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!

Investors Should Keep Their Expectations High

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

As an investor, do not lower your expectations. Some such as Charles Ellis, author of Winning the Loser’s Game, think you should. He found that 80 to 90 percent of money managers underperform the market. His conclusion? Investors should lower their expectations. He’s not alone in his findings on under performance. Burton Malkiel, author of A Random Walk Down Wall Street, found over 80 percent of money managers underperform the market. Robert W. Baird & Co also found that over the last 10 years only 370 out of 4,000 money managers beat the Standard and Poor’s 500 (S&P 500) by an average of one percent. Do these success rates, or lack thereof, scare you? Do they make you wary? Maybe. But, I don’t believe they should keep you from investing. Nor do I believe you should lower your expectations. I won’t and neither will my clients. Then how to be a successful investor? Stay ahead of the curve. Investing is not a zero sum game. It’s not a one-size fits all box. You need to be aware of what’s going on in the world and the changes that are taking place. Take for example the predicted shift in consumerism. Currently, the United States is the top consuming country in the world. The Hong Kong and Shanghia Banking Company (HSBC), one of the largest banks in the world, conducted a study. It showed, in the next 40 years, the United States’ conspicuous consumption will be replaced by the rest of the world. International investing is complicated. I’m not a fan of diversifying your portfolio by investing in overseas companies, but when the major consumers move, your investment needs to follow.   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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Fiduciary or Not?

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

As a business owner, if you offer a retirement plan to your employee’s you are a plan sponsor and therefore a fiduciary. Even if you hire an advisor, the Department of Labor (DOL) considers you a fiduciary. As such, you are held legally responsible for your plans compliance. Why is your role suddenly such a big deal? In 2008, the DOL had just 100 enforcement officers to oversee roughly 485,000 plans. Retirement plans, such as 401(k)s, were rarely audited unless there was a complaint. But after the Great Recession, it became painfully obvious retirement plans were not functioning as they were intended. The DOL has said that 77 percent of plans are not compliant with the Employee Retirement Income Securities Act (ERISA). ERISA was designed to create a supplemental income for retirees. Yet the average retiree receives between $400 – $500 a month from their plan. Not much of a supplement. In an effort to bring plans back into compliance, the DOL hired an additional 780 officers in 2009. Their ranks have now grown to over 1,000. With the added numbers, the DOL has begun performing compliance audits and issuing fines. Fines reached $1.36 billion in 2009 and $1.69 billion in 2010. Who received these fines? Fiduciaries and the companies they represent. What is the full extent of your fiduciary responsibilities? What actions can you take now to become complaint? How does your company’s retirement plan affect your employees?   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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Fees

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

Do you know what your broker is charging you? The North American Securities Association recently published a survey of 34 big and regional brokerage firms and found their fee disclosures were complicated and ranged from 1 to 45 pages. While the disclosures met the technical requirements of disclosure, they were anything but straight forward. The disclosures were often in documents some people put at the side of their bed to read when they needed something to bore themselves to sleep. Fees are important because they can reduce performance. A 1% increase in fees will reduce a portfolio’s value by 17% over 20 years. A portfolio of $100,000 that grows an average of 10% a year will grow to $611,591. That same $100,000 with an additional 1% in fees charged will grow to just $514,166. That is a significant difference over most investor’s time frame. I believe that many of the fees that clients actually hear about from their financial advisors are only a portion of the actual fees. For example, I often read about mutual funds with expense ratios of 0.90%. Actual fees paid by the client are closer to 4% to 5%! Undisclosed to clients (and financial advisors) are the fees/costs of transactions, cash drag, and taxes. The expense ratio excludes those costs. Every time a trade is made in a mutual fund there is a transaction fee paid to the broker who executes that trade. It is far from free. Excluding the cost now associated with dark pools and flash trading, the average transaction charges add another 1.44% to the fee-cost of mutual funds. Mutual funds usually carry higher quantities of cash for buying opportunities, but even more importantly for redemption needs as clients move out of the fund. That is the “cash drag”. Whereas I try to keep my clients fully invested almost all the time, mutual funds will carry that extra cash. That will add 0.83% to the fee-cost of the fund. Additionally, there are the tax costs. I do what I can to reduce taxes. An example of something I do to reduce taxes is to sell (or double and sell) stocks held for a short term loss, and sell out gains long term if possible. This is a tax advantage. The average mutual fund adds 1.00% in fee-cost in taxable accounts. Add those fee-costs together and the actual fees run for just the mutual fund without the financial advisor’s part, 3.17% for tax deferred accounts and 4.17% in taxable accounts.1 When a financial advisor adds his 1% (the average fee advertised by many financial advisors), the actual fee-cost for a wrap account with mutual funds: Taxable: 5.17% Non-taxable: 4.17% Eugene Fama of the University of Chicago shared the Noble Prize in economics this past year. One of his studies shows that fewer than 7% of all professional money managers do as well as or better than the market. When you look at the fee-costs it becomes pretty clear why that is. To do as well as the market the mutual fund manager would have to have gross returns before fees of 4.17% better than the market. This is not easily done. I often say my fees are some of the highest in the industry. However, when all fees and costs are considered and compared the fees at Adams Financial Concepts LLC are in line or a little below the average. For equity (stock) and balanced (stock and bond) account the fees are as follows: Size of Account Fee $ 100,000 to $500,000 3.00% annually, and for the next $ 500,001 to $1,000,000 2.25% annually, and for the next $1,000,001 to $2,000,000 2.00% annually, and then $2,000,001 and more 1.75% In addition Fidelity charges an average transaction cost of 0.62%. Since every portfolio for the Custom Portfolio Wealth Management (CPWM) is either invested in stocks or bonds, there are no other expenses or fees except a small transaction fee charged by the custodian. For those fees clients receive the follow: A customized portfolio specifically designed for the client’s risk and objectives Management of buy and sell decisions Research by Mike Adams on positions held in the account Custody at a third party (usually Fidelity Investments) Compliance review by a third party (Core Compliance of San Diego) Quarterly reports comparing the account performance to benchmarks Quarterly reports prepared by Morningstar taking data directly from the custodian A quarterly letter with comments about performance and brief outlook for the future All administration of the account Tax advantage selling and buying that can add to clients’ return but does not show on reports Minimal cash drag. Cash can be held in anticipation for purchasing securities at lower prices. Regardless of the fees and costs, the most important thing is performance. There are few financial advisors who will publish their performance numbers. Either their firms do not allow it, or they choose not to show the actual results. Either way it seems like clients should be asking the question why performance is not shown. At Adams Financial Concepts we are proud of our track record. We do not beat the market (net of fees) every month, every quarter, or even every year. However, over the longer term we feel we strive to do so and have in the past been successful in doing so. While past performance does not guarantee future performance the track record is published for all to see. 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. Regards, Mike Adams Footnote 1: “Scale Effects in Mutual Fund Performance: The role of Trading Costs” Edelen, Evans and Kadlec, March 17, 2007  

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Diversification or DeWORSification

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

I believe one of the main reasons money managers underperform the market is diversification. Robert Haywood from the University of Denver showed that if you took most money managers’ top ten stock picks, they outperformed the market. But, when you add the other 100 plus stocks , which most money managers have, their results decline significantly. I call this, deworsification. Sometimes, less is more. Evaluating each company and its potential for innovation and growth is extremely important to ensuring successful investments. R.W. Baird did a study in which they examined over 4,000 mutual funds. They found only 370 produced an annual average of at least one percent better than their benchmark over a period of 10 years. And, not one of those 370 top performing funds worked on a computer model. Every single one of them had an active money manager – a real person who selected the stocks. Equations are nice. They are simple and predictable. Unfortunately, neither life nor the market are simple and predictable. It takes human intuition to weed through and determine which companies will fail and which will succeed.   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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Big Questions

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

The Fiduciary Standard says, “A broker or financial advisor must make every decision in the best interest of their client.” Sounds like the right thing to me. Why then are big firms fighting this standard? Registered investment advisors must adhere to this fiduciary standard. But, registered representatives, such as financial advisors and consultants for big brokerage firms, only have to make suitable recommendations on their client’s behalf. If their recommendations aren’t in the best interest of their clients, then in whose best interest are they?   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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Chocolate-Covered Hand Grenades

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

What is something worth? It’s worth as much as another man or woman is willing to pay for it. When I talk about investing in “chocolate covered hand grenades,” I’m not literally talking about hand grenades or chocolates. I’m describing what happens when people invest in bubbles. Bubbles in the market are created by supply and demand. As the demand increases and the supply decreases, the cost rises. This is the bubble growing. But, when the demand disappears the bubble bursts and the cost drops suddenly. More than likely, it plummets. Why, when a burst is coming, do people keep investing? Chocolate covered hand grenades! The idea, the story, the craze behind the bubble growing is so enticing people keep buying. This craze, which drives the cost up, is not based on facts and figures. It’s based on stories – on the emotional whim of the buyer. So, when the craze disappears, so does the value.   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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A Better Approach to Financial Planning

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

I said it last week. I’m going to say it again. Do not lower your expectations as an investor. Did the Great Recession leave you wary? Most likely. As you evaluate your portfolio and establish your goals, you should consider on what your portfolio is based. Many financial advisors build their client financial plans using software that forecasts that stock market returns vary according to the normal distribution (that so called “bell curve”). As a mathematician, if it was true that market returns followed this curve, it would be an easy format to use. Typically, distribution curves are predictable. Unfortunately, stock market returns are not nicely grouped in a bell shaped curve. The bell shaped normal distribution forecasts that stock markets would move in small steps. Mark Rubinstein and a UC Berkley colleague calculated the likelihood of a market drop such as that of October 19, 1987 would only happen once every couple billion years if the stock market actually followed the normal distribution. I believe in keeping a pulse on the market. This type of investing is a two-step process. First, you need to identify companies which are based on successful characteristics such as innovation, strong leadership and a focus on quality. Second, you need to follow them closely. Identifying and investing aren’t enough. Buying and shelving stocks will not work. Rather I believe in an attentive, intelligent, and deductive approach to investing. Watch how the companies you are invested in grow and how they handle setbacks. Evaluate how they maintain their cutting edge technology. It is up to you, or your financial planner, to keep a current pulse on 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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401(k) Developments

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

It’s my pleasure to introduce Rowena Lei, the newest member of the Adams Financial Concepts family. As a recent graduate from the University of Washington, Rowena majored in History. Monday was her first official day in the office. She’s a bright, talented young woman and I’m very excited to have her on board. Over the next few months, she will play a crucial role as we continue to develop our 401(K) program. Why is this important? I have talked often about 401(K)s. Frequently On The Money we’ve explored the historical development of 401(K) plans, their pros and cons, and the upcoming changes such as transparency of fees. In the next few months, new regulations require plan sponsors and participants to be notified of previously hidden fees. Additionally, the Department of Labor estimates 77 percent of all 401(K) plans are not compliant with regulations. Sponsors of non-compliant plans can be fined up to 10 percent of each plan’s value. The scramble to meet regulations has already begun. As an Account Administrator, Rowena will help layout initial meetings with plan sponsors, develop and implement an educational component for clients, and discuss investment policies. In 2008, 40 percent of people stopped contributing to their 401(K). To me, this makes about as much sense as not making your house payment because housing prices drop. Unfortunately, most people spend more time each year planning for a vacation than they do planning for their retirement. As with other aspects of wealth management, I believe Adams Financial Concepts clients expect to win by achieving more than the standard return on their investments.   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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401(k) Changes

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

Change. Do you find it scary? A lot of people do. In the financial industry, big businesses have been fighting change. They haven’t been successful. Change has come. The Department of Labor instituted a new rule for 401(k)s starting in November 2011. Personally, I think it’s necessary. The new rule for 401(k) plans states all fees must be spelled out for participants. This means third party administrators, those who prepare the reports, will break down each fee and disperse the information among participants. Why is this huge? Seventy percent of 401(k) participants don’t think they pay anything for their 401(k). They believe the plan is paid for by their employer. I think employees and employers are in for a rude awakening when the fees are fully disclosed. There are a small number of fund companies which dominate 401(k) funds. These are the funds about which most people know. It doesn’t mean they are the best performing funds or the least expensive. One of the biggest changes deals with advisors who are non-fiduciaries. That is what most financial consultants are. If you are dealing with an advisor they currently don’t have to disclose any conflicts of interest. But, this is about to change. They are now being asked to do two things: Flat Payment – Advisors are now being asked to accept a flat amount no matter which 401(k) plan they recommend. In the past, an advisor received more depending on the fund they recommended. This gave them an incentive to recommend a fund based on their own earnings rather than what was in the best interest of their client. Third Party Computer – Advisors are also being asked to use a third party computer model to look at the performance of the funds. This raises a really interesting question because for a long time it was held that past performances were not a guarantee for future performance. This still remains true. There is no guarantee, but we are beginning to realize past performances may be a useful factor to take into account. Change may be scary, but I think it’s entirely necessary. Don’t you?   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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401(k) – How’s Your Retirement Looking?

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

How much you put into your 401(k) and how your plan performs can determine how you enjoy your golden years. Will you live comfortably or will you need to sell peanuts at the baseball game? Recently 401(k)s have come under incredible scrutiny. The Department of Labor, who oversees 401(k)s, says 77-percent of 401(k)s are non-compliant with current regulations. Non-compliance includes failure to properly communicate the plan to employees, provide investment diversification or an investment policy statement, and more. What is a 401(k)? 401(k)s give employees the ability to save for retirement tax deferred. They can start withdrawing as early as 59½, but typically depositors don’t tap their 401(k) until they are between 62 – 66. Where did the 401(k) come from? In 1974 the Employee Retirement Income Security Act (ERISA) was passed. It established minimum standards for pension and health plans in private industries. These standards were intended to protect individuals. The 401(k) was developed from ERISA. What’s Happening With 401(k)s Now? In 2009, Department of Labor enforcement officers levied $1.69 billion in fines for non-compliant plans. In 2010, they were targeted to hire an additional 780 enforcement officers, raising the total number of officers to 17 thousand. They plan to raise the number of officers again in 2011. What’s the Big Concern? According to the General Accounting Office, the average balance of those retiring last year was just $144-thousand. If you apply a 4-percent interest rate to this average savings, these retirees earn less than $500 a month in supplemental income to their Social Security. Additional concerns from the General Accounting Office show 54-percent of Americans have less than 25 thousand dollars in retirement savings. Twenty seven percent have less than one thousand dollars in retirement savings.   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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