Road To Independence

As the fourth quarter (and year) comes to a close, it will soon be time to meet with clients and review their accounts. With this in mind, I’d like to share some of what I will be discussing with them. In the past I’ve always reported on performance. I’ve also discussed their portfolios’ composition and the funds and ETFs they hold. In 2009, I added my fiduciary score for each mutual fund and ETF to the review. This time around I plan to add an additional component to the review that you might call “factors involved in getting to the performance numbers.”  In other words, I plan to discuss which trades worked out well and which ones didn’t.

In 2009, I did well with a couple of ETFs but not so well with a bank loan fund I bought in 2008 and sold recently. The client needs to know that I am willing to discuss my failures as well as my successes. I believe clients appreciate an advisor who is honest enough to say, “I missed that one.”

Another issue involves the cost of trading or “transaction costs.” Now some of you might be thinking that discussing the costs of trades may open a Pandora’s box. I look at it differently and here’s why.

We all know that mutual funds come in a variety of share classes and that each share class has a different expense ratio. Let’s say we have the choice of buying an A share with no transaction fee or an institutional share with a $20 fee (that’s the fee with my custodian). Because the A share has a higher expense ratio it will underperform the institutional share. Let’s assume the A share has an expense ratio which is 0.50 basis points higher than the institutional share. If you bought a $20,000 position then the difference in expenses would be about $100. Subtract the $20 transaction fee and you are still $80 ahead. The larger the position you buy, the more advantageous it is to buy the institutional share and pay the fee.

I inform clients that I will buy the cheapest share class available to reduce their expenses. At some point in the future I may decide to pay this fee for larger clients, but at this point, the client pays it.

Thanks for reading!

I’ve been thinking a lot about strategies to improve efficiencies in managing client assets. What brought me to this point was the price of oil falling below $70 a barrel. You see, I had exited my oil position several months earlier after the price rose to $71 from $35; it was one of those times to take some profits off the table. Now, I’m considering getting back in. My challenge is doing this for several clients without entering the trades one account at a time. TradePMR, my custodian, offers the capability of creating model portfolios, assigning each account to a model, then buying the new position in each account with a few clicks of a button. A better option may be to create a “basket.” With a basket you can purchase a security for several accounts and each client receives the same price. However, some accounts need 3%, some 4% and some 5%. To facilitate this, I have created three account groups: conservative, moderate, and aggressive. Then, I can create a basket for each account group as they have a different allocation percentage for oil.

The Tax Angle
Another account group I created is entitled “taxable accounts.” At the end of the year, I need to know what the tax ramifications are for each taxable account. For instance, if an account has a $10,000 gain, is there a position I can sell to create a loss and minimize the tax due? The information I need consists of interest and dividends, realized and unrealized capital gains, for the year and whether the gains are short or long term. The bottom line is that I don’t want my clients getting a big tax bill.

My question to you is, how are you managing this process in your practice?

Finance or Pay Cash
I presented an updated financial plan to a client this week. As I wrote last week, the decision is whether to finance or pay cash for a new home. The client has no debt at this time. Financing came out slightly better, but we’ll see what the client decides. The presentation included a Historical Plan Summary with past plan data for comparison purposes and a scenario merger. The merger combines key data for all three scenarios in one consolidated report so the client can easily see how they differ. Again, we’ll see what they decide.

Profits From the Dollar
I also unwound my bearish dollar position this week. This is another example of taking some profits off the table. Who knows, maybe the greenback will stage a comeback, at least temporarily.

Finally, I’d like to wish you all a Merry Christmas and thanks for reading!

I consider a significant part of my value offering to clients to be the unique financial planning analysis I provide. Moreover, the specific tool I use for this has evolved a great deal over the past several years. Each page of the output contains very useful information without a lot of “fluff” which is so common in many of the “out-of-the-box” tools on the market today.

After all, the better the information, the better the decision , and good-decision making adds real value.

Many of us create a customized plan or analysis for our clients. But what frequently happens is the plan ends up on a shelf or in a filing cabinet rarely to be referenced again. Just as the initial plan was important for gaining a perspective on a client’s financial situation, future plan revisions are equally important.  Just as the initial plan provides a point-in-time analysis, future plans allow the client and planner to compare projections to actual results and track progress toward the client’s desired goals.  . Therefore, planning is not a static exercise, but a very dynamic one

Last week, I spent some time updating a client’s financial plan and compared it to the initial plan created a little over two years ago. There is a question on the table for this particular client: “Should I pay cash or finance our second home?” Without planning, you might base this decision on whether or not your investment return is expected to exceed the mortgage rate. That’s part of it, but I believe there’s more. Yes, money is cheap right now.

Allow me to digress for just a moment. It was an “easy money” policy which got us into this mess and the same policy is presented to get us out. Basically, it was Washington’s desire to create homeowners from lower-income individuals and their punitive threats to lenders for non compliance which changed the face of lending and Wall Street. This policy is centered on pushing loans out the door.

With an easy money policy which includes low interest rates (Keynesians arise), borrowing, when it make sense, can be a wise move. Actually, the best time to borrow is when  rates are low and higher inflation is expected. Both of these conditions exist today. Now let’s get back to my client.

I ran three scenarios: Pay cash; finance for 30 years; and finance for 30 years, but pay off the loan when the client’s current house sells in three or four years. The answer? The financing options resulted in the best outcomes while paying cash was the worst. I expect the decision will come down to the client’s comfort level with debt and whether he feels the need to maximize his investments. We’ll see.

I’m a firm believer that everything happens for a reason. I have also learned that being an independent advisor can sometimes be as challenging as it is fulfilling. This week I had an experience which I call “the week from techell” (tech-hell). This happened after a CMS upgrade.

Two weeks ago I discussed how I had acquired an additional user license with ACT, my contact management software. During installation we had to get a tech on the phone as we encountered issues which exceeded our knowledge (contrary to popular gender norms, I like to ask for directions). After an hour the tech had us up and running. That was the end of the day before the Thanksgiving break. When we returned to work and opened ACT, it ran about as slow as the old dial-up Internet on Valium. Click here, go get a cup of coffee, and maybe it will be ready when you return. All the “efficiency” we had hoped to obtain was gone. Efficiency down = frustration up! Surely there must be something we could do.  

I called ACT tech support. I waited on hold for over an hour before reaching a person. I was on the phone with him for another 2.5 hours and he was unable to resolve the situation. He said it seemed the problem was with my particular database and recommended that I speak with their database maintenance group. He e-mailed my database to them and asked me to fill out their online form. What he failed to tell me was that they charge for this service. Since this problem manifested when I upgraded to their new version and added an additional license, I took issue with that. So after wasting over four hours on the phone, I wasn’t any closer to resolving the issue. Moreover, the tech changed many settings on my computer to try and improve its processing efficiency even though the problem wasn’t with my computer, it was with the program.

Twice during the call I suggested getting another tech on the phone that may be more familiar with this issue.

The next day, I was seeking one of two outcomes, fix the problem or give me a refund. I called sales reasoning that I could get to a manager quicker through the sales department than through service. When they  answered,  I immediately asked for a manager and told them I had already spent way too much time trying to debug the program and was not about to spend any more time with a lower level tech. I asked for their highest level tech and they granted my request. Twenty minutes later my problem was fixed and now ACT runs faster than ever! I suggested they train their level I techs on this issue to minimize situations like this.

A few days later my assistant could not open her Microsoft Outlook (#&%#^#!*%)! We eventually fixed it, but she lost a lot of her personal data! Fortunately, our business data was preserved. Oh, I also had an issue with Excel which reformatted a lot of cells (which were not dates) to the “date” format.

Like I said, it was “the week from techell.”

Hope this week is better for me, and you . . .