ETFs are all the rage right now in investing for good reason. They are tax efficient with low expenses and can be used to create almost any investing strategy imaginable.
XLI is an example of an ETF that contains only stocks in the industrial sector. When you invest in XLI, you’re getting a small piece of 500 different stocks. After seeing an advertisement in Barron’s magazine this weekend for XLI, I was reminded that with every ETF you have to take the bad with the good.
General Electric (GE) is the top stock holding in the ETF and it accounts for 7% of the total fund. GE’s stock price is going through a tough time recently and its stock price is down 16% for the year.
The other top 10 holdings in the ETF have done well this year and have all returned a positive percentage:
Year to date XLI has a performance return of 13.04%. This is a pretty good return and in line with how the overall market has done. But if we take GE’s abysmal performance out of XLI it would have increased its return by an additional 2% to over 15%.
There’s no free lunch in investing. Even if you are going to use ETFs you still have to know what is inside the ETF that you are purchasing. Even one bad stock out of 500 can have an impact on the overall return.
When you partner with someone to help manage your financials, you want to ensure that he or she is truly a trusted financial advisor with only your interests and goals in mind, not just a salesperson looking to make a commission.
Below are the 5 main differences between a trusted advisor and a salesperson.
- A trusted advisor is a fiduciary and always acts in your best interest. They won’t be talked into selling you a product even if you insist.
- A salesperson follows the suitability standard and may push you a preferred product that gives them a higher commission.
The definition of what it means to act as a fiduciary is very simple: he or she always act in the best interests of their clients. This is in comparison to a salesperson who only needs to check the suitability of a prospective buyer, which is based primarily upon financial objectives, current income level and age, to complete a commissionable sale of a financial product. In a way, when a salesperson checks the suitability of a potential buyer, they are measuring how much financial product can be sold, not the needs of the investor.
The difference between the two definitions may seem small, but the impact can be enormous. Let’s look at an example:
Two financial advisors, Mr. Fiduciary and Mr. Suitability, are both working with the same client and determine that it would be beneficial to add a Balanced Mutual Fund to the client’s portfolio. A Balanced Mutual Fund is a common type of fund that usually has an equal mix of stocks and bonds. All of the major fund families (Vanguard, Fidelity, T. Rowe Price, American Funds, Franklin Templeton, etc.) offer their own version of a Balanced Fund.
Mr. Fiduciary researches all of the available balanced funds and based on fees and expenses, performance, independent ratings, and how the fund is allocated picks the best one for his client.
The company that Mr. Suitability works for has an agreement with Mutual Fund Company XYZ. They offer a free trip to Hawaii for any financial advisor that meets a quota and sells XYZ’s Mutual fund to ten of their clients. It’s easy to guess which Balanced Fund Mr. Suitability recommends, right? While there is a chance that XYZ’s Balanced fund is a good one, it is not very likely. After all, Mutual Fund Company XYZ is going to have to pay for many Salespeople’s trips to Hawaii and in order to pay for those trips, most likely their Balanced Fund is going to charge higher fees and expenses while providing less of a return to investors.
- Comprehensive Planning
- A trusted advisor does not stop at money management but incorporates all areas of your finances while following a process to help you create a comprehensive financial plan that meets all of your goals.
- A salesperson has a technique for making a sale and placing a trade.
Clients want and need more than just investment management – they want comprehensive financial planning. Clients need an advisor who can act as their financial quarterback by helping them to understand their retirement plans and estate planning needs and coordinate with their legal and tax professionals.
Here is a list of financial planning topics that you should be focusing on to secure your Financial Future.
- A trusted advisor is upfront and transparent about all fees and expenses you will pay for their services and recommendations.
- A salesperson likes to bury the fees and expenses in reams of paperwork hoping that you never realize they’re there.
There are different ways that advisors could be compensated for their services but they should always be upfront, transparent, and detailed with those fees. If an advisor receives a commission when selling you a product, or tells you that there are no fees for what they do, then you are probably working with a salesperson.
Many clients think the financial advice they receive is free. I know of a large Wall Street company whose CEO once said, “The sole objective of our firm is to make money.” With those marching orders why would that company and other firms like it do anything for free? Some clients I work with were under the assumption that they were not paying any fees while with their previous financial advisor. When I showed them the fees they were actually paying, they were truly floored and astonished.
While on the topic of free advice, it’s usually not good or well-informed. You may have a colleague or family member giving you advice on what to do with your finances; like a hot stock tip or a way to pay less taxes. While intentions are usually good, the advice usually is not.
- You should never feel pressured when working with a trusted advisor.
- A salesperson often resorts to high-pressure tactics to get you to purchase something.
Occasionally, after doing an analysis on a new client’s financial situation and making recommendations to reach the goals set, I may hear nothing back. As much as a trusted advisor wants to inspire a new client to take action, they will never pressure them into doing it.
Still, there are many salespeople acting as advisors that use high-pressure tactics to close a sale. I’m sure at one point or another you have felt the squeeze of a salesperson and it does not feel good. Using manipulative talk, making outrageous promises, and inflating past performance are all typical tactics used by salespeople. Don’t fall victim to these schemes.
- Custom, Individualized Service
- A trusted advisor should provide a high level of personal attention and involve appropriate advice and service based on each client’s individual situation.
- A salesperson utilizes a general cookie cutter plan or product meant for a clear majority of clients.
Just like every person is unique, no two clients and financial situations are alike. While a Roth IRA may be the best option for one person to save for retirement it may not make sense for another person. A particular stock or bond may not be right for everyone.
In addition to the top 5 differences above to ensure you are working with a trusted advisor, below is a checklist to follow.
- If you were referred to the advisor, was the recommendation strong?
- Does the advisor seem thorough and detail oriented?
- Does the advisor take care in reviewing and calculating financial figures?
- Is your advisor reliable? Do they do what they say they will?
- Is the response to your financial details non-judgemental?
- Does the advisor listen well and ask relevant follow-up questions?
- Does there seem to be a “fit” between you and the advisor?
The best-trusted advisor will be with you for the long haul so you should also feel comfortable reaching out at any time with any questions. He or she will continue to touch base with you as you implement your financial plan, monitoring your progress to ensure you are progressing steadily to your goals while removing doubt along the way.
Please feel free to schedule a complimentary call with Bautis Financial.
“What return can I expect? How much are the fees? How often will we meet?” These are often the questions that arise when you’re ready to have your money managed by a financial advisor. These are all simple questions to answer, however, the most important question you should ask yourself is this: Is this the right advisor for me?
OK, let’s get real here. Life can throw us curve balls and sometimes bad things happen to good people. Trusted financial advisors like Bautis Financial are not just managing money for clients, but planning meticulously for the future, not only for your ideal retirement but also for when you’re no longer here. It’s hard to think about, but best to plan for those difficult times now rather than in the heat of a crisis.
I have lost clients unexpectedly and then spoken with the grieving family members, parents, business partners, and other advisors of the deceased – all these important people in our lives that make up who we are as people. It may be time to get us introduced, this way Bautis Financial can really take the best care of you, your loved ones, and your legacy.
Not many of us like to follow a set of rules, but for each component of our life we need to set some personal rules, or standards that can apply to our everyday obligations. If we don’t it’s like we are flying blind and that area of our life can quickly turn chaotic.
For example to have optimal health some good rules to follow are:
- Lift Things and Move Around…
- Avoid Excess Stress…
- Don’t Put Toxic Things in Your Body…
- Nourish Your Body With Whole Foods…
If we establish similar rules to guide us with our finances we’ll have a better chance of achieving our goals. Some examples of good financial rules are:
- Contribute the max to your retirement accounts
- Contribute the max to college funds
- Pay off your credit card balance each month
- Avoid excessive fees
- Have lots of insurance
- Invest in assets that generate income
- Keep a minimum balance in emergency savings account
- Set & adhere to a monthly budget for categories like dining out, entertainment, travel…
If we expand on one of the rules above we can see how it can guide our daily lives. Let’s say we set a rule to have a minimum of $10,000 in our emergency savings account. The behaviors that stoke the standard are important. You can expand the rule to say that we will not dine out or go shopping until we hit the standard.
The challenge is that most of us we don’t like rules and we covet the freedom to do and say what we want. However, if we don’t have any rules our financial lives can turn to chaos and set ourselves up for failure.
A target date fund is a type of mutual fund that is popular in retirement accounts like 401k’s. The way they are supposed to work is that you select the fund with the date closest to your retirement year and the fund will adjust itself over the years to become more conservative in its investment allocations as you get older. They funds have names like:
- Vanguard Target Retirement 2050
- Vanguard Target Retirement 2045
- Vanguard Target Retirement 2040
- Vanguard Target Retirement 2035
- Vanguard Target Retirement 2030
- Vanguard Target Retirement 2025
While it simplifies the choice of allocating your 401k investments, they may not be what’s best for you. Here is an analogy: Let’s say you are not feeling well and go to the doctor. He asks how old you are. You tell him your age and he says, “Ok, I’m going to give you this medicine because that’s what I give to all of the people that age.”
- Your job
- Your spouse’s job
- If you have kids & perhaps their age(s)
- How much risk with your investments you are emotionally comfortable with
- How risk with your investments you may need to take to hit your goals
- Any inheritance you may receive
- Other assets you have saved up
- Your projected expenses in retirement
Whenever I put together a portfolio allocation for someone I like to see how it would have fared during the 2008 and 2009 financial crisis. History doesn’t mean it’s going to repeat itself, but it’s interesting to look at. Studies show that many of the 2010 target-date funds were found to be too aggressive when the markets crashed in 2008.
These will include brands, patents and regulatory licenses. A strong brand name will increase the customers willingness to pay up for their products. For example, Coca cola has a strong brand name that helps it receive a better return from other companies that sell the exact same product. Patents will protect the entrance of competitors into their market. An example would be a pharmaceutical company holding a patent for a specific drug only they can make and sell. Government Regulation will also hinder competition from entering the market.
When the cost of switching exceeds the expected value and benefit of not changing. This doesn’t have to only be determined by price. An example of this is software that you may be able to find cheaper from another company. But because of the hassle of switching and training time it takes to get the new software up and running it may not be worth it for you to change.
When the value of a particular good or service increases for both new and existing users as more customers use that good or service. A good example of this is Facebook. When it started it didn’t have a very large network, whereas now they have one of the largest networks in the world. You can also look at the credit card network and how they have increased over time to the power houses they currently are.
Companies with wide moats have sustainably lower costs than their competitors. Sustaining these low costs can come about in a number of ways. An example is economies of scale driven by large operations. The more units produced the lower the cost per unit.
When a niche market is effectively served by one or a small handful of companies, efficient scale may be present. For example, midstream energy companies such as Enterprise Products Partners EPD enjoy a natural geographic monopoly. It would be too expensive to build a second set of pipes to serve the same routes; if a competitor tried this, it would cause returns for all participants to fall well below the cost of capital.
What are the Positives of a Wide Moat?
Wide Moats have long duration’s of positive returns. Wide Moats Focuses on outperforming the Market Over time of which it has done so.
One of the questions I receive when someone starts saving for their children’s college via a 529 plan is what happens if their children do not go to college. One option is to have another family member use the funds in the 529 plan to pay for their education. If we take that into account along with the fact that there is no time limit on when the 529 funds have to be used and that the money inside the 529 grows tax-free I created the image below to show how one 529 plan can be used to create a Family Education Foundation that can last generations.
Click here to view the image below
I made a recent appearance on Jen Selverian’s, The Nadexa Group Podcast. We discussed
– What it means to be a fiduciary
– What an engagement with me as a financial advisor starts with
– Why understanding your cash flow is important
You can view the interview here
Have you ever wondered how efficiently you are using the money you earn?
There are many different calculations you can use, but one that’s very helpful is called The Power Percentage. The Power Percentage is a formula that was created by financial planner, Peter Dunn to help determine how efficiently you are using your income and how ready you are for retirement.
We’ll look at an example to see how a Power Percentage score is calculated. The first step is to determine your Gross Monthly Income. This is the amount you earn in a months’ time before taxes. In the example we’ll use $5,000 as a gross monthly income amount. If you earn by commission you can add your previous 12 months’ commissions plus your base salary and divide it by 12.
The next number you need for the formula is the amount of money you are saving each month. Your savings may be going to different places: an IRA or 401k, a 529 plan, savings or checking accounts, or an investment account. In our example we are going to use $500/monthly into a retirement account with a $250 employer match. We are also going to add $150 to a 529 account and $150 to an emergency savings account. Don’t include anything you that you plan on spending in the near future such a vacation fund, Christmas fund, or new car fund.
If you have a mortgage we also want to add to the savings total the amount of principal that is being reduced from your mortgage each month. In our example we will use $400. Finally we’ll add to the total any other debt reductions you are making each month whether you are paying off student loans, medical debt, … Everything is Bold in the below chart was added together to give us a total monthly savings of $1650. We then take that amount and divide it by our gross monthly income ($5000) to get a Power Percentage of 33%.
Power Percentage = Total Monthly Savings / Gross Monthly Income
|Gross Monthly Income||5,000|
|Employer Sponsored retirement||500|
|Total Saving and Debt Reduction||1650|
There are four levels of scoring.
Level 1: 0% to 10%. (Not Good)
Level 2: 11% to 20% (OK)
Level 3: 21% to 34% (Pretty Good)
Level 4: 35% and above (Excellent)
33% Is quite good but still can be improved. Why might you have a low score when figuring out your power percent? You may not be earnings enough income to support your current lifestyle You also may just not be saving enough each month. There are many different scenarios that could be happening. If you would like help calculating your score I would be happy to help. Once you have your score you can measure how different changes to saving and spending over time improve it.