Seeking Prudent Advice Archives - Page 9 of 23

More Money Lessons from “Downton Abbey”

We’re big fans of “Downton Abbey”, the television show that follows an aristocratic British family in the early decades of the 20th century.

Over the five seasons that the show has graced PBS’ “Masterpiece”, a number of money lessons have been showcased — mostly what NOT to do!

For example, don’t bet the family fortune on a railroad thousands of miles away (i.e., massive lack of diversification). A professional advisor working in concert with the Earl of Grantham probably would have prevented him from concentrating so much capital in a Canadian railway!

Downton’s money lessons include financial and estate-planning disasters, bad investments, messy trusts, and inadequate business succession plans.

Here are some key takeaways and tie-ins:

Spell out control and ownership when passing the baton of a family company
(the generational transfer of Downton Abbey from Robert to Matthew)
Use trusts to protect the family fortune
(to protect Robert Crawley’s from his own poor decisions)
Make a will before giving birth
(think of Matthew Crawley’s untimely demise)
Set up a medical directive
(the terrible struggle of how to handle Sybil in childbirth)

We can’t wait for more Dowton Abbey and money lessons as season 5 continues!

Morgan Stanley Advisor Leaks Data for 350,000 Clients

Morgan Stanley financial advisor Galen Marsh downloaded personal and sensitive account data for 350,000 clients of the firm. Essentially none of these clients were his own. A few weeks ago in December 2014, these data started showing up on Pastebin, a website popular with data thieves and other illegal operators. The anonymous data leaker offered to trade more data in exchange for a payoff in virtual currency. Morgan Stanley detected the breach, subsequently fired the 30-year-old advisor and the FBI has opened an investigation.

One startling aspect of this data breach is the seemingly weak information security at Morgan Stanley. One of the basic tenets of this space is “access control” — each employee’s access should be restricted to the data he or she needs to operate. In this case, Mr. Marsh should have had access to only the handful of clients that he supported, not 350,000!

Marsh admitted to downloading data for 350,000 clients but denies posting it online. Morgan Stanley is trying to understand how Marsh transferred the data offsite.

In response to this breach, Morgan Stanley reportedly tightened security to its client database, hired an outside call center to handle the surge of inbound calls from clients concerned about the breach, and is offering credit and identify theft services to impacted parties.

Source: WSJ

Higher Income Earners Got Better Investing Advice

The Wall Street Journal reported this week that only the top 10% of income-earning households were able to hold onto their stock portfolios and ride the big rally over the past few years. As a consequence, the wealth gap increased as the bottom 90% had no skin in the game as the market turned positive.

According to the Wall Street Journal:

The Fed’s Survey of Consumer Finances shows that among the bottom 90% of households by wealth, families bailed out of the stock market between 2007 and 2010—the central bank’s study is conducted every three years—and between 2010 and 2013. The total share with stockholdings declined by 4.4 percentage points. That’s the equivalent of 5.4 million households selling stocks, even as the market rebounded. Only households in the top 10% have been increasingly likely to own stocks.

This is strong evidence that the top 10% benefited from the power of having financial advisors while the bottom 90% went largely without. Wealthy investors get better advice and are more likely to endure the pain of holding onto their stocks through down markets.

Before the Advice, Check Out the Advisor

Elaine and Merlin Toffel, two retirees in their 70s, wanted help with their investments. They visited their local U.S. Bank branch and the teller suggested they meet with the bank’s investment brokers. The bank ended up selling these retirees more than $650,000 in annuities to generate lifetime income payments.

Now Ms. Toffel says they didn’t realize the variable annuities came with a big annual charge: 4% of the invested amount or more than $26,000 per year. Moreover, they didn’t understand there would be a 7% surrender charge (>$45,000) if they need to get their money back right away.

Mr. and Ms. Toffel fell prey to a painfully regular pitfall. They assumed the broker was working and advising them in their best interest. That is simply not true. Brokers are not a fiduciary. They are allowed to put their own interests or their employer’s interests ahead of yours!

“Brokerage customers are, in a certain sense, deceived,” said Arthur Laby, a professor at the Rutgers School of Law and former cunsel at the SEC. “If brokers continue to call themselves advisers and advertise advisory services, customers believe they are receiving objective advice that is in their best interest. In many cases, however, they are not.”

“While many brokers do right by their clients, others push bad products at high prices,” said Knut A. Rostad, the regulatory and compliance officer at Rembert Pendleton Jackson,

Please arm yourself with information by reading this New York Times article.

Risks to Family Wealth

source: U.S. Trust

Chasing Past Performance is Expensive

A new study demonstrates that chasing the hot mutual fund is an inferior investing strategy compared to good, old-fashioned buy and hold.

Vanguard analyzed a decade of data ending December 31, 2013 across nine asset classes. In every case the investor would have been significantly better off just sticking with the index. On average the indexes generated 50% higher returns than the performance-chasing strategy!

Buy and hold may not be perfect, but it can be a lot better than flitting from mutual fund to mutual fund.

Regulators Urge Small Investors to Avoid Non-Traded REITs

REITs stands for Real Estate Investment Trusts. REITs sell like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate.

Real Estate is historically a good performing asset class. Allocating approximately 10% of your stock portfolio is a generally prudent choice. However, state regulators are seeing more and more trouble with a certain type of real estate investment: non-traded REITs.

Non-Traded REITs
Unlike normal REITs, non-traded REITs do not trade on a securities exchange. They have several very significant issues:

Non-traded be can very illiquid.
They can be very difficult or impossible to price on a regular basis.
It can be difficult to exit the investment.

Front-end fees can be as much as 15% (much higher than traded REITs due to the limited secondary market)

Non-traded REITs buy office buildings, stores, and other properties. They are sold directly to private investors by financial advisors and brokers.

State Securities Regulators Worried
Regulators are concerned that small investors are not fully aware nor understand the risks associated with non-trade REITs. States are on the verge of adopting new restrictions to protect “mom and pop” investors including:

Limit how much an individual’s net worth could be put into any a single REIT
Limit the ability of REITs to pay dividends immediately after raising new money (to avoid a Ponzi-scheme like dynamic of paying old investors with new investors’ money)

The State of Massachusetts has brought enforcement actions against brokerages for improper sales of non-traded REITs including

LPL Financial
Ameriprise
Commonwealth Financial
Lincoln Financial

Source: WSJ

75% of Americans get the Most Important Investing Question WRONG

Powerful observation from Vox.com regarding public perception versus reality when it comes to how to best invest your money:

Which of the following do you think is the best long-term investment?

Real Estate
Gold
Stocks/Mutual Funds
Savings Account

Don’t feel bad if you didn’t get the answer right. You’re in good company.

Recently, Gallup asked Americans what they thought their best investment bet was over the long run. 24 percent of Americans named stocks and mutual funds — but the same share named gold, and even more (30 percent) named real estate. The trend lines are actually positive, as in 2011 a baffling 34 percent of Americans named gold as their top pick:

There’s a right answer here — and it’s one that about two thirds of respondents who answered the question got wrong. If history is any guide, stocks are the best bet in the long run, and gold and real estate certainly are not.

Source: Vox.com

Student Debt Linked to Worse Health and Less Wealth

The negative effects of student debt are significant and persistent according to a new Gallop poll. Those who borrowed more than $25,000 are less likely to enjoy work and are less financially and physically fit than their debt-free peers even 24 years after graduation.

Gallop examined five elements of well-being:

Purpose: liking what you do each day and being motivated to achieve your goals
Social: having supportive relationships and love in your life
Financial: managing your economic life to reduce stress and increase security
Community: liking where you live, feeling safe, and having pride in your community
Physical: having good health and enough energy to get things done daily

Financial and physical well-being show the strongest relationship with student debt. Conversely, social well-being appears to have the weakest debt link.

“These results offer a new dimension of how college debt affects the rest of your life and it gives us more cause for concern,” said Brandon Busteed, executive director of Gallup Education.

Source: Gallup

Annual Asset Class Returns

The table below ranks the best to worst investment returns by asset class over the past 15 years. CLICK IT FOR A CLOSER LOOK
Great chart from Novelinvestor:

The chart shows several issues investors struggle with all the time. It’s difficult to pick the best performing investment year after year, yet for many investors it’s an annual event. They look for an encore, picking the best asset class last year with the hope of a repeat performance. Yet, betting on last year’s winner rarely works out.

Assets at the top of the chart one year could be at the bottom the next, and vice versa. Much of this is due to reversion to the mean. But over the long-term, those big swings even out. The chart shows annual returns for eight asset classes against a diversified portfolio. Diversification works to smooth out those big swings in the short-term. While you’ll never get the biggest gains of any year, you avoid the huge losses.

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