Wise Money Decisions

Some interesting California statistics:

Domestic migration outflow: 49th highest out of 50 states. 

According to ”Rich States, Poor States” by economists Arthur Laffer and Stephen Moore, the Californians leaving for elsewhere are our ”highest achievers and those with the most wealth, capital and entrepreneurial drive.” 

Highest maximum tax rate: 2nd highest out of 50.

Highest corporate tax rate: 15th highest out of 50.

Highest taxed population: 12th out of 50.

Best business climate as ranked by the Tax Foundation: 47th out of 50. 

Most expensive state to do business according to CNBC: 3rd out of 50.

Best state to do business according to Forbes magazine: 40th out of 50.

State requiring special credentials or licensing of most occupations: 1st out of 50.

California has credential or licensing requirements for 177 occupations.  Including mine.

Highest workers’ comp costs: 2nd out of 50. 

Highest gas taxes: 1st out of 50.

Highest unemployment rate: 3rd out of 50.

Highest foreclosure rate: 1st out of 50.

Housing affordability: 50th out of 50. 

Highest average public school teacher salaries: 1st out of 50.

Highest average compensation for state employees: 1st out of 50.

Highest welfare grant level: 2nd out of 50.

Highest state and local government spending per capita: 4th out of 50. 

Highest eighth grade math scores: 42nd out of 50.

Highest eighth grade reading scores: 45th out of 50.

Highest fourth grade math scores: 46th out of 50.

Highest fourth grade reading scores: 48th out of 50.

Highest level of violent crime: 10th out of 50.

Worst traffic: 1st out of 50.

Highest cost to repair and expand transportation infrastructure: 1st out of 50. 

Depending on your political leanings, you may find a few of the numbers encouraging.  But most of them are discouraging no matter which side of the aisle you’re on.

The statistics come from an article by Dave Cogdill, the Minority leader in the California Senate.

This AP article by Mitch Weiss points the proverbial finger at unscrupulous appraisers, lenders, brokers and others:

To be sure, there are many causes of the housing crisis - lenders who allowed people with spotty credit to buy homes with little or no money down, mortgage brokers who focused on selling loans without regard to the borrowers’ ability to repay, investment bankers who bought and sold risky mortgage-backed securities.

But wait a sec….. isn’t someone missing from the list?

How about the borrowers that didn’t exercise enough common sense to avoid biting off more than they could chew!

I don’t think that bad appraisers, lenders, or bankers should escape scrutiny.  But why give bad borrowers a free pass?  They’re just at fault.  If there were no bad borrowers, there would be no bad appraisers or lenders either. 

It seems everybody wants to know what the highest paying majors are.  Could it be that the school year is about to start? 

Here’s yet another one.  It lists the top five in demand majors according to the National Association of Colleges and Employers (NACE) Spring 2008 Salary Survey.

And this time Mechanical Engineering is #1 — woo hoo!

Following up on the post about Most Lucrative College Majors and this follow up post, see this from Yahoo News:

Graduates with technical skills do well in the short term. But in the long run, it’s the folks who move into management positions that take home the biggest paychecks. Top earners who majored in economics or finance have higher salaries than any other major, followed by chemical engineering, math, and physics, according to PayScale.com.

“If you can take technical skills and turn them into something entrepreneurial,” you have the chance to make a top salary, says Russell Miller, managing director at Executive Compensation Advisors in New York. “Lots of people who graduate from MIT start up their own technology firms.”

Regarding engineering schools:

Interestingly, median starting salaries for alumni of MIT, California Institute of Technology, and Harvey Mudd College, which have strong engineering programs, are the highest in the country ($75,500, $72,200, and $71,800).  But the salaries do not get as high for midcareer professionals from those schools as they do for graduates of the elite liberal arts schools. 

In my line of work I get a constant stream of phone calls from three types of people: headhunters, brokers, and financial planners.

The headhunters always ask the same thing.  They want to know if I’m happy with my job.  They’re a very sweet bunch to be so concerned about me.

The brokers and planners don’t ask about my happiness.  They want to talk money.  They want to know how much I have in investable assets.

To keep things simple, you can divide financial planners into two categories: fee-only investment advisers and salesmen.  Brokers are NOT investment advisers.  Brokers are a separate category.  More on that in a minute.

Investment Advisers

Investment advisers have passed the Series 65 exam (to be precise, the adviser’s “representatives” have passed the exam), are registered with the SEC or a state regulatory agency, and are legally required to act in the best interests of their clients. 

Financial planners other than “fee-only investment advisers” are more like salesmen.  They advise you to buy various products, typically insurance and investment products such as mutual funds or annuities.  Many are conduits that don’t invest your money directly, but instead farm it out to other advisers or mutual fund companies.  That results in another layer of fees. 

Other advisers are compensated for each trade they make on your behalf.  If you use this kind of adviser, it’s highly likely your account will be churned.  “Churning” is when your adviser makes unnecessary trades in your account to generate fees.

Brokers

Brokers are not investment advisers.  There is an important regulatory distinction between the two.  Brokers are not required under the law to act in the best interests of their client.  That’s why a broker who knows nothing about me or my financial situation can cold-call me and promise me a 60% annual return by putting a large portion of my portfolio into covered call options on a single oil refiner (which happened last week). 

A good investment adviser would not make that recommendation to me until he understood my financial situation.  A good investment adviser would learn about my financial situation and determine an investment strategy that makes sense for me.  He is obligated under the law to know my situation and make recommendations that are in my best interests. 

A broker is neither required to understand my financial situation nor act in my best interests.

Complicating Things

Now here’s where it gets complicated. 

Some investment advisers think they’re salesmen.  Rather than act in their clients’ best interests, they try to sell expensive, fee-laden mutual funds to their clients. 

Why would they do that?  Because the mutual fund compensates them with a kickback.  The higher the fee paid by the client, the higher the kickback.

This is not in the best interests of clients because you can stack the research a mile-high showing that fee-laden mutual funds tend to underperform the market.  But it’s standard fare for many brokers and investment advisers.

So how can you protect yourself? 

Don’t listen to brokers.  Their interests are not aligned with yours.

Use a “fee-only investment adviser.”  A fee-only investment adviser does not receive kickbacks from mutual funds or insurance companies.  His advice should be independent and not tainted by his own interests.

Fifteen years ago I had a friend that would drive across town to save 5 cents/gallon on gas.  With a 15 gallon tank, he saved 75 cents per fillup. 

With gas at $1/gallon he probably came out ahead financially, although just barely. 

When you account for his time he came out behind, even though there’s no way his time was worth more than $4.25/hour.  Trust me, I knew this guy.  $4.25 is generous.

When you get older your time becomes more valuable.  There’s an inflection point in the value of your time when driving across town for cheaper gas is no longer a wise money decision.

But today was an exception.  I saw gas for $4.99/gallon at a station in Redwood City. 

FOUR NINETY-NINE!

How can they charge $4.99 when it’s $4.35 at a station not far away?  I don’t get it.  I think the guy put up $4.99 as a joke, but people still came in.  So he left it up.

Generally it’s not worthwhile to drive to a cheaper station.  But when the discrepancy is 65 cents, and especially when you can buy en route, go for the lower price.

By the way, have I ever mentioned that Redwood City has the country’s best weather, proved conclusively by government climatologists?