How to Avoid Being Victimized by Financial Deception

“I’m calling it — this is an Apple commercial,” said my 14-year-old son, about halfway into the visually stunning emotional appeal for educational experimentation that appeared on our TV while we were otherwise dedicating ourselves to one of the best college football games of the season.

Yes, it’s about that time again, when companies are rolling out new commercial campaigns in conjunction with some of the year’s most viewed sporting events–beginning with the college football playoff and culminating, of course, with the only spectator sporting event where no one wants to cede their seat during the commercials, the Super Bowl.

“I think you’re right,” I said to my son (especially gripped because the commercial featured a young man sharing a defining moment with his beloved parents via his smartphone), just as the musical crescendo sent a chill down my spine.

But then came the verdict.

It wasn’t Apple, after all, even though the tech company is known for its artistic commercial flair in imploring viewers to engage technology in the most relational ways. It was a mainstay financial company inviting us to bring the benefit of our long-term financial planning for the future into the present.

Brilliant.

“Wait a minute, though,” I said to my boys, “These guys are notorious for hard-selling over-priced insurance policies for big commissions!”

“Whatever they are, it’s a great commercial,” my 12-year-old son concluded before the Oklahoma Sooners and the Georgia Bulldogs again filled the screen.

He was absolutely right. But as I reflected on the power of this particular message and medium, I’ve had this lingering sense that there’s a real danger present.

Sure, we know to be wary when opening the email from a heretofore unknown distant relative in a foreign land inviting us to collect our inheritance, or when we approach a used car lot, or when we see one of those horribly produced local attorney commercials asking if we’ve been hurt in an accident.

But for years, household-name financial companies have been attempting to convince us through commercial messaging that their primary goal is to improve our lives–to help us toast the new beach house, celebrate the accomplishments of our children or launch that new sailboat–when the evidence seems to suggest the lives they first seek to improve are their own.

Indeed, the company behind these great new commercials–implicitly pledging to put you and your family first–has gone on the record as being opposed to a rule that would legally require them to act in the best interests of their clients at all times.

So, how can you help ensure that you’ll not become a victim of financial deception, however tempting a commercial or individual plea may seem? Consider these two simple steps:

1) Only work with a full-time fiduciary.

It seems like a simple expectation, right? That your financial advisor would pledge to only act in your best interest, and not to allow their personal (or their company’s) profit motive to compromise the very best advice for you? But, unfortunately, it’s not that simple. And by applying this first rule, you’ll likely eliminate many who’ve adopted some version of the “financial advisor” label from the competition to be your financial advisor.

One of the reasons you have to be so careful today is that many who hold themselves out as financial advisors are, indeed, fiduciaries–but only part-time. If your advisor has passed the requisite Securities and Exchange Commission (SEC) exams that license them to charge a fee for investment and financial advice, they are required to act as a fiduciary when operating in that capacity. But they may also sell stocks, bonds, mutual funds, REITs, annuities and life insurance policies for a commission, in which case they are held to one of multiple lesser standards.

Do they tell you when they take the fiduciary hat off and put the sales hat on?

There has been some movement on this front. The SEC has enforced some version of a fiduciary obligation for those under its purview since 1940, and the Department of Labor is attempting to implement a rule requiring that anyone offering advice on a client’s 401(k) or other retirement-specific account do so as a fiduciary. But you can set your own, even stricter standard by choosing to work only with a full-time fiduciary.

If you’re looking to get something in writing, the strongest, clearest language I’ve seen is the Fiduciary Oath required of anyone who is a member of the National Association of Personal Financial Advisors (NAPFA).

2) Only work with an advisor who puts you at the center of the planning.

While it is certainly true that not every non-fiduciary is a bad advisor (although I still wouldn’t settle for anything less), it’s also true, unfortunately, that not every fiduciary is a good advisor. There are those who’ve chosen to align their business practices with a fiduciary standard primarily because they think it’s good for business. And there are others who are good fiduciaries but simply bad practitioners.

Bad advisors may have a lack of experience or education, but it may also be that they are suffering from the self-deception that they–or their investment philosophy or planning process–are the secret to your success. This perspective may even be a problem baked into the industry norm, its apparent purpose being to create a facade that can compete with the behemoths who can afford great prime-time commercials.

Signs that you’re working with a self-centered planner are that they dominate the conversation with their accomplishments and the preeminence of their or their firm’s success, or that your recommendations seem decidedly generic and aren’t framed within the context of your values and goals.

Signs that you’re working with a client-centered planner are that you remain the focus on both a macro and micro level. The planning engagement should begin with you and what’s most important to you and your family before moving on to your money. Then every conversation in the future should be driven by your agenda, not the advisor’s, and all additional planning should be reconnected back to your values and goals.

(Note: While being a genuinely client-centered financial planner is really just good financial planning–and it’s a method that many good fiduciary advisors have practiced for years–there are those who’ve sought to bolster their strengths via additional training in a technique called “financial life planning,” or simply “life planning,” through educational bodies like the Kinder Institute and Money Quotient.)

I’m a little sensitive to this whole commercial thing, but that’s because the ideal portrayed in these and other great financial industry commercials profoundly shaped, in part, my early career. I wanted to be clients’ trusted advisor, and that’s what all the marketing collateral, and even the interview processes, portrayed. But it took me fully nine years of weaving my way through the industry proper to discover where true financial advice resides.

Hopefully it doesn’t take you that long.

This commentary originally appeared January 14 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

How to Manage Your Money in 2018

With markets hitting record highs and a new tax plan in place, there’s a lot in play when it comes to balancing your finances. A member of our team, Tim Maurer visits with the TODAY show’s Sheinelle Jones and Craig Melvin to discuss managing debt, saving for the future and investing long-term.

Find it on Today.com.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2018, The BAM ALLIANCE

Checking in on 2017’s ‘Sure Things’

At the start of 2017, I compiled a list of predictions that gurus had made for the upcoming year, along with some items that I hear frequently from investors, for a sort of consensus on the year’s “sure things.” I’ve kept track of these sure things with a review at the end of each quarter.

With the turn of the calendar, our third quarter review of 2017’s list is due. As is my practice, I’ll give a score of +1 for a forecast that came true, a score of -1 for one that was wrong, and a 0 for one that was basically a tie.

Bonds & Stimulus

Our first sure thing was that the Federal Reserve would continue to raise interest rates in 2017, leading many to recommend investors limit their bond holdings to the shortest maturities. Economist Jeremy Siegel at one point even warned that bonds were “dangerous.” And on March 15, 2017, the Federal Reserve did raise interest rates by 0.25%. It did so again on June 14, 2017.

However, despite the prediction that interest rates would rise having actually come to pass, through Sept. 30, 2017, the Vanguard Long-Term Bond ETF (BLV) returned 7.8%, outperforming the Vanguard Short-Term Bond ETF (BSV), which returned 1.5%, and the Vanguard Intermediate-Term Bond ETF (BIV), which returned 3.8%. Score: -1.

The second sure thing was that, with the large amount fiscal and monetary stimulus we have experienced, in addition to the anticipation of a large infrastructure spending program, the inflation rate would rise significantly. On September 14, 2017, the Bureau of Labor Statistics reported that in August the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4% on a seasonally adjusted basis. The agency also reported that the index for all items rose just 1.9% over the last 12 months. The index for all items less food and energy had risen just 1.7% over the 12 months prior to that. Score: -1.

The third sure thing was that with the aforementioned stimulus, anticipated tax cuts and a reduction in regulatory burdens, the growth rate of real GDP would improve from its 1.6% growth in 2016 to 2.2% this year. But first quarter growth was just 1.2%. The second quarter came in better at 3.1%. The current full-year forecast from the Philadelphia Federal Reserve’s Survey of Professional Economists is for growth of 2.1%. We’ll give this a score of +1.

Our fourth sure thing follows from the first two. With the Fed tightening monetary policy and our economy improving—and with the economies of European and other developed nations still struggling to generate growth, and with their central banks still pursuing very easy monetary policies—the dollar would strengthen. The dollar index (DXY) ended 2016 at 102.38. The index closed the third quarter at 92.88. Score: -1.

Emerging Markets & Valuations

The fifth sure thing was that, with concern mounting over the potential for trade wars, investors should avoid emerging markets. Through September 30, 2017, the Vanguard Emerging Markets Stock ETF (VWO) returned 23.6%, outperforming the Vanguard 500 ETF (VOO), which returned 14.2%. Score: -1.

The sixth sure thing was that, with the Shiller cyclically adjusted price-to-earnings (CAPE) ratio at 27.7 as we entered the year (66% above its long-term average), domestic stocks are overvalued. Compounding the issue with valuations is that rising interest rates make bonds more competitive with stocks. Thus, U.S. stocks would be likely to have mediocre returns in 2017. A group of 15 Wall Street strategists expects the S&P 500, on average, to close the year at 2,356. That’s good for a total return of about 7%. As noted above, VOO already has returned 14.2% in just the first nine months of the year. Score: -1.

The seventh sure thing was that, given their relative valuations, U.S. small-cap stocks would underperform U.S. large-cap stocks this year. Morningstar data showed that, at the end of 2016, the prospective price-to-earnings (P/E) ratio of the Vanguard Small Cap ETF (VB) stood at 21.4 while VOO’s P/E ratio stood at 19.4. Through September 30, 2017, VB returned 10.6%, underperforming VOO, which, as we stated, returned 14.2%. Score: +1.

The eighth sure thing was that, with non-U.S. developed market and emerging market economies generally growing at a slower pace than the U.S. economy (and with many emerging markets hurt by weak commodity prices, slower growth in China’s economy, the Fed tightening monetary policy and a rising dollar), international developed market stocks would underperform U.S. stocks in 2017. Through September 30, 2017, the Vanguard Developed Markets ETF (VEA) returned 21.0%, outperforming VOO. Score: -1.

Our final tally for the period shows that six “sure things” failed to occur while just two happened. I’ll report back again at the end of the fourth quarter for a full-year accounting. The following table shows the historical record since I began this series in 2010.

Year Number of Sure Things Yes/True (+) No/False (-) Tie/Draw
2017 Q3 8 2 6 0
2016 8 2 6 0
2015 8 3 4 1
2014 10 3 7 0
2013 7 2 5 0
2012 8 3 4 1
2011 8 1 7 0
2010 5 1 4 0
Total 62 17 43 2

The table shows that only a little more than 25 percent of “sure things” actually came to pass. Keep these results in mind the next time you hear some guru’s forecast.

This commentary originally appeared October 16 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

Tips to Help Teach Your Children About Money

As parents, we continually struggle to pass knowledge on to our children. Unfortunately, sometimes financial knowledge is left off the list or lost in translation. To prevent that happening, consider the following five tips to help teach your children about money:

 It is never too early to start. Just like saving for retirement, the earlier you start educating your children about money, the better off they will be. You can start with some early lessons around earning and spending. For example, show kids that when they do a job they can be rewarded with their own money. Give them examples of how much the money they’ve earned will allow them to buy. This puts into perspective how much various items cost and the amount of work needed to afford something they want.

Understand the Save, Share, Spend mentality. For every dollar earned, either through an allowance, babysitting or other jobs, familiarize kids with the concept that there should be three buckets for their money: the amount they want to save for the future, the amount they want to share with others and the amount that is left over to spend. This will reinforce the idea that it is important to save for something special and give back to others in need instead of simply spending whatever makes its way into their pocket.

Be smart about debt. There is an opportunity cost associated with every decision. If you spend now, you will have less to spend later. If you spend more than you have, you will incur debt. If you take on debt, 1) your future earnings will be reduced by the amount needed to pay off prior purchases, and 2) you will pay an additional amount above the original purchase cost through interest. The lesson to impart is that it’s better to wait and save for that special purchase than it is to jeopardize your future income stream.

 Teach goal-setting and budgeting Help kids understand how to budget effectively and set goals around spending. Whether it’s to buy a desired toy, go on a special trip or purchase that first car, setting and achieving a financial goal comes with its own reward. There is value in learning to set the goal, patiently watching the money accumulate and then realizing your success with that special purchase.

 Take away the taboo of talking about money. For many, money is a very taboo subject. People don’t want friends or family to know how much they make or what they spend it on. Change this trend by sharing information with your kids about your individual situation regarding money. Talk through the various thought processes that occur when deciding how to spend, save or share your money. Finally, tell your children the lessons you have learned, including the mistakes that you have made along the way.

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

Iconic Report Supports Index Investing

Since 2002, S&P Dow Jones Indices has published its S&P Indices Versus Active (SPIVA) scorecards, which compare the performance of actively managed equity mutual funds to their appropriate index benchmarks. The 2017 midyear scorecard includes 15 years of data.

Equity

Following are some of the highlights from the report:

  • Over the five-year period, 82% of large-cap managers, 87% of midcap managers and 94% of small-cap managers lagged their respective benchmarks. Note that the performance of active managers was the worst in the very asset class they claim is the most inefficient.
  • Over the 15-year investment horizon, 93% of large-cap managers, 94% of midcap managers, 94% of small-cap managers and 82% of REIT managers failed to outperform on a relative basis. Again, note the poor performance in small-caps, as just 6% of active funds outperformed their benchmark index.
  • Over the 15-year horizon, on an equal-weighted (asset-weighted) basis, active large-cap managers underperformed by 1.5 percentage points (0.9 percentage points), active midcap managers underperformed by 1.9 percentage points (1.3 percentage points), active small-cap managers underperformed by 2.3 percentage points (1.6 percentage points) and active REIT managers underperformed by 0.8 percentage points (0.5 percentage points). Note that multicap managers, who have the supposed advantage of being able to move across asset classes, underperformed by 1.3 percentage points (0.4 percentage points). Again, the worst performance was in the supposedly inefficient small-cap space.
  • Over the 3-, 5-, 10- and 15-year investment horizons, managers across all international equity categories underperformed their respective benchmarks. Over the 15-year horizon, 85% of active global funds underperformed, 92% of international funds underperformed, 83% of international small-cap funds underperformed and, in the supposedly inefficient emerging markets, 95% of active funds underperformed.
  • Over the 15-year horizon, on an equal-weighted (asset-weighted) basis, active global funds underperformed by 0.8 percentage points (0 percentage points), active international funds underperformed by 2.0 percentage points (0.6 percentage points) and active international small funds underperformed by 1.1 percentage points (0.3 percentage points). Emerging market funds produced the worst performance, underperforming by 2.5 percentage points (1.4 percentage points).
  • Highlighting the importance of taking into account survivorship bias, over the 15-year period, more than 58% of domestic equity funds, 55% of international equity funds and approximately 47% of all fixed-income funds were merged or liquidated.

While I believe the preceding data is compelling evidence of the active management industry’s failure to generate alpha, it’s important to note that all the report’s figures are based on pretax returns.

Given that actively managed funds’ higher turnover generally makes them less tax efficient, on an after-tax basis, the failure rates would likely be much higher (taxes are often the highest expense for actively managed funds).

Fixed Income

The performance of actively managed funds in fixed-income markets was just as poor. The following results are for the 15-year period:

  • The worst performance was in long-term government bond funds, long-term investment-grade bond funds and high-yield funds. In each case, just 2% of active funds beat their respective benchmarks. On an equal-weighted (asset-weighted) basis, long-term government bond funds underperformed by a shocking 3.5 percentage points (3.0 percentage points), long-term investment-grade bond funds underperformed by 2.6 percentage points (2.2 percentage points) and high-yield funds underperformed by 2.3 percentage points (1.7 percentage points).
  • For domestic bond funds, the least poor performance was in intermediate- and short-term investment-grade funds, where 76% and 71% of active funds underperformed, respectively. On an equal-weighted basis, their underperformance was 0.5 percentage points and 0.7 percentage points, respectively. However, in both cases, on an asset-weighted basis, they outperformed by 0.3 percentage points. This result possibly could be explained by the funds having held longer maturities (taking more risk) than their benchmarks.
  • Active municipal bond funds also fared poorly, with between 84% and 92% of them underperforming. On an equal-weighted (asset-weighted) basis, the underperformance was between 0.6 percentage points and 0.7 percentage points (0.2 percentage points and 0.4 percentage points).
  •  Emerging market bond funds also fared poorly, as 67% of them underperformed. On an equal-weighted basis, the underperformance was 1.4 percentage points. On an asset-weighted basis, the underperformance was 0.4 percentage points.

Summary

The SPIVA scorecards continue to provide powerful evidence on the persistent failure of active management’s ability to generate alpha (risk-adjusted outperformance). In particular, they serve to highlight the canard that active management is successful in supposedly inefficient markets like small-cap stocks and emerging markets.

The scorecards also provide compelling support for Charles Ellis’ observation that, while it’s possible to win the game of active management, the odds of doing so are so poor that it’s not prudent to try—which is why he called it “the loser’s game.” And it’s why we continue to see a persistent flow of assets away from actively managed funds.

This commentary originally appeared September 27 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

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