Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

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Ask DWM: “Please Explain how Investment Returns are Calculated”

Written by Les Detterbeck.

Time Weighted ReturnExcellent question from a valued client and an extremely important one.  You need to know how your investments are performing.  Are you on track to meet your goals?  Are any changes needed? 

To start, focus on your “total return.” In simplest terms, this is the total increase in your portfolio for the period. Let’s say you had $100,000 in one account at the beginning of the year and you didn’t add money or subtract any money during the year. At the end of the year, this account has grown to $111,820.  Your total return is $11,820 ($111,820 ending value minus $100,000 beginning value).  This is an 11.82% total return ($11,820 divided by $100,000). 

Next, let’s drill down a little further.   The total return is composed primarily of two parts; the change in market value during the period plus dividends and/or interest earned.  Let’s assume, for simplicity sake, that this $100,000 portfolio only had one investment on January 1, 2016 and it was invested entirely in the Schwab S&P 500 Index Fund (SWPPX).  Those shares were valued at $31.56 per share at the beginning of that year- 3,168 shares with a total value of $100,000 (3,168 times $31.56).   Here is what actually happened with those shares in 2016:  Their value went up to $34.42. The $2.86 per share increase ($34.42-$31.56) amounted to a $9,062 increase in value.  And, in December, dividends were paid totaling 87 cents per share, a total of $2,758.  So, the account increased by a total of $11,820, of which there was a $9,062 price increase (9.1%) and a $2,758 (2.7%) dividend return.  Overall, an 11.82% total return for 2016.

Dividends and interest are the income received for holding the security and are called the “yield.”   Some investors focus on a high yield and ignore the potential impact of market increases or decreases.  We believe that is a mistake.  Historically, there are times, such as periods of low inflation, when dividend-paying stocks have outperformed.   And, there are times, such as the 1990s, when tech stocks with limited earnings and no dividends outpaced dividend payers by nearly 5% per annum.  Focus on total return (and, of course, diversification).

Now, let’s look at the situation where money is added or subtracted from the investment portfolio during the year.  When this happens, the performance results are generally calculated and shown as “time-weighted returns” which eliminates the impact of money coming in or going out and focuses on daily returns. Our DWM/Orion reporting system calculates the daily return for each holding and multiplies the daily returns geometrically to determine the time-weighted return. 

The DWM/Orion reports show gross total returns for all holdings and asset classes and deduct management fees in calculating the time-weighted return.  Furthermore, reports covering a period of less than a year are not annualized.  For example, if the time-weighted return for the first three months is 2%, the report shows 2% and does not annualize that number (assuming the next three quarters will be similar results) and show an 8% annualized return.  However, on reports covering a period of more than one year, the overall results are reduced to annual amounts.  For example, if a performance report covering a three-year period shows a time-weighted return of 6%, then the overall return for that total period is approximately 18%.

The CFA Institute, the global association of vetted investment professionals, including Brett and me, which sets the standard for professional excellence and integrity identifies clear, trustworthy investment reporting as the most valuable tool for communicating investment information.  Early on, we at DWM determined that we and our clients needed a robust reporting system to calculate, help monitor and report on your investments.  Schwab as custodian provides regular statements for each account showing balances and activity during a given period. However, the statements don’t show performance vs. benchmarks on a percentage basis.  It also only shows one account at a time. Our DWM/Orion reporting system can show you performance at various levels: asset, asset class, account and household for a more complete, holistic review.

In today’s world, when there is so much data and so much news and much is either fake or biased, it’s important to know that your investment returns with DWM are calculated in an objective, basis and compared to benchmarks for any time period.  This allows proper monitoring and facilitates modifications, when needed. 

Thanks again for the question and let us know if there are any follow-up questions.

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Let’s Make Taxes Simpler and Fairer!

Written by Les Detterbeck.

Tax ReformLast Wednesday, President Trump’s one-page Tax Reform Proposal was released.  We expect the Administration will soon discover that Tax Reform is similar to Health Care Reform.  President Trump’s February 27th “epiphany” concerning Obamacare was expressed this way:  “Nobody knew that healthcare could be so complicated.”

Tax Reform isn’t simple either.  The last major Tax Reform was in 1986 and it took years of bipartisan effort to get it done.  In 1983, Richard Gephardt of Missouri and Bill Bradley of NJ introduced a tax reform bill to cut rates and close loopholes.  The proposal was predictably attacked by special interest groups and didn’t gain much traction.

In 1985, President Reagan met with a bipartisan group of senators to push forward revenue-neutral tax reform. Four key principles were established:

  • Equity, so that equal incomes paid equal taxes
  • Efficiency, to let the market allocate resources more freely
  • Simplicity, to reduce loopholes, and
  • Fairness, to ensure those who have more income pay more tax

Dan Rostenkowski, Democratic chairman of the House Ways and Means committee and Bob Packwood, Republican chairman of the Senate Finance Committee were tasked with getting the bill passed.  It wasn’t easy.  Ultimately, many loopholes and “tax shelters” were eliminated, labor and capital were taxed at the same rate, low-income Americans got a big tax cut, corporations were treated more equally, and the wealthy ended up paying a higher share of the total income tax revenue.  In the end, the bipartisan 1986 Tax Reform Act, according to Bill Bradley, “upheld the general interest over the special interests, showing that clear principles, legislative skill and persistence could change a fundamentally unfair system.” 

The current Tax Reform proposal is, of course, only an opening wish list, but it has a long way to go.  The current proposal would basically give the richest Americans a huge tax break and increase the federal debt by an estimated $3 trillion to $7 trillion over the next decade.  As an example, it would eliminate the Alternative Minimum Tax, which would have saved Donald Trump $31 million in tax on his 2005 income tax return (the only one Americans have seen). Furthermore, there’s lots of work to be done on corporate/business rates, currently proposed to be revised to 15% (from a current top rate of 40%).  Workers of all kinds would want to become LLCs and pay 15%. 

U.S. Treasury Secretary Steven Mnuchin at the time of presenting the proposal last week stated that the Administration believes the proposal is “revenue-neutral.”  The idea is that tax cuts will produce more jobs and economic growth and therefore produce more tax revenue.  We’d heard estimates that real GDP, which was .7% on an annual basis in 1Q17 and 2% for the last number of years, would grow to 3-5% under the current tax proposal.  However, there is no empirical evidence to show that tax cuts cause growth and, in fact, can result in severe economic problems.  The latest disastrous example was the state of Kansas.  The huge tax cuts championed by Governor Sam Brownback in 2012 haven’t worked.  Kansas has been mired in a perpetual budget crisis since the package was passed, forcing reduced spending in areas such as education and resulting in the downgrading of Kansas’ credit rating.

Furthermore, we’ve got some additional issues that weren’t there for President Reagan and the others in 1986.  First, our current federal debt level is 80% of GDP.  It was only 25% in 1986.  Adding another 25% or 30% of debt, to what we have now, could be a real tipping point for American economic stability going forward. Second, the demographics are so much different.  Thirty years ago, the baby boomers were in their 30s and entering their peak consuming and earning years. 

Tax Reform is needed and can be done.  It’s going to take a lot of work and bipartisan support.  It was great to see Congressional leaders reach a bipartisan agreement on Sunday to fund the government through September, without sharp cuts to domestic programs, an increase in funding for medical research, and not a penny for Trump’s border wall.  On Monday, Republican Charlie Dent (PA) and Democrat Jim Hines (CT) put together a great op-ed in the Washington Post calling for compromise and cooperation.  It concluded:  “Ideological purity is a recipe for continued bitterness. …Failure to seek commonality or accept incremental progress will threaten more than our congressional seats and reputations.  It puts our systems of government at risk.  We owe it to our country to do better.”

Hear! Hear!  Yes, let’s make the tax system fairer.  Let’s do tax reform correctly- the way they did it in 1986- putting our country’s interests ahead of personal or special interests.

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Digital Legacy

Written by Grant Maddox.

48fb285152fd1d4f66ca7fa12164b126 002With all of the various accounts, passwords and files that make up our digital identity today, it is easy to see why organization of this information is essential. While this is a subject that many do not like to discuss, it brings up the interesting concept of digital legacy and how important it is to maintain and preserve your digital identity in the event of incapacity or death.  

It is becoming a more and more common practice for financial advisors, including DWM, as well as estate planning attorneys, to advise their clients on a plan to preserve their digital legacy. According to a survey conducted by NAPFA, two-thirds of NAPFA members said that they do in fact advise their clients on digital legacy.

As part of our DWM “Total Wealth Management” process, we provide our clients with an “Estate Flow.”  This has three parts. First, a concise and easy to read recap of all of their estate documents to make it easier to review so that they can assess whether their documents outline their current wishes or if changes need to be made.  Second, a review of titling and beneficiary designations, to make sure the disposition of the estate is as desired and its administration is as hassle-free as possible.  And, third, our recommendations. We have recently added a review of our clients’ digital legacy as part of this process.

It is vital that all information is stored in one designated place to ensure that your entire estate is transitioned smoothly and easily.    There are many applications and services that can help you store passwords to preserve digital legacy. Having a password manager for your passwords so that someone can log in to your accounts in the event of your incapacity or passing and take care of your digital assets is essential. Many cloud-based digital services will actually wipe your data after an account is closed, so it is imperative that your loved ones have a way to access this information before that occurs. Some of the more useful password tools that enable the user to assign heirs include PasswordBox and Zoho Vault.

Aside from password protection, there are other steps individuals can take to ensure their digital legacy is properly handled, such as the introduction of “digital heirs.” As digital legacies begin to become a common hindrance in postmortem estate processes, more companies, such as Google’s Gmail, are instituting ways to improve the flow of digital legacies. Through Gmail’s Inactive Account Manager, found in your account settings page, you can now specify what you would like to have done upon account inactivity. After three, six, nine, or twelve weeks, the user can choose to have his or her data automatically deleted or have a notification email sent to trusted contacts. By enabling a contact email to be sent, the user is allowing this contact to access his or her account, which may contain sensitive information, so it is important to choose this contact selectively. 

The bottom line is this: It is necessary to develop and implement a plan to preserve your digital legacy and ease the transition for your loved ones, making it as simple as possible for them to take care of your digital assets, including financial accounts.  Specifically, at DWM, we would recommend three key components:

  1. Take and record an inventory of all of your digital assets including your user names and passwords and store that information in a secure place.
  2. Work with your estate planning attorney to make sure that digital asset provisions are included in your estate documents. These provisions should allow your successor Trustees or executor/executrix the power to access, view, modify and make use of any electronic accounts including online financial accounts.
  3. Consider providing your successor trustee or executor/executrix now with information about your digital assets.

At DWM we believe your digital assets are a very important part of your legacy.  Getting things in order now can significantly help your loved ones in the future.

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