It’s about making people’s lives better

It’s not just about money.

In most people’s minds the term “financial advisor” has all the emphasis on “financial” and very little about “advisor.” We disagree. We think of ourselves as advisors to the family, helping guide families with a whole range of issues. Some don’t have anything to do with investing.

We have gone car shopping for a client who didn’t want to deal with car salesmen. We have helped people choose the right retirement community.  We help educate young people about investing to make sure they get a good start in life.  We explore vacation destinations for our clients. We review our clients’ estate plans and beneficiary designations to make sure that they are in line with their wishes. We wrote a book designed to help people provide critical information to their heirs before they pass on (Before I Go).

And, of course, we have provided peace of mind to clients who worried about running out of money in their retirement years. This allowed them to do the things they wanted such as travel, spend time with their grandchildren or just relax with a good book.

We do more than manage portfolios. We assist the people who come to us for advice with the deeply personal things in their lives. Making people’s lives better is our goal.

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Financial tips for corporate executives

The December 2014 issue of Financial Planning magazine had an article about “Strategies for Wealthy Execs.” It begins:

Just because your clients are successful executives doesn’t mean they understand their own finances.

And that’s true. Successful executives are good at running businesses or giant corporations. But that does not make them experts in personal finance.

One of the ways executives are compensated is with stock options. But options must be exercised or they will expire. Yet 11% of in-the-money stock options are allowed to expire each year. That’s usually because they don’t pay attention to their stock option statements.

Executives usually end up with concentrated positions in their company’s stock. Prudence requires that everyone, especially including corporate executives, have to be properly diversified. Their shares may be restricted and can only be sold under the SEC’s Rule 144. To prevent charges of insider trading, many executives sell their company stock under Rule 10b5-1.

An additional consideration for executives is charitable giving. Higher income and capital gains tax rates make it beneficial for richer executives to set up donor-advised funds, charitable lead trusts, charitable remainder trusts, or family foundations.

For more information on these strategies, consult a knowledgeable financial planner.

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The retirement savings crisis

Banker’s Life commissioned a survey that’s troubling for baby boomers, people aged 50 to 68. The survey says that middle income boomers have saved too little. Only 13 percent have investable assets of $500,000 or more. More than half (54 percent) have less than $100,000, and one-third (34 percent) have assets of less than $25,000.

What does this mean for boomers? Many will have only Social Security income after retirement. Some will also have pensions. And over half expect to continue working after age 65.

This should be a wake-up call for people younger than baby boomers. When boomers entered the work force many of the big companies offered pension plans. That number is fast dwindling. So younger workers will be even more dependent that their elders on their own savings.

Social security is also a problem. The number of workers contributing to the system has been declining relative to those receiving benefits. At some point in the future, benefits will have to be cut or taxes will have to go up to levels that will be politically unsustainable.

The lesson for the children and grandchildren of the baby boomers is to save more and invest wisely. And begin now.

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The use and abuse of securities based lending

According to a recent article in Fortune magazine, the latest push by the big investment firms is to get as many of their clients as possible to borrow against the value of their portfolios.  Clients can borrow from 50% to 95% of their portfolio’s value.

Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. A May 2014 article in The Wall Street Journal told the story of Jason Katz, a UBS broker who has arranged portfolio loans for 21 of his clients in the prior year, a four-fold jump from the year before. The Journal reported that portfolio lending jumped by 28% at UBS between 2011 and 2013.

The loan has an interest rate, which may be either higher or lower than a bank loan.  But what many borrowers may not realize is that their portfolio can be sold out without their approval.

Supposed someone “has” to have $100,000 for a new boat.  With a stock portfolio worth $200,000, that individual can get a quick loan without a single transaction taking place.   But if the value of the portfolio drops, the firm has the right to sell the portfolio instantly, without notice.

Should market volatility result in a capital call, securities held directly by wealth management customers can be liquidated instantly with very little risk to the brokerages who’ve extended the credit. In essence, we’re seeing re-leveraging amongst the 10% of America that owns 80% of the stock market, while the other 90% of the country has been forced to deleverage in recent years.

As a fiduciary, it is our job to advise our clients on risks.  While taking an occasional short-term loan may be the right thing to do in special circumstances, borrowing against a portfolio, especially near the limits is very, very dangerous.  Wall Street is pushing these loans to fatten it’s bottom line.  Don’t get hooked.


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General Electric (GE) dividend increase disappoints

General Electric announced a 4 cent increase in its annual dividend, from $0.88 ($0.22/per quarter) to $0.92 ($0.23/quarter). The x-dividend date is December 18th and the pay date is January 26, 2015.

A number of analysts were looking for a bigger increase. The smaller-than-expected rise in the dividend is attributed to the drop in oil prices. GE has made a big bet in energy infrastructure including wind, as well as in more energy efficient transportation such as fuel efficient jet engines and locomotives. Lower oil prices make investments in these items less compelling.

It looks as if it will be some time before GE gets back to the $1.24 annual dividend it paid prior to 2009.

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Who Will Serve the Underserved? The Big Brokers Don’t Want Clients With Less Than A Quarter Million $$$

It’s been a trend at the big brokerage firms since 2008: the focus on the on the multi-millionaire and billionaire client. At Merrill Lynch, management has increased its effort to discourage their brokers from dealing with clients under $250,000. It simply won’t give its brokers their usual percentage of the commissions these clients generate.

From Financial Advisor magazine:

Merrill Lynch told its 14,000 brokers on Wednesday they will get higher bonus payments in 2015 for attracting new clients and assets but eliminated pay for servicing clients with less than $250,000.

Because Merrill Lynch is now owned by Bank of America, it is encouraging its brokers to have their clients buy loans, banking and trust products, or put into fee-based advisory accounts. Merrill brokers get cash bonuses if they do this.

This can certainly lead to a conflict of interest. Merrill is one of a growing number of firms that don’t want the younger, less wealthy clients. That leaves a great opportunity for the independent RIA community who are able and willing to service this under served cohort.

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What Sports Stars and Lottery Winners Have In Common

According to a story in Yahoo Finance:

Former NBA player, Antoine Walker, 38, earned over $110 million throughout his NBA career, more than four times the average player in the league. All that money, though, didn’t stop this All-Star from going broke.

Walker’s financial problems began his first year in the league as a 19-year-old rookie with the Boston Celtics in 1996. Although he had a financial advisor help him establish a plan for his long-term finances, Walker had other ideas about what he wanted to do with his newfound wealth.

“Through my young arrogance, being ignorant to a degree and being stubborn and wanting to do my own thing with my money, I went against a lot of his wishes,” Walker told Yahoo Finance.

The rest of the story is predictable. Walker spent lavishly on his relatives, buying them multi-million dollar houses and expensive luxury cars. He spent lots of money on himself and got himself a “posse”

His generosity extended beyond his family to his many friends and acquaintances. From lavish all-expenses-paid trips to luxury gifts for his friends, Walker made sure everyone in his circle enjoyed the lifestyle he led. With his fellow NBA players, Walker gambled extensively – losing $646,900 in just two years.

He then made things worse by going into debt, “investing” in real estate. For a financial rookie he poured money into things he didn’t understand, undoubtedly persuaded by sales people who saw a naïve man with lots of money.

…Walker had a plan to put his income to work and bought more than 140 properties along the South Side of Chicago. Whether it was land to build on or commercial and income properties, Walker had a full-range of real estate investments meant to maintain the lifestyle he had built for his family after retiring from the league.
With the housing bubble and bust, Walker found himself defaulting on loans where he was the personal guarantor, losing value on land, and failed to get a handle on the legal issues that followed.

He finally declared bankruptcy, with liabilities exceeding assets by over $8 million.

This is almost exactly the same path that most lottery winners walk. Unaccustomed to their sudden wealth, they buy things for themselves, their families, their friends and anyone who has a hard-luck story. If they are especially unlucky, they get sold “investments” like real estate that they don’t understand, on credit. That is a recipe for disaster. They imagine that the pot of gold they found is unlimited. It isn’t.

They may find a financial advisor. A good financial advisor will tell them “no.” But people who come into sudden wealth rarely take no for an answer. So they ignore the financial advisor. It really doesn’t take that long to run through millions of dollars.

So what’s the lottery winner or the next highly paid sports star to do? The first thing is to realize that there is no such thing as unlimited wealth. The second thing is to learn to say “no” and get a good financial advisor who will say that for you.

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Markets rise as year-end approaches

We are approaching the end of 2014 with the markets at/near a record high. The market’s recovery since March of 2009 has now lasted nearly 5 years with only a few pullbacks. There has been some concern about the market’s rise as headlines bring reasons for concern. The American middle class does not seem to be benefitting from the less-than-robust economic recovery. The labor force participation rate has hit a 35 year low. Add to that a record national debt now over $18 trillion, unrest both here and abroad; there are a lot of things to worry about.

That is all true, but stocks are driven by corporate profits and profits are rising.


It’s too easy to get distracted by “noise.” While the issues that get the headlines are important, they may have little or no impact on the price of any one stock or the direction of the market. And in the investment business, that’s what counts.

There is one issue that can create a problem for many investors. It’s the issue of “indexing” and relative performance. The S&P 500 index is the primary benchmark for many investors and portfolio managers. However, it can create a self-fulfilling prophesy because it is market weighted. That means that all 500 stocks are not treated equally. The larger the company, the more impact it has on the index. Consider that the 20 largest stocks in the S&P 500 are just 4% of the stocks in the index but about 30% of the weight of the index. That means that just a few stocks have an outsized influence on the index.

That’s fine when the price of these large companies go up. But when they begin to go down, people have the impression that all stocks are going down. This is not true. But since indexing has become so popular, the passive investors in the index funds will experience a great deal of financial pain if and when these over-valued stocks come back down to earth.

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How do financial planners add value to workers seeking to retire?

The November 2014 issue of the Journal of Financial Planning published an article by two professors, Terrance K. Martin Jr., Ph.D.; and Michael Finke, Ph.D., CFP® “A Comparison of Retirement Strategies and Financial Planner Value”

They conducted a study to determine if – and how – financial planners made a difference in how well people retired.

Financial literacy and planning is much more important today than ever before.  The last two decades has seen a dramatic shift in how people prepare for retirement. A generation ago, most employees worked for companies that provided pensions as an employee benefit. The company took care of investing for their employees’ retirement. The employee was guaranteed a pension income when they retired.

That’s no longer the case. The responsibility for funding retirement has shifted from employers to employees. The (defined benefit) pension is out, the (defined contribution) 401(k) is in. But that’s a problem.

“Only 38 percent of all private workers participate in employer sponsored defined contribution plans, and just 14 percent of Americans are confident in their ability to retire comfortably.”

“Greater employee responsibility for funding retirement means that individuals, rather than pension professionals, must estimate how much saving is needed to provide an adequate retirement income … A lack of financial knowledge and sophistication among many American workers may contribute to inefficient retirement savings … Most American households cannot maintain a constant level of consumption in retirement with their current retirement savings … and one-third of retirees obtain 90 percent of their income from Social Security, according to 2012 data from the Social Security Administration.

The study was intended to determine what value financial planners brought to workers saving for retirement.  There were three main benefits.

  1. Professional financial planners can help households accurately estimate the amount of retirement income needed to fund household retirement goals.
    • Most people have heard the old adage that if you don’t know where you are going, any road will take you there. Without a specific goal most people save too little. Studies have shown that young households aged 35 to 45 save 9% to 19% less than they should. Another study estimated that the median household needs to save 20% more than they do.
  2. A financial planner can provide a financial plan that provides the steps needed to meet a retirement goal, review progress regularly, and make appropriate adjustments.
    • Planning for retirement begins with an analysis of current assets, the mix of assets needed to achieve the retirement financial income, and the savings rate to meet the goal. The financial planner will use an investment strategy consistent with economic theory and “help reduce a client’s behavioral biases.” The professional financial adviser will help the client overcome the anxiety that comes from market volatility.
  3. Working with a financial planner helps the worker become aware of the consequences of low savings and help overcome the biases that many people have against participation in the financial markets.
    • Financial literacy surveys show that most American workers don’t have the investment knowledge to make effective retirement savings decisions. The simple process of process of calculating retirement income makes people realize that they have not been saving enough for retirement. A major value of working with a financial planner is to be shown the difference between current and optimal retirement saving.

To understand the value of a financial planner it is important to distinguish between types of financial advisors. Many who hold themselves out as advisors are stockbrokers or investment managers. The ones who have the biggest impact on retirement savings behavior take a holistic approach, making the plan and the goal the center of the relationship. They take the time to explain the complex choices involved in creating the appropriate portfolios.  They are typically RIAs.

Here’s the bottom line:

Results indicate consistent evidence that a retirement planning strategy and the use of a financial planner can have a sizable impact on retirement savings. Those who had calculated retirement needs and used a financial planner (which likely captures those who used a comprehensive planner who follows a more thorough planning process that includes retirement needs assessment) generated more than 50 percent greater savings than those who estimated retirement needs on their own without the help of a planner.

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Family Business Financial Planning

A family business is one of the ways that individuals build something of value for themselves and their family. Suffolk is a great example of a community where family owned restaurants, hardware stores, gift shops, bike shops, jewelry, sporting goods, clothing and furniture stores line the streets. Suffolk has its national chains, but its most recognizable businesses – in the pork and peanut industry – began as family businesses.

These family shops often provide a comfortable living as well as job opportunities for family members of the founders. Whether they stay small and local or grow into large businesses, there are challenges that everyone running a business has to face.

The first is competition. For every business there is a better financed competitor. The supermarket doomed the family-run grocery store. Wal Mart is a feared competitor for anyone selling groceries, clothing, furniture, electronics, toys, eyeglasses; and now it’s even getting into banking.

The second challenge is a bad economy. Many communities have seen their downtowns shuttered when local industry left. The businesses depending on housing have still not fully recovered from the crash of 2008.

Finally, most small businesses are very dependent on one or a few key people. If the children don’t want to get into the business when the parents are ready to retire, the business often closes. There is no guarantee that a business can be sold when they owner is ready to retire. Unless the owner has prepared for this, the financial results can be devastating.

For all these reasons, the family business owner has to make sure that they have prepared themselves financially for life after the business. Succession planning is critically important and should be part of the business plan from the moment the business is started. If a business is a partnership, buy-sell agreements should be in place to avoid complications from the death of a partner. If a business is going to be passed along to children, the owners should be clear about the division of assets. Otherwise there is likely to be wrangling – or even lawsuits – over who is entitled to what.

Most people in business choose to convert from individual proprietorships to limited liability companies. This protects the business owners’ personal assets in case of a lawsuit against the business. Some convert to “Chapter C” corporations for tax purposes. If a company wants to grow even larger, it may want to raise cash by “going public” and selling shares to the general public.

One of the most common mistakes that business owners make is to invest too much of their money in the business. It’s a fact that a family business is a high-risk enterprise. Competition, the economy – even a change in traffic patterns – can bring a business to its knees. Building an investment portfolio should go hand-in-hand with building a business. When most of your money is tied up in your business you are making the same mistake as the investor who owns only one stock. Diversification reduces risk and provides a safety net. Factors that are out of your control could end up severely damaging your business value, thereby crippling your total savings and your future goals and ambitions.

In addition to the traditional savings and investment accounts, the tax code provides many ways for business owners to put money aside in a variety of tax-deferred accounts such as SEP-IRAs, 401(k) plans, and SIMPLE-IRA plans. As a business owner you can even set up a “Defined Benefit Plan” which works much like a traditional pension.

There are a great many things that running a business entails beyond offering customers a great product or service. People who start a business are usually focused on this aspect of the business. But to insure that the business – and the family – survives and thrives, business owners should seek the assistance and guidance of a team consisting of an attorney, an accountant and a financial planner. They may be in the background, but they are critical for the financial success of the family business.

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