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Researching a Financial Advisor: Form ADV Part II

One thing I’d suggest doing before enlisting the services of a financial advisor is getting a copy of the advisor’s Form ADV.

Form ADV is a document that Registered Investment Advisers (RIAs) are required to file with either their state or with the SEC. It’s broken down into two parts.

ADV Part I includes:

  • Identifying information about the firm,
  • How many clients they have,
  • Total amount of assets they manage,
  • Whether or not they’re a broker-dealer or a registered representative of a broker-dealer (That is, are they paid commission to recommend certain investments?), and
  • A whole list of other (less interesting) tidbits.

ADV Part II includes (among other things):

  • What type of services they offer,
  • How they charge their clients (hourly fees, percentage of assets under management, fixed fees, commissions, etc.),
  • What type of analysis they perform when selecting securities for a client, and
  • The RIA’s education and career background.

Finding an Advisor’s Form ADV

There are two ways to get a copy of an RIA’s Form ADV:

If you look it up online, you can search by name of the firm or by name of the advisor. Unfortunately, RIAs aren’t currently required to submit Part II electronically, so you’ll have to ask the RIA for it.

Note: If a financial advisor doesn’t have a Form ADV, that means that he or she is not a Registered Investment Adviser. It’s likely that this person is either a commission-paid stockbroker or insurance agent, in which case my suggestion would be to look elsewhere for advice.

How About an Example?

It would surely be useful, but I don’t have the heart to make an example of an RIA whose Form ADV sets off all kinds of red flags. Instead, let’s take a look at an RIA whose ADV shows pretty much everything I’d look for.

Dylan Ross is an RIA and CFP who regularly reads and comments on this blog. His ADV Part II is publicly available on his website. From it, we can see that:

  • He charges hourly or fixed fees rather than commissions or AUM fees (and if you scroll through to Schedule F, you can see the specific fees for each service),
  • He counsels clients on long-term investing rather than short-term trading,
  • He provides advice in the areas of cash flow, debt management, risk management, college funding, retirement planning, estate planning, tax planning, asset allocation and investment selection.

And we can see the following about his investment selection process:

“Adviser believes that the appropriate allocation of assets across diverse investment categories (e.g. stock vs. bond, foreign vs. domestic) is the primary determinant of portfolio returns and critical in the long-term success of one’s financial objectives; therefore, Adviser advocates the use of passive, low-cost, broad-market index investments.”

Why Not Just Ask?

Wouldn’t an RIA would be willing to share any of the above pieces of information if you asked? Yes, almost certainly. Still, I’d suggest getting the official documentation for two reasons:

  1. It may call your attention to a potential red flag that you would not have thought to ask about, and
  2. It doesn’t allow for any wiggle room. Rather than getting a carefully-worded answer that conceals an unpleasant piece of information, you get a check in a box: “yes” or “no.”

Stocks Aren’t a Ponzi Scheme

In the last two years, one assertion I’ve heard over and over is that the stock market a giant Ponzi scheme — it only works if everybody continues to feed it money, and it collapses when people take their money out.

A similar assertion is that the stock market is just a “greater fool game,” in which stocks’ only value lies in the hope that you can sell them at a higher price to a greater fool at some point in the future.

Both claims are nonsense.

Stocks Have Inherent Value

If the public at large decided that they wanted nothing to do with stocks, and they all pulled out (and this is, to a lesser extent, what goes on in severe bear markets), stocks wouldn’t become worthless. Yes, they’d be worth less, but not worthless.

For the value of a stock to go to zero, the company itself has to be worthless. As long as a company has intrinsic earning potential, a share of ownership in that company has value as well.

A Worthless, Profitable Company?

For example, imagine if the price of Verizon’s stock declined all the way to $0.01 and that this decline was caused purely by investor panic. That is, it had nothing to do with any fundamental change in the profitability of the company. With a share price of $0.01, the company’s dividend yield (based on its most recent dividend) would be 4750%! Even if the price never went back above $0.01, you could get an obscenely high return from buying at such a low price.

Of course, such a scenario would never occur. The price of a company doesn’t ever go that low unless there’s a fundamental decline in the company’s profitability. At some point, investors would step in to snatch up the high dividend yield, thereby keeping the price from falling further.

Owning, Not Just Selling

Yes, companies’ earning potential can decline, or even go to zero. But it’s not caused by people getting scared.

Unlike a Ponzi scheme or a “greater fool” game, stocks have an inherent value. And they have that value even if there’s no “greater fool” to sell to, and even without investors continually pumping  money into the system.

Now, to be fair, stocks do have a ponzi-ish aspect to them, in that their market value does go down when other people pull their money out. But to assert that stocks’ only value lies in their ability to be sold is simply not true. You can receive value by owning stocks, not just by selling them.

Deducting an IRA Loss (Roth or Traditional)

Update: As discussed below, the deduction for an IRA loss is a miscellaneous itemized deduction. And due to the Tax Cut and Jobs Act of 2017, miscellaneous itemized deductions cannot be claimed at all for tax years 2018-2025.

From time to time I get emails asking whether it’s possible to claim a deduction for a loss in an IRA.

Yes, it’s possible. But the rules for deducting an IRA loss are so restrictive that it’s a non-option for most investors. Specifically, there are three reasons why most taxpayers won’t be able to gain any tax benefit from a loss in their IRA.

You Can’t Claim a Loss on a Per-Investment Basis

In a taxable account, you can sell an investment that’s currently worth less than your cost basis (which, in most cases, is what you paid for the investment) and claim a loss. In an IRA, you can’t claim a loss on a per-investment basis. The whole IRA needs to be worth less than your basis in the IRA.

  • For a Roth, your basis is equal to the sum of your Roth contributions.
  • For a traditional IRA, your basis is equal to the sum of your nondeductible traditional IRA contributions. (Note: This means that for many investors, their basis in their traditional IRA is zero, and, therefore, they cannot claim a loss no matter how low the value of their IRA goes.)

Also, for purposes of deducting a loss in an IRA, all your Roth IRAs are considered to be one Roth IRA, and all your traditional IRAs are considered to be one traditional IRA.

Example: In 2009, Jerry opened his first Roth IRA with a $5,000 contribution. In 2010, he opened another Roth IRA (at a different brokerage firm) with a $5,000 contribution. At the end of 2010, one IRA is worth $4,000, and the other is worth $7,000. Even though one IRA is worth less than his initial contribution, Jerry cannot claim a loss because the combined value of his Roth IRAs is greater than his basis ($10,000).

You Must Distribute the Entire IRA

The second reason many investors can’t benefit from the ability to deduct IRA losses is that, in order to claim the loss, you have to have all the money in the account distributed to you. That is, you have to withdraw every dollar from the IRA. (Or, more specifically, you have to withdraw every dollar from all your IRAs of that type, because, as we just discussed, they’re all considered to be one IRA.)

The reason this can be a problem is that taking IRA distributions to claim a loss does not exempt you from the 10% penalty if you’re under 59½. As such, unless you meet one of the other exceptions to the penalty, the extra 10% tax will almost surely negate the benefit of being able to deduct your IRA loss.

Note: In the case of a Roth, this is a non-issue, as you can take Roth IRA withdrawals up to the amount of your contributions without paying tax or penalty. (And your contributions are obviously greater than the IRA’s current value, otherwise there would be no loss for you to consider deducting.)

It’s a Miscellaneous Itemized Deduction

The final reason that most investors can’t benefit from claiming an IRA loss is that the deduction you get is a miscellaneous itemized deduction. You can only deduct the loss the extent that it (plus your other miscellaneous itemized deductions) exceeds 2% of your Adjusted Gross Income.

And even then, you only receive a benefit from the deduction if it (plus your other itemized deductions) exceeds your standard deduction for the year.

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Merrill Lynch Debit Card Review

This is a guest post by Michael from Credit Card Forum

If you want the best cash back credit card, check out Mike’s recent post about the Fidelity Retirement Rewards American Express, which offers rewards worth 2%. But if you prefer debit cards over credit cards, you may want to consider the Merrill Lynch Signature Rewards debit card.

What makes it special?

As we all know, it’s rare to find a debit card that offers rewards. There are a few on the market, but the fine print often includes traps or tricks. For example, Chase recently started offering a debit card with “up to” 3% cash back, but it’s not nearly as good as it sounds — there’s an annual fee, cash back is only given on a few categories of spending, and you have to spend over $1,000 per month to qualify for the maximum rebate.

The Merrill Lynch debit card is different from the rest. For starters, it offers a flat 1% back on spending — for a credit card that may be average, but for a debit card that is almost unheard of. It also offers a wide array of benefits that, to the best of my knowledge, aren’t offered on any other debit card at the moment. There is an annual fee, but you won’t necessarily have to pay it (which I will discuss further in a moment).

A closer look at the rewards…

You earn 1 “Merrill Point” per dollar spent, and for most redemption options, each point equals a penny (so 1% rewards). Here’s what you can cash them out for:

  • IRA Account: You can convert the points to cash which will be deposited into your Merrill Lynch IRA.
  • 529 Account: Your points can also be converted to cash for your Merrill Lynch 529 account (college savings account).
  • Fees & Commissions: If you don’t have a Merrill IRA or 529 account, you can still redeem your points to pay for fees and/or commissions posted to most other Merrill Lynch accounts during the current calendar year.
  • Travel: They say you can “travel anytime, anywhere, any airline with no blackout dates starting at 25,000 Merrill Points”
  • Miscellaneous: There are other options for merchandise, gift cards, etc.

A closer look at the benefits…

This debit card is a Visa Signature, which is something normally only found on credit cards. It comes with benefits for travel purchases made on the card, such as lost luggage reimbursement, trip cancellation insurance, medical evacuation coverage, common carrier travel accident insurance, and more. One benefit in particular I like (because I do not believe AmEx offers it) is the Hotel/Motel Burglary Coverage –- in the U.S. and Canada, you’re eligible for up to $1,000 in coverage if personal property is stolen from your room.

They also throw in phone concierge service and “Purchase Security” which covers eligible purchases made with the card for up to 90 days against theft, some types of accidental damage, etc.

What’s the catch?

For starters, you must have a Merrill Beyond Banking or Cash Management account. Your card will be linked to it and purchases will automatically be debited from its balance. Last but not least, there is a $95 annual fee which you may or may not have to pay. I know at least one accountholder who has the fee waived. Whether or not they will be willing to waive it likely depends on your balance and relationship with Merrill Lynch.


If you use Merrill Lynch for your brokerage account, their Signature Rewards debit card can be a great way to offset fees and commissions. Alternately, the card can be an easy way to add to your 529 college savings or IRA. That being said, if they’re not willing to waive the annual fee for you, it might not be worthwhile.

Michael runs CreditCardForum, which is a message board and blog for the discussion of credit cards and debit cards. Topics range from cash back credit cards to credit card customer service. On a personal note, traditionally Michael has invested in individual stocks based on intrinsic value, but due to time constraints, during the last few years he has been sticking with index funds.

I Don’t Want to Retire(ment Planning)

When I write about retirement planning or saving for retirement in general, one reply I often hear is, “But I don’t want to retire! I enjoy my work.” That’s a sentiment I can relate to personally. I enjoy my work a great deal, and I hope to continue doing it for as long as I can.

So, for those of you in a similar situation, what should you be doing differently from other investors?

Should You Save for Retirement Anyway?

You may enjoy your work now, but will you still feel that way when you actually reach the age where most people retire? Betting your future livelihood on the assumption that you won’t change your mind is a risk that doesn’t seem wise to me.

Naturally, the level of this risk is affected by your current age. If you’re 62 and have no desire to retire, that’s one thing. Being 32 and having no desire to retire is another. The likelihood of changing your mind at some point in the next three decades is much greater than the likelihood of changing your mind in the next three years.

In fact, if you’re in your twenties or thirties, I’d suggest saving as if you planned to retire at a typical age, regardless of whether you currently intend to do so.

Once you begin to close in on 65 or so, if you still feel no desire to retire, then at that point, it likely makes sense to start scaling back your annual retirement savings. (Or, depending on how much you’ve accumulated by that point, it could make sense to stop saving completely.)

How Long Will You Be Able to Work?

Even if you never end up wanting to retire, it’s important to recognize that you might not get a say in the matter. Layoffs occur, even to valuable employees. And in an era where age discrimination is an (unfortunate) reality, finding another job isn’t a sure bet.

Alternatively, even if your employment prospects never pose a problem, your health might. Depending on the work you do, there’s a good chance that at some point your body simply won’t allow you to continue the same level of productive output.

To neglect saving because you assume you’ll be able to work as long as you want puts you at risk of a meaningful decline in living standard later in life.

Roth IRA or Traditional IRA?

As we’ve discussed before, the question of whether to contribute to a Roth or traditional IRA is primarily a function of how you expect your tax bracket during the withdrawal stage to compare to your current tax bracket. (If you expect it to be higher later, go with a Roth. If you expect it to be lower, go with a traditional IRA.)

Naturally, if you expect to continue earning income well into what many would consider their retirement years, your late-in-life tax bracket is likely to be higher than that of many other investors. As such, a Roth IRA becomes relatively more attractive.

Don’t Forget About Insurance.

Lastly, if you work well into your 70s, you’re going to have different insurance needs than investors who retire at age 60 or 65. If you’re planning to continue working (and you expect to be reliant on that income), you’ll probably want to keep a disability insurance policy active. And, if anybody other than you will be relying on your extended-career income, you may also need life insurance longer than most other investors.

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The Best Places to Retire

For the Baby Boomer generation, the current economic recession has meant both reduced investment accounts and impeded prospects for continued employment. In fact, many Americans are facing the prospect of retiring with social security as their primary means of income.

Naturally, most people do not want to see their living standards decline dramatically in retirement. As a result, many people have begun to ponder retiring overseas — particularly in the developing world — as a way to maintain their standard of living, or perhaps even elevate it.

While retiring overseas is an option, it’s not a perfect solution. Poor countries have many problems. The poorer the country, the more problems: poor infrastructure, political instability, and perhaps most importantly, economic instability. Further, poor countries might even suffer from periodic currency devaluation (as a result of defaulting on their debts).

Where You Can Retire

As a foreign retiree, you are essentially an immigrant. That means you will require a special visa to settle indefinitely in a new country. Most countries in the world do not have retirement visas and therefore make it next to impossible for foreign retirees to settle in their country. The United States, for instance, does not have a retirement visa program.

However, some countries around the world, particularly in Latin America and Southeast Asia, have created special retirement visas for foreigners. These countries believe that retirees with state pensions — such as social security — are a revenue generator, and they have made it possible for this group to settle permanently in their countries.

So which countries are best for a person to retire to? If you are approaching retirement with considerable assets and income, the list of countries you can retire to is considerable. If you are facing a retirement with low income, you really can only retire to the developing world. Developed countries are simply too expensive.

Best Places to Retire Abroad: Limited Income

Most of the following countries suffer from periodic currency devaluations, political instability, and poverty. But, on a limited income, they’re the best of the bunch.

Costa Rica: In many ways the most politically stable and economically vibrant country in Latin America (with the exception of Chile), this country is extremely popular with American tourists. It’s outlook is certainly bright, and it boasts a large number of nature preserves for those interested in a more ecologically friendly country for their retirement.

Malaysia: The most developed country in Southeast Asia outside of Singapore, this country is affordable and far more stable than its neighbor Thailand. It has a developed retirement visa program, and it boasts pristine beaches and wilderness. Beware though, that its conservative Muslim government is known for restricting the rights of some ethnic minorities.

Uruguay: One of the most affordable places to live in the Americas. It has a relatively low crime rate, and a politically stable government. However, its small economy can be dramatically affected by the volatility of its neighbor to the South, Argentina.

Panama: This progressive Central American country probably has the most economic incentive programs for foreign retirees. There are discounts for shopping if you are over a certain age, you can import some goods duty free, and you pay no tax on all foreign income. The Panamanian economy also uses the dollar as its currency. Beware the high humidity and somewhat-high crime.

Nicaragua: This is another Central American country trying to attract western retirees looking for a lower cost of living. Nicaragua is quite poor, but it is stable and has a rapidly growing economy. For those trying to get the most bang out of their buck, it may be ideal. But beware the lack of sophistication and high levels of poverty.

Best Places to Retire Abroad: Higher Income

France: A stable, strong economy with great healthcare and of course great scenery. However, it doesn’t come free, and this country has the highest cost of living of any retirement destination on this list. But if you can afford it, go for it.

Spain: Spain has great infrastructure that is improving by the day due to government investments. It has low crime and decent healthcare. While it’s cheaper than France, it’s still far more expensive than anywhere in Latin America.

Italy: Italy, particularly in its Southern and rural regions, is more affordable than France and Spain, but in urban centers it can get expensive. It’s famous for its ineffective bureaucracy, which can make applying for a retirement visa a headache. Infrastructure can be spotty in areas as well.

Portugal: The most affordable part of Western Europe, it is a country that is growing in popularity as a retirement destination. While it is cheaper to live there than other places in Europe, that affordability comes with a price: economic instability.

New Zealand: The ideal place for an American to retire. It’s cheap, has a diverse ecology, and English is the national language. The problem is that New Zealand’s retirement visa program literally costs millions of dollars in order to qualify. If you can afford it, and are not comfortable living in a country where English is not widely spoken, go for it. For others interested in New Zealand, a snow bird alternative — liveing in the country on a tourist visa for up to six months a year — will be the only realistic option.

Do Your Research

Retiring overseas is not easy. It is not a matter of simply picking up and moving. It requires research and a well thought out plan. It helps if you speak the local language of the country you plan to live in. And it is best if you visit the country before moving.

Visit the country, and see how far your budget will really go. Explore the country thoroughly in all seasons of weather to determine whether you can handle the climate. And ask other expats, particularly those from your own country, about their experiences and for their advice. Most importantly, however, make use of common sense when approaching an overseas move. If it sounds too good to be true, it probably is.

About the author: Rick Todd writes at Expat Investing, where he covers such topics as whether retiring abroad is right for you and how much it costs to retire overseas.

Retiring Soon? Pick Up a Copy of My Book:

Can I Retire Cover

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less

Topics Covered in the Book:
  • How to calculate how much you’ll need saved before you can retire,
  • How to minimize the risk of outliving your money,
  • How to choose which accounts (Roth vs. traditional IRA vs. taxable) to withdraw from each year,
  • Click here to see the full list.

A Testimonial from a Reader on Amazon:

"Hands down the best overview of what it takes to truly retire that I've ever read. In jargon free English, this gem of a book nails the key issues."
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