Posts

Financial Wellness for Gen X and Millennials – It’s About More than Investments

Part 1: Car Insurance

I’ve noticed a few recurring themes from financial plans this past year. They have nothing to do with investments, but they are in many ways, so much more important. It turns out, there are a few items in your financial life that require consistent maintenance. Dropping the ball could cost you quite a bit of money.

If you have any financial assets, you need full liability coverage car insurance. The state minimum amount will not be enough to cover you in an accident when you’re at fault, and the other party can sue you personally after the insurance maxes out. In Louisiana, the state minimum liability insurance is 15/30/25. That means $15,000 for bodily injury per person, $30,000 for bodily injury to more than one person in an accident, and $25,000 for damage to the other person’s vehicle. So, the next time you total someone’s $80,000 Tesla, you’re on the hook after the first $25,000. But the larger risk is the bodily injury limits. Have you ever seen a hospital bill, with an ambulance ride, for less than $15,000? If you carry minimum liability insurance, the injured person will be suing you for the remainder of their medical bills.

You need the maximum liability coverage of 100/300/100. That’s $100,000 bodily injury per person, $300,000 per accident, and $100,000 in property damage. In addition to full liability insurance, you might also want uninsured and under-insured coverage in case the other driver is at fault and doesn’t have enough insurance. To protect your assets further, you should consider purchasing an umbrella policy on your homeowner’s insurance that pays an amount above the maximum car insurance rates.

There are a few things you can do to lower your car insurance premiums. You might consider a higher deductible of $1,000 rather than $250 or $500. If you don’t owe anything on your car, and you have enough in savings to buy a replacement car, you might consider dropping collision coverage on your vehicle. If you run the numbers, self-insuring may be cheaper over the life of your vehicle.

Many car insurance companies are offering a discount to drivers who place a tracking device in their car for up to six months. This allows the insurance company to confirm the number of miles driven and analytical data such as speed and brake usage. Drivers deemed to be “safe” drivers are given a discount of up to 20% based on the data collected. This can backfire, however, if you’re a hot-rodder, so consider you’re driving style before taking this route.

Are you adding a teenage driver to your car insurance soon? Good luck! As parents before you know all too well, car insurance for teenage drivers is expensive. However, many insurance companies offer discounts for teens who have completed approved driver’s education classes and logged enough practice time behind the wheel with a parent. Teens can also get a discount for having good grades. Check with your insurance company to find out what information they need to apply for a teen driver discount.

I used to be the person who never changed car insurance, accepting the annual premium increase into infinity. It makes sense to shop your coverage every couple of years. Although the process is tedious, many people find significant savings by switching companies.

This is Part 1 of a series on financial wellness for Gen Xers and Millennials. Check back next week for a discussion on shopping your cash savings rate.

,

3rd Quarter 2017 Market Commentary

Stocks continued to climb higher during the third quarter, with international and emerging market stocks increasing their lead on U.S. markets. S&P 500 earnings rose to an all-time high of $30.51 per share for the second quarter. International and emerging markets continued to soar, assisted by a declining U.S. dollar, low valuations, and strong earnings. Large cap stocks performed better than small caps, and growth stocks outperformed value stocks. Technology was the highest performing sector in the S&P 500, and was up 27.4% for the year. On the flip side, energy and telecom stocks have posted negative returns this year. Bonds posted small positive returns as short-term interest rates ticked higher. International and emerging market bonds outperformed U.S. bonds.

*US Stocks represented by the S&P 500 Index, International Stocks represented by the MSCI EAFE Index, and Emerging Markets represented by the MSCI Emerging Markets Index

Where is Volatility? Read more

Mark-up Disclosure for Bonds: It’s About Time

I’ve spent the better part of a decade trying to explain to investors that bond purchases are not free. But that’s a difficult task when the costs are hidden from investors. This will change in May 2018, when the SEC’s new bond mark-up disclosure requirement takes effect.

What is a Mark-up?

Unlike stocks, where investors receive a confirmation that explicitly lists the transaction fee or sales commission, bonds are offered to investors out of a broker-dealer’s inventory. The broker-dealer firm buys the bond at one price, then “marks up” the bond and sells it at a higher price to its customers. There’s nothing wrong with the broker-dealer receiving compensation for functioning as a liquidity provider between buyers and sellers. The problem is that mark-ups have never been disclosed to investors. As a result, investors do not have an opportunity to compare costs and create a market price for these transaction costs. While the costs to trade stocks, ETFs, and mutual funds have come down dramatically, bond transaction costs remain a mystery.

Here’s an example of a mark-up in action:

Source: https://emma.msrb.org/

This is real trade data from May 31, 2017 for a municipal bond from Illinois.

At 3:10pm a broker-dealer purchased 50,000 bonds for $100.9 for a total purchase of $50,450.

At 3:33pm the broker sold pieces of this bond to two customers for $102.679. One customer bought 10,000 bonds and paid a mark-up of $177.90, and the other bought 20,000 bonds and paid a mark-up of $355.80.

At 3:45pm the broker sells the final 20,000 bonds to a customer who pays a mark-up of $355.80. Total mark-up earned by the broker-dealer and paid by the customers = $889.50 or 1.76%.

For perspective, a commission rate of 1.76% to purchase 100 shares of Apple stock would be $269.60. Online brokers charge between $10 – $25 for this type of trade.

Arguably bonds do not trade on exchanges and require broker-dealers to take risk by holding them on their balance sheet as inventory, if only for a few minutes. This requires broker-dealers to employ more traders to handle bond transactions. I’m not implying the bond trades should cost the same as stock trades, but what I do know is that consumers have no idea what they’ve been paying to buy bonds. That will change next year.

Disclosure Requirements

Beginning in May 2018, mark-ups must be disclosed to investors on trade confirmations. Specifically, the broker-dealer must disclose a mark-up if it sells a bond to you out of its inventory, which is also known as a principal transaction. Additionally, the trade confirmations must include a hyperlink to a website containing publicly available data for the specific security traded. This will allow investors to see exactly what time (to the second) the broker-dealer purchased the bonds it sold to them at a what price.

Sunlight is the best disinfectant. Mark-up disclosure is long overdue. It will give investors a chance to compare prices and will create competition among broker-dealers. This is good for investors. Broker-dealers and their sales representatives will have to make adjustments to their business models. I suspect that long gone are the days of charging customers “2 points in and 1 point out.”

 

 

Footnotes:

1) Based on closing price of $153.18 per share on June 1, 2017.

2) A common mark-up charged by brokers to retail customers is 2 points (2%) to buy and 1 point (1%) to sell a bond.

, ,

Blair duQuesnay One of FA Magazine’s 10 Young Advisors to Watch

ThirtyNorth CIO Blair duQuesnay was recently named one of FA Magazine’s 10 Young Advisors to Watch. The article states:

“Still in her 30s, Blair DuQuesnay has carved out a role as thought leader in her CIO and partner role at New Orleans’ ThirtyNorth Investments, a firm with $135 million in assets. She’s written papers on everything, questioning how cheap ETFs really are to showing the stock performance risks companies take when they have no females on their boards.”

Read the rest of her profile on the FA Magazine website by clicking here.

 

 

, ,

It’s Smart to Use Common Sense

Just as you wonder when the bad news cycle or political campaign season will ever end, something is announced which encourages you to think positively about the future.

Recent business news included the release of Commonsense Principles of Corporate Governance, www.governanceprinciples.org . Before you quickly conclude that I need a real vacation (yes, it’s scheduled), let me explain why the contents of this release are important to all of us as investors.

Everyone invested in the stock market, through individual stock holdings, mutual funds or ETFs, relies on the quality and competency of the leadership of the corporations in which they invest. This leadership comes from both boards and management, but the focus of these principles is with board leadership.

The Commonsense Principles of Corporate Governance were offered by a group of corporate leaders and institutional investors, including Warren Buffett of Berkshire Hathaway, Jeff Immelt of GE, Larry Fink of Blackrock and Bill McNabb of Vanguard to name a few. The hope of the authors is that “our effort will be the beginning of a continuing dialogue that will benefit millions of Americans by promoting trust in our nation’s public companies. “

When something goes terribly wrong at a publicly held company, how often do you hear the question “Where was the board?”   Too often there is concern (sometimes justified, oftentimes not) that boards are just cronies of top management, unwilling to ask the challenging questions or overlooking their responsibilities as fiduciaries of shareholders. This sort of thinking erodes trust in the very corporations that provide economic growth and employment in our country.

The letter from the authors of the principles states “truly independent corporate boards are vital to effective governance”. The principles cover best practices in a wide variety of areas from board composition to responsibilities to the public.  It’s a virtual handbook of good governance, and much of it is applicable to private, governmental and non-profit entities as well as public companies. It even addresses diversity on boards, stating that “diverse boards make better decisions, so every board should have members with complementary and diverse skills, backgrounds and experiences”.

As an investor, I find the work of this group encouraging and applaud the leaders who participated. With the adoption of these guiding principles, we should all feel more confident of the actions of our corporate boards. How commonsense is that!

2nd Quarter 2016 Market Commentary

Despite tumultuous headlines, global markets finished the second quarter of 2016 on a high note. In the weeks since quarter end, major US stock market indices have reached new all time highs. US stocks were up 3.84% through the first half of the year, measured by the S&P 500 Index. Emerging market stocks snapped a pesky losing streak, gaining 6.41% through June. International developed stocks suffered a setback with the UK’s Brexit vote in late June. The MSCI EAFE Index was down -4.42% year to date. Interest rates plunged to new lows after the Brexit vote and global bond prices soared. The Barclays US Aggregate Index was up 5.31% for the year. Both real estate and commodities fared well during the first half of 2016. Global REITS were up 12.33%, and the Bloomberg Commodity Index was up 13.25%.

Brexit, What Brexit?

On June 23rd, the U.K. voted to leave the European Union. The “leave” vote, titled Brexit, was unexpected, and markets reacted violently. The Dow Jones Industrial Average fell more than 600 points on Friday, June 24th.  The British Pound fell more than 7% overnight, to levels not seen since the mid 1980’s.  The Pound has not recovered its loss as many other financial markets have in the weeks since the Brexit vote.

One-Year Chart of British Pound to US Dollar

Pound Chart

Source: Bloomberg.com

After a sharp two-day drop, most global stock markets recovered quickly after Brexit. Bonds rallied as interest rates dropped to new lows, in anticipation of a rate cut in the U.K. and continued delay of a rate hike by the Fed. But the U.K. economy, European banks, and the U.K. property market continue to suffer.  Michael Hasenstab, global bond manager at Franklin Templeton, expects a 2% – 7% contraction in the U.K.’s economy over the next several years.(1)  That is a brutal economic disruption, as the U.K. must negotiate every trade agreement with the European Union, presumably on less favorable terms.  Hasenstab expects a modest hit to the remaining EU economy of 0.5% and minimal negative effects for the U.S. and emerging market economies.  Markets do not like surprises, and the Brexit vote was unexpected.  However, after the steep initial decline in global stocks, cooler heads prevailed, realizing that Brexit’s impacts outside the U.K. are likely to be minimal and won’t take effect for some time. Read more

,

DOL Fiduciary Rule

On April 6th, the U.S. Department of Labor (DOL) issued its final rule on the fiduciary standard for retirement accounts. The rule stipulates that brokers cannot give conflicted investment advice to consumers in 401k, IRA, or other qualified retirement plans. There is an exception that allows brokers to enter a Best Interests Contract agreement with customers to allow flexibility of services and products provided. This agreement stipulates that the broker will provide advice that is in the Best Interests of the client and opens the broker up to litigation, including class-action litigation, if the contract is not honored. Prior to the Best Interests Contract, brokers were able to force customers into arbitration agreements, keeping disputes out of the courts.

You might be asking yourself – Don’t brokers already have to look out for the best interests of their clients? The short answer, is no. The financial service community is broken into two (or three) types of regulatory regimes. Brokers, or registered representatives, operate under FINRA’s Suitability Rule. Brokers work for large and small broker dealer firms such as Bank of America’s Merrill Lynch, Morgan Stanley, Wells Fargo, and LPL Financial to name a few. Financial advisers, employed by Registered Investment Advisory firms, are held to a fiduciary standard. Insurance agents adhere to yet another set of rules, but many are also registered representatives who follow the suitability rule. The suitability rule is a lower bar than the fiduciary standard, allowing brokers to put their firm’s interest ahead of clients in many cases.

Read more

Time to Check your Beneficiaries

Did you know there are assets that will not transfer to your heirs based on the instructions in your will? Instead, these assets transfer based on a beneficiary form you filled out.  While many advisors recommend you check your beneficiary designation forms any time you experience a major life event – birth, death, marriage, or divorce – we believe it’s a best practice to review your beneficiaries once per year.

Retirement savings accounts, such as IRAs, SIMPLE IRAs, SEP IRAs, 401k, 403b, and pension plans, annuity contracts, and life insurance proceeds are all assets that transfer based on the beneficiary designation and not through your will. Despite the importance of beneficiary designations, many people do not consult an advisor, attorney, or CPA before completing these forms.

There are a host of potential problems that can occur if your beneficiaries are not properly designated. Here are just a few examples:

Retirement savings or life insurance proceeds passing to an ex-spouse. Surprisingly, this is a common occurrence because many people forget to update old beneficiary forms.  One major potential downfall of this mistake is disinheriting children from a second marriage, at least in regards to these accounts. Read more

1st Quarter 2014 Market Commentary

Financial markets greeted the New Year with increased volatility. Global stock markets retreated in January, rebounded strongly in February, and declined again in March.  By quarter end, US Stocks were up 1.81% (S&P 500 Index), developed international stocks were up a modest 0.66% (MSCI EAFE Index), and emerging market stocks, showing continued weakness, were down -0.43% (MSCI Emerging Markets Index).  Fixed income investors caught a breather from negative price pressure, as bonds returned 1.84% (Barclays Aggregate Bond Index) for the quarter.  Alternative investments demonstrated their value in a diversified portfolio. Global real estate was up 7.03% (S&P Global REIT Index), and commodities snapped a lengthy losing streak, returning 6.99% (DJ-UBS Commodity Index) year to date.

During the quarter, the current bull market for US stocks turned 5 years old. For those who love useless data facts, it is now the 5th longest bull market for US stocks since the Civil War. [1] The S&P 500 Index has returned 179% since its March 9, 2009 intra-day low of 666, and is 7% shy of tripling in value.[2]  However, current levels are only 21% above the previous high in October 2007. Television pundits and Wall Street sell-side analysts are ever so eager to call the top of the market and predict the next down turn. While we do not attempt to make such predictions, we have a difficult time finding legitimate reasons for a major stock market decline in the near-term. Bear markets are caused by the existence of one or more of these four factors – economic recessions, restrictive monetary policy, excessive valuations, and exogenous shocks. Read more

Is Investing a House of Cards?

By:  H. Clark Gaines, Jr.    (On Twitter @Clarkgaines)

 

“Pay attention to the fine print.  It’s more important than the sale price.” – Francis Underwood

Frank Underwood

 

 

 

 

 

 

 

 

 

Francis Underwood, the smooth talking Congressman played by Kevin Spacey in Netflix’s hit show, House of Cards, is never short on crafty one-liners.  Seldom though does he give us one with so many parallels to investing.  In today’s investing climate, there’s a lot of hype about Exchange Traded Funds (ETFs).  The assumption is that mutual funds are slow, expensive, antiquated means of investing while ETFs are liquid, transparent, and a cheap way to access a market sector or index.  Some broker-dealers offer teaser rates for trading ETFs with no transaction costs.  Imagine that, a “free” way to invest in the market!

Most of our clients have heard us say, there is no free lunch in investing.

Just because something appears free, nearly free, or even “cheap” doesn’t mean that is the case. Transaction costs are only one piece of a complex investing puzzle. Read more