Financial Symmetry News & Views

Archive for ‘How We See It’

Understanding the difference between a fiduciary standard and a suitability standard could pay major dividends in a relationship with a financial professional.  Operating under the fiduciary standard requires a planner to put the client’s interest ahead of his or her own.  In other words, don’t be afraid to ask your financial advisor the motivation behind his or her recommendations.  Recently, the FPA in a combined effort with NAPFA and the CFP Board have made a big push to have the fiduciary standard applied to securities brokers that give investment advice as well.  In this msn.com article, Liz Pulliam Weston does a nice job breaking down the differences between these two words and lists some questions you might like to ask your advisor.

Can You Trust Your Financial Advisor?

Written by Chad Smith, CFP®.

When researching mutual funds to invest client funds, we evaluate numerous aspects including corporate culture, manager experience and compensation, research philosophy, and expenses. One of our primary concerns is that fund managers have their interests aligned with those of shareholders. In our view we find one of the best measures of this to be if managers invest significantly in their own funds. Consistent with recent studies by Morningstar, this also seems to be indicative of better performance.

The recent issue of Investment News details these findings:

“…funds whose managers invest $1 million or more of their own money in their fund ranked in the 42nd performance percentile, on average, over the five-year period through July. That means they outperformed 58% of their peers.”

To read the full article click here: InvestmentNews

The following is written by Allison Berger, CFP®.

Given current economic conditions, is a weak dollar a good or a bad thing?  There are strong opinions on this matter from both sides of the issue.  Paul Krugman, an economics professor at Princeton and a columnist for The NY Times makes a compelling case for a weakening U.S. dollar being good news.

He writes:

“The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.”

While we agree with Professor Krugman that a lower dollar can help to even out our trade balance, if it falls too low, however, it could create unwelcome inflationary pressures. The Federal Reserve will look to prevent an inflationary event by tightening the monetary spigot which includes raising interest rates.  Krugman argues that this would be a disastrous policy move at this stage of the economic recovery.  He was an ardent proponent of government intervention in the form of stimulus and believes that we didn’t do enough.

Click here for the original article, “Misquided Monetary Mentalities.”

The CFP® board requires financial planners to attain a significant amount of continuing education to keep their designations current.  So this week Allison and Chad attended the FPA of the Triangle’s 2009 Annual Symposium.

One of the presentations by fellow FPA member, Dennis Stearns, provided some quality economic research that should lend some interesting discussion in our next Investment Outlook Committee meeting.  Here is a summary of some of the interesting ideas he discussed during the presentation:

• Behavioral Finance (the intersection between psychology and finance) will play a larger role in investor decisions going forward
• The Great Depression was no comparison to the Current Recession with respect to length or severity
• Deep Recessions usually mean strong recoveries
• Be aware of uncertainties and how they can impact scenario planning
• Barclay’s new research on a Composure Index, which measures an investor’s composure in the face of financial uncertainty, might be a nice addition to gauging risk tolerance.
• Pay attention to SuperTrends (Globalization, Technology Accelerators, Global Age Wave)
• Four different ways we can reduce the Federal Deficit (tax, save, inflate and grow)
• How will the explosion in internet media change the way we deal with a more sophisticated and confused client?
• How will Long-Term Care Insurance be affected if a cure for Alzheimer’s is found? or if average lifespan increases to 125?

The American Recovery and Reinvestment Act provides better education cost breaks to more taxpayers for 2009 and 2010. Computers, certain software and internet access can be covered by tax free 529 plan distributions as long as they are used by an eligible student while enrolled at an eligible institution.  The ARRA also replaces the Hope education credit with the American opportunity credit.  Key changes from the Hope include: books are now eligible expenses, an increase in the amount of credit available, and higher income limits for eligible taxpayers.  Click here to view more information on IRS.gov.

Looking for a way to better track your budget? Throughout the upcoming weeks, we will be bringing you personal reviews of some of the budgeting software available. Some will be free, online websites, while others will be computer software programs available for purchase or download.

Our first review comes from Heather Zaczek, our Operations Specialist, who has been using Mint.com for a little over a year.

What is Mint.com?

Mint.com is a free, online account aggregation tool that can help you plan, manage and stick to your budget. Setup is quick and easy—you can expect to have your accounts linked to Mint within a couple of minutes. Security is good, being at or above most institutional banking websites. Mint never asks for your account numbers, name or other personal identification information. Money cannot be accessed, moved or transferred within Mint, and all data stored at Mint is backed by bank-level data security protections.

How Do I Set Up an Account with Mint.com?

Setting up an account with Mint is simple. To get started, you will create a user ID, which is normally your email address, and create a password. Once logged in, adding accounts is simply. Your asset and debt accounts are aggregated by providing your institution’s user ID and password for the particular site and Mint does the rest. Mint has a search feature to find the correct login website for a particular institution, although some smaller, hometown banks and credit unions may not be available for connection yet. Once you have your accounts linked with Mint, simple, easy to read charts and graphs are available to create a budget and track spending. Budgets are set up monthly, and you are able to quickly view past months to estimate for the current month’s expenses. Your monthly budget appears on the homepage to show where your money has been spent so far, and how close (or away) you are from estimates through a color-coded bar graph.

What are Some Features of Mint.com?

Overall, the website is fairly easy to navigate, with tabs for transactions, spending trends, investments and ways to save on the homepage. For a better sense of security, Mint has established an alert system that you can customize for each linked account. These alert settings can increase your financial protection and awareness of suspicious activity within your accounts, a great feature that takes minutes to set up. Alerts can be created to notify you if large purchases are made, credit limits have been reached, or low balances exist within accounts.

Mint also tracks your interest rates, credit card reward programs and your credit payment habits to look for ways to save money. If your ABC card is costing you more money than say XYZ card, Mint will suggest switching your cards while estimating your savings on an annual basis. The great thing about Mint’s suggestions is that they are running in the background rather than popping up on your homepage. Saving strategies are located on a separate page and can include customized views for checking, savings and investment accounts.

Are There Drawbacks to Mint.com?

Since Mint.com is free, you can expect a few areas to be less than perfect. There is not a feature to download transactions from institutional websites directly to Mint, and transactions cannot be manually added. Cash transactions can be split into different categories if you have a linked ATM transaction, which enables you to track each cent spent from the cash withdrawal. Another drawback is associated with linking transactions between accounts. For instance, Mint has a little trouble sometimes tagging transfers between checking and credit card accounts, making it difficult to match payment transactions in relation to specific dates. Mint’s reports are simple and informative, without elaborate graphics. Time lines can also become an issue when comparing data over long periods of time; Mint’s standard time frames range only from the time you linked your accounts forward, so older transactions may not be reflected. This may work out as a benefit of Mint if you are just starting with a budget and are not too concerned with past expenses.

Are There Any Additional Features of Mint.com that Make Budgeting More Interesting?

There are a few neat features of Mint that can make budgeting a little more interesting. Mint compiles data from users’ spending patterns so that you can compare your spending habits to those in your location—either state or large city. Mint also has a regularly updated blog with easy to understand financial concepts in every day language. A few recent posts include “The Pros and Cons of Online Banks” and “15 Ways to Eat Out More Spend Less.” Most blog posts include “Mint’s TakeAway” to provide suggestions on how ideas presented effect spending. Overall, Mint.com is a great, easy to use, free budgeting tool, that beats will outperform spreadsheets most of the time.

If you have any questions about Mint.com, feel free to contact Heather at hzaczek@financialsymmetry.com or 919-851-8200 ext. 205.

Chad Smith, CFP® was recently quoted on wsj.com. In the article, “Financial Advisers Look Local,” Shelly Banjo profiled several ways Financial Symmetry was reaching out to clients in the Triangle. Some of these initiatives included working with charitable organizations, educating younger couples, and providing information on the company’s blog.

Download pdf of article

Back in March, many investors were wrestling with the emotions of wanting to preserve whatever money they still had.  Generally, this thought process involved convincing themselves that cash or CD’s were safer investments than stocks.  Using a little hindsight, those decisions to move into “safer” investments, do not seem as appealing after a 50% increase in the S&P 500 index since then.  This type of behavior is a classic example of the typical mistakes that investors make at turning points within the markets.  In a recent Wall Street Journal article, “Playing it Safe Can Hurt Returns,” you can see examples of how impulsive moves to safe investments can negatively influence your investments.

There are two primary types of client relationships in the world of financial investments.  The sales model represented by brokers versus the fiduciary model represented by Registered Investment Advisors.

The following is a good example of the pitfalls of the sales model:

CIT Debt Sold to Widows Has Fine Print Pimco Resists

Notice that FINRA, the self regulatory authority for brokers says:

“….it’s investigating whether the risks associated with the securities were adequately disclosed.”

Well here is an example of so called disclosure:

CIT Group Inc. Prospectus Supplement

It is our opinion that it is ridiculous to expect most Americans to be able to adequately interpret 72 pages of “disclosure” (and this is only the supplement to the initial disclosure document).

Yet the world of FINRA regulation provides the framework for a Prudential spokesman to proclaim:

“As with all bonds, investors choosing to sell the notes before maturity may sell them at market value to other investors and face certain risks, which are fully disclosed at the time of issue…”

In other words, buyer beware.

The inherent problems and conflicts of interest with the sales model is why we choose to operate as Registered Investment Advisors.  Our regulatory framework is the Investment Advisors Act of 1940, which requires that we act in our client’s best interest.  We believe this is the best framework for client relationships.  The SEC is responsible for supervision under the Act, and they have unfortunately been underfunded for the last several years.  We hope that will be corrected as we feel more of the public should be served by Registered Investment Advisors.

All data is not created equal.  The following chart would seem to indicate
that US stocks are more expensive and overvalued then they’ve ever been.

http://www.chartoftheday.com

The rest of the story is that the last 12 months of earnings are not
representative of what earnings will be going forward.  Our best estimate is
that at current price levels, the PE ratio is actually around 13 to 17.  Most
definitely not the most expensive market in history.

Much of our research effort involves separating good data from bad data,
which is essential to gain and maintain a competitive edge against other investors.