Diabolical Financial Products

financial-diabolicalMerriam Webster’s Dictionary defines diabolical as “of, relating to, or characteristic of the devil.” Unfortunately, there are a quite a few investment products that meet that definition.  They are often overpriced, extremely conflicted, non-transparent and are sold regularly as “suitable” retirement options to gullible investors.

Here are some to avoid:

  • Front-Loaded Mutual Funds. These are usually the “A” shares of a mutual fund. An upfront fee, as much as 5.75%, goes to the brokers, so a $100,000 investment may start with a net value of $94,250.  Generally, these “actively managed” mutual funds will then charge 1%-2% in annual fees on top of this, so long-term underperformance is virtually guaranteed.
  • Proprietary Mutual Funds. These are mutual funds created by the broker.  This is cross selling at its best (or rather its worst).  Brokers extract both selling fees and much of the operating fees.  Furthermore, many of these mutual funds are not publicly listed and therefore tracking performance is almost impossible.  (Yes, non-transparency is wrapped into these mutual funds.)
  • Equity-Indexed Annuities. This is a tax-deferred investment whose credited interest (growth) is tied to an equity index, such as the S&P 500.  However, the upside is typically capped and there is usually a large potential for a substantial loss.  Add in an upfront sales charge of up to 10% and this investment becomes indeed diabolical.
  • Variable Annuities. The average contract cost is 1.5% per year.  And, because it uses actively managed funds, one needs to add another 1% or so to annual expenses.  As a result, there is a 2.5% drag on performance each and every year, at a time when equity returns are expected to be in single digits.  A losing proposition.
  • Non-Traded REITs.   Last week, our blog discussed publicly traded Real Estate Investment Trusts (“REITs”).  http://www.dwmgmt.com/real-estate-investment-trusts-reits/  Non-public REITs, on the other hand, have significantly underperformed their publicly traded cousins.  Four reasons:  Huge (up to 10%) upfront commissions, lack of transparency, higher annual fees, and illiquidity (cannot be turned into cash readily).  Run from these.
  • Hedge Funds. Due diligence is prudent before any investment in hedge funds, given hurdles such as a possible 2% annual fee plus a possible 20% charge on annual profit, along with high minimums and illiquidity.

These diabolical products cost investors trillions of dollars over time in unnecessary fees, which directly reduce performance.  They have been described as “created by foxes, sold by wolves, and bought by sheep.”

Moral:  Avoid diabolical investment products.  Choose low fees, transparency, liquidity and a wealth manager who will act as your fiduciary, always putting your interests first.  And, have fun with the little devils at Halloween.

Real Estate Investment Trusts (“REITs”)

reit-promo-type-1What do soaring rental markets, high yields and diversity have in common?  Answer: they are all part of the reason that Real Estate Investment Trusts (“REITs”) are booming.  In fact, they just became a new sector in the S&P 500 index.

For the first time since 1999, the S&P 500 index is being reconfigured; breaking out REITs from the financial sector. It makes sense, due to the unique characteristics of REITs. They own or finance property and pay no taxes, but have to distribute 90% of earnings to shareholders.  Their current yield is 3.6% more than double the 1.7% yield offered by a ten-year Treasury bond.

The growth of REITs have been accelerated by increases in renting as more people have decided to rent, not own, their houses.  Rents have increased 3%-6% per year in cities such as New York and San Francisco.  REITs have become very involved with residential real estate.  Some REITs, for example, own and rent groups of suburban single-family houses with gardens and make a substantial return doing it.

REITs have become more and more diverse. The early RE ITs of the 1960s were primarily used to own office buildings and produce a steady stream of rental income.  They were viewed similarly to bonds; drawing little interest in the 80s and 90s when stocks were providing double-digit annual returns.  Today REITs own cell towers and data centers.  Casinos and hotels have sold their properties to REITs and lease them back for their operating business.  Macy’s and McDonald’s have been receiving pressure from activist groups to do the same.

REITs have been one of the hottest investments of the last decade.  They’ve attracted $68 billion in Exchange Traded Funds (“ETFs”) since 2010; the most by any major industry classification, outpacing energy, technology and all the others. They are trading at 23 times earnings, compared with 17 for the S&P5 500 index on average.  With the influx of new cash, they have reduced their debt-to-asset ratio from 70% in 2008 to 31% today.

At DWM, we consider REITs as an alternative; neither a stock nor a bond. REITs have been part of our Liquid Alternatives model for many years.  As such, they currently represent about 7% of our clients’ alternative asset class. There is a small overlap due to the fact that REITs represent about 3% of the S&P 500 Index which clients gain exposure to via our DWM Core Equity model.  Overall, a typical DWM investor would have a roughly 1.5-3% overall allocation to REITs in their diversified portfolio.

With REITs being hot, it comes as no surprise that we’ve received questions recently wondering if now is the time to increase our overall REIT allocation.  We think not.

It’s curious.  Seventeen years ago, the S&P 500 Index added a new sector, technology, by splitting it from industrials.   This was right before the dot.com bust in March of 2000.  It took 13 years for the tech sector to return to its 1999 levels.  Similar results occurred with the Dow Jones industrial Average added Microsoft, Intel and Apple.  At the time of admission, all companies were at all-time highs, but once admitted, their values fell and it took considerable time for them to recover to those levels.

No one knows if the REIT breakout will help or hurt this sector. We do know REITs have performed well for our clients, for us and for others. We also know they have relatively high current valuations.  This is a good reason to keep the allocation where it is now and keep monitoring the situation.

How to Nickname Accounts within SchwabAlliance

nicknamesHaving a hard time deciphering which account is which within SchwabAlliance? Well, our blog today is directed toward helping you conquer just that!

As you most likely already now, as a DWM client, you have a few ways to access your information:

DWM/MoneyGuidePro Financial Planner

DWM/Orion Portfolio Manager


(For more info on DWM-Connected Sites please click here to read our short blog: DWM Websites-101)

SchwabAlliance is a third-party site that, unlike the top two sites listed above, DWM cannot control. This is intended for compliance purposes. Since we cannot control that site, we cannot “nickname” an account for you there like we do within our DWM/Orion reporting system.
But by following this easy-to-use guide created by newest DWM teammate, Nick “Nick-Name” Schiavi, you can have those accounts nicknamed in a matter of minutes.


     Here is a link to the guide: Nicknaming and Grouping Schwab Alliance Accounts

Of course, you can always call the friendly folks at SchwabAlliance (800.515.2157) if you’re still having trouble with that site. For any help on the other DWM sites, please don’t hesitate to call us.

Happy surfing!

We Americans Work Hard for Our Money- Our Money Should Work Hard for Us

money-tree-3We hope everyone had a wonderful Labor Day weekend and a great summer.  We certainly did.

We American workers work hard for our money and our money should work hard for us.

Our country was built by hard workers. The second industrial revolution (from the late 1880s to 1970) brought the U.S. from an insular growing nation to the greatest country in the world, a distinction we still hold.  Our country has led global prosperity for seven decades since WWII based on a multinational system of institutions, rules and alliances.  Now that prosperity is in jeopardy.

For the last 15 years, economic growth in advanced nations has been weak.  The US is still adding jobs, but with reduced productivity.  From 1947 to 2000, the per-person GDP rose by 2.2% per year.  Since 2001, it’s been less than 1%.  81% of the US population has had flat or declining real income in the last decade.  The slowdown in growth has two main components; people working fewer hours and less economic output (productivity) for each hour of labor.  Northwestern economist Robert Gordon, whom we discussed at last fall’s seminar, argues that the third industrial revolution which includes computers and the internet has not had the same transformative impact on growth as cars, electricity, airplanes and indoor plumbing did.

American workers’ jobs have changed considerably in the last four decades.  In 1979, 19% of our nation’s jobs were in manufacturing, today only 8% are in manufacturing.  Yet, the U.S. share of global manufacturing has held at 20% for the last 40 years with American companies getting more done with fewer people.  Globalization has helped boost our GDP.

U.S. multinational businesses pay their U.S. employees 25%-30% more than domestic employers do.  U.S. manufacturing workers whose jobs depend on exports earn 18% more.  Cheap imports save the average U.S. household about $10,000 annually.  Every month, the U.S. economy gains and loses 5 million jobs because of innovation, competition, changed consumer tastes and trade.  Lots of winners and losers.

Hence, there is a huge difference in how Americans see the economy.  Higher education means higher hopes for financial prospects.  The poor are understandably more worried about retirement income. Those living in the South and West are understandably more optimistic than those in the “Rust Belt.”

Millions of Americans and Europeans who have not participated in globalization and who are either unwilling to or incapable of change, want to close the door to their nation.   Politics is moving from Republicans vs. Democrats or left vs right to “open” vs. “closed.””   Economic dislocation and demographic change (aka “too many immigrants”) has millions thinking it’s time to pull up the “drawbridges.”  In Poland and Hungary, the “drawbridge-uppers” are firmly in place.  In France, Marine LePen, thinks the opposite of “globalist” is “patriot.” The populist vote in Europe has nearly doubled since 2000 despite the fact that trade alliances have long been a huge benefit around the world.  Both U.S. political parties used to back free trade. Now they bash it- neither Donald Trump nor Hillary Clinton supports the Trans-Pacific Partnership (“TPP”), which would be the largest regional trade accord in history.  When you add an anti-globalization movement to the existing productivity decline in the U.S. and Europe, world growth will likely continue to fall.

Fortunately, the U.S. economy has held up fairly well- adding jobs driven by consumer spending.  However, as Federal Reserve Vice Chairman Stanley Fischer outlined in his concerns at the Jackson Hole summit, there is concern for longer-term prospects for the U.S. economy.  He called for more public investment in education and infrastructure.  Both Presidential candidates favor infrastructure spending.  Harvard economist Larry Summer suggests that paying workers to build roads and bridges creates more “demand” as workers become reattached to the work force. And this demand increases supply and produces more growth.

Conclusion:  Today, with reduced productivity and anti-globalization sentiment strong, we expect slower world growth and lower inflation to continue.  This means lower nominal equity returns. And, there are other continuing concerns, such as global terrorism and stock valuations.  Economists and forecasters are great at overstating the probability of worst-case scenarios. While, most often, their “expert predictions” of dire consequences don’t occur, we all have to endure the constant negativism from the media.

We recommend that investors remain invested in an appropriate asset allocation to obtain a reasonable return based on their risk profile.  In the long-run, equity markets have produced an equity “premium” over fixed income returns (aka a “real return” above inflation). Fixed income and alternatives have continued to provide a counter-balance to equities, traditionally remaining stable or going up when equities decline.   We’ve all worked hard for our money, and even in this new investment environment, we need to keep it working hard for us.

Happy Labor Day!

Labor-Day-Picnic-Clip-Art-PicturesWe hope you have a fantastic upcoming extended weekend. Although, I feel, the end of summer is a bit sad, there is much to look forward to come fall: beautiful mild temperature days, family visits to the pumpkin patch, leaves changing color, Halloween, and of course… football season. The shift always begins on the first Monday of September, or better known as Labor Day.

While most everyone is a fan of Labor Day and the three-day weekend, the history isn’t as well known. Labor Day is dedicated to the achievements of American workers and a celebration of how important they are. The state which first created the holiday, by legislative enactment, was Oregon on February 21, 1887; soon followed by Colorado, Massachusetts, New Jersey, and New York (the first state to propose Labor Day as an official holiday). By June 28, 1894, Congress made Labor Day an official holiday to be celebrated on the first Monday of September throughout all of the US.

Labor Day comes from one of the worst time periods to work in the trade, the Industrial Revolution. Many Americans worked 12 hour a day, seven days a week, and close to 365 days a year. In some states, families had to send children as young as 5 years old into the workforce, just to get by. With little regulation, workers were forced into extremely unsafe and unsanitary working conditions. With no other options, they had to take the chance in order to keep food on the table.

Eventually, enough was enough. Labor unions formed and, throughout the beginning of the 18th century, they grew larger and more vocal. For the first time, a group was standing up for the working man. Strikes, protests and rallies started to take place, demanding safe/clean working conditions and realistic pay. On September 5, 1882, over 10,000 workers left work to march from City Hall to Union Square, this would later be known as the first Labor Day Parade in New York City. The Unions made significant progress and eventually the idea of a “workingman’s holiday” started to float around.

In 1894, Eugene V. Debs of the American Railroad Union called for a boycott of all Pullman railway cars, crippling all railroad traffic throughout the US. This eventually led to riots and the deaths of many protestors, leaving government and worker relations severed. In an attempt to gain the trust of the American workforce, Congress officially passed the act to make Labor Day a legal holiday in the United States.

To this day, there is still a debate of who came up with the original idea of Labor Day. Many credit Peter J. McGuire, cofounder of the American Federation of Labor, while others argue it was actually Matthew Maguire, a secretary of the Central Labor Union, who originally proposed the idea.

Whether it was McGuire or Maguire, Labor Day is now a weekend that is always circled on the calendar. Working hard is part of our culture at DWM. We take pride in knowing we can add value and better the lives we touch every day. At the same time, we don’t take for granted the people whom we collaborate with and who allow us to provide more comprehensive service to our clients. So while it is a great weekend to barbeque with the family, it is also a great time to reflect on all of the hard labor done before us in order to make our lives better.