Turning age 70.5 with an IRA account – what you need to know

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

When you turn 70.5, you have to start taking distributions from your retirement plans. There are several decisions you will need to make once this process starts, but making sure you do start taking distributions is the most important, since the IRS imposes a 50% penalty on funds that are not withdrawn as mandated.

How is a required distribution calculated?

The calculation is fairly straightforward, if you fall under the regular rules. You would take the value of your IRA accounts as of December 31 of the prior year and then divide it by the IRS divisor based on your age. This IRS Uniform Lifetime Table can be found here:

https://www.fidelity.com/building-savings/learn-about-iras/required-minimum-distributions/overview

There are several rules depending on whether you are married or single, and whether your spouse is 10 years younger than you are. If your spouse is 10 years younger, your distribution amount will be less, and you would use the IRS Joint Life Expectancy Table to find the correct divisor. The custodian of your IRA will usually calculate your required distribution and will track how much you take out on a monthly basis. They will then give you this information on your monthly statement. However, if you have a unique situation (inherited IRA or younger spouse), you may need to calculate and track this on your own.

Do you need the cash?

If you need cash, you would simply withdraw the required amount from your IRA and move it into a taxable account less any tax withholding. Usually the custodian of the funds will send the tax withholding directly to the IRS on your behalf. This works somewhat like withholding on a W2, so when you go to file your taxes this amount has already been paid to the IRS on your behalf. At the end of the year, you will get a 1099R showing how much you took out and the taxes that were withheld on this amount. Sometimes your accountant may suggest a higher withholding than your actual tax rate, since the withholding may cover taxes on any other income you might be receiving. If you don’t need the funds, you can transfer securities into a taxable account. This will still be considered a taxable distribution, so you will either need to have funds available to pay the taxes or you may need to sell some securities to generate funds to pay the taxes. You should speak to your accountant to determine how much you should withhold based on your tax situation.

Should I wait until the following year to take my distribution?

You have until April 15th of the year after you turn 70.5 to take your first distribution. Keep in mind that, in this case, you will have to take a second distribution that year. If you are still working in the year you turn 70.5, but plan to retire the following year and project that you will have lower income, you can choose to wait and take two distributions the following year.

Do I have to take a portion from each account?

If you happen to have several IRA accounts, you can aggregate the value of the accounts to make the calculation, but then take the distribution from only one of the accounts. You do not need to take a portion from each account, unless you prefer to do it that way for accounting purposes. Keep in mind, if you have a 401K account, you will need to calculate that amount separately and then take that portion from the 401K. If you have other accounts, such as retirement annuities or 403b’s, you will likely have to take those distributions separately, as they cannot be aggregated with your regular IRAs. If you have a 401k and you are still working and contributing, providing you are not more than a 5% owner of the company, you can choose to defer distributions until you retire. If you own more than a 5% share of the company, you will be required to take a distribution.

Charitable contributions and the new tax laws

The new tax laws have increased the standard deduction and put caps on what you can itemize. If you have charitable contributions, you can make these through your IRA by sending a check to the charity directly from your IRA account. These donations go towards satisfying your required minimum distribution, but are tax free. For example, if your RMD is $50,000 and you donate $50,000 to a charity from your IRA, you owe no taxes and you have satisfied your required distribution. You can also request checks on your IRA in order to make smaller donations along the way that otherwise may not be deductible. Keep in mind that the charity has to be registered as a qualified charity.

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

For more information on financial planning visit our website at www.Evensky.com

Harold Evensky’s NewsLetter Vol. 12, No. 2 – March 2019

Harold Evensky CFP® , AIF®
Chairman

Dear Reader:

SPIVA UPDATE

S&P 500 SPIVA Institutional Scorecard

“This report adds institutional accounts to the mutual funds analyzed in the U.S. SPIVA scorecards. Underperformance among institutional accounts was not meaningfully different from those reported for retail funds.

“For active equity institutional managers, the one-year performance figures ending December 2017 were positive. Managers in 10 out of 17 categories outperformed their benchmarks, gross-of-fees. [Editor’s note: There are only two problems with this positive spin: gross-of-fees and short term.]

“However, the majority of equity managers in 15 out of 17 categories underperformed their respective benchmarks over the 10-year horizon, gross-of-fees.”

LINK

 

COOL TIDBITS

The following bits of wisdom are from a talk by my friend Jane Bryant Quinn, one of the very best personal finance writers ever.

  • Clairvoyance Society of London will not meet this week due to unforeseen circumstances.
  • I am an optimist. I’m not someone who smells flowers and looks around for a coffin.
  • Her mom is 102, and five years ago married a young man of 85.
  • Broker: “I’ve looked over your assets and I’m happy to say there is enough there for both of us.”
  • The SEC is enabling fake fiduciaries: “Informed consent” supported by the SEC staff.
  • Lilly Tomlin: No matter how cynical you become, it’s hard to keep up.
  • A man was going to die and asked God if he could bring some of his things with him. God said yes but only one suitcase. He scoured his investments—stocks, bonds, real estate. He decided on gold. When he got to the pearly gates, St. Peter asked, “What’s that?” He opened his suitcase and all the gold bars spilled out. St. Peter exclaimed, “What, you brought pavement?!”

 

FROM MY FRIEND PETER

Don’t blame me for these—blame Peter.

  • England has no kidney bank, but it does have a Liverpool.
  • I tried to catch some fog, but I mist.
  • I changed my iPod’s name to Titanic. It’s syncing now.
  • I stayed up all night to see where the sun went, and then it dawned on me.
  • I’m reading a book about antigravity. I just can’t put it down.
  • I did a theatrical performance about puns. It was a play on words.
  • Why were the Indians here first? They had reservations.
  • I didn’t like my beard at first. Then it grew on me.
  • Broken pencils are pointless.
  • What do you call a dinosaur with an extensive vocabulary? A thesaurus.
  • I dropped out of communism class because of lousy Marx.
  • I got a job at a bakery because I kneaded dough.
  • Velcro: what a rip-off!
  • Don’t worry about old age; it doesn’t last.

 

THE WORST PERFORMING ETFs IN THE PAST MONTH

As reported by Wealth Management magazine

Past month? You’ve got to be kidding. That’s noise, not news. This is a story I would classify as financial pornography.

LINK

 

2018: A YEAR TO FORGET FOR ACTIVE INVESTORS

Excerpts from a Morningstar research report, as seen in Financial Advisor

“Proponents of active management may want to forget what happened in 2018. In fact, if they’re large-cap investors, they may want to forget the entire past decade.

“Only 38 percent of active U.S. stock funds survived and outperformed their average peer passive fund last year, which was down from 46 percent in 2017, Morningstar said in its year-end ‘Active/Passive Barometer’ report….

“While that was the year-to-year picture, the long-term view of active vs. passive fund performance wasn’t any better, according to the Chicago-based research firm. Only 24 percent of all active funds beat their passive fund rivals over the 10-year period ending December 31….

“The data is based on the performance of 4,600 U.S. funds that account for about $12.8 trillion in assets, or about 69 percent of the U.S. fund market, Morningstar said.”

LINK

 

DAN EGAN

I don’t know Dan, but I did enjoy his tweet: “How come we have Smart Beta and not Lucky Alpha?”

 

DID YOU KNOW?

These come courtesy of my special friend Patti.

  • Humans are born with two fears: falling and loud noises. Every other fear is learned.
  • You once held the world record when you were born, for being “the youngest person on the planet.” Think I’ll add it to my resume.
  • An octopus actually has six arms and two legs, not eight legs.
  • There are exactly 46,783,665,034,756,288,456,012,645 moves possible in a game of chess.
  • Elephants can smell water from three miles away.
  • If humans killed each other at the same rate we kill animals, we’d be extinct in 17 days.
  • Without your pinkie finger, your hand would lose 50% of its strength.
  • Giraffes spend about 70% of their day eating. They must be on a cruise.
  • Cows have best friends and get stressed when they are separated.
  • Beer reduces the risk of developing kidney stones by 40%.
  • Dogs are capable of understanding up to 250 words and gestures. The average dog is as intelligent as a two-year-old child. And they pay about as much attention.
  • Tea is the most consumed drink in the world after water. I’m working on wine to give tea a run for its money.
  • Once a tractor company owner was insulted by the owner of Ferrari. Enzo Ferrari’s words were “You may be able to drive a tractor, but you will never be able to handle the Ferrari properly.” Today that tractor company is known as “Lamborghini.”

 

AND IF YOU’RE NOT YET CONVINCED THAT YOU SHOULD AVOID “GURUS”

Barron’s runs an annual forecasting challenge. Last year it had over 4,000 entrants. Here are a few of the results.

What will the DOW industrials return in 2018, including dividends?

Correct answer: Negative

Correctly answered by 11.57%

Which global market will do best in 2018?

Correct answer: U.S. S&P

Correctly answered by 25.03%

Which of these developments is most likely to occur in 2018?

Correct answer: Equity bear market, S&P 500 finishes in the red

Correctly answered by 8.11%

How many times will the Federal Reserve lift short-term rates in 2018?

Correct answer: four or more

Correctly answered by 5.98%

 

WILL ROGERS QUOTES

Suggested by my friend Alex:

  • “Common sense ain’t common.”
  • “Live in such a way that you would not be ashamed to sell your parrot to the town gossip.”
  • “The road to success is dotted with many tempting parking spaces.”
  • “When you find yourself in a hole, quit digging.”
  • “The short memories of American voters is what keeps our politicians in office.”
  • “A fool and his money are soon elected.”
  • “I don’t make jokes. I just watch the government and report the facts.”
  • “The trouble with practical jokes is that very often they get elected.”
  • “Be thankful we’re not getting all of the government we’re paying for.”
  • “Last year we said, ‘Things can’t go on like this,’ and they didn’t—they got worse.”
  • “The only difference between death and taxes is death doesn’t get worse every time Congress meets.”
  • “There are men running governments who shouldn’t be allowed to play with matches.”
  • “The taxpayers are sending congressmen on expensive trips abroad. It might be worth it except they keep coming back.”

I’ll let you decide whom these shoes fit. I can only believe Rogers would be having a ball if he were alive today.

 

AND IF THE MARKETS DON’T SCARE YOU, WHAT DOES?

According to Popular Science…

Heights                               28.2%

Sharks                                 25.4%

Reptiles                              23.6%

Public Speaking            20.0%

Deep lakes & oceans 18.2%

Clowns                                6.7%

LINK

 

READY FOR A QUIZ?

Also from Popular Science:

Sorry, you’ll have to wait for the end for the answers…

 

FOLLOW THE MONEY

From Skip and InvestmentNews

Fiduciary-based—IAA, FPA…………………………$     468,264

NOT Fiduciary-based…………………………………$19,915,902

SIFMA—brokerage firms

ICI       —Mutual funds

NAIFA —Insurance

FSI      —Commission-based advisors

SIFMA, the trade association representing major brokerage firms, spent more money lobbying lawmakers last year than Goldman Sachs, Fidelity InvestmentsVanguard Group, and other top financial services firms.

 

INTERESTING BUT DEPRESSING

Notes from the Journal of Financial Planning:

In “Retirement Income Literacy: A Key to Sustainable Retirement Planning,” Hopkins and Pearce conclude “…those who better understand key retirement income issues are more likely to have a well-developed retirement income in place.”

“Unfortunately, based on a 2017 survey of 1,244 respondents between the ages of 60 and 75 with at least $100,000 of investable assets:

Mean Score for Retirement Income Knowledge Areas: 47%”

“When asked: how knowledgeable would you say you are about retirement income planning, 88% responded they were moderately to extremely knowledgeable. However, of this same group, only 28.6% passed the literacy quiz with a score of 60 percent or higher.

When asked about Concerns, “Running Out of Money” was of the least concern and health care costs and potential cuts to Social Security were the highest.”

From the Center of Financial Services Innovation U.S. Financial Health Pulse Study:

  • “Only 28 percent of Americans are ‘financially healthy.’ Over half (55 percent) were categorized as ‘financially vulnerable.’”

And some less depressing news:

  • ETFs: 2018 was the 25th anniversary of exchange-traded funds. (I had no idea they were that old.)
  • Roth IRA: 2018 was the 20th anniversary
  • Bitcoin: 2018 was the 10th anniversary
  • Dow Jones Industrial Average (DJIA) removed General Electric, a member of the index since 1907, replacing it with Walgreens.
  • In 2018 Amazon and Apple reached a value of $1 trillion, and Fidelity reached $2 trillion in retirement assets.

 

INTERESTING STATS

Also from the Journal of Financial Planning:

$35,676: Average cost of tuition and fees for the 2018–2019 school year at a private college

$21,629: Average cost of tuition and fees for the 2018–2019 school year at a state school for out-of-state students

$9,716: Average cost for state residents at public colleges for the 2018–2019 school year

40: Percentage of parents with 10th graders who have a financial plan in place to reach college savings goal

56: Percentage of parents with 10th graders who have not discussed how much their kids will be expected to contribute to the cost of college

$16,400: Average amount borrowed per year by parents to pay for their children’s college education in 2014, up from $5,200 in 1990

$37,180: Estimated parental debt from federal college loans for the 2017–2018 school year

 

NEWS HEADLINES FROM NPR

That’s tough!

I guess it would have been OK if he had been legally spying.

 

MORE NEW, OLD PRODUCT PITCHES FROM PETER

 

WANT TO RETIRE IN COMFORT? HERE’S WHAT IT COSTS BY STATE PER YEAR:

#50 – Arkansas     $36,378

#37 – Texas          $39,814

#30 – Louisiana    $41,107

#24 – Florida         $42,586

#4   – California    $49,640

#3   – New York    $50,321

#2   – Hawaii         $54,590

#1   – Alaska         $56,879

LINK

 

TECHNOLOGY, ONCE UPON A TIME

LINK

 

I KNOW YOU’VE ALL BEEN WAITING

So here’s the link to our updated paper, “The Efficacy of Publicly-Available Retirement Planning Tools”: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732927.

 

A THOUGHT TO REMEMBER DURING ROCKY MARKETS

A boat that doesn’t rock doesn’t move

 

INSURANCE INDUSTRY BATTLES BACK AGAINST FIDUCIARY STANDARD

“The three leading insurance and agent associations are working in tandem to support a state ‘standard of care’ proposal for agents that rejects fiduciary responsibility for agents and advisors. At stake, they say: middle-class investors.”

Of course, why on earth would middle-class investors deserve to be provided a fiduciary relationship?

LINK

 

BARRON’S RANKED ADVISOR DIRECTORY

Barron’s publishes this ranking four times a year that it says is based on “…a deeply researched, quantitate approach.” Assuming I counted correctly, I found that the following large commission-based brokerage firms represented about 58% of the total.

Morgan Stanley –     23%

Merrill Lynch –           21%

UBS –                                  6%

Wells Fargo –                  4%

J.P. Morgan –                   4%

Fee-only fiduciary firms were just a small fraction of the listings. Go figure.

Of course, with the ranking Barron’s notes: “The list of highlighted advisors below is a special advertising section.” That might have something to do with it.

MORE FROM BARRON’S

Maybe their crystal ball isn’t so great, but I’ll give them credit for honesty. In an article reviewing the publication’s 2018 stock picks titled “A Mixed Year for Barron’s Stock Picks,” they wrote: “Shares of the 71 companies we wrote about bullishly fell 10.5% on average, versus 9.5% for their benchmarks. Add back dividends and we were down 9.4% versus a drop of 8.5% for the benchmarks. The S&P lost 7.4% over the same period.”

GOOD TO KNOW

ANOTHER GOOD WEEK

Deena and I were honored with the Dr. A. William “Bill” Gustafson Distinguished Leadership Award, “…recognizing distinguished leadership that is consistent with the ideals of the Texas Tech Department of Personal Financial Planning and promotes the financial planning profession with commitments to developing leaders of the highest caliber and character.”

The award was presented by our department chair, Vickie, and our partners Katie and John (John won the Distinguished Alumni Award last year).

 

 

SHOW YOUR SWAGGER

We are happy to introduce a new website, Advisor on My Side (https://www.advisoronmyside.org/), where investors can get reliable information from ethical financial advisors who truly have their clients’ interests at heart. Here’s an excerpt:

It’s a fact. Objective and competent financial advice can be life-changing. Yet with confusing information from the industry and regulators, it can be tough to figure out who’s who. To know which advisors are on your side. Advisors who are actual fiduciaries.

All advisors talk the talk. Only some can walk the walk.

Advisor On My Side brings together the best tips from investors, fiduciary advisors, and experts.

The mission: to help investors learn what they need to know to protect themselves.

Be sure to look at the short video to understand what we mean by “swagger.”

 

THE ANSWERS

 

FINAL FOOD FOR THOUGHT

Also from my friend Alex.

Hope you enjoyed this issue, and I look forward to “seeing you” again.

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

For Previous Issues:

Vol. 12, No. 1 – January 2019

Vol. 11, No. 7 – December 2018

www.Evensky.com

What is perfect tax planning when it comes to tax returns?

Michael Hoeflinger, CFP®
Wealth Manager

It’s that time of year again when millions of Americans file their tax returns before the deadline, hoping for a tax refund of some sort. But is that really the best strategy from a financial planning standpoint? The best tax planning is to have a tax balance of zero when it’s time to file, which means you would neither owe anything nor receive a refund. This would indicate that you paid exactly the amount of tax liability owed for that particular year.

This tax season will be different for filers under the Tax Cuts and Jobs Act that went into effect in 2018. Some of the major changes from the new law include a higher standard deduction ($12,000 for single filers and $24,000 for married persons filing jointly), the elimination of personal exemptions, new limits placed on itemized deductions and a new $10,000 cap on state and local deductions. The law also changed the higher standard deduction for the elderly, the blind and those with a disability. Furthermore, the IRS and Treasury department released new withholding tables, which means that the guidelines your employer follows in order to deduct the appropriate amount of income tax from your paycheck have changed.

  2017 2018-2025
Standard Deductions    
Single $6,350 $12,000
Married filing jointly $12,700 $24,000
Elderly or blind

(single and not a surviving spouse)

Add’l $1,550 Add’l $1,600
Elderly

(both over age 65 and married filing jointly

Add’l $2,500 Add’l $2,600
Exemption    
Personal exemption $4,050 per family member Eliminated

What can you do if you are surprised after filing your 2018 tax return? First, take a look at your tax withholding from your employer and think about what you can do to adjust it. This could be as simple as reviewing your W-4 form with your employer alongside the withholding tables to help best determine your income tax load. For example, if you claim too many allowances on your W-4, your employer will withhold less tax from your paycheck, but you may owe the following year. If you claim zero allowances, you may overpay and get a refund come tax time, but you will take home less pay per month as a result of the taxes. If you need less of your income to be taxed, make sure you are contributing more to your employer’s retirement plan as well as any other tax-sheltered accounts (assuming you are not already at the maximum allowed). If you are a 1099 employee, you may need to evaluate how much you are paying in taxes each quarter to make sure you get the liability just right.

Tax planning is a critical component of your overall financial planning, and making the necessary adjustments along the way will help you over both the short and long term.

Feel free to contact Michael Hoeflinger with any questions by phone 305.448.8882 ext. 241 or email: MHoeflinger@Evensky.com

REFERENCE: www.irs.gov

For more information on financial planning visit our website at www.Evensky.com

My Own “Jiminy Cricket”

Brett Horowitz

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

Whether you are working with a doctor, lawyer, or financial professional, you need to be aware of who is watching over you. It’s not enough to simply assume that they are on your side. When someone gives us recommendations, we want them to be like the Jiminy Cricket character in Pinocchio—a trustworthy person who is looking out for us and helping us make good decisions. Let’s look at an example to help frame this discussion.

You go to the doctor’s office complaining of muscle pain, and the doctor offers you a choice of medications. He hands you Medicine A and you walk out the door, feeling comfortable that he gave you the right medication that will make you feel better in no time. Why are you so at ease with the doctor’s recommendations? The short answer is that you trust the doctor. You believe that they will follow the Hippocratic Oath, which says in summary “above all, do no harm.” You have come to expect that they are providing you with advice that is in your, the patient’s, best interest. What if I told you that the financial profession doesn’t work that way? Surprised? Confused? If you’re like most Americans, you’re not alone.

According to a recent study by the RAND Corporation, commissioned by the SEC, most Americans have trouble distinguishing between advisors and brokers. As the study’s authors note, “Our analysis confirmed findings from previous studies and from our interviews with stakeholders: Investors had difficulty distinguishing among industry professionals and perceiving the web of relationships among service providers.” When a financial professional can have dozens of different titles, ranging from investment advisor to wealth manager to financial planner, it’s not hard to see why consumers are confused. One of the major differences comes down to a popular buzzword in the industry that every investor should understand: the term FIDUCIARY.

What is a fiduciary?

Quite frankly, one of the first questions you should ask your investment professional is this: Are you a fiduciary and do you acknowledge this in writing? (If you’re already working with someone and are unsure of their status, it’s a good idea to call them up and ask them.) A financial advisor held to a fiduciary standard occupies a position of special trust and confidence when working with a client. As a fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated, elimination of any significant conflicts of interest to the extent possible, and full disclosure of any remaining significant conflicts of interest. In other words, the financial advisor must place their client’s interests first.

Our website specifically states, “As a fee-only financial advisor, our revenues derive solely from fees paid directly to us by our clients. We have no potential conflicts associated with commissions or proprietary products.”

Our firm charges fees based on the amount of money that we are managing for our clients (i.e., assets under management). If you are a client of our firm and are interested in paying off a mortgage to free yourself of the debt, we acknowledge the potential conflict of interest that exists in you withdrawing money from the portfolio and the resulting drop in our fees, but we will help you make the right decision. In fact, over the last few years, we have helped many clients pay off their mortgage. It’s with this peace of mind that they can sleep comfortably knowing that we are on their side.

Let’s say that you just found yourself the recipient of an inheritance or a large bonus check and are thinking about possibly investing it in your portfolio. Without this fiduciary relationship, the answer would be simple: invest everything, because the more you invest, the more fees the firm will reap. But that’s not how we answer the question. We would want to know whether you expect to make any significant withdrawals from the portfolio during the next five years. We do not believe any investor should invest money in the market if they expect to need it back within the next five years. If you’re likely to need funds annually to supplement other outside income, we would make sure that you have enough cash set aside in case the markets go down so that you don’t have to sell anything in the next year and you know exactly where your grocery money will come from. Once again, the decision is not how to maximize our short-term profits; instead we are looking to make smart decisions that will benefit our clients.

On the other hand, brokers and other commission-based advisors are held to a “suitability” standard, which states that they must recommend a product that is suitable for the client, but that may not necessarily be the best recommendation for that person. For example, you’ve probably seen situations where a representative from XYZ Company recommends buying the XYZ Bond Fund, the XYZ Large Cap Growth Fund, and the XYZ International Fund. Is it really likely that XYZ Company could have the best mutual fund in every category?

Fees, fees everywhere

Some firms charge an annual rate, some charge based on assets under management, and some build the fees into the stock and bond transactions. None of these are inherently unfair as long as you know exactly how the advisor is getting paid, whether the fees are reasonable, and what their duty is to you (i.e., business standard or fiduciary). There may also be additional fees—such as mutual fund expenses, transaction fees, account opening or closing fees, and such—so it’s important to know how much those fees are and who receives those fees. At our firm, we use no-load mutual funds and exchange-traded funds. As there are no commissions involved, these investments have relatively low expense ratios, and fees are paid directly to the fund companies. There are small transaction fees as well, and these fees are paid directly to the custodian. We are paid only by our clients, who receive a bill each quarter with the calculation and amount of those fees. Performance is calculated net of fees where possible so that it’s in our best interest and the client’s best interest to limit all fees as much as possible.

You should always be aware of conflicts of interest as they pertain to fees. Will buying the mutual fund, annuity, or life insurance contract primarily benefit you or the person selling the product? The type of legalese you might look for is something to the effect of “Your account is a brokerage account and not an advisory account. Our interest may not be the same as yours … We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.” (Italics are my emphasis.)

For example, a representative at the XYZ firm may recommend a high-yielding bond to their client. What the client doesn’t know is that the firm is trying desperately to sell the bond to everyone it can so that it doesn’t have to keep the bond on its books due to expected losses (I have taken this example from the book Liar’s Poker by Michael Lewis, a nonfiction book describing his experience as a bond salesman in the 1980s). Who is the best prospect to sell the bond to? Their client, of course. They can do this because as long as the client asked for income in their portfolio, this investment would be suitable.

None of this by itself implies that there is anything wrong with compensation by way of commission. The bottom line is that you, as the client, need to understand how the advisor is getting paid, whether they are being held to a fiduciary or suitability standard, and whether these details are in writing. If in doubt, simply ask your advisor if they will sign a statement similar to the following:

  • In our relationship I will always place your interest first.
  • I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.
  • I will not mislead and will provide you with conspicuous, full, and fair disclosures of all important facts.
  • I will avoid conflicts of interest.
  • I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

It’s time that we break down the confusion surrounding investment professionals so that the public understands who their Jiminy Cricket is.

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

For more information on financial planning visit our website at www.Evensky.com

 

 

Unexpected Expenses When Buying a Home

Roxanne Alexander

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

Buying a new home can be an expensive process, and if you are not careful, you can end up paying for items you don’t need or have already paid for.

Loan Costs

When applying for a mortgage and receiving quotes from various mortgage companies, make sure you are comparing apples to apples. You will want to find out the average closing costs in your state or county and compare them to what you are being offered. There are some costs which are fixed, such as recording fees and transfer taxes, but there are other costs you can shop around for, such as title and insurance fees. These numbers can vary quite widely depending on the lender.

If you get a quote for a fixed-rate mortgage and have it locked or remove escrow, make sure you don’t see points added to your closing statement that you didn’t agree to. Paying points may not be worth it unless you plan to keep the loan for a long time. Points do lower your interest rate and your monthly payment, but it takes some time to break even.

For example, assume the monthly payment difference between paying 1.125 in points vs. no points is $64 per month, which is $768 per year. If it costs roughly $6,000 to pay points, it will take you around eight years to break even. Paying points may make sense over the long term provided you plan on living in the home indefinitely or possibly keeping it and renting it out in the future. If you think you are going to sell and move in less than eight years, paying points is more expensive.

You probably should avoid escrow if you are disciplined about setting aside funds. Paying escrow gives the bank extra funds to hold on to for you to pay taxes and insurance when you could be earning some interest on those funds in the interim.

Check your closing statement in detail and make sure everything you have already paid is included in the calculation. You may be surprised to find that the numbers sometimes don’t add up if you plug all the line items into a spreadsheet. You may save yourself from overpaying if you happen to find a mistake. You will sometimes be asked to pay a good-faith deposit when moving forward with a lender. This deposit is usually applied toward the appraisal or other fees, so make sure you are not charged twice.

Quick mortgage checklist:

  1. Compare interest rates and closing costs being offered. Are points being paid? What is the percentage difference between variable rates and fixed rates?
  2. Make sure lenders do not tack on points after they have locked your rate (unless you intentionally want to pay points and agreed to this in advance).
  3. Make sure any items you have prepaid are not included again in the closing costs.
  4. Make sure the lender does not add escrow unless you want it.
  5. The buyer has the right to use their own attorney or title company – you may be able to lower title costs if you shop around.
  6. The lender may ask you to pay a good-faith deposit, which they usually use for appraisal, etc. Make sure you get that back as a credit.
  7. Check your property tax calculation against the property appraiser’s website or property tax bill.

 

Homeowners associations

If the home is covered by a homeowners association, read the condo documents to make sure there are no rules and restrictions that you cannot live with, such as rules against pets (if you have them) or alterations you are planning to make. Pay attention to the association’s financial statements, since this will give you clues on potential assessments, whether there are enough reserves for large repairs, or if you will have to find a lump sum when the roof needs to be replaced or the house painted. You will also want to find out if there are any outstanding lawsuits or liabilities against the association.

Inspection and property disclosure

You are not obligated to use the inspector recommended by the realtor, title company, or lender. It is usually best to shop around for someone you trust who is independent from all the other parties that have interest in the deal. Some inspectors just go through the motions and miss checking the smaller problems, which can end up costing you money later on. You want to make sure the appliances are all in working order and that you are aware of when the air conditioner and water heater, etc., were last replaced or serviced. The inspector should check all the electricals and plumbing to make sure everything is in working order. It is advisable to verify that all permits have been closed out and that new construction meets code if the previous owner made any major renovations.

Homeowners insurance

Insurance is sometimes included in the mortgage estimate and is usually quoted higher than you would actually pay on your own. Shop around and don’t assume the number they state is what you will ultimately have to pay. You will need to purchase homeowners insurance prior to closing. Find out if the association covers any of the insurance costs, as this may be included in your maintenance fees. This lowers your costs of insurance, since you only have to insure contents and fixtures.

Homestead and property taxes

Property taxes are usually paid up once the sale goes through. Closing agents make estimates on the property taxes, which may be higher than the actual taxes stated on the county property appraiser’s website. Check the closing statement to make sure the taxes match what needs to be paid and that you are not overpaying. You should only be responsible for the portion of the year you own the home. For example, if you close on October 31, you should only be responsible for the days in November and December. If taxes are $8,500 for the year, then a rough calculation would be $8,500/365 = $23.28 per day x 61 days = $1,420.

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

For more information on financial planning visit our website at www.Evensky.com

 

 

Harold Evensky’s NewsLetter Vol. 12, No. 1 – January 2019

Harold Evensky CFP® , AIF®
Chairman

Dear Reader:

FOREWARNED IS FOREARMED

From an interview at the end of 2018 with Greg Davis, Vanguard’s Chief Investment Officer:

“The bull market in stocks that began in many parts of the world in early 2009 is nearly a decade old. Should investors adjust their expectations?

“Based on our fair-valuation metrics, we expect globally diversified stock portfolios to deliver annualized returns in the 4.5%–6.5% range over the next ten years. That’s roughly half of their long-term historical average return. And it’s roughly a third of their annualized gains since the depths of the financial crisis a decade ago. So, yes, some investors probably are expecting too much from stocks.

“Below our headline expectations for global stock portfolios, which assume dollar-denominated investments, are somewhat higher forecasts for non-U.S. markets and somewhat lower forecasts for the U.S. market. We’re a little more optimistic about stocks outside the U.S. because their valuations are lower.”

And one more observation from an interview with WealthManagement.com:

WM: Do active managers have an edge in volatile markets?

GD: That’s always been the claim, but we haven’t seen the data really bear that out.

His observations are consistent with our expectations.

Vanguard: Our CIO talks expectations, interest rates, and blockchain

WealthManagement.com: Inside ETFs Q&A: Vanguard’s Gregory Davis

A HEAD-SCRATCHER

SEC’s latest on fiduciary: Advisers can customize individual client agreements

Disclosure and informed consent can limit services, allow third party pay

“When Securities and Exchange Commission chairman Jay Clayton asserted at a congressional hearing last week that investment advisers can ‘contract around’ their obligation to act in a client’s best interests, it caused some head scratching in the adviser community.

In response to being pressed by Sen. Elizabeth Warren, D-Mass., about the SEC’s investment advice reform proposal, Mr. Clayton said: ‘Advisers are allowed to contract around this standard; it’s not well known. This is something we want people to understand.’”

InvestmentNews: SEC’s latest on fiduciary: Advisers can customize individual client agreements

A head-scratcher indeed. All the more reason to be sure your financial advisor signs the OATH. See below in the “FOR SHAME” note for a copy.

HEAD-SCRATCHER FOLLOW-UP

What makes this proposal even more incredible are the results of a RAND study commissioned by the SEC Office of the Investor Advocate and published in its 2018 Report on Activities. These were some of their observations:

To understand investor understanding of the term “best interest,” we asked respondents “What do you think it means if a financial professional is required to act in your “best interest?” We offered respondents eight attributes to which they could respond yes, no, or I don’t know. Panel 3 of the infographic on the previous page summarizes three of the responses we want to highlight for the individuals that reported currently using a financial professional for investment advice. Current advice users overwhelmingly believed (86 percent) that a professional required to act in their best interest monitors their accounts on an ongoing basis. This is somewhat of a concern because the best interest standard, as proposed, will apply to broker-dealers who are not required to provide this service as part of their typical offerings. The next two questions relate to cost and conflicts of interest. Seventy-three percent of current advice users believed that a professional acting in their best interest “will help me to choose the lowest cost products, all else being equal.” Sixty-one percent indicated that the professional would “avoid taking higher compensation for selling me a product when a similar but less costly product is available.”

From Panel 3:

That is, most didn’t have a clue.

Asked if financial professionals acting in an investor’s “best interest” would be required to:

  • Avoid taking higher compensation for selling one product when a similar but less costly one is available one is available …………………………………………61% said yes
  • Help them choose the lowest cost products, all else being equal ……73% said yes
  • Monitor their accounts on an ongoing basis …………………………….86% said yes

THESE ARE CURRENTLY NOT REQUIREMENTS FOR THOSE REGISTERED AS BROKERS

 

WHO REMEMBERS?

From my friend Peter

          

FROM MY LAST ISSUE

My friend the math professor says don’t try and use this PIN.

“You have an integral divided by a square root, where it appears the square root is not part of the integrand. I don’t see how this can provide a PIN; do you? Even if it were meant to be part of the integrand, there is still something wrong, because x^2-3x+2=(x-2)(x-1).”

PERSPECTIVE

Some thoughtful charts prepared by my associate Michael

YES!

I checked with my little brother (the Economics Professor at Syracuse) as he has the same porous memory as I do and we agreed we must be brilliant.

Open News: Neuroscientists Say Your Forgetfulness Is A Sign of Extraordinary Intelligence

WOW!

“The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years”

“‘We are becoming the dominant energy power in the world,’ said Michael Lynch, president of Strategic Energy & Economic Research. ‘But, because the change is gradual over time, I don’t think it’s going to cause a huge revolution, but you do have to think that OPEC is going to have to take that into account when they think about cutting.’

“The shale revolution has transformed oil wildcatters into billionaires and the U.S. into the world’s largest petroleum producer, surpassing Russia and Saudi Arabia. The power of OPEC has been diminished, undercutting one of the major geopolitical forces of the last half century.”

Bloomberg: The U.S. Just Became a Net Oil Exporter for the First Time in 75 Years

I KNOW YOU WANT TO KNOW

Top dog names for 2018 from NPR

FEMALES                               MALES

#1       Bella                                       Max

#2       Lucy                                       Charlie

#3       Luna                                       Cooper

#4       Daisy                                     Buddy

#5       Lola                                        Jack

NPR: Origins Of The Top Dog Names Of 2018: Pop Culture, Brunch, And Baby Names

 

MORE NOISE NOT NEWS

New York Times, Friday, December 7, 4:38 a.m.

“The arrest over the weekend of a top executive at Huawei, the Chinese telecommunications giant, has complicated President Trump’s trade talks with Beijing and drawn sharp protests from the Chinese government….

Side effects: The news contributed to whiplash for global markets on Thursday, but things seem more stable today.” [Emphasis mine]

thestreet, Friday, December 7

  BREAKING NEWS  11:08 am
  Dow’s Losses Accelerate, Blue-Chip Index Tumbles More Than 300 Points

Dow Falls 500 Points as Earlier Rally Fizzles     CLOSING – DOW off 558.72

 

WHO KNEW?

From Snaps

GOOD ADVICE FROM THE NEW YORK TIMES

FOR SHAME

From WealthManagement.com

“Today, you can invest in the Vanguard 500 Index Fund for as low as 4 basis points. But some legacy index funds—which track the exact same index—charge much, much higher fees than that, and investment gurus say they are simply unjustifiable.”

“The Rydex S&P 500 Index Fund—often considered the poster child of high-fee index funds—charges a net expense ratio of 2.33 percent. That includes a management fee of 75 basis points and 1 percent 12b-1 fee, a reward to the advisor for selling the fund. But there are more than a dozen similar, plain vanilla funds—also tracking the S&P—with net expense ratios over 1 percent. Federated Investors, State Farm and Invesco are just a few providers.”

Note: Data as of Oct. 31; these are widely held, market-cap-weighted, long only funds that track the S&P 500. It does not include funds that go short or use leverage.

It seems Barron’s reached the same conclusion in “Getting Fleeced on Fund Fees.”

“Investors might think index funds are a great way to capture market returns. Most index funds charge practically nothing: One of the largest, Vanguard Total Stock, charges just 0.04% a year; the average stock index fund’s expense ratio is down to 0.09%, less than a dime for every $100 invested. That has dropped from 0.27% in 2000, according to the Investment Company Institute, the fund industry’s lobbying group.

“Yet the industry’s method of calculating fees, on an asset-weighted basis, obscures a surprising fact: Hundreds of billions of dollars are sitting in share classes of index mutual funds that charge well above 1% in annual fees. Many of these funds do nothing more than track broad market benchmarks like the S&P 500. Yet their fees are on par with actively managed funds and, in some cases, even exceed them, topping 1.6% a year.”

“Another pool of high-fee funds sits in variable annuities, insurance contracts that hold stocks, bonds, or other financial assets in “sub-accounts.” Industry-wide, these sub-accounts hold more than $106 billion in index funds with expense ratios averaging 0.59%, according to data from Morningstar. That’s partly because these funds don’t have to compete against low-cost versions that investors may buy outside the insurance wrapper, says Todd Cipperman, founder of Cipperman Compliance Services, a financial consulting firm based in Wayne, Pa.”

“Barron’s found hundreds of funds held in variable annuities with sharply higher fees than what investors would pay for identical funds outside annuity wrappers. The Rydex Variable Nasdaq 100 fund is a popular choice, showing up in sub-accounts issued by carriers such as Nationwide, Principal, and Prudential, according to Morningstar. The fund has an expense ratio of 1.66%, well above the 0.2% for Invesco QQQ Trust (QQQ), an ETF with the identical portfolio. A spokesman for Nationwide said the firm ‘does not set nor establish the expense ratios of third-party funds.’ Principal declined to comment on the expense ratio of the Nasdaq fund. Prudential did not reply to requests for comment.”

WealthManagement.com: The Persistence of High-Fee Index Funds

Barron’s: Investors Might Be Paying Too Much for These Index Funds

Wonder why I keep pitching the Committee for the Fiduciary Standard’s Fiduciary Oath?

WHOOPS

Seems like I included a bum link in my last NewsLetter; so I’m trying again:

FINANCIAL PLANNING – A GREAT PROFESSION

If you have a few minutes to kill, this is a link to an interview I did at the Financial Planning Annual Convention: CLICK HERE

10 GOLF COURSES YOU MUST VISIT BEFORE YOU DIE

For our golfer friends and clients

  1. Cabot Cliffs, Cape Breton, Canada
  2. Emirates Golf Club, Dubai
  3. Highland Course At Primland Resort, Meadows of Dan, Va.
  4. Cape Kidnappers Golf Course, Hawke’s Bay, New Zealand

Here’s an example of these courses:

  1. Leopard Creek Country Club, Mpumalanga, South Africa
  2. Yas Links, Abu Dhabi, United Arab Emirates
  3. Sandy Lane, St. James, Barbados
  4. Pebble Beach Golf Links, Pebble Beach, Calif.
  5. El Camaleón Riviera Maya Golf Club, Playa del Carmen, Mexico
  6. The Blackstone Course at Mission Hills, Hainan, China

FA: 10 Golf Courses You Must Visit Before You Die

MERRILL LYNCH LOWERS MAX ADVISORY FEE TO 2%

Hot off the press from FinancialAdvisor IQ

“Wirehouse Merrill Lynch is dropping the top fees charged to its advisory platform clients for second time in two years…

“The maximum fees such clients will pay effective Jan. 1 will be 2%, according to FundFire. The current fee structure, effective since February 2017, sets the maximum at 2.2% for accounts with less than $5 million and 2% for those with more than $5 million, FundFire writes, citing Merrill Lynch’s March ADV.”

No comment.

FinancialAdvisorIQ: Merrill Lynch Lowers Max Advisory Fee to 2%

 

MORE TOPs – THE NATION’S TOP 10 ‘PARTY SCHOOL’ COLLEGES

I’m sure parents of students of these schools are very pleased.

  1. University of Rhode Island, South Kingstown, R.I., Enrollment: 15,092,
  2. Colgate University, Hamilton, N.Y., Enrollment: 2,873
  3. University of Wisconsin-Madison, Madison, Wisc., Enrollment: 32,196
  4. University of California – Santa Barbara, Santa Barbara, Calif., Enrollment: 22,186
  5. Lehigh University, Bethlehem, Pa., Enrollment: 5,075
  6. Bucknell University, Lewisburg, Pa., Enrollment: 3,611
  7. Syracuse University, Syracuse, N.Y., Enrollment: 15,252
  8. Tulane University, New Orleans, Enrollment: 6,571
  9. West Virginia University, Morgantown, Va., Enrollment: 22,504
  10. University of Delaware, Newark, Del., Enrollment: 18,144

 FA: The Nation’s Top 10 ‘Party School’ Colleges

SURE HOPE HE’S RIGHT

“Byron R. Wien, vice chairman in the Private Wealth Solutions group at Blackstone, issued his list of ‘Ten Surprises for 2019’ on Thursday, and it paints a rosier picture than some investors might expect, considering recent market volatility and economic signals.

“This is the 34th year Byron has released his list, which contains his views on economic, financial and political events for the coming year. Byron defines a ‘surprise’ as an event that the average investor would give a one-in-three chance of happening, but which he believes has a better than 50-50 chance of becoming a reality.”

Wien’s surprises for 2019, in his exact words, are as follows:

“Partly because of no further rate increases by the Federal Reserve and more attractive valuations as a result of the market decline at the end of 2018, the S&P 500 gains 15 percent for the year. Rallies and corrections occur but improved earnings enable equities to move higher in a reasonably benign interest-rate environment.”

FA: Byron Wien ‘Surprises’ With Rosy Predictions for 2019

 

NOT SO GOOD NEWS FOR ACTIVE MANAGERS

From S&P Dow Jones Indices:

ThinkTank: Does Past Performance Matter? The Persistence Scorecard

AND EVEN MORE BAD NEWS

From the recent S&P 500 SPIVA® Institutional Scorecard:

Similar to findings in previous scorecards, more mutual fund managers underperformed than their institutional counterparts for all equity categories on a net-of-fees basis. · For example, over the past 10 years in the large-cap equity space, 89.51% of mutual fund managers and 58.78% of institutional accounts underperformed the S&P 500® on a net-of-fees basis. … · Similarly, during the same period in the mid-cap space, 96.48% (85.37%) of mutual funds and 78.57% (62.98%) of institutional accounts underperformed the S&P MidCap 400® on a net (gross) basis. · Small-cap equity remains a challenging space for active managers. Over 80% of mutual funds underperformed the S&P SmallCap 600® (net- and gross-of-fees), while 81.61% (61.45%) of institutional accounts underperformed on a net (gross) basis in the past 10 years. The findings in the small-cap space help to dispel the myth that small-cap equity is an inefficient asset class that is best accessed via active management.

S&P Dow Jones Indicies: SPIVA® Institutional Scorecard: How Much Do Fees Affect the Active Versus Passive Debate?

QUIZ FOR MY VERY BRIGHT FRIENDS WHO ARE ALSO FORGETFUL

From my bright friend, Leon. There are nine questions.

These are not trick questions. They are straight questions with straight answers.

  • Name the one sport in which neither the spectators nor the participants know the score or the leader until the contest ends.
  • What famous North American landmark is constantly moving backward?
  • Of all vegetables, only two can live to produce on their own for several growing seasons. All other vegetables must be replanted every year. What are the only two perennial vegetables?
  • What fruit has its seeds on the outside?
  • In many liquor stores, you can buy pear brandy, with a real pear inside the bottle. The pear is whole and ripe, and the bottle is genuine; it hasn’t been cut in any way. How did the pear get inside the bottle?
  • Only three words in standard English begin with the letters “dw” and they are all common words. Name two of them.
  • There are 14 punctuation marks in English grammar. Can you name at least half of them?
  • Name the only vegetable or fruit that is never sold frozen, canned, processed, cooked, or in any other form except fresh.
  • Name 6 or more things that you can wear on your feet beginning with the letter ‘S.’Answers to Quiz:
  • The one sport in which neither the spectators nor the participants know the score or the leader until the contest ends: boxing.
  • North American landmark constantly moving backward: Niagara Falls. The rim is worn down about two and a half feet each year because of the millions of gallons of water that rush over it every minute.
  • Only two vegetables can live to produce on their own for several growing seasons: asparagus and rhubarb.
  • The fruit with its seeds on the outside: strawberry.
  • How did the pear get inside the brandy bottle? It grew inside the bottle. The bottles are placed over pear buds when they are small, and are wired in place on the tree. The bottle is left in place for the entire growing season. When the pears are ripe, they are snipped off at the stems.
  • Three English words beginning with “dw”: dwarf, dwell, and dwindle.
  • Fourteen punctuation marks in English grammar: period, comma, colon, semicolon, dash, hyphen, apostrophe, question mark, exclamation point, quotation mark, brackets, parenthesis, braces, and ellipses.
  • The only vegetable or fruit never sold frozen, canned, processed, cooked, or in any other form but fresh: Lettuce.
  • Six or more things you can wear on your feet beginning with “s”: shoes, socks, sandals, sneakers, slippers, skis, skates, snowshoes, stockings, stilts. Don’t send it back to me. I’ve already failed it once.

MARKET INSIGHTS

From JP Morgan’s most excellent Market Insights:

TELL ME IT’S NOT TRUE!

NPR: Woodstock Will Return This Summer, For Its 50th Anniversary

UNBELIEVABLE!

Ancient termite megapolis as large as Britian found in Brazil

CNN travel: Ancient termite megapolis as large as Britain found in Brazil

 

OH MY

Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement

“It’s no wonder one in three Americans believe they have a better chance of learning the mythical creature Chewbacca is real than retiring comfortably, given their current dearth of savings and retirement planning. Many simply aren’t saving anything and have no plan to start in 2019. Fewer than half (47%) of working Americans in their 40s and 50s with household incomes from $40,000 to $99,999 said retirement was one of their top three savings priorities for 2019, according to a new AARP-Ad Council survey. Just 21 percent said saving for retirement is their top priority for the new year.”

FA: Many Americans Think Proof Of Bigfoot Is More Likely Than A Comfortable Retirement

 

NOT SO UNIQUE

A little perspective from Barron’s (12/28/2018):

Barron’s: Sizing Up the Market’s Recent Volatility

AMAZING PICTURES

Winners of the Epson International Pano Award contest from my friend Leon. Lots more at:

DailyMail.com: Lightning striking the Grand Canyon and a magical dive into an abyss: The stunning winners of the panoramic photography awards revealed.

Zoom the page up for more dramatic views:

 

 

GETTING OLDER

A distraught senior citizen phoned her doctor’s office. “Is it true,” she wanted to know, “that the medication you prescribed has to be taken for the rest of my life?”

“Yes, I’m afraid so,” the doctor told her. There was a moment of silence before the senior lady replied, “I’m wondering, then, just how serious is my condition because this prescription is marked ‘NO REFILLS.’”

~~~~~~~~~~

An older gentleman was on the operating table awaiting surgery and he insisted that his son, a renowned surgeon, perform the operation. As he was about to get the anesthesia, he asked to speak to his son.

 

“Yes, Dad, what is it?”

 

“Don’t be nervous, son; do your best, and just remember, if it doesn’t go well, if something happens to me, your mother is going to come and live with you and your wife….”

 

(I LOVE IT!)

~~~~~~~~~~

 

The older we get, the fewer things seem worth waiting in line for.

 

~~~~~~~~~~

 

When you are dissatisfied and would like to go back to youth, think of Algebra.

~~~~~~~~~~

Now, if you feel this doesn’t apply to you, stick around awhile … it will!

SPEAKING OF OLDER

I graduated from high school in 1960. Here are some sobering facts from that year:

Average income………………….….$5,620/year

Senator’s income…………………….$22,500/year

New home…………………………….$12,700

Gas……………………………………..31 cents/gallon

Movie ticket…………………………….51 cents

Minimum wage………………………..$1.00

DOW……………………………………613

Best Picture……………………………”The Apartment”

Best Actor………………………………Burt Lancaster, “Elmer Gantry”

Best Actress……………………………Elizabeth Taylor, “Butterfield 8”

 

Top Songs

“It’s Now or Never,” Elvis Presley

“I’m Sorry,” Brenda Lee

“Running Bear,” Johnny Preston

“Teen Angel,” Mark Dinning

“The Twist,” Chubby Checker

“Alley Oop,” Hollywood Argyles

 

Those were the good old days!

 

LAST MINUTE ADDITION

Jack Bogle, founder of Vanguard and a beautiful person just passed away. Below is a wonderful tribute by Ron Lieber in the New York Times.

The New York Times: The Things John Bogle Taught Us: Humility, Ethics and Simplicity

 

Hope you enjoyed this issue, and I look forward to “seeing you” again.

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

 

Business owners, if you offer a company 401(k), you should know the difference between 3(21) and 3(38) fiduciary services.

Marcos A. Segrera, CFP®
Financial Advisor

In today’s evolving legal, regulatory, and litigation environments, it is vital for qualified retirement plan fiduciaries to understand their roles and responsibilities. The additional time and money needed to cover fiduciary duty may be hard to come by for business owners, who likely prefer to spend those resources growing their businesses rather than learning and worrying about the nuances of a corporate retirement plan. As lawsuits targeting 401(k) plan sponsors proliferate, the need and demand for investment fiduciary services has grown.

The services fall into two distinct levels: 3(21) and 3(38). These numbers refer to specific sections of the Employment Retirement Income Security Act (ERISA) of 1974. The goal of this post is to address the differences and benefits of 3(21) and 3(38) fiduciary services and highlight some of the common areas in which 401(k) lawsuits fall.

To begin, you should be familiar with two fiduciary terms: plan sponsor and plan fiduciary.

The plan sponsor is the company that provides the plan, including 401(k), profit sharing, cash balance, etc., for the benefit of the owners and employees. By default, the company is also a plan fiduciary.

The plan fiduciary is any individual with discretionary authority or responsibility for the administration of the plan, anyone who provides investment advice to the plan for compensation, or anyone who has any authority or responsibility to do so. These individuals are therefore subject to fiduciary responsibilities. Plan fiduciaries include plan trustees, plan administrators, and members of a plan’s investment committee. Business owners are often listed as a trustee, administrator, etc.; therefore, they are plan fiduciaries.

We find three main areas of concern where plan participants and the Department of Labor (DOL), which regulates ERISA plans, brings forth a lawsuit:

  1. Inappropriate investment choices
  2. Excessive fees
  3. Self-dealing

Both 3(21) and 3(38) fiduciary services can help mitigate these issues.

With regard to investment choices, ERISA does not specify which investments are appropriate or inappropriate. Often, the finding for or against a plan’s fiduciaries does not hinge as much on results—i.e., whether investment returns were too low or fees were too high—but whether a prudent process was followed and documented as well as whether the decisions made were in the participants’ best interests. The plan fiduciaries need to demonstrate that the final menu of investment options was determined using prudent decision-making that has been consistent over time. Issues can also arise when plan fiduciaries include the employer’s own stock within the plan investments.

Outside the obvious, ERISA does not specify much when it comes to fees, but it has been the major source of lawsuits during the recent surge in litigation. Again, the emphasis is on showing that a prudent process was used to select investment options and ensuring that the plan pays no more than reasonable fees for needed services. For example, ensuring that your plan offers institutional share classes of mutual funds versus the more expensive retail share class is a simple way to improve investment costs. However, many plan fiduciaries find themselves with retail share classes in their menu of options when an equivalent institutional share class is available. It is important to consistently review your current menu against what is available for your plan. In addition, the costs of plan operation, including third-party administrators, record-keepers, etc., fall under the duty to control plan costs to those reasonable and necessary.

Self-dealing refers to an instance in which the plan fiduciary acts in their own best interests rather than serving the plan and its participants. Self-dealing only accounts for a small share of total lawsuits. Most violations arise from actions taken by very large companies that include proprietary investment products in their plans. Companies are not prohibited from having proprietary products included in their 401(k)s, but issues arise when a plan fiduciary encourages participants to invest in those products. Self-dealing also plays a role in determining which expenses can be paid by the plan, i.e., essentially by the employees, versus being paid directly by the employer. The DOL divides fees into two categories: administrative expenses that are payable from plan assets and settlor expenses that cannot be paid by plan assets.

For more information regarding the causes and consequences of 401(k) lawsuits, you can refer to this study by the Center for Retirement Research.

How can 3(21) and 3(38) fiduciary services support plan fiduciaries? They help by allowing the plan fiduciaries to share in the investment liability—3(21)—or delegate the liability—3(38).

A 3(21) advisor-fiduciary is a co-fiduciary role that provides counsel and guidance. An advisor provides investment advice to the plan sponsor with respect to the investment options available on the 401(k) menu. The advisor only makes recommendations for which it has no legal responsibility because a 3(21) fiduciary has no ERISA-defined “discretion.” The plan fiduciaries retain the discretion to accept or reject the advice. Since the plan fiduciaries are co-decision makers they hold co-responsibility, and generally “the buck stops” with the plan fiduciaries. The investment advisor shares in the liability but does not assume the full liability pertaining to investment decisions. The 3(21) services add a level of investment expertise for an employer and may cost less – than a 3(38) fiduciary, but it does not remove ultimate liability from the plan fiduciaries, including the business owner.

A 3(38) advisor-fiduciary manages the investments on a discretionary basis and holds responsibility for selecting, monitoring, and replacing investments. The plan sponsor enjoys less liability in this relationship because the fiduciary risk is delegated to the advisor. The plan fiduciaries retain the responsibility of selecting and monitoring the advisor. Under ERISA, as long as the plan fiduciaries prudently monitor the investment manager, the plan sponsor will not be liable for the acts and omissions of the investment manager. These services may cost more than the 3(21) services, but they obviously provide greater protection for plan fiduciaries.

Do you know if your company-sponsored retirement plan has 3(21) or 3(38) fiduciary services in place? Unfortunately, many business owners and plan fiduciaries do not know the answer to this question, and they may assume they have a 3(38) relationship by hiring a firm to run the plan; however, simply hiring an advisor does not mean they provide 3(38) services. If you don’t know, now is the time to have a conversation with your plan provider or plan investment advisor. For most employers, the additional plan cost is well worth the protections they provide.

Feel free to contact Marcos A. Segrera with any questions by phone 305.448.8882 ext. 212 or email: MSegrera@Evensky.com 

REFERENCES

https://www.marketwatch.com/story/401k-lawsuits-are-surging-heres-what-it-means-for-you-2018-05-09

https://www.employeefiduciary.com/blog/dol-guidance-for-paying-401k-fees-from-plan-assets

https://www.plansponsor.com/invesco-accused-self-dealing-401k/

https://www.planadvisor.com/general-electric-401k-fiduciaries-accused-of-self-dealing/

http://crr.bc.edu/briefs/401k-lawsuits-what-are-the-causes-and-consequences/

https://fa.morganstanley.com/todd.barden/mediahandler/media/142120/Understanding%20Your%20Fiduciary%20Liability.pdf

For more information on financial planning visit our website at www.Evensky.com

The Family Information Organizer

Josh Mungavin

Josh Mungavin CFP®, CRC® Principal, Wealth Manager

“There is in the act of preparing, the moment you start caring.” —Winston Churchill

A longtime friend named Dana called me one day because she needed help. Her father had just passed away and she didn’t know what to do. Although I’ve helped clients’ children through similar situations many times, something occurred to me as I saw her left lost and alone with a scattered paper trail and no instructions to help her through: Having all essential information in one place makes a challenging time easier and leaves a legacy of respect and security. This book was created to help your family members navigate loss while also making sure you have everything you need in times of emergency or natural disaster. Receiving this book gives you a good reason to begin gathering your information now, rather than wait for a crisis to act.

Before helping Dana, I had taken our firm’s emergency planning benefit for granted because we have records of family finances at our fingertips. Our clients get an elevated level of care because we work with the professionals in their lives and have made the investment in tools, employees, and education necessary to create an objective and tailored plan to manage risks, simplify financial lives, maintain wealth, and provide for heirs. Most people don’t have that level of care, and while this is not a replacement for services we provide, it is our attempt to help our clients and those who don’t have the support we offer. This book was created to help you take care of your family through emergencies by having all essential information in one place (extra pages, which can be duplicated, are at the back of the document to provide enough space for all of your information).

For the book as a fillable PDF visit the following link:  www.EK-FF.com/Organizer.pdf 

For the free eBook click one of the following links:

AMAZON

BARNES & NOBLES

Feel free to contact Josh Mungavin with any questions by phone 305.448.8882 ext. 219 or email: Josh@Evensky.com 

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

 

 

NewsLetter Vol. 11, No. 7 – December 2018

Harold Evensky CFP® , AIF®
Chairman

Dear Reader:

 

NOT LOOKIN’ GOOD

For active managers. From the S&P DOW Jones SPIVA Scorecard:

Overall performance of active equity funds relative to their respective benchmarks over the medium term also improved, although the majority still underperformed their benchmarks. Over the five-year period, 76.49% of large-cap managers, 81.74% of mid-cap managers, and 92.90% of small-cap managers lagged their respective benchmarks. Similarly, over the 15-year investment horizon, 92.43% of large-cap managers, 95.13% of mid-cap managers, and 97.70% of small-cap managers failed to outperform on a relative basis.

https://us.spindices.com/documents/spiva/spiva-us-mid-year-2018.pdf

 

WHERE’S THE BENJAMINS ($100 BILLS)?

In billions of notes, how much cash was in circulation in 2017?

$1        12.1

$2        1.2

$5        3.0

$10      2.0

$20      9.1

$50      1.7

$100    12.5

$100 bills as a percentage of total cash: 78%

There are 36 $100 bills in circulation for every man, woman, and child in the United States.

Where are the $100 bills?

  • $80 billion in domestic depository institutions
  • $453 billion with domestic businesses and individuals
  • $1.07 trillion held abroad!

www.wealthmanagement.com

 

GREAT MINDS

From Deena’s office:

Great Minds Discuss Ideas

Average Minds Discuss Events

Small Minds Discuss People

 

SOUND ADVICE

Some basic but wise advice from The Bogleheads’ Guide to the Three-Fund Portfolio: How a Simple Portfolio of Three Total Market Index Funds Outperforms Most Investors with Less Risk, by Taylor Larimore, via my friend Alex:

  1. A 100% stock portfolio can be dangerous.
  2. Believing a broker is your friend can be dangerous.
  3. Avoid the lure of individual stocks.
  4. Past performance does not forecast future performance.
  5. Investment newsletters are a waste of money, and market-timing doesn’t work.
  6. Past performance does not forecast future performance (some advice requires repeating).
  7. Avoid expensive stockbrokers and their hidden fees.
  8. Buying high and selling low is a losing strategy.

The Boglehead Philosophy

  1. Develop a workable plan.
  2. Invest early and often.
  3. Never bear too much or too little risk.
  4. Diversify.
  5. Never try to time the market.
  6. Use index funds when possible.
  7. Keep costs low.
  8. Minimize taxes.
  9. Invest with simplicity.
  10. Stay the course.

https://www.amazon.com/gp/product/1119487331

 

THERE’S A SECRET CODE ON YOUR MILK. HERE’S WHAT IT MEANS.

Most dairy farmers don’t bottle and sell directly to grocery stores. They work with regional dairy plants, which act as middlemen. You can see what dairy bottled your milk. Just grab a gallon and look at the code!

Here’s what to do:

  • Find the secret code—usually located near the expiration date. It looks like: 01-12345 or 01-02.
  • Pull up Where Is My Milk From (http://whereismymilkfrom.com/#) and type in the code to see where your milk was bottled.

http://www.msn.com/en-us/foodanddrink/tipsandtricks/theres-a-secret-code-on-your-milk-heres-what-it-means/ar-BBOQWSS?li=BBnb7Kz&ocid=iehp

 

BOZO JIM CRAMER BLAMES MOMENTUM ETF FOR HIS RECENT PERFORMANCE WOES

The title above is not mine; it is the heading of an article by Evan Simonoff, my friend and the editor of Financial Advisor magazine. It seems Cramer’s poor performance isn’t his fault but everyone else’s (although readers of my Newsletter will know I don’t necessarily disagree with Evan’s characterization of Mr. Cramer). From the article:

One doesn’t have to be Isaac Newton to realize that when a security goes vertical like some tech and credit card stocks have for almost this entire, extended bull market, they can also go the other way. Momentum stocks have been experiencing some tough times over the last five weeks. After 10 years of sensational performance, many think they were due for a major correction.

But Jim Cramer of Mad Money fame penned a piece Thursday in which he seems convinced that some of his favorite stocks, notably Amazon, Visa and Mastercard, are trading like “Mexican jumping beans” all because of evil “voyeuristic ETFs” that are “completely hidden.”

So which ETF is the most serious culprit ruining Cramer’s life? It is iShares Edge MSCI USA Momentum Factor ETF (MTUM). Incidentally, I suspect Cramer’s mood is not in a better state this week with the Dow down more than 600 points.

Apparently, MTUM is one of several “totally abusive ETFs out there that really do unlevel the playing field and make a mockery of the whole business,” he wrote.

So who is he calling morons and doofuses? It’s the “moron managers flitting all over the place, the kind Warren Buffett calls out as expensive doofuses,” who are constantly engaging in the risk-on, risk-off trades that always appear to poop on Cramer’s parade. And their current instrument is MTUM.

MTUM may be one of many vehicles raining on the parade, but it’s likely there are many other far more powerful algorithmic strategies making momentum investors miserable. In recent weeks, wizards like AQR’s Cliff Asness have sent apologies to investors talking about their underwhelming investment performance in recent weeks [see “Hope Springs Eternal” later in the Newsletter].

https://www.fa-mag.com/news/bozo-jim-cramer-blames-etfs-for-his-performance-woes-41868.html

 

MORE BAD NEWS

From CBS News:

Tough Retirement Realities for Baby Boomers

The vast majority of older working Americans don’t have sufficient savings to retire full-time at age 65 with their pre-retirement standard of living. That’s one of the sobering conclusions from the recent Sightlines report issued by the Stanford Center on Longevity (SCL).

As a result, the report noted, workers approaching retirement will either need to work beyond age 65, reduce their standard of living, or do some combination of the two. This should cause some soul-searching among older workers, their families, and their employers…According to the SCL report, almost one-third (30 percent) of them have saved nothing toward retirement.

https://www.cbsnews.com/news/baby-boomers-tough-retirement-realities/

 

STRANGE FACTS ABOUT THE USA

From my friend Leon:

  • More people live in New York City than in 40 of the 50 states.
  • The word “Pennsylvania” is misspelled on the Liberty Bell.
  • There is enough water in Lake Superior to cover all of North and South America in one foot of water.
  • In 1872, Russia sold Alaska to the United States for about 2 cents per acre [about $25 at 5%].
  • It would take you more than 400 years to spend a night in all of Las Vegas’s hotel rooms.
  • There is enough concrete in the Hoover Dam to build a two-lane highway from San Francisco to New York City.
  • Kansas produces enough wheat each year to feed everyone in the world for about two weeks.
  • The Library of Congress contains approximately 838 miles of bookshelves—long enough to stretch from Houston to Chicago.
  • The entire Denver International Airport is twice the size of Manhattan.
  • A highway in Lancaster, California, plays the “William Tell Overture” as you drive over it, thanks to some well-placed grooves in the road.
  • The total length of Idaho’s rivers could stretch across the United states about 40 times.
  • The one-woman town of Monowi, Nebraska, is the only officially incorporated municipality with a population of 1. The sole 83-year-old resident is the city’s mayor, librarian, and bartender.
  • The number of bourbon barrels in Kentucky outnumbers the state’s population by more than two million.

 

THOUGHTS FROM VANGUARD

An excellent interview with Dan Berkowitz, an investment analyst with Vanguard Investment Strategy Group:

“Active or passive? What investors and advisors need to consider”

You often hear that actively managed funds tend to outperform in bear markets. Is that true, and can you speak to some of the misconceptions around fund performance?

Dan Berkowitz: Yes, this one has come up increasingly so, given where equity and fixed income valuations are these days. It’s a natural question. And it’s a common assumption that active managers as a group provide a better degree of downside protection in poorly performing market environments, or bear market environments, whether through a greater allocation to cash or through portfolio management skill. And there certainly are strategies in the active and index universe that are designed to provide a degree of downside protection.

But when we look at active managers again as a group, we just don’t see that they provide, at a high level, a degree of downside protection.

https://www.advisorperspectives.com/articles/2018/10/15/active-or-passive-what-investors-and-advisors-need-to-consider

 

THIS IS WHAT A SOUTHERNER LIKES ABOUT THE SOUTH

From my BFF Patti—the first one is her theme song:

  • A true Southerner knows you don’t scream obscenities at little old ladies who drive 30 MPH on the freeway. You just say, “Bless her sweet little heart.”
  • There is no magazine named “Northern Living” for good reason. There ain’t nobody interested in moving up there, so nobody would buy the magazine!
  • Southerners know everybody’s first name: Honey, Darlin’, Shugah.
  • Only a Southerner knows the difference between a hissie fit and a conniption fit, and that you don’t “HAVE” them, you “PITCH” them.
  • Only a Southerner can show or point out to you the general direction of “yonder.”
  • Only a Southerner knows exactly how long “directly” is, as in: “Going to town, be back directly.”
  • Only Southerners grow up knowing the difference between “right near” and “a right far piece.” They also know that “just down the road” can be 1 mile or 20.
  • Only a Southerner both knows and understands the difference between a redneck, a good ol’ boy, and po’ white trash.
  • And to those of you who are still having a hard time understanding all this Southern stuff, bless your hearts, I hear they’re fixin’ to have classes on Southernness as a second language!

Now, Shugah, send this to someone who was raised in the South or wish they had a ‘been! If you’re a Northern transplant, bless your heart—fake it. We know you got here as fast as you could.

 

WHY I’M A GURU SKEPTIC

Some recent market prognostications:

March 2013

Welcome, 2016: The Coming End of the 16-Year Bear Market

Two well-regarded forecasters, the Leuthold Group and Jeremy Grantham of GMO, both see low single digit returns from stocks over the next 7 years from current levels.

Could still be, but we’re 5¾ years into the 7 years, and the annual total return has been 14%. To meet an annualized 6% return, the market loss will have to annualize at –14% until March 2020.

https://seekingalpha.com/article/1288681-welcome-2016-the-coming-end-of-the-16-year-bear-market?page=7

December 2013

Dow is up more than 5% five consecutive years now. A sixth such year has not happened before in history. A 5-year bull trend only occurred once before, in the 1990s, and was followed by 3 down years. Russell 2k rallies of similar size and duration to 2013’s (excluding accelerations from major bear lows) are shown below. In each case all the gains were given back the following year…

To sum up, from a pure statistical perspective, removing any notion of the bigger picture, the probability for 2014 is at best a flat year for equities with a significant drawdown on the way, and at worst a significant down year. Stats are just a guide, but we see united predictions across a range of measures, drawn together at the top of the page.

Yet the bullish momentum of the market and “this time is different” thinking (Fed trumps all, equities need revaluing due to suppressed bonds and cash yields) are making for widespread complacency about (and dismissal of) the parallels…

Whilst we should not overly rely on any one indicator or discipline, it’s the collective case that gives me such conviction on the short side (disclosure: short stock indices).

S&P total annual return (dividends reinvested) 2014 … 15.9%

 

February 2014

The Bear Market of 2014–2017 Is Starting. Why, How & When (Revisited)

As markets opened up on January 2, 2014, everyone was excited. After all, what was not to like? The stage was set for the bull market to continue, or so everyone thought.

How little did they know. What they didn’t (and still don’t) know is that the bull market topped out just two days earlier, on December 31, 2013, at 16,588 on the DOW (mathematical top, the actual top will come later in the year), ushering in the final stage of the Cyclical Bear Market that will take us into the final 2017 bottom.

S&P total annual return (dividends reinvested) from 2014 to the end of 2017 … 15.9%

http://www.investwithalex.com/the-bear-market-of-2014-2017-is-starting-why-how-when/

http://www.marketoracle.co.uk/Article43692.html

February 2015

Opinion: 7 danger signs of stocks’ coming bear market

Protect your portfolio now before the downturn begins

With the US stock market trying to surpass its all-time highs, many investors still don’t see the problem. After all, if the market is going up, why worry? Lately, many bulls feel invincible.

The problem is that if you wait until a bear market is formally announced, you will have lost a chunk of your paper profits. The key is to slowly take money off the table now. You may also protect your stock portfolio using hedging strategies, such as buying options.

S&P total annual return (dividends reinvested) to October 2018 … 11.5%

https://www.marketwatch.com/story/7-danger-signs-of-stocks-coming-bear-market-2015-02-13

January 2017

Despite Trump euphoria, Wall Street’s 2017 forecast is the most bearish annual outlook in 12 years

S&P total annual return (dividends reinvested) 2017 … 20.9%

https://www.cnbc.com/2017/01/03/streets-2017-forecast-is-the-most-bearish-annual-outlook-in-12-years.html

And how about other gurus?

USA Today April 2007

From an interview with Steve Ballmer, CEO of Microsoft

“There’s no chance that the iPhone is going to get any significant market share. No chance,” said Ballmer. “It’s a $500 subsidized item. They may make a lot of money. But if you actually take a look at the 1.3 billion phones that get sold, I’d prefer to have our software in 60% or 70% or 80% of them, than I would to have 2% or 3%, which is what Apple might get.”

iPhone Sales in billions

2007 – 1.39

2012 – 125

2017 – 216.8

https://www.statista.com/statistics/276306/global-apple-iphone-sales-since-fiscal-year-2007/

https://usatoday30.usatoday.com/money/companies/management/2007-04-29-ballmer-ceo-forum-usat_N.htm

 

WHAT A DIFFERENCE

From my friend Leon:

Here are some statistics for the year 1910:

  • The average life expectancy for men was 47 years.
  • Fuel for this car was sold in drugstores only.
  • Only 14 percent of homes had a bathtub.
  • Only 8 percent of homes had a telephone.
  • There were only 8,000 cars and only 144 miles of paved roads.
  • The maximum speed limit in most cities was 10 mph.
  • The tallest structure in the world was the Eiffel Tower!
  • The average US wage in 1910 was 22 cents per hour, and the average US worker made between $200 and $400 per year.
  • A competent accountant could expect to earn $2000 per year, a dentist $2,500 per year, a veterinarian between $1,500 and $4,000 per year, and a mechanical engineer about $5,000 per year.
  • More than 95 percent of all births took place at home.
  • Ninety percent of all doctors did not have a college education. Instead, they attended so-called medical schools, many of which were condemned in the press and the government as ”substandard.“
  • Sugar cost 4 cents a pound; eggs were 14 cents a dozen; coffee was 15 cents a pound.
  • Most women only washed their hair once a month and used Borax or egg yolks for shampoo.
  • Canada passed a law that prohibited poor people from entering into their country for any reason.
  • The population of Las Vegas, Nevada, was only 30!
  • Crossword puzzles and iced tea hadn’t been invented yet.
  • Two out of every 10 adults couldn’t read or write, and only 6 percent of all Americans had graduated from high school.
  • Marijuana, heroin, and morphine were all available over the counter at the local corner drugstore. Back then, pharmacists said, “Heroin clears the complexion, gives buoyancy to the mind, regulates the stomach and bowels, and is, in fact, a perfect guardian of health.”
  • There were about 230 reported murders in the entire United States!

AND FOR THOSE OF YOU OLD ENOUGH TO REMEMBER 1955

From my friend Peter:

If they raise the minimum wage to $1.00, nobody will be able to hire outside help at the store.

When I first started driving, who would have thought gas would someday cost 25 cents a gallon. I’m leaving the car in the garage.

Did you see where some baseball player just signed a contract for $50,000 a year just to play ball? It wouldn’t surprise me if someday they’ll be making more than the president.

The fast food restaurant is convenient for a quick meal, but I seriously doubt they will ever catch on.

No one can afford to be sick anymore. At $15.00 a day in the hospital, it’s too rich for my blood.

NO COMMENT

From YouTube Pun Based Humor:

COOL!

You probably need to be an academic to have ever heard about SSRN, but “it’s an open-access online preprint community providing valuable services to leading academic schools and government institutions…SSRN is instrumental as a starting point for PhD students, professors, and institutional faculty to post early-stage research, prior to publication in academic journals.”

https://www.elsevier.com/solutions/ssrn

SSRN’s eLibrary provides 828,739 research papers from 406,723 researchers across 30 disciplines.

“Congratulations, Harold. You are currently in the top 10% of Authors on SSRN by all-time downloads.”

 

DOING GOOD

These organizations topped the Chronicle’s new cash-support ranking.

RANK ORGANIZATION CASH SUPPORT
1 United Way Worldwide $3,260,274,867
2 Salvation Army $1,467,750,000
3 ALSAC/St. Jude Children’s Hospital $1,314,189,700
4 Harvard University $1,283,739,766
5 Mayo Clinic $1,140,619,378
6 Stanford University $1,110,664,853
7 Boys & Girls Clubs of America $909,035,450
8 Compassion International $819,417,089
9 Cornell University $743,502,739
10 Lutheran Services in America $731,566,533


https://www.philanthropy.com/specialreport/the-100-u-s-charities-that-ra/183

HOPE SPRINGS ETERNAL

From Financial Advisor magazine:

AQR Quant Genius Apologizes to Clients over Performance

Wall Street’s quant wizards often argue that many of their math-driven strategies are designed for the long-term. But they’ve rarely had to shout this loud.

Global equities posted the worst run in six years in “Red October,” and it tore through the investing styles that slice and dice assets based on traits like momentum and growth. Most factor funds, as they are known, fell in concert with stocks. That not only capped an already miserable year, it threw into doubt their diversification benefits—forcing advocates onto the defensive.

Cue Cliff Asness, godfather of quant investing and co-founder of the firm which helped popularize factors, AQR Capital Management. In a 23-page, 17,000-word blog post in October he acknowledged the strategies AQR favors have had “tough times,” predicted no miracle bounce back, but argued that evidence and common sense dictate they will ultimately prevail.

Cliff is one of the smartest and most professional money managers I know, and his honest, thoughtful response to his funds’ performance is a reflection of his quality. Although I’m a skeptic, we continue to follow his work.

https://www.fa-mag.com/news/aqr-plays-defense-as-crisis-of-confidence-looms-for-quant-land-41812.html

 

FINANCIAL PLANNING—A GREAT PROFESSION

If you have a few minutes to kill, here is a link to an interview I did at the Financial Planning Annual Convention:

https://www.assettv.com/player/assettv-us-sign-off-player/204348

 

HMMM…

From my friend Bill G.:

One of my favorite authors, Upton Sinclair, is credited with saying, “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

Kind of reminds me of regulators and politicians.

THE EVENSKYS DO NEW YORK

STATISTICAL NOISE

An excellent summary by Michael Kitces of Mark Hulbert’s excellent review of Fama and French’s excellent article “Volatility Lessons” in the Financial Analysts Journal.

It’s generally understood that markets can be volatile in the short-term, and that it’s necessary to evaluate an investment strategy (or the performance of an investment manager or financial advisor) over an extended period of time in order to really judge their efficacy. However, in a recent paper by Eugene Fama and Kenneth French in the Financial Analysts Journal, it turns out that even over 10-year periods—generally viewed as “long-term” by most advisors and clients making evaluations of investment results—stock market volatility is great enough that there’s still a material risk that a superior strategy or factor will underperform. For instance, their analysis suggests that otherwise-long-term-outperforming value strategies still lag in 9% of randomly created 10-year investment horizons using historical data…implying that the underperformance of value over the past decade is still well within the range of normal statistical noise (and not necessarily a signal that value investing itself has lost its value). Similarly, given their even-higher volatility, there is a 24% chance that small-caps will underperform over a 10-year cycle (even when assuming their historical return premium is persisting) and a 16% chance that stocks will underperform Treasuries (even if their historical equity risk premium remains valid). On the one hand, the important implication of the research is that even 10 years is not necessarily long enough to determine if a manager (or a factor) has lost its ability to outperform. On the other hand, when the researchers also find that even over 20 years, there’s an 8% chance that equities will underperform Treasuries despite the equity risk premium…

https://www.kitces.com/blog/weekend-reading-for-financial-planners-nov-10-11-2/.

https://www.wsj.com/articles/your-fund-performance-is-even-more-about-luck-than-you-thought-1541387460

https://www.cfapubs.org/doi/abs/10.2469/faj.v74.n3.6?mod=article_inline&

 

FASCINATING VIEW OF ECONOMIC GROWTH OVER THE LAST SIX DECADES

Keep your eye on China…

From my friend Peter:

https://youtu.be/MT5hszbwW9U

 

WHY TEACHERS DRINK

From my friend Judy:

The following questions were set in last year’s GED examination. These are genuine answers (from 16-year-olds)…and they WILL breed.

Question Answers
Name the four seasons. Salt, pepper, mustard and vinegar.
What causes the tides in the ocean? The tides are a fight between the earth and the moon. All water tends to flow towards the moon because there is no water on the moon, and nature abhors a vacuum. I forget where the sun joins the fight.
What guarantees may a mortgage company insist on? If you are buying a house they will insist that you are well-endowed.
In a democratic society, how important are elections? Very important. Sex can only happen when a male gets an election.
What are steroids? Things for keeping carpets still on the stairs
Name a major disease associated with cigarettes. Premature death
How can you delay milk turning sour? Keep it in the cow (simple but brilliant).
How are the main 20 parts of the body categorized (e.g., the abdomen)? The body is consisted into 3 parts—the brainium, the borax and the abdominal cavity. The brainium contains the brain, the borax contains the heart and lungs and the abdominal cavity contains the five bowels: A, E, I, O, U.
What is a terminal illness? When you are sick at the airport.
What does the word ‘benign’ mean? Benign is what you will be after you be eight.
What is a turbine? Something an Arab or Shreik wears on his head

DEPRESSING DATA

 

I LOVE THE INVESTMENT INSIGHTS FROM THE MEDIA

Two headlines a few hours apart:

Apple Beats Q4 Expectations with Best September Quarter Ever

https://www.zdnet.com/article/apple-beats-q4-expectations-with-best-september-quarter-ever/

Apple Stock Falls on Light Sales Guidance for Holiday Quarter

https://www.investors.com/news/technology/click/apple-stock-q4-2018-earnings/

 

BEST & WORST

States to live in according to USA Today:

BEST (Top 5)

#1 – Massachusetts

#2 – New Hampshire

#3 – Connecticut

#4 – Colorado

#5 – Minnesota

 

WORST (Bottom 5)

#50 – Mississippi

#49 – West Virginia

#48 – Louisiana (at least my home state wasn’t #50)

#47 – Alabama

#46 – Kentucky

 

AND

#33 – Texas

#28 – Florida

Obviously weather wasn’t a major factor.

https://www.usatoday.com/picture-gallery/travel/experience/america/fifty-states/2018/11/06/whats-best-american-state-live-all-50-states-ranked/1901557002/

 

SCARY

Student loan debt is now a crisis, says U.S. Department of Education Secretary Betsy DeVos.

The Latest Student Loan Debt Statistics

Personal finance website Make Lemonade says that the student loan debt is now the second highest consumer debt category—second only to mortgages and higher than credit card debt.

According to Make Lemonade, there are more than 44 million borrowers who collectively owe $1.5 trillion in student loan debt. The average student in the Class of 2016 has $37,172 in student loan debt. The average student in the Class of 2017 has almost $40,000 in student loan debt.

“Our higher-ed system is the envy of the world, but if we as a country do not make important policy changes in the way we distribute, administer and manage federal student loans, the program on which so many students rely will be in serious jeopardy,” DeVos said, according to her remarks released by the Education Department.

https://www.forbes.com/sites/zackfriedman/2018/11/28/student-loan-debt-crisis/#da0d13621e30

 

FUN

From my friend Alex:

IT’S FREE!!!

Thanks to my partner Josh, the electronic version of my book, Hello Harold, is now free on Amazon.

Here’s the story:

Welcome to Hello Harold (that’s me, Harold Evensky). I’ve been a practicing financial planner for over three decades; financial planning is my avocation as well as my vocation. I’ve had the privilege of participating in the growth of my profession, serving on the national Board of the International Association for Financial Planning, as Chair of the Certified Financial Planning Board, the International Certified Financial Planning Board of Standards, as well as on advisory boards for Charles Schwab and TIAA-CREF.

In those three decades plus, I’ve seen a great many changes, not only in the markets but also in how investors—and their advisors—respond to them. Some of those responses make very little sense. Financial planning is a powerful tool that can help you develop and maintain the quality of life you want. Unfortunately, there’s a ton of noise and nonsense foisted on investors that can undermine their financial success.

Maybe you’re one of the many unlucky folks who’ve tried using a broker or financial advisor and wound up with one of the few less than ethical ones who had you invest in easy-answer funds that did more for the advisor’s bottom line than yours. Maybe you decided to go it alone. Unfortunately, investing is not a simple task, and without a grasp of the fundamentals, many investors wind up making costly mistakes. Although there are innumerable books—many of them very good—designed to help you invest wisely, many are too long, too technical, too boring, too commercial, or too simplistic to hold the reader’s attention.

So it’s my turn. I decided my book would be just right—not too long, not too short, not too technical, not too simplistic, not commercial, and, most important, fun to read. Hello Harold gives you the foundation you need to navigate the markets and plan your financial future. I take you along with me on phone calls and meetings, conferences and classrooms, and let you eavesdrop on my thoughts, conversations, and brainstorming sessions with clients, colleagues, and students. I introduce you to actionable concepts that will make you a far better investor, with a sound plan for your future. You may even have some fun along the way.

Unlike with most books, don’t feel obligated to move from page one through to the end. Each chapter stands on its own, so you can skip and jump to your heart’s content, chasing subjects you find of interest in any order that appeals to you. No matter where you land, whether it’s cash flow or market timing or taxes or any of a myriad of essential topics, you’re likely to find something you hadn’t considered before in quite that way. Each chapter is designed to give you insights that will improve your financial bottom line and your chances of achieving your financial goals.

https://www.amazon.com/Hello-Harold-Veteran-Financial-Investor-ebook/dp/B019G0SSJ4/

 

SEASICK?

I’ll close with a few pieces of advice.

  • Don’t get seasick; don’t pay attention to the daily financial pornography. It’s noise, not news.
  • Plan for the long term, not the last 10 minutes.
  • If the world doesn’t come to an end and you plan an investment intelligently for the long term (that’s what we do for our clients), your financial life will be solid. If the world really comes to an end, you won’t care.

Hope you enjoyed this issue, and I look forward to “seeing you” again in a couple months.

Harold Evensky

Chairman

Evensky & Katz / Foldes Financial Wealth Management

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

NewsLetter Vol. 11, No. 6 – October 2018

NewsLetter Vol. 11, No. 5 – September 2018

 

www.EK-FF.com

IRS Increases 2019 Retirement Plan Contribution Limits

David Garcia

David L. Garcia, CPA, CFP®, ADPA® Principal, Wealth Manager

Every October, the IRS considers whether, due to inflation, the limits for retirement account contributions should be increased. For several years now, a low inflationary environment has meant increases have been scarce. At times, there was even fear that contributions may be reduced due to negative inflation. The Federal Reserve has increased interest rates seven times since December 2016, so that is no longer a concern.

Below we have listed the new contribution limits for various retirement account types.

  • IRAs. The contribution limit for IRAs and after tax Roths has increased from $5,500 in 2018 to $6,000 in 2019. Note, the catch-up contribution for individuals over 50 remains the same in 2019 at $1,000. Therefore, an individual over 50 can make a maximum contribution of $7,000.
  • 401(k), 403(b), Federal Thrift Savings Plans, and most 457 plans. The IRS has increased the annual contribution limit for these plans from $18,500 in 2018 to $19,000 in 2019. The increase also applies to after-tax 401(k) or Roth 401(k) contributions. Like IRAs, the catch-up contribution for employees over the age of 50 stays the same for 2019 at $6,000. Therefore, an employee over 50 can make a maximum employee deferral of $25,000.
  • SEP IRAs. Self-employed individuals’ contribution limit on SEP IRAs increased from $55,000 in 2018 to $56,000 in 2019. Contribution amounts are calculated based on a percentage of compensation. The compensation limit increased from $275,000 in 2018 to $280,000 in 2019.
  • Phase-outs for deductible IRA and Roth IRA contributions. For a married couple filing a joint return, where the spouse making the IRA contribution is not covered by an employer plan but is married to someone who is covered, the deduction is phased out between AGI of $193,000–$203,000. If you are the spouse participating in an employer plan, the deduction is phased out between AGI of $103,000 to $123,000. For a married couple filing a joint return, your ability to contribute to a Roth IRA phases out between AGI of $193,000 to $203,000. For folks who make too much to contribute to a Roth, opening a nondeductible IRA and performing a Roth conversion may be an option.

Not everyone may be able to max out their retirement contributions. However, even if you contribute less than the maximum, it is one of the best things you can do for your financial future. This is especially true for those with employers who provide 401(k) matching. This is where employers match employee contributions up to a certain percentage. It’s basically free money. According to research data, only 48% of workers participate in employer-sponsored plans for retirement.[1]  Among millennials, participation is even lower, at only 31%.[2]  The key is starting as soon as possible and taking advantage of the incentives for saving for retirement.

Feel free to contact David Garcia with any questions by phone 305.448.8882 ext. 224 or email: DGarcia@EK-FF.com.

[1] Pew analysis of 2012 Census Bureau Survey of Income and program Participation data

[2] Pew analysis of 2012 Census Bureau Survey of Income and program Participation data