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Institutional Investor article by Andrew Barber
National Advisors Trust Co. keeps building its wealth management footprint by offering registered investment advisers an alternative to traditional trust companies. On September 30 Cornerstone Advisors, an independent RIA headquartered in Bellevue, Washington, announced the launch of Cornerstone Advisors Trust Services with NATC. The deal brought Overland Park, Kansas–based NATC’s total number of RIA partners to 155.
For NATC president and CEO Jim Combs, this growing base helps prove the validity of a unique business model. “Our concept of shared fiduciary responsibilities allows us to provide undivided loyalty to both the adviser and the trust,” Combs says. “The client looks to us for administration and support, and to the adviser for planning and investment advice, creating a set of checks and balances.”
Founded in 2001 exclusively to serve the clients of independent RIAs on a noncompetitive basis, NATC is owned by its adviser partners. The firm traces its origin back to adviser Tom Bray, who, after spending 20 years building two key relationships, saw those accounts stolen by the bank trust company he had worked with to custody the trust assets.
Using his own time and money, he inspired a group of similarly frustrated RIAs to form NATC; 82 firms signed up to found the chartered federal savings bank as a thrift. Today NATC counts RIAs in 43 states as shareholder-members and is set to exceed $10 billion in assets under advisement by year’s end.
When it comes to tax and estate planning, trust services play a critical role in managing U.S. multigenerational wealth. As of the second quarter of this year, the country’s 25 largest trust companies held more than $17 trillion in assets, the Federal Deposit Insurance Corp. estimates.
For independent advisers, working with traditional trust companies is fraught with risk. By definition a trust is a separate legal entity, and the trustee may have tremendous latitude to interpret the grantor’s wishes by making decisions that include firing the RIA that helped create the trust as a fiduciary. When the trustee is an employee of the trust company itself or of another party that works closely with it, such as a preferred law firm, the chips can be stacked against the adviser of record once the grantor passes away.
The experience of Ray Ferrara, chairman and CEO of ProVise Management Group, is typical. “Like many other advisers in the ’90s, I was always worried about custodians soliciting my clients,” says Ferrara, who founded Clearwater, Florida–based ProVise, a financial planning specialist, in 1986. Today his firm employs 12 financial professionals overseeing a total of $1.14 billion in assets for some 900 families.
Shortly after a leading national trust company took over an account that he had introduced, Ferrara joined the consortium of RIAs that founded NATC. For ProVise the benefits of working with an adviser-owned trust company go well beyond the security of client relationships. “Investors like to have a trustee that is truly independent to manage after they are gone,” Ferrara says, adding that “from a practice management standpoint, the opportunity to share ideas with a large group of peers is invaluable.”
Working as a group is central to the NATC mandate. “We strive to foster a community among our advisers,” notes president and CEO Combs. “Our model is built on providing service and advice to our advisers but also allowing them to share information to improve their individual practices.”
NATC capitalizes on its client-owned structure to provide buying power through scale, thereby reducing advisers’ technology and administrative costs. The advantages of this structure outweigh traditional shareholder perks, according to Jeff Ramsey, COO and chief compliance officer for Lee Financial, a Dallas- based financial planner with $1 billion in assets. Founded in 1975, Lee was among the initial investors that launched NATC.
“Shareholders like our firm are not looking for dividends,” Ramsey says. “We are looking for capital to be redeployed to maximize the value for our customers and our practices.”
As NATC keeps expanding its adviser network, it has broadened its product offerings to compete with national players. In 2013 the firm created National Advisors Trust of South Dakota, which allows adviser partners to use trust services in a state that offers the best asset legal protection and client confidentiality in the U.S. Says ProVise’s Ferrara: “The South Dakota entity definitely provides us with a competitive edge — one that many trust companies do not have, let alone financial planning firms.”
Posted by: Steven Maimes, The Trust Advisor
Bloomberg News by Mary Childs
Janus Capital Group Inc. (JNS), the firm that hired bond legend Bill Gross last month, said profit rose 25 percent in the third quarter as assets rose from a year earlier, boosting fees for managing money.
Net income at Janus increased 25 percent to $40.9 million, or 22 cents a share, from $32.6 million, or 17 cents a share, a year earlier, the Denver-based firm said today in a statement. Earnings matched the 22-cent average estimate of five analysts surveyed by Bloomberg.
Chief Executive Officer Richard M. Weil has raised the firm’s profile in the past month, hiring Pacific Investment Management Co. co-founder Gross and agreeing to buy VelocityShares LLC to expand in exchange-traded products. Customers pulled a net $2.4 billion from Janus’s equity funds in the quarter, while putting in $300 million into the firm’s fixed-income products. Since taking over in 2010, Weil has struggled to stem defections even as he expanded Janus’s fixed-income team and created a multi-asset investing group.
“Bill’s decision to join Janus is reshaping the fixed income landscape across the industry,” Weil and Chief Financial Officer Jennifer McPeek said in the company’s earnings presentation. Gross’s fund “stands to benefit substantially over time across distribution channels and geographies,” and other franchises including asset allocation are also benefiting, according to the presentation.
Janus shares, which surged a record 43 percent the day the firm announced Gross was joining, have climbed 15 percent this year, compared with a 3.7 percent decline in the 18-company Standard & Poor’s Index of asset managers and custody banks.
The 70-year-old Gross started managing the Janus Global Unconstrained Bond Fund (JUCIX) this month after surprising executives at Newport Beach, California-based Pimco and its parent Allianz SE with his departure on Sept. 26. He previously managed the world’s biggest bond mutual fund, the $201.6 billion Pimco Total Return Fund. (PTTRX)
The Janus Unconstrained fund, which started in May, received $66.4 million in September, according to Morningstar Inc., and had about $79 million under management at the end of September, according to data compiled by Bloomberg. The fund has lost 0.2 percent in the past month, trailing 76 percent of peers.
The market anticipated $25 billion to $50 billion in new assets after Gross joined, which may be “setting up for possible disappointment,” Citigroup Inc.’s William Katz wrote in a report to clients Oct. 3.
Janus has about $174.4 billion in assets, mostly in stock funds. Third-quarter revenue climbed 8.9 percent to $237 million as fees for managing investor money rose.
The firm is expanding its presence in exchange-traded products by buying the parent company of VelocityShares, which offers products including exchange-traded funds and notes that track swings in market volatility. Janus agreed to pay at least $30 million for the company.
“With Bill’s arrival and the acquisition of VelocityShares, we have an opportunity to develop future products in the exchange-traded product space,” according to the presentation.
Posted by: Steven Maimes, The Trust Advisor
Forbes article by Deborah L. Jacobs
With Halloween just around the corner, children’s thoughts turn to candy and costumes. Their parents and grandparents should be focusing on more macabre matters — like the life insurance policies they bought (or are thinking of buying) to secure the financial future of these little ghosts and goblins if a key provider dies.
Though life insurance can serve various purposes, for most people, it is a tool for income replacement — to pay the mortgage or foot the bill for college if the unthinkable happens. Often a term-life policy, which provides a preset death benefit when the insured person dies, is all they need. Premiums for these policies, typically offered for 10- or 15-year terms, have fallen sharply in recent years.
But unfortunately it’s not enough to stuff the policy in a drawer and forget about it. Here are some potentially costly life insurance pitfalls that could escape your notice.
1. Rate increases. With a level premium, term-life policy, you’re guaranteed that the cost of the plan will not go up during the initial coverage period – for example, 10 or 15 years. But after that, watch out. When the stated period is up, you’re likely to get an invoice for the latest premium that’s many multiples of what you had been paying previously. Somewhere in the policy fine print there’s probably wording that says the policy is renewed automatically if the premium (meaning whatever you’ve been billed) is paid.
Insurance companies take the position that they have no obligation to flag the rate increase for you. It’s up to you to mark your calendar and if you don’t pay bills yourself, to alert the person who does it for you.
When that invoice arrives for the higher premium, you have a few options. You can ask the company to offer you a lower rate, based on your submitting an updated medical history. You can cancel the policy right away. Or you can simply let it lapse, in which case a grace period (for example, 30 days) will probably apply.
2. Affinity groups. Various professional associations offer life insurance to their members at group rates. They save you the trouble of shopping, but the price won’t necessarily be less than what you could find on the open market or through a reputable insurance broker. There is a hidden cost of buying insurance this way, too: In order to maintain the policy, you generally must keep your membership in the group current by paying the organization’s yearly dues. You may find yourself locked into the membership purely to maintain the insurance policy, even if professionally you’re not getting much out of the affiliation.
Another issue is that even if you still like the group, the price of membership may have gone up. Some professional associations (for example, lawyers’ groups) have a graduated dues schedule that correlates with how long you have been out of school. They assume that your salary has gone up to reflect your work experience, though in today’s job market that may not necessarily be the case. So while your insurance premium may remain the same over time, the cost associated with the policy — membership in the affinity group — goes up.
3. Beneficiary designations. This is a document given to an insurance company or financial institution indicating who should inherit certain assets that do not pass under a will or trust — such as retirement accounts and the proceeds of a life insurance policy. You fill out the form when you buy the policy, but can later amend it.
It’s crucial that you keep these forms up-to-date. To change a beneficiary – for example, if you get married or divorced or your spouse dies – make sure to file an amended form. In a case decided by the U.S. Supreme Court in 2013, a widow and an ex-wife battled for five years over which of them was entitled to a life insurance policy worth $124,558.03. The ex-wife won, no doubt after great expense and heartache for both women. And all that because the insured did not change the beneficiary designation on his life insurance policy, either when he got divorced in 1998, or after his subsequent marriage in 2002, or after being diagnosed with a rare form of leukemia from which he ultimately died.
4. Estate tax. If you are both the insured and the policy owner, the proceeds will be considered part of your taxable estate. In that case, those funds are added to everything else you leave behind. If the total is more than the tax-free (“exclusion”) amount and you’ve left it to anyone except your spouse or to a charity, it will be subject to estate tax. The federal rules in a nutshell: For deaths in 2014, the tax-free amount is $5.34 million per person; widows and widowers can add any unused exemption of the spouse who died most recently to their own–it’s called “portability.” State estate tax or inheritance tax (or both) complicates the picture in 19 states plus the District of Columbia.
One way to avoid estate tax on life insurance proceeds is to designate the family member who will receive the proceeds of the policy — say, an adult child — as the owner of the policy. (Note: Minors can’t own the policy directly.) You can give this person the money to pay the premiums by using your yearly $14,000 gift tax exclusion – the amount, in cash or other assets, that you can give every year to each of as many individuals as you want, without incurring gift tax of up to 40%.
If you don’t want beneficiaries to receive the insurance proceeds outright or your heirs are minors, you can set up an irrevocable life insurance trust. Typically the ILIT buys the policy and, when you die, holds the proceeds for whomever you’ve named as beneficiaries.
What if you already own a policy? You can transfer it to the trust. But if you die within three years of making this gift, the proceeds would generally count as part of your estate. A way around that rule is to sell the policy to the trust instead. First you would need to put enough money into the trust to cover the purchase. For a term policy, it would be nominal sum, since the value of the policy is just the cost of that year’s remaining premium.
5. Crummey letters. If you plan to fund an ILIT with annual exclusion gifts, the trust must give the beneficiaries what are called Crummey powers, and the beneficiaries must receive an annual Crummey notice, sent by you or by the trustee at the time you add the gift to the trust. This gives them the right for a limited time (usually 30 or 60 days) to withdraw from the trust the yearly gift attributable to them. Without providing the beneficiaries Crummey powers, your gift to the trust would be considered a future interest (something beneficiaries can’t use right away) rather than a present one and would not qualify for the annual exclusion.
In an estate tax audit, the IRS often asks for these annual Crummey letters. If your heirs can’t produce them, contributions that might have qualified as tax-free gifts could be subject to tax.
Posted by: Steven Maimes, The Trust Advisor
Forbes article by David Cearley of Gartner, Inc.
Gartner’s top 10 strategy technology trends have the potential for significant impact on organizations in the next three years.
While this doesn’t mean adoption and investment in all of the trends will occur at the same rate, companies should make deliberate decisions about them during the next two years. The trends cover three themes: the merging of the real and virtual worlds, the advent of intelligence everywhere, and the technology impact of the digital business shift.
Merging Real and Virtual Worlds
As mobile devices continue to proliferate, Gartner predicts an increased emphasis on serving the needs of the mobile user in diverse contexts and environments, as opposed to focusing on devices alone.
The Internet of Things
The combination of data streams and services created by digitizing everything creates four basic usage models — Manage, Monetize, Operate and Extend.
3D printing will reach a tipping point over the next three years as the market for relatively low-cost 3D printing devices continues to grow rapidly and industrial use expands significantly.
Ubiquitous embedded intelligence combined with pervasive analytics will drive the development of systems that are alert to their surroundings and able to respond appropriately.
Prototype autonomous vehicles, advanced robots, virtual personal assistants and smart advisors already exist and will evolve rapidly, ushering in a new age of machine helpers. The smart machine era will be the most disruptive in the history of IT.
The convergence of cloud and mobile computing will continue to promote the growth of centrally coordinated applications that can be delivered to any device.
Software-Defined Applications and Infrastructure
Agile programming of everything from applications to basic infrastructure is essential to enable organizations to deliver the flexibility required to make the digital business work.
Web-scale IT is a pattern of global-class computing that delivers the capabilities of large cloud service providers within an enterprise IT setting. More organizations will begin thinking, acting and building applications and infrastructure like Web giants such as Amazon, Google and Facebook.
Risk-Based Security and Self-Protection
All roads to the digital future lead through security. However, in a digital business world, security cannot be a roadblock that stops all progress. Organizations will increasingly recognize that it is not possible to provide a 100 percent secured environment. Once organizations acknowledge that, they can begin to apply more-sophisticated risk assessment and mitigation tools.
Posted by: Steven Maimes, The Trust Advisor
Forbes article by Maggie McGrath
Within the next six years, that number will surge to $7 trillion. Some may think we’re lazy and entitled, but we’re ripe for the picking — assuming we actually figure out how to grow our wealth. And in a panel at the Forbes Under 30 Summit in Philadelphia on Monday, three of the people trying to figure out how to make financial service sites that Gen Y will actually use gave tips on how to do just that.
A 2013 survey noted that “Millennials are the generation that are the least likely to be on track for retirement. … People aren’t paying as much attention to them and they are falling behind and falling further behind.” Alexa von Tobel, Josh Reich and Jon Stein — CEOs and founders of planning site LearnVest, banking service Simple and investing site Betterment, respectively — are paying attention, and they think that smart technology paired with some smart budgeting (and saving, and investing) will help Gen Y get on track for not just retirement, but all of their financial goals.
“Financial planning is just math. It’s complex math,” von Tobel said to a packed room in Philadelphia’s Convention Center Monday afternoon, noting that newer online financial planning sites (like LearnVest or Mint.com) are like GPSes for your finances that decode that math, and make the math understandable in the process. And, she added, they’re a type of GPS that every household in America should have access to.
Reich agreed, and added that the type of connectedness that young (and older) adults feel on social media is a connectedness that can and should be applied to their finances. “When I am interacting with my [financial] transactions in real time, every decision I make, I know the value of my money,” he said of managing his money digitally.
Technologically-efficient financial tools like LearnVest, Betterment and Simple are one thing, but if consumers don’t know the basic A-B-C’s about their wallets, that technology will only go so far. To that end, von Tobel, Reich and Stein offered budgeting advice for those in (and out of) the room.
“Save as much as you can. Most people don’t save enough, especially when they’re young,” Stein said. “Save 30 to 40% of your income if you can. Live efficiently so you can put a lot of money away; that can provide multiples of happiness in the future.”
Reich recommended internalizing the value of a dollar. “Don’t spend it in a way that isn’t respectful of your work,” he said.
Alluding to the popular piece of personal finance advice that dictates people need to live within (or, ideally, below) their means, von Tobel joked that no one really knows what our means are. But if you want to live below your means, she suggests trying what some call the 50/20/30 rule. The way it works is this: take what you make 50% (or less) of what you make and spend that only on what’s essential for you to live: housing, transportation, groceries. Then, take 20% (or more) of what you make and put it towards the future — a 401k, an emergency fund, a 529 plan for your kids, any or all of the above. And finally, the remaining 30% (or less) should go towards what von Tobel called “lifestyle choices” — eating out, entertainment, traveling, clothes. In other words, non-essentials.
“If you can’t do that, if you can’t save at least 20% for the future, we can predict mathematically that you’re going to be off [of your goals], you’re not going to be prepared for the future,” she said.
And while it might sound hard or even crazy to think about retirement at the tender age of 30 or even 25, Betterment’s Stein cited the power of compound interest as reason enough to start saving.
“Saving more now means a lot more than saving the same amount later. You can roughly, with reasonable expectations about returns, double your money every 10 years if you’re investing that,” he said. “A dollar saved and invested now is worth 8 or more times what it’s worth now when you reach retirement.”
Posted by: Steven Maimes, The Trust Advisor
Bruce Ashton thinks he has a pretty good idea why any retirement plan advisors might have failed to show up Wednesday for his presentation on the Department of Labor’s investigations of RIAs and broker-dealers.
“They’ve either already gone through an investigation or they’re in la-la land,” Ashton said.
It was meant as a joke, of course, but the comment didn’t evoke much laughter, a reflection no doubt of the growing concern among advisors, brokers and plan sponsors that the DOL has, as Ashton put it, “careened out of control, in some respects.”
Whether it has or not, the DOL has unquestionably become more aggressive in its pursuit of potential offenders. The agency conducted more than 3,600 audits of qualified retirement plans last year. Settlements related to violations totaled $1.7 billion in plan reimbursements and fines.
Ashton, speaking at the Center for Due Diligence conference here, went beyond merely expressing concern about potentially overzealous government investigators. He was disdainful of the DOL’s approach in a number of his observations. Among them:
- The DOL has no qualms asking for information where it has no jurisdiction.
- The DOL will contact an advisor’s clients. “They don’t seem to care how much disruption the process causes the firm under investigation,” he said.
- The DOL doesn’t have any sense whether its probe will go anywhere or not.
- DOL investigators don’t seem to be very well trained, in some respects.
Ashton shared some of the details of a client’s experience to underscore his points. This particular client, he said, is a dual-registered broker-dealer and RIA who provides wealth management, investment advice to retirement plans and is an advisor to a mutual fund.
In its probe, the DOL has asked the client for a number of items that Ashton expected would be sought, including a list of plan accounts, copies of its contracts and 408(b)(2) disclosure forms.
Less expected, if not surprising, was the DOL’s request to see a list of all of the advisor’s wealth clients and all of the mutual fund investors. The DOL also asked to review the advisor’s general ledger. And it also contacted the advisor’s clients asking for information, sharing with them that its request was being made in connection with an investigation of the firm.
“Fortunately,” Ashton said, “we had crafted something to alert clients. Yet some of them were naturally spooked after being contacted by the DOL.”
Joan Neri, another Drinker Biddle attorney, said the DOL seems especially keen on rooting out advisors who commit prohibited transactions, whether deliberately or not.
Improper or incomplete disclosures get advisors into trouble, she said, including failing to acknowledge that they are, in fact, acting as a fiduciary when rendering investment advice to a plan’s investment committee.
What has the DOL most concerned, she said, are advisors who use their positions to generate additional fees for themselves or their affiliates.
Ashton warned that the DOL’s deadline may be short and that much of the information it requests may not be readily available.
That’s why, he said, it’s important to try to negotiate with the agency on some of its demands.
“Don’t just get their letter and start scurrying around for everything they want,” he said.
In some cases, advisors might go so far as to ask the DOL to issue a subpoena for what it wants. Doing so allows advisors to explain to angry clients that they were compelled by law to provide the DOL with the information.
Posted by: Steven Maimes, The Trust Advisor
NYT article by Tara Siegel Bernard
But if any lesson should have been learned from the last recession, it was the importance of having a well-diversified portfolio and resisting the urge to sell in a state of panic.
So consider the recent gyrations as a warning signal — not of impending market doom, but a nudge to ensure your investments are on firm footing to withstand whatever happens to blow through the financial markets.
“This is a reminder that the market goes up and the market goes down, and this is normal,” said Stuart Ritter, a senior financial planner at T. Rowe Price. “One of the worst things people can do is draw the conclusion that something different has happened and therefore they should abandon their strategy. The flip side of that is they should have a strategy in place, and not one that is driven by what the market did in the past three hours.”
Some financial advisers emailed letters to their clients this week, urging them to ignore the headlines — a sound idea for investors who are trying to ascertain if their overall approach is still working. Are stocks overvalued? Possibly. Will a slowing European economy destabilize the faltering recovery here in the United States? Perhaps. Is this a moment to get a better grip on the bond market? Absolutely.
The point is, nobody can predict what will happen; the stock market is, and always has been, a gamble. But the right combination of stocks and bonds can reduce overall risks, even in dire circumstances. Investors holding all of their money in stocks during the downturn of 2008 to 2009 had to wait three years to break even, according to Vanguard. But people with investments split evenly between stocks and bonds recovered just 18 months later.
Here are some ideas on how to ensure your portfolio is still working for you:
As of Wednesday’s market close, the Standard & Poor’s 500-stock index was down 7.4 percent from its high of 2011.36 on Sept. 18. Technically speaking, it takes a 10 percent plunge to qualify as a correction, and a 20 percent fall to move into bear market territory, said Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices.
Also on Wednesday, the yield on the 10-year Treasury note briefly fell below 2 percent, crossing a symbolic threshold that signaled investors were rushing for safety; bond prices and yields move in opposite directions, so prices on longer-term bonds increased.
In other words, diversification worked: while stocks slumped, longer-term bond prices picked up some of the slack. “The market declines are pretty normal,” said Fran Kinniry, a principal in Vanguard’s Investment Strategy Group. “But the good news is that diversified portfolios are seeing a rally in high-quality, fixed-income investments.”
And when you consider that most people don’t — or at least shouldn’t — have 100 percent of their money invested in large American stocks, the losses aren’t as severe.
An investor’s ideal mix of stocks and bonds — known as an asset allocation — will vary based on overall goals, age, time horizon and personal circumstances. It’s one of the most important decisions investors can make because it determines how much risk they are willing to take in exchange for a chance at a decent return, experts said.
“The right asset allocation is the one that brings you to your financial goal because you’re able to maintain it during all market conditions,” said Rick Ferri, the founder of the money management firm Portfolio Solutions and author of “All About Asset Allocation.”
Investors can find some different combinations of stocks and bonds that can serve as guideposts, including those outlined in Mr. Ferri’s book. For example, people who are three to five years from retirement with a moderate tolerance for risk might split their money evenly between stocks and bonds, though a more conservative investor might put only 30 percent in stocks. A younger saver early in her career, for instance, might consider anywhere from 60 to 80 percent in stocks, he said.
But it’s not quite that easy, either. “Finding the right asset allocation isn’t as simple as ‘your age in bonds,’ ” he said, referring to the old maxim. “There are many 70-year-old people who can and should have more than 30 percent in stocks, and there are many 30-year-old investors who have difficulty with 70 percent in stocks.”
Think back to the severe market downturn in 2008 to 2009, which served as investors’ ultimate test. Were you able to ride out the market tumult? Investors who felt compelled to do something, or who dumped piles of stock holdings, were invested too aggressively, financial advisers said. If the most recent gyrations are tempting you to make rash moves, then your investment mix is probably too heavily tilted toward stocks.
This is important for everyone, but probably even more so for retirees; selling stock funds while they are down will either lock in losses, or if the investors try to get back in the market there will be less time for them to recover. “Pick an asset allocation range for stocks you can live with for the long run,” said Allan Roth, a certified financial planner in Colorado Springs. “It should be set so that you would have the courage to buy more stocks when they plunge so you can stick with that allocation.”
During the financial crisis, many investors realized that they were holding bonds that were riskier than they thought, and they didn’t provide an adequate counterbalance against plunging stocks. Bonds are also sensitive to interest rates, which is why you want a diversified portfolio of bonds that won’t fluctuate too much if rates move too far in one direction. Remember that even high-profile bond managers such as Bill Gross, formerly of Pimco, have made big directional bets on interest rates that have proved wrong.
That is why investors are usually best served by holding bonds in low-cost index mutual funds that invest in a diversified array of high-quality holdings, financial advisers said. (Higher net-worth investors, or those who are tax-sensitive, should seek tax-exempt bond funds.)
“Make sure your bonds are high-quality, or mostly U.S. government-backed,” Mr. Roth said. “The last thing you need is your bonds to get crushed when your stocks do, as what happened to many in 2008 and 2009. Bonds need to be boring and hold value.”
A bond’s “duration,” measured in years, will provide a general idea of how a bond fund might behave if interest rates were to fluctuate. It’s a rough measure, but generally speaking, for every percentage point that interest rates rise (or fall), a bond’s value will decline (or increase) by its duration. Bonds with shorter durations are less sensitive to interest rates (the faster the bond matures, the more quickly you can reinvest the money at a potentially higher interest rate.)
So if rates fell by one percentage point, the Vanguard Total Bond Market Index fund, which has a duration of 5.7 years, would rise by 5.7 percent. But since the fund also pays investors income — it has a yield of about 2.1 percent — it would post a total return of 7.8 percent, explained Mr. Kinniry of Vanguard. Conversely, if rates were to rise by one percentage point, the fund would lose 3.6 percent.
This is the process of trimming back winning investments and reinvesting the money into laggards so that a portfolio maintains the overall mix that was originally set. But this can make investors uneasy since they are buying losing investments. Some opt to remove the emotion from the process and use services that will rebalance automatically. “Sometimes it is counterintuitive to rebalance after a period like this, but that is where you can receive some of your benefits,” said Reed Fraasa, a financial planner in New Jersey.
For investors who don’t feel confident enough to sort this out on their own, it is possible to find an unbiased, fee-only financial planner through organizations like the National Association of Personal Financial Advisors, the Garrett Planning Network or XY Planning Network. There is also a growing industry of online investment managers — sometimes called robo-advisers — that will handle the entire task for a relatively modest fee.
Still unsure what to do? David Yeske, a financial planner in San Francisco, recently sent out a calming note to his clients explaining that downturns are inevitable, but he offered another strategy. He offered some “fun and uplifting” distractions from the scary headlines, and he provided links to videos featuring a rendition of “Stand by Me,” and a flash mob.
Posted by: Steven Maimes, The Trust Advisor
CNN Money News article by Matt Egan
The arrival of Ebola in the U.S. has coincided with a period of extreme turbulence in the stock market, which has tumbled about 8% from record highs.
The deadly virus is clearly not the only factor behind the market slide, but it’s a major unknown that is increasingly weighing on market psychology. That was the case again on Wednesday as the Dow plummeted as much as 370 points and health officials revealed a second health-care worker in Dallas tested positive for Ebola.
Ebola fears are most obvious in the airline sector. Shares of American Airlines Group (AAL) and Delta Air Lines (DAL) fell sharply on Wednesday, hurt by the news that the new Ebola patient flew the day before being diagnosed. Both airlines are down nearly 20% over the past month alone.
“The fear is that people will be afraid to fly,” said Jason Weisberg, managing director at Seaport Securities.
Other sectors being caught in the Ebola downdraft include the cruise industry, where Royal Caribbean Cruises (RCL) and Carnival (CCL) have tumbled nearly 20% from their 52-week highs.
Hotel stocks like Hilton Worldwide (HLT) and Starwood Hotels & Resorts Worldwide (HOT) have also been punished by the Ebola concerns.
Extreme fear: The Ebola scare is not having an impact on many businesses at this point. For that to happen, the deadly virus would have to spread much more rapidly in the West. That means earnings — the fundamental component of stock prices — aren’t being hit.
However, market psychology, which has become increasingly fragile, is clearly being hurt by the Ebola epidemic.
“The stock market is now driven by emotion rather than fundamentals. The former rapidly switches from greed to fear on Ebola news,” Ed Yardeni, president of investment advisory Yardeni Research, wrote in a note on Wednesday.
Just check out CNNMoney’s Fear & Greed Index. It tumbled to zero for the second time ever earlier this week, indicating “extreme fear.” Just a few months ago it was flashing “extreme greed” as stocks cruised to record highs.
The VIX gauge of market volatility has spiked 90% over just the past month alone as wild market swings have become the norm.
To be sure, Ebola is not the main driver of the current market pullback. There have been plenty of other negative headlines to go along with Ebola, including Europe’s gloomy economy, the energy price meltdown, new gains by ISIS in Iraq and worries that global central bankers are out of ammo.
It’s all “added up to a nasty, snowballing environment of shoulder tapping and second guessing that continues to keep rallies under lock and key,” Michael Block, chief market strategist at Rhino Trading, wrote in a note on Wednesday.
A number of investors believe Monday’s late-day nosedive was caused by a false alarm about passengers with flu-like symptoms being removed from a flight in Boston.
Greed isn’t dead: Wall Street never misses a chance to make money. Investors are betting that at least some companies will be able to capitalize on the epidemic.
However, it’s important to remember these stocks have very small market valuations, making them potentially risky and speculative plays, especially for retail investors.
Shares of Tekmira Pharmaceuticals (TKMR), which is working on an experimental Ebola drug, have soared 200% this year.
Another bright spot has been Lakeland Industries (LAKE). The Hazmat suit maker has skyrocketed almost 300% over just the last three months alone even though it remains a risky bet.
While fear continues to dominate Wall Street, some believe the recent chaos has given investors sitting on the sidelines a chance to jump into the stock market. That could explain why the Dow erased more than half of its early 370-point plunge on Wednesday.
“We’re seeing stocks at some levels that are very, very attractive. Unless you think the world is going to suffer a complete meltdown here, this is a very good buying opportunity,” said Weisberg.
Posted by: Steven Maimes, The Trust Advisor
Forbes article by Luisa Kroll
“The Ebola epidemic is at a critical turning point. It has infected 8,400 people so far, but it is spreading very quickly and projections suggest it could infect 1 million people or more over the next several months if not addressed,” Zuckerberg said in a statement posted to his Facebook page. “We need to get Ebola under control in the near term so that it doesn’t spread further and become a long term global health crisis that we end up fighting for decades at large scale, like HIV or polio.” The Facebook CEO also called out the heroic work of the frontline responders.
Zuckerberg, who at age 30 is already among the top philanthropists in the U.S. as measured by 2013 giving, joins a growing cadre of wealthy individuals who have donated to stop the spread of this disease. On September 10, the Bill & Melinda Gates Foundation announced it was immediately giving $50 million to the United Nations agencies and international organizations involved in the response to help them and local governments buy supplies and build up emergency operations in affected countries.
Microsoft cofounder Paul Allen has also been quick to respond, giving $20 million to fight Ebola and launching the Tackle Ebola campaign. “A winnable battle should never be lost,” said Allen, “Now is the time to respond to this crisis with the speed and resources needed to support all who are working hard to contain, and ultimately tackle, this horrible disease.”
Africa’s richest person, Aliko Dangote, and other wealthy tycoons in Nigeria were also quick to respond, donating money to help stop the spread of the disease in Nigeria and elsewhere. Nigeria has nearly eradicated Ebola in its country and could soon be declared Ebola free.
Here is a copy of Zuckerberg’s full statement:
Priscilla and I are donating $25 million to the Centers for Disease Control Foundation to help fight Ebola.
The Ebola epidemic is at a critical turning point. It has infected 8,400 people so far, but it is spreading very quickly and projections suggest it could infect 1 million people or more over the next several months if not addressed.
We need to get Ebola under control in the near term so that it doesn’t spread further and become a long term global health crisis that we end up fighting for decades at large scale, like HIV or polio.
We believe our grant is the quickest way to empower the CDC and the experts in this field to prevent this outcome.
Grants like this directly help the frontline responders in their heroic work. These people are on the ground setting up care centers, training local staff, identifying Ebola cases and much more.
We are hopeful this will help save lives and get this outbreak under control.
Posted by: Steven Maimes, The Trust Advisor
CNBC.com article by Lawrence Delevingne
If you can’t beat the robots, join them.
That’s what Betterment—the ultra-low cost, computer-driven personal portfolio service—hopes financial professionals will do with its new institutionally focused “robo-advisor” offering. Launched Wednesday, Betterment Institutional lets registered investment advisors, or RIAs, use a product that is seen by some as a threat to their relatively expensive and outdated money-management services.
Betterment’s core retail product has gained attention recently as awareness of low-cost, passive money management—also called “digital” advising for its automatic allocations to exchange traded funds based on investor goals—has gained popularity with entrants such as Wealthfront and Vanguard Personal Advisor Services. Launched in 2010, Betterment now has 49,000 individual customers with $875 million invested as of Tuesday.
According to Betterment and its partners, the service will help advisors by eliminating or combining many traditionally cumbersome tasks, including a paper-based sign-up process; using multiple software programs for asset allocation and tax efficiency; going between separate brokerage and custodian vendors; and using multiple tools for tax and return reporting. The end result, they say, will be saved time and money.
The product has several major votes of confidence. One is a previously unannounced collaboration with Fidelity Institutional Wealth Services, a platform for nearly 3,000 RIA firms. Fidelity will now provide information and education on Betterment to those advisors, although they will not be required to use it.
“(We) share an interest in helping advisors realize that digital advice should not be perceived as a threat, but rather an opportunity to evolve,” David Canter, an executive vice president in Fidelity’s Institutional Wealth Services unit, said in an email. “Betterment Institutional is an exceptional solution for many of our RIA clients that need a scalable, automated platform,” he added.
“Advisors have been coming to us and saying, ‘This is great. I love what you guys are doing. I’m using it myself for my personal accounts. How can I use this for my clients?’” Betterment founder and CEO Jon Stein said in a recent interview. The company made the The 2014 CNBC Disruptor 50 List earlier this year.
The product was also shaped in partnership with the two heads of major wealth advisory firms. One is Steve Lockshin, founder of Convergent Wealth Advisors, AdvicePeriod and Fortigent. The second is Marty Bicknell, CEO of Mariner Holdings, which includes Mariner Wealth Advisors and Montage Investments. Lockshin and Bicknell are investors in Betterment and plan to use the product with some of their firms’ clients (AdvicePeriod and Mariner for now). About 25 RIA firms have also been using the beta version of Betterment Institutional.
The cost for professionally advised users will be similar to Betterment’s current retail fees, plus whatever the RIA charges for additional services. Betterment now costs 0.15 to 0.35 percent of average annual assets, depending on the amount of money invested.
Betterment Institutional will feature a 0.25 percent “platform” fee regardless of assets. Stein said that with the RIA charges, the total cost for their clients would likely range from 0.50 to 1 percent. That will usually be below the 1 percent or more that advisors typically charge to clients who meet a minimum account size, say $10,000 or even $1 million.
The idea is that advisors will provide services that Betterment can’t, such as estate planning, in-depth financial guidance, trust and other family-related asset management. Betterment will be used to handle the bulk of actual client investments, including the rebalancing and tax-efficiency work that’s typically done using disparate types of software or even by hand.
Through Betterment, RIAs get a custom website featuring their branding. Clients will use the site to sign up and monitor their investments; RIAs can also review the portfolios on the back end through their own dashboard or even work with clients in real-time over shared-screen technology.
Fidelity’s Canter said that RIAs can use the Betterment service to better attract new business segments, especially those with investment amounts that previously fell below their thresholds. Fidelity research from May found that 56 percent of RIA and broker-dealer firm leaders plan to “embrace digital advice by incorporating it into their existing businesses or partnering with a digital advisor.”
Lockshin is quick to tout Betterment’s potential. Besides possibly adding a slew of smaller new clients, Lockshin said that it will help manage the portfolios of existing clients more effectively.
“It commoditizes the parts of our business that should be commoditized and lets us focus on the value-add piece of the relationship,” he said.
Lockshin estimates that RIAs will save 20 percent to 30 percent of their time because the Betterment software is so much more effective. They will also save money by buying less software.
Lockshin said he will have no investment minimums for clients on his platforms. They will begin by charging clients the 0.25 percent platform cost, and advisors in the network can then add further fees for extra service.
Advisors will be able to add investments on top of Betterment’s simple stock and bond ETF mix, but such allocations will be done outside of the platform.
CEO Stein doesn’t see RIA use of Betterment’s technology as a threat to their passive model.
“If advisors are doing that, they’re doing that already. Our product is only going to nudge them in a better direction,” Stein said. “That’s the only affect it’s going to have.”
Lockshin agreed that the RIA advisory model was compatible with Betterment’s. Some clients, he said, need more personal guidance to stick with a long-term passive plan, especially when the market sours and there’s incentive to sell.
“It doesn’t need to be a death match. We’re actually arguing it’s not us versus them, it’s us plus them,” Lockshin said. “I’m excited about it and my peers in the industry are all pretty excited about it. I think the next year’s going to be a lot of fun.”
Stein hopes that the new institutional product will help Betterment become a household name.
“We want to be the next Charles Schwab. We want to be a big, trillion-dollar asset manager,” he said. “We see this as one of the natural ways to continue to grow our franchise.”
Posted by: Steven Maimes, The Trust Advisor