You Have To Watch The Commercials Too!

I don’t watch a lot of financial TV but a couple weeks ago, an economist I respect was on one of the two major financial networks.  I tuned-in a few minutes early.

While I was waiting, the channel ran four commercials from:

           

            a)     A reverse-mortgage lender,

            b)    A delinquent-tax negotiator,

            c)     A time-share liquidator and

            d)    Someone selling electronic patches for back pain.

I’m no marketing genius but I’d say the advertisers were targeting people who can’t pay their bills, can’t pay their taxes, make poor real estate choices and/or have sore backs.

That’s no accident.  Networks design content to target the customers their advertisers want to reach.  Time is not on their customers’ side.  You need to turn a quick profit or dump assets when the IRS is breathing down your neck. 

I hope my clients don’t use those products …

… except maybe for the back-patches.  We’re not as young as we used to be.

Our objective is to patiently own investments that mature in the fullness of time.  Time has a habit of smoothing the bumps.

Almost everyone is forgiven.  Viewers are hoping to learn something that improves their lives.  Advertisers and stations have the right to sell their wares.  My economist showcased his firm’s services to a national audience.

But I’m on shaky ground.  If an idea I got here blew-up in my face, there would be nobody but Skip to blame.  My clients would rightly think so.

So when you watch financial TV, if the ads are for products you pray you’ll never need, remember who the content is for.

Ah!  My back feels better already!  Sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Securities offered through LPL Financial, Member FINRA/SIPC

Visit to OLLI - Part 2

Welcome back.

Last week I re-answered a question I received at the OLLI class at UNC Asheville.  Most of the attendees were people who make their own financial decisions.  Maybe not a brilliant marketing strategy for HelmsWealth but I love talking about finance and usually learn something myself.  We can swap yarns in good fellowship because none of us risks our trust.

Before the bell, I said that investors with full-service financial advisors didn't need to know anything about portfolio mechanics.  Instead, they absolutely must answer these three questions about their advisor:

          1)  Do I like this person?

          2)  Do I trust this person? and

          3)  Will he (or she -- usually he) do what I need?

You need three confident "yes" answers whether you are interviewing a prospective advisor or have known him for 12 years.  If you get all three right, managing the money is his job from them on.

After class, I was asked to expand on that statement.  I’m glad of the opportunity because it comes down to the trust I think is the hallmark of the essential family advisor.

"Trust" and "like" are separate questions for a good reason.  When it comes to money or family, trust is the higher standard. 

President Reagan famously said, "Trust, but verify."  Verifying trust with your financial advisor can be daunting.  But you have to do it.  You are the only one who can.  I can't give you much emotional support from a blog page but I can share some ideas how to start your search.

Investors are between a rock and a hard place.  On one hand, Wall Street sells investments.  Sales incentives can include rewards or pressure depending on how much freedom advisors have to choose what you own.

On the other hand, financial advisors have an ongoing fiduciary duty to place their clients' interests above those of their firm.

How your advisor and his firm handle those competing forces determines where their loyalties lie. 

That’s also the easy (and discreet) place to look for conflicts-of-interest.  If you really want to know where you stand, test the integrity of your advisor's product supply chain.

My personal favorite fiduciary responsibility is maintaining the transparency of the investments in my clients' accounts -- both what they are and how they get there.  We shop hundreds of investment sources using a fee-based platform so none of the vendors have any economic leverage to force their way into the portfolio.

That's crucial because part of that essential duty is to intervene in the product flow when I see strategic threats or opportunities.  As things change, there is always a Plan B without duress from suppliers.

It's not so simple when firm-wide revenues depend on favoring one vendor.  Plan B means a one-sided talk with your boss about being "a team player".  If you distribute for a single-line manager, Plan B means looking for another job.

Let's do some verifying in your best interests:

Start with the low-hanging fruit.  Does your advisor's firm or parent corporation frequently pay huge fines for stealing?  That's a clue. 

Can your advisor only sell (or does he only sell) products or strategies his company manages?  That's another clue – although not a deal-killer if they're competent.

My big red flag is when advisors are paid to keep you on their company's glide-path (last week's blog).  Funds, wrap accounts, annuities – the platform doesn't matter if you are just a dot on the chart.  Managing one big account is more profitable than managing 80,000 little ones.  That doesn't mean it's better for you – or even cheaper.

Case-in-point:  Last week I said I think rigid asset models are a strategic threat for retirees when used instead of on-going vigilance.

I've been wrong before.  Maybe I'm just the only advisor who can't squeeze 6% out of a 3% bond.  Right or wrong, markets create plenty of other dangers without my help.  When I spot one, I can act without someone breathing down my neck.

If you haven't done the 5-minute exercise at the bottom of last week's blog, please do that now.  You need to know your asset allocation before you ask why you have it.

Innocently ask your advisor how he would change your investment strategy if he felt you, his portfolio process or even his firm was on the wrong track.

Then listen.  He has one chance to get this right.

A good answer is that he constantly monitors client portfolios and chooses investments from independent sources without duress.

A bad answer (stated or unavoided) is that he hasn't had any portfolio input since your account was opened.

The bad answer means there is no Plan B if his firm implodes, uses self-serving products or forces him to sell you things you wouldn't touch with rubber gloves. 

They may never happen – but you are trusting him to tell you if they do.

Sometimes I imagine investors embracing these truths and flocking to my door.

That doesn't happen very often.  Trust is deeply personal.  Verifying it can be uncomfortable.  Many investors won't even risk the pain of learning (or finally admitting) their trust has been misplaced.  If they get that far, they have to find somebody new without any idea how to look.

One of the reasons I've made my practice so transparent is to save clients the embarrassment of asking if I'm honest.  I explain how I handle those conflicts-of-interest early in the conversation so they always know it's OK to hold me accountable.  If you advisor has earned your trust, he won’t mind either.

Find the courage to verify the trust your advisor must earn every day.  It makes everything better.  You may even like him more.  sh

PS-  Or just come see me!  

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Securities offered through LPL Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial are separate entities.

Visit to OLLI - Part 1

On August 5^th I had the pleasure of visiting the investment Special Interest Group of OLLI at UNC Asheville.  The Osher Lifelong Learning Institute is a program for “experienced” people to continue their education.  This was my third visit and I hope they want me back.

After the meeting, I was asked to clarify a couple of the things I said.  I think I did a better job the second time and I’m going to expand on those answers for the next two blogs.  If you happened to be there, I hope you’ll share these with the group since I’m not sure if the folks who asked the questions are on the blog list.  

The first question was about the relationship between bond prices and yields.

I’ve always made a mess of trying to connect all the moving parts conceptually but I wrote a blog last year with a practical example that does a credible job.  If you will click here for the backstory, I’ll add some practical context.

My example was very bearish.  For the last 34 years, the bond market has been in a strong bull market.[i]  Rising bond prices have dropped yields from all-time US highs to all-time world-wide lows. 

This is a chart from the US Federal Reserve showing the yields on the US 10-year Treasury note going back to 1981.  They peaked at 16% and closed last week at 1.59%.

When I talk to bond investors, they don’t always realize that individual bonds only ever pay as much as their scheduled interest and maturity payments.  Rising prices only affect when you enjoy the benefits.  Gains you book over the life of the investment are actually prepaid interest you won’t see in the future.  New buyers and reinvested dividends buy new bonds at higher prices but you have to split the lower income more ways.

Last year I shared my concern with the way my industry markets, manages and enforces inflexible asset-allocation models.  By that I mean portfolios with preset percentages of stocks, bonds and cash.  Some of them periodically rebalance to those ratios while other follow a “glide-path” and automatically increase fixed-income holdings as the owner gets older.

If you’ll take a quick peek at the opening chart on my target-date podcast, you can see that by retirement, this version has roughly 2/3 of the portfolio in either bonds or cash.  Most of these allocation models were adopted 10 to 15 years ago.  Rates were a lot higher then.  Once the prospectus is printed, the asset mix is set.

This is where I think investors need to be smart.  Asset allocation modeling is the industry-standard for the retail investment business.  Tens of trillions of dollars are managed on some version of that glide-path.  Years ago, managers bet the farm that those income projections would hover around historical averages. 

They didn’t.

The market meltdown drove rates lower than they have ever been.  It would take a crippling bear market like in my example to drive them up to anywhere near those levels again. 

Admitting this would be a disaster for the industry.  For 25 years, the business has told investors those allocations were sacred – that they must buy-and-hold through all market conditions to benefit from the long-term trends.

Who’s going to tell millions of retirees they might run out of money?  Who’s going to tell them and millions more 401(k) participants they have to reallocate to more volatile holdings?

Nobody.  Better to keep getting paid and let customers figure that out for themselves.

Calm down.  This is good news. 

If you are a long-term bond owner, you’ve already gotten most of the income you ever will as appreciation.  Bonds are still at all-time high prices.  Let the next guy keep your 1.59% along with the potential volatility of rising yields.  If they rise, you will be adding more volatility anyway so do it in something with more upside potential.

Here’s a little homework to see if you are on a glide-path that isn’t going where you want:

  1)    Open your statement and calculate the percentage of your portfolio in bonds and money-markets.  Is it close to your age?  Double-check it on the glide-path chart.

  2)    Divide the current income those investments produce by the value of the investments.  Is that percentage enough to cover inflation, taxes and spending money?

  3)    Then tally what percentage of your portfolio can’t reasonably support your lifestyle anymore.  Who came up with that idea?

Next week I’ll take a stab at a deeper question.  See you then, sh

The opinions expressed here are those of Skip Helms and do not necessarily reflect those of LPL Financial or anyone else. Investing involves risks, including the loss of principal. Past performance does not guarantee future results. Please consider potential transactions carefully and read all appropriate materials before investing or sending money. Bonds are subject to market and interest rate risk of sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Securities offered through LPL Financial, Member FINRA/SIPC. OLLI, Helms Wealth Management, and LPL Financial are separate entities.

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[i] My interest rate references come from the US Federal Reserve FRED website.