Financial Planning Is More Than Investment Advice - A Visual Representation

Below is a copy of a "Mind Map" that I have created to help organize the issues that are involved in a financial plan - which is not just managing investments. Investments are one part of the whole process.

At Angelucci Wealth Management, LLC, we help you in all aspects of your financial life.

ANNOUNCING 5 YEAR RETURNS ON AWM INVESTMENT PORTFOLIOS

DATA SHEETS ARE AVAILABLE ON THE AWM WEB SITE - http://www.awmfinancial.com/

I have recently reached the 5 year mark with my model portfolios.

Model portfolios are risk based portfolios that I create and manage over time and which I use as a basis for directing many of my clients investments.

The portfolios have outperformed the Dow Jones - S&P Global Risk Portfolios over the 5 year period in all but the Low Risk Portfolio. That area only slightly underperformed. The reason for the underperformance was primarily due to its heavy bond weighting which was invested in a less risky bond mix than that of the benchmark.

Likewise, The other, more equity heavy portfolios outperformed due to an equity mix that took extra risks in small and value stocks versus the benchmarks.

These reports are important, because the represent evidence of investing success. I encourage you to share these information sheets with others you may know who need investment advice.

It is important to note that not every client is invested in the exact manner as the attached portfolios. Adjustments are made for individual timing and circumstances.

Past performance is not a guarantee of future returns.

An Example Of Why Many In The Industry Oppose The Fiduciary Standard?

Many in the financial industry are opposing the DOL's push to require financial advisers of retirement plans (401K, IRAs) to act as a fiduciary when advising their clients. Recently, the CEO of Raymond James issued a call to arms:

http://wealthmanagement.com/raymond-james-national-conference/opposition-dol-fiduciary-gains-ground

A fiduciary standard would require the adviser to put the clients needs above their own. How is this a bad thing? Why would those who earn commissions or annual fees on investment products oppose this.

The answer is made clear in a prior blog post of mine reproduced below:

How was an adviser, who placed their client in the Highland Small-Cap investment shown above, acting in their clients best interest?

Recently, I have taken on 3 new clients. All 3 were with commission or fee based advisers prior to asking me for advice.

The chart above, produced by Morningstar, is representative of at least 10 of the funds that the new clients owned.

In this case, the client's adviser invested the clients money in the Highland Small Cap Equity fund in 2011. Highland invests in small company growth stocks.

The chart shows the following;

1. Highland's performance over the last 10 years in blue.
2. The performance of all small cap growth funds in orange.
3. The performance of the Vanguard small cap index in yellow.

The Vanguard Index is simply a fund that holds all stocks that meet the definition of small cap growth - this is known as an index fund. The fee for this particular index fund is .08%

The other funds are known as actively managed funds - which means the funds employ managers who pick stocks in an effort to outperform a benchmark (or index). In this case the managers are trying to outperform the small cap growth sector.

A review of the chart shows that the Vanguard index fund clearly was a better choice in 2011 based on a visual look at the performance.

So why would an adviser NOT place their client in the Vanguard?

A look at the the top of the chart shows that there is a 4% load on the fund and an annual expense of 2.75%. This means that for every $1,000 initially invested the adviser gets an initial fee of $40. In addition, the fund takes 2.75% off of the balance every year. In fact, of that 2.75%, 1% goes to the adviser on an annual basis.

The adviser had a choice, he could have recommended the no load, .08% annual fee Vanguard fund, yet they placed their client in the Highland fund which rewarded him a 4% initial fee + 1% of the balance annually.
How was that good for the client. It seems it was good for the adviser.

In my opinion, this is what is wrong with this industry. It is based on a system where brokers and fee based advisers earn income off of recommended investments.

One way to combat this is too work with a fee-only adviser who doesnt accept commissions or fees from products they recommend. Dont confuse fee-only with fee based. fee based can receive fees from products they recommend to you. A fee-only adviser will generally charge an hourly rate or base the fee on the dollar amount of assets managed.

Note: Michael Angelucci MBA, CFP is a fee-only adviser.

Non-Traded REITS another example of: Guaranteed reward for the adviser, not so much for the investor

• This industry continues to have products that reward the seller and not the investor. Below is a recent blog from Josh Brown's  blog "The Reformed Broker."  In the blog he exposes the risks and expenses associated with non-traded REITs through a dialogue between a client and advisor, where the advisor is giving the client full disclosure.
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• Joshua M Brown
 
• May 21st, 2014

I consider non-traded REITs or nREITS to be part of the group of investments that are just absolutemurderholes for clients – they pay the brokers so much that they cannot possibly work out (and they rarely do wihout all kinds of aggravation and additional costs).

Further, I have yet to hear a single credible explanation as to why a broker would recommend a non-traded REIT over a public REIT other than compensation. The only explanation that makes sense to me is that 7% is a lot more than the 1% commission you get doing an agency trade on a NYSE-traded REIT.

The best excuse I’ve heard is that, because the value of the nREIT doesn’t change in the client’s account, it appears to be less volatile and so is a better holding than a public REIT. The liquidity and transparency being given up by the client in exchange for this illusion of stability is rarely mentioned.

But these products will continue to be the bread and butter of the independent broker-dealer world so long as the sales reps long for product and remain shut out of IPO syndicates from the wirehouses. Non-traded REITs (along with closed-end fund IPOs) are seen as the next best thing. I know guys who make a chunk of their living on these products, supplementing the rest of their income from A-share mutual funds and variable annuities – the Unholy Triumvirate!

I’m sure I’ll get some emails from industry people, it’s not personal guys. But my mind can’t be changed on these things.

A reader with experience in the industry sent this in to me and I found it hilarious. Below, a fictional, transparent conversation between an indie broker and his “client” that would never occur…

***

If Independent brokers were transparent:

Rep:

Before we wrap up our quarterly portfolio review I would like to talk to you about a new investment I think you might be interested in.  You have been looking for more income and this is an investment vehicle that pays a 7% dividend.

Client:

Sounds great, give me the details.

Rep:

With your portfolio size and risk tolerance I would recommend a $100,000 investment.  Given that amount let’s first go over the fees.  If you invest $100,000 I will be paid a commission of $7,000. My firm is going to get $1,500 – $2,000 in revenue share. My wholesaler, the salesman that works for the investment’s sponsor company, will get $1,000. He is a great guy, buys me dinner all of the time and takes me golfing. The sponsor company is going to get around $3,000 to pay for some of the costs they incurred in setting up the investment.  So all in on Day 1 there will be around $87,000 left over to actually invest.  I bet you are getting excited.

Client:

Are you on drugs? Why would I pay 13% in fees on anything?

Rep:

Don’t worry, it won’t feel like you are paying $13,000 in fees. The rules allow my firm to report your investment at $100,000 on your statement. You never really know what its worth but you will think you never lost money. Pretty sweet huh?

Client:

You have to be kidding.

Rep:

No, this is a really good investment. Let me tell you about the income component before you jump to any conclusions. Like I said this investment pays a 7% dividend and the dividend won’t change.

Client:

That sounds high and how do you know it won’t change?

Rep:

You see, the sponsor just picks the 7% dividend number out of thin air. Here’s how it works. You see the vehicle you are going into invest in is new and it’s going to take the firm a while before your net $87,000 is actually invested. Later on, maybe 2-4 years from now they will have the money fully invested and it will generate actual cash flow. So they just pay a quarterly dividend of 7% by giving you your money back.  This is great from a tax perspective because return of capital isn’t taxed as income.

Client:

Are we on hidden camera or something?

Rep:

Ha, you are funny. I bet this next benefit will change your mind.

Client:

I hope so or I should start looking for another financial advisor.

Rep:

This is the best feature. You can’t sell your investment until the sponsor has the opportunity to create liquidity. You might be locked up in this investment for 7-10 years.

Client:

This feels like the Twilight Zone. Your firm allows you to sell this crap?

Rep:

Oh yeah, our firm sells a ton of it. In fact independent broker dealer firms like mine sold over $20 billion of these investments in 2013. Think about that. Reps like me made over $140 million dollars and our firms pocketed $20-$30 million.

Client:

This is crazy, what is this investment?

Rep:

Non-traded REITs. $100,000 sound about right?

Client:

You’re fired!

***

Don’t count on that conversation happening anytime soon in real life. In the meantime, anytime we onboard an account from a client who’s been sold one of these things, it’s a major pain in the ass to get accurate information about them. The exit is even more annoying.

Read more about Murderholes here and here.

The Emperor Has No Clothes - High Paid investment Advisors May Go The Way of Print Books and Vinyl Records

The business of managing other people’s money is being commoditised. Investors are starting to see that the emperor has no clothes!

Take the time to read this wonderful article in the Economist:



http://www.economist.com/news/briefing/21601500-books-and-music-investment-industry-being-squeezed-will-invest-food

I have been arguing this point for the last 20 years to anyone who will listen - Portfolios are commodities, so why pay high fees to advisors who can't consistently beat an index fund. 
The data is overwhelming: net of expenses, it is nearly impossible to beat an index fund over time.

Although this is not new news, John Bogle founded Vanguard 40 years ago based on the idea that investors cant beat indexes so why not own the index!

This article does a nice job of articulating the reasons why the environment is changing.

A big reason is that investors are doing the math: many advisers charge clients 1% or more on the value of assets managed. When one calculates the fee, and the time spent with the adviser, the hourly rate equates to that of the highest paid lawyers or surgeons.  Then, compared to the after fees return, you would have been better in an index fund.

That doesn't mean advisers do not add value. A good adviser will help you invest according to your need and risk. Then manage tax exposure, fees and your behavior - that desire to run from your plan during bad times and sell low. But there is no reason to pay more than .25% to .50% for those services.

Read this wonderful Michael Lewis indictment of the financial advice industry

Michael Lewis's article in Upstart Business Journal is a great story which shines a light on the financial advice business and the premise that investment managers can beat the market.

It is a wonderful piece of writing in the Lewis style of profiling certain people in an industry who have found flaws in their world:

http://upstart.bizjournals.com/executives/features/2007/11/19/Blaine-Lourd-Profile.html?page=all

Buffett's Advice for the Average Investor

This is an excerpt from a WSJ Market Watch story on Buffets recent advise to average investors.

Five lessons for the average investor:

1. You don’t have to be an expert to achieve satisfactory investment returns. Recognize your limitations, keep things simple and “don’t swing for the fences.” Don’t believe in or look for a quick profit.
2. Focus on the future productivity of the assets you are considering. Unless you can make a rough estimate of its future earnings, move on. You can’t evaluate everything, but you have to understand the actions you’re going take.
3. Avoid speculation, such as focusing on the prospective price change of an asset. “Half of all coin-flippers will win their first toss; none of those winners has an expectation of profit if he continues to play the game,” says the Sage.
4. Think about what that asset will produce, not about daily valuations. “Games are won by players who focus on the playing field — not by those whose eyes to the scoreboard,” says Buffett.
5. “Forming macro opinions or listening to the macro or market predictions of others is a waste of time” and even “dangerous, because it may blur your vision of the facts that are truly important,” he says.

How does Buffett buy stocks? He looks at whether he can sensibly estimate an earnings range for five years out or more. If the answer is yes, he’ll buy it if he can get it at a reasonable price in relation to the bottom boundary of his estimate. If he can’t estimate future earnings, he moves on.

“In the 54 years we have worked together, we have never forgone an attractive purchase because of the macro or political environment, or the views of other people. In fact, these subjects never come up when we make decisions,” he says.

And nonprofessional investors? The good news is that they don’t need to know how to predict future-earnings power, as American businesses have done well over time and will keep headed in that direction, he predicts. The nonprofessional should not be trying to pick “winners” all the time, but “own a cross-section of businesses that in aggregate are bound to do well. A low-cost S&P 500 index fund will achieve this goal.”

His final bit of advice for the nonprofessional? Accumulate shares over a long period, and never sell when the news is bad and stocks are well off their highs.

The full article can be found:

http://finance.fortune.cnn.com/2014/02/24/warren-buffett-berkshire-letter/

– Barbara Kollmeyer writes for MarketWatch. Follow her @bkollmeyer.