Flingin' it - 5/13/16

Photo by tudor-rose 

I'm always looking for ideas for the Accountable Update. Sometimes an idea may not warrant a full post, but may still be interesting (at least to me) or have merit. This week will be the first in what will probably be a once or twice per month version of the Update where I'll cover several shorter topics or links to material I'd like to share with our readers. The subjects will vary widely.

After considering several titles, I landed on calling these entries, "Flingin' it", as in spaghetti on a wall, mud, or other things you may find in a pasture. I hope it doesn't get too deep.

Do recent GDP estimates spell doom?

If you were really bored, had insomnia, or are a market wonk, you probably noticed that the Bureau of Economic Analysis (BEA) released an estimate of Q1 2016 US GDP growth on April 28. If you are like the rest of us, it may have slipped by unnoticed. I'm sure the suspense is killing you, so before I lose you to a frantic Google search I'll tell you what it was...

.5% (or annualized 2%).

Does that look kind of low? It should, because that is below the historical average of 3.2%, according to the BEA. Does that mean it is time to start stuffing the mattresses? Probably not.

The following chart shows that the average quarterly return for the S&P 500 Index from 1948-2016 was 3%. In quarters following lowest quartile GDP growth, the average quarterly return was 3.2%! So is this a buy signal?

Quarterly S&P 500 Index Returns, 1948–2016

Sources: S&P Dow Jones Indices, Bureau of Economic Analysis.

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. 

Not if you believe, as I do, that current stock prices reflect all current information. With the average quarterly returns following poor GDP being very close to the average of all quarters, perhaps we can move on to more interesting reading next time we can't sleep!

The Long and Short of it

Hardly a week goes by that I'm not approached by a salesperson about including their "alternative" strategy in the Accountable Portfolios℠. The pitches are sometimes very compelling. Higher returns, lower volatility, with little correlation to more traditional assets. Some of these alternatives undoubtedly offer some benefit, but are those benefits superior to methods such as those that ATX Portfolio Advisors embraces? More to the point, are they worth the extra expense?

Eugene Fama and Ken French explore two such type of alternative approaches on the Fama/French Forum. Long/Short Strategies in the May 10th entry and Portable Alpha on May 5th answer those questions.

Can Negative Rates be Positive?

With countries like Japan and Germany experiencing negative interest rates on their bonds as a result of market forces and/or central bank policies, it is reasonable to wonder why anyone would willingly buy a bond that is going to pay back less than you put in.

In the last piece, I've linked an Issue Brief from Dimensional Funds, Finding Positive Expected Returns in a Negative Rate Environment. It discusses that hedging the currencies of foreign bond issuers can not only control volatility but may also lead to positive expected returns, even when rates are negative.

That's enough for this week. If any of it sticks with you, get in touch if you would like to discuss!

Issue Brief - What Is Fiduciary Advice?

Photo by Simon Cunningham 

Last fall, I wrote about the Department of Labor's proposed Fiduciary Rule for retirement advice in the October 30 edition of the Accountable Update. Since then, they have released new rules governing the $7 trillion that individual investors have invested in IRAs. The rules go into effect next year, but if you are an ATX Portfolio Advisors' client, not much changes. We already put your interests first and even make a Fiduciary Pledge to our customers. However, if you would like to have a better understanding of what fiduciary advice is, the following "Issue Brief" from Dimensional Funds does a nice job of summarizing the differences between two different standards that currently apply to investment professionals.

Once you understand the difference, you may be asking two questions:

1. Why would I ever want anything BUT fiduciary advice?
2. Would I rather work with someone that voluntarily chose a fiduciary standard, or someone forced to by the government?

What Is Fiduciary Advice?

Dimensional Fund Advisors
May 2016

Anyone searching for investment advice is undoubtedly confronted with many choices of service providers operating under titles such as certified financial planner, financial consultant, registered investment advisor, stockbroker, and insurance agent.

These titles can be confusing because on the surface it is not clear whether these professionals are legally required to have a client’s best interest in mind when making investment recommendations.

Many investors may have read that the Department of Labor (DOL) announced a substantial overhaul in the regulation of financial advice given on retirement savings. Central to this discussion are two terms: fiduciary and suitability. What does it mean for an advisor to operate on a fiduciary standard, and how does this differ from a suitability standard?

THE FIDUCIARY STANDARD

The DOL has described a “fiduciary” as someone who is required to put their clients’ best interest before their own profits. Fiduciaries include registered investment advisors, advisors to mutual funds (like Dimensional), and others who hold themselves out to be fiduciaries (like trustees and certain retirement plan consultants).

Fiduciaries are required to act impartially and provide advice that is in their clients’ best interest, and in doing so, must act with the care, skill, prudence, and diligence that a prudent person would exercise based on the current circumstances. A fiduciary must avoid misleading statements about fees and must avoid conflicts of interest.

Fiduciaries are typically compensated by payment of a fee rather than a commission. Fiduciaries to retirement plans, plan participants, and IRAs are also prohibited from receiving payments that create conflicts of interest unless they comply with the terms of certain exemptions issued by the DOL.

Probably most importantly, clients can expect that a fiduciary will act with transparency and avoid prohibited conflicts of interest. For example, given two comparable investment choices for a client, a fiduciary should typically recommend an option with lower management fees.

Fiduciaries are personally liable for breaches of their fiduciary duties. For example, if there is a loss caused by a breach of fiduciary duty, the fiduciary must make the plan or IRA whole by restoring any losses caused by the breach and restoring to the plan or IRA any profits made through the use of plan or IRA assets. Civil actions to obtain appropriate relief for a breach of fiduciary duty may be brought by a participant, beneficiary, fiduciary, or the US Secretary of Labor, and the fiduciary may be subject to excise tax penalties.

THE SUITABILITY STANDARD

Historically, representatives of a broker-dealer are required under the securities laws to judge the suitability of a product for a prospective investor, based primarily on that person’s financial goals, income, and age. Unless agreed otherwise, under this standard the rules do not legally require a recommendation of the most cost-effective product, a disclosure regarding conflicts associated with the investment, or disclosure of the compensation received when making that recommendation. Under the new DOL rule, it may mean that common forms of broker compensation, such as commissions and revenue sharing, will be restricted.

A SINGLE STANDARD OF ADVICE

As many financial advisors are dual registered as both brokers and investment advisors, it can be difficult to determine under which standard investment advice is given. A primary goal of the recent regulatory changes was to create a single standard for retirement financial advice based on a fiduciary model. Many clients already receive fiduciary advice, and for those clients the change in rules will not have much impact. Following the new DOL rule, it may be the case that professional financial advice for retirement assets (whatever the source) is subject to a level fiduciary standard.1 However, as with any investment advice, clients should conduct their own research, ask questions, and learn more about the reputation and philosophy of an advisor.2

1.     Note that in certain circumstances, information provided by advisors or brokers may not be treated as fiduciary advice. Some examples of these exceptions from the new DOL rule are providing general investment education, simple “order-taking” (executing an order to buy or sell without providing a recommendation), or certain “robo-advice.”

2.     For informational purposes only and not for the purpose of providing tax or legal advice. You should contact your tax advisor or attorney to obtain advice with respect to any particular issue or problem.

Source: Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. This information is intended for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

This information should not be misconstrued or otherwise interpreted as legal advice. Please consult with qualified legal or tax professionals regarding your individual circumstances.

PSAT and an O$#!+ Moment

Photo by Luftphilia

"PSATs are in," read the text.

"Huh?" I replied.

"Your son's PSAT score is in," said my wife.

"Oh, cool. How did he do?" 

"Pretty good. His score plus his GPA gives him a 60% chance of getting into Stanford!"

"Great! Wait. What?"

The preceding conversation is a not very fictionalized version of a text conversation between me and my wife earlier today. For maybe the first time, the thought of the cost of college became a very real and present concern in my household, versus the concept it had been (like retirement) up to now. 

As a financial planner, I have access to a wealth of information about the cost of different things. The planning software I use with clients, MoneyGuidePro®, provides very specific information, even at the individual college level, for planning purposes. Today, I opted to look at the cost of some individual schools versus the "average" categories I typically used for my personal planning. The results were a little unnerving.

First of all, my typical default has always been in-state tuition at a place like my alma mater, Texas A&M University. The current estimate for a public in-state college in the US starting in 2016 is $24,061 per year. That is right in line with what we have been saving for his college expenses. However, today was an epiphany.

First, I looked at the specific estimates of attending Texas A&M University. Here is how it broke down:

---

$ 9,428
$10,330
$ 1,194

$20,952

Tuition
Room & Board
Books & Supplies

Total

---

I felt pretty good about that, particularly given my previous assumptions using public school averages. I also looked at a few other Texas schools.

I started with the hated (at least in my house) University of Texas, a fine second choice if a kid can't get into A&M. It wasn't too daunting of a figure, just a little more than the flagship in College Station. Total costs = $22,016 per year.

Other Lone Star choices were Baylor ($52,834), Rice ($56,703), TCU ($53,570), and Texas Tech ($19,172).That's enough of sample size for me to use the following rule of thumb for Texas schools. $25,000 a year for public and $50,000 for private colleges.

Then for the moment of truth. Stanford University has always been a school that my son has said he may be interested in attending. With today's news that his PSAT coupled with his GPA gives him at least a coin flip's chance of getting in, I decided it was time to plan for the worst. The tally? 

 $61,261. Oh $#!+!

That's about 3X more than Texas A&M. (Caution, there is some Aggie math being used here.) For even a little more reality, the inflation rate for colleges has been about 5% over that past decade according to The College Board®. That means the current estimates would be about double for a four year old today if that rate holds true going forward.

So what does it all mean? For me, probably a little more belt tightening and discipline about where our money goes for the next few years. For ATX Portfolio Advisors clients, it means I will do what I can to help: whether it is forecasting the cost of college for your children or grandchildren, developing a plan to get there, or managing assets that are earmarked for that goal.

One of ATX Portfolio Advisors' values is to not kick someone when they are down. Thus, we don't pile on fees when your account balance falls from one month to the next, with the hope that our clients will be more likely to stay the course when they know they have a partner on the same side of the table.

I also believe that anything I can do to encourage better education and less debt for graduates is a small investment in all of our futures. To encourage more savings for those goals, ATX Portfolio Advisors will manage money invested in a low cost 529 plan for FREE if you have other assets being managed by me. (Note that 529 plans have costs associated with them that are levied by the plans and underlying investments.)

It's not free college for everyone, but it's a start. If you would like to discuss college planning or management of your assets, please get in touch.