“American Spirit and Values”

David McCullough, Pulitzer Prize winning historian has a new book.  “The American Spirit,” is a compilation of speeches Mr. McCullough has made over the last 25 years.  His hope is to “remind us, in this time of uncertainty and contention, of just who we are and what we stand for, of the high aspirations of our founders and of our enduring values.”   Our country has always stood for opportunity, vitality and creative energy, fundamental decency, insistence on truth, and good-heartedness to one another.

However, much of what we read in the papers these days belies our American values.  Today, let’s look at two key areas- corporate America and Washington- that require substantial improvement.

First, let’s talk about today’s problem of big business focusing solely on “maximizing shareholder value.”  The result has been an almost Dickens-like atmosphere for consumers and employees. Turning airplanes into cattle cars is a good example.  We all saw the United passenger dragged off the flight in April.  United used to have a bonus program for executives based on on-time arrivals, consumer satisfaction and profit.  It doesn’t now- it’s only based on pretax income and cost savings.  Same thing for American Airlines.  After years in Chapter 11, AAL came out of bankruptcy by merging with US Airways in 2013.  Earlier this year, after finally making a profit, management awarded its long underpaid flight attendants and pilots with a raise to bring them to industry levels of compensation. Wall Street “freaked out” that some potential shareholders earnings were being diverted and AAL’s stock price tanked.

Wal-Mart doesn’t want that to happen to them. Seven Walton family members (with a net worth of $130 billion) own ½ of WMT.  In 2015, WMT made $14.7 billion and shareholders got $10.4 billion in dividends and stock repurchases. WMT’s “low, low prices” are in part made possible by low, low wages for its 1.5 million employees. Many full-time WMT employees live in poverty, without enough money to pay for an apartment, buy food, or get basic health care. And, each year, we taxpayers pay $153 billion to pay for food stamps and other welfare programs for low paid employees, with WMT employees receiving about $7 billion of it.  WMT’s CEO made $21.8 million last year. The median annual pay for CEOs of the S&P 500 companies is now $11.7 million.

The real issue with low wages is the impact on the overall economy.  One company’s workers are another company’s customers.  Profitable companies could pay workers more and shareholders less, leading to more spending on products and services from other companies. This is turn could increase the revenue and profits of the overall economy.  Treating employees more fairly, giving them more opportunity and training is good for America and the economic growth and happiness of our country.  Focusing on making super products and providing excellent customer service are great.   Those aspects of capitalism are good for American.  The greed and selfishness parts are not.

Which brings us to Washington.  In less than five months, President Trump has transformed us from leaders of the free world to whiny bullies.  He pulled us out of the Trans-Pacific Partnership, refused to reaffirm the mutual defense commitment to NATO and abandoned the voluntary Paris climate accord.  Here’s how Mr. Trump’s national security adviser, Lt. Gen. H.R. McMaster described the President’s world view:  “The world is not a ‘global community’ but an arena where nations, nongovernmental actors and businesses engage and compete for advantage.”

Really?  Is it all about self-interest? What happened to the more cooperative, rules-based vision that motivated America and its allies since WWII?  Our leadership was good for the world and has been good for our country.  A world of cutthroat competition and zero-sum outcomes is not.

On the domestic side, the House passed the Financial Choice Act (FCA) last week.  Very disappointing.   This legislation would replace the post 2008 financial crisis Dodd-Frank regulations, designed to protect Americans.   FCA would repeal the “Volker Rule,” which restricts banks from certain types of trading, and would strip the Consumer Financial Protection Bureau of its power to write rules and supervise investment firms (particularly regarding deceptive practices and consumer complaints.)  This, like the Health Care Choice Act and proposed tax reform, is just another Congressional attempt to give Wall Street and the top 1% unfair advantages so they can keep making more money at the expense of most Americans.

History can be a strength and an inspiration- it reminds us who we are and what we stand for.  Certainly, let’s make America Great, but let’s do it the right way- working together and providing opportunities for all 321 million Americans to reach their full potential. Let’s move away from the toxic polarization, greed and selfishness we see every day and get back to the high aspirations of our founders; cooperation, vitality, energy, basic truth and decency.  And, yes, let’s “Make Our Planet Great Again” and work with almost 200 countries worldwide to mitigate global warming.  We 7.5 billion citizens of the world are all in this together, hopefully for centuries and centuries to come.  Finally, let’s remember and promote our American Spirit and Values.

In America We Trust

trust-3

Americans have some major trust issues as we approach November 8th. We are mired in distrust of our Presidential candidates, Congress, the media and each other!  It is election week and the biggest hurdle facing both of our Presidential candidates is their inability to inspire the trust of the American voters.  Poll after poll highlights this seemingly national concern and has been fodder for debate all year.  In a September Wall Street Journal poll, far less than half the voters believe that either of the major party candidates are trustworthy.  A recent CBS/NYT poll showed that 2/3 of likely voters view both candidates as untrustworthy.  Not only that, but we don’t even trust each other.  A Gallup poll, also in September, showed that only 56% of us have a great deal or a fair amount of confidence that our fellow Americans will make good judgments about the issues facing our country.  Wow!  Not surprisingly, the same poll shows that only 32% of us have even a fair amount of trust in the media and 57% have little or no confidence or trust in those currently in office or running for office.  That is an awful lot of American cynicism!

Are these political campaign season statistics and events unprecedented in history?  Nope.  Even the Founding Fathers were full of distrust.  The framers of the Constitution created the Electoral College to decide the presidential election. Instead of allowing for “one person, one vote” presidential elections — as the democratic process would imply — the founders opted to place the responsibility in the hands of a select few who “will be most likely to possess the information and discernment requisite so complicated an investigation,” or so wrote Alexander Hamilton in The Federalist, No. 68 [source: League of Women Voters].

Because Electoral College voting does not necessarily reflect the vote of the American people, a president can be elected without receiving the majority vote. Looking back in history, we have had a few disputed outcomes to our Presidential elections that caused distrust on all sides.  For example, in 2000, George W. Bush won the presidential election by winning in Electoral College votes even though neither Bush nor Al Gore, Jr. had a clear popular vote victory – remember the hanging chads in Florida?  In 1824, Andrew Jackson charged that a corrupt deal led Congress to award the Presidency to John Quincy Adams when no candidate received enough Electoral College votes.  Sometimes we don’t even trust our democratic process!

Of course, the financial services industry is under perennial scrutiny, especially this year with some of the banking industry issues we have seen.  In order to restore a sense of trust, the Department of Labor rule defining fiduciary responsibility will begin taking effect in 2017. It will require that financial institutions and advisors give advice in the “best interest” of the client and that they comply with a professional and reasonable standard of conduct and compensation.  See our previous blog:  http://www.dwmgmt.com/fiduciary-standard-closing-in-on-reps-and-brokers.   DWM welcomes these changes and believes it is the right way to do business.  As members of NAPFA, the National Association of Personal Financial Advisors, we have always adhered to these principles.

The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of Fee-Only financial advisors—highly trained professionals who are committed to working in the best interests of those they serve. Since 1983, Americans across the country have looked to NAPFA for access to financial professionals who meet the highest membership standards for professional competency, client-focused financial planning, and Fee-Only compensation.”    http://www.napfa.org/

 

One thing we can trust is that, once this election is over, there will be a renewal of the iconic American optimism, no matter who wins.   We certainly hope that, as Americans, we can begin to re-establish a belief in our democratic process, in our leaders, in the media, the financial services sector and in each other.  At DWM, we are confident that we have earned the trust of our clients and will continue to operate with the integrity that you have come to expect.  Happy Election Day-please make sure to vote!!

Is Our World Really a Bad Place?

world-held-up-by-hands-002Aren’t you glad the contentious presidential debates are now over?   Do you feel like the only things reported are politicians bashing each other and other terrible and depressing events?  Wondering what this world is coming to? Sick of the negativity?  Yes, we are too.

The problem is that “big data,” the media and politicians all know the “secret.”  Our brains are hard-wired to react strongly to negative impulses.  Not surprising, from the dawn of human history, survival depended on our skill at staying away from danger.  To ignore bad news could be dangerous and/or fatal.

That’s why political smear campaigns work better than positive ones.  Nastiness just makes a bigger impact on our brains.  Hence important political issues take a back seat to allegations of candidates being “crooked” or “womanizers.”

Researchers Marc Trussler and Stuart Soroka ran an experiment at McGill University in Canada focused on the kind of political news people really prefer to read.  Even though, when asked, participants said they wanted good news stories, in a controlled experiment they generally chose stories with a negative tone- corruptions, set-backs, and hypocrisy rather than neutral or positive stories.  We are all unfortunately naturally attracted to negative content.

This phenomenon is more solid evidence of our “negativity bias”, which is the psychologists’ term for our desire to hear and remember bad news.  Is it any surprise that the media and politicians know this and focus their content accordingly?

So, think of a typical evening newscast.  Out of 30 minutes, there are 28 minutes filled with stories of political accusations, tragic events around the world, reports of threatening diseases and commercials designed to suggest we can’t live without their product or service. And, at the end, two minutes of a heart-warming, human interest story.  So, basically 90% disturbing stories and 10% of what most of the world is really like.  Is it any surprise that we start to think the world is a bad place?

Let’s look at the facts.  There are 7 billion people on earth.  How many do you think are threats to the rest of us?  Let’s include the world’s worst politicians, terrorists, violent criminals, corrupt corporate officers and downright evil people.  Let’s say there are 7 million of these threats to society.  That’s less than 1/10 of one percent.  In other words, 99.9% of the people in the world are likely decent human beings or at least not a threat to others.

Mahatma Gandhi summed it up this way:  “You must not lose faith in humanity.  Humanity is an ocean; if a few drops of the ocean are dirty, the ocean does not become dirty.”

In addition, the negativity bias impacts more than just our reactions to politicians and the media.  It impacts our relationships with friends and loved ones as well.  Because negative interactions take on a greater weight in our brains than positive interactions, we must have more positive stimuli than negative just to “stay even.” Researchers suggest a ratio of five to one.  For example, studies show that marriages where there was five times the positive interaction as compared to negative interaction were likely to be stable over time.  Couples heading for a divorce generally had a ratio of less than 5 to 1 and sometimes below 1 to 1.  Our other relationships need the similar 5 to 1 ratio for success.  Great relationships in life may be built over time on many small positive interactions.

I am sure we all cannot wait to have November 8th and our presidential election behind us.  Regardless of your political feelings, we must all agree that this “dirt” that both parties have been throwing into our “ocean” is sickening.  Let’s hope both parties give us better choices in the future.  For now, we might all benefit by just turning off the news sometimes and instead identifying and celebrating positive, even if small, observations in our daily lives.  And, then taking the time to provide positive communication, smiles and interaction with our loved ones, friends, associates and even those we pass on the street. The world is not a bad place.  Our ocean of humanity is not dirty.  Let’s all just do our part to keep it clean.

Elder Abuse: What You Need to Know & Be On the Alert for

thunder0Over the weekend, my younger son and I watched a fun animated movie called Thunder & the House of Magic. Part of the plot of the movie: a nice, old, wacky magician, who has some “cognitive decline,” is in jeopardy of losing his home.  Why: the magician’s scheming nephew sees his chance to cash in by selling his uncle’s mansion, tricking the old man into signing what turns out to be a power of attorney.  What happens: Thunder the cat saves the day.

It wasn’t the greatest movie and hasn’t won any awards, but it was entertaining for us. Moreover, it touched upon a growing epidemic in the US: elder abuse.

Elder abuse is an intentional act, or failure to act, by a person in a position of trust, that creates a risk of harm to an aging adult. It can be physical and/or emotional. From a financial perspective, exploitation occurs when there is unauthorized, illegal, or improper use of an aging adult’s resources by a person in a position of trust. According to the National Adult Protective Services Resource Center, 90% of elder abusers are family members (like the movie) and less than 5% of cases get reported to any agency.

Elder abuse is prevalent because of “diminished capacity” in our senior population. Diminished capacity is a mental condition that affects a person’s ability to understand their own decisions or acts. One of the most common example of diminished capacity in aging adults is dementia. Dementia describes a set of symptoms that may include confusion, memory loss, emotional disturbances (e.g. anxiety, paranoia, depression) and difficulties with thinking, problem solving, and/or language. Alzheimer’s is the most common form of dementia and impacts 1 in 9 Americans over age 65. It’s diagnosed among 20% of Americans over age 70 and 33% over age 85. It’s a slow, progressive, irreversible disease with, so far, no cure.

Unfortunately, there are bad, greedy people that take advantage of these seniors, and like the nephew from our cat movie, are on the attack for what they think is an easy pay-day. Sometimes it’s a “new friend” that spends a lot of time developing the relationship and justify in their heads that their behavior is okay because of their time spent paying attention to the aging adult. Unfortunately, in all cases, potential elder abuse is something we need to monitor.

Here are the common signs of elder abuse:

  • Neglect
  • Physical or emotional abuse
  • Blocked access to assets or belongings (e.g. the wacky magician was stuck in the hospital not knowing that the nephew was showing the house to would-be buyers)
  • The aging adult’s regular habits change.
  • A previously uninvolved relative, caregiver, or “new friend” makes decisions on the aging adult’s behalf.
  • The aging adult becomes isolated from professional advisors and even family.
  • Unexplained disappearance of valuable objects, financial statements, cash
  • Unexplained or unauthorized changes to wills or other estate planning documents
  • The aging adult exhibits strange behaviors, such as:
    • Unpaid bills and changes in spending habits
    • Unexplained change in professional advisors (e.g. doctor, CPA, attorney, etc)
    • Unexplained asset transfers
    • Atypical cash withdrawals/wire transfers
    • Checks written to “Cash”

DWM looks at every client transaction and will flag anything that looks out of the ordinary. As such, wealth managers can often serve as the first line of defense for addressing some aging client issues. But that doesn’t mean loved ones shouldn’t be on alert. If you suspect an incident of elder abuse, contact your local Adult Protective Services who will investigate. Here’s the link: http://www.napsa-now.org/get-help/help-in-your-area/

Given the increased focus to elder financial abuse prevention, regulators are adding enhanced scrutiny in this area, and laws and regulatory monitoring are progressing. The SEC came out with a recent Bulletin encouraging investors to plan for possible diminished financial capacity, stressing the importance of such planning tools as:

  • organizing important documents
  • providing financial professionals with trusted emergency contacts
  • creating a durable financial power of attorney

Our clients know that as part of our estate planning review, DWM requests and monitors these three important tools.

The good news is that people are living longer. The bad news is that some of the older population, particularly the ones with serious cognitive decline, are vulnerable to this elder abuse phenomenon. Be sure to keep your eyes and ears open to prevent this from happening. Stay in touch with your elder loved ones and look for the common signs. And if you do see the signs, take action immediately…just like Thunder the cat…so like the movie there is a happy ending!

Save the Fan: Reviewing Property and Casualty Insurance

ceiling_fan_cleaningThere is a salty saying by an author perhaps intentionally unknown which is, “A little risk management saves a lot of fan cleaning.”  Our lives today demand that we all have varying amounts and styles of insurance.  We all know we need it, we just don’t necessarily know how much or what kind.  And if a catastrophe or accident occurs, the last thing we want to discover is that we are not covered as well as we thought, or worse, that we aren’t covered at all.  Properly insuring yourself, your family and your personal assets from a variety of risks is a necessary consideration nowadays and it can be confusing to decipher the particulars.  At DWM, we believe regularly evaluating your risk management is a fundamental element in your total financial picture.  As our clients know, we include a regular review as part of our on-going total wealth management process.

It is always important to do a routine annual assessment. Certain life events may trigger a need for policy updates.  My daughter recently got her driver’s license, now my third household driver under 20, so I am particularly aware of how a new driver or change of automobile status can trigger a painful review of auto insurance costs!  With homeowner’s insurance, everyone understands that when you move you will need to investigate property insurance.  It is also a good idea to watch for the renewal notices and review each policy before it is due to renew.  It can be easy to forget about property insurance when it is buried in an escrow payment, so you can check with your mortgage lender or insurance agent to keep track of the renewal date.  There are other events that should make you think about your insurance as well.   Perhaps you added some significant jewelry or art that may need to be covered.  Maybe you did some renovations or improvements to your home recently, like an added security feature, a new roof or upgraded windows.  Other triggers might be changes in lifestyle – marriage, birth, divorce or death can all affect your insurance requirements.  Even sending kids off to college or landing a new job with added responsibility can increase your need for coverage.  All of these changes can impact your property and casualty insurance policies and should be evaluated by an insurance professional.

Besides changes in your lifestyle, it is worth reviewing your policy to look for coverage problems.  Some coastal homeowners’ policies may have very high deductibles for wind & hail insurance.  This includes hurricane damage, but also can include a thunderstorm knocking a tree onto your house.  You might prefer to have a high deductible on the “named storm” coverage and keep the regular wind events covered in the lower amount of your “all other perils” deductible.  Most homeowner insurance coverage uses a standard cost for satisfying replacement or repair claims.  You may want to look for policies with extended replacement cost coverage for custom home features or for inflated costs of goods and services during a large impact event.  Lastly, it is a good idea to be sure you aren’t over-insured.

We also think it is important to watch for changes in the marketplace and keep up with new products or services that might be available to our clients.  We have recently learned more about a company called PURE (Privilege Underwriters Reciprocal Exchange), a mutual company owned by its ‘members’ or policyholders rather than public shareholders.  Their niche model specializes in offering exceptional coverage and savings to “responsible” owners of the “finest built homes” and allows PURE to offer competitive rates for property & casualty insurance, often with premiums at 20% less than their competition.  The idea is to provide competitive coverage to successful families who are motivated to take care of their properties and who value the premium customer service offered to the PURE members.  The PURE founders came from the high net-worth programs at AIG and Chubb and have been inspired, in part, by the successful member exchange concept at USAA.  PURE believes in a client-centric service model with financial transparency and customized and detailed risk management assessment.  PURE writes insurance around the country for high-value properties worth $1 Million or more.  We don’t endorse particular companies, but we think PURE does a good job of acting as a fiduciary for the insurance coverage of their clients.  If you fit their profile, it is worth getting a quote from an agent.

Sorting through all of the coverage levels, intricate policy choices and evaluating your personal insurance requirements can be daunting and time-consuming.  At DWM, we are happy to sort through the details on all of your insurance, including property & casualty, health, life, disability or long term care.  We work with trusted insurance professionals to ensure you have the most appropriate coverage at the best possible price.   We think it is important for all of us to work together to make sure your risk is well-managed.  We hate to see our clients have any fans to clean!

Election Musings

Trump ClintonAs the DNC convention concludes, we now have our two Presidential candidates and about 100 more days of campaigning before the Election on November 8th.  In a year of unprecedented dislike of both candidates, billions will be spent trying to convince voters.  What a waste.

The Supporters aren’t Changing.  Trump and Clinton supporters aren’t changing their minds.  One Trump enthusiast was asked what it would take for the Donald to lose his vote.  His response: “Nothing. There is nothing he could do to lose my vote.”  To his supporters, Donald Trump is going to make America great again.  “He’s rich and can’t be bought.” “He speaks his mind.” “He’ll get the job done.”  Those who oppose him often believe him to be a narcissistic buffoon, liar, racist, and woman-hater; unfit to be president.

Hillary Clinton’s supporters believe she is the only qualified candidate, the only one capable of being commander-in-chief and, of course, she isn’t Donald Trump.  Those who oppose her believe she is a phony, part of the establishment that caused their economic woes, and has a long history of corrupt episodes including the recent FBI investigation into the “extremely careless” use of her private email server.

For supporters, new information makes no difference.  “It really goes back asswards, lots of times,” said Peter Ditto, a psychologist at UC Irvine.  “People already have a firm opinion and that shapes the way they process information.”  Psychologists call this “motivated reasoning” meaning that once a person selects Trump or Clinton, they tend to downplay or ignore things that paint their candidate in a bad light by forcing new information to fit within pre-existing beliefs.  Even lies don’t matter.  Many people would rather hear an appealing fib rather than an ugly truth. And politicians know that for sure.

Investors like Clinton.  Americans with money in the markets prefer Clinton.  They love divided government and are assuming the Republicans will control Congress and Clinton would be held in check.  Actually, for all their promises of sweeping changes, U.S. Presidents can’t do much without the House and Senate.  Furthermore, Republican House Speaker Paul Ryan has his own ideas, different from Trump and Clinton on taxes, trade and other matters.  So, we’ll likely have a divided government in any case.

Wall Street seems to think that it is highly unlikely that Trump will win.  Of course, think back to Brexit, when the “Remain” camp was certain they wouldn’t lose.  If he did win, Trump would likely move quickly to get the U.S. out of NAFTA and perhaps put tariffs in place on Chinese and other goods.  This could lead to a “trade war” which would most likely hurt the U.S. and world economy.

The Race will likely remain too close to call.  With more than three months remaining, we will continue to be bombarded daily with media coverage, emails and phone calls.  Like Brexit, it will likely come down to voter turnout. There are many angry, disillusioned Americans these days.  They question is which ones will show up in droves on November 8th.

Impact on Investments.  When Britain voted to leave the EU it surprised investors worldwide.  In the U.S., markets initially declined 5-10% and many investors bailed out.  It took the markets just a few days to realize that Brexit is a UK problem, not a U.S. issue and since then the S&P 500 Index and Dow Jones have hit all-time highs though demand remains high for “haven” assets; for example, government bonds and gold.

Investing based on world events is nearly impossible. UK politicians, property owners, businesses and bookies got all it wrong.  Timing the market, both entrance and exits, is impossible.  Longer-term investors know that you need to look beyond short-term events like Brexit, Kennedy’s assassination, the 1987 market crash and 9/11 to see that each had a short-term downside and fear followed by a return to fundamentals.  It’s prudent to leave the short-term noise to short-term traders.

Let’s focus on staying invested in a globally diversified portfolio with an appropriate asset allocation.  Yes, diversification may be boring, but it works.  We can control our behavior, but there are lots of things we can’t control, including the U.S. Presidential election.  So, enjoy the Greek drama as it unfolds. Not sure we are watching a comedy, tragedy or satyr (featuring lustful, drunken woodland gods).   Regardless, don’t let it stress you out.  Enjoy the rest of the summer and focus on what you can control.

DWM 2Q16 Market Commentary

brett-blogWe’ve eclipsed the half way point of 2016; kids are out of school, people are gearing up for vacations, and temperatures are soaring. There are a couple more amazing things of note: 1) It’s July and the Cubs are still in 1st place! 2) Given all the uproar about everything from interest rates to oil to the election and to, most recently, Brexit; investor returns in general are not only positive, but pretty decent.

Think about it: we’ve been bombarded with negative news all year and the second quarter was no different. We had terrorism issues not only abroad, but here on American soil. We had job creation falter with May readings showing the worst month of employment gains since 2010. There’s economic weakness abundant around the globe. To top everything off, on June 23, we had Brexit – the UK referendum that shocked many when results showed more votes to actually LEAVE the European Union than remain! A sell-off in stocks ensued and had some feeling like it was 2008 all over again.

Well, it wasn’t. Markets reversed and many equity benchmarks are actually higher at this time of writing than they were before Brexit. (For more on Brexit, see our last week’s blog by clicking here.) In fact, in the US, the S&P 500 ended the week after Brexit up 3.3%, finishing the quarter with a 2.5% gain. In Europe, the EuroStoxx600 and the FTSE100 finished the week up 3.2% and 9.9%, respectively, in an apparent turnaround of investor confidence.

Investors also flocked to bonds during the quarter and even more so since the Brexit vote, with bond yields setting lows around the world. The Brexit vote actually helped solidify investors’ expectations for global central banks to keep rates down. And since yields move inversely to bond prices, bond investors did very well during this time period.

Let’s look at some numbers:

Fixed Income: The Barclays US Aggregate Bond Index, the most popular bond benchmark, was up 2.2% and now up 5.3% for 2016 – not many would have predicted that at the start of the year. Really almost everything within bond land did well. Corporates, in particular, did great as evidenced by the iBoxx USD Liquid Investment Grade Index registering 4.1% for the quarter & now up 9.0% YTD.

Equities: The MSCI AC World Equity Index registered +1.0% for the quarter and is now up 1.2% on the year. With the Brexit vote, European stocks struggled (MSCI Europe down 2.7% for the quarter & down 5.1% YTD), but emerging markets have done quite well with the MSCI Emerging Markets Index up 0.7% for the quarter and now up 6.4% YTD.  In terms of domestic cap style; in general, mid cap has outperformed small cap which has outperformed large cap. And value continues to outperform growth in a big way this year.

Alternatives: The Credit Suisse Liquid Alternative Beta Index aims to replicate the returns of the broad hedge fund universe using liquid securities.  It came in -0.7% for 2q16 thus indicating that those type of alternative strategies didn’t fare as well as some of the other alternative strategies we follow. For example, it was another stand-out quarter for gold* (+7%), real estate** (+3%), and MLPs*** (+19%). These alts are all up big YTD as well (24%, 9%, 11%; respectively).

So, a diversified investor with exposure to the three major asset classes may see returns somewhere between 3 and 5% for this first half of 2016 – 6-10% annualized – amongst all this so-called uncertainty.  Not bad!

We are also cautiously optimistic about the second half of 2016, however, the negativity and the uncertainty (CNBC’s word of the year so far) will definitely continue:

  • Brexit has really only started – this may take over two years to play out and even though Brexit fears have been shrugged off for now, they could come back. Clearly, European GDP and thus global GDP will be affected.
  • Central banks could be running out of ammunition if things do indeed get worse. Interest rates are NEGATIVE in Europe and Japan. How low can they go? And how much fire power really remains?
  • Here in the US, inflation remains well below the Fed’s 2% preferred target.
  • China growth problems and oil price volatility could resurface.
  • Profits at companies in S&P500 have fallen for four consecutive quarters and are expected to fall another 5% this quarter. Hard for stock prices to continue to go upward in that type of environment.

So, why be cautiously optimistic? There is some positive economic data out there including:

  • US consumer confidence is strong.
  • Retail sales continue to escalate steadily.
  • The Case-Shiller Home Price Index reported an April rise of 0.5%, with prices increasing on a seasonally adjusted basis in most cities.
  • There are pockets of strength to be found here in the US and around-the-world. Lots of exciting opportunities abound that keep hungry investors and companies enthusiastic!

Like we have said before, the key is to stay disciplined to your diversified game plan. Stay invested in accordance to a long-term asset allocation target mix which is in-line with your risk tolerance, and don’t let emotions control you. Unfortunately, that can be difficult to do on your own or if you have improper assistance.  On the other hand, if you have an independent, unbiased wealth manager like DWM, they can help you accomplish this by making the appropriate changes when and where necessary to lead you to the higher ground. Let us know if you have any questions on the way.

  • *represented by iShares Gold Trust
  • **represented by SPDR Dow Jones Global Real Estate
  • ***represented by Alerian MLP

Three Point Shots and RIAs: More in Common than You Think

s curry 1Hats are off to the Golden Warriors for a fantastic season with 73 victories.  Of course, this eclipsed the record 72-win season that Michael Jordan and the Bulls had 20 years ago.   Steph Curry had a huge season, averaging 30 points a game, including making 402 three point shots, breaking his 3-point record total last year by 116.

These days, the best teams shoot lots of 3s.  It wasn’t always that way.  Larry Bird, whose best 3-point season was 87-88 when he made 98, puts it this way:  “I thought little of the shot when it came into the league (in 1979).”  That first year, the entire NBA averaged 2 attempts per game.  Of course, many coaching staffs and their owners were slow to accept change.  It took 15 years before the league averaged 10 three-point attempts per game.  This year the average was 25 per game with Golden State averaging 32.

Just 10 years ago, NBA defenses focused on protecting the paint.  Now they know they need to protect the perimeter as well.  The math is pretty simple.  A three-point shot is worth 1.5 times that of a 2-pointer.  And, if you can make them 45% of your attempts, as Steph Curry does, that’s huge.  But even a three at 33% accuracy (NBA’s overall rate was 35% this year), yields the same points as shooting 50% from 2-point range.

A similar sea change is happening in the wealth management world.  Registered Investment Advisors (“RIAs”) like DWM continue to draw assets from the big banks, wire-houses and other brokerage segments at an impressive pace.  Since the 2008-09 financial crisis, there has been a big movement to RIAs.  RIAs managed 19% of assets in 2010, 25% now and Cerulli Associates of Boston estimates the number will be 28% by 2018.

Again, the math is pretty simple.  The world has changed.  Double digit equity returns in the 80s and 90s, fueled by higher economic growth and inflation, are gone.  Actively managed mutual funds have been shown to underperform over time.  Families are looking for more than “big-name” investment management.  They are looking for an experienced, competent wealth manager to help them in all aspects of their financial life. People are demanding more value for their money.

They are also looking for a financial advisor that is committed to putting their interests first.  RIAs, by law, are required to follow a fiduciary standard.  Brett and I have signed an oath demonstrating that commitment and also are Accredited Investment Fiduciary (AIF®) certificants. But not every advisor has been adhering to the same standard. So the Department of Labor (“DOL”) has taken action.

Just last week, the DOL issued its new rule requiring advisors to adhere to fiduciary rules with respect to most of the $23 trillion U.S. retirement market.  As we reported in our February 18, 2016 blog “Fiduciary Standard Closing in on Reps and Brokers” http://www.dwmgmt.com/fiduciary-standard-closing-in-on-reps-and-brokers/, the new rules should eliminate the large front-end loads and high average annual expense ratios on most retirement accounts.  This will save individual investors billions of dollars each year.  Investors will continue to demand more fair-dealing with their money.

Of course, not all RIAs are the same and not all NBA players are Steph Curry.  His success is a combination of a number of factors, including his own “special sauce.”  Certainly Steph has exceptional hand-eye coordination, a quick release and great repetition.  It’s more than that.   Curry is shooting as he is jumping.  The result is a sharp arc and steeper shot which provides a wider opening into the rim.  Hence, his huge accuracy.

Steph had to work hard to get here.  He was often the smallest guy on the court growing up and had to find a way to get the ball over the taller boys and keep up with the bigger and better players.  Curry had to develop his own unique offering which is extremely successful and a delight to watch.

Similarly, there are lots of excellent RIAs, but we feel very few with a “special sauce.”  DWM is one of those few.  We were “late to the party,” starting in 2000; experiencing tough markets for us and our clients from day one.  We had to work harder: our investment management offering needed to be focused on finding better ways to protect and grow assets.  And, we needed to add lots more value than simply managing money.  We do this with a proactive, proprietary process focused on “Increasing Family Wealth by Adding Value” every day, week and month of the year in every aspect of our clients’ financial lives.   For us, that’s just like hitting a 3-point buzzer beater.

 

Forbes: “Why Wall Street, Insurers Don’t Want Fiduciary Duty”

client centricDefinition: “A fiduciary duty is a legal duty to act solely in another party’s interest.” It may not seem like much, but it’s really a big deal in our business. Registered Investment Advisers, like DWM, have a legal responsibility to put their clients’ best interests first. Wall Street banks and insurance companies don’t. In fact, they “hate the idea” according to John Wasik, in the most recent (8/23/13) Forbes. Mr. Wasik continues: “It would alter their business models and change their bottom lines forever.”

Fiduciaries are not only legally bound to put clients first, they are also required to disclose all investment costs and potential conflicts of interest. Brokers and insurance companies aren’t. To protect investors, the Securities and Exchange Commission and the Department of Labor have been working to mandate fiduciary rules for all financial advisors, including banks, brokers and insurance companies.

Brokers have been putting up a massive effort to avoid the mandate for fiduciary rules. Mr. Wasik feels you have to “look at the profit motive behind the broker-adviser model to understand why Wall Street and insurers are fighting like wolverines to kill fiduciary rules.” It’s all about compensation.

Mr. Wasik quoted Kathleen McBride, a founder of the Committee for the Fiduciary Standard who stated, “Currently, brokerage firms and insurers look at investors as cash cows. They look at using the investors to serve the firm. They are firm-centric, not client-centric. There is a fear at brokerage firms and insurance companies that if they have to put investors’ interests ahead of their own they won’t be able to sell the high commission, high fee securities they routinely do now- that are in the firm’s interests but not the clients.”

Ms. McBride continued, “As fiduciaries, brokerage firms would have to reveal all the costs the investor is paying- what the firm receives and what the broker receives- commissions, fees, revenue sharing, 12b-1 fees, and other trail commissions and more. Clients are not seeing that from brokerage firms now. That kind of transparency brings costs down.”

Finally, Ms. McBride outlined the intense anti-fiduciary lobbying campaign: “There is so much money at stake that banks, insurance companies and brokerage firms are spending hundreds of millions of dollars to derail the fiduciary mandate. The broker-dealer wirehouses, insurers, and lobby groups are pounding regulators and Congress. Congress has responded with a bill and letters to the SEC and DOL calling for a delay or dismissal of the efforts to put investors first.”

Mr. Wasik concludes his article in the following way: “Fiduciary duty may not be the ideal way to cut down on the worst abuses in financial services that produce churning brokers and Bernie Madoffs, but it’s a better approach to align advisers with the best interests of investors than all of the other commission-based business models. It’s clearly a quantum leap forward for investor protection.”

We salute Mr. Wasik and ForbesForbes calls itself “The Capitalist Tool.” We’re pleased that they have taken a tough stand to speak out against Wall Street bankers, brokers, and insurers in favor of investor protection and the fiduciary duty. Yes, capitalism can have a “soul.”

At DWM, we, of course, support the client-centric business model and embrace the responsibility of fiduciary duty. We may not make as much money as the brokers, but it’s really not about our money, it’s about yours.

“Saving on Lattes Will Not Make You Rich”

pound_foolish_bmpSo says Helaine Olen, a freelance journalist and author of “Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.”  Ms. Olen takes direct aim at investors and advisers alike in her recently published book. She makes some very good points.

Saving $3 a day on lattes, or $1,100 a year and investing it can help a plan, but it won’t build a fortune. Ms. Olen terms such faddish advice as the financial equivalent of miracle diets. Most people are looking for a quick fix or the next “home run.” A belief in instant riches lured millions into buying internet stocks in the late 1990s and overpriced houses in the mid 2000s. Millions watch Jim Cramer on TV looking for the latest tip when, in fact, Cramer’s picks have not done well. And, over 75% continue to invest in actively managed stock and bond funds when these funds annually underperform passive, low-cost funds.The fact is that there is no single financial elixir or silver bullet that can guarantee personal financial success.

Yet, lots of investors are still looking for that free lunch and promises of double digit returns. According to AARP, over 6 million people attended a free seminar in the last three years. Many elderly are terrified of outliving their savings. Desperation, fear and insecurity become the salesperson’s best friend. At the World MoneyShow, an annual event in Orlando, 80% of the attendees were over 55. As Ms. Olen, puts it, “a panicked baby boomer is their best customer.”

Ms. Olen includes many leading financial women in her book, including Jane Bryant Quinn and Elizabeth Warren. She doesn’t like Suze Orman, whom she criticizes for making huge amounts of money by telling others to be frugal. Further, Orman’s “affiliations with companies like FICO and Lending Tree raise questions about the impartiality of her advice.”

Furthermore, Ms. Olen points out that many financial plans fail because the investor and their advisor forget to stress test the financial and investment planning. Risk management analysis is often completely ignored. A plan with reasonable investment returns may be destroyed by death, disability, long-term care issues, a job loss, or high-interest debt. 

We agree with Ms. Olen. Some investors and advisers should be taken to the woodshed. There are no quick fixes and no one-size fits all solutions. Successful wealth management is a process, not a product.

It starts with investors working with advisers who don’t have conflicts of interests but rather are fiduciaries; putting the client’s interests first. Next, it requires experienced and trusted advisers to understand the client’s goals, resources, risk assessments and constraints to realistically and objectively prepare an initial financial plan. Then, that plan needs to be stress tested from risk management, estate planning, income tax and investment perspectives. Only at that point can an appropriate asset allocation be determined and implemented for the client. Going forward, the entire plan and investment portfolio need regular monitoring, rebalancing and stress testing. To be successful (aka not running out of money), it needs continual on-going professional review.

With the right help, you might be able to have it all: a successful financial plan and all the lattes you want.