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Posts Tagged ‘Individual Investors

Market Guesswork Can Come Back to Haunt.

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

People have been wondering what the stock market will do since they first began trading under the buttonwood tree in lower Manhattan.

I read an article – one of a zillion such articles that always get multiple opinions from people who invariably prove they never had a clue to begin with – yesterday by Gil Weinreich, writing for AdvisorOne,  You can find a link to it on the IFG Facebook page; and this from the article caught my eye:

“The most recent Chicago Booth/Kellogg School Financial Trust Index indicates that 47% of the public expects the stock market to plunge in the next 12 weeks, according to Wharton professor Olivia Mitchell. Mitchell’s own portfolio has outperformed the stock market since 1999, when she put all her investments in Treasury inflation-protected securities. Her difficulty today, however, is figuring out what to do now that TIPS are paying negative returns.”

The professor put ALL her investments in TIPS.   Translation:  She was ‘timing the market’.  Not the stock market, but the bond market.  And, she’s got lucky.    But, there was a price.    Those who ride high on one side are often in danger of getting ‘whipsawed’ on the other.   

The market giveth and the market taketh away. 

The professor isn’t alone.  Many intelligent people – the same people who would never build a home without a blueprint, or launch a business without a well thought-out business plan – often make investment decisions and asset allocations based on an outlook, which means it’s virtually always without a long-term written investment plan.  It’s important to note there is NO professionally-written plan on earth, for a home, business, or investments, that would use only one material, or concentrate all risk into one sector.

Risk concentration isn’t a strategy.  It’s a guess.  It’s a hope.  Yet, too many Americans do it all the time.  It’s called ‘chasing returns’.

It doesn’t work.

It’s never worked.

Some point to past successes, similar to the example above; but, those always end-up being short-term.  When you calculate the returns over time – and one might argue the professor’s track record since ’99 isn’t exactly short-term – it’s also true that returns are now negative and her investment life isn’t over yet – and won’t be for many years to come.

Anyone who’s attended a large gathering of financial types knows the room is always filled with better-than-average investors; yet, few – although the number may be closer to ‘none’ – can even beat the indexes consistently.

It’s not about being brilliant; it’s about being smart.  Being smart really all about knowing what you don’t know… it’s about managing risk, not money… you just do it with money…. And market risk is only one of them.

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  

The Independent Financial GroupAdditional IFG Links:

 

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description. Opinions expressed are those of the author.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Scattered Assets Can Be More Than Risky

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

They can be expensive, too!

What are scattered assets?  Many people have multiple investment accounts, often with multiple brokerages and or mutual fund companies.  There are even those who have multiple institutional managers in separately managed accounts.

And, all this is in the name of diversification.  I just wrote about this in our ezine which you can find on the IFG Insights Archive.  But, here’s an overview:

Problem is, most of these people aren’t diversified at all?  In fact, rather than reducing risk, they may actually be increasing it! 

There are three issues at play – issues many often ignore:

  • Duplication is not diversification.   But, there’s more:  Few people realize that you can’t really diversify-away market risk.  Think about it: If you bought stocks in the ENTIRE stock market, you’d only be replicating market risk, not eliminating it.
  • Mutual funds contain hidden taxes.  Sure, most people know that; but, what they may not know is this:  They don’t own the underlying fund holdings; they are shareholders of the investment company and as such they share in the fund’s capital gains.  If the fund sold a stock they bought ages ago at a low price and now has large unrealized gains; the shareholder will share in ALL of those gains, even if the stock is sold just after the investor bought-in!
  • Tax inefficiency.   This happens when there are multiple managers, even if one of them is the client, in addition, buying securities in his own online account.  The duplication mentioned above can result in some real costs that can far outweigh any perceived savings.  Again, you’ll find a detailed example in this morning’s IFG Insights, which you can find in our archive.

Like Warren Buffet once said, if you think investing is fun, the odds are great you’re doing something very wrong.

Enjoy!

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IFG BlogJim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, and by subscribing to IFG Insights letters  for  individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen

Written by Jim Lorenzen, CFP®, AIF®

October 9, 2012 at 7:45 am

How to Recognize Investment Service Models

IFG BlogThe average investor can often have a difficult time understanding just how different investment professionals operate and who they’re really dealing with.

There are three basic service model environments where investment professionals can be found; but, what can make these environments even more difficult to understand is that it’s possible for two to be combined… or one can be masqueraded to look like something else entirely!   When you add to all that the alphabet soup of credentials and designations – some excellent and most meaningless – it’s no wonder the average investor has trouble figuring it all out.

While it would be impossible to address everything without writing a book, here’s an admittedly cursory overview of the three environments.  All have their selling points and negatives – and none is intrinsically better than the other –  but, since I’ve worked in all three, maybe I can help shed a little light on this and make them a little easier to understand.

1.      The Captive Registered Representative

This is how many, including yours truly, began their careers; and, in fact, many never leave!  The captive RR is someone you may know as a stockbroker, although the broker-dealer is actually the employer firm and the person you’re thinking of is a Registered Representative of the broker-dealer firm.   These firms can be the well-known large ‘wire houses’ with widely-recognized names or they can be smaller regional or even local firms.  In all captives, the RR is an employee of the firm and it is the firm that must sign ‘selling agreements’ with outside product providers if the RRs are going to offer anything other than in-house product.

I began my career in such a firm that provided all the services and infrastructure.  The job of an RR was is to generate revenue for the firm.  The hierarchy looked something like this:

What you may not know:  In the old days, these large firms made most of their money from their own packaged in-house proprietary product, including mutual funds, unit investment trusts (UITs), and other offerings.  I don’t know how true that is today – my guess is it’s probably much less so than in those days.   The reason I think this is because the wirehouse industry’s margins have been declining steadily over the years, indicating fewer proprietary product sales and evidenced by (1) a greater number of mergers that never seem to end, and (2) the fact that broker payouts – the percentage they pay their RRs on generated revenues – have been declining.  Brokers throughout the industry are having a tougher time ‘keeping their desks’ as margins have put pressure on RRs to increase revenue production.  This may be a reason why some, if not all, within that community are resisting the adoption of a fiduciary standard.

As I said, some RRs never leave the large wirehouses, for a variety of reasons, including the large in-house back-office infrastructure support, etc.   And, let’s face it, some may not be cut-out for self-employment.  For those who are, they often take the next step.

2.     The Independent Registered Representative

Some RRs who don’t want to remain ‘captive’ often want to set-out on their own and open up a private practice.  When a RR makes the decision to ‘break free’, they have to pay their own bills.  In my early days, that meant getting office space, phones connected, office furniture, supplies, and paying for my own insurance and a thousand and one other things; but, I could now select my own broker-dealer (BD) to function as my back-office and process all the paperwork through the various providers, etc.   

There are hundreds of BDs available to the independent RRs and they come in all shapes and sizes with different attributes.   Since my need was primarily for back-office processing, I wanted one that had (1) prompt and quality personal service, and (2) good relationships with quality custodians and other service providers.  Today, almost all can probably fit that bill.   While the RR is not an employee of the BD, the BD must still have Selling Agreements with product providers before the RR can access them for his/her clients.

One of the things about independence that independent RRs like is that the hierarchy can be flipped, which, to my mind, creates more of a ‘client first’ environment.

What you may not know:  An independent RR may be operating out of a small office in your local community; but, don’t let that fool you.  That independent likely has access to a huge array of institutional money managers and widely respected and recognized asset custodians and other service providers.   In fact, it wouldn’t be at all surprising if your local RR office actually had a wider menu of availabilities than the major wirehouse down the street, since many BD operations have provided their RRs with greater access to the marketplace.   An independent is far more likely able to provide you with a choice of custodians, etc., than a captive whose employer itself may want to be the custodian.

Something else you may not know:   Ever walk into your local bank branch and see the investment desk sitting somewhere in the lobby or off to the side?   When you sit down at that desk, you may think you’re still in the bank; but, guess again.  There’s no FDIC insurance there!  The likely scenario:  Some BD has signed a deal with the bank to private-label a brokerage service.  Not bad; you should simply be aware.

3.  The Independent Fiduciary Model:  The “pure” fee-only Registered Investment Advisor (RIA)

Some independent RRs finally decide to complete the process:  They want to drop all sales and commissions and gain access to the entire world of products and service providers, including those who don’t work through sales channels.  In my case, since I had already been in business in my own office for fifteen years, it was a simple process to register as an advisor and simply drop all the selling licenses.  An RIA must avoid conflicts of interest and operate under a fiduciary standard:  The clients’ interests must be paramount.

The model, however, looks much like the independent RR:

What you may not know:   Captive RRs and independent RRs both very likely work for or with a BD that is dually-registered, making the RRs also RIA representatives.  This allows them to work on a fee basis, as well as on commission.  Some will tout their fiduciary status during the planning stage; but, you should ask if they will operate under that status during the investment implementation stage.  It’s one thing to “adopt a fiduciary standard’ and quite enough to accept fiduciary status in writing.  From what I’ve observed, few, if any, BDs will allow their RRs to accept this status, whether they’re captive or independent.   That doesn’t mean they aren’t honest or that they don’t do good work; it’s just something you should be aware of.

Also be aware that some RIA firms provide investment management, asset custody, and portfolio reporting services all in-house while others prefer to work in a purely advisory capacity using third-party providers for the various services. 

Example:  In my own practice, most clients’ assets receive custody services from Pershing (owned by Bank of New York-Mellon).  All institutional managers are independent of the custodian and all portfolio reporting is provided by third-party services independent of the managers.  All parties are compensated by client fees only, as are my advisory services.   While it may sound like more fees, it’s often actually less.  All these services are usually ‘bundled’ by investment providers; I just unbundle them and ‘shop’ them individually, which can result in savings.

While this overview just scratches the service, it might give you some idea of the playing field.  In the final analysis, choosing an advisor is a personal choice.  You should find someone you’re comfortable with… and someone who will talk with you like an adult.  Avoid the ‘glad handers’ who tell you what you want to hear; find one that will talk straight and tell you what you need to hear, even if you think you’re an investment genius.  

Good luck!

Jim Lorenzen, CFP®, AIF®

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

 

Additional IFG Links:

 

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Local Attorney Faces 5 Years In Prison

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

That’s the headline I saw in my local paper a few days ago; and, I have to admit I was surprised.

I didn’t know him, but he was half of a well-respected law partnership that has been in the area for (I think) over two decades.   Now he’s convicted of 34 felony counts and faces up to five years in prison for swindling the estate of an elderly client – in this case, a deceased client – for more than $500,000.

How did this happen?  According to the article, the attorney was executor for the estate and failed to initiate probate for a year after his client’s death and, in the meantime, systematically embezzled the money from his client’s accounts while concealing those assets from the probate court and subsequently filed false statements with the court.

What makes the case interesting is that the attorney had repaid everything he took prior to the filing; but, that didn’t matter, as it shouldn’t.

How do avoid this from happening to you?

Almost all embezzlement scams – Bernie Madoff comes to mind – usually have one thing in common:  The lack of an independent third-party cusotodial firm.  Now, in the Madoff case, checks were made out to Madoff and Madoff supplied all the reporting.

In this case, I don’t know if the investment accounts resided at an independent custodian firm or not.  The attorney may have had control over the accounts, for all I know; but, if there was an independent custodial firm, where was the ‘checks-and-balances’?

Was there a Registered Investment Advisor on the account who would have been receiving independent reporting directly from the custodian, which would have been made directly available to the deceased’s heirs?   Those withdrawals would have shown-up there, no matter what the attorney gave the court… and both the advisor and heirs would have been asking questions immediately – though, presumably, the attorney would have been smart enough not to attempt an embezzlement in the first place, knowing there are other people receiving true reporting.

My guess, and it’s only a guess, is there was likely no independent entity providing the reporting to anyone that could have provided a checks-and-balances. 

There’s a lesson there for all of us.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Contributing To A 401(k)? Count Your Blessings!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Particpants in company 401(k) plans may be in the best market they could hope for! 

Yes, you read that right.  It was just about one year ago when I showed the math on why investors who don’t quit can win, even if the market goes down and only gets back to even!  You can read that post here.

Unfortunately, they don’t teach investment literacy in school; so, most plan participants know only what they see on the financial entertainment shows or in one of the consumer publications.   But, make no mistake about it, this is the time participants shouldn’t quit, especially if your employer is contributing for you with some kind of match!

Tune out the noise!  Just keep on contributing!  And, don’t try to pick winning stocks.   A good mix of low-cost indexes will likely do just fine.  Remember, studies show most investors can’t even tie an index, much less beat it – and that includes the so-called professionals!

Questions?  Talk to your plan advisor or to your personal advisor.  Of course, if all else fails, you know where to find me.

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NOTE:  Jim Lorenzen was interviewed by The Wall Street Journal’s Glenn Ruffenach for an article appearing in SmartMoney magazine.  You’ll find it on page 46 in the September 2011 issue now on newstands.

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary®  in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Individual Investors Need Help!

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

According to a recent paper by Vanguard, most individual investors still don’t do very well when it comes to selecting mutual funds.    For those of you who really like  to get `deep in the weeds’ on this stuff, you can read it here

This is an issue affecting many company retirement plan participants who have plans offering a long list of mutual fund selections.

Many plan sponsors – mistakenly, I think – believe that if they offer a huge menu of funds and turn all decision-making over to their participants, they’re `off the hook’ for the participants’ investment decisions.

Not sure that’s so.  I’m no attorney – if you’re a plan sponsor, you may want to discuss this with your ERISA attorney – but it seems to me that plan fiduciary’s first and only consideration should be to act in the best interest of plan participants.

DALBAR Financial Services tracked investor’s behavior chasing market returns from 1987-2006[i].  During that 20-year period, the S&P 500 yielded an average annual return of 11.8% while the average investor realized only 4.3%, clearly demonstrating that the vast majority of plan participants lack the knowledge, skill, and discipline to make good investment decisions.

So why do most plan sponsors simply offer a menu of high-priced retail stand-alone mutual funds – or worse, a bundled package assembled by a `big name’ company selling a high (hidden) priced product – instead of seeking out professional investment management solutions?  My guess is it’s simply a matter of a long history of drilled-in programming.   Let’s face it, many plan sponsors have been sold a `bill of goods’, some even believing their plan is `free’; but, asking participants to assemble investment portfolios is like asking them to assemble all the parts of an automobile and expecting them to reach their destination!

The Vanguard paper and the DALBAR study are just two in a long list that reach the same conclusions.  Plan sponsors need to ask themselves:  Are their participants really better off self-managing their retirement assets?  Should we really be asking them to do something they’ve never been educated to do?   – Let’s face it, many truly believe they know what they’re doing, but often their only education was a weekend class learning a trading system – or they read consumer magazines

Prudent plan sponsors – `prudent’ does have a legal definition in ERISA – who truly understand their duty is to act “solely in the interest of the participants and beneficiaries and for the exclusive purpose of providing benefits to participants and their beneficiaries” may want to consult with a plan consultant about their options.

Jim

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER™ and an Accredited Investment Fiduciary® now in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.


[i] DALBAR, Quantitative Analysis of Investor Behavior, 2007