It can be hard to imagine having all the savings we need to roll into retirement and not sacrifice our lifestyle. While AFC offers advising on retirement plans, we also think it's important to stay abreast of the latest news about retirement law, fiduciaries, and to really understand what it takes to retire comfortably. We encourage you to take a look at some of our posts, and if you have any questions we hope you contact us!

Lessons Investment Advisers Need to Learn from Robo-Advisers

By Adams Financial Concepts | January 17, 2018 | 0 Comments

On May 1st, 1975 the government deregulated fixed commissions in the brokerage industry. At the time, I don’t believe many in the industry would have said this would make any great impact on revenues, and history shows most chose to carry on with the status quo. Few stock brokers (that was the title financial advisers used back then) felt there would be much change in their business. One man did see an opportunity, though, and moved to found a firm that charged significantly less in transaction fees. That man, of course was Charles Schwab, who would build a significant and competitive that would capture one-third of portfolios by 1999. I think it isn’t unfair to say my industry is not good at seeing what innovations will reshape the industry. It is, after all, much easier to carry on with what you know. And yet investing is nothing if not the practice of trying to predict success and innovation. When I licensed in 1986, broker dealers (as financial advisors were called at the time) made up the largest percentage of the market, about 95%. To increase profitability those big companies began getting rid of any brokers who were not generating $75-100,000 in brokerage commissions. The average family income at the time was $43,000, but profitability was more important than loyalty to these big firms. Those dismissed brokers had licensed under the Securities and Exchanges Act of 1932, which made them registered representatives, and only required that they provide investment options “suitable” for each client. This meant that, if two investments fulfilled all the criteria for a suitable investment, the broker could suggest the one which gave her a greater kickback (if you’ve heard me go on about fiduciary responsibilities at all, you know my feelings regarding suitability). Many of the brokers the big firms dismissed became independent and licensed under the Investment Company Act of 1940, which required that they have fiduciary responsivity toward their clients, and had to make every decision in the clients’ best interests. They are held to stricter oversight, and can be sued if their decisions are viewed as being anything other than in the client’s best interest. By the 1990s and 2000s it was not just the dismissed brokers who became independent, but larger producers who wanted out from under the big firms were leaving and licensing as Investment Adviser Representatives and Registered Investment Advisers. This channel of Registered Investment Advisors have gained momentum, and recently Cerulli released a report which said that in 2016, RIAs grew by 6%, and the large brokerage firms were down 1.6%; they predict that by 2019, registered investment advisors will have more assets under management than the brokerage houses.[1] The big brokerage firms and their representatives (financial advisers) did not see the impact of the discount brokers. The big firms and financial advisers did not see the rise of RIA independent channel. As in the past, I believe that the financial industry will be disrupted again – this time by robo-advisors. When you look at most financial advisors’ performance, they put together portfolios which have generally underperformed. When I worked at those big firms we were told “to sell yourself and your personality, not your returns.” I began doing fee based accounts in 1991 when the general practice was to charge 3% on the first $500,000 or so of assets under management. Fees began to drop, in my opinion, because of poor performance. It is certainly hard to justify a 3% fee when the account is only growing at 5%. Many brokers have taken their fees down to 1% and below. Not only are fees under pressure because of poor performance, but today almost all the same services financial advisors offer can be provided by robo-advisors at a 90% discount. I was sitting on the plane next to a financial advisor from a large brokerage firm. I asked what their value proposition was. He claimed it was the personal connection, willingness to meet in person, and willingness to “hold hands” during tough times in the market. He said nothing about delivering great performance. It is true that human financial advisors will do the things he mentioned. Is that enough to justify charging ten times what a robo-advisor will charge? That advisor also commented the robo-advisor will be used by millennials but not their older clients (as millennials were the stated target). The fact is, we are seeing people across the spectrum (of age, income, and background) using robo-advisors. My Private Banking, an industry publication, produced a survey in 2016 which found that 40% of high-net-worth investors were considering using a robo-advisor.[2] Lower costs, convenience, and greater access to personalized options were all stated reasons for high-income interest in robo-advisors. One in five respondents were even concerned that their current financial advisor wasn’t making decisions in their best interest and thought they would see better advice from the robo-advisor. Now the question is, when set side-by-side, what does the broker, or financial advisor, bring that the robo-advisor doesn’t? Robots are much more adept at compiling and analyzing data than the human brain, or even the very basic computing software (or more complicated, even) we use to put together financial plans. Frankly, I think financial plans as a whole are flawed, as we saw them come apart in 2008/09 (you can read those options in greater depth in other blogs). I hear you cry – robots don’t have that personal touch! But how many people still want that? I have a number of clients overseas that I have never met in person, others who live out of state and I only speak to them over the phone. Personality and the “human touch” aren’t valuable enough to have clients prioritize them over efficiency and lower fees. Our value proposition at Adams Financial Concepts is to deliver over the longer-term superior performance. That is something the robo-advisors are not doing. That is something that the very large majority of financial advisors are not doing. Josh Brown in his book Backstage Wall Street said this: “Most of the brokers I know and have met over the years are phenomenal, world-class sales people…But a great many of these security selling savants don’t attain the knowledge necessary to actually accomplish anything for their clients… Selling one’s expertise is much easier than actually developing an expertise, especially as it pertains to investing.” If you look at other studies, Dalbar presented a report that said the average equity investor (including those who are clients of financial advisors) for the past 30 years has averaged a 3.69% return.[3] Compare this to the S&P 500, which is at 11.11%.The industry is going through a lot of changes, and I believe that the best selling point for a human advisor over a robot is the provide superior returns. That is what brings value to an advisor. Not human touch or better plans, but a tangible, superior return. The industry is changing again, and we, whether we are registered financial advisors, or brokers, or clients, must not imagine it will be slowed down. We must be prepared for what the future brings. [1] Cerulli Associates Global Analytics. The Cerulli Report: US RIA Marketplace 2016. 2017. [2] My Private Banking. Robo-Advisors 2015. [3] Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior. 2016. http://www.qidllc.com/wp-content/uploads/2016/02/2016-Dalbar-QAIB-Report.pdf

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We’re Getting Old

By Adams Financial Concepts | January 17, 2018 | 0 Comments

In 1965, a Frenchman by the name of Andre-Francois Raffray thought he had made a very good deal; he had purchased an apartment from an elderly widow for about $500 a month. Up until 1975, France had no form of Social Security, and retired individuals had to rely on their savings and a process called En Viager. En Viager allowed a younger person to purchase a home in monthly increments paid until the death of the current resident. Mr. Raffray offered the 90-year-old Jeanne Louise Calment $500 each month in exchange for her apartment, which was worth about $90,000 in ’65. Unfortunately for Mr. Raffray, Ms. Calment lived to be 122 years old, the longest lifespan of any human. In fact Mr. Raffray died before Ms. Calment did. By the time of her death, he had paid about $184,000 for an apartment in which he never had a chance to live. This rather highlights the potential problems with a system like En Viager. In fact, it highlights many problems with the US perception of retirement as well. Every year, the expected lifespans of retirees is extended by three months. In 2016, it was theorized that the first baby who would live to be 150 years old was probably born. Modern medicine, healthy lifestyles, and access to amazing technologies have ensured that our lifespans are continuing to lengthen. That means that budgeting to die at 90 could mean you fall very, very short of your actual date of death (morbid as that thought may be). In the US, Social Security usually represents about 40% of your income; your savings have to make up the other 60%. For many of us, Social Security will be significantly less than 40% of what we will need in retirement.  Unfortunately, four of ten Americans reach retirement age without any savings whatsoever, and others are only able to provide themselves about 20% of their yearly income in retirement. It is no wonder that a Fidelity Study on Wellness found that 57% of the surveyed don’t “feel good” about money, and 42% would go so far as to say they are “anxious” about it; a horrifying 24% said that they avoided medical treatment because of money.[1] On that topic, the longer our lifespans, the more likely we are to face expensive medical treatment during our “golden years.” Even if (and this is a very timely conversation, so my apologies to those who look back with the benefit of hindsight) the Affordable Care Act continues to fund Medicare, a couple in 2016 would only receive approximately $260,000, and it is likely that President Trump will continue to propose legislature which will defund the Medicare Program. Yet on average, affluent individuals can pay over $1,000,000 in premiums during retirement. It isn’t a circumstance which inspires confidence. There is no easy or guaranteed solution to increasing retirement savings. If you’ve read my blog 10 Is the New 4, you know that I believe we are too focused on “safe” money with low risk and low returns. I believe that in order to get the retirement fund that our parents had by putting away 4% of their income, we now have to put away 10% because low-return investments are being pushed onto people who could benefit from greater potential risk for greater potential returns. Additionally, if the secular bull market ends as I feel is the highest probable end with high inflation, the purchasing power of that safe money will be significantly reduced. Think of the 1970s when inflation reduced purchasing power by 40% to 60%. That would mean instead on needing $1,000,000 for medical premiums a retiree will need 2 to 3 times that amount. Obviously everyone needs to weigh their own risk tolerance and needs, but I have found that too many investment advisors provide low benchmarks and low expectations when we should be providing higher returns to our clients – because that, I believe, is what is in their best interest in the face of possibly 30 years of retirement. If I were to tell you that you are saving for 30 to 50 years of unemployment, and would get an unemployment stipend equal to about 40% of your current income, would you look at those savings the same way? [1] “Measuring and Predicting Financial Wellness.” Fidelity Investments. July 2016. Accessed on 9/6/2017. https://sponsor.fidelity.com/bin-public/06_PSW_Website/documents/PDF-Measuring%20and%20predicting%20financial%20wellness.pdf

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What’s A Fiduciary?

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Recently, British comedian John Oliver’s show Last Week Tonight put out a flooring (and very entertaining) look at the retirement industry. I spent Monday morning watching it after Sara shared it, and between nodding along with his points and laughing so hard I choked I decided that I needed to share it. You can watch the video included, and I encourage it, but I also wanted to highlight some of the most important points. First, Oliver asks what is a financial advisor? He answers actually, and technically – nothing. That title, along with financial analyst, financial consultant, investment consultant, or wealth manager does not actually indicate credentials. The only valid credential is whether your advisor is a fiduciary. I am. Two, as Billy Eichner asks, “[What]…is a fiduciary?” Well, it means that I (as a fiduciary) am required by law to put your well-being first. I cannot receive commissions from brokers. Every few years I can be, and often am, audited to make sure that there isn’t anything going on that shouldn’t be – as is every one of my employees. It is the highest standard of care in the industry. Finally, Oliver looks at fees. He compared fees to termites: they are tiny but they eat away at returns. In fact, a previous Department of Labor study found as many as 17 fees and costs being taken from 401Ks, and most of them were hidden so neither participant or sponsoring company realized they existed. Low returns could mean the employee participants may end with account balances at retirement that are up to half of what they might have been. A quality 401k does provide a lot of other benefits that aren’t usually associated with your retirement plan in addition to returns: retaining skilled employees and tax deferrals are just two. John Hancock responded saying that the plan Oliver was discussing was a start-up plan with $30,000 of assets. Read between the lines and it seems John Hancock is saying the plan is so small it loses money for John Hancock. While they claim there are no hidden fees, they did not say the costs were fully disclosed. Now that you know, what’s your next step? Watch the video: Then, I would start by contacting your advisor – or whoever works with you on your retirement plan – and asking two questions. First, if he or she is a fiduciary (now that you know what it is), and second, ask for their REAL returns, net of all fees. With these in hand, you can start to assess where your plan is at now, and make decisions about where you want it to be.

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Trust

By Adams Financial Concepts | January 17, 2018 | 0 Comments

The most vital role of a financial adviser in regards to working with a retirement plan is minimizing fiduciary liability. Moreover, the financial advisor minimizes the responsibility that a plan sponsor and the plan trustees have when handling the process of plan investments. There are primarily three levels of fiduciary. Non-fiduciary brokers place full weight onto the plan sponsor (organization) for financial advise and all fiduciary responsibility and liability. Fiduciary 3(21) allows for the plan sponsor to share fiduciary responsibility and liability. Fiduciary 3(38) accepts complete fiduciary responsibility and liability. Participant education can be used as a tool to assist plan sponsors to minimize their liability under ERISA 404(c). One of the biggest assumptions made about the role of participant education is that it’s not required by law. However, under the regulations of the Department of Labor, fiduciaries must provide sufficient information to the participants in order for them to make informed decisions.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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The Value of Compounding

By Adams Financial Concepts | January 17, 2018 | 0 Comments

One of my favorite questions is: If you had a job for 30 days and could choose to either be paid $1000 every day or a penny the first day, doubled every day after, which would you choose? Take a second. Think about it. I think this will help you make up your mind. If you calculate a penny a day doubled for 30 days it grows to over $10 million dollars. I know what I’d pick! A penny doubling every day illustrates the principal of compounding. The bigger the beginning number, and the bigger the percentage at which it is compounded, the larger the final outcome. Take for example, the purchase of Manhattan in 1626. Peter Minuit paid local Indians a load of cloth, beads, hatchets, and other odds and ends worth 60 Dutch guilders. This was equivalent to $24. Sounds like the Indians were taken, right? Yet, if those Indians had invested their $24 at a 7 percent interest rate, today it would be worth $4.9 trillion. Every city block of Manhattan would be worth $644 million. And, that is just for the land. It doesn’t include what’s built on it. Imagine if the Indians had invested at 10 percent. Their $24 would be worth $207 quadrillion now. Are you thinking to yourself: “But, that would take over 300 years. I don’t have 300 years!” I couldn’t agree more. Do you have 25 years? If you invested $100 thousand at 5 percent for 25 years, it would grow a little over three fold. If you invested it at 10 percent, it would grow almost 10 fold. That’s $985 thousand!   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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Structured Products

By Adams Financial Concepts | January 17, 2018 | 0 Comments

We’ve talked before about chocolate covered hand grenades – the too-good-to-be-true investment. Time and again, the market has expanded rapidly as investors get caught up in opportunities based on stories and ideas rather than facts. Most of us are familiar with the explosion of Sub Prime Mortgages and how they played a major role in the Great Recession. Another seemingly tasty investment blew up as a result of the Great Recession. Structured products cost numerous investors big time. What are structured products? The term “structured product” is financial industry jargon referring to a product which allows you to participate in the stock market while guaranteeing your principal. How do they work? Originally, structured products were made up of two different elements: stocks and zero coupon treasuries. By spending half of your principal on zero coupon treasuries and holding onto them until they reached their full maturity, an investor would be able to, at a minimum, get their initial investment back. Over time, investment advisors set up structures which reflected zero coupon treasuries and stock market investments. In theory, this was great. In reality, these structures were just paper. They weren’t based on facts. What happened? Lehman Brothers, a major brokerage house, created a variety of complex structured products which were sold by third parties. When they filed for bankruptcy in September of 2008, investors discovered the company’s collapse could cause them to lose most, if not all, their money. Why? They weren’t invested in real securities. They were invested in reflective securities. When they wanted their money, most investors ended up selling for $0.10 on the $1.00. What’s the moral of the story? Smart investments are made based on facts. If you invest based on stories and ideas, you most likely will get a blast of reality.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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Strategic Versus Tactical Investing

By Adams Financial Concepts | January 17, 2018 | 0 Comments

When it comes to investing, one of the biggest questions in my mind is strategic versus tactical management. Before we can discuss the merits of one or the other, I think we should clearly define both. Strategic management focuses a financial portfolio on a group of assets. Tactical management changes the asset classes of a portfolio depending on the economy. So, which is better? In theory, tactical management sounds wonderful. You get in when the market is low and out when it is high. Unfortunately, this does not consistently yield the maximum returns to investors. Correctly guessing the exact moment to jump in and out of the market can have definite rewards. However, the key word is “guessing.” And, I believe guessing what will happen in the market is far riskier than just staying in. And I am not alone. The facts back me up. Just look at this 20-year financial study published in Money Magazine in August 2008: Carla Fried analyzed the Standard and Poor’s 500 Index from 1982 to 2001. She discovered that $100,000 invested in the stock market in 1982 and left alone would have grown to $930,000. This is nearly a 10-fold increase. What if you missed just the best 10 days? Carla’s study shows your portfolio would be cut nearly in half, totaling $560,000. If you missed the best 30, it would have dropped to $280,000. And if you missed the best 50 days, it would have gone down to just $150,000. A financial advisor’s attraction to tactical management is understandable. It is extremely difficult to feel those losses. Yet, those who ride the ups and downs consistently come out ahead. Keeping your money in the market, even when things look bleak, means you don’t have to guess about what will happen in the market. I think guessing should be better known as betting. After all, there is a reason Las Vegas stays in business. When it comes to my financial future, I believe in calculated risks not hopeful acts.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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Retirement Budget

By Adams Financial Concepts | January 17, 2018 | 0 Comments

How much savings is needed to secure a comfortable retirement? In a recent survey from Ameriprise Financial Inc., working Americans between the ages of 50-70 with at least $100,000 in investible assets predicted that on average, they needed $980,000 to retire comfortably. What does this ideal “retirement number” really mean? How significant is it? What assumptions are clients making about the amount that they will need to meet expenses during retirement? Financial advisors have the opportunity to discover the right answer. One of the best assumptions we can make of future spending patterns is to look at how clients manage expenses during their pre-retirement years. An old saying that remains appropriate is, “the secret to living within your means after retirement is living within your means before retirement.” Just a little over half (51%) of working Americans ages 50+ are confident they will have enough investable assets to retire. The other half are worried they will not have enough. This boomer generation, however, may have a less comfortable retirement than their parents!   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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Questions For Your Financial Advisor

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Over the next few months, many investors will sit down with their financial advisor to look over their portfolio. Before the meeting, ask yourself what kind of investor you are. Do you simply want lower risk and higher returns that will beat the rate of inflation? Or do you want to succeed? Do you want to outperform the market? I believe my clients want to win. They want their wealth to grow significantly. If this sounds like you, I encourage you to ask your Financial Advisor the big questions. For me, they are the following: Look At The Real Dollar Terms The first question you have to ask is, how is your portfolio performing in real dollars? Is your account growing or losing money? Request A Performance Report Compared To The Market To really win, you need to outperform the market. Sometimes financial advisors only compare your earnings to the rate of inflation. Don’t stand for this. Make sure they show you how your account has done compared to the Standard and Poor’s 500 (S&P 500) for a stock account or the appropriate bond index if it is a bond account. Ask How Your Portfolio Is Picked Every portfolio takes a hit from time to time. My clients have seen dips. This is to be expected. However, it’s important to position yourself for the upswing. Your financial advisor should have an understanding of what will happen over a 5 – 10 year period. Ask your advisor how he picks your portfolio. Some advisors may say, “The firm makes recommendations and I take the firm’s recommendations.” Others might say, “The firm makes recommendations. I sort through their recommendations and pick the best of them.” If that’s the case and they’re successful, they should be able to provide you with a clear longer-term performance report. As you evaluate your financial advisor’s responses to these questions, keep in mind what you first asked yourself. Do you simply want lower risk and higher returns that will beat the rate of inflation? Or do you want to “win”? Do you want to outperform the market?   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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Plan for Long-Term Success

By Adams Financial Concepts | January 17, 2018 | 0 Comments

Take care of the customer and everything else will take care of itself. This simple principle has led to decades of success at Albert Lee Appliance. Albert Lee III, President of Albert Lee Appliance, joined me on About Money last Friday. He said he tells his staff, “I’m not your boss. The customer is your boss.” Albert’s grandfather, the company’s founder, taught him this from the beginning. “He always said, you need to listen to your customer. They’ll tell you what you’re doing right and what you’re doing wrong,” Albert said. Despite the Great Recession, Albert Lee Appliance has expanded, opening new locations to serve additional customers. How was this possible? Long-term planning. Rather than looking to make a quick buck, the company never lost its focus on customer trust. They continually planned for 10, 15, and 20 years from now. For you as an investor, long-term planning is just as important. Hiding money in your mattress is not the answer. It didn’t work in the past and it isn’t working now.   For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more! I want to hear your opinions; please leave a comment below and let me know your thoughts.  

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