the video, readers may need to consult Saylor’s glossary, below.) Even a seemingly simple concept – “transparent fees” – was misinterpreted. It means that fees are fully disclosed but was interpreted to mean “invisible.”

No wonder people are confused by the “Finglish” – financial English – thrown around by their mutual-fund companies, 401(k) managers, and other investment professionals, Saylor said.

His work also explores the subtle distinctions people make when the industry attempts to use familiar terms, such as “guarantee” or “nest egg.” …

NWNE Heard On The Street from Center for Retirement Research on Vimeo.

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Widowed Advisor Strives to Help Others

The death of a husband is frightening and overwhelming. These feelings are magnified for women who relied on their husbands to handle the household finances.

Widows Guidebook coverFlorida financial planner Kathleen Rehl’s new book, “Moving Forward On Your Own: A Financial Guidebook for Widows,” gently guides widows through this daunting task.

The author’s professional experience over the years has naturally “morphed” into her interest in helping her “widowed sisters,” through this book, she said. And her credentials are all relevant: Ph.D. in education, CFP certification, and recent widow. Her husband died of liver cancer in 2007, eleven weeks after his diagnosis.

Here’s what I like about her award-winning book: my 75-year-old mother would like it. Rehl tries to make widows comfortable that keeping their emotional priorities straight is their top priority – allowing time to grieve, making an effort to plan activities with friends and grandchildren, and growing spiritually.

Advice like this is interspersed with examining the reader’s “personal money style,” a “financial feelings survey” and brass-tacks advice like figuring out what net worth is and where the money goes.Learn More

New Product Boosts Low-Income Saving

A Connecticut non-profit is testing a new product to help low-income people overcome their particular obstacles to saving money.

Innovations for Poverty Action is recruiting participants at the District Government Employees Federal Credit Union in Washington. The effort replicates a program already up and running in New York City.

The product’s name, Super Saver CD, is a bit of a misnomer. It is a hybrid of a bank certificate of deposit and a traditional savings account. Its low minimum deposit – $15 – removes a formidable obstacle for people who can’t afford to shell out $1,000 for a CD.

Innovations for Poverty Action was founded by behavioral economist Dean Karlan at Yale University, and it designed the Super Saver CD to help people to act in their own interest and save. The human behavior that drives the product’s design is that people don’t always do what they say they’ll do. So the Super Saver CD requires that people commit to regular deposits. The idea is to encourage saving regularly, a little at a time, like a savings account. But once the money is put away, it can’t be touched – that’s where a CD-style commitment comes in.

Rosa Sorto, who irons linens at a Washington laundry service for hotels and hospitals, said the program appealed to her because she can put the money away and forget about it. …Learn More

A macro image of US Savings Bonds.

Nudge to Save Doesn’t Work

The popular strategy of automatically enrolling people in savings plans didn’t work so well among low-income people.

Researchers found that when a tax preparation service slated 10 percent of filers’ tax refunds to purchase a savings bond, many balked and opted out of the program. The likely reason: they already had plans for how they were going to spend the windfall, including a pressing need to pay bills.

Automatic enrollment in 401(k)s, a strategy pioneered by behavioral economists, is gaining popularity in U.S. workplaces, largely because it works so well: a record 51 percent of U.S. employers used auto enrollment in 2010, according to Callan Associates, a benefits consultant.

Workers can still opt out, but employers have found that most of them remained in the 401(k) plan. This is due to inertia and also because employees know that saving for retirement is the right thing to do – they just needed a push.

But an experiment by economists at Swarthmore College and the University of Virginia, published recently by the National Bureau of Economic Research, “raises questions about the power of defaults.” …Learn More

Expert Offers Advice About Advisors

J. Michael Collins, faculty director of the Center for Financial Security at the University of Wisconsin – Madison

People often have a tough time deciding whether they would benefit from hiring a financial advisor.

J. Michael Collins, who specializes in consumer decisionmaking in the financial marketplace at the University of Wisconsin – Madison, attempted to answer some questions on the topic in an online interview by a Chicago money manager.

Most agree that fee-based advisors are preferable to those who earn commissions by selling products to their clients – being a broker or a salesman conflicts with giving advice. This troublesome conflict is eliminated by paying an advisor a fee for his or her work.

But even the prospect of hiring a fee-based advisor typically raises more questions than answers. What do advisors do? Is the service worth the fee an advisor charges? What exactly am I paying for?

Read here what Collins had to say on the topic.Learn More

A lit lightbulb floating in front of a blue sky with a large puffy white cloud.

Finding Motivation to Control Spending

In a May 5 Squared Away blog post, I provided a list of financial planners’ five favorite tools for helping people control their spending. In this post, I’m providing their motivational suggestions.

Here are the five tips, based on my informal survey of planners. Each tip includes the psychological rationale behind it.

Find the “Aha! Moment.”

Some clients respond when they see, in detail, how much they’re spending and what they’re buying. Bonnie A. Hughes, a northern Virginia planner, is a big believer in mild shock therapy. She’s had great success by showing clients how much their income would fall if they were laid off, divorced, or dropped out of the workforce. Or she shows them just how much they’ll need in retirement, and it’s usually a big number.

Reason: The Aha! Moment provides the self-motivation that clients must possess and that planners can’t provide. …Learn More

Are you a STOCK or a BOND? Book Cover.

Nature of Job is Key to Investing

Toronto finance professor Moshe Milevsky has written a new book, so this seemed like a good excuse to revisit his favorite question: are you a stock or a bond?

Milevsky believes financial advisors should ask their clients this question before making any asset-allocation decisions. If someone has a risky job, he argues – if they are a stock – then their portfolio should emphasize bonds.

“If a financial advisor says you have a lot of stocks [in your investment portfolio] and should buy bonds, the response should be, ‘My job is a bond,’ “ he said.

Milevsky is adding another layer to the risk formula usually promoted by financial planners, who typically advise clients to lower their risk as they age. Milevsky wants people to avoid the double jeopardy dramatized by Enron Corp. employees, who had high-risk jobs in energy speculation and put their money into high-risk stocks – even worse, they were Enron stocks.

In a recent interview, he rated a few professions on the stock-bond continuum to demonstrate how his theory works. …Learn More