Seeking Prudent Advice Archives - Page 8 of 23

NorthStar Client Family Featured in AARP The Magazine

Debra and Gary Wilhoit, a NorthStar client family, are featured in the June/July 2016 issue of AARP The Magazine. Dr. Chris Mullis, CEO and senior planner at NorthStar, is quoted in the article alongside senior advisors from Charles Schwab and T. Rowe Price.

Kudos to the Wilhoits for candidly sharing their early-retirement anxieties and the actions they have taken to ultimately reach greater peace of mind and long-term success. Millions of Americans who are transitioning toward and into retirement can immediately relate to the Wilhoits’ experience. And millions of Americans can benefit by adopting the Wilhoits’ long-term perspective and positive investor behavior.

AARP The Magazine addresses the evolving life stages of 50+ Americans and is the largest circulation magazine in the United States (35.9 million readers).

Hedge Funds — Exceptional Complexity, Exceptional Underperformance

The chart above compares hedge fund returns to the S&P 500 Stock Index (blue) and the Barclays/Lehman Aggregate Bond Index (red) since 2011. Various popular hedge fund strategies are portrayed by the four colorful lines that occupy the zero-to-negative return space! In both an absolute and a relative sense, this is stunning underperformance. Moreover, those hedge fund returns are before fees, so the investor return is even worse. Hedge funds traditionally charge a management fee that’s 2% of assets, plus 20% on any profits.

Despite this dismal five-year run, complex and expensive hedge funds are more popular than ever. In the Internet era, interesting, persuasive, and money-losing commentary is just a click away!

At last Saturday’s annual meeting of Berkshire Hathaway, legendary investor Warren Buffett unloaded: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.” Buffet added that hedge funds operate with “a compensation scheme that is unbelievable to me.”

Our brains are naturally attracted to “shiny objects” and our intuition suggests success requires a complex solution. Nonetheless, empirical data such as the chart above demonstrate that wealth can be achieved through simple investments combined with simple discipline.

Misconduct! 10 Worst & 10 Best Behaving Advisory Firms

New research shows the level of financial advisor misconduct is alarmingly high. “It’s everywhere, not just small firms. It is pervasive,” said Dr. Amit Seru, a finance professor at the University of Chicago’s Booth School of Business and a co-author of “The Market for Financial Adviser Misconduct” (Egan, Matvos, and Seru 2016).

These researchers data mined the FINRA database to aggregate and measure the misconduct data for all U.S. firms with at least 1,000 advisors. The industry-wide average was 7% of all advisors have records of misconduct.

Oppenheimer ranked #1 in the “bad behavior” list. Nearly 20% of the advisors at Oppenheimer & Co. have been disciplined for misconduct that varies from placing clients in unsuitable investments to trading client accounts without permission. This rate is ~25 times higher than the “best behaving” firm, Morgan Stanley.

The following excerpt from Table 6 of this landmark study lists the 10 firms with the highest rate of “bad behavior”:

On the flip side, here is the list of the “best behaving” firms from the study:

Here are some other key findings from this research:

Roughly 7% of advisors have misconduct records
Prior offenders are 5 times as likely to engage in new misconduct as the average financial adivsor
Approximately 50% of financial advisors lose their job after misconduct
44% of those advisors are re-employed in finance within a year (!)
Misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes
Some firms “specialize” in misconduct and cater to unsophisticated consumers

Run, don’t walk, to the FINRA search page to immediately review your advisor’s regulatory disclosures!

Sources:
The Market for Financial Adviser Misconduct (Egan, Matvos & Seru, 2016)
Bloomberg

What Buffett Wouldn’t Do and You Shouldn’t Either

People often look to Warren Buffett, one of the greatest investors of all time, for guidance what to do. But what about the opposite? The Oracle of Omaha has a great list of “no-goes” enumerated in a recent Bloomberg article:

Investing:

Don’t be too fixated on daily moves in the stock market (from Berkshire letter published in 2014)

Don’t get excited about your investment gains when the market is climbing (1996)

Don’t be distracted by macroeconomic forecasts (2004)

Don’t limit yourself to just one industry (2008)

Don’t get taken by formulas (2009)

Don’t be short on cash when you need it most (2010)

Don’t wager against the U.S. and its economic potential (2015)

Management:

Don’t beat yourself up over wrong decisions; take responsibility for them (2001)

Don’t have mandatory retirement ages (1992)

“Don’t ask the barber whether you need a haircut” because the answer will be what’s best for the man with the scissors (1983)

Don’t dawdle (2006)

Don’t interfere with great managers (1994)

Don’t succumb to the attitudes that undermine businesses (2015)

Don’t be greedy about compensation, if you’re my successor (2015)

Source: Bloomberg

Financial Advising Jedi?

With today’s opening of “The Force Awakens”, Ryan Neal has a great piece on “Star Wars” lessons for financial planning. Here are some excerpts and adaptions to help you answer the perennial question, Is my financial advisor a Jedi Master?

The Power of Holistic Planning

As young Skywalker’s advisor, Obi Wan Kenobi teaches him that the Force, an energy field created by all living things that binds the galaxy together, is the source of his power. For financial advisors to truly unlock their potential, they need to have a holistic view of their clients’ financial lives, as well as a mastery of investment strategy. By understanding how various accounts, needs and goals all connect together, an advisor can be a truly powerful guide for their clients.

Sticking to the Plan

While Luke is a neophyte just learning the ways of the Force, Han Solo is a hardened skeptic, disregarding advisors like Obi Wan Kenobi and instead preferring the lifestyle of a risk taker, which has led him to real problems with debt. When Luke gets distracted by Solo’s taunts, Kenobi reminds him to trust in his plan instead of making knee-jerk reactions. While things get rocky along the way, Luke eventually reaches his goal of becoming a Jedi Knight. It’s a good reminder for when the markets get rough: Trust in the plan, mitigate short-term emotional reactions, and focus on long-term goals. Han may call it luck, but advisors know there’s no such thing.

The Quick and Easy Path Leads to the Dark Side

We learn more about the Force in the 1980s’ “Empire Strikes Back,” when Jedi master Yoda teaches Luke about the Dark Side. Like a good advisor, he tells Luke that chasing instant gratification, like investing heavily in a hot stock, can lead to ruin. When Luke ignores the advice, he’s almost defeated by Darth Vader. Yoda reminds us that patience is key with investing, not adventure or excitement.

Know Your Advisor’s True Value

Though his investment strategy might be questionable, Han Solo does understand value. Luke is shocked when Solo initially discloses his fees to pilot them across the galaxy in the Millennium Falcon. Luke says he could buy and pilot his own starship for less, but Obi Wan Kenobi knows expertise can command a fair price and even offers to spend more to ensure results. It turned out that Luke didn’t know flying through hyperspace from dusting crops, and Solo’s experience came in handy.

It’s Not Just About Money

Though Han Solo told Princess Leia that he doesn’t care about her or the rebellion, he becomes a true hero after he realizes that there’s more to life than money. Advisors are worth more than just allocating assets and providing returns; they can be even more valuable to clients by helping them navigate important milestones in life, like buying a home, sending kids to college, and retiring comfortably. Remember what Leia told Han: “If money is all that you love, then that’s what you’ll receive.”

Don’t Judge by Appearances

“Judge me by my size, do you?” Yoda may be small, but his power with the force is great. Similarly, many investors often think bigger is better and don’t realize that small boutique firms can provide superior guidance.

Source: WM

Our appearance in U.S. News & World Report

U.S. News and World Report quoted us in an article they ran on Monday (9/14) entitled“10 Reasons New Investors Should Enter the Market”. Lou Carlozo, one of the nation’s leading personal finance writers, reached out to NothStar Capital Advisors for ourinsights and wisdom for new investors contemplating an entry into a choppy or down market. Scroll down to read our full guidance.

Here are our leading thoughts to guide new investors:

New investors should embrace the opportunity to start their investing experience in a down market. These conditions are ideal for helping you get your investing psyche or your investing brain straightened out from the get go. Bear markets showcase the negative inputs and fears that all investors ultimate face. Take up the challenge early on to understand the fears, to recognize your intuitive human response, and take counter-intuitive actions. You’ll cultivate long-term wealth with that counter-intuitive mindset that features taking the long-view, developing a thick skin to combat the short-term “noise”, and sticking to your investment strategy with steely discipline.
If you’re new to investing you should be happy there’s a bear market because that means more buying opportunity. You’re buying on discount and getting more bang for the buck. So embrace the bear market. Get in the game and get the benefits.
Another reason one shouldn’t hesitate to get into a down market is because bear markets are absolutely normal events. Historically a bear market occurs about every 6 years on average. So a smart young person who starts investing in her mid 20’s will experience about 7 bear markets before retiring in her mid 60’s, plus 5 more during 30+ years of retirement. Even though bear markets are regular events, the exact timing of the bear’s appearance and disappearance is not. Hence, the evergreen but difficult-to-follow-advice, “don’t try to time the market”.
When you’re trying to understand what’s the best course of action, it’s often beneficial to consider what’s the worst thing to do. When it comes to bear markets, the worst thing to do is to panic, sell, and become a non-participant. Today in 2015, our office gets a regular flow of folks seeking our help. They cashed out at the bottom of the market in ’08 and ’09 and never got back in. They are trying to find the courage and commitment to come back in and re-start the wealth accumulation process. They have squandered the last 6+ years of stock market growth by sitting on the sidelines. They’ve thrown away money and damaged their retirement lifestyle by taking negative action around a bear market. So back to your quandary of plunging into a bear market…get in and stay in. You’ll be happier and wealthier in the end.
In summary, investors grow their wealth by getting in and staying in. If you have any troubles understanding the why’s or maintaining your discipline to stay the course regardless of the moment, reach out to a professional advisor. That will probably be the most profitable call you ever make in your life.

If you know someone who is new to investing and struggling to decide the best thing to do for her family, please share this information with her.

Jason Zweig’s Rules for Investing

Jason Zweig is a leading financial journalist and author. You’ll find his stuff in the Wall Street Journal several days a week. Buried within the appendix of his book, Your Money & Your Brain, is this great list of common sense rules that are commonly ignored.

Jason Zweig’s Rules for Investing

1. Take the Global View: Use a spreadsheet to track your total net worth — not day-to-day price fluctuations.

2. Hope for the best, but expect the worst: Brace for disaster via diversification and learning market history. Expect good investments to do poorly from time to time. Don’t allow temporary under-performance or disaster to cause you to panic.

3. Investigate, then invest: Study companies’ financial statement, mutual funds’ prospectus, and advisors’ background. Do your homework!

4. Never say always: Never put more than 10% of your net worth into any one investment.

5. Know what you don’t know: Don’t believe you know everything. Look across different time periods; ask what might make an investment go down.

6. The past is not prologue: Investors buy low sell high! They don’t buy something merely because it is trending higher.

7. Weigh what they say: Ask any forecaster for their complete track record of predictions. Before deploying a strategy, gather objective evidence of its performance.

8. If it sounds too good to be true, it probably is: High Return + Low Risk + Short Time = Fraud.

9. Costs are killers: Trading costs can equal 1%; Mutual fund fees are another 1-2%; If middlemen take 3-5% of your cash, its a huge drag on returns.

10. Eggs go splat: Never put all your eggs in one basket; diversify across U.S., Foreign stocks, bonds and cash. Never fill your 401(k) with employee company stock.

Your Investing Philosophy in Ten Words or Less

Brevity is power. If you truly understand something well, you can explain it in simple terms. Ten individuals share their investing philosophies in 10 words or less:

Barry Ritholtz, Bloomberg: “Keep it simple, do less, and manage your stupidity.”
Ben Carlson, author of A Wealth of Common Sense: “Less is more. Process over outcomes. Behavior is the key.”
Harold Pollack, University of Chicago: “Save 15-20%. Low-fee Indexes. Pay off plastic. Maximize 401(k).”
Robert Brokamp, Motley Fool: “Diversification reduces risk, increases predictability, and boosts returns.”
Michael Batnick, Ritholtz Wealth Management: “Avoiding catastrophic mistakes matters more than constructing the ‘perfect portfolio.'”
Cullen Roche, Pragmatic Capitalism: “Low-fee, tax-efficient, index-based global-macro asset allocation.”
Eddy Elfenbein, blogger, Crossing Wall Street: “Be patient and ignore fads. Focus on value. Never panic.”
Seth Jayson, Motley Fool: “Be safe, keep your costs low, and don’t overthink.”
Josh Brown, CNBC, The Reformed Broker: “Roses are red, violets are blue. I don’t know what will happen and neither do you.”
Morgan Housel: “Worry only when you think you have it figured out.”

Source: MF

3 Characteristics of Good Financial Advice

Searching for a good advisor? Here’s an insightful opinion on the 3 characteristics good financial advice should demonstrate:

It should be given by someone you like who is qualified to be giving advice. This may seem so elementary, but it’s absolutely worth noting. Financial success is not typically something that happens in short periods of time. Most times it requires long stretches of behavioral adjustment. Therefore, the giver of advice is likely someone you will want to develop a relationship with. Relationships without chemistry are not usually very successful for any useful period of time. They should also be qualified to be giving the advice.

It should only be given after arriving at a conclusion based on an exploration into your needs. Taking off the cuff financial advice should be avoided at most costs. If it is simply a fact or specific rule that applies to anyone – like IRA contribution limits at a certain age / income level, that’s fair. But if it has to do with how you should be allocating assets, how much you should be saving, what types of accounts you should have – these are all things that require developing a far deeper understanding than a brief conversation can offer.
It should be simple for both the receiver and giver to understand. If the person giving the advice has your better interest in mind, they will have a deep grasp whatever it is they are recommending you do or invest in. If they truly do, it will be conveyed with ease. It may require some detective work on your part, but it shouldn’t be too difficult to figure out if you are listening to someone who doesn’t deeply understand the stuff they are talking about.

Source: TCP

Finance Needs an Ethics Class

A new report on the financial industry describes a very troubling situation.

A third of the people surveyed who make more than $500,000 annually claim that they “have witnessed or have firsthand knowledge of wrongdoing in the workplace.”
“Nearly one in five respondents feels financial service professionals must sometimes engage in unethical or illegal activity to be successful in the current financial environment.”
One in ten say they have been directly pressured “to compromise ethical standards or violate the law.”

More than 1,200 traders, portfolio managers, investment bankers, and hedge fund professional were surveyed.

Clearly not all financial professionals are unethical, but given the high degree of bad operators, we continue to counsel our clients and friends to ask good questions, be skeptical, and do your due diligence when making financial transactions.

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