Last week I had lunch with an old colleague of mine. It’s always good to catch up with others in the same profession but sometimes it also truly helps you understand why so many consumers are confused. Here’s a brief background and then a summary of an actual conversation between two financial advisors:

 

Both financial advisors began their careers working for major wirehouse firms (think Morgan Stanley, Prudential, UBS, Smith Barney, etc…). They each then worked at Charles Schwab as part of the Retail Branch Network and Schwab Private Client (SPC) group. Thereafter, Advisor #1 (who we will call Fee-Based Advisor) left Schwab to join one of the advisors that is in their Schwab Advisor Network program.  This is a network that has made certain firms wildly successful as Charles Schwab branch representatives get compensated to vector investors and Schwab account holders to meet with advisors who pay to be in their program. Advisor #2 (who we will call Fee-Only Advisor) is not part of any network and is not affiliated with any brokerage firm, mutual fund company, or insurance company. “Fee-Only Advisor” is a Registered Investment Advisor (RIA).

Fee-Based Advisor: So…how are things out there?

Fee-Only Advisor: Good…I keep plugging away but sometimes it’s frustrating to see how undereducated the general public is about this industry.

Fee-Based Advisor: What do you mean?

Fee-Only Advisor: Well…take for example the most very basic thing that a client should first know and understand; the platform that their advisor works from. I’m working with a prospective client right now that is being pitched products by another advisor and doesn’t understand that the advisor will be paid by both him and the product!

Fee-Based Advisor: Yep…that’s frustrating. Is the guy disclosing everything to the client?

Fee-Only Advisor: I hope so but the client told me the other day that we’re both basically the same. I asked him if he knew that we are Fee-Only and not Fee-Based and that potential conflicts of interest arise in the latter platform.

Fee-Based Advisor: I hear you but I’m Fee-Only too even though I can sell insurance and annuities…I just usually choose not to.

Fee-Only Advisor: You’re actually a Fee-Based advisor….or at least the firm which you work for is. You do understand the difference, right?

Fee-Based Advisor: Well…you mean like sort of the ability to offer a flat fee or hourly just for planning type of thing? Yeah..of course.

Fee-Only Advisor: No… there is a clear difference between Fee-Only and Fee-Based. No offense… but even in your case you’re not fully aware that your own firm is Fee-Based and not Fee-Only. Fee-Only is where the only way you can and are compensated is by your client. If a mutual fund, an insurance company, or some other form of commissionable product pays you…you are NOT Fee-Only.

Fee-Based Advisor: Oh c’mon…same thing. I don’t do that stuff to my clients.

Fee-Only Advisor: Good for you but…not really (shaking his head)

It is shocking how many investors do not understand how their Financial Advisor is compensated! As indicated in the conversation above there is a significant difference between an advisor that is Fee-Only and one that is Fee-Based.

  • Fee-based – These advisors charge both a fee and collect commissions based on the products that they sell. Often these advisors will sell investments along with insurance and annuity products which pay attractive commissions to the advisor.
  • Fee-only – These advisors work under a ‘fiduciary duty’ which essentially means that by law they must do what is in each client’s best interest. There is no conflict of interest as they don’t accept any additional fees or commissions from any products, services or relationships.

While the differences appear very clear, the Financial Services industry has done a tremendous job at making a topic that should be black and white appear to be gray. Here are some simple questions that any investor should feel comfortable asking their advisor or prospective advisor to help them discover how they are compensated:

  • Are you limited to what you can sell? Can you only sell your company’s products? Are you incentivized to sell certain products?
  • Are you an employee of a corporation? If so what is your compensation structure and can I review it?
  • Ask what the total fees are associated with any product and service. Are there multiple layers?
  • Ask if they sell annuities, insurance or other insurance products. If so, what are they paid for selling those?

Fee-only vs Fee-basedIf you have any questions or would like to discuss in more detail we would encourage you
to contact us directly at 888-47-GUIDE (888-474-8433). If you find yourself confused or have questions allow us to help you so you are informed and can be confident in any decisions you are looking to make.

(1) Don’t take investment advice from a CPA and vice versa.

Notice how we practice what we preach. Our first “tax tip” will be to let you know that for specific tax advice you should NOT go to your investment advisor. We’re not CPA’s and even though we understand a great deal about taxation (specifically with regard to investments) our job is to manage investments, not tax codes.

Why is it then that we see so many accountants, tax preparers, CPA’s, and even “enrolled agents” dole out investment advice around this time of year? Investors naturally gravitate to the professional that sees the majority of their financial house and by default it’s typically a CPA. We’re not bashing CPA’s but allow us to be crystal clear on this point: A CPA has no formal training nor better understanding of investments or the portfolio strategy you or your financial advisor has put together.

Look to Tip #2 on what your CPA should know about your investment situation:

(2) If the introduction hasn’t been made yet…Make it happen!

In the case of investments and taxes one old adage couldn’t be more true: ”The right hand should always know what the left hand is doing.”

If your investment advisor has not met or interacted with your CPA an introduction needs to be made. They don’t have to become best friends but your overall financial situation will be enhanced when key professionals that help you know each other.

(3) What type of tax professional do you need?

Do you simply need a tax preparer? Do you need help with specific tax planning? Are you being audited? Should you use TurboTax?

Depending on your situation, you might need an accountant, an attorney, an Enrolled Agent or a CPA – or perhaps none of them! Not all of these professionals do the same thing. It’s critical to think about what

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The markets are constantly moving from one headline to the next – some of them having a profound impact on the markets. Last Sunday night “60 Minutes” aired a topic that has been lurking in the shadows for years, suddenly it jumped up and grabbed headlines raising concerns and paranoia with investors. High Frequency Trading (HFT) has dominated headlines over the last week prompting a federal investigation and hours of debate.

 

 

 

Michael Lewis, author of “Flash Boys”, has been on a publicity tour claiming the U.S. Stock Market is ‘rigged’. Is the average investor at a disadvantage, on the outside looking in at the security exchanges? 

Here are some key facts and figures regarding High Frequency Trading:

  • The SEC (U.S. Securities & Exchange Commission) authorized High Frequency Trading in 1998.
  • HFT is based on algorithmic calculations many of them proprietary trading strategies specific to the firms that utilize them.
  • Trades occur in fractions of a second – many times thousands of trades are placed trying to capture just a fraction of a cent.
  • HFT is anything but a ‘Buy and Hold’ strategy – most positions are not even held overnight or for more than a few hours.
  • It is estimated that HFT trading makes up over 50% of U.S. equity trading volume since 2009.

This week we encourage you to view a letter being sent to our clients and friends of the firm :

 

April 2014

Who would have thought, amidst a relatively quiet quarter-end, that the splashiest market news would come from the launch of a book tour? As Michael Lewis promoted his book “Flash Boys” on “60 Minutes,” he called for a major overhaul to our trading exchanges. His aim is to combat what he believes is a “rigged” U.S. stock market, brought to us by high frequency traders.

If there’s one thing we opinionated Americans share, it’s a loathing of an unfair system. So it’s no wonder that Lewis’ call to arms handily drowned out quieter reports of the fact that mid-March marked the five-year anniversary of a bull run in the U.S. market that began in 2009

To the extent that Lewis is generating renewed scrutiny of market costs and efficiencies in a fair market, the conversation is worthwhile. We have been as vehement as Lewis about minimizing hidden trading costs and conflicts of interest such as those found within traders’ black-box relationships. Our emphasis on promoting a level playing field is one of many reasons we turn to alliances such as TD Ameritrade Institutional. We are proud to use the industry leading and lowest cost ETF’s from Vanguard who demonstrate a transparent track record for managing underlying trading costs.

Is the U.S. stock market a model of perfection, with all high-frequency traders lily white? Clearly not. At the same time, there is considerable evidence that the market is continuing to handsomely reward those who adopt a patient, evidence-based approach to participating in it.

There also is compelling evidence that high-frequency trading has dramatically reduced rather than increased overall trade costs, ironically because of the cut-throat competition it generates compared to traditional tactics. Felix Salmon’s March 31 Reuters’ commentary is one of a number of op-eds addressing this point. Other solid references include Jared Kizer’s April 2 Multifactor World blog post and Cliff Asness’s April 1 Wall Street Journal piece.

Put in proper context, Michael Lewis’ work is an interesting perspective on the inner workings of a messy market. It may also contribute to renewed steps toward the ideal of a market where all players receive a fair shake. But achieving perfect trading technique is nowhere near the greatest factor that will contribute to or detract from your own success as an investor. What still matters by a landslide is how you manage these and other market risks – confidently maintaining your low-cost, globally diversified portfolio according to your personal goals 

On that front, we remain as firmly by your side as ever. As we have all along, we will continue to aggressively champion your highest financial interests in our role as your fiduciary advisor, serving as a buffer between you and a universe of traders who have, yet again, made it clear that your financial success is of no concern to them. Not like it is to us.

My Portfolio Guide, LLC        

March has turned in another month of stubborn market defiance as the investment world is waiting for a correction yet it never seems to come or fully develop! It’s without question that many of the warning signs continue to lurk below the surface but the S&P 500 has still managed to tack on about another +1%. Year to date we’re just about 1% of where we started 2014 but it sure feels uncomfortable for many.

If this is your first time reading about our MPG Core Tactical Portfolio please refer back to our first post. (click here) In short you will see what adjustments we make throughout the year on a $1 million dollar portfolio and how that performs relative to a portfolio that is rebalanced once per month with an allocation of 60% Stocks and 40% Bonds.

Here’s the current summary of the overall portfolio mix, which is updated as of this writing (March 31, 2014).

HOW DID WE DO VERSUS A 60/40 BENCHMARK? (Click here and compare)

What adjustments did we make?

On March 3rd, we kicked off the month with some dividends from several Bond ETF’s (JNK, LQD,MBB, and BND). These all get swept into our cash account which then get deployed to other investments. Speaking of dividends, our equity ETF’s also had some healthy yields come into cash on the 25th of the month. (namely IVV, VB, VO, VNQ, VEU, and VWO) People often forget just how much these core investments pay in yield but they are as follows: (1.82%, 1.27%, 1.14%, 3.83%, 3.19%, and 2.88% respectively)

3/10/14:       Sold 100 shares of VB (Vanguard Small Cap ETF) (~$11k total)

3/17/14:       Sold 494 shares of STIP (iShares 0-5 year TIPS Bond ETF) (~$50k total)

3/24/14:       Bought an opening position in BlackRock Strategic Income Opportunities Portfolio Institutional Shares (BSIIX) with 6,248 shares @ $10.26 (~$64k total)

                       

We didn’t make too many moves this month but the main adjustment was to continue our preparation for what we believe is developing; a correction in possibly both equities AND relative underperformance in passively managed bonds. (more on this later) 

As for the standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. Much like last month the 60/40 model called for a slight paring back on Bonds with the proceeds going back into Stocks:

3/31/14:       Sold 21 shares of BND (Vanguard Total Bond Index)

                     Bought 28 shares of IVV (S&P 500 Index)

The MPG Core Tactical Portfolio is still in defensive mode. It’s actually quite amazing that it’s held up as well as it has considering our light exposure to equities and a stock giving back quite a bit of profit. Tesla Motors (TSLA) had a brutal March giving back about -17% of return that we enjoyed (at least on paper) last month.

For the first quarter of 2014 the MPG Core Tactical Portfolio was neck and neck with the S&P 500 but took on far less risk in achieving about the same return (+1.50% to +1.69% respectively). The passively managed 60/40 Benchmark is leading the pack turning in +2.49% for the quarter.

Where are we going from here?

The MPG Core Tactical Portfolio took money off the table in both Small Cap and passively managed Bonds for one simple reason; each is showing continued warning signs of choppy waters ahead. The challenge in a market like this is that you almost are forced to ignore traditional warning signs of a market that is artificially inflated, way ahead of itself, and flat out frothy!

Small Cap (VB) is the asset class that typically breaks down first during overbought conditions but is also the one that leads the rally from the bottom after a bear market or substantial correction. With the small sales proceeds from selling a portion of VB we added that to the sale of STIP which is essentially dead money right now. If you’re managing a bond portfolio right now you better hope you either know what you’re doing or have someone who is nimble and sharing more expertise aside from “shorten your maturity” before interest rates rise. We’ll write more on this in the future but we firmly believe that if there ever was a time to use an actively managed bond manager that has the ability to long and short…now is that time.

From a technical standpoint the S&P 500 could actually break out to higher levels and continue to defy odds. Some of the technical analysis that we follow is keenly focused on whether the S&P can close and maintain above the 1,883 level; if it does even the most bearish investors will be forced to nibble more as the breakout could ruin 2014 with missed upside.

Keep an eye out for Q1 earning reports. Once those start rolling out we believe you’ll get a decent feel for some direction at least in the next quarter. Corporate America is as bearish and pessimistic as ever as we head into the upcoming Q1 earnings season next week. We actually believe some of this could set the table for the market to spike higher. Many companies are trying to under-promise and then “surprise” with decent earnings numbers and that can trick the investing public into thinking there’s still plenty of steam left in this long-toothed bull market! After that a correction is all but guaranteed and even if we finish the year higher (which we think is highly likely) it simply won’t feel good…or real.

See you next month!

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