Embracing Simplicity

Around the holidays, I find myself overcomplicating things.  From trying to find the perfect gifts and decorating the house just right, to making a spectacular meal consisting of recipes I’ve never tried.  Many times, this just ends up causing anxiety, and the end does not feel like it justifies the means.  Not because I have ungrateful friends or family, but because what is more important to them is the time spent together, not the hours spent preparing a “Martha Stewart” moment.

The irony is that I am not practicing what I preach.  I often tell clients that the less complicated an investment, often makes it better.  This usually means lower fees, which translates into better performance. 

It’s also true for the way people save.  It can be very easy for someone to reach their financial goals by creating a plan, reviewing it at least annually or as their life changes, and simply letting the power of compound interest do the rest.  Unfortunately, we live in a world where more complicated has become synonymous with more appealing.  It’s easy to get seduced by the notion that more time and effort will always result in a better outcome.

All you have to do is look at our government to see how well this works.  Most legislation that is passed is written on thousands of pages.  Chip recently attended a Dimensional (DFA) conference where one of the speakers suggested each government agency cut their annual budget by x% each year.  He mentioned this in his last blog post, FiscalStuff.    This simple move could meaningfully cut our country’s deficit with minimal pain shared by everyone.

So, as you gather with your family over the holidays, and talk ultimately turns to New Year’s resolutions, maybe yours could be to embrace simplicity.   This could be anything from setting up your 401(k) contributions to increase by 1% each year, to changing one dietary habit a month if you’re trying to lose weight,  to just being cognizant of the way we allow complication to sneak into our lives.  As with most things, once we create a plan of attack, our goals become easier to reach.

Enjoy the holidays!      

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Hire an Advisor, Not a Salesperson

A common misconception about the investment world is that the person giving you financial advice is either commission-based or fee-based. At The Asset Advisory Group we are neither. We are fee-only. This means that we do not receive any compensation from the investment companies whose products we use to implement our client’s financial plans.

A commission-based salesperson will always have a temptation to make a recommendation based on what would be best for themselves or the company they represent, not their client. I’m not saying this is intentional, but I have seen it happen time and again.

If a client comes to me with $500,000 to invest, I will charge them a 1% annual management fee and allocate their funds to low cost institutional no load mutual funds. I receive no compensation from the mutual fund company. If the same client were to walk into a broker’s office, they may end up with a $500,000 annuity which pays the broker a $24,000 commission. When looking at an immediate payout of $4,000 or $24,000*, which would most salespeople choose? And do you think they will continue to give on-going advice to this client or look for their next prospect?

There are many advisors that are fee-based which accept both an ongoing management fee from their clients as well as a commission from the company whose products they are selling. Sounds like a great plan – for the advisor!

While I feel very strongly that fee-only advisors have the best opportunity to serve the interests of their clients, the bottom line is to know how your advisor is compensated. Anyone who gives you financial advice should not have a problem revealing exactly how much money he will make based on his recommendations for your portfolio.

*assumes a 6% commission and an 80% payout on the annuity and an 80% payout on the management fee

Chris Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com

Morningstar Says Fees Foretell the Future Better Than the Stars

Morningstar Inc., one of the most well known mutual fund evaluation companies, published a study on August 9th that concluded low fees were the best predictor of a mutual fund’s future success – even better than Morningstar’s own star-rating system.

This is a big deal; because Morningstar’s business consists of looking at past returns of mutual funds using a complicated evaluation system, assigning a star-rating to each one, and selling this information to individual investors, libraries and the financial industry. Mutual fund companies take out full page ads touting their 5 star rating because they know it will attract new deposits. For years, financial magazines have instructed people to invest only in Morningstar 5-star ranked mutual funds if they wanted to own the “best performing” funds.

“If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds,” wrote Russel Kinnel, Morningstar director of fund research and the study’s author. This conclusion is very important, because many creators of hedge funds and active mutual funds acknowledge that they are much more expensive than other alternatives, but insist that their outperformance will overcome costs. Based on the study, in every single time period and data point tested, this was not the case. It is too difficult to overcome the burden of high costs.

The investment industry is required to remind people that past performance is no guarantee of future returns. I believe people are deaf to this warning because research shows mutual funds experience a flood of new deposits after they publish high returns, and they are usually severely disappointed with the results. A better tactic is to focus on what you CAN control – what you are paying to invest in the fund. Mr. Kinnel at Morningstar came to the same conclusion: “Perhaps the most compelling argument for expenses is that they worked every time--because costs always are deducted from returns regardless of the market environment. The star rating, as a reflection of past risk-adjusted performance, is more time-period dependent. Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

I couldn’t have said it any better myself.

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com

Lessons for Investing Success

It’s always interesting to read the financial press this time of year. You can find a prediction to support whatever your gut feeling is about the future direction of the stock market. Tucked into this month’s Money Magazine amongst articles profiling the hottest mutual fund managers, and why investing in gold is a fool’s errand, is an excerpt from The Elements of Investing by Burton G. Malkiel and Charles D. Ellis. It caught my eye because Dimensional Fund Advisors (DFA), whose mutual funds we use in our client portfolios, utilizes the research of both of these gentlemen to guide their approach to investing.

The article is entitled “Dodge the 6 Biggest Investing Mistakes” and in each area, I see clients struggle to overcome these mistakes so that they will be successful long term investors.

Overconfidence

“We tend to be overconfident. If we do make a successful investment, we confuse luck with skill.”

All of us want to be able to brag to our friends that we identified the next hot stock before anyone else due to our superior stock picking ability. In reality, most times a lucky pick can turn into a disaster when confused with skill that can be relied upon in the future.

Following the Herd

“Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market’s bottom when pessimism is rampant.”

During the past twenty years I have talked many clients out of doing the exact opposite of what they should. We all know that buying low and selling high is the way to investing success, but unfortunately, our gut, along with the popular press and our friends and relatives, often leads us in the wrong direction.

Timing the Market

“The average investor’s actual returns are at least two percentage points lower (than the stock market as a whole) because the money tends to come in at or near the top and out at or near the bottom.

I think that this is one of the areas that an advisor can add the most value to clients. It doesn’t matter if the market is going up or down, investors feel better when buying the winning asset class or stock and selling the loser. Convincing them that staying invested over the long run is the best path to reaching their financial goals can be challenging during a roaring bull or raging bear market.

Assuming More Control Than You Have

“There is no dependable way to predict the future movements of a stock’s price from its past wanderings.”

We all want to look for trends, whether it’s in the market’s movement in general, a particular stock’s price, or whether it is likely to split in future. Feeling as if we can spot these patterns gives us more sense of security than we really have. I continually see this when discussing the price of the stock of a company from where the client has retired.

Paying Too Much in Fees

“There is one piece of investment advice that, if you can follow it, can dependably increase your returns: Minimize your investment costs.”

The DFA funds are not available to the public and are passively managed, which both allow them to keep the costs within their funds a fraction of what the typical retail investor pays.

Trusting Stockbrokers

“The stockbroker’s real job is not to make money for you but to make money from you.”

The advantage of working with an independent, fee only investment advisor is that there is no incentive from a brokerage firm to recommend trades or products which can be hazardous to the client’s wealth.

Investors that are able to overcome these mistakes and focus on their long terms goals despite the short term fluctuations of the stock market and the constant barrage from the media enticing them to do the exact opposite, are more likely to have a successful investing experience.

Chris Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Does Your Financial Advisor Work for You?

As the market recovery continues, we have been receiving many phone calls from individuals looking for a new financial advisor. Most inquiries are from people who have been working with a brokerage firm such as Merrill Lynch or Smith Barney. Last year’s market rout has exposed the fact that their portfolios were not diversified, and their broker isn’t interested in proactively communicating with them. As if this is not enough, when we prepare an analysis of their current portfolio, they are often shocked to find out the true cost of this advice.

Bob Veres, author of a monthly newsletter for financial advisors explains:

A brokerage firm representative is employed by, and owes a duty to, the firm, rather than the client.

The brokerage firm representative is PAID by the brokerage firm, rather than the client.
People follow the directions of whoever is paying their income.

And (here's the biggest distinction) the brokerage firm representatives inevitably recommend investment products with a lot of buried, hidden, obscure costs that trickle out of the customer's investment portfolio into those enormous multi-billion-dollar bonus pools. By the rough estimate of one advisor, a client with a $1 million portfolio will pay at least $20,000 more in various hidden costs to a broker than he or she to a financial advisor, even if both the broker and advisor are charging the same fee amount for the planning and investment work.

This is not just an issue of finding the cheapest advisor. This is the brokerage firm putting one over on its customers, draining the portfolio in ways that are never quite visible.It's a trust issue. The brokerage person posing as a real professional is helping the firm take money which, if the consumer knew about it, the consumer would object. The difference between professionals and salespeople is the professionals disclose all costs and compensation clearly and visibly, and you know what you're paying for.

At The Asset Advisory Group, the only compensation we receive is from our clients. Period. We are never paid by an investment company or any other firm. It is important for everyone to understand how the person giving them investment advice is compensated so they can be assured their advisor is working for them and not on behalf of their employer.

By Chris Carleton, CFP®
clcarleton@taaginc.com
www.taaginc.com