Equity Trades are Free – But there is no Free Lunch

Broker price wars

Before 1975, brokers had it really good. Commissions were fixed and regulated-at very high levels. It would sometimes cost hundreds of dollars to buy 500 shares of a blue-chip stock. That changed in 1975 when the SEC opened commissions to market competition.   A young Chuck Schwab and others became discount brokers- often charging ½ or less of the old rates. Since then, fees have continued to fall and earlier this year, trades could be made for $5 or less. Now, Charles Schwab & Co. as well as TD Ameritrade, E*TRADE and others have cut stock and ETF trades to zero. Free trading of equities has arrived.   Please be advised, though, that there is no free lunch- brokers profit from you even if they don’t charge for equity trades.

Here are some the main sources of income for brokerage firms:

  • Trade commissions
  • Brokerage fee- to hold the account
  • Mutual fund transaction fee-charges when you buy or sell a fund
  • Operating Expense Ratio-an annual fee charged by mutual funds, index funds and exchange-traded funds (“ETFs”)
  • Sales load- A sales charge or commission on some mutual funds paid to the broker or salesperson who sold the fund
  • Uninvested cash- brokers become bankers and lend it out

Let’s focus first on uninvested cash. In 2018, 57% of Schwab’s income came from loaning out its customers’ cash. As is typical in the brokerage business, uninvested cash is swept to an interest bearing account. However, sweep accounts typically earn almost nothing- usually ½ to ¼ of 1% or lower to the investor.

Schwab had a total of $3.7 trillion of deposits, with about 7% of it ($265 billion) in cash earning nice returns for them. Assuming a return of 2.5 % on the uninvested cash, that’s a return of $6.6 billion. The cost of that money was likely ½% or about $1 billion, with Schwab netting about 2%. $5.7 billion of Schwab’s $10 billion net revenue in 2018 was earned on its customers’ cash. Virtually all the brokers use the same model with uninvested cash.

Robo- advisors generally use the same format. Virtually all of them charge lower fees but require a certain amount of cash, between 4% and 30% in their pre-set asset allocations. Yes, there is a small sweep account interest paid on those funds, but not much. And, this is all typically disclosed. The rate paid on clients’ cash “may be higher or lower than on comparable deposit accounts at other banks” is a typical warning.

The use of uninvested cash is income for the brokers and reduction in performance for the investors. Let’s say your portfolio has 10% cash generating a 0% return. If your annual return on the invested 90% in your portfolio is 6%, then the return on 100% of the account is only 5.4%. A huge difference over time. As an example, the difference between earning 5% per year versus 6% a year on $100,000 for 30 years is $142,000.

Now, let’s look at the operating expense ratio (OER). OERs are charged by mutual funds, index funds and ETFs. If a fund has an expense ratio of 1%, that means you pay $1 annually for each $100 invested. If your portfolio was up 6% for the year, but you paid 1% in operating expenses, your return is actually only 5%. The OER is designed to cover operating costs including management and administration.

The first mutual funds were actively traded, meaning that the portfolio manager tried to beat the market by picking and choosing investments. Operating expenses for actively managed funds include research, marketing and significant administration with OERs often at 1% or more. Index funds are considered passive. The manager of an index fund tries to mimic the return of a given benchmark, e.g. the S&P 500 Index. Index funds should have significantly lower operating expense ratios. Evidence shows that actively managed funds, as a whole, don’t beat the indices. In fact, as a group, they underperform by the amount of their OER.

Operating expense ratios, primarily because of increased use of index funds and ETFs to minimize costs, have been getting smaller and smaller. In fact, we have seen some funds at a zero operating expense ratio. However, for these funds, a substantial amount (10% to 20%) of cash is maintained in the fund.

Conclusion: Set a target of 1-2% cash in your portfolio. Stay invested for the long term.   In addition, the investments in your portfolio should have very low OERs, wherever possible. However, in selecting investments, you need to look at both the OERs and the typical cash position of the mutual fund, index or ETF. Even if the OER is zero and the security holds 10% in cash, your performance on that holding will likely only be 90% of the benchmark, at best. Remember, when equity trades are free, brokers will continue to look for ways to make money, often at your expense.

The End of Signing on the Dotted Line

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We all lead busy lives, so it’s important to save time and maximize efficiency whenever we can. The new eSignature feature from Charles Schwab allows you to review, electronically sign, and send back eligible forms to us, making a variety of processes quicker and easier than ever before.

At DWM, we always stay up to date with the latest technology and keep you informed, so we can ensure the best possible experience for our clients. As we learn more about today’s changing technology and the need to stay on top of cybersecurity, going digital allows sensitive client material to remain safely guarded, as well as providing an easier, less burdensome and more accurate onboarding process for everyone.

eSignature is accepted on many new account applications, maintenance forms, and managed account forms, such as:

  • Schwab One Personal accounts
  • Schwab One Trust Accounts
  • Company Retirement Accounts (CRA/Pension Trust)
  • Custodial/Minor IRA Applications
  • Account Closure Forms
  • Designated Beneficiary Plan Agreements
  • Investor Checking Accounts
  • IRA Distribution Forms
  • MoneyLink Applications
  • Transfer Your Account (Into or Out of Charles Schwab)

For a full list of eligible forms, click here. This time-saving eSignature feature is extremely efficient, and it’s easy to use, too! Simply follow the steps below and you’ll be well on your way to mastering electronic signatures.

1)When expecting a form for eSignature, keep an eye out for an email from Charles Schwab that states “Documents for Your Electronic Signature.”

2)Click “Review Documents” at the bottom of that email.

Review

 

3)Log into your Schwab account using your Schwab Alliance when prompted. If you don’t know your account information, let us know or contact Schwab Alliance at 1-800-515-2157.

4)Click “Agree/Continue” to agree to the eSignature terms and conditions.

5)Review the document and ensure that it is accurate before signing.

6)When you are ready, choose from two signing options: automatic signature or draw, in which you digitally “draw” your own signature.

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7)Click “Sign” in all places where signature or initial is needed.

8)Click “Finish” to complete the process. DWM will be notified promptly and you will then receive a confirmation email.

 

We could all use some time back in our day, so if you’d like to learn more about eSignature, reach out to us at any time or contact Schwab Alliance at 1-800-515-2157 for more information.

Innovation: Showcasing Efficiency and Tightening Security

Companies in the 21st century are constantly looking for way to move their services to the next level of the digital age. Accessibility, convenience, and speed are major factors that industry leaders always look to improve upon, and Charles Schwab & Co., Inc. is no different.

Over the past few weeks, Schwab has put on several presentations in cities across the nation to showcase their technological advancements in a series they call Schwab Solutions. At DWM, we were lucky enough to attend one of these presentations and learned of a lot of exciting new features and opportunities that we believe can assist our clients. Here are some of the highlights:

  • E-Signature->For existing clients looking to open a new account at Schwab, we can utilize a new process called e-signature to send the documents over to your Schwab portal. Simply let DWM know your intention to open a new account, and we can work up the forms to do so. Once the forms are ready, we can send a request for your e-signature, which will send a notification to your Schwab Alliance account. This will assist in opening your account faster, more securely, and with no paper waste!
  • E-Approval->For check and journal requests (moving money from one account to another at Schwab), we can follow a very similar process to the e-signature process, with e-approval! Once again this reduces processing time, paper waste, and improves document accuracy. Schwab is also working to bring this feature to MoneyLink requests, so stay tuned for that improvement!
  • Mobile Deposit->The Schwab app also allows investors to scan/take a picture of the front and back of a check and upload them for deposit, usually within the same day!
  • The Schwab platform itself is receiving an overhaul in the coming months, which should provide clients with a much sleeker, more intuitive experience. A major difference to come will be a personal value chart, which will display a simplified net worth statistic based on the accounts at Schwab, as well as the ability to add in accounts outside of Schwab (think 401ks)!
  • In addition to the aesthetical changes, the Schwab portal now has much more client interactivity than before, which will allow investors to update various information on their accounts all from within the website, no paperwork involved. These various services include:
    • Updating accounts in case of address change
    • Beneficiary updates on IRAs
    • Tax withholding percentages for IRAs

As with any technological advancement, new security challenges often emerge, and Schwab, as well as DWM, are your first line of defense against these threats. For Schwab’s part, they have bumped up security in some major ways:

  • Whenever a new device is used to access a Schwab portal, a text or e-mail is sent (depending on how the security of the specific account is set-up), to ensure that fraudsters are not trying to access your account information electronically.
  • In addition, Schwab offers a security feature called two-factor authentication, which allows for an app on your phone to provide a six-digit code to follow your Schwab Alliance password, further ensuring that only the account holder can access their sensitive information.
  • Finally, one further security measure clients can choose to utilize is called Schwab Voice ID. With this service, a client calls in and answers some basic questions to the Schwab Alliance team, through which their Voice Biometrics system analyzes the quality of your voice. Then, if any suspicious activity occurs in your accounts, Schwab will call and verify the activity with you, using the Biometrics system to ensure that the voice on that end of the line is actually the account holder.

As far as DWM goes, our stance and determination in protecting our clients’ information remains resolute. We are completely committed to client security, and will continue to both provide education to keep our clients informed of rising threats, as well as keeping ourselves up-to-date about viral issues and staying abreast of any suspicious account behavior. For example, one of the most dangerous areas regarding theft and fraud currently going on are real estate scams. Hijackers will find a way into legitmate e-mail threads regarding wire information for a client buying property, and provide phony wire information. As a result, verbal verification is the new normal. As part of our safeguarding protocol, DWM will be calling the client and/or the title company to verify these wire instructions to ensure that everything goes as planned.

At DWM, we are passionate about protecting our clients and helping them shape their financial future, worry-free. This is seen throughout our wealth management process, from investing to account management, to financial planning. We aim to help clients notice and avoid any landmines that might be hiding in their long-term financial plan. Providing safer, more efficient ways of accessing and updating their accounts, while also actively monitoring for suspicious activity and ensuring accuracy is an effective method of doing so.

Please feel free to stay updated on Schwab’s technological advancements through their “Client Learning Center” page found here:

http://content.schwab.com/learningcenter/

Please also feel free to contact DWM with any questions or concerns regarding either advancements or safety.

At DWM, we are passionate about protecting our clients and helping them shape their financial future, worry-free. This is seen throughout our wealth management process, from investing to account management, to financial planning. We aim to help clients notice and avoid any landmines that might be hiding in their long-term financial plan. Providing safer, more efficient ways of accessing and updating their accounts, while also actively monitoring for suspicious activity and ensuring accuracy is an effective method of doing so.

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

SchwabAlliance

(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!

Schwab Fraud Prevention: A Must-Read for DWM Clients!

Schwab app logoThis month I attended the annual Schwab Solutions event in Chicago. It is an excellent opportunity for DWM to make sure we are up to date on all the recent enhancements to Schwab’s technology offerings, which we offer to our clients. The focus was on cybersecurity and fraud prevention: Cybercrime is now more profitable than the illegal drug trade. That’s scary. In addition, “Financial services firms are hit by security incidents a staggering 300 times more frequently than businesses in other industries, with attack patterns changing frequently to outwit IT pros, according to Websense.” Phil Muncaster, Info Security Magazine. One great way to help prevent fraudulent wires or identity theft is to take advantage of electronic signatures and approvals through the Schwab Alliance website and the Schwab Mobile app on your smartphone. No pen needed! They also have some other really handy features too, like remote deposit (great for those April 14th IRA contributions!). It’s quick, easy, and, most important, secure. Schwab even has a guide that will walk you through setting up both.

On the Schwab Alliance website, you can view real-time information, nickname your accounts, retrieve 1099s, enroll in paperless delivery, approve wires, electronically sign applications, and more. You can even update your contact information (no need to sign a change of address form!)

Schwab also offers a very useful app. As with the website, you can see your Schwab accounts, approve wires, and electronically sign applications. And you can remotely deposit checks. It’s available for iPhone/iPadAndroid, & Kindle.

Schwab screen shot account list             Schwab screen shot check deposit             Schwab screen shot market overview

The electronic approval tools are a key feature of the website and app. It enables you to access forms and wire requests securely by logging directly into Schwab with your credentials, thus helping prevent fraud. Besides coming to sign in person, this is the most secure method. Email was not designed with security in mind, and accounts can be easily hacked. You may not realize what kinds of data a thief could mine from your sent and filed emails. It could be enough for them to commit wire fraud or steal your identity. For this reason, it’s best to avoid using email for anything that contains sensitive information.

So what’s the next step? Follow the guide to set up your Schwab Alliance credentials and app on your phone. Make sure your cell phone number and email address are up to date (which can be done through Schwab Alliance). That’s it! The next time we need you to sign a Schwab form or approve a wire, you will receive an email with a link to the Schwab Alliance login page. You will also receive an alert on your phone screen prompting you to log in to the Schwab Mobile app to approve/sign digitally. It will walk you through the signing or wire process; just click a few buttons and you’re done! We can even include DWM forms in the same ‘envelope’.

We are confident the Schwab Alliance website and mobile app will save you time and give you peace of mind.

 

For more on preventing identity theft and fraud, see my blogs on two-step verification and identity theft.

Continuing Education: My Time at Schwab Impact

BernankeLearning is so very important. Just because one has undergone extensive training through classroom work, hands-on experience, or has obtained a prestigious designation like the Certified Financial Planner practitioner or the Chartered Financial Analyst charterholder, doesn’t mean the education stops there. At DWM, we actively participate in ongoing education to keep us up-to-date with the latest and greatest in an industry that is constantly evolving and changing by the second.

In this blog, I’ll provide a little insight about what I think is the “mack daddy” educational event in our industry: Schwab’s annual IMPACT convention, held this year in beautiful Denver, Colorado. For a Registered Investment Advisor Representative like me, I think it’s the best convention available in terms of blending thought-provoking speakers, networking opportunities, and collaborative learning that can be customized to an advisor’s personal taste.

For example, the educational sessions that I chose included ones such as health care reform, social marketing, and investor behavior. I also attended many investment-oriented sessions including, but not limited to, emerging markets, liquid alternatives, fixed income, and smart beta. It was also great fun to hear different ideas and research some of the newest products from over 300 exhibitors in the 500,000+ square foot Exhibit Hall. One can also see CNBC broadcasting within the Hall, where, as they say, “the heartbeat of the industry beats”, represented by the networking of around 2000 of the country’s finest advisors (including yours truly).

There are always a number of good speakers at this event. Charles Best, who leads DonorsChoose.org, a nonprofit organization that provides a simple way to address education inequity, spoke of how the same technology behind “crowdfunding” can help students in schools with needs. Dr. Dambisa Moyo, economist and author, gave us macroeconomic views on global affairs and where this world may be heading if we don’t take action now. But the most thrilling presenters were this year’s keynotes: Dr. Ben Bernanke, our former Fed Chairman and President George W. Bush. Bernanke talked about the crazy times during the Great Recession and how he and his team led us out of the turmoil and brought this country back on its feet. George W. talked about his new passion and talent for painting and how anyone can reinvent themselves however old or young they are. He also had everyone rolling when he told us the story about how Putin made it a point to show him how Putin’s dog was bigger, stronger, and better than Bush’s dog, Barney.

These events are great in that we get to hear past and future leaders and gather our own ideas which ultimately make us better leaders. We leave an event like this with new ideas, strategies, and knowledge to propel us individually forward, our firms forward, and our clients forward.

Brett at BroncosMy four day agenda was jam-packed. The days were long amongst all the sessions and networking, but there were still a little time for fun which for me included a stop at fabulous Mile High Stadium and culminated with the final night event featuring the band Train (“Hey Soul Sister”).

In an effort to continue to learn and gain knowledge, Les and I attend many educational events and workshops like this throughout the year. They equip us to be stronger advocates for our clients and for our industry. Never stop learning. Knowledge is power!

Safeguard Your Assets Against Cyber Attacks

cyber attackThe cyber attack this summer on JPMorgan Chase compromised the accounts of 83 million households and 7 million small businesses. Last year, the information of 40 million cardholders and 70 million others was breached at Target. In September, hackers got 56 million names, addresses and phone numbers at Home Depot. Fortunately, it has been reported that the various hackers did not get detailed information such as account numbers, passwords, social security numbers and dates of birth. Even so, cyber attacks are on the rise.

The financial industry is working on prevention- JPMorgan, e.g. plans to spend $250 million per year on security. Congress is discussing legislation. Regardless, individuals need to take primary responsibility for the safety of their identity and assets.

Therefore, we thought we would recap some of our earlier comments regarding prevention of identity theft. In addition, we’ll update you on the safety of your accounts at Schwab and your 401(k) plans.

Here’s what you should do re digital security:

  • Choose tough to decipher passwords
  • Use anti-malware/spyware and anti-virus programs
  • Don’t respond to “phishing scam” e-mails
  • Shop online only on secure sites
  • Don’t use the same password for multiple sites

Here’s what to do at home:

  • Shred everything with sensitive information
  • Protect snail mail
  • Don’t fall for telephone scams
  • Use a bolted-down safe for important documents

When out and about:

  • Limit the amount of information you provide at store checkout registers
  • Avoid “shoulder surfers”
  • Watch what you carry
  • Carry your wallet in your front pocket, if possible

Other:

  • Change your credit card to include a PIN
  • Monitor your credit card and bank activity at least every few days
  • Order a free credit report
  • Put a security freeze on your credit files to prevent new accounts

At the same time, we’re pleased to report that assets held at Charles Schwab & Co. or company 401(k) plans should be secure. Here’s Schwab’s guarantee: “Schwab will cover 100% of any losses in any of your Schwab accounts due to unauthorized activity.”

Schwab monitors every disbursement from each account. Anytime a transfer request comes through to send money to a third party, Schwab will first contact the investment adviser, such as DWM, to make sure we have talked with the client and that this disbursement is authorized. In addition, in many cases, Schwab will also contact the account holder directly. We’ve seen phone calls on transfers of as little as $600. We and Schwab recognize that it’s a bit of a pain to have to answer a call about a transfer for which you have already signed, but in this day and age of hackers, it’s a necessary and valuable procedure.

A few caveats about the guarantee. First, account holders need to safeguard their account access information including login ID, password and security questions. If they share it with anyone, Schwab will not cover the loss. This information is not shared by Schwab with us, Orion, or any other party. Second, if you suspect you have been a victim to activity you didn’t authorize within your Schwab account, Schwab needs to be notified immediately.

Unauthorized activity in a 401(k) or similar account would be very difficult to accomplish. First, there are only certain times that a participant could request funds from the account. They could do it to borrow money from their account, when they terminate employment, or when they have an in-service withdrawal. All of the requests are typically done through the human resources department of the employer and require signed documentation. In addition, we have only seen transfers from 401(k) plans either go directly by wire, trustee to trustee, to the same registration at a new custodian or, in the case of a check, mailed to the participant’s home address and made payable to the participant and the new custodian.

In addition, we have been asked about the cloud services DWM uses based on the breach of the Apple iCloud. We are pleased to report that Orion and MoneyGuidePro never request, nor receive, any client account access information.

DWM and Schwab are committed to safeguarding your assets and the privacy of your information. We want you to have the highest level of confidence when you do business with us. We will continually review our privacy policy and update it as necessary to protect you. If you have any questions about these very important matters, please let us know.

Fast Money: Financial Apps to Make Your Life Easier

look up sqNowadays, wherever you go, it seems half the people around you are looking down at their phones. (That is, if you take the time to look up and notice this phenomenon). In fact, over 90% of the US adult population owns a smart phone. But you can make good use of your screen time because one of the best ways to stay current on your investments is through mobile apps. We would like to spotlight two important (and free) ones today.

App logoDWM: We recently blogged about our Client Portal overhaul. Did you know you can see the same information through our mobile app? You can see all your accounts in one place, check balances and positions, see performance, run reports, view statements, and contact us. It’s available for iPhone/iPad & Android.

(Click on any image to see a full size version)

DWM screen shot valuesDWM screen shot performanceDWM screen shot reports


Schwab app logo

Schwab: In addition to Schwab Alliance, Schwab offers a very useful app. You can see your Schwab accounts, approve wires, electronically sign applications, deposit checks, pay bills, find a branch, and more. Even more exciting capabilities are coming soon. It’s available for iPhone/iPadAndroid, & Kindle. Schwab even has a one page guide that will walk you through set-up. (Again, click on any image to see a full size version)

Schwab screen shot account listSchwab screen shot check depositSchwab screen shot market overview

 

 

 

 

 

 

 

 

 

Credit card and bank or credit union apps are also handy to have on your devices. Simply search for them in the iTunes Store for Apple users, or the Google Play Store for Android devices.

If you have trouble finding what you’re looking for, AppCrawlr is “the app discovery engine”. This is a great, user friendly site where you can find apps by category or many other criterion, for any device.

Of course, make sure all your devices are password protected so sensitive information isn’t accessible to prying eyes. This is one of the easiest things you can do to protect your identity.

Lastly, for our clients, you are welcome to bring your tablets and smart phones to our meetings. We would like to make sure you are able to login and answer any questions you might have.