Stable Financial Freedom

Introduction – Nature & Definition

Human life needs multiple things for survival and growth such as food, cloth, shelter, vehicles, knowledge, and skills. Generally, the needed items are acquired through spending some money units on it. Apparently, the plentiful availability of money units for buying required things gives financial freedom to an individual; on the contrary, the scarcity of money units for purchasing necessary items may lead someone towards financial dependence/financial subjugation. Realistically, it is livelihood that gives financial freedom to an individual.

A person having livelihoods enjoys financial freedom. What is livelihood? In 1991 Robert Chambers and Gordon Conway provided the first elaborated definition of the livelihood, “A livelihood is a mean of making a living. It encompasses people’s capabilities, assets, income and activities required to secure the necessities of life.” In addition, they proposed the concept of sustainable livelihood, “A livelihood is sustainable when it enables people to cope with and recover from shocks and stresses (such as natural disasters and economic or social upheavals) and enhance their well-being and that of future generations without undermining the natural environment or resource base.” In nutshell, for financially independent people, the livelihood or income from assets or job or business is greater than expenses and the earning stream is stable.

Absence of livelihood means financial dependence. It happens on account of two reasons – personal & interactive. At personal level, the very negation of independent life-pattern is cause of meager livelihood. At interactive level, the utter denial of interdependent life-pattern is reason behind insufficient livelihood. Financial freedom is the state of having sufficient personal wealth/income to buy independently needed items and desired goods/services.

Achieving Financial Freedom

Financial freedom is prerogative of every economic agent. An economic agent is one who is regularly involved in earning activities such as job, import, export, manufacturing, teaching, training and consulting. A successful economic agent designs SMART (Specific, Measureable, Achievable, Realistic and Time bound) financial goals. There are five steps procedure for setting and achieving financial goals:

1. Define exactly what you want in each area of your life; for example, specify the savings for children / old age or income generating assets. The optimistic view towards life is vital for effective specification of financial targets. (Specific Mindset towards Paraphernalia of Life)

2. Go for only the measurable financial targets, for example, it is wrong to chase richness without exact specification of income stream. Write down the necessary actions or work plan in order to realize the measurable goals. Prepare work plan/action plan clearly, meticulously and concisely. (Measuring Mindset towards Execution)

3. Now you have made a list of every-action you might think crucial in attaining your goals. Take actions immediately, it is decisively important. (Attainment is outcome of Proactive Behavior)

4. Realize something every day that moves you towards the realization of your goals. You may encounter hurdles, detractors and limitations. Manage them wisely and maintain momentum and morale during upcoming situations or challenges. (Consistent Behavior towards Realistic Targets)

5. Set a definite deadline for tasks. If it is a long-run goal, break it down into sub-deadlines and organize the items in proper sequence and priority. It is utmost important to follow the maxim, put first thing first. A goal may be unachievable on account of some reasons, revisit the goals to avoid wasted efforts. Abandonment is, sometime, a best strategy towards various surreal targets. Right abandonment saves money, efforts and time for some realizable goals. (Time Efficient Behavior)

Absolute Bases of Financial Freedom

Human beings are epitome of Divine Scheme of Creation. God bestowed us many powers, latent and patent, to enjoy life and to conquer His universe for the benefit of humanity. The ingrained productive capacity of earning is natural gift of God. The natural productive capacity can adopt three routes through proper nourishment, i.e., entrepreneurship, consultancy, and workmanship. Workmanship is the ability of an individual to accomplish an economic work, efficiently. Consultancy is the capacity to provide professional advice/workable idea to someone on economic work, honestly. Entrepreneurship is the ability of an individual to innovate/realize business idea, effectively. The innate productive capacity is wasted or damaged on account of wrong beliefs or heinous crimes, whatever may be the reason, conceptual or practical, the dormant or depleted productive capacity can be regained or replenished through concerted economic efforts and earning skills. The prominent replenishing tools are learning of new earning techniques, application of acquired skills for earning and networking with relevant people or institutions. In nutshell, it is learning, earning and networking during economic struggle. An important dimension of productive skills is investment talent, it is unavoidable for business. However, the investment talent is not natural productive capacity rather it is based on earned capital and offshoot of natural productive capacities i.e., entrepreneurship, consultancy, and workmanship. An effective investor is supportive during multiple financial crises, pragmatic towards business opportunities and precise towards accounting works of a business.

Major Path Hurdles during Financial Struggle

A work for monetary benefits is called economic work; it gives monetary independence to individuals. Economic works are countless. The very selection of a definite economic work depends on personal choice of an economic agent. In addition, the financial Intelligence is required to accomplish multiple economic works, successfully. Financial intelligence is an ability to differentiate between possible economic opportunities and economic threats. Generally, an economic work realizes stipulated money units for personal use. An effective economic work must demands three vital steps – acquisition of financial education, aspiration of financial goals, and application of financial techniques for financial goals. The major path hurdles during an economic struggle are – financial idealism, in-discipline, fear of failure, get rich quick mentality and procrastination.

Concluding Remarks

The road towards financial freedom is dominantly sustainable livelihood. The decisive personality elements of financial sovereignty are moral sense, independent mindset and interactive behavior. The aforementioned personality traits attract financial independence. Financial independence means effective planning, strategic execution and patience in struggle till logical outcome of struggle is not appeared.

What Wall Street Doesn’t Want You to Know About the Independent Financial Adviser

The word independent can be described as autonomous, unbound by another entities force, direction or will, or perhaps and most importantly freedom. But in the context of your financial advisory relationship independence means much, much more. To understand just why the independent financial advisor model is so vital to your long term financial success, you must understand the difference in advisory models from the ground level up.

According to a survey by Cerulli Associates, an industry polling and research firm, the channels of financial services models can be broken down into roughly six major categories:

National Full Service Brokerage – These are firms such as Merrill Lynch, Smith Barney, Morgan Stanley and Goldman Sachs. A financial advisor at one of these firms works for their employer directly, but can provide financial advisor services and sell you insurance and investment products (maximizing profits and enriching company value). There are approximately 70,000 “financial advisors” at national full service brokerage firms.

Regional Full Service Brokerage – These are smaller geographically specific brokerage firms such as Robert W. Baird, Edward Jones, and AG Edwards. Regional brokerage firms are nearly identical to their national counterparts in business model, however they’re smaller in size and typically geographically anchored to service a smaller segment of investors. There are approximately 15,000 “financial advisors” at these smaller regional full service brokerage firms.

Independent Broker-Dealers – These are firms such as LPL Financial (Linsco Private Ledger), Associated Securities Corp., Ameriprise and ING. A broker-dealer acts as either a sales organization selling consumers investment and/or insurance products OR as a buyer of securities. Some broker-dealers act in both capacities. There are approximately 100,000 “financial advisors” at independent broker-dealers.

Bank Brokerages – These are banking institutions who also offer financial advisor and investment management services to their banking customers. Banks such as Wells Fargo, Bank of America and Citigroup offer these services and employ roughly 15,000 “financial advisors”.

Insurance Broker-Dealers – Firms such as New York Life, ING, AXA Advisors, Equitable, and Transamerica are involved in the exchange of insurance contracts and services from company to consumer. There are roughly 35,000 “financial advisors” in such firms.

Registered Investment Advisor Firms – There are roughly 25,000 Registered Investment Advisor Firms. A Registered Investment Advisor (RIA) is a firm registered directly with the Securities and Exchange Commission (SEC) or their state securities licensing division. My firm Red Rock Wealth Management is an SEC Registered Investment Advisor Firm. Nearly half of all Registered Investment Advisor firms are also working with or through a broker-dealer (at some level) however to facilitate investment and insurance transactions.

Removing the RIA’s with broker-dealer affiliations this means roughly 5% of “financial advisors” are solely in the Registered Investment Advisor model.

The words “financial advisors” are in quotations because these firms hold their employees out to the public in a financial advisor capacity, yet they may or may not be true financial advisors depending on their employment status. In fact, they may be nothing more than facilitators of brokerage transactions for insurance and investment products.

Why is this industry knowledge important to you and your financial future? Because there are varying levels of DEPENDENCE in the first five models for financial advisors. The pure Registered Investment Advisor model with no broker-dealer affiliation is the only completely INDEPENDENT model.

To be clear, many financial advisors at independent broker-dealers like LPL consider themselves independent, and provide financial services in that manner. However there are still issues of reliance on the company that pays their commission checks. Outside of the RIA model however, the independent broker-dealer is the closest thing to a purely independent financial advisor practice.

To fully grasp why the national and regional brokerage firms, the bank brokers, the insurance brokers, and the independent brokers are not independent, simply look at who writes their paycheck. Unless you’ve never been employed, you understand clearly that your paycheck is contingent upon fulfilling your duties to your employer as your employer describes said duties, period – end of story.

If your employer is “calling the shots”, to maintain employment and get your paycheck – you fall in line, you follow orders. You do so regardless of whether those shots the employer calls are in your clients best interests or not. To earn a living – you follow orders. This concept is clear and unwavering whether you’re flipping burgers for McDonald’s and must prepare food a certain way, or if your a Fortune 500 CEO and accountable to shareholders and a Board of Directors. If you work for someone else, you’re dependent on fulfilling their idea of what your job description is.

If your financial advisor is beholden to their employer (and 95% of financial advisors are) they’re dependent on that entity for income, benefits, and job security. If they’re dependent on their employer, they must fall in line and follow company orders.

But that’s not so bad is it? 95% of financial advisor representatives being dependent on the company they work for to earn a living? It is if the company they represent is in turn beholden to maximizing profits and increasing shareholder satisfaction. If the financial advice given to you is somehow influenced by corporate profits, how can you be certain it’s in your best interests?

There are several reasons an INDEPENDENT financial advisor will have the upper hand when it comes to providing unbiased financial advice and guidance, but to name a few:

No Proprietary Products – Each of the first five models may create, manage, and sell their own investment and insurance products, or in many cases they have “special arrangements” with other firms to promote and sell “preferred” investment and insurance products. By “special arrangement” I mean kickbacks, a commission, compensation, additional business benefit, etc. The fact is, whether the products are truly proprietary or a special arrangement is made, if the company receives a financial benefit to sell certain investment and insurance products it’s effect is proprietary in nature, as it clearly identifies a conflict of interest.

Highly Profitable Insurance and Investment Products – Perhaps the most common form of abuse with the dependency created in the first five practice models is promoting investment products with higher fees and commissions for higher corporate profits. Certain products, such as life insurance, variable annuities and limited partnerships, pay handsome commissions and fees to the financial advisor and their firm. With such a financial incentive – many advisors and their firms will “tailor” their financial planning advice and investment guidance, leading the consumer to believe these higher cost higher profit alternatives are the best solution for their financial problems. This practice lines their pockets while oftentimes picking your pockets clean!

Investment Banking Relationships – Take for example XYZ Company wanting to go public (a Wall Street machine revenue generator). Wall Street Firm A provides a channel to sell XYZ Company stock through their “financial advisors” (and other methods) to consumers. If Wall Street Firm A has an investment banking deal with XYZ Company, chances are even if XYZ Company is horribly run, unprofitable, and inefficient – they’re going to take XYZ Company public with an incentive for their stock analysts to be kind in rating XYZ Company stock. Granted, there is supposed to be a “Chinese Wall” between the investment banking side of a firm and the retail outlets and stock analysts – however with the inherent conflict of interest it’s naive to believe this doesn’t occur at some level.

Promoting proprietary or higher cost investment and insurance options to consumers is in all likelihood nothing more than an effort to increase personal and company profits. This holds true with many investment banking deals as well. 100% of consumers can benefit from low or no-load investment and insurance alternatives. If a financial advisor’s real underlying goal it to create a positive financial impact for their clients – why aren’t these firms and their financial advisors implementing financial plans using the lowest cost most efficient and effective alternatives? Certainly high costs and fees cannot be a pre-requisite for good performance and financial goal achievement!

A Registered Investment Advisor Firm with no broker-dealer association is the only financial services industry model where the entire compensation comes from the client only – not from the “Wall Street machine”. Those first five of six financial advisor models create an inherent dependence on behalf of their financial advisor employees directly to the company they work for. It’s unfortunate that only 5% of financial advisors are practicing in the form of a Registered Investment Advisor.

College Financial Aid FAQ

Financially Challenged? There’s lots of free college information available online, and here are some of the most popular questions when it comes to student Financial Aid. Learn about the difference between grants, student loans and college scholarships and bank on your future!

What is Financial Aid? Financial aid is monetary aid to help you pay for your college education. Aid is made available from grants, college scholarships, student loans, and part-time employment from federal, state, institutional, and private sources. The types and amounts of aid awarded are determined by financial need, available funds, student classification, academic performance, and sometimes the timeliness of application.
What is the FAFSA? FAFSA stands for Free Application for Federal Student Aid. The FAFSA is the Federal Department of education’s primary application for financial aid and is the gateway form to just about any other federal, state or private grants, college scholarships, student loans or college work study programs. The FAFSA form must be filled out each year between January 1 and March 10th (although some colleges have their own earlier deadlines) and can be completed online or by mail. Four to six weeks after you file the FAFSA (two to four weeks if you filed electronically), you will receive your Student Aid Report (SAR) which will contain a summary of the information you submitted on your FAFSA and presents your Expected Family contributions (EFC) which tells you the amount your family is expected to contribute towards your education. The amount of financial aid is then determined approximately by the tuition of your college subtracted by your EFC. If you do not receive the SAR within a reasonable amount of time, you can call the Federal Processor at 1-319-337-5665. Review the SAR carefully for errors. If necessary, make any corrections on Part 2 of the SAR and return it promptly to the address listed on the form. You will then be sent a new SAR with the changes made.
What is the College Scholarship Services Profile (CSS Profile)? Some colleges also require you to fill out a College Scholarship Services Profile form in addition to the FAFSA. It is a secondary financial aid form that supplies further information about your family income. Be sure to check whether this form is necessary and about specific deadlines with your college directly.
What is the difference between a Grant, a Student Loan and a College Scholarship? A grant is free money from government or non-profit organizations that does not need to be repaid. Grants are usually determined by financial need but can also be influenced by academic merit. Unlike grants, student loans are money loaned from an academic institution, financial institution, or federal government that must be repaid. Like a grant, a student scholarship is free money, but is generally offered through colleges, businesses, private individuals and outside sponsors. Those awarded by the college itself are often called MERIT AID. While grants tend to be issued according to financial need, college scholarships are awarded on a broad-base of criteria, the most common being academic merit. Furthermore, to receive any grants or loans you must complete a FAFSA, however, many scholarships may not require you to complete a FAFSA to be eligible. Instead, you may need to obtain application material directly from the donor of the scholarship.
What are the different kinds of grants? There are federal as well as campus-based (institutional) grants. Federal Grants are free gift money from the Federal Department of Education while campus-based grants are government funds issued directly from your college. The campus-based grants provide a certain amount of funds for each participating school to administer each year. When the money for a program is gone, no more awards can be made from that program for that year, so make sure you find out about the types of grants awarded by each college you are considering as well as their specific deadline. Below are some of the most common grants.
Federal Grants Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and non-federal sources might be added. Pell Grants are usually only awarded to undergraduate students who have not earned a bachelor’s or a professional degree. The amount you get depends on your financial need, your college’s tuition, your status as a full-time or part-time student and your plans to attend school for a full academic year or less. The Academic Competitiveness Grant is a new grant available to first year college students who graduated from high school after January 1, 2006 or for second year college students who graduated from high school after January 1, 2005. Only students who are eligible for a Federal Pell Grant and who has successfully completed a rigorous high school program as determined by the state or local education agency and recognized by the Secretary of Education. An Academic Competitiveness Grant will provide up to $750 for the first year of undergraduate study and up to $1,300 for the second year of undergraduate study for full-time students who are eligible for a Federal Pell Grant. The National Science and Mathematics Access to Retain Talent Grant (AKA the National Smart Grant) is available during the third and fourth years of undergraduate study to full-time students who are eligible for the Federal Pell Grant and who are majoring in physical life, or computer sciences, mathematics, technology, or engineering or in a foreign language determined critical to national security. The student must have also maintained a cumulative grade point average (GPA) of at least 3. 0 in coursework required for the major. The National SMART Grant award is in addition to the student’s Pell Grant award. Campus-based Grants
The Federal Supplemental Educational Opportunity Grant (FSEOG) The FSEOG is a campus-based grant aimed at assisting students with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. You can receive between $100 and $4,000 a year depending on when you apply, your financial need, the funding at the school you are attending, and the policies of the financial aid office at your school.
What are the different kinds of student loans? A student loan is money that needs to be repaid after you have completed your studies. Generally, interest rates are low- so that you do not rack up as much debt as you would with a credit card or bank loan. There are campus-based loans, which you repay directly to your college, as well as federal loans which you repay either directly to the U.S. government or to your financial institution.
Campus-based LoansFederal Perkins Loan The Federal Perkins loan is a campus- based loan because it is administered directly by the financial aid office at each participating school. In other words, your school is the lender although the loan is made with government funds. Your school will either pay you directly or apply your loan to your school charges. You’ll receive the loan in at least two payments during the academic year. You can borrow up to $4,000 for each year of undergraduate study with a maximum of $20,000 for your entire undergraduate degree. The amount you receive depends on when you apply, your financial need and the funding level at your school. The Federal Perkins Loan is a low-interest , 5 % loan for students with exceptional financial need. You must repay this loan directly to your school and you have nine months to begin your repayment plan after you graduate. Generally you will make monthly payments to the school that loaned you the money over a 10 year period. Federal LoansThe U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as 1. Stafford Loans (for students) and 2. PLUS loans (for Parents). Schools generally participate in either the FFEL or Direct Loan program, but sometimes schools participate in both. For either type of loan, you must fill out FAFSA, after which your school will review the results and will review the results and will inform you about your loan eligibility. You also will have to sign a promissory note, a binding legal document that lists the conditions under which you’re borrowing, and the terms under which you agree to repay the loan.
Stafford Loans Stafford loans are federal loans for students. Eligibility rules and loan amounts are identical under both the FFEL and Direct loan programs, but providers and repayment plans differ. For all Stafford loans first disbursed on or after July 1, 2006, the interest rate is fixed at 6. 8 percent. However, you can be considered for a subsidized loan, depending on your financial need, in which the government will pay (subsidize) the interest on your loan while you’re in school, for the first six months after you leave school and if you qualify to have your payments deferred. You might be able to borrow loan funds beyond your subsidized loan amount even if you don’t have demonstrated financial need. In that case, you’ll receive an unsubsidized loan. Your school will subtract the total of your other financial aid from your cost of attendance to determine whether you are eligible for an unsubsidized loan. Unlike a subsidized loan, you are responsible for you’re the interest from the time the loan is disbursed until the time it is repaid in full. After you graduate, you will have a six month ‘grace-period’ before you must begin repayment. During this period of time, you’ll receive repayment information, and you’ll be notified of your first payment due date. You are responsible for beginning repayment on time, even if you don’t receive this information. You will receive more detailed information on your repayment options during entrance and exit counselling sessions provided by your school.
Federal Family Education Loan (FFEL)Funds from your FFEL will come from a bank, credit union or other lender that participates in the program. Schools that participate in the FFEL program, will usually have a list of preferred lenders. Student loan borrowers may choose a lender from that list, or choose a different lender they prefer. Your loan money must first be applied to pay for tuition and fees, room and board and other school charges. If money remains, you’ll receive the funds by cheque or in cash. Besides interests, you will pay a fee of up to 4 % of the loan, deducted proportionately from each loan disbursement. For a FFEL Stafford Loan, a portion of this fee goes to the federal government, and a portion goes to the guaranty agency (the organization that administers the FFEL Program in your state) to help reduce the cost of your loans.
Direct LoanUnder the direct loan program, the funds for your loan come directly from the federal government and you will need to repay your Direct Loan to the U.S. Department of Education’s Direct Loan Servicing Center. Like the FFEL loan, you will pay a fee of up to 4 % of the loan. For a direct Stafford Loan, the entire fee goes to the government to help reduce the cost of the loans.
PLUS Loans (Parent Loans)Parents can borrow a PLUS Loan to help pay your education expenses if you are a dependent undergraduate student enrolled at least half time in an eligible program at an eligible school. PLUS Loans are available through the Federal Family Education Loan (FFEL) Program and the Direct Loan Program. Your parents can get either loan, but not both, for you during the same enrolment period. They must also have an acceptable credit history. For a Direct PLUS Loan, your parents must complete a Direct PLUS Loan application and promissory note, contained in a single form that you get from your school’s financial aid office. For a FFEL PLUS Loan, your parents must complete and submit a PLUS Loan application available from your school, lender, or your state guaranty agency. After the school completes its portion of the application, it must be sent to a lender for evaluation.

What are the different kinds of scholarships? Scholarships are awarded on a broad-base of criteria, the most common being academic merit. Many scholarships carry conditions besides academic merit, such as financial need, affiliation with a group-, leadership, athletic talent, artistic or musical ability etc. Some scholarships are awarded by the college itself, often called MERIT AID. Other scholarships are awarded by outside sponsors. For some scholarships, you need to be nominated. For most of them, you apply directly to a sponsor. Because there are so many different types of scholarships, you should check directly with your financial aid office at your college.

Can I apply for a grant, a loan and a scholarship at the same time? Yes. You can team up different types of financial aid or simply have one kind. Nevertheless, some types of financial aid are contingent on others. For example, you can only receive an Academic Competitive Grant or a Federal Supplemental Educational Opportunity Grant if you have received a Pell Grant. While you cannot team up a FFEL loan with a direct loan, you may be eligible to receive a subsidized loan (in which the interest is paid by the government) and an unsubsidized loan (in which you are responsible for the interest) at the same time. You can also combine grants with loans and scholarships, so it never hurts to try to get as many different varieties of aid as possible!

What is the Federal Work Study Program? The Federal Work-Study Program (FWS) is a campus-based program that provides part-time jobs for undergraduate and graduate students with financial need, that allows them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient’s course of study.

How often should I apply for financial aid? You will need to apply for financial aid each year. Even if you did not qualify this year, you should reapply next year since financial circumstances can change. The number of family members in college, for example can have a big impact on your eligibility for financial aid. If you submitted a FAFSA during the previous year, you may be able to complete the shorter Renewal FAFSA form instead. The renewal FAFSA will be mailed to your home. The renewal FAFSA preprints most of your answers from the previous year’s FAFSA. Verify that the old responses are still accurate and provide corrections or new answers where appropriate. If you don’t receive a renewal FAFSA by February 15, fill out a new FAFSA form.

How do I know whether I am eligible for financial aid? Don’t assume that you will not qualify for financial aid. Nearly all U.S. citizens or eligible non-citizens enrolled at least half the time are now eligible for some form of financial aid. Even if you don’t qualify for a grant, free college info is still available, and you may still be eligible for other forms of financial assistance. Many families don’t apply for financial aid, because they believe that they earn too much money. However, you don’t need to be from a low-income family to receive financial aid. Some loans and scholarships are available regardless of need. Many factors are used to determine your eligibility for financial aid and there is no simple cut-off base on income. You can’t get aid unless you apply!!

How to Find the Best Financial Planner Around

It has been said that good fortune happens when opportunity meets great planning. There are a lot of people who can boast of taking financial planning courses and who can offer financial advice to clients from all walks of life. However, each individual requires different financial advice at different times. This is because people have varying priorities, financial goals and responsibilities at different stages in their life. The billion dollar question is: how does one find a financial consultant who will meet their specific financial needs?

The first thing that an individual should look for in the best financial planners is the certification and credential to match their titles. They should have taken various financial planning courses that will teach them about communication, networking and planning. They should also have received extensive training in financial planning from an accredited institution.

The next thing that an individual should look for in their financial adviser is industry experience. The truth is that there are so many different strategies for increasing wealth. The best financial planner will know which type of strategy will work best for their client’s financial situation. The consultant should deal with each client individually, and design detailed services that will meet the client’s needs and expand their investment prospects.

A proficient financial advisor should have rave reviews and recommendations from previous clients and industry experts. Previous clients should praise the financial consultant’s support, expertise and knowledge. The consultants should be passionate about their work and about helping their clients to reach greater financial heights. The best financial planner is very committed to the task of ensuring that the client is happy. They should help their clients to seize their financial future by giving them proper financial solutions.

Some of the solutions that great financial advisors offer include cash flow management, wealth protection, income protection, estate planning, retirement planning and investment management. The planner should give their client all the services that will help them to wisely buy stock in domestic markets as well as international markets. They should help their client to gain access to capital raisings. Finally, they should help their client with pension funds and superannuation, and this should include superannuation funds that are self-managed.

Great financial planning advice will help the client makes great financial planning decisions. It will guarantee posterity in the client’s financial future. The financial advisers are hard to find, but once a client meets one, they can be sure that they will be on the right path to financial freedom.

World’s Financial System in Limbo – What to Expect!

In my recent article about investor protection and financial market size, I emphasized the world’s financial system being made up of a cluster of market-based and bank-based financial systems. I reiterated that whilst the U.S. and U.K. financial systems are predominantly market-based, that of Germany and some other European countries are bank-based. Now, whatever system is dominant in a country, market-based and bank-based systems form the main source of financial capital for investors, governments and individuals.

In other words, the interaction and integration of the two systems is what constitutes the financial systems of countries. The extent of their integration has promoted the situation where any failures or setbacks in one system permeate the other system. During the recent economic downturn, the world witnessed initially the failure of the market-based financial system of U.S. which had a spillover into the bank-based and market-based financial systems of the rest of the world. This confirmed the inseparability of market-based and bank-based financial systems and the global nature of the financial system.

Quite recently, there has been much talk about the urgent need to protect investors, customers, markets and banks with regards to both types of financial systems through government intervention. Government intervention is primarily to deal with what is called “agency” problems in finance and economics. Unfortunately, even as immaculate protection of these entities is impossible and unfeasible, inordinate protection can lead to inefficiency of the financial system, or what is called “deadweight” in economics.

Agency problems are inherent of financial system and it is not possible to completely eradicate them. Government regulations may improve transparency in the financial system and help also restore confidence in a country’s global competitiveness, but it cannot abate completely the agency problems which emanates from the discrepancy between the management’s self-interest and investors or stakeholders interest. Now, the federal government’s expansion of power through regulations into the management of a country’s financial system in order to deal with agency problems has its ramifications. The regulations may be towards the avoidance of the repeat of the financial meltdown and the rooting of potential “Madoffs”; however, care should be taken to avoid the production of “mechanical” managers and curtailing of “innovative” managers. For the proper functioning and sustainability of the world financial systems, there is the need for strong ethical moral innovative managers and not ethical moral mechanical managers. Ethical moral innovative managers are endowed with unlimited power and they would act in the interest of majority of stakeholders in the presence of external stimuli influence.

Contrarily, mechanical managers are those with limited discretion and who take decisions in response to problems based on an external stimuli or influence. As a matter of fact, mechanical managers do not have the freedom to make decisions that are in conformity with their own interests and that of the investors or stakeholders. Thus, an action plan by governments in the form of regulations should avoid providing a stringent documentation of regulations encompassing what managers, CEOs and those in higher authority should do or not do. This is because it would impede the existing deregulation in the world’s financial system.

Most importantly, the regulations should avoid telling the managers what they should do. Such an action plan has the potential proclivity towards the production of mechanical managers. Meanwhile, any government pursuit of extra transparency which is very important in a market-based bank-based systems should be applauded and commended as it would offer an appreciable level of protection for investors, markets, banks and stakeholders in general. The regulations should seek to prevent scandalous activities, promote compensation of managers tied to earnings and stock price methodology whilst preventing socialistic tendencies of government’s ultimate interest and control of the systems. Judiciously, the trajectory of government’s intervention should be towards transparency, accountability (that is better accounting disclosures) and probity to ensure sound financial practices in an atmosphere of flexibility in financial operations. Anything more than this, infringes on economic or financial freedom of the system.

The days when companies in the financial system paid huge sums to managers, CEOs without regards to earnings and stock prices are over. The future demands ethical moral innovative managers to promote transparency, accountability and probity in the financial system and to prevent a repeat of the meltdown. Now, too much legitimate power from the government can exacerbate the situation by turning innovative managers into mechanical managers. This is prevalent in most socialist and communist countries. These managers can be effective and efficient if they can collaborate with the government on the regulations whilst both parties make conscious effort to avoid the production of mechanical managers. Technically, efficiency and effectiveness is what distinguishes an innovative manager from a mechanical manager. For it is possible to be efficient without being effective and vice versa. By definition, efficiency is a measure of how well or productively resources are used to achieve a goal.

Effectiveness is a measure of the appropriateness of the goals an organizational entity is pursuing and of the degree to which the entity achieves those goals. Mechanical managers may have effectiveness because of complete subjection to governmental control but lack efficiency due to absence of creativity and innovativeness. They may operate under too much of government control and so lack the freedom to be innovative or creative. Such managers cannot reconcile organizational goals with government regulations for efficiency. Consequently, they are not able to use the resources productively to achieve organizational goals. Production of mechanical managers has often resulted in wastage of human or intellectual capital over the years in several countries.

In spite of the efficacy of ethical moral innovative manager’s positive impact on a financial system, there are associated negative dimensions. First, the setback in the government’s regulations with respect to innovative manager’s production is creation of utilitarianism-oriented systems — a system with principles that advocates for the greatest good of stakeholders — in that it supports the option that provides the highest degree of satisfaction to stakeholders. Secondly, this principle focuses on the results of our actions and not on how we achieve those results. The fact is that stakeholders have wide ranging needs and values and it is almost impossible to satisfy all these needs and values. If utilitarianism is to hold in this case then these innovative managers may be compelled to engage in unethical behaviors and decisions to attain results that seem ethical to some stakeholders (for example the government and some people of higher authority).

Thus, what is ethical is relative with regards to stakeholders. This is also analogous to a contravention of the “public choice” theory in that the government’s interest may not be the interest of the majority of stake holders. If the government seeks to regulate the financial market it would have to enact policies that are not totalitarianism-oriented but somewhere in-between egalitarianism and utilitarianism.

Egalitarianism principles advocate equality among all peoples socially, politically, economically and civil rightly. There are various forms of egalitarianism which includes gender, racial, political, economic, religious and asset-based. However, economic and asset-based egalitarianism would be of prime importance in the financial system. Egalitarianism is hard to achieve now because the economic inequality gap based on Gini coefficient analysis worldwide continues to widen due to the recession. This is also precursory that economic inequality is insurmountable in future. Though utilitarianism is dominant now, the best shot of government intervention is to produce policies that are in between the two principles. Why? Because utilitarianism has failed the system and there is the need for modification. Indeed, the recent financial meltdown is the result of utilitarian principles that have prevailed in the financial system. That is to say governments were focused on the results or positive outcome in the financial system and not on how the results were achieved. Consequently, the “smart” guys in the room took advantage of the situation and produced the worldwide financial mess.

Another underrated defect of government regulations is curtailing of financial innovation. Unfortunately, any unreasonable regulation may also create an incentive for banks or financial sectors or “gurus” to get around the regulation if it is unfavorable for business. They argue that it is financial innovation that has brought products like credit cards, debit cards, CDs, ATMs, internet billing, automatic banking transfers and determination of variable rates for transactions (mortgages, loans e.t.c). Thus, there is the tendency that government regulation that seeks to put a cap on how banks or financial institutions do business with clients would create an incentive for these institutions to act otherwise. These institutions would look for ways to get around it indirectly producing unpleasant financial innovations such as uncalled for penalties, unjustified fee charges and interest rates, bonuses and the likes whilst maintaining or declaring the needed profits. For example, one should not be exasperated if rates on ATM transactions increases as a result of a government regulated financial system.

Another example could be the conversion of fixed rates into variable rates on loans, credit cards, unjustified declaration of bonuses for managers, CEOs based on market oriented explanations. All these are forms of unpleasant financial innovations which is possible under a regulated system. The fact is that the financial institutions are constantly seeking for ways to improve services as well as earn larger profits by lowering the cost of doing business and increasing the returns from their transactions. These institutions assert that they need financial capital to support their huge investments and assets and would try to get around these regulations in order to stay in business and do that.

These developments lead to two questions. Is the world to be worried about regulations? No. Is the world to be worried about the repercussions? Yes. The world is not to be worried about regulations because it would seek to promote transparency, accountability and probity. However, the world is to be worried about the repercussions because of the response of the financial system to the government regulations if the regulations are unfavorable and most importantly infringes immensely on financial freedom and innovation of the system.

In conclusion, the government regulations should seek for transparency, accountability and probity and not an imposition of stringent measures on the financial system. The government should redefine these terms of transparency, accountability and probity for the sector without inhibiting favorable financial innovation or creating an incentive for unpleasant financial innovations. Redefining transparency, accountability and probity should produce a documentation of guidelines and regulations established by consensus. Such redefinition would cause the financial sector to be cautious in their transactions knowing that at the end of the day transparency, accountability and probity would have to be met. There is the tendency for collusion with contention resulting in a situation that forces the two parties into what is called “Nash equilibrium” in economics where there is an incentive for one party to default. In this wise, the documentation should include a frame work that prohibits contention and promotes collusion besides any unwanted spillovers to stakeholders. Let’s not forget the proverbial saying that “when two elephants fight, it is the grass and the ground that suffers.”