of x

Best Practices

Published on March 2017 | Categories: Documents | Downloads: 13 | Comments: 0
237 views

Comments

Content


PRESENTATION FOR HARVEY MUDD ALUMNI
BEST PRACTICES FROM INSIDE A PROFESSIONAL FINANCIAL ADVISORY FIRM
March 23, 2012
Proud Bird Restaurant
Potpourri of Topics
• Estate planning
• Umbrella liability
• Education planning
• Mortgage payo"
• Charitable Giving
• Advisory landscape
• Tax loss harvesting
• Retirement
spending
• Investing
• Your questions
Estate Planning
• This is first because it’s important
• Under current federal law couples can pass
on $10M without paying estate tax
• So why do you need to worry about this?
• It’s about control of assets, not tax savings
• Probate is time consuming and expensive
– California probate is running 18 months
– Statutory fee on $1M assets is $23,000
Estate Planning (cont.)
• Standard package includes
– Revocable living trust
– Pour-over wills
– Healthcare powers of attorney
– Financial powers of attorney
• Guardians for children are listed in wills
• Selecting trustees/executors and ultimate
beneficiaries often proves di#cult
• Cost: $1,500 to $3,500 (non-blended
family)
Umbrella Liability Insurance
• A question about umbrella liability
insurance appears on the Certified Financial
Planner
TM
certification test every year
• Is in addition to your homeowners and auto
policies (i.e., an umbrella over)
• Provides additional coverage against large
claims and lawsuits
• Very a"ordable – $1M coverage about $200
Education Planning
• 529 college savings
plans recommended
– Contributions grow tax-
free if used for college
– Opportunity to front-
load with five year
contribution
– Each state runs a plan
– Shop based on
investment choices
• Be careful with
custodial (UTMA)
accounts
Mortgage Payo"
• Should I pay o" my home mortgage loan?
• The portfolio leverage answer:
– Assume taxable (i.e., accessible) investment
portfolio earning 8% per year
– Assume interest rate 4.5%; tax bracket 37%
combined (28% fed + 9% CA)
– After-tax cost of loan = (4.5%)(1-.37) = 2.8%
– Return di"erence: 8% - 2.8% = 5.2%
• Limited by income available for debt service
Charitable Giving
• Donor-advised funds
can be a good option
• Income tax deduction
in year of contribution
• Make donations from
the fund any time
• Assets leave your
estate but you retain
control
• Used to reduce tax in
high income years
Advisory Landscape
• Proliferation of credentials
– CFP, CFA, CIMA, CPA, EA, ChFC, CLU, CMFC, PFS,
RIA, AAMS, CDFA, etc.
• Growth in client-centered, advice-driven
model versus traditional product sales
model
– Independent firms vs. Wall Street firms
• Fiduciary standards debate
• Advisors are
employees
• Products and services
limited, often
proprietary
• Sales culture,
product-centric
business model
• Advisors/reps are
NASD Series 7
licensed to sell
financial products
• Paid by commission
and fees which can
create conflicts of
interest
• Advisors not
fiduciaries (not
obligated to act in
client’s best interest)
Fully A!liated Supervised Independent Fully Independent
Brokerage Firm:
(e.g. Smith Barney, Merrill
Lynch, UBS, Morgan Stanley)
Independent Broker/
Dealer (IBD):
(e.g. LPL, Royal Alliance)
• Advisors are
independent
contractors
• Products and services
limited to IBD
o"erings
• Mixed culture,
products and advice
• Advisors/reps are
NASD Series 7
licensed to sell
financial products
• Paid by commission
and fees which can
create conflicts of
interest
• Advisors not
fiduciaries (not
obligated to act in
client’s best interest)
• Advisors are self-
employed/partners
• Broadest product
access and most
sophisticated service
o"erings
• Client-centered,
advice driven business
model
• Advisors are NASD
Series 65/66 licensed
to provide investment
advice
• Advice for fee
compensation reduces
conflicts of interest
• Fiduciaries by law,
required to act in
client’s best interest
Registered Investment
Advisor (RIA):
(e.g. Parkworth Wealth Mgmt., Inc.)
NAPFA
• About 600,000 people are called financial advisor in the U.S.
– Includes brokerage reps, broker/dealer reps, bank reps and insurance
reps
– Most are sales people; conflicts abound
• Of those, about 65,000 are CFP
®
practitioners
– Certified Financial Planner
TM
certificants have completed 6+ graduate
level courses and practicum, passed a two-day exam, have minimum 3
years’ experience and complete 30 hours of continuing education every 2
years
– Considered the most highly qualified financial advisors
• Of those, about 1,300 are NAPFA registered
– The National Association of Personal Financial Advisors
(www.napfa.org) is known for advocacy of fee-only compensation
structures to reduce conflicts of interest, and tough membership
requirements stressing ethics and competence
– NAPFA registered advisors must be CFP practitioners, submit work
samples (e.g., financial plan) to peer review, sign a fiduciary oath and
complete 60 hours continuing education across 7 subject areas every 2
years
• High transparency
• Low fees
• ERISA 3(38) fiduciary advisors
• Independent registered investment
advisory firm managed plans
• Plan sponsor/participant driven
• Non-fiduciary consultants
• Insurance company and large
brokerage firm managed plans
• Lack of transparency
• Unnecessarily high fees
• Conflicts of interest
Changing 401(k) Marketplace
Tax Loss Harvesting
• Technique to reduce and defer capital gains taxes
generated by taxable portfolios
• Involves selling an investment at a loss, buying
back a similar investment and holding for 30 days,
then selling that investment and buying back the
original investment
• Result is a capital loss that can be used to o"set
capital gains in that year or carried forward to use
in future years
Retirement Spending
• For the first time in human
history, mass population is
scheduled to be retired
nearly as long as they worked
• Retirement portfolios will
need to keep working hard
• Sustainable withdrawal rates
while maintaining principal
are in 3%-5% range
• A glimpse at the future:
Stanford and Yale
endowments are pioneering
spending rules using a “low-
pass filter” to smooth
spending
Stanford Spending Rule:
[w
1
* (s * (1+i))] + [w
2
* (r *
m)]
w
1
= 60%
w
2
= 40%
s = last year’s spending
i = inflation
r = policy spending rate
m = last year’s market value
Randomness of Returns
Highest Return
Lowest Return
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
36.94 28.58 66.41 31.04 40.59 7.62 74.48 35.14 34.54 35.97 39.78 8.83 79.02 34.59 9.37
33.75 23.11 33.01 8.96 18.04 5.11 69.18 33.16 24.13 32.99 8.16 6.60 70.19 29.53 3.38
33.36 11.95 30.16 8.28 12.35 3.82 66.79 32.11 22.63 32.59 8.04 4.75 51.48 28.07 2.31
25.79 10.24 28.41 7.33 8.44 3.58 60.25 30.58 15.10 27.54 6.35 -37.00 47.81 20.79 2.11
19.66 9.69 21.51 4.01 7.28 3.39 57.81 27.33 13.82 26.32 6.31 -38.64 47.02 20.17 0.57
7.27 8.41 21.04 -2.01 6.44 -2.85 56.28 25.95 9.70 21.87 6.24 -39.20 44.83 19.30 -5.38
7.12 7.75 6.99 -3.08 -2.37 -6.00 36.43 19.15 5.61 21.70 5.95 -42.54 37.51 19.20 -10.78
5.93 5.91 4.37 -6.40 -2.71 -11.72 36.18 17.74 4.91 17.08 5.49 -44.49 28.46 15.06 -15.12
0.39 -2.33 4.04 -9.10 -6.48 -13.84 28.69 10.88 4.45 15.80 -2.61 -45.12 26.46 13.32 -15.59
-11.59 -10.04 3.55 -12.26 -11.89 -19.87 2.04 2.65 3.08 4.32 -12.24 -47.11 2.29 3.73 -17.05
-14.55 -17.01 1.90 -12.26 -15.41 -22.10 1.95 1.35 2.36 4.09 -17.55 -53.14 0.80 1.99 -18.17
-15.12 -25.34 -2.58 -30.61 -16.75 -30.28 1.47 0.83 1.34 3.75 -18.38 -53.18 0.19 0.83 -19.90
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US Large Cap
33.36 28.58 21.04 -9.10 -11.89 -22.10 28.69 10.88 4.91 15.80 5.49 -37.00 26.46 15.06 2.11
US Large Cap Value
33.75 11.95 6.99 -6.40 -2.71 -30.28 36.43 17.74 9.70 21.87 -12.24 -53.14 37.51 20.17 -19.90
US Small Cap
25.79 -2.33 28.41 -12.26 18.04 -19.87 57.81 19.15 5.61 17.08 -2.61 -38.64 47.02 29.53 -5.38
US Small Cap Value
36.94 -10.04 4.37 -3.08 40.59 -11.72 74.48 27.33 4.45 21.70 -18.38 -44.49 70.19 34.59 -10.78
US Real Estate
19.66 -17.01 -2.58 31.04 12.35 3.58 36.18 33.16 13.82 35.97 -17.55 -39.20 28.46 28.07 9.37
International Large Cap Value
0.39 23.11 33.01 4.01 -15.41 -13.84 69.18 30.58 15.10 32.99 6.35 -45.12 51.48 13.32 -17.05
International Small Cap
-14.55 10.24 30.16 -12.26 -16.75 -2.85 60.25 32.11 22.63 26.32 8.04 -47.11 44.83 20.79 -15.59
International Small Cap Value
-15.12 9.69 21.51 -2.01 -6.48 3.82 66.79 35.14 24.13 27.54 6.24 -42.54 47.81 19.30 -15.12
Emerging Markets
-11.59 -25.34 66.41 -30.61 -2.37 -6.00 56.28 25.95 34.54 32.59 39.78 -53.18 79.02 19.20 -18.17
One-Year US Fixed
5.93 5.91 4.04 7.33 7.28 3.39 1.47 0.83 2.36 4.32 5.95 4.75 0.80 0.83 0.57
Five-Year US Government
Fixed
7.12 7.75 1.90 8.96 8.44 7.62 2.04 1.35 1.34 3.75 8.16 8.83 0.19 3.73 3.38
Five-Year Global Fixed
7.27 8.41 3.55 8.28 6.44 5.11 1.95 2.65 3.08 4.09 6.31 6.60 2.29 1.99 2.31
• The vast majority of the variation in
returns is due to risk factor exposure
• After fees, traditional management
typically reduces returns
sensitivity
to market
[market
return minus
T-bills]
sensitivity
to size
[small stocks 
minus big
stocks]
sensitivity
to BtM
[value
stocks 
minus
growth]
random
error
e(t) 
+ + + + =
average
expected
return
[minus T-
bills]
average
excess
return
THE MODEL TELLS THE DIFFERENCE BETWEEN INVESTING AND SPECULATING
Priced Risk
• Positive expected return
• Systematic
• Economic
• Long-term
• Investing
Unpriced Risk
• Noise
• Random
• Short-term
• Speculating.
Structured
Exposure to
Factors
Unexplained Variation
• Market
• Size
• Value/Growth
Structure Determines Performance
• Equity Market
(complete value-weighted universe of
stocks) Stocks tend to have higher
expected returns than fixed income over
time.
• Company Size
(measured by market capitalization)
Small company stocks tend to have higher
expected returns than large company
stocks over time.
• Company Price
(measured by ratio of company book value
to market equity) Lower-priced “value”
stocks tend to have higher expected
returns than higher-priced “growth” stocks
over time.
Value
Large
Small
Growth
Increased Risk
Exposure and
Expected Return
Total
Stock
Market
Decreased Risk
Exposure and
Expected Return
Three Dimensions of Stock
Returns around the World
Risk and Return are Related
US
Large
Value
S&P  
500
US  
Large
Growth
US  
Small
Value
CRSP  
6-10
US  
Small
Growth
Intl.
Value
Intl.
Small
MSCI
EAFE
Intl.
Growth
Emg.
Markets
Value
Emg.
Markets
Small
Emg.
Markets
“Market”
Emg.
Markets
Growth
US Large  
Capitalization Stocks
1927–2011
US Small  
Capitalization Stocks
1927–2011
Non-US Developed
Markets Stocks
1975–2011
Emerging
Markets Stocks
1989–2011
13.63 11.77 11.29 18.82 15.72 13.74 17.44 18.23 12.98 10.74 22.86 20.00 17.77 15.63
27.10 20.41 21.81 35.07 30.84 33.90 24.81 28.32 22.37 22.07 42.31 40.86 36.47 34.77
Average Return (%)
Standard Deviation (%)
Annualized
Compound
Returns (%)
Size and Value E"ects Worldwide
The Failure of Active Management
Percentage of Active Public Equity Funds That Failed to Beat the
Index 
Five Years as of June 2011
US Large
Cap
US Mid  
Cap
US Small
Cap
Global Internationa
l
International
Small
Emerging
Markets
%

o
f

A
c
t
i
v
e

F
u
n
d
s

T
h
a
t

F
a
i
l
e
d

 
t
o

O
u
t
p
e
r
f
o
r
m

B
e
n
c
h
m
a
r
k

Equity Fund Category
Investing
• Asset allocation is the primary determinant of a broadly
diversified portfolio's performance
• Market timing and individual security selection are far less
important in determining performance
• Portfolio return is related to risk. Generally, the more risk the
greater the return.
• Diversification is essential. Investors are not compensated for
the additional risk of concentrated investments.
• Passive, not active management, is preferred in most markets
• Reducing expenses and minimizing taxes increases net return
• Rebalancing maintains portfolio structure and risk level
• Asset location is powerful in reducing taxes
• Alternative investments can increase return while reducing
risk
Bull and Bear Markets
S&P 500 Index (USD) 
Daily Returns: January 1, 1926–December 31, 2011
220%
-13%
-85%
20%
-16%
-39%
119%
87%
27%
-15%
-10%
-13%
100%
44%
-53%
25%
40%
-13%
-14%
26%
-25%
22%
-11%
23%
-33%
83%
-11%
99%
-26%
19%
-11%
-16%
26%
53%
91%
-13%
121%
-11%
26%
-13%
18%
69%
-21%
-11%
44%
-27%
15%
96%
-11%
59%
-27%
-10%
-21%
-32%
56%
-12%
38%
-45%
22%
-13%
50%
-13%
38%
-15%
27%
-13%
26%
-10%
21%
-16%
48%
-20%
78%
-11%
156%
-33%
73%
-10%
16%
-19%
303%
-12%
37%
50%
-19%
-12%
23%
-11%
13%
-47%
21%
-14%
113%
03/09/2009
-55%
12/31/201
1
-11%
1%
Average Duration
Bull Market: 413 Days
Bear Market: 220 Days
Average Return
Bull Market: 58%
Bear Market: -21%
Your Questions
Bruce R. Barton, CFP
®
CFA
[email protected]
(408) 436-9800

Sponsor Documents

Or use your account on DocShare.tips

Hide

Forgot your password?

Or register your new account on DocShare.tips

Hide

Lost your password? Please enter your email address. You will receive a link to create a new password.

Back to log-in

Close