What Is the Value of a Financial Advisor?

What is value? The answer seems simple in one sense: Value is what something is worth. We apply this principle every day when we make purchases. If the value we attach to a certain object or service is equal to or greater than its offer price, we hand over our payment.

But viewed another way, value is harder to define. For example, suppose you have two new cars sitting side by side: one a Lamborghini Huracán Spyder and the other a Chevrolet Cruze. The first is priced at $210,000, and the second at $17,000. Which one has more value? Before you answer, consider: If all you require is basic transportation, and especially if you make less than several million dollars a year, the Cruze is probably the better value, even though its price is much less. Why? Because the value or benefit you receive by purchasing the Lamborghini is less than the cost. You need basic, dependable transportation; you don’t need 0–60 in 3.2 seconds, not to mention what you’d have to pay for insurance!

The same considerations apply when putting a value on a financial advisor. For each investor, the situation is different, because different investors have different needs. For some who feel overwhelmed by all the choices, risks, and other factors, a financial advisor’s value may lie mostly in his or her ability to help make appropriate choices and to relieve the client of the need to keep up with market movements, portfolio rebalancing, and other “confusing” processes. For more informed and involved investors, an advisor’s value may lie more in the ability to provide authoritative research and educated judgments as a counterpoint or even a check to the client’s own ideas and initiatives.

Recently, The Vanguard Group published a white paper that attempts to put value parameters around the client’s relationship with a financial advisor. Interestingly, the Vanguard study came up with seven activities or services usually provided by financial advisors that can be more or less quantified in terms of their addition of value:

1. Assisting with asset allocation,
2. Cost-effective implementation of investments,
3. Disciplined rebalancing,
4. Behavioral coaching,
5. Asset location (taxable vs. tax-deferred or tax-exempt),
6. Spending strategy (maximizing effective withdrawal order), and
7. Assisting with total-return vs. income strategies.

The Vanguard study puts the total value of these activities at between 2.3 and 3.8 percent of portfolio value, annually. The study goes on to stipulate, however, that, similar to the automotive example above, much of an investment advisor’s value remains “in the eye of the beholder:” governed as much by a particular investor’s inclinations, talents, and interests as by the quantifiable categories in the Vanguard list. Further, aspects of portfolio management such as charitable giving preferences, inheritance considerations, and other factors must also be considered as a part of the value equation.

Especially with the financial industry becoming more fee-driven and less commission-oriented, it is entirely appropriate for investors to carefully assess the value they are receiving in return for the services they are paying for. Likewise, financial advisors must keep in mind that value–whether quantitatively or qualitatively assessed–is ultimately in the eye of the client.

Posted in Behavioral Finance, Financial Advisor, Rebalance | No Comments

Keeping Your Finances Safe Online

With more and more financial data being stored in and accessed by computers (and even mobile phones), and with untold millions of transactions taking place on the websites of retailers, banks, and others, it has never been more important to practice “safe computing.” The sobering fact is that computer hackers are ever-present online, searching for the vulnerabilities that will allow them to commit the next scam, identity theft, or outright burglary of assets stored in one of your digital “safes.”

It is even more surprising to learn that the vast majority of cybercrimes are enabled by users who employ weak or insecure passwords. Recently, Wikileaks founder Julian Assange claimed that the email account of John Podesta, head of the Hillary Clinton presidential campaign, was hacked because his password was “password.” While Assange’s claim has not been verified, it still points up the fact that far too many users are far too naïve when it comes to protecting their online data and identities.

For example, Forbes tech columnist Yael Grauer posts an annual column of the “Year’s Worst Passwords.” For 2016, the winner was “123456,” long regarded as the worst, least-secure password on the Internet. Why? Because this is almost always one of the first guesses by anyone trying to gain access to someone else’s account. Nevertheless, “123456,” along with “password,” routinely tops the Forbes list–year after year. Apparently, some users are very slow learners.

Furthermore, it’s not enough to alter or add one or two letters to numbers in order to increase password security: hackers are long accustomed to trying “passw0rd,” “p@ssword,” and even “password1.” Patterns generated by your keyboard should also be avoided. “Qwerty,” the first six keys from left to right on the top alpha row of a standard keyboard, is on the “Hacker’s Greatest Hits” list, as is “zaq1zaq1” (what you get when you key the far left column of characters). And don’t even think about using words like “login,” “admin,” or “welcome.” Similarly, your name and the names of your family members–or alphanumeric variants on them–are password no-nos.

Many users have begun employing random password generators, like the one that comes with the Safari web browser that is standard on Macintosh computers. In many cases, these randomly generated passwords can be synchronized across your various devices. Others favor programs that allow them to keep their different passwords in an encrypted–password-protected–“virtual vault,” usually on a handheld device, for easy reference when accessing various secure websites (this also helps to alleviate frustrating memory lapses and the frequent need to reset login information). The important thing to remember, cyber-security experts say, is that a password need not necessarily be random in order to be secure; it just needs to be sufficiently complex (with enough digits, letters, or special characters), and it needs to be hard for anyone but the user to guess. Also, for maximum security online, you should avoid re-using passwords or using the same password for different accounts.

Practice “safe computing.”

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Protecting the Finances of Aging Parents

These days, we are becoming more and more familiar with the term, “Sandwich Generation:” those who are faced with the dual prospect of providing ongoing financial support for struggling adult children and simultaneously watching over aging parents who are becoming dependent. For younger Baby Boomers and older Gen Xers, the need to safeguard aging parents’ finances is becoming particularly acute. There are several useful steps that can be taken to help shield older persons from both their own failing cognitive abilities and from financial abuse by others.

One of the most important steps is also one of the most basic: Stay in touch. Elders who are in frequent communication with their children or other younger caregivers are much less likely to be victimized, financially or otherwise. Consistent contact by family members, and the ongoing awareness of elders’ situation, resources, and concerns that results, will do almost as much as any other single step to assure that aging parents continue to live securely and with dignity.

Powers of attorney that cover both healthcare and financial decisions can also insure that retirees have a trusted person who is able to speak for them, should they become incapacitated. Often, it is advisable to have a separate document for healthcare and finances, since the person who can be most trusted to make potentially life-or-death medical decisions may not also possess the acumen to manage important financial decisions.

Another helpful move to consider is consolidation of elders’ checking accounts at a single bank and any investment or brokerage accounts at a single firm. Many older people are in the habit of maintaining different accounts for different uses, but in later years, memories often become cloudy, leading to forgotten accounts and other hazards. Making sure that everything is centralized will greatly simplify the task of those who are assisting aging parents with their finances. This can also be a good time to cut up all but one or two credit cards: Use one for automatic bill payments and another for day-to-day purchases. Keeping it simple is the key.

The American Association of Retired Persons (AARP) maintains an active fraud prevention network; information is available at AARP.org. Similarly, the federal government’s program, accessible at StopFraud.gov, has a separate link for “Elder Fraud.” Finally, the IRS (IRS.gov) maintains a list of the “Dirty Dozen” currently active tax-related scams, many of which target vulnerable older taxpayers.

Returning to the step that opened our discussion, for all of the above ideas, the principal key is good communication. Staying in close touch with aging parents or other elderly persons permits talking about possible scams, warnings, and other helpful information. This is also pivotal for helping older investors, the majority of whom value their independence very deeply, to accept the difficult fact that it is time to relinquish some or all of the day-to-day decisions about their finances. According to most experts, older Americans are unlikely to recognize the degradation in their capabilities, and caring, consistent communication from a trusted person provides the best opening for the conversations that can help them allow others to provide the oversight that they need.

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Millennials, Savings, and Investments

Human Relations 101 teaches us that when we want to offer effective advice or suggestions, we should start by affirming the other person. So, I’ll start with a word or two of praise for the financial habits of Millennials–persons born in the period between about 1980 and 2000. Here’s the big thing Millennials are doing correctly with their finances: they are saving their money. As a matter of fact, according to the Transamerica Center for Retirement Studies, a strong majority of this generation–almost 75 percent–are actively saving for retirement at an earlier age than past generational groups. About half of Millennials are socking away 6 percent or more of their income, and those who participate in workplace retirement plans are saving closer to 7 percent. In that respect, their parents–mostly Baby Boomers–could learn a thing or two from these kids; their savings statistics are the highest of any cohort of savers since the Great Depression–and that is despite the fact that Millennials are carrying record levels of student debt.

Unfortunately, though, Millennials’ good savings habits do not carry over into their investment practices. The fact is that most of them are simply too scared of or confused about the financial markets to entrust their hard-earned savings there. This means that they tend to keep high levels of cash in bank accounts that, despite recent rises in rates by the Federal Reserve, are still earning very close to nothing. In the same Transamerica survey mentioned above, 25 percent said they were uncertain how their retirement savings were invested, and those few who were prompted to find out more reported much higher allocations to bonds, money market funds, and other low-return investments than their Boomer or Generation X counterparts.

Why are Millennials so shy of the financial markets? Part of the reason is what they have witnessed in their lifetimes, including the dot-com bust of the early 2000s and the Great Recession of 2007–09. Many of them watched their parents and older siblings suffer steep losses in investment and retirement portfolios, not to mention facing unemployment amid a job market that appeared at times to be in free fall. No wonder they associate the markets with risk and danger, rather than opportunity and long-term financial success.

How can Millennials’ perceptions of the financial markets be changed? The answer lies in two areas: education and opportunity. Principles of investing are not taught in many of today’s classrooms, but those few Millennials who do have such educational openings often report more positive attitudes toward market investments and appropriate levels of risk. This trend will need to continue over the long term for Millennials to enter the markets in significant numbers.

Second, Millennials who work for companies that offer payroll-deducted retirement plans have a great opportunity to gain the benefit of the diversification and market expertise afforded by professional managers and advisers. Because of the number of Millennials participating in the “gig economy,” outside traditional employer-employee relationships, this opportunity may take longer to develop. But because of the youth of this demographic, time is still on their side.

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What to Do when the Markets are Up, Down or Sideways?

Our country recently experienced one of the most raucous and divisive presidential elections in recent memory. And, since January, we have been bombarded with news related to the new president’s actions and policies. Depending on your preferred news source, the Trump presidency is either the saving of the American democracy or a sign of the coming apocalypse. Either way, such all-or-none viewpoints tend to make us nervous, no matter which side our beliefs fall on.

In times like these, financial planners often get calls from clients who are, not surprisingly, anxious about their investments. “The market is at an historic high; should I be worried?” “The Fed is raising interest rates; should I be worried?” “The European Union is having problems should I be worried?” “Employment is up, but not by very much; should I be worried?” And the list goes on.

Actually, it is very understandable to be concerned by headlines. Back when President Obama was elected–with the economy reeling from a financial crisis that threatened many of our largest institutions–many conservatively minded investors were convinced that the election of a liberal Democrat was going to be the death of the stock market. Most financial advisors did their best to calm such fears–and a good thing, too, since, for example, the DJIA went from a low of 6,443 in the depths of the Great Recession to a high, in mid-March, of nearly 21,000. On the other side of the coin, investors of a more liberal mindset might have felt panic at the election of Donald Trump. But thus far, such fears have proved unfounded: the DJIA was at 19,827 on the day he was sworn in, and as I write this, it stands at 20,596–a 3.9% gain in the last two-and-a-half months.

Of course, what these investors are really asking is, “What’s going to happen?” And the only truthful answer for any advisor to give is “We don’t know.”

What we do know, however, is that no matter which direction the markets take, investors will still need to save for retirement, education, and other important life-phase-driven events. We also know that diversification tends to protect assets from major changes in value in any single market sector. We know that those approaching retirement can often benefit from prudent, planned movement into more conservative holdings, and that those whose horizon is longer will almost always see good results by holding to a well-conceived strategy, trusting that over time, the markets will generally reward those who are patient and disciplined enough to stay the course during the inevitable downturns.

There is no question about it: we live in an uncertain world. But taking the long-range view can help iron out the discomfort that comes with day-to-day fluctuations. Keep your eye on the goal, trust in your strategy, and maintain appropriate diversification. This advice may not be as exciting as the latest news headline, but it has stood the test of time and the markets–both good and bad.

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Prophets and Profits: Beware Those Cloudy Crystal Balls

A friend of mine tells about a former colleague, a stockbroker, who was famous around the office for his frequent, dire financial predictions. “He successfully predicted five of the last two bear markets,” my friend remarked.

On the other side, there are those who seem to be constantly touting the next can’t-miss breakout on the upside. These supposed gurus are usually selling something: a book, a subscription to their newsletter, or even an investment product.

It’s easy to understand the attraction of both types of “prophets”; their messages, both positive and negative, play directly into the fear-greed cycle that preoccupies many investors’ attentions. As the human central nervous system evolved over millennia, it became extremely efficient at two tasks: helping us avoid threats and urging us to capitalize on opportunities. These basic emotional behaviors are on vivid display in the financial markets, and both the doomsayers and the evangelists of prosperity are skilled at manipulating them in the most advantageous direction.

In this connection, Harry Dent often comes to mind. Mr. Dent made his first major mark with the 1993 publication of his book, The Great Boom Ahead: Your Comprehensive Guide to Personal and Business Profit in the New Era of Prosperity. Dent’s rather wordy title proved fortunate in its timing; stocks and the economy enjoyed one of the longest peacetime expansions in history during the remainder of the 1990s. Hailed as the financial seer of the age, Dent’s book sales certainly demonstrated a bullish trend.

Dent’s next offering was The Roaring 2000s: Building the Wealth and Lifestyle You Desire in the Greatest Boom in History, released in late 1999 just before the dot-com bubble burst, helping the stock market into a downward slide that would eventually cut its value in half. His next four titles proved similarly ill-timed, with the first predicting a boom that never came and the next three auguring crashes or other economic calamities that failed to materialize–and all, of course, aiming to show readers how to profit from the scenarios forecast by Dent.

What’s an investor to do? When so many “experts” offer such differing predictions, who is to be believed?

We believe the proper response is usually, “None of the above.” Rather than trying to chase the economic or market theory du jour, we counsel our clients to develop a sound investment strategy that takes into account their goals, their resources, and their anticipated needs. We help them diversify their holdings in ways that mitigate market volatility and prudently distribute risk. We base our recommendations on reason and research, not on emotion, and we coach our clients to pay more attention to long-term strategy and proven investment principles than to the latest headlines or the prognostications of pundits.

Of course, this approach fails to offer the thrills or drama that feature prominently in the advice of Harry Dent and his colleagues. But we have also found, over the years, in good markets and bad, that it provides what our clients most desire: dependable performance.

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Risks & Rewards of International Investing: Part II

In our last article, we noted that international factors are very much on investors’ minds as they look toward 2017. According to a recent Morgan Stanley survey, four of investors’ top five concerns for this year arise from global trends. We took a brief look at some of the chief risks that US investors must consider when they invest internationally.

So . . . should investors in the United States even bother with global markets, given the various uncertainties? At Bernhardt Wealth Management, we strongly believe that the answer, for most investors, is “Yes.”20170306 InternationalInvesting Pt2

Why do we take this position? Let’s take a look at some of the principal rewards of carefully selected global investments.

Reward #1: Greater Diversification. Remember, the US market represents only about half of the global opportunity. Ignoring such a large proportion of the investment universe means giving up tremendous opportunities to broaden the financial foundation of a portfolio. Often, when domestic stocks are under pressure, investments in other parts of the world can be enjoying a bull market. International investing, as part of a well-conceived diversification strategy, can provide important downside protection for times when our own national economy is flagging.

Reward #2: Growth Potential. Everyone knows that buying low and selling high is the market ideal. For that reason, analysts often look to emerging markets–rapidly developing economies in places like Vietnam, Indonesia, or India–because of their potential for higher returns than in more mature, settled markets. According to a January 2017 report from Dimensional Fund Advisors, global equity markets advanced at a significantly higher rate than US markets (2.63% vs. 1.9%). Additionally, emerging markets (places like China, Indonesia, Brazil, and India) outperformed both US and other developed markets, with an aggregate return of 5.02%, compared with 3.01% and 1.90%, respectively.

Reward #3: Reduced Volatility. This benefit may sound surprising to some, especially in light of concerns about emerging markets and the risks inherent to them (see our previous article). But it actually makes sense when we consider the benefits of greater diversification, as outlined above. We often use the Callan Periodic Table of Investments as a key visual aid to demonstrate to our clients that no single asset class–including US stocks–is always the top performer. Various types of assets will produce better or worse yields at any given time, and often the sectors represented by these assets move in uncorrelated ways. For this reason, owning investments in less-related areas–including different global market sectors–distributes an investor’s risk of being harmed by a downturn in any single sector, thus reducing overall volatility. Recent studies have shown that investing as little as 10 percent of a portfolio in global equities can have a significant long-term “smoothing” effect on swings in portfolio value.

As with any investment strategy, international investing should be undertaken only after careful consideration of the risks and assessment of your financial goals. You should especially discuss with your financial advisor ways that you can limit the transaction costs associated with foreign investment. An experienced and qualified professional advisor can help you decide how and when international investing should figure in your overall investment strategy.

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Risks & Rewards of International Investing: Part I

A December 2016 article on Marketwatch.com reported on a Morgan Stanley survey of investors that listed respondents’ top five financial worries for 2017. In order from greatest to least, these were:

  1. The breakup of the European Union;
  2. A recession in the United States;
  3. A “hard landing” for the Chinese markets and economy;
  4. Terrorism;
  5. War with Russia.

Because four of the five top worries for investors for 2017 involve international economic or political aspects, it seems like a good time to reconsider some basics of international investing, both the risks and the rewards.20170306 InternationalInvesting Pt1

In fact, it might be worth asking: Should you even risk international investing in the first place? After all, in addition to the usual market uncertainties, international investing also exposes you to currency fluctuation risk, often-unpredictable political risk, and sometimes–especially in emerging markets–liquidity risks. Given all that, shouldn’t you just keep your investments within the borders of the good old USA?

If you are interested in total return and reduced volatility, the surprising answer is, “Not necessarily.” Investment professionals and portfolio managers have known for years that adding an international component to your portfolio is a key to good diversification and reduction of overall portfolio volatility.

With that in mind, let’s take a look at some key risks of international investing. In a later article, we’ll review some of the potential rewards.

Risk #1: Transaction Costs. Investors are often surprised to learn that one of the biggest downsides of investing in foreign markets is the simple cost of doing the trades. In addition to brokerage commissions, international investment transactions can be subjected to stamp duties, trading fees, and transaction levies that can add significantly to costs, over and above the brokerage commission. Keeping transaction costs in check is a key to smart international investing.

Risk #2: Currency Risk. When you are purchasing your investments in one currency but their value is assessed in a different currency, it is always possible that unfavorable movements in currency valuation can have an adverse effect on your investment. For example, let’s say you bought shares in an Italian company when the Euro was strong, relative to the dollar. Next, let’s suppose that when you got ready to sell your stock, the Euro was very weak. Even though the price of the stock may have gone up in Euros, the number of dollars you would receive from the sale is reduced because of unfavorable currency fluctuation.

Risk #3: Liquidity Risks. Though emerging world markets can be quite enticing because of their rapid growth potential, the other side of the coin is that when markets are new and developing, they can be more susceptible to financial, political, or even military emergencies that can obstruct market liquidity. In other words, you might not be able to sell your investment quickly, if you decided you needed to.

These are some of the principal risks of investing internationally. Before you make global investing a part of your portfolio, you should consult with a qualified and trusted advisor who can help you devise a plan that takes these risks into account, in light of your individual financial goals and strategy.

In our next article, we’ll look at some reasons why risks like those discussed here should not necessarily scare investors away from the opportunities to be found outside the borders of the United States.

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One of My Favorite Days

Several years ago one of my sisters sent me the following poem. It meant a lot to me, and I wanted to share it with you today:

One of My Favorite Days

(March Fourth)

We all love Christmas. Halloween is scary sweet.
I’m thankful for Thanksgiving, boy how we eat!
Then there’s our birthday which is really fun.
New Year’s Eve is festive but we’re a little tired come January One.

Easter is delightful! Fourth of July fireworks are great!
There is St. Patrick’s, Presidents, Valentines, Veterans, Labor,
Columbus, Flag, Father’s, Mother’s, Martin Luther King, . . .
How do we keep track of all of these darn dates?

When I look at my one year calendar,
March Fourth is one of my favorite days.
Nothing much happened in history.
It’s just what the day has to say!

When you have problems, March Forth!
When things don’t work out, March Forth!
When bad things happen, March Forth!
When you lose, March Forth!

When anything can happen, March Fourth says it all.
When something does happen,
Get up, Brush off, and March Forth,
Because we’re all bound to fall.

–Anders Rasmussen

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Improving One’s Financial Health

A December survey by the National Endowment for Financial Education (NEFE) finds more than two thirds (68 percent) of U.S. adults will make a financial New Year’s resolution for 2017. Saving money (53 percent) tops the list, followed by managing debt (44 percent). Sadly, one in three (31 percent) rate the current quality of their financial life as worse than they expect it to be and more than three quarters (78 percent) say they wrestle with financial stress.

The survey also finds that nearly half (48 percent) of Americans admit that they are living paycheck to paycheck. More women than men live paycheck to paycheck: 51 percent versus 45 percent. 20170227 FinancialHealthThe main reasons people believe they are living paycheck to paycheck are due to credit card debt (24 percent), employment struggles (22 percent), and mortgage/rent payments (18 percent). Americans cited the most significant financial setbacks they experienced in 2016 as transportation issues (23 percent), housing repairs/maintenance (20 percent), and medical care for an injury/illness (18 percent).

NEFE found higher income provides little protection. While 85 percent of adults earning under $50,000 per year report being stressed, the percentages don’t improve much for people earning $50,000 to $74,900 (80 percent are stressed) and $75,000 to $99,999 (79 percent).

NEFE offers the following advice for those hoping to improve their financial lives:

“Get debt under control. Set a goal to reduce your debt load next year by five to 10 percent. That might mean reducing impulse shopping. Six in 10 people admit they purchase on impulse and 80 percent of those regret purchases afterwards. When you face temptation, walk away for at least 30 minutes and see if you still want it and it’s a good idea.

Start saving now and do so often. Common advice tells us we should have six to nine months of income set aside. Again, set a goal–start with as little as $500. Of course, more is better, but by starting small you gain a sense of security, a sense of goal achievement, and you reduce stress.

Shop for better services. Where can you come up with $500 for an emergency fund? Make a game out of shopping providers to find the best value in the services you use. How long has it been since you shopped your insurance policies? Any chance you can save money on your cell phone plan, internet or utilities?

Understand what’s behind your financial decisions. Ever wonder why you feel good about spending money on vacations, but avoid saving for retirement? Why you buy new golf clubs, but procrastinate when it comes to giving your kids an allowance? The answer may lie in your unique life values and how they influence your financial decision making. Take the LifeValues Quiz to better understand your values and attitudes about money.

Of course, you may also want to consider talking to a financial advisor or mentor when it comes to setting goals and creating a plan.

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