Millenials – #NewEconomicTrends

MillenialsThere is a lot of buzz about this next generation of young adults in the U.S. workforce as they begin impacting and shaping the economy. Lately, the trend is to define a generation and to stereotype their culture to better understand what they have done in the past, predict what they might do in the future, and evaluate how this will affect us all. For example, there are the Traditionalists, born between 1925-’45, who are considered to be patient, respectful and hard-working. Next came the Baby Boomers, 1946-’64, who are thought to be optimistic, ambitious and cooperative. After that are the Gen X’ers, 1965-’81, described as skeptical, self-reliant and risk-taking. Now we have the Millenials, also called Generation Y, who are described as tech-savvy, hopeful and empathetic. Generalities, of course. However, the specific traits of these 18 to young 30-somethings may already be impacting trends in financial practices and corporate strategies.

Many see this group as comprised of “creatives” in the job market, interested in technical innovation and independent, stylistic pursuits. These young adults are purportedly skeptical of religious, political, and financial institutions, but embrace communalism, companies with good citizenship and are connected to everything around them through social media and smart technology. They are health-conscious, value quality of life over material acquisitions and look to use their incomes to exercise professional control. Increasingly, the Millenials are looking to be entrepreneurial, telecommuting and flexible enough financially to be independent professionally. By 2025, statistics report that Millenials will make up 75% of the workforce, so these trends may play a significant role in how this country does business. Start-ups, working from home, and placing importance on job satisfaction over wealth acquisition are key aspects. Millenials also expect corporations to be increasingly socially responsible. There is strong brand loyalty as both consumers and job-seekers by this generational segment to companies who participate in solutions to social concerns. Many are starting their careers in the Peace Corps, Americorps, and Teach for America. Future job market trends show growth in technology, childcare/education and preventitive healthcare, so the Millenials appear well-positioned to take advantage of these trends.

In their financial lives, Millenials tend to be extremely cautious. They watched their parents and older generations adversely affected by the 2000 tech bubble and the 2008 recession and it has impacted the way they approach their financial planning. Many are distrustful of banks, think the markets are rigged and believe that technology from services like Google, Amazon, Apple, Paypal or Square will overhaul the system of banking access and financial management. Those that have conquered their residual student loan debts are uber-conservative in their asset allocation and prefer to leave large percentages in cash, rather than trust their savings to equities investing. This is a mistake, cautions many advisors, as the younger investor has the most to gain from balanced, long-term investment strategies. Millenials are understanding of the importance of saving generally and know they cannot depend on the past retirement ‘givens’ of pensions and Social Security. However, only around 13% seek advice from advisors and their conservative and independent approach to their finances keeps them from taking advantage of proven long-term investment opportunities.

In all, the stereotype of the Millenials seems positive… innovative, socially responsible, and fiscally conservative. In pursuit of their long term success, we hope the Millenials develop another trait: recognizing the benefit of sound financial advice.

Ready for Your New, More Secure Credit Card?

credit card with chip cartoonBy the end of 2015, 70% of U.S. credit cards and 41% of U.S. debit cards will have security chips. Yes, these are the chips that Europe, Canada, Mexico and Asia have had for years. Finally, U.S. banks and credit unions are sending out the new cards, both with the traditional strip on the back plus the chip. Merchants are installing new registers to handle them. It’s a big change.

Currently there are two primary credit card technologies in the world. In the 1960s, cards were issued with a magnetic stripe to carry encoded cardholder information. The problem is that the magnetic bits of information are “fairly simple” to decode and then can be re-encoded on another credit card to make fraudulent purchases. Europe and the rest of the world has been way ahead of the U.S. in combating fraudulent losses. Their card encrypts data within a chip-embedded card that resembles the SIM in a smartphone. These Chip-and-Pin cards are known as EMV, Europay Mastercard Visa and they make it much more difficult for the bad guys.

The huge attack on 40 million Target credit card customers last Christmas brought home the fact that U.S. credit card companies needed to start issuing the more secure, more expensive EMV cards. Just last week, grocery chain Supervalu disclosed it was investigating a breach that could affect customers at 1,000 locations. P.F. Chang’s China Bistro and Goodwill Industries have also incurred hacks. Until now, neither U.S.  businesses or credit card companies wanted to make the investment. Businesses didn’t want to invest in new technology until the credit card companies had issued the new cards. And, the card issuers didn’t want to give them to customers until there was a place to use them. With the continuing breaches, the U.S. is now becoming the last of the G-20 countries to move to EMV.

However, most card issuers are not going with chip and PIN. They instead will use chip and signature. Chip and signature is less expensive and less complicated to users. And, issuers, knowing that the average American has 3.4 cards in the wallet, don’t want their card to be hard to use. Of the 14,000 banks and credit unions that issue cards, it is expected that 50% will use chip and signature, 25% chip and PIN, and 25% undecided. It’s expected that U.S. issuers will distribute more than 575 million credit and debit cards by the end of 2015, roughly half of the estimated billion cards now in circulation.

Merchants are upgrading their computer terminals. To push them along, the credit card companies have given them an October, 2015 deadline. After that, if a business that hasn’t shifted to the new “EMV-enabled” reader processes a counterfeit credit card, the business, not the credit card company, will be liable for the fraudulent charges.

The new cards will bring changes for the customer. Swiping the card generally won’t work. The card will need to be inserted in the terminal and remain there as the transaction is processed. And, if a PIN is required, the consumer will need to tap in the four-digit number when the terminal screen requests it. Yes, a little more work, but lots more security. And, with the right chip and PIN, customers can travel abroad and use their U.S. credit cards.

In the next few months, you’ll be seeing lots of information on the new credit cards. And, if you get a new card or one expires, you’ll likely get an EMV card. Using the new cards may be a little different in the beginning, but if it makes the cards more secure, it sounds like a great improvement.

Time for a Stock Market Correction?

bullsvsbearThe overall calm, positive performance of financial markets in 2014 took a hit on July 31st when stocks declined 2-3% and fixed income and alternatives lost about 1%. Markets have been about flat since then, yet talk about a stock market correction of 10% or more has escalated.

There’s lots of reasons why some believe a correction could happen:

  • Valuations of stocks are high. The current P/E ratio of the S&P 500 is 15.7- higher than the 10-year average of 14.1
  • Improving U.S. economic conditions have brought concerns about the Fed raising rates quicker than many investors anticipated
  • Europe’s prolonged economic slump is making deflation a concern
  • Economic sanctions against Russia could negatively impact consumer demand in many countries
  • Geopolitical unrest in Iraq, Gaza, Syria, Ukraine, etc. could explode

Yet, at the same time, there are many reasons why some believe the bull market should continue:

  • The U.S. economy is the best in years: new jobs are up, unemployment is at 6.1%, job openings are at a seven-year high, housing is up again after a slow start in 2014, car sales are at post-crisis high, and consumer sentiment is up
  • There has been a huge recovery in American corporate revenue and profits since the 2008-2009 crisis. Yes, lower borrowing costs helped. Second quarter earnings, with nearly 90% of S&P 500 companies having reported, are on track to grow 8.4% this year
  • For a variety of reasons, companies are continuing to buy back large quantities of stock
  • Market peaks have occurred historically when P/E ratios are 25 times earnings or more
  • Geopolitical worries have boosted the allure of “safe” bonds. With U.S. 10-yr bonds at 2.4% and German 10-yr bonds at 1%, stocks continue to be very attractive

Overall, it has been suggested that we are in a “Goldilocks” economy. One that is “not too hot, not too cold.” Stimulative policies, created by Fed Chairman Ben Bernanke and now Janet Yellen have created a great environment for stock growth. However, when investors get nervous about the Fed’s ability to keep the “temperature just right” we have seen big swings. May and June 2013 saw 5-6% drops when the Fed first started talking about “tapering” the QE program. Now, with the economy doing better and inflation nearing 2% targets, investors are concerned that the Fed will start to raise interest rates and change our “just right” conditions. That’s a huge challenge for the Fed. A perceived major misstep or miscommunication by the Fed could again shake the markets.

Yes, at some point we will have a correction in the stock market. History tells us they come along regularly (27 corrections of 10% or more since 1945). Yet, a priori, the reasons were enigmatic. Hence, trying to time the start and finish of such events is useless.

We have a saying at DWM: “There are many variables you cannot control. Long-term success, on the other hand, relies on managing the variables you can control, including reviewing your risk profile and asset allocation, reducing expenses, diversifying portfolios, minimizing taxes, and staying invested.”

Calling All Small Business Owners Who Sponsor Retirement Plans!

Business man pledgingA 401(k) and/or any other qualified plan is an extremely important part of one’s overall financial planning for their long-term future. Participation in a qualified plan gives one a head-start on their long-term financial security. The qualified plan not only provides a mechanism for saving, it also allows the money in this account to compound tax-deferred (or in the case of a Roth: tax-exempt). That means the earlier one begins to participate in making contributions, the greater chance one has in amassing a substantial retirement account that may ultimately provide one with their future financial independence.

All of our clients know that DWM takes an active role in shaping a client’s qualified plan portfolio such as 401(k)s, 403bs, 457s, etc. We look at one’s overall portfolio in a holistic fashion, addressing all of their accounts including individual accounts, trust accounts, retirement accounts, etc. In some cases, the retirement account / qualified plan represents the majority of one’s total portfolio.

But not everyone knows that DWM also offers assistance to employer sponsors of qualified plans. This is of particular importance right now as the Department of Labor and the IRS crack down on out-of-compliance sponsors of plans that are not up to snuff.

Many plan sponsors don’t realize that they are what is known as “fiduciaries”. Fiduciaries have important responsibilities and are subject to standards of conduct because they act on behalf of retirement plan participants and their beneficiaries. The most important responsibilities include, but are not limited to: drafting an Investment Policy Statement, selecting the funds that will make up the investment menu, and providing education to the participants.

Here’s an example of a plan sponsor that is out of compliance and hence subject to penalties and other liability:

It’s 1990 and a small business owner is told by his accountant that he and his employees need some type of qualified plan for their savings vehicle. The owner whips together a basic plan with little instruction, throws some investment options in there based on some chatter at a cocktail party, and basically sets and forgets it. Little education is provided to the employees after the establishment of the plan. Paperwork for new hires is handled by an employee not hired for such service. Fast forward 20+ years and that plan hasn’t changed much: using the same basic funds and investment menu that was provided many, many years ago. Those funds may not be appropriate anymore. They might have large fees. They may have horrible past performance. Furthermore, the menu not may not provide appropriate diversified choices. For example, for equity funds there should be at least an option for large-cap, mid-cap, small-cap, international, and emerging markets. In fixed income, there should be choices like short-term bonds, international bonds, high-yield bonds, etc. There should be active and passive options available. Passive options are a good way to keep costs down. Furthermore, the employees – the plan participants – aren’t getting any education or instruction on how to invest, how much to invest, etc.

The example above is happening out there today in many, many plans. Long story short, the investment world has changed dramatically over the last couple decades. Compliance cannot be taken casually as regulation has increased exponentially. Most importantly, the goal should be to optimize the success of all the participants in the plan. That said, the plan sponsor needs to be cognizant of what’s happening with these plans, they need to understand and monitor what their employees are doing, and provide some form of education and direction on what to do with the options. If not, that Plan Sponsor could be running afoul of the rules and regulations set forth under ERISA, and may be subject to fines and other time-wasting penalties.

It goes without saying that there are a lot of employer plan sponsors that do not take this job seriously. Many of them may not even know of or understand their responsibilities as a fiduciary. This puts them at risk, which is why DWM started its Qualified Plan Enhancement Program (“QPEP”) for Plan Sponsors. The QPEP provides support for the employer sponsor by getting them up to speed with the requirements set forth by both the department of labor and the IRS. Here are just some of the issues that plan sponsors face today which DWM can help with:

  • Plan design and conversion services
  • Investment analysis and menu selection
  • Investment monitoring and committee meetings
  • Fund replacement and manager searches
  • Investment fee analysis 
  • Asset Allocation modeling
  • Plan sponsor fiduciary responsibility
  • Employee education 
  • Employee meetings
  • One-on-one guidance

If you or someone you know has an employer plan in need of getting up to speed, don’t hesitate to contact us.