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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.

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.

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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.

 

 

4th Quarter 2016 Market Commentary

Executive Summary

  • Year in Review – “Worst Start”, Brexit, Trump surprise victory
  • Small cap and Value stocks outperform
  • Interest rates decline mid-year, then rise to finish year higher
  • Will the US pass income tax and corporate tax reform in 2017?
  • Late innings for the current US economic expansion
  • The folly of forecasts 

In 2016, the US stock market reached new highs. You may recall that the market began the year with the “worst start” of any year on record. The “worst start” began early, with a 5% decline in the Dow Jones Industrial Average in the first four trading days in January. It continued in mid February, with US stocks down more than 11% for the year. By year-end the S&P 500 Index was up 11.96%. That’s a remarkable difference in market performance within the same calendar year. It makes the case for long-term thinking and following a disciplined approach to investing.

Last year was also a year marked by surprises. In June, voters in the United Kingdom voted to leave the economic agreement with the European Union. Prior to the voting results, almost every poll, and certainly the financial markets, expected a vote to remain in the EU. The reaction from financial markets to this surprise was initially strong. The Dow Jones Industrial Average lost 900 points in two days, and the British Pound declined below $1.30, a level not seen for over 30 years. However, within a week, global stock markets recovered their initial losses and even climbed higher. It was a remarkably fast reversal in market sentiment.

Markets reacted strongly to the surprise victory of Donald Trump in the US Presidential Election in November as well. This time, markets corrected even faster … literally overnight. On November 8, the day before the election, almost every poll predicted a win for Hillary Clinton. The New York Times gave Clinton an 85% chance of winning, and famed pollster Nate Silver of FiveThirtyEight predicted a 71.4% chance for a Clinton victory. To say that Trump’s win was unexpected is an understatement. What is more interesting, however, is the initial reaction and subsequent reversal in financial markets. As the election results became clear, Dow futures fell as much as 800 points. S&P 500 Index futures declined 5%, prompting a halt in trading. In Japan, the stock market was open overnight and closed down -5.4%. European markets initially traded down but finished the trading day higher than the open. US stocks initially opened lower on November 9, but recovered by mid-morning and closed in positive territory for the day. Stocks continued to rally through the end of the year. Read more

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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!

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Financial Advice – It’s Not Only Cost, but Quality

 

There have been countless articles written on the cost of financial advice in recent years.  Every time I pick up a Wall Street Journal or a popular personal finance column there’s a story about fees. They are right to criticize.  Financial services costs remain high even though advances in technology have reduced costs dramatically.

This laser-like media attention on costs has sparked a revolution in financial services. Investors are flocking to low cost ETFs, whose AUM surpassed that of hedge funds in 2015. For Do-It-Yourself investors, online, automated investment services called robo-advisors provide basic asset allocations for one-third the traditional costs of similar advice.

These reductions in costs are good for investors. After all, the less you pay to invest, the more returns you get to keep. I would like to see the media turn its attention now, to the quality of financial advice, not just the cost.

Providing financial advice does not have a uniform education requirement, licensure, continuing education, or self-regulatory institution like many other established professions. Anyone who can pass a low level test has the right to call him or herself a “financial advisor.” Financial planners do not need credentials to enter the field.  The disparity in the quality of financial advice investors receive can be enormous. Some financial advisors have zero educational background or training in investing. Other advisors have PhDs and many professional designations. Might a difference in the price of these two individuals make sense?

Read more

Blair DuQuesnay Ranked Top 100 Social Advisor

Brightscope, the online financial information company dedicated to bringing transparency to opaque markets, recently published a list of Top 100 Social Financial Advisors in the US. ThirtyNorth’s Director of Investments, Blair duQuesany, made the list at number 46.

According to Brightscope Co-Founder and CEO, Mike Alfred, “It has been reported that nearly half of investors would like to interact with advisors online but they cannot find them. Social media has become a required communication tool and BrightScope wants to recognize advisors taking advantage of the impact a robust digital profile can have on an advisor’s practice.”

View the entire list here.

Follow Blair duQuesnay on Twitter @BlairHduQuesnay

Third-party rankings and recognition from rating services, organizations, and publications are no guarantee of future investment success. Working with a highly-rated advisor does not ensure that a client or prospective client will experience a higher level of performance. A more thorough disclosure of the criteria used in formulating these rankings is available by contacting the advisor.

Suzanne Mestayer Named as New Orleans Federal Reserve Board Member

Suzanne T. Mestayer, managing principal of ThirtyNorth Investments LLC in New Orleans, was appointed to the board of directors of the Federal Reserve Bank of Atlanta’s New Orleans branch.

Federal Reserve Bank of Atlanta branch directors provide economic information from the branch territory to the district bank’s president and head office directors.

They use the information in formulating monetary policy and making discount rate recommendations. Continued reading article on The New Orleans Advocate

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

2013 IRA Contribution Deadline

Have you made your 2013 IRA contribution yet? It’s not too late. You have until April 15, 2014 to make IRA contributions. Last year the IRS raised IRA contribution limits to $5,500 for individuals under age 50 with an additional $1,000 for individuals over age 50.  The following are some common questions we hear regarding IRA contributions:

ThirtyNorth Investments, LLC does not provide tax advice. You should consult your tax professional regarding questions of deductibility, limits, and eligibility before making IRA contributions.

  1. My spouse doesn’t work. Can he/she still make an IRA contribution?  – Generally, individuals who are unemployed are not allowed to contribute to retirement accounts. However, there is an exception for married individuals. The working spouse can contribute to an IRA on behalf of the non-working spouse. In order to make “spousal IRA contributions” you must be married, file a joint tax return, you must be under age 70.5, and have compensation of at least the amount you contribute to your IRAs. However, there is no age limit to contribute to a ROTH IRA, only a requirement to have earned income below certain thresholds discussed below. Fun fact: this is now officially known as the Kay Bailey Hutchison Spousal IRA Limit in honor of the former Texas Senator. Read more