Category Archives: financial advisors

Scary Headlines and bad advice.

I was listening to the car radio the other day and hear an ad by someone who was predicting the end of the financial word. After listing the all the things that will go wrong, he promised that if you invested with him you could enjoy all the gains of the stock market but would not risk losing a penny.

Sound too good to be true? Of course it is, but it works by appealing to people who want to believe that there’s such a thing as a free lunch.

I was reminded of that radio commercial when I read this article by Gil Weinreich at Seeking Alpha:

All investors are looking for astute analysis, but in order to appreciate it when you see it, it is worthwhile considering what bad analysis looks like. Jeff Miller does just that, critiquing analysts who make spurious connections between long-term economic trends and specific portfolio recommendations. I’ve seen scary headlines to this effect offering “sell now”-type advice in 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 up until today. Even though such analysts had all kinds of valid concerns, investors following the serial bad advice have missed out.

When seeing representative articles from this genre, I ask myself what manner of benevolence prompts a writer to offer ever fresh warnings of doomsday. What’s going on with these analysts? Jeff hits the nail on the head. I quote in pertinent part:

Their business model seems to be one of supporting the insatiable appetite for confirmation bias from investors who have misjudged the market. Unfortunately, many average investors stumble on these sources and take the material seriously. They do not know about past errors or track records.

You never see a retraction or admission of an error. The only clue is that these sources monetize their audience with a ‘solution’ to fear – gold, annuities, a no-fail trading system, or some other seductive, high-commission product.”

The point is a critical reader must understand not just what an author’s main point is, but what is his interest in writing the article. This is not to say that someone with a point of view and a business interest should be ignored. Such a combination often prompts very good content. But understanding these elements can help you evaluate the analysis. Is it tendentious or is it instructive? Strong financial communicators educate; salesmen agitate.

There is so much bad advice generated by the media that it pays to ask what’s in it for the advice-givers. Too often it’s a fat commission on a product that is deceptive.

 

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2017 Top 40 Under 40 Honoree: Stephen Korving

Stephen 40 under 40

At work: President of Korving & Company, a financial planning and investment management firm focused on helping families plan for a secure retirement.
“I love helping people create their financial plan, working with them to implement the steps and follow the plan, and then being there to see their excitement and sense of accomplishment when they achieve their goals.”
Home and family: “I live in Western Branch with my wife, Megan, and our three kids who make every day an adventure and an amazing learning experience: Madeline, Mason and Ty.”

Volunteer activities: “I’m fortunate to serve on the boards of local organizations whose missions I get excited about and that make a direct impact on the areas where I live, work and play:”
• Portsmouth Museums Foundation (vice president),
• Portsmouth Partnership (secretary),
• Southeast Virginia Community Foundation (development committee chair),
• LEAD Hampton Roads,
• Portsmouth Assembly.

Motivating factor: “I strongly believe in loyalty, respect, integrity and doing what I can to try to make my little part of the world better.”

Advice for young people: “Two simple things: treat others the way that you want to be treated, and if you say that you will do something, do it.”

Professional goal in five years: “To continue growing our practice without losing focus on what’s made us successful – getting to know our clients very well and providing fair, honest unbiased financial advice.”

One thing I’d change about Hampton Roads: “Instead of competing against one another, it would be nice for the cities of Hampton Roads to work together, sharing resources to compete against other regions in order to grow and attract new business.”
Region’s biggest asset: “It’s a tie: the people and the location. Having lived in other parts of the country, these two things are what set this area apart and what drew me back home.”

Downtime: “I spend most of my downtime with my family. I like to be outside, so when the weather is nice I like to work in the yard, head to the beach or go for a run.”

 

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Who needs a financial advisor?

Investment Approach

Not everyone needs a financial advisor. But if you are not sure about how your financial assets should be invested, if you make major errors when you invest, you are a candidate for getting professional financial advice.

Fees are the main barrier that keeps people from getting the kind of advice that would improve their financial lives.

But just as doctors get paid for keeping us healthy and lawyers for protecting our interests, getting good financial guidance is worth every penny. Solving our financial problems has a huge impact on our lives. Making sure we don’t run out of money during retirement that can last decades is often people’s biggest fear in life.

People who are in good shape financially may not need assistance. But too many times people need guidance but are reluctant to pay for what they need. Instead, they search the internet, or ask friends or family who are often not knowledgeable. And even if they get good advice, friends and family are not going to create a plan and make sure that the plan is followed. That’s not their job.

That’s were a professional investment advisor comes in. He’s paid to create a plan, to design a portfolio for you, manage that portfolio and alert you in case the plan needs adjusting. Like a physician conducting a periodic physical, a financial professional keeps track of your progress and fixes it when things go wrong.

If you think you may need help, find an advisor in whom you have confidence, pay him a fair fee for his services and you’ll have the peace of mind knowing that your financial future is in good hands.

 

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Avoiding Bad Advisors

Some good advice from SeekingAlpha:

The elephant standing in the room in all discussions of financial advice is the unethical advisor who offers bad, or not good, advice. Many commentators prefer not to dignify such people with the term “advisor.” I completely agree that the gulf is wide between these folks and those who genuinely possess advisory credentials; the trouble is that they typically call themselves advisors and they often give advice – it’s just that such advice is conflicted!

At their most extreme, bad advisors are the sharks sitting down in a Long Island boiler room pushing some pump-and-dump microcrap to widows lacking a companion to speak with. They talk about how their stock (or any other money-making device) is poised to shoot for the moon, and try to make you feel stupid for not handing over everything you’ve got.

Most people can recognize such wolves in sheep’s clothing, but seniors are not infrequently taken in, not because of their age certainly, but because of the growing problem of cognitive impairment such as Alzheimer’s and the like. A major national survey conducted two years ago by Public Policy Polling on behalf of nonprofit Investor Protection Trust found that nearly one in five Americans aged 65 and older had been victims of a financial swindle.

It is relevant to point out that a good financial advisor is often the first line of defense against such predators, as are adult children with sufficient awareness of the issue and, increasingly, doctors now trained to check for signs of financial exploitation when treating patients experiencing cognitive decline. It is also critical to note that a big source of vulnerability is the lack of awareness (of seniors and their adult children) of such decline.

Beyond the outright looting of bank accounts and the like, there are advisors who, on their own initiative or as a result of pressure from their firms, operate like used-car dealers are reputed to do; that is, they try to “put you in” a product today. And the firms we’re talking about, it is important to note, are not just large full-service brokerage firms that have been embroiled in past scandals, but also the discount brokerage firms of saintly reputation that are associated in the public mind as pro-consumer. Here’s a quote from an article by Bloomberg’s Nir Kaiser, citing a recent Wall Street Journal report:

Fidelity representatives are paid 0.04% of the assets clients invest in most types of mutual funds and exchange-traded funds,” but they earn 0.1% on investments that “generate higher annual fees for Fidelity, such as managed accounts, annuities and referrals to independent financial advisors.”

I think the above quote gets to the nub of the problem of unethical advice. Anyone who has any interest other than the client’s best interest should be automatically disqualified from offering you advice. The reason is simply that the person cannot be trusted. Maybe he is generally an upstanding citizen but the day you need his advice, he’s got a big bill to pay at home and convinces himself, first, that the product that will put the biggest jingle in his pocket is just the thing you need. Or, maybe the advisor faces no personal financial pressure whatsoever, but faces pressure to “perform” at work, and wants to keep his job. A 2015 survey from whistleblower securities law firm Labaton Sucharow found that nearly one in five financial industry respondents felt that financial services professionals must at least sometimes engage in illegal or unethical practices.

Such pressures exist in every field, but perverse incentives increase where large sums of money are involved. Many honest advisors seeking to break away from what they see as a conflicted corporate environment have undertaken fiduciary responsibilities, banded with an organization that imposes ethical standards and very often set up their practices as registered independent advisors, or RIAs. These are all good ideas, and favor good advice, but it bears mentioning that there are honest advisors outside of this framework, and that this framework doesn’t guarantee honest advice. Ultimately, it is incumbent on every individual who could benefit from professional financial advice to hone his own ability to detect integrity or the lack thereof, and to find an honest and capable advisors whose advice will help them succeed beyond the cost they are paying for the service.

Getting financial guidance is more important than ever, but be careful who you take advice from.  If you have questions, feel free to ask us.

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What are mutual fund share classes and why are they important

Mutual fund share classes are little understood by the investing public, but they are important because they determine how much the investor pays in fees.

Fund classes are identified by an alphabetical letter that follows a mutual fund’s name in most newspapers.

Mutual fund “A” share classes typically have a “front-end load,” a sales charge payable when you buy the fund. This fee is used to pay the brokerage firm and part of it goes to the broker who sells the fund.

The amount of the load depends on the kind of fund – bond funds generally have lower loads than stock funds – and the amount of money invested. The more money that’s invested, the lower the fee. Known as “break points,” they refer to points at which front-end charges go down. For example, the front-end load for the Growth Fund of America class A shares is 5.75% on investments up to $25,000. But if you invest $1 million dollars or more the front-end load is 0%.

Mutual fund “B” shares typically have a “back end load” payable when you redeem the shares. These decline over a period of years (usually 6 to 8 years) until they finally disappear.

Both “A” and “B” shares usually have an “12b-1” marketing fee, generally 0.25%, charged annually.

Class “C” shares have no front-end load, a small back end load, usually 1%, that goes away after 1 year. However, they have higher 12b-1 fees, typically 1%.

There are other share classes such as I, Y, F-1, F-1, F-2. In fact, some funds have as many as 18 share classes. They are all the same fund; the only difference is the fee charged to the investor.

Many fund families offer “institutional” share classes that are only available to certain investors. Institutional shares are purchased by businesses who are in the investing business such as banks, pension funds, insurance companies and registered investment advisors (RIAs) who buy them as agents for their clients. This is one of the benefits of working with an independent RIA who has access to lower cost funds, load waived funds and no-load funds that are often not offered by the major Wall Street firms.

Contact us for more information.

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How to Avoid Fumbling Your Retirement Money

NFL football player Marion Henry retired from football at age 28.  Professional athletes usually begin a second career after they give up the game, most because they have to.  Here’s his admission:

Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.

I was one of them.

Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.

 

He goes on to make the point that:

When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.

 

People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, or considered the effects of inflation on the cost of living as they get older.  They also assume that their investments will continue to grow at the same rate as they have in the past.  And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.

A good retirement planning program will take these issues into consideration.   Visit an dependent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.

 

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What a Nobel Prize Winner tells us about Investor Behavior

University of Chicago’s  Richard H. Thaler, one of the founders of behavioral finance, was awarded the 2017 Nobel Prize in Economics for shedding light on how human weaknesses such as a lack of rationality and self-control can ultimately affect markets.

People who are not financial experts frequently turn to investment advisors to manage their portfolios.     But many smart people use advisors to overcome very common psychological obstacles to financial success.

The 72-year-old “has incorporated psychologically realistic assumptions into analyses of economic decision-making,” the Royal Swedish Academy of Sciences said in a statement on Monday.

“By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes,” it said.

Thaler developed the theory of “mental accounting,” explaining how people make financial decisions by creating separate accounts in their minds, focusing on the narrow impact rather than the overall effect.

….

He shed light on how people succumb to short-term temptations, which is why many people fail to plan and save for old age.

 

It does not take a Nobel Prize to understand that people often make decisions based on emotion.  We do it all the time.  We judge people based on first impressions.  We buy things not because we need them but because of how they make us feel.  We go along with the crowd because we seek the approval of the people around us.  When markets rise we persuade ourselves to take risks we should not take.  When markets decline and our investments go down we allow fear to overcome our judgment and we sell out, afraid that we’ll lose all of our money.

Professional investment managers have systems in place that allow them to overcome the emotional barriers to successful investing.  It begins by creating portfolios that are appropriate for their clients.  Then, in times of stress, they use their discipline and stick to their models, often selling what others are buying or buying what others are selling.  This is the secret to the old Wall Street adage that the way to make money is to “buy low and sell high.”  By taking emotion out of investment decisions professional managers take a lot of the risk out of investing.

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Questions and answers about retirement

A couple facing retirement asks:

I will retire in the Spring of 2018 (by then I will have turned 65). My wife is a teacher and will retire in June of 2018. When we chose 2018 as our retirement date, we paid off our house. At the same time we replaced one of our older cars with a new one and paid cash. We have no debt. We will begin drawing down on our investments shortly after my wife retires. Also we both plan to wait until we are 66 to draw on Social Security. Our current nest egg is divided 50/50 in retirement accounts and regular brokerage accounts. About 60% are in equities and mutual funds. The rest is in bonds and cash. I’ve read about the 4% rule, adjusting annually up depending on inflation, expenses and market performance. As of today, based on our retirement budget, we can generate enough cash only using our dividends to live on. In our case this approach would have us taking interest and dividends from all accounts, including IRA, 457 B and 403 B before we are 70 years old. Seems that this approach would make it easier to deal with market volatility, yet it does not seem to be favored by the experts.

My answer:

There are a number of different strategies for generating retirement income. The 4% rule is based on a study by Bill Bengen in 1994. He was a young financial planner who wanted to determine – using historical data – the rate at which a retiree could withdraw money in retirement and have it last for 30 years. The rule has been widely adopted and also widely criticized. It’s a rule of thumb, not a law of nature and there are concerns that times have changed.

Based on your question you have determined that the dividends from your investments have generated the kind of income you need to live on in retirement. Like the 4% rule, there is no guarantee that the dividends your portfolio produces in the future will be the same as they have in the past. Dividends change. Prior to the market melt-down in 2008 some of the highest dividend paying stocks were banks. During the crash, the banks that survived slashed their dividends. Those that depended on this income had to put off retirement because their retirement income disappeared.

I would suggest that this is an ideal time to consult a certified financial planner who will prepare a retirement plan for you. A comprehensive plan should include your income sources, such as pensions and social security. The expense side should include your basic living expenses in addition to things you would like to do. This includes the cost of new cars, travel and entertainment, home repair and improvement, provisions for medical expenses, and all the other things you want to do in retirement. It will also show you the effects of inflation on your expenses, something that shocks many people who are not aware of the effects of inflation over a 30-year retirement span.

Most sophisticated financial planning programs forecast the chances of meeting your goals based on a “total return” assumption for your investments. Of course, the assumptions of total return are not guaranteed. Many plans include a “Monte Carlo” analysis which takes sequence of returns into consideration.

That’s why the advice of a financial advisor who specializes in retirement may be the most important decision you will make. An advisor who is a fiduciary (like an RIA) will monitor your income, expenses and your investments on a regular basis and recommend changes that give you the best chance of living well in retirement.

Finally, tax considerations enter into your decision. Most retirees prefer to leave their tax sheltered accounts alone until they are required to begin taking distributions at age 70 ½. Doing this reduces their taxable income and their tax bill.

I hope this helps.

If you have questions about retirement, give us a call.

 

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Answering the important retirement questions.

With over 100 million people in America closing in on retirement, big questions arise.  Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.

The most common advice that retirees get involves invoking the “4% Rule.”  That number is based on a 60-year-old-study that may well be out of date.  Individuals and families should be getting better guidance because now retirement often spans decades.  Many people are retiring earlier and living longer.

There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.

  • When should I claim Social Security benefits?
  • What happens if I live too long? Will I run out of money?
  • What would happen to my income if my spouse died early?
  • Will I need life insurance once I retire? If so, how much?
  • What are the effects of Long-Term-Care on my retirement plans?
  • Can I afford the items on my “wish list?”
  • Will I leave some money to my heirs?

Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions.  They are often CFPs® and focus on retirement planning.  Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.

If you are approaching retirement and have questions or concerns, contact us.  We’ll be glad to provide you with the answers.

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What Makes Women’s Planning Needs Different?

While both men and women face challenges when it comes to planning for retirement, women often face greater obstacles.

Women, on average, live longer than men.  However, women’s average earnings are lower than men, according to a recent article in “Investment News,”  in part because of time taken off to raise children.  What this means is that on average, women tend to receive 42% less retirement income from Social Security and savings than men.

The combination of longer lives and lower expected retirement income means that women have a greater need for creative financial advice and planning.  The problem is finding the right advisor, one who understands the special needs and challenges women face.

A majority of women who participated in a recent study said they prefer a financial advisor who coordinates services with their other service professionals, such as accountants and attorneys.  They want explanations and guidance on employee benefits and social security claiming strategies.  They want advisors who take time to educate them on their options and why certain ones make more sense.  Yet many advisors do not offer these services.

Men tend to focus on investment returns and talk about beating an index.  Women tend to focus more on quality of life issues and experiences, on children and grandchildren, on meeting their goals without taking undue risk.

If your financial advisor doesn’t understand you and what’s important to you, it’s time you look for someone who does.

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