Buyer Beware: What Do You Get From Your Advisor?

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Although I have never been to Thailand, I have read that you cannot go more than a few feet in a typical town market without someone yelling “same same.” It is the vendor’s way of telling you that what they offer is the same as everyone else, thus encouraging you to end yourcomparison shopping and buy from them.

Recently I spoke with a gentleman considering whether to become a client of our wealth management firm, and he asked matter-of-factly how we are different than all the other hundreds of investment firms in the area. It seems that most of the public thinks of all financial firms as “same same,” yet they differ widely. Here are a few of the things that may distinguish one financial advisory firm from the next.

You Don’t Know What You Don’t Know

I cannot tell you the number of prospective clients who sit down to meet with us and have no idea how to answer the following three major questions.

  1. What return do you need in order to meet your personal goals?

If your portfolio is making 20% per year but it is loaded with risky assets that are keeping you up at night and you only need to earn 5% per year to live your current lifestyle, what is the point of taking the extra risk? Is your plan to make as much money as possible or to have the ideal lifestyle with the least amount of risk? If your goals change, shouldn’t the asset allocation (and desired return) be altered as well?

  1. Is your portfolio performing suitably to help you meet your goals?

If you are not receiving performance reports every so often, how do you know if the current advisor is doing a good job in helping you meet your goals? What does this performance tell you about the likelihood that you will meet your goals? Do you have a plan in place for tracking your goals?

  1. How does your current advisor get paid, and what is the total cost of your relationship?

If you cannot determine how much your advisor is being paid, isn’t it vital that you ask, to make sure the fees are reasonable? The US Department of Labor 401(k) fee website (http://www.dol.gov/ebsa/publications/401k_employee.html) compared two investors who started at age 35 with a 401(k) balance of $25,000 and never contributed again. Both investors earned 7% per year before fees, but one paid a 0.5% annual fee and one paid a 1.5% annual fee for the investments. The ending value after 35 years would have been $227,000 for the investor who paid a 0.5% annual fee versus $163,000 for the investor who paid a 1.50% annual fee. The 1 percentage point difference in fees reduced the account balance at retirement by 28%! An advisor cannot control the market, but they do have some control over taxes and expenses.

Out of Sight, Out of Mind

We recognize that you have a lot going on and you do not always get around to completing your tasks. Perhaps you bought a life insurance policy years ago and have never revisited that decision to determine whether it still makes sense. Perhaps you never made a change to your estate documents or IRA beneficiaries after a marriage or divorce. Or perhaps you have not revisited your 401(k) allocation since the first time you made the initial selection.

Is this something that your advisor addresses? Does your advisor even know or want to know about your social security benefits, life insurance, or estate documents? Or have you simply been reduced, in your advisor’s eyes, to “a number?”

There are also certain age milestones that should prompt you to confer with your financial expert to ensure that decisions are made responsibly, such as:

  1. A few months before age 62, we suggest you sit down and go through a social security analysis to determine the optimal age for beginning to collect benefits.
  2. A few months before age 65, we recommend you research and apply for Medicare (as delaying will likely lead to penalties, based on the current Medicare rules).
  3. At age 70½ (or earlier for inherited IRAs) and each year thereafter, you need to decide the best approach in taking Required Minimum Distributions from your IRA.

Tax Brackets

Knowing your tax bracket and working with your accountant can help you achieve the highest after-tax return on your bonds.

Tax Sheltering

Placing certain assets to take advantage of IRAs, where you do not pay taxes on income and gains, can help boost your overall return.

Capital Gain Distributions and Tax Losses

If you are not watching out for mutual fund capital gain distributions at the end of the year, you are likely to get hit with a large tax bill. In addition, one of the ways to lower your tax bill is to take advantage of losses in your account once they take place.

Rebalancing

It is important to keep your asset allocation consistent with your goals by rebalancing between stocks and bonds. This may also lead to higher risk-adjusted portfolio returns over time.

The Devil Is in the Details

At the end of the day, it will benefit you to find a firm that puts a lot of time, effort, and thought into these details. The plan that is put in place on Day 1 should not be “buy and hold” (often described as “set it and forget it”), but rather “buy and manage,” with changes based on research, long-term projections, and unique circumstances. I can assure you that all financial firms are not “same same.” It is incumbent upon you as the buyer to ask the right questions before choosing the firm that’s best for you.

 

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Staying the Course No Longer Works!

HRE PR Pic 2013

Harold Evensky CFP® , AIF® Chairman

Ever since the market debacle triggered by the Great Recession, “Staying the Course No Longer Works” and “Modern Portfolio Theory Is Dead” have been popular headlines with the financial media. It sure sounds good; after all, why would any investor willingly subject their portfolio to the massive losses of 2008 and early 2009? They wouldn’t, of course; so does that mean that long-term strategic investing is out the window? One of the core beliefs at Evensky & Katz / Foldes Financial Wealth Management is that to earn market returns an investor needs to be in the market. Is that yesterday’s story? Needless to say, our investment committee takes these considerations very seriously, and we regularly review our investment philosophy and strategies. What we’ve concluded is that a better headline for the critics of modern investment theory would be “The Pot of Gold at the End of the Rainbow.” Unfortunately no one has yet discovered that pot. Here’s our take on the debate.

The critics claim that modern portfolio theory, asset allocation, and buy and hold are all equivalent concepts and all are passé. What surprises me is that the critics seem to believe they have just discovered the truth, when in reality a new group of “gurus” discovers the same truth after every bear market. These critics typically claim that “allocations are solely and simplistically based on projected historical data and traditional methodology that assumes valuation is irrelevant; they are determined at the beginning of the investment process and are never changed, except when they are rebalanced.”

Although unfortunately it is true that many practitioners do in fact develop allocation models based simply on historical data, that is certainly not the case at Evensky & Katz / Foldes Financial Wealth Management. We heed the advice of Harry Markowitz, Nobel Laureate and the father of modern portfolio theory. In his seminal work, Professor Markowitz wrote, “The first stage starts with observations and experience and ends with beliefs about the future performances of available securities.” He is quite clear in rejecting the approach of using historical projections. “One suggestion as to tentative risk and return is to use observed risk and return for some period of the past…I believe that better methods, which take into account more information, can be found.”

We certainly agree. When developing our recommendations for allocations to bonds and stock, we first develop forward-looking estimates for the returns, risk, and relative movement (i.e., correlations) of the various investments we will consider for our portfolios. While there can be no guarantee that these estimates will turn out to be correct, they certainly take into consideration not only the past but also the current market environment as well as expectations regarding future changes. For example, our projections for future returns are modest relative to past returns, our expectation regarding risk is that the markets will remain more volatile than in the past, and finally we believe that we live in an increasingly global world, so markets will move more in tandem in the future than in the past. The result is that the benefits of diversification will be diminished but not eliminated.

Regarding the criticism that allocations are determined at the beginning of the investment process and never changed, except when they are rebalanced—a strategy I call “buy and forget”—again, unfortunately many practitioners do follow this ostrich-like policy. But this criticism should be leveled at the practitioners setting their policies in stone. There is nothing in the literature or in practice to suggest that a policy allocation should not be revisited and revised when and if forward-looking market expectations change. As a consequence, it is our practice to review our assumptions at least annually, and our “strategic” allocations do in fact vary over time as a result of changes in our worldview. Rather than “buy and forget,” our policy is “buy and manage.”

The bottom line is that some may develop allocation models based solely on projections of historical data, but we do not. Some may also ignore valuations; again, we do not. And some may design allocation models and set them in stone; we do not.

Feel free to contact Harold Evensky with any questions by email: HEvensky@EK-FF.com

Visit us at www.EK-FF.com

Are Bonds the Next Bubble to Burst?

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

Nary a week has gone by in which we don’t get asked this question in some form or other. Newspapers and CNBC trumpet this headline to grab their readers’ attention, and I make no apology for doing the same—although as you will see as you continue reading, the tone of my article will not be quite as alarming. Newsletters tell their subscribers in UPPERCASE BOLD LETTERS the “secret” that only their subscribers can learn as to how to deal with this risk. Never mind the fact that if they actually had the secret, why would they tell you, and why would they need to sell their newsletter to earn a living? Let’s separate fact from fiction and discuss in a clear-headed manner what investors and our clients should do about this supposed impending disaster.

Back in the early 1980s, you could have purchased a 10-year Treasury bond, backed by the full faith of the U.S. government, with an interest rate of just over 15%. During the past 30-plus years, interest rates have decreased, and earlier this year, rates for 10-year Treasury bonds were at 2.5%. Bond prices move inversely to interest rates. If you own a bond with 5% coupon (or interest rate) and rates go up, such that new bonds pay 6%, your bond becomes less attractive, and the price of your bond goes down. However, if you hold that bond to maturity, barring a default, you will get your full money back at maturity. After interest rates falling for 30 years, we’ve already seen them rise this year, and experts have a consensus view that rates will continue to rise going forward, bringing us back to more normal levels. After all, interest rates can’t get much lower!

If you own an individual bond, you may not worry as much about rising interest rates, because if you ignore the interim price fluctuations, you will get back the full value of the bond, absent a default. There is a risk, though, that if you need money before the bond matures, the price may not equal what you paid for the bond, and you may recognize a loss. In addition, as we saw during the Great Recession, there have been times when liquidity for bonds ceased to exist. Investors were having such a hard time selling them that they accepted whatever price was offered. This price anomaly will affect the price of other people’s bonds too, similarly to how a foreclosure in a neighborhood affects the prices of the other homes in that neighborhood. The price is only as good as what someone is willing to offer.

Most people choose to own bond mutual funds, since owning individual bonds can be expensive and mutual funds can be very diversified. If you own a basket of 10 $50,000 bonds and you suffer one default, that’s a 10% hit. If a bond mutual fund holds 2,000 positions, a bond default is not even noticed. Bond mutual funds are a basket of bonds with a fund manager deciding which bonds to buy, which to sell, and which to keep to maturity. Just like individual bonds, the collection of bonds in a mutual fund will lose (gain) value if interest rates rise (decline). The easiest way to quantify the effect of an interest rate change is to view a bond’s duration. Duration is a measure of a bond’s sensitivity to interest rates and the higher the number, the greater the impact. A bond fund with a duration of three years means that for every 1% change in interest rates, the price will move by 3%. A bond fund with a duration of 15 years would have a larger move associated with a change in rates than a bond fund with a duration of fewer years.

If we knew that interest rates would rise tomorrow (there’s the rub!), we would sell bonds completely to avoid this risk. While we expect rates to rise over the coming years, we don’t know how or when they will rise. At the beginning of 2017, 10-year Treasury bonds were yielding 2.45%. Had someone bailed out of bonds and sat on the sidelines all of last year because they expected interest rates to rise, they could have missed out on great returns (the Bloomberg Barclays Municipal Bond Index was up 5.45% for 2017). In addition, rates may move differently for two-year bonds than they would for 30-year bonds. Lastly, who’s to say that the United States won’t slip back into a recession and that bonds will be the best-performing asset class for the next 12 months—or that stocks won’t drop 20% because they have become overvalued, and then suddenly a small bond loss looks like a good deal in comparison? The point is that trying to time this event is tantamount to useless, and anyone who says they can do it is either lucky or is bound to be wrong more than half of the time.

Given all this, should you be worried about bond losses? Yes and no. I’ll first point out that bonds are not guaranteed to make money over any period of time. If you want a guaranteed return, you can buy a CD or stuff your money into a savings account. Both currently earn a pittance and are almost certain to lose money to inflation over time. But when bonds do lose money, the losses are usually modest because the lower volatility protects bond investors. The worst annual return by the Barclays U.S. Aggregate Bond Index going back to 1976 was a 2.92% decline in 1994. Contrast that to the worst annual stock return going back to 1976 (measured by the S&P 500, including dividends)—37% in 2008—and you can see that by dumping bonds in favor of stocks, you avoid the interest rate risk but are simply exchanging this risk for overall market risk, which is far greater. Many of our clients have seen us walk through the long-term modeling in Money Guide Pro and have seen that the results frequently look better the more bonds someone owns. While the average returns each year will be lower (if we assume stocks outperform bonds), the volatility is reduced, and that may cause the probability of a successfully funded retirement to increase. If you had a choice between earning 8% per year with a 50% probability of successfully funded retirement, or earning 7% per year with a 90% probability of success, which would you choose? We think that for a majority of our clients, the probability of retirement success is more important than leaving a larger inheritance.

A number of investors have pointed to dividend-paying stocks, Master Limited Partnerships (MLPs), or Real Estate Investment Trusts (REITs) as appropriate alternatives to bonds. All three investments provide a potentially higher yield than cash and bonds, but without the interest rate risk. Sounds good, right? Unfortunately, investors are again simply avoiding one risk (interest rate) for another risk (market risk), as these investments got hammered in the Great Recession. Here’s a table of their returns from 10/31/2007 through 2/28/2009:

Investment (based on Morningstar Office) Cumulative Return
DJ U.S. Select Dividend TR USD -53.32%
Average of the 20 largest MLPs in the Alerian MLP 50 Index* -31.04%
DJ U.S. Select REIT TR USD -66.14%

* The Alerian MLP Index has only been in existence since 4/2009.

So if we have concluded that market timing does not work, and that many classic bond “alternatives” seemingly have more risk, not less, does that mean we sit back and acquiesce to the bond universe? Not entirely. At our firm, we’ve made a number of changes to our clients’ bond portfolios going back several years. First, we shifted a portion of the fixed-income funds into shorter-duration funds. None of the traditional bond funds in the portfolio currently have a duration longer than five years, and there is currently very little invested in long-term bonds. Should rates rise, this will help mitigate the losses. Second, we have carved out 25% of the bond portfolio into what are called “unconstrained bond funds.” These funds have wide latitude and buy foreign bonds, junk bonds, long bonds, and T-bills, or even short the market and make a bet on higher interest rates. The risk exists that these active funds make wrong bets and underperform the market, but so far, their track record has been very strong. The main reason we are using these managers is to protect on the downside should interest rates rise, as opposed to trying to make a high return with high risk. Lastly, we continue to keep an exposure to inflation-protected bonds. If interest rates rise because investors are concerned about higher inflation, these bonds have the ability to outperform traditional bonds.

If your investment horizon is short-term, bonds may prove to be a low- (or negative-) returning investment. Never assume that bonds will always provide positive returns: if someone is looking out 30 years, they will see ebbs and flows in all markets. Our advice: stay relatively safe in your bond portfolio, stay connected to the annual review of your Money Guide Pro retirement plan, and stay calm. Unfortunately, the headlines are more entertaining than the reality of the situation.

Feel free to contact Brett Horowitz with any questions by phone (305.448.8882 ext. 216) or by email: BHorowitz@EK-FF.com

Visit us at www.EK-FF.com

NewsLetter Vol. 11, No. 2 – April 2018

Dear Reader:

GURU’S SECRET
From the Wall Street Journal:

How Pundits Never Get It Wrong: Call a 40% Chance
Talking heads have learned that forecast covers all outcomes; “I just said it was a strong possibility.”

What are the chances that readers will make it to the end of this article? About 40%.

If you do make it, that prediction will look smart. If you don’t, well, we said the odds were against it.

Brilliant!!

SHELF LIFE
Ever wonder if the food you are about to eat is still good? Here is a website that allows you to check if the date on your food means it can be eaten or should be thrown out.

Still Tasty?

BOY, DOES THIS SOUND FAMILIAR
Wisdom from my #1 son:

As I get older, I realize

1. I talk to myself because there are times I need expert advice.
2. I consider “In Style” to be the clothes that still fit.
3. I don’t need anger management—I need people to stop pissing me off.
4. My people skills are just fine. It’s my tolerance for idiots that needs work.
5. The biggest lie I tell myself is, “I don’t need to write that down; I’ll remember it.”
6. I have days when my life is just a tent away from a circus.
7. These days, “on time” is whenever I get there.
8. Even duct tape can’t fix stupid—but it sure does muffle the sound.
9. Wouldn’t it be wonderful if we could put ourselves in the dryer for ten minutes and come out wrinkle-free and three sizes smaller?
10. Lately, I’ve noticed people my age are so much older than me.
11. “Getting lucky” means walking into a room and remembering why I’m there.
12. When I was a child, I thought naptime was punishment. Now it feels like a mini vacation.
13. Some days I have no idea what I’m doing out of bed.
14. I thought growing old would take longer.
15. Aging sure has slowed me down, but it hasn’t shut me up.
16. I still haven’t learned to act my age, and I doubt I’ll live that long.

I wonder if he’s trying to tell me something!

HEAD SCRATCHER
Excerpts from an article in InvestmentNews discussing the possibility of the SEC mandating the appropriate use of titles for financial service practitioners (i.e., sales titles for brokerage representatives and advisor titles for fiduciary advisors):

“We’re hoping that it will play a significant role because it is an action the SEC could take immediately without going through the whole political process,” said Harold Evensky, chairman of Evensky & Katz/Foldes Financial and a member of the Committee on the Fiduciary Standard. “It’s a commonsense, mom-and-pop solution to the issue of distinguishing the relationship between the professional and the client.”

But nothing is ever as simple as it may first appear.

“If you see the two terms side by side, the ultimate effect is to create a pecking order with a competitive advantage,” said Gary Sanders, counsel and vice president of government relations at the National Association of Insurance and Financial Advisors. “It’s not the regulators’ role to give a competitive advantage to one segment of players over another.”

“Competitive advantage”? Letting the public know the difference between a salesman and a fiduciary? For shame! How naive of me. I thought the regulators’ role was to protect the public, not a business model.

REALLY DEPRESSING
From Financial Advisor:

Advisor, Pastor of One of U.S.’s Largest Churches Allegedly Defrauded Elderly
The pastor of one of the nation’s largest Protestant churches defrauded elderly investors of $3.4 million in an investment scheme involving pre–Communist era Chinese bonds, according to a federal indictment.

Kirbyjon Caldwell, senior pastor at Windsor Village United Methodist Church in Houston, orchestrated the scheme with financial planner Gregory Alan Smith of Shreveport, Louisiana, who was permanently barred from the securities industry in 2010 by Finra, according to the U.S. Justice Department and the SEC.

MILLIONS OF MILLIONAIRES
The number of millionaires in the United States climbed to over 11.5 million by the end of 2017! (MarketInsights)

WHERE DO SOME COME FROM?
From Kiplinger’s:

CEO Pay Hits the Stratosphere
Pay for the average large-company CEO has risen 46% since 2009, versus 2.2% for the average worker.

2016: $15.6 million

IMPORTANT LIFE LESSONS
From Christo, a Lubbock friend:

• I never make the same mistake twice. I make it five or six times, just to be sure.
• The secret of enjoying a good wine:
1. Open the bottle and allow it to breathe.
2. If it doesn’t look like it’s breathing, give it mouth to mouth.
• “It’s true, I do sh*t in the woods.” [the bear]
• Dear Optimist, Pessimist, and Realist,
While you three were busy arguing about that glass of water, I drank it!
• Every box of raisins is a tragic tale of grapes that could have been wine.

DON’T FEEL BAD
If you don’t get to play with the “Big Boys” on Wall Street. From Bloomberg Markets via my partner, Lane:

One of John Paulson’s hedge funds has plunged about 70 percent over the past four years, marking a dire stretch for the billionaire plagued with investor redemptions…

The performance marks yet another setback for Paulson, whose claim to fame was his bet a decade ago that the U.S. housing market would collapse. But his Paulson & Co. has failed to keep up such money-making wagers and instead shuttered a fund last year and made wrong-way trades on gold, U.S. banks and drugs stocks.

Investors lost patience. The firm’s assets nosedived from a 2011 peak of $38 billion, when clients contributed about half the capital. Now the firm runs about $9 billion, and roughly 80 percent of that is Paulson’s own money.

Paulson Partners also follows a merger arbitrage strategy, which typically bets that a target company’s shares will climb toward the offer price while the bidder’s will fall. Since the fund started trading in 1994, it has produced a 9 percent annualized return, while the levered version has gained 7.5 percent since its inception in 2003 [as of early January 2018]. Last year the funds lost money on their pharmaceutical stocks, the person said.

By way of comparison (S&P 500)
January 1994–January 2018: 9.8% (dividends reinvested)
January 2003–January 2018: 10.2% (dividends reinvested)

TOOT HIS HORN
From AARP Bulletin:

The Kentucky Derby doesn’t start until Steve Buttleman blows his bugle call. Mr. Buttleman has been the bugler, playing his 32-inch herald trumpet, at Churchill Downs for 23 years.

FROM MY LITTLE BROTHER
Control Tower Repartee
Tower: “Delta 351, you have traffic at 10 o’clock, 6 miles!”
Delta 351: “Give us another hint! We have digital watches!”

Tower: “TWA 2341, for noise abatement turn right 45 degrees.”
TWA 2341: “Center, we are at 35,000 feet. How much noise can we make up here?”
Tower: “Sir, have you ever heard the noise a 747 makes when it hits a 727?”

A student became lost during a solo cross-country flight. While attempting to locate the aircraft on radar, ATC asked, “What was your last known position?”
Student: “When I was number one for takeoff.”

A DC-10 had come in a little hot and thus had an exceedingly long roll-out after touching down.
San Jose Tower Noted: “American 751, make a hard right turn at the end of the runway, if you are able. If you are not able, take the Guadalupe exit off Highway 101, make a right at the lights, and return to the airport.”

Tower: “Eastern 702, cleared for takeoff, contact Departure on frequency 124.7.”
Eastern 702: “Tower, Eastern 702 switching to Departure. By the way, after we lifted off we saw some kind of dead animal on the far end of the runway.”
Tower: “Continental 635, cleared for takeoff behind Eastern 702, contact Departure on frequency 124.7. Did you copy that report from Eastern 702?”
Continental 635: “Continental 635, cleared for takeoff, roger; and yes, we copied Eastern. We’ve already notified our caterers.”

One day, the pilot of a Cherokee 180 was told by the tower to hold short of the active runway while a DC-8 landed. The DC-8 landed, rolled out, turned around, and taxied back past the Cherokee. Some quick-witted comedian in the DC-8 crew got on the radio and said, “What a cute little plane. Did you make it all by yourself?”
The Cherokee pilot, not about to let the insult go by, came back with a real zinger: “I made it out of DC-8 parts. Another landing like yours and I’ll have enough parts for another one.”

The German air controllers at Frankfurt Airport are renowned as a short-tempered lot. They not only expect one to know one’s gate parking location but how to get there without any assistance from them. So it was with some amusement that we (a Pan Am 747) listened to the following exchange between Frankfurt ground control and a British Airways 747, call sign Speedbird 206.
Speedbird 206: “Frankfurt, Speedbird 206! Clear of active runway.”
Ground: “Speedbird 206. Taxi to gate Alpha One-Seven.”
The BA 747 pulled onto the main taxiway and slowed to a stop.
Ground: “Speedbird, do you not know where you are going?”
Speedbird 206: “Stand by, Ground, I’m looking up our gate location now.”
Ground (with quite arrogant impatience): “Speedbird 206, have you not been to Frankfurt before?”
Speedbird 206 (coolly): “Yes, twice in 1944, but it was dark—and I didn’t land.”

SAD BUT TRUE
Excerpts from The Death of the Fiduciary Rule Is Bad News for Your Retirement.

The Fiduciary Rule is one step closer to death, and that means it’s once again A-ok for your retirement planner to scam you.
I’m sure they’d take issue with the phrasing, but effectively it’s what they’re doing. For many financial planners, there’s no requirement that the advice they give you is in your best interest—it only needs to meet a “suitability” standard. Instead, they can suggest products and funds that give them a kickback, even if the products don’t perform as well as others or have higher fees attached to them. In fact, the White House Council of Economic Advisers found that non-fiduciaries cost retirement investors (AKA you and me) $17 billion per year.
Do you know who does have to work in your best interest? Fiduciaries. There are plenty of them out there—you can search for one here—and these advisors pledge to do what’s best for you, their client. Certified Financial Planners (CFPs) and Registered Investment Advisors (RIAs) are fiduciaries, for example. They don’t get kickbacks from certain products, and they don’t tack on extra fees. Instead they help you make a financial plan that works for you….
The Fiduciary Rule, crafted by the Obama Administration, would have required that all financial professionals (like brokers and insurance agents) to adhere to the “fiduciary” standard—meaning they’d have to work in your best interest if they were advising you on your retirement investments. Simply, they would have had to put your needs before theirs.
Naturally, the financial industry was not happy. How could they continue to turn such enormous profits if they’re not able to scam the average investor out of his or her retirement savings?
… a federal appeals court ruled that the Department of Labor overstepped its authority when it wrote the rule. The opinion did say that Congress or another “appropriate” state or federal regulator could act to institute it, though…that isn’t going to happen anytime soon.
Who else is held to a fiduciary duty? Lawyers are a typical example. Would we all be fine with some lawyers breaching client-attorney privilege or cutting a deal with the defense to receive a portion of their client’s payout on the backend, if they charged the client slightly less upfront? No?
So what can you do? Well, of course be aware that this is happening. If it’s possible, hire a “fee-only” planner to advise you on your investments. And lobby your state government to institute its own version of the Fiduciary Rule. And maybe get a little riled up about it.
You might also ask your financial advisor to sign the Committee for the Fiduciary Standards Oath (http://www.thefiduciarystandard.org/fiduciary-oath/). At least then you’ll know your advisor is committed to your best interest. If they refuse? Consider a change.

HANDY TO KNOW
Also from Kiplinger’s:

When It’s Safe to Shed Your Tax Records
In most cases, the IRS has three years after the due date of your return (or the date you file it) to do an audit. You should keep some records even longer than that, and it’s a good idea to hold on to your tax returns indefinitely.

Three Years—W-2s, 1099s, 1098s, cancelled checks, and receipts for charitable contributions. Records relating to HSAs and 529 Plans. Contributions to tax-deductible retirement accounts.

Six Years—Receipts for business income and expenses, if you’re self-employed.

THIS IS VERY COOL!
The U.S. Postal Service has a new service called “Informed Delivery.” It provides a picture of the exterior, address side of letter-sized mailpieces and tracks packages that are scheduled to arrive soon! You can also check back for the prior week. Sign up for free at https://informeddelivery.usps.com/box/pages/intro/start.action.
LITTLE HAROLD
From my friend Ron:

04-2018_Little Harold

A new teacher was trying to make use of her psychology courses. She started her class by saying, “Everyone who thinks they’re stupid, stand up!” After a few seconds, Little Harold stood up. The teacher said, “Do you think you’re stupid, Harold?”

“No, ma’am, but I hate to see you standing there all by yourself!”

Harold watched, fascinated, as his mother smoothed cold cream on her face. “Why do you do that, Mommy?” he asked.

“To make myself beautiful,” said his mother, who then began removing the cream with a tissue.

“What’s the matter?” asked Harold. “Giving up?”

Harold’s kindergarten class was on a field trip to their local police station where they saw pictures tacked to a bulletin board of the ten most wanted criminals. One of the youngsters pointed to a picture and asked if it really was the photo of a wanted person. “Yes,” said the policeman. “The detectives want very badly to capture him.”

Harold asked, “Why didn’t you keep him when you took his picture?”

The math teacher saw that Harold wasn’t paying attention in class. She called on him and said, “Harold! What are 2 and 4 and 28 and 44?”

Harold quickly replied, “NBC, FOX, ESPN, and the Cartoon Network!”

I like Little Harold.

A TEST
John Durand wrote Timing: When to Buy and Sell in Today’s Markets, a classic in active investment management. He also wrote How to Secure Continuous Security Profits in Modern Markets, in which he opined: “As this is written, one of the greatest bull markets in history is in progress. People have been saying for several years that prices and brokers’ loans are too high; yet they go on increasing.… People who deplore the high at which gilt-edged common stocks are now selling apparently fail to grasp the fundamental distinction between investments yielding a fixed income and investments in the equities of growing companies. Nothing short of an industrial depression … can prevent common stock equities in well-managed and favorable circumstanced companies from increasing in value, and hence in market price.” What year was this book published?

Send me an email at hevensky@ek-ff.com with your guess. No fair looking it up on the web. I will publish the names of the first 5 people who guess correctly in my next newsletter.

Hope you enjoyed,

_HRE SIGNATURE

Harold Evensky
Chairman
Evensky & Katz / Foldes Financial Wealth Management

 

Check out the link below for Harold’s previous NewsLetter:

NewsLetter Vol. 11, No. 1 – February 2018

My loved one passed away. What now? A financial advisor may be a valuable resource.

 

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

My dad recently passed away, and a month prior, a very dear client passed away. Both left their spouses to handle the finances, and although they left their affairs organized, extensive detective work was still necessary. Once the initial shock of losing someone subsides and the ceremonial procedures are over—what do you do now financially? After losing a best friend and loved one, thinking about money and handling the red tape required by financial institutions may be the last thing someone wants to face. In the best cases, it can take months to navigate through insurance policies, trusts, wills, bill payments and account transfers to beneficiaries. Tremendous pressure is lifted off the family when they have someone they can trust to reach out to—which could be a financial advisor.

Knowing the total picture

A family working with a financial advisor when a loved one passes away has several advantages. Financial planners and advisors usually know the total financial picture and may have clues to accounts of which you may be unaware. For example, another client who recently passed away had several annuities bought 30 years ago that were held at various insurance companies. The trustees of the trust had no prior details on these policies, so working with those annuity companies was very time consuming and difficult, as each company had their own requirements. One company wanted original documents and another accepted faxed copies, one wanted a long-form death certificate and another accepted photo copies, while some companies required a letter of acceptance for qualified account rollovers. Since the trustees worked long hours, it was hard for them to find the time to spend on the phone with the insurance companies navigating all the paperwork. A financial advisor knows the right questions to ask, which can speed up the process considerably.

The advisor may also be familiar with family dynamics—in some cases the client may have discussed personal matters about the family, such as one child not being financially responsible or wanting gifting to continue to a certain charity, which may help the surviving family members make decisions.

Knowing the technology

My mom inherited a bank account abroad—not only did she not speak the language, but that bank’s technology was very complex and required several passwords and barcodes. This was confusing for her, and having someone to walk her through the process was very helpful.

A cellphone or computer can be a valuable resource—it contains a plethora of information such as emails, passwords and other financial information. Having the deceased’s cellphone or computer can be crucial for logging in to accounts, resetting passwords, etc. Information in emails can also give clues to other accounts and bills that need to be cancelled. While working with one client, we realized there were several apps on the spouse’s phone that needed to be cancelled to avoid a monthly fee. It is important to keep in mind that although the intentions may be good, accessing these devices without permission could cause potential liability. It makes sense to talk to an estate attorney about what should be in place in advance before taking this approach. Having a legal document in place allowing you to access the phone, email, social media and other financial accounts of a deceased love one may prevent any potential legal disputes. Another option could be to discuss passwords beforehand, but accessing someone’s account after that person has passed away may also have legal ramifications.

Knowing the process

An advisor can help you through the process of dealing with retirement accounts, pension companies and insurance companies, as this can be confusing when it comes to rolling accounts over to the beneficiary due to the complex tax and transfer rules. Advisors have experience in what to look for and can facilitate the process more quickly, avoiding issues the client would not have expected.

Advisors can act as a liaison between family members. They can explain the process and expectations with respect to time and requirements by account custodians. The advisor can be a neutral third party that can discuss the best course of action between beneficiaries. Consulting a professional can ensure that accounts are set up correctly, avoiding potential tax penalties or premature tax payments. Discussions with beneficiaries regarding the best course of action could save them time and money in the long term—for example, issues like taking a lump sum versus leaving the account invested or knowing the tax consequences if they liquidate the account.

Many advisors will gladly work with heirs to open new accounts as a courtesy to the client. In many cases, retirement accounts must be split at the current custodian before they can be moved. IRAs and inherited IRAs have complicated account rules for tax purposes, so correct accounts should be opened to avoid any type of tax penalty.

 

Knowing the professionals

The financial advisor may have relationships with the client’s CPA, estate attorney and insurance agents. A client may change estate attorneys and not inform the beneficiaries, but the advisor may still have several revisions of the estate documents and beneficiary update forms on file. Financial advisors can also work as a team with the other professionals to brainstorm the most efficient plan for taxes and future estate planning. The advisor can coordinate obtaining trust tax IDs, facilitate the update of estate documents with the attorney or make sure any trust accounting is in place after consulting with the CPA.

Planning for the future

A financial advisor can reevaluate your risk tolerance, goals and expenses going forward, especially if your financial plan was created when you were married. Usually the portfolio is anchored to the spouse with the lower risk tolerance. Have the goals changed? Have the expenses changed? Should the portfolio still be invested in the same allocation?

Links to other related blogs:

Navigating the Death of a Loved One

Estate Planning for Online Accounts & Digital Media

Estate Planning Proceed with Caution

 

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Intergenerational Planning: Time to Start Planting Seeds

Brett Horowitz

Brett Horowitz, CFP®, AIF® Principal, Wealth Manager

It takes the average recipient of an inheritance 19 days until they buy a new car.1

                Over the past several years, some of our clients have participated in client advisory boards in which they tell us what they want and what keeps them awake at night. One of the biggest challenges is bringing up finances and financial planning with their children. They are not alone. Intergenerational planning, in which families look at long-term financial needs together, is sorely missing. But to the surprise of many, it’s not just the parents who want this connection—it’s the kids as well. A study from MFS Investment Management reports that more than one-third of those in the “sandwich generation” (people ages 40 to 64) worry about aging parents’ financial issues in addition to their adult children’s financial issues.2 It’s about time to get everyone involved.

                According to the same study, less than half of the sandwich generation has prepared a list of assets, created a durable power of attorney or living will, purchased long-term care insurance, or established a trust. Further, even if they have checked off the boxes for these basic estate-planning tools, many have not communicated this information to their children.

Given that the older generation has been reluctant to have needed discussions, should we be surprised that the sandwich generation is concerned about their parents’ finances, yet hasn’t done anything to prepare their own children for what’s to come? All too often, the burden of managing a parent’s deteriorating health or financial situation falls to an adult child, who must step into a parent’s shoes at the last minute and try to cobble together information to form a basic plan. If a parent doesn’t discuss their specific assets with their adult children, and if no one knows they exist, those assets may not be used for their care. Assets may wind up being claimed by the state or federal government, adding to the more than $58 billion in abandoned property. Recent statistics suggest that 70% of families lose control of their assets when an estate is transferred to the next generation and 90% of the wealth is spent by the third generation. Why? About two-thirds of high-net-worth individuals have disclosed little about their wealth to their children, with the most common reason being that they do not feel that the next generation is financially responsible enough to handle an inheritance. Parents can head off this asset transfer problem, while at the same time avoiding divisive and costly family feuds, by taking the lead in these transformative conversations.

                The good news is that many of our clients have become more organized while working with us, and a lot of this information is in one place. But unless this information is disseminated to adult children, it remains stressful for everyone involved. Parents should suggest a family meeting with all their children at the same time to help ensure that their message is received uniformly. Having these conversations one-on-one may cause family members to fight, harbor grudges, or get confused, with the result that the discussion has the opposite of the intended effect.

For instance, parents may choose to leave money to their children in a trust, much to the dismay of the children, who may believe that this is being done to prevent them from having unfettered access. But perhaps the parent is trying to protect the children from creditors, due to having litigious jobs. Another reason could be a desire to protect money from a child’s former spouse. There could be estate or income tax reasons to form the trust in a certain way. Or it could be as simple as wanting to make sure that their frivolous-spending children do not run out of money within the first few years of receiving the inheritance. Parents may think that they are encouraging hard work by not disclosing their financial situation to their children, but they may in fact be fostering ignorance and anger.

These joint meetings may help a parent spell out their reasoning for how they are dividing their assets (including the house and personal belongings) and how they have decided who will be the estate’s executor, have durable power of attorney, or be the primary caregiver for minors. It’s much easier to understand what a parent wants to accomplish with their estate plan if they’re still around to explain it to their family. This doesn’t mean that specific numbers have to be included and that full disclosure be given, but it’s up to the parents to start the conversation and share what they are comfortable sharing.

In other cases, the parent is more interested in handing down values than money. Perhaps all that’s needed is a simple conversation about the importance of having a financial team—consisting of a financial planner, estate attorney, and accountant—establishing a financial plan, saving and investing money, and giving back to charity. So often we hear from clients that a discussion early in their childhood about money formed the foundation for their lifelong financial habits. If the situation is more complex, a family facilitator might need to be hired, someone who can broach difficult, personal, and possibly painful subjects, with the end result being a unified family that is more aware of each other’s feelings and goals. These conversations can be done at the 30,000-foot level if not everyone is comfortable sharing information, or they can be very specific. No one wants a child to feel entitled to expect a large inheritance, but as a parent, do you want your children completely left out of the loop?

                Our firm can help parents review their long-term financial plan with their children, discuss where accounts and important documents are located, and provide contact information for the parents’ financial team. The family should review the will/trust and communicate their wishes about health care preferences to avoid squabbles (who will ever forget the Terry Schiavo situation?). Getting everyone in the same place keeps the message consistent and unequivocally removes any doubts that may have been building. It’s not going to be the easiest of conversations, and all parties may start off anxious, but reticence about the subject will surely backfire. If parents are concerned about their children and children are concerned about their parents, doesn’t it make sense to get everyone together in a room to talk?

1 The source for cited statistics is a Time article, available at: http://time.com/money/3925308/rich-families-lose-wealth/

 

2 The source for cited statistics is an MFS study available at: http://www.mfs.com/about/news/press_080296.html

 

Feel free to contact Brett Horowitz with any questions by phone 305.448.8882 ext. 216 or email: BHorowitz@EK-FF.com

For more information on financial planning visit our website at www.EK-FF.com.

Could a reverse mortgage be right for you?

John_Salter2012

John R. Salter, CFP®, AIFA®, PhD Wealth Manager, Principal

If you are up late at night, you might have seen the TV commercials with your favorite stars of yesteryear and thought that reverse mortgages were only needed if you had nothing left—a last resort whenever every other option has been exhausted.

Changes to the FHA insured Home Equity Conversion Mortgage, or HECM, have changed the face of the reverse mortgage we once knew, opening the mortgage up to many more possible uses. In fact, the HECM program has been the focus of my research for the past few years as a faculty member of Texas Tech’s Personal Financial Planning program, where we have been searching for its possible uses in retirement planning to make sure you are able to sustain your standard of living for the rest of your life.

The HECM program can provide three main ways to utilize the equity built up in your home:

  • Line of Credit – The unused credit line actually grows over time, allowing a higher benefit in later years. The credit line can be borrowed against, and paid back with flexibility.
  • Monthly Payments – These payments, known as tenure payments, essentially convert home equity into annuity-like payments for as long as the owners remain in the home.
  • Lump Sum – A larger distribution from the home equity, often used for issues such as large home maintenance, paying off a traditional mortgage, etc.

Payback of the mortgage is flexible; the loan can be paid back at any time, but any borrowed funds plus interest are ultimately due upon sale or death of the homeowner (the owner or owners on the mortgage). The portion of the upfront fee to FHA and ongoing charges if funds are borrowed are used to make the loan nonrecourse, meaning that upon sale or death the amount due will not exceed the market value of the home. Beware, of course, that any funds used are a debt and have to be repaid at some point—it is, after all, a loan.

So how can this help you? If you and your spouse or co-borrower are over 62, you are eligible to qualify. Even if you feel you are wealthy, the program can contribute to your future financial well-being. I will outline a few quick ideas we have researched and find credible—we are working on many more. (Note that the program has changed to allow a second borrower to be under age 62 and be on the loan, but understanding and care must be taken before making this decision.)

Replace a home equity line of credit (HELOC) – A traditional home equity line of credit, although “free” to set up, has a few drawbacks. For one, the lender can reduce, call, or cancel the line of credit at any time; this cannot happen with the HECM program. In addition, payback with an HEMC is flexible and voluntary and the unused line of credit actually grows over time.

As a last resort, rather than waiting to establish a reverse mortgage later, do it today and let it sit. The interest rate environment is such that you can have a larger line of credit today compared to what it would likely be in the future. You may never use it, but you won’t be mad that you paid for home insurance all these years and never had to use it either.

Refinance your mortgage – Provides flexibility in repayment or stop payments altogether, or to refinance a resetting HELOC.

Increase income – The monthly payment option allows you to draw monthly payments for the rest of your life.

I would encourage you not to automatically dismiss the idea of a reverse mortgage. Take the time to learn more about it and find out how it may fit your needs. The program is complex, so there is no way to fit all of the details in this column, but you can find a lender that is more than happy to help educate you—there are many out there.

By John Salter, PhD, CFP®

John is a partner and wealth manager at Evensky & Katz/Foldes Financial Wealth Management and associate professor of personal financial planning at Texas Tech University. He can be reached at john.salter@ttu.edu.

References and Supplemental Reading

Pfau, Wade D. 2016. “Incorporating Home Equity into a Retirement Income Strategy.” Journal of Financial Planning 29 (4): 41–49.

Pfeiffer, Shaun, C. Angus Schaal, and John Salter. 2014. “HECM Reverse Mortgages: Now or Last Resort?” Journal of Financial Planning 27 (5): 44–51.

Salter, John R., Shaun A. Pfeiffer, and Harold R. Evensky. 2012. “Standby Reverse Mortgages: A Risk Management Tool for Retirement Distributions.” Journal of Financial Planning 25 (8): 40–48.

 

NewsLetter Vol. 11, No. 1 – February 2018

Dear Reader:

DEJA VUE ALL OVER AGAIN?
From a Barron’s article:
“That we are having a major speculative splurge as this is written is obvious to anyone not captured by vacuous optimism.”

“There is here a basic and recurrent process. It comes with rising prices, whether of stocks, real estate, works of art, or anything else. This increase attracts attention and buyers, which produces the further effect of even higher prices. Expectations are thus justified by the very action that sends prices up. The process continues; optimism with the market effect is the order of the day. Prices go up even more.”

Bitcoins anyone?

This was written by economist John Kenneth Galbraith in 1997.

TULIPS
This is going to be interesting. I’m writing this in mid-December, but the NewsLetter will not be going out until around March, so we’ll know more by then how this all shakes out. In the interim…
Have you heard of Tulip Mania? Well, in the early 1600s the price of tulip bulbs reached extraordinarily high levels. According to Wikipedia, at its peak in February 1637, some bulbs sold for more than ten times the annual income of a skilled craftworker. Unfortunately, by May of that year prices had collapsed to close to zero. Until now, Tulip Mania has been the poster child of financial manias. Well, Convoy Investments has created a chart to include the recent Bitcoin price movement just in case we may have a new financial mania king. Of course, even if it is a mania, there may be money to be made if you’re quick enough to hop off the merry-go-round before the bubble pops. Here’s what Crypto pioneer Mike Novogratz said on said Monday on CNBC’s “Fast Money” (12/11/17).

“This is going to be the biggest bubble of our lifetimes.” Which, of course, does not stop him from investing hundreds of millions in the space. While conceding that cryptos are the biggest bubble ever, he also said, “Bitcoin could be at $40,000 at the end of 2018. It easily could.” Then, of course it may not.

Stay tuned (unless something has already happened).

[As I write this, it’s hovering around $10,000 having bounced back from a low of about $6,000.]

It’s Official: Bitcoin Surpasses “Tulip Mania”, Is Now The Biggest Bubble In World History

02-2018_Rise & Fall of some famous asset bubbles

IT WAS A BUSY YEAR
I know because American Airlines sent me a summary of my travels.

• 90 hours in the sky
• 1.5 times around the world
• 12 destinations

That didn’t even include the trips I took on carriers other than American (e.g., Cape Town).

WHO WOULD HAVE GUESSED?
From David, my #1 son, via the Wall Street Journal:

U.S. Oil Output Expected to Surpass Saudi Arabia, Rivaling Russia for Top Spot

THIS WAS A BIT DIFFERENT
I’ve done a lot of interviews over the years, but this was a bit different. The interview was with “Goldstein on Gelt,” an Israeli radio show. I was certainly in good company as Mr. Goldstein has interviewed every living Nobel Laurent in Economics.

Does Your Financial Planning Account for the Worst-Case Scenario?

FOUR YEARS! THEY MUST BE KIDDING
From Barron’s:

Citigroup Must Pay $11.5 Million Over Ratings Glitches

“In a news release, the regulator says that from February 2011 through December 2015, the Citigroup brokerage unit displayed to brokers, retail customers and supervisors inaccurate research ratings for more than 1,800 equity securities. That’s more than 38% of those covered by the firms’ analysts.
In some cases, the firm displayed the wrong rating for securities its research team covered, saying, for example, that a stock was a “buy” when it really was a “sell.” In other cases, ratings appeared for stocks that CGMI analysts did not in fact rate.”

VERY PROUD!

02-2018_DBK Keynote speaker

 

SMART, NOT BRILLIANT
JP Morgan Guide to the Markets 1Q 2018

02-2018_JP Morgan Guide to the Markets 1Q 2018

AVOID A SEAT THAT DOESN’T RECLINE!
If you fly, be sure to check out SeatGuru (www.seatguru.com). SeatGuru.com is a website that features aircraft seat maps, seat reviews, and a color-coded system to identify superior and substandard airline seats.

ROBOs — DÉJÀ VU ALL OVER AGAIN
July 1, 2016
Automated investment advisor Betterment suspended client trading amid Friday’s market turmoil.

February 6, 2018
The websites of two of the country’s biggest robo-advisers — Wealthfront Inc. and Betterment LLC — crashed on Monday as the S&P 500 Index sank. Complaints quickly spread across Reddit and other Internet sites from people who had trouble logging in to their accounts.

MORE PROUD
In its New Year’s letter, the Coral Gables Community Foundation very graciously highlighted the community efforts of our firm.

02-2018_CGCF Happy New Year

The Evensky & Katz / Foldes Financial Charitable Fund was created by David Evensky, Principal and Chief Marketing Officer of the Evensky & Katz / Foldes Financial firm based in Coral Gables. The Fund serves as the central source of the company’s philanthropic giving in the community.

The Fund is one of the most active and charitable at the Foundation. Evensky & Katz has made a positive difference throughout Coral Gables and Greater Miami by generously donating over $500,000 to a myriad of organizations and causes such as Big Brother Big Sisters of Greater Miami, St. Alban’s Child Enrichment Center, Coral Gables Art Cinema, Miami Children’s Hospital Foundation, Coral Gables Museum and many more.

This year, Evensky & Katz / Foldes Financial hosted the 13th Annual Charity Classic in partnership with the Foundation and the Coral Gables Chamber of Commerce to benefit local non-profit organizations. David Evensky and his team have been generous supporters of the Foundation for many years. Currently, Michael Walsh, a Financial Advisor at the firm, serves on the Community Foundation Board and David served on the Foundation Board from 2008 to 2012.
The Community Foundation commends David, Michael and the entire Evensky & Katz / Foldes Financial team for their commitment to service and philanthropy in our shared community.

I LOVE GURUS
January market predictions for the year end:

Goldman Sachs 2300
Credit Suisse 2300

Market close 12/29/17 2673.61

I’m still looking for the gurus who called the early February volatility; so far, I’ve had no luck.

FOOD FOR THOUGHT
Speaking of gurus, there is an interesting article in the Journal by Mark Hulbert. Mark is the author of the Hulbert Financial Digest that he founded in 1980. The Digest tracks the performance of investment advisory newsletters. It’s now owned by Dow Jones and is published as MarketWatch. In his recent column Mark wrote, “Consider the performance of a hypothetical portfolio that each January invested in the recommendations of the investment newsletter at the top of the previous calendar year’s performance ranking. According to a study by my company, this portfolio created from each year’s winners has lost almost everything [my emphasis] — incurring an 18.0% annual loss since 1991. So $100,000 invested in this portfolio back then would today be worth just $471 today.”
The Year’s Fund Returns Are In. Do They Matter?

BEST JOBS FOR THE FUTURE 2017
From Kiplinger:
10 Best Jobs for the Future
I knew that. I’m pleased Kiplinger does also.

As Americans age and pensions become a thing of the past, the value of good investment advice will only grow. Baby boomers, especially, could need more professional help as they plan for and enter retirement. You usually have to be a college grad to get on this career path. A bachelor’s degree in finance, economics, accounting, or a similar field would best prepare you for dealing with money matters, but most employers don’t specify a required major. Certification from the Certified Financial Planner Board of Standards — which requires you to earn a bachelor’s degree, have at least three years of relevant work experience and pass a rigorous exam on a wide range of financial issues — adds to your credibility. Licensing is required to sell certain types of insurance and investment products.

Personal Financial Adviser
Total number of jobs: 251,715
Projected job growth, 2016-2026: 23.8%
Median annual salary: $86,780
Typical education: Bachelor’s degree

Be sure and tell all your younger children, grandchildren, nieces, and nephews.

SICK WORLD
As my readers know, I’ve long been involved in the fight for a fiduciary duty for anyone providing financial advice. It turns out the battle is getting dirty. Here’s a report from FinancialAdvisor IQ

“A large proportion of comments criticizing the fiduciary rule seem to be fake, an investigation has revealed.
“The Department of Labor’s fiduciary rule purports to require retirement account advisors to put clients’ interests first. While it went into partial effect in June, the rule’s final implementation date, originally scheduled for next month, has been pushed back by 18 months. In the meantime, the DOL has been taking public comments on the rule to help the department understand the rule’s effect on advisors and investors.
“According to analysis by the Wall Street Journal and research firm Mercury Analytics, some 40% of supposed commenters didn’t write posts ascribed to them.
“For instance, Robert Schubert, a salesperson from Devon, Pa., supposedly wrote: “I do not need, do not want and object to any federal interference in my retirement planning.” But he tells the Journal the comment was a fraud and not only did he not post it, but also doesn’t agree with it…”
CLIENTS’ INTEREST FIRST?
Wonder why my friends and I are so passionate about regulators enforcing fiduciary standards?

Excerpts from an Administrative Complaint by the Enforcement Section of the Massachusetts Securities division of the Office of the Secretary of the Commonwealth.

Scottrade, a Massachusetts-registered broker-dealer, has knowingly violated its own internal policies designed to ensure compliance with the United States Department of Labor (DOL) Fiduciary Rule by running a series of sales contests involving retirement account clients…. Prior to the Fiduciary Rule, Scottrade employed a firm-wide culture characterized by aggressive sales practices and incentive-based programs. For example, between December 2015 and April 2017, Scottrade ran a series of call nights and sales contests, in part to drum up additional business in light of an upcoming merger with TD Ameritrade…

Notwithstanding the implementation of certain elements of the Fiduciary Rule on June 9, 2017, Scottrade launched two sales contests between June and September 2017 that ran in violation of its own internal policies designed to ensure compliance with the Fiduciary Rule. Scottrade launched the first of these two contests, the Q3 Win and Retain Sales Contest … on June 5, 2017. The Q3 Sales Contest came on the heels of predecessor sales contests, placed an explicit emphasis on generating net new assets, including retirement assets, and offered $285,000 in cash prizes. Almost immediately after the Q3 Sales Contest ended on July 31, 2017, Scottrade launched the Q4 Dials and Referral Contest … which was nearly identical in scope and structure….

Scottrade encouraged its customers to bring new assets to the firm, while failing to inform them of the conflicts arising from the sales contests. To appraise the performance of its agents, Scottrade frequently circulated internal metrics and rankings during the Q3 and Q4 Sales Contests. Under the Q3 Sales Contest, Scottrade required its agents to achieve a call penetration of at least 80% in order to qualify for particular prizes. Under the Q4 Sales Contest, Scottrade required its agents to make recommendations and referrals to its investment advisory program in order to qualify for particular prizes. These contests could reasonably be expected to cause Scottrade agents to make recommendations in their own best interests rather than the best interests of their customers, including those with retirement accounts.

MERE SALE ACTIVITY
Eugene Scalia, a partner with Gibson Dunn who represents the nine plaintiffs suing the Labor Department over its fiduciary rule, told the U.S. Court of Appeals for the 5th Circuit on Friday that Massachusetts’ action Thursday against Scottrade for allegedly violating the fiduciary rule’s Impartial Conduct Standards is “without merit,” and will spark “private plaintiffs … to exploit the rule to concoct state law claims.”

Scalia said that the Massachusetts’ complaint asserts that “Scottrade has failed to act in good faith to comply with the fiduciary rule,’” and argues that “this gives rise to multiple violations of state law.”
“As Appellants warned …, a fiduciary breach is alleged to have occurred through mere sales activity.” [my emphasis]
Lawyer Fighting DOL Rule Blasts Scottrade Fiduciary Charges
From my friend Ron Rhodes, here’s more on the “mere” sales effort:

The facts are pretty damning. Internal-use materials instructed agents to target a client’s “pain point” and emotional vulnerability and training sessions lauded the use of emotion over logic in getting a client to bring additional assets to the firm. The firm distributed weekly net new assets reports and closely tracked progress during these sales contests. The firm used internal quotas that ranked agents during the contests. The firm frequently used performance metrics to rank the different branches and agents in order to incentivize them to make recommendations to retirement account clients.
One branch manager stated, “This … is honestly the most interested I have ever been in one of our contests. We are going to make a concerted effort to win this thing.” A Divisional Vice President stated in email, “The first week of the Q3 ‘RUN-THE-BASES’ contest is done, and we have a few regions off to a SCREAMING start! You certainly knocked the cover off the ball! Some would say you knocked it out of the park! Very soon, we will get an official count on how we did, and more exciting, a chance to see where we stack-up against our peers on our official scoreboard! […] Happy Selling.”

I’m obviously living in an alternative universe from Mr. Scalia.

SPEAKING OF A SICK WORLD
• Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other. ~Oscar Am ringer, “the Mark Twain of American Socialism”
• I offered my opponents a deal: “if they stop telling lies about me, I will stop telling the truth about them.” ~Adlai Stevenson, campaign speech, 1952
• “A politician is a fellow who will lay down your life for his country.” ~Texas Guinan, nineteenth century American businessman
• “I have come to the conclusion that politics is too serious a matter to be left to the politicians.” ~Charles de Gaulle, French general & politician
• “Instead of giving a politician the keys to the city, it might be better to change the locks.” ~Doug Larson (English middle-distance runner who won gold medals at the 1924 Olympic Games)
• We hang petty thieves and appoint the bigger thieves to public office. ~Aesop, Greek slave & fable author
• “Those who are too smart to engage in politics are punished by being governed by those who are dumber.” ~Plato, ancient Greek Philosopher
• “Politicians are the same all over. They promise to build a bridge even where there is no river.” ~Nikita Khrushchev, Russian Soviet politician
• “Politicians are people who, when they see light at the end of the tunnel, go out and buy some more tunnel.” ~John Quinton, American actor/writer

WONDER WHY RETAIL INVESTOR INTEREST COMES LAST?
From InvestmentNews via my friend Skip:
2016-2017 Campaign Contributions

02-2018_2016-2017 Campaign Contributions

ICI, NAIFA, SIFMA, IRI, FSI are all financial service firm organizations
IAA and FPA represent fiduciary-oriented practitioners.

OK, OFF MY SOAP BOX
On to a more positive note, this week, my partner, Katie Salter, who is President of our Lubbock Rotary, arranged for a true American Hero to appear as the lunch speaker, Hershel Woodrow “Woody” Williams. Mr. Williams is a retired United States Marine Corps warrant officer who received the United States military’s highest decoration for valor — the Medal of Honor — for heroism above and beyond the call of duty during the Battle of Iwo Jima in World War II. He and three soldiers are the only living Medal of Honor recipients from that war. In addition, he is the only surviving Marine to have received the Medal of Honor during the Second World War, and is the only surviving Medal of Honor recipient from the Pacific theater of the war. To say his talk was inspiring is a gross understatement. You may recognize his picture as he tossed the coin at the Super Bowl.

02-2018_Hershel Woodrow Williams

ROBOS — DÉJÀ VU ALL OVER AGAIN
July 1, 2016
Automated investment advisor Betterment suspended client trading amid Friday’s market turmoil.

February 6, 2018
The websites of two of the country’s biggest robo-advisers — Wealthfront Inc. and Betterment LLC — crashed on Monday as the S&P 500 Index sank. Complaints quickly spread across Reddit and other Internet sites from people who had trouble logging in to their accounts.

John’s query:
I wonder if they sent robo-calls to comfort their clients?

Hope you enjoyed,

_HRE SIGNATURE.jpg

Harold Evensky
Chairman
Evensky & Katz / Foldes Financial Wealth Management

 

Check out the link below for Harold’s last NewsLetter:

NewsLetter Vol. 10, No. 5 – December 2017

Thoughts before Funding a 529 Plan

Roxanne Alexander

Roxanne Alexander, CAIA, CFP®, AIF®, ADPA® Senior Financial Advisor

The new tax law was amended to allow tax-free distributions of up to $10,000 per year from a 529 plan for elementary and high school costs starting in 2018. This is an added benefit and can be an advantageous tax break for parents starting to save for their young child’s education.

College costs have outpaced inflation. According to The College Board®, the average 2014-2015 tuition increase was 3.7 percent at private colleges and 2.9 percent at public universities. However, looking back at the last decade, the 10-year historical rate of increase has been approximately 5 percent.

529 Basics — Opening a regular savings account/custodial account for your child is an option, but this comes without the benefits of a 529 plan such as the tax-free growth on earnings if the funds are used for qualified college expenses. Deposits to a 529 plan up to $15,000 per individual per year ($30,000 for married couples filing jointly) will qualify for the annual gift tax exclusion (for 2018). You can also front-load your investment in a 529 plan with $75,000 ($150,000 if joint with your spouse) and use this toward your gift tax exemption for five years providing there have been no other gifts to that child — this is not possible for a regular savings/custodial account for your child (you would only be able to gift $30K jointly). By adding a large amount up front, you allow the lump sum to grow over a longer time horizon vs. making smaller contributions over time. Contributions to a 529 plan do not have to be reported on your federal tax return.

Contributions to a 529 plan are not tax deductible (although some states do offer tax benefits), but the earnings grow tax free and are not taxed if used to pay for education. Another advantage compared to a custodial account is control; the named beneficiary has no legal rights to the funds, so you can ensure the money will be used for education.

A 529 account owned by someone other than the parent (such as a grandparent) is not considered an asset for financial aid purposes. Also, the value of a 529 account is removed from your taxable estate, yet you retain full control over the account.

How to choose a 529 plan? Research the underlying expenses of the mutual funds and review the investment options available compared to other plans. The age-based models may be the easiest to manage as the plan shifts to more conservative investments as the student gets closer to college age. You can choose any state plan no matter where you live, but if you reside in a state that provides tax breaks for using your state plan, you would likely want to start there. For example, New York residents get tax benefits for using their state plan. Keep in mind that you have the ability to move your 529 to another provider, but only one rollover is permitted per twelve-month period.

How much to fund? The amount to contribute to a 529 plan depends on several assumptions such as whether your child will attend a public college or a private college, the returns during the investment time horizon, and future college inflation. Funding varies widely depending on what you would like to achieve and the assumptions involved — and of course there is no right answer. If the beneficiary does not go to college, you can transfer the 529 plan to a sibling in the future or to another family member such as a cousin or grandchild. If you don’t have any eligible family members, the worst-case scenario is that you would have to pay tax and a 10% penalty on the earnings to take the money out for another purpose. Withdrawals from a 529 plan that are not used for the beneficiary’s qualified education expenses are taxed and penalized (subject to a 10 percent federal penalty and taxed at the income tax rate of the person who receives the withdrawal). If the beneficiary gets a scholarship, then the penalty is waived.

Avoid overfunding the 529 if possible as “qualified education expenses” do not cover all expenses related to college. Qualified expenses include tuition, on-campus room and board, books and supplies, computers, and related equipment. It may also make sense to save otherwise for expenses such as travel, cars/transportation costs, insurance, sports or club dues, and off-campus housing, etc., which are not considered qualified expenses but can easily add up.

Considerations if you have more than one child — If you have several children, it may make sense to fully fund the first plan for the oldest child and if the funds are not used, they can be transferred to the next child in line. You probably want to avoid fully funding all the plans in the event one child does not end up going to college, gets a scholarship, or starts a business. Some schools and some trade schools/programs do not qualify for 529 funds (for example, if a grandchild wants to go to a specific acting or cooking school). You can find out if your school qualifies by using this link: http://www.savingforcollege.com/eligible_institutions/.

http://www.savingforcollege.com/tutorial101/the_real_cost_of_higher_education.php

https://www.npr.org/sections/ed/2018/01/08/575167214/congress-changed-529-college-savings-plans-and-now-states-are-nervous

Feel free to contact Roxanne Alexander with any questions by phone 305.448.8882 ext. 236 or email: RAlexander@EK-FF.com

 

What Constitutes the Art of Practicing Financial Planning?

The below chapter is from “The Art of Practicing and the Art of Communication in Financial Planning” (Click here to purchase the book.)

Matt McGrath

Matthew McGrath, CFP® Managing Partner Wealth Manager

Why would one use the word “art” when describing the practice of financial planning?  The most highly qualified planners have gone through rigorous education and testing in order to acquire licenses and certifications.  They use a methodical process to establish the client-planner relationship.  This process includes gathering data, analyzing and evaluating the client’s status, developing and presenting recommendations; as well as implementing and monitoring those recommendations.  They use sophisticated software to run complicated analyses and they stay abreast of laws and regulations affecting a wide array of financial issues.  Where is the art?

The art of practicing financial planning can be found when professionals deploy a fundamentally sound process while injecting experience and judgment to develop advice in the best interest of the client.  Financial planning involves altering human behavior which presents unique challenges each and every single time.  It includes navigating an ever-changing body of knowledge and applying it to individual circumstances in order to arrive at a recommendation appropriate at that point in time.

Let’s start with the people.  At its core, financial planning is a “people” business.  Clients are looking to planners to guide them on some of the most important decisions of their lives.  Establishing trust and maintaining effective communication are crucial to the successful execution of the financial planning process.  Being technically proficient (i.e. “book smart”) does not necessarily translate to successful advice.  The ability to communicate the relevant details to clients in a way they understand and embrace is the key to effective planning.  Successful financial planners channel their inner teacher to convey facts, figures and details in a way that is easy to comprehend.  Many clients are intimidated by financial matters, and it takes skill to break through those emotional barriers and establish a level of comfort.

Of course, before attempting to communicate any advice, a good planner needs to start by listening to their client.  Understanding what is truly important to a client is crucial to establishing trust and rapport.  The last thing a client wants to hear is generic advice regurgitated from a book; they can find the information in countless places using any internet connected device.  What they want is someone who understands their personal concerns and goals and develops recommendations specific to them.  If a planner is doing all the talking in client meetings, then I would argue that they are not engaging in true financial planning.  Listening must always come first.  Meetings should involve meaningful two-way conversations, not a one-way presentation.

Keep in mind, when working with people, every situation is unique and emotions play a big part in the process.  People do not always behave in a rational manner.  It is not unusual for a client to come to tears during a meeting.  Money, finances and the future can be very emotional topics.  Therefore, the right advice on an issue may not necessarily be the one with the maximum financial outcome.  Client biases, fears and preconceptions can all have an influence on the ultimate advice.  A good planner will try to guide the client to a rational decision, but also has to acknowledge that a client needs to be able to live with the outcome.  Empathy is critical, as is the ability to interpret and understand the motivations of each client in order to develop advice appropriate for them.  The “people” side of financial planning can be very complicated and the ability to interact with others is a necessary ingredient in the art of practicing financial planning.

It is also essential to understand that financial planning is a journey, not a destination.  Changes occur every day.  Planners deal with a wide array of issues such as marriage, divorce, recessions, market crashes, retirement and, sadly, death.  Successful planning keeps up with these changes by adapting to the new circumstances in a way that keeps the client on the path to accomplish their goals.  Success is not measured by dollars or annual rates of return; nor is it defined by the creation of a beautiful comprehensive financial plan that goes in a drawer never to be seen again.  Rather, it is defined by the ongoing achievement of goals throughout one’s life.  It is an organic process that, for each client, takes on a life of its own.

The planning process often involves evaluating questions that have more than one potential answer.  Part of the art of financial planning involves evaluating those answers and helping someone choose the best one for their personal situation.  At the end of the day, the planner’s objective is to enable clients to make informed decisions.  I once had a client ask me if he should take his kids out of private school and I told him that’s not my call.  I can walk through his financial plan with him and help him understand the consequences of different decisions.  But in the end, the clients need to take ownership of their decisions and their lives.  Planners who cross this line are doing a disservice to their clients and robbing them of their true financial freedom.  A planner’s role is not to tell someone what they should do; it is to empower them to make appropriate decisions within the context of their unique lives.

The art of practicing financial planning exists in the less tangible aspects of the process.  This involves listening, assessing, analyzing, communicating and ultimately recommending a course of action.  Experience, judgment, trust and communication are crucial to the successful implementation of a financial plan.  Information is everywhere, but knowing what to do with it to help an individual achieve their specific goals is absolutely a form of art.  Like other forms of art, it is predicated on an underlying body of knowledge that must be successfully interpreted and executed under specific circumstances.  And like good artists, good planners will be greatly appreciated by their clients.

Feel free to contact Matt McGrath with any questions by phone 305.448.8882 ext. 206 or email: MMcGrath@EK-FF.com