Gordon J. Bernhardt's Blog

Kudos to Generation Y

2012-02-27T07:00:00.003-05:00

What interest rate are you earning on your savings account? The fact that today’s bank savings accounts generate virtually no yield certainly makes it tougher to convince younger generations to save for retirement. Yet, while you might expect that low interest rates and, therefore, lower compound growth over time, would result in even more young Americans spending rather than saving, a recent TD Ameritrade survey found the reverse to be true. The survey found that Generation Y (teens and twenty-somethings) are more dedicated to saving than their parents and grandparents.

Specifically, the survey reported that 25% of Generation Y and 23% of Generation X who are in their 30s and 40s are saving in their 401(k) plans. This compares to just 16% of Baby Boomers. Generation Y can do better, however, by investing in appropriately diversified portfolios of stock and bonds. Somewhat surprisingly, the survey found that 40% of Generation Y will “never” invest in stocks.

The survey also illuminated another area for improvement. Although the vast majority of Boomers expressed worries about reaching their retirement goals, more than two thirds of those over age 50 (68%) did not take advantage of the catch up contribution provision to their employer-sponsored retirement plan that would have allowed them to sock away another $5,500 last year.

Working with a trusted financial advisor can ensure that you create a fully diversified portfolio that can minimize market volatility and take advantage of all opportunities to save for your short- and long-term goals.

Hedge Funds: A Luxury Nobody Can Afford

2012-02-20T07:00:00.000-05:00

I recently read a piece by Jim Parker, a Vice President at Dimensional Fund Advisors, entitled “Hedge of Darkness.” Parker notes, “Big money can be made from hedge funds. If you run one, that is.” Parker goes on to offer some amazingly compelling statistics from The Hedge Fund Mirage: The Illusion of Big Money and Why It's Too Good to be True by Simon Lack, an asset manager who once chose hedge funds for JPMorgan.

For example, Lack begins his book with the statement, “If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good.” Other potential surprises noted by Lack: The 18% return on hedge funds in the nine years to November 2011 was easily beaten by the total 29% gain from the S&P 500 index. The gap was even more pronounced for investment grade corporate bonds, which in the same period gained 77%, as measured by the Dow Jones Corporate bond index.

Of course, I’d emphasize Lack’s point that the underperformance of hedge funds over this period is even greater once the 2% management fee and 20% performance fees charged by hedge fund managers are factored in. In fact, Lack estimates that from 1998 to 2010, the hedge fund industry captured at least 86% of the returns it earned for its customers. So while hedge fund managers amassed great fortunes, their investors earned subpar returns.

In addition to the high fees that eat into returns, poor disclosure, complex legal structures, and the great number of fraud cases contribute to hedge fund’s risk/reward ratio being way out of whack. Pull the lavish curtain aside and what’s advertised like an exclusive five-star resort often turns out to be a dumpy roadside motel.

Are You Wearing Blinders?

2012-02-13T07:00:00.000-05:00

You’ve probably heard a family member or a colleague complain about someone who “hears only what he wants to hear.” While being wedded to one’s opinions and ignoring new, relevant information is human nature, this trait can seriously jeopardize investment decisions. In fact, in the world of behavioral finance, ignoring information that could challenge an opinion you already hold has a name--confirmation bias. When we selectively filter information and focus only on data that supports our current opinions, we lose perspective and are prone to make poor investment decisions. In fact, studies show that even professional fund managers are more likely to accept information that supports their original investment thesis than they are to search for information that contradicts their views.

How does confirmation bias affect your decision making? Think of times a stock you purchased fell in value, yet you remained convinced of its long-term viability. How long did you hang on, expecting it to recover, before you cut your losses? Consider, too, how many investors believe they should only invest in dividend paying stocks. When they see a magazine headline promoting the benefits of dividends, they buy the magazine and read the article to support what they believe. Because they don’t consider the fact that many of today’s dividend paying stocks were not dividend payers earlier because of their startup nature is absent from their decision making process. They don’t consider that selecting only dividend paying stocks over the last few decades would have deprived their portfolios of the returns of companies like Cisco, Kohl’s Oracle, St. Jude Medical, and Starbucks in their early days. Take these factors into consideration and it’s likely an investor will embrace a broadly diversified strategy that includes both dividend payers and non-dividend payers and enjoy the potential rewards of both.

As Benjamin Graham said, “The investor's chief problem--and even his worst enemy--is likely to be himself.” So, be mindful of your behavioral tendencies and keep an open mind. Increased self-awareness can lead directly to better investment decisions.

Some Perspective on Living with Market Volatility

2012-02-06T07:00:00.005-05:00

“O, woe is me, to have seen what I have seen, see what I see!” This quote from William Shakespeare’s Hamlet has particular relevance today as the prolonged uncertainty of the world’s financial markets has induced a kind of “end of the world” mentality. Many believe they are shouldering difficulties unprecedented in modern history. Yet, without discounting the anxiety generated by the Great Recession and the current Eurozone crisis, a look back on the 20th century puts these seemingly insurmountable current events in perspective.

Reflect on some of the experiences of our grandparents and parents. Nearly 100 years ago, Europe was embroiled in World War I and dealing with widespread rationing, labor shortages, and massive government borrowing. Just over a decade later, the Great Depression cut a swath through the global economy. Yet, these economic challeneges were overcome even though a century ago in the United States the average life expectancy for men was 47 years, only 8 percent of homes had a telephone, and there were only 8,000 cars and only 144 miles of paved roads.

Certainly, the current financial crisis tops off a decade of significant world tragedies -- among them, the attacks of 9/11, the 2004 Asian tsunami, and the 2011 Japanese earthquake, tsunami, and nuclear crisis. Yet, remember that during World War II, more than 50 million died, most of Europe's infrastructure was destroyed, millions of people were homeless, and rationing was prevalent.

As the US and Europe continue to grapple with tough economic conditions, we need to keep in mind that much of the developing world is experiencing rising levels of education, health, and employment. All that -- coupled with the fortitude and resourcefulness that enabled our ancestors to overcome economic difficulties -- bodes well for a stronger global economy.

From Gifford to Hickman

2012-02-01T10:28:00.000-05:00

Marine Pvt Jonathan Lee Gifford was the first U.S. soldier killed in Iraq. He was killed just two days into the war. Spc. David Emanual Hickman was killed by a roadside bomb in Iraq. The Washington Post on December 17, 2011, said Hickman "may have been the last" U.S. soldier killed in Iraq.

After reading an article about Gifford and Hickman my sister began writing a poem that she titled "From Gifford to Hickman." Tears come to my eyes everytime I read it. And it gives me great pride to share the poem written by my sister, Gloria Bernhardt.

From Gifford to Hickman

by Gloria J. Bernhardt

From Gifford to Hickman…and all those in between,

You fought bravely amid chaos and dangers unforeseen.

Twenty-one guns have sounded, the riderless horse walks on.

Fond memories are remaining. A nation’s child is gone.

Sons and daughters; fathers, mothers -- broken hearts intertwined.

Hugs and kisses; their successes – major milestones left behind.

Your selfless gift -- a life laid down; for fellow soldier, family, land.

Duty called -- call was answered -- no greater love hath man.

“I’m getting taller. I lost a tooth. I got 100 on my test!

Miss your pancakes and your tickles, goodnight kisses were the best.

Who will answer all my questions now? I’ve important stuff to learn!

You said you had a big surprise on the day that you’d return.”

“I talk to you at bedtime -- after lights go out at night.

I told Jesus that I miss you…sure wish you could hug me tight.

When Grandpa says I look like you, Grandma starts to cry.

I’m mad that you’re not coming home…I need to say goodbye!”

From Gifford, to Hickman, through every soldier who has served,

Liberty’s fruits are savored and freedom is preserved.

We live freely due to soldiers, willing to support and defend

Our Constitution, our country -- against enemies ‘til the end.

Sons and daughters; fathers, mothers -- broken hearts intertwined.

Hugs and kisses; their successes – major milestones left behind.

Your selfless gift -- a life laid down; for fellow soldier, family, land.

Duty called -- call was answered -- no greater love hath man.

“I had a dream the night before…you smiled and walked on by.

When I awoke, I thought it odd…it seemed like a ‘good-bye’.

I couldn’t put my finger on the dark cloud that remained,

When the phone began to ring…I knew my life had changed.”

“I questioned God, ‘Why MY child? Why do I have to lose?’

I imagined His response would be ‘If not your child, then whose?’

Your bright life flashed too briefly… seems He only takes the best.

I’m thankful for the time I had. For that I’m truly blessed.”

From Gifford to Hickman and every warrior who has passed,

The price you’ve paid bought freedom, but will we make it last?

Your last breath drawn for citizens in this country and abroad

Are we worthy of such gifts is known only but to God.

Sons and daughters; fathers, mothers -- broken hearts intertwined.

Hugs and kisses; their successes – major milestones left behind.

Your selfless gift -- a life laid down; for fellow soldier, family, land.

Duty called -- call was answered -- no greater love hath man.

“My world stopped spinning…I couldn’t breathe! Lord, how can I go on?

My days are all one midnight…but they say it’s darkest ‘fore the dawn.

I can hear you say, ‘I’m proud of you! I know that this is hard.’

What do I do without you here? What dreams do I discard?”

“I miss your laugh. I miss your smell. I even miss our fights.

No more messes. No embraces. It’s more ‘real’ late at night.

I saw you in a crowd today; but you vanished in the throng.

Wishful thinking changes nothing! I know my “rock” is gone.”

FOR Gifford, FOR Hickman…FOR all the fallen in between,

You’ve trudged through shadowed valley and joined heroes’ ranks unseen.

Upon freedom’s altar, we sacrificed our daughters and our sons.

Empty boots stand at attention. The flag is folded. Your mission’s done.

Reprinted by permission.

Let's Put the Federal Debt into Perspective

2012-01-30T07:00:00.037-05:00

Last year, in the midst of federal debt crisis, I observed in a client newsletter (Let's Put the Federal Debt and Budget Crises in Perspective) that as painful as the fractious debate over raising the nation’s debt ceiling was, that I hoped it would underscore for Americans that getting our nation’s fiscal house in order should be job one. Yet, although politicians on today’s primary campaign trails loudly address the need to reduce spending, each year our federal government continues to spend far more than it collects in tax revenues.

For many in Congress, I suspect the numbers on the federal balance sheet may be so big that they become meaningless. In my newsletter, I suggested stripping away zeroes to try and make it possible to relate to the numbers and take action to reduce spending. MFS Funds has gone one better and produced a chart (If your budget resembled the U.S. Government) that really puts the federal budget in perspective. For example, if you made $100,000 last year and ran your household like the federal government, you would have spent nearly $160,000 and would be shouldering an accumulated dent of almost $650,000, more than six times your current annual earnings. Take a look:

Source: MFS Fund Distributors, Inc.

Thinking in terms of our own budgets illustrates the financial stress our nation operates under and underscores the need for spending and tax reform.

Survey Says . . . Independence Is the Way to Go

2012-01-23T07:00:00.004-05:00

According to a new report from Cerulli Associates, “Advisor Migration: The Changing Landscape of Retail Distribution,” independent financial advisors, including registered investment advisor firms, independent broker-dealers, and dually-registered advisors, are gaining market share. The report’s author, Scott Smith, says investors’ and advisors’ disillusionment with the big wirehouses is driving the change.

Notably, the Cerulli report estimates that the major wirehouses lost $188 billion in client assets through September of 2011 as advisors left to embrace their independence. According to the report, we independent advisors increased our market share from 29% to 35% in 2011, while wirehouses’ 50% market share fell to 43%. If the trend continues, Cerulli expects that by the end of this year, independents and major wirehouses will each have a 39.3% share of assets under management nationwide. Cerulli expects independent advisors to surpass the wirehouses by 2013.

Nevertheless, it is important to note there is a difference between an advisor with an independent broker/dealer and an advisor with an independent registered investment advisor. As you search for an independent advisor you should consider using the Focus on Fiduciary Questionnaire as a guide.

Clearly, recognition of the importance that advisory relationships be governed by the fiduciary standard where advisors always put their clients’ needs ahead of their own is gaining momentum. And it’s about time. Our nation's investors deserve nothing less.

Women Express Justifiable Concern over Retirement Readiness

2012-01-16T07:00:00.000-05:00

According to the Employee Benefit Research Institute (EBRI’s) 2011 Retirement Confidence Survey, more than half of the 1,260 respondents surveyed were not confident that they'd be able to afford the retirement they desire. While the survey registered the lowest level of confidence among workers in 21 years, results were particularly bleak for women who reported being less confident than men about retirement. From an advisor’s perspective, the lack of confidence women express seems understandable. The EBRI report found, for example, that 35% of women surveyed believed they will need less than $250,000 to fund retirement. This compares with just 26% of men who figure $250,000 is enough to support them in their golden years. More problematic, 12% of women compared to just 5% of men said they do not know how much they will need to save for retirement.

Women falling short on their retirement estimates and failing to plan ahead is even more troubling considering that women live longer than men and, therefore, need to save more for retirement. Consider these facts: The Women's Institute for a Secure Retirement reports that there are six million more women than men ages 65 and over in the United States. What’s more, according to the U.S. Census Bureau’s “Current Population Survey, 2010 Annual Social and Economic Supplement,” today 57% of American women 65 or older, compared with just 26% of elderly men, live alone and shoulder all the financial responsibility of monthly bills, real estate taxes, and the home’s upkeep.

If you are a woman seeking to boost your retirement confidence, your first step should be to maximize your contributions to your tax-advantaged retirement savings accounts, from 401(k)s to IRAs. And, if you are older than age 50, make the maximum catch-up contributions. Also, review your investment strategy to ensure it reflects your risk tolerance and is designed to fund your short- and long-term financial goals. In my experience tying specific goals to savings is a powerful motivator.

And it is also recommended that you consult your financial advisor and discuss strategies you should consider before or during retirement.

In Praise of Innovation

2012-01-09T07:00:00.003-05:00

With the recent passing of Apple’s Steve Jobs and from the interviews of a hundred entrepreneurs I have conducted, I have been thinking a lot about entrepreneurs and the amazing contributions they make to our society. As Jobs once said, “Innovation distinguishes between a leader and a follower.” Jobs’ point is well illustrated in the short video “Entrepreneurs Do Three Things” where Carl Schramm, President and CEO of the Kaufman Foundation, details how entrepreneurs’ push to innovate enriches our entire society. I found Schramm’s presentation inspirational. I hope you enjoy it!

BWM Cares 2011

2012-01-04T07:00:00.003-05:00

The Holidays are a time of tradition and giving. For nine consecutive years we offered to make contributions to charities in honor of our clients instead of sending gift baskets duing the Holiday Season.

We are proud to have contributed $4,700 to 20 local and national charities and $12,460 to the following six local charities in honor of our clients:

The response we get from each charity is similar to the response we received from a hospice facility this year: "What a wonderful tradition of honoring your clients and helping charities fulfill their mission! Thank you for selecting us for this donation!"

And just as important, we thank our clients for allowing us to serve them. Without our clients we would not be able to help the charities that our clients identified. Thank you!

We hope you had a wonderful Holiday Season and hope you have a happy, safe, healthy and prosperous year in 2012!

The Medicare Surtax

2012-01-02T07:00:00.001-05:00

It may have seemed a ways off when this provision was first introduced into the tax code, but starting in 2013, couples filing jointly with more than $250,000 of Modified Adjusted Gross Income (MAGI) ($200,000 for single filers) will owe a 3.8% Medicare tax on the lesser of net investment income—including interest, dividends, capital gains, annuities, rents, and royalties—or MAGI over the threshold.

Fidelity Investments provides the following helpful example: If you and your spouse had a total MAGI of $275,000—with $225,000 coming from earned income and $50,000 from investment income—you would owe the Medicare tax on the amount of investment income equal to your MAGI over the $250,000 threshold, or $25,000. On the other hand, if your $275,000 in MAGI consisted of $260,000 in earned income and $15,000 of investment income, you would owe the 3.8% tax on just $15,000.

You can minimize your exposure to this new tax by holding your income-paying investments in tax-advantaged accounts, such as your IRA or 401(k). Of course, that income ultimately would be taxable when withdrawn in retirement.

There is no easy way to decide whether to pay Uncle Sam now or pay him later. To evaluate your situation, you need to make some long-term projections on both your earnings and future tax rates. You might also consider converting your IRA to a Roth IRA where qualified withdrawals are tax-free.

Ten Secrets of Success

2012-01-01T07:00:00.001-05:00

A client recently reminded me of a list I distributed a few years ago. I do not recall where I found this list or when I sent it. However, she liked it so much that she has it posted at her desk. And I am taking this opportunity to share it again on the first day of the New Year!.

Ten Secrets of Success

(Traits that leaders and successful people in all walks of life possess.)

How you think is everything. Always be positive. Think success, not failure. Beware of a negative environment.
Decide upon your true dreams and goals. Write down your specific goals and develop a plan to reach them.
Take action. Goals are nothing without action. Don’t be afraid to get started. Just do it.
Never stop learning. Go back to school or read books. Get training and acquire skills.
Be persistent and work hard. Success is a marathon, not a sprint. Never give up.
Learn to analyze details. Get all the facts, all the input. Learn from your mistakes.
Focus your time and money. Don’t let other people or things distract you.
Don’t be afraid to innovate; be different. Following the herd is a sure way to mediocrity.
Deal and communicate with people effectively. No person is an island. Learn to understand and motivate others.
Be honest and dependable; take responsibility. Otherwise, numbers 1–9 won’t matter.

Savvy Mutual Fund Tax Moves

2011-12-26T07:00:00.002-05:00

Year-end is always hectic, but it’s well worth taking the time to consider a few investment moves that could have positive tax ramifications.

First, think about tax-loss harvesting, or selling some of your losing positions at a loss in order to offset capital gains elsewhere in your portfolio. Also you need to manage mutual fund distributions. Remember, mutual funds must pay out at least 90% of their net capital gains and income to shareholders every year. Therefore, funds typically issue shareholder distributions toward the end of the year. If you’ve registered a loss in a fund that’s set to make a distribution, you might consider selling it before the distribution is issued. Not only can you use the loss to offset other gains, but you avoid taxes on the distribution.

Similarly, you might consider putting off until next year the purchase of a new fund poised to make a distribution. That is, if you buy the fund now, you will owe taxes on any distributions you receive by the end of year even though you did not participate in the fund’s growth over the course to the year.

You might think that the market’s negative performance this year would mean a lack of gains to distribute. However, it’s always worth checking to be sure. Your fund company's website should have estimates for year-end distributions.

However, if you own mutual funds in your 401(k), IRA or other tax-advantaged retirement account, you don't have to worry about these fund distributions because they will not be taxed until you begin withdrawing your money in retirement.

Feeling Squeezed?

2011-12-19T07:00:00.003-05:00

Call it the middle-class squeeze. According to Paul Taylor, executive vice president of the Pew Research Center, income is shifting to the top tier of American households, especially those in the top 5% who earn more than $181,000 annually.

Just how much of American income has shifted to the top wage earners? The Pew Research Center found that in 2010, the top 20% of U.S. households collected 50.3% of the nation's income, up from 49.9% in 2006. The lowest-earning one-fifth of households collected just 3.3% of the nation's income, down from 3.4% in 2006. Three-fifths of households, or 60% collected just 46.3% of the income last year, down from 46.7% in 2006.

These increases for top tier households and decreases for the middle class may seem relatively minor, a percentage point here and there. However, according to Heidi Shierholz, an economist with the Economic Policy Institute, in the 1970s, 53% of the nation's income went to the middle class. She notes that middle class households began losing significant ground in the early 2000s and that the downward trend has been exacerbated by the recent recession and our difficult employment market.

With record unemployment, a struggling housing market, and continued market volatility, it is unlikely the middle class squeeze will cease anytime soon. That makes it that more crucial than ever to tend to your financial plan. Now’s a great time for an annual review to construct your balance sheet, evaluate your goals and ensure that your investment strategy properly aligns with your short- and long-term goals and your risk tolerance.

CDO Chief Daddy Officer

2011-12-16T17:00:00.006-05:00

Many of you know that Bernhardt Wealth Managment has two traditions during the Holiday Season. One is that we make contributions to charities in honor of our clients and the other is that we send our clients and strategic relationships a book. This year is the 14th year we have sent a book, and we were pleased to send CDO Chief Daddy Officer: The Business of Fatherhood by Christos Efessiou.

Chris told me about the book when I first met him last year. As soon as he described the premise of CDO, I knew it would be an outstanding candidate for our gift book. My instincts proved correct when I had the opportunity to read a draft this summer.

I recommend this book to business owners, executives and employees; parents and grandparents; and teenagers, college students and recent graduates. There are lessons that every reader can apply to his or her life. One lesson we can apply is to leverage our business skills to the business of life.

Chris signing books in my office

One reason I like the book so much is that it confirms the reason I started my own independent, fee-only firm to give objective, conflict-free advice to our clients. My passion is to touch each client’s life in a way that allows them to lead the life they want to lead. For some clients hiring us as their personal chief financial officer means they have more time to spend with their family. For others it means they have more time to focus on their business/profession. And for others it means they have more time to give back to their communities or charities that are important to them.

Money is a tool. Peace and contentment do not increase as our net worth increases. Peace and contentment are the byproducts of realizing what is important to you and spending more energy on those things. I don’t think Chris will look back at any point in his life and say “I wish I spent less time with my daughter and more time day trading.”

Chris signing books in my office

I encourage you to get his book (if you don't already have it) and hope you find it inspirational and motivational. I also invite you to contact me to let me know what you liked about the book. And finally, I hope you consider writing a review of the book on Amazon.

The entire Bernhardt Wealth Management team and I wish you a happy, safe and rewarding Holiday Season! Please let us know if we can leverage our skills and knowledge to help you or someone you know achieve and pursue what is important to you or them.

Chris and me holding one of the books he signed

If It Sounds too Good to Be True, You Can Bet That It Is

2011-12-12T07:00:00.000-05:00

A recent article in the Washington Post, “Children’s Charity Victim of Ponzi Scheme,” caught my eye. Looking to protect its endowment in 2008’s difficult market, the DC-based Hillcrest Children’s Center invested in what Garfield Taylor of Gibraltar Asset Management Group described as a “can’t lose” investment strategy. By mid 2009, the $8 million Hillcrest invested had evaporated in a Ponzi scheme, severely compromising their ability to help orphans and families in need.

Stephen L. Cohen, an SEC official, notes in the piece that this sad story should serve as a reminder to investors. “There really isn’t any such thing as an investment that has zero risk with a high reward,” Cohen said. I wrote an article “A Tragic Case of Misplaced Trust” in the wake of Bernie Madoff’s crimes that outlines steps investors should take to protect themselves. Briefly, investors should choose to work with an independent Registered Investment Advisor who is bound by a fiduciary duty to clients and who uses an independent custodian. Also, it’s crucial not to put all your eggs in one basket and to understand what you invest in.

Above all, however, question the impossible. When an investment manager claims to always beat the market, be skeptical. Simply, when evaluating potential investments, remember the old adage: “If it sounds too good to be true, it probably is.”

Sports Illustrated: In My Tribe

2011-12-06T18:21:00.000-05:00

Most of the people who know me know that I love college football and, more specifically, the Nebraska Cornhuskers. I never attended the University of Nebraska but I grew up on a farm in Nebraska. There was always work to be done on the farm but on a Fall Saturday I would never be far away from a radio so I could hear the radio broadcast of my beloved Nebraska Cornhuskers and the opponent I hoped they would defeat that day.

My pride for my Nebraska Cornhuskers is about to come forth and I wanted to share with you the first paragraph and last section of an article, In My Tribe, written by Terry McDonell in the November 28, 2011, issue of Sports Illustrated.

First Paragraph: In the fall of 1980, when SI senior writer Lars Anderson was nine years old and living in Lincoln, his father took him to the Florida State-Nebraska game. With less than a minute left in the fourth quarter, the highly favored Cornhuskers had the ball on the Seminoles' three-yard line, trailing 18-14. That's when heartbreak visited Nebraska: Quarterback Jeff Quinn fumbled. Florida State recovered. Game over. Then, as Seminoles coach Bobby Bowden and his team walked off the field, the crowd rose to its feet in appreciation of the underdogs' hard-fought victory. At first it was just polite clapping, the kind you hear at a golf tournament, but then fans started cheering for Bowden and his players, building to one of the loudest roars of the day. Tears of disappointment ran down Lars's cheeks as his father put his arm around him, pointed to the red-clad fans in full throat and said, "Lars, this is as good as sports gets."

Last Section: The rearview mirror has always been the best oracle when it comes to sports. More than 30 years after Lars Anderson saw that Florida State-Nebraska game with his father, he was reporting a story about the history of spring football and had lunch with Coach Bowden in Birmingham. Near the end of the conversation, Anderson mentioned that he was from Lincoln. The coach's eyes lit up. Without prompting, he recalled that day three decades earlier when the fans of Nebraska cheered him off the field.

"What a moment," Bowden said, a grin spreading over his face. "Wow."

And then these two men, two generations apart, just looked at each other until Bowden spoke again.

"The classiest thing I ever experienced."

Thanks for indulging me for a few moments to share my love of Nebraska football. Go Huskers! Go Big Red!

Could Black Friday Spark a Rally?

2011-12-05T07:00:00.001-05:00

Black Friday sales may be the harbinger of a significant surge in consumer confidence that could fuel our economic recovery. According to the National Retail Federation (NRF), Black Friday retail sales were up 16% over last year. The NRF notes that 226 million shoppers hit the stores and online sales over Thanksgiving weekend and spent $52.4 billion.

In more good news, an NRF pre-holiday poll found that shoppers are more optimistic this year than they were last year. Based on that survey, the NRF forecasted that total holiday sales would be up 2.8% to $465.6 billion. However, the wildly successful Black Friday may result in sales beating that estimate. Interestingly, over the last ten years, we’ve seen a 2.6% annual average increase in holiday spending. However, over the course of the previous decade, the average annual increase was 3.4%.

Retailers have a huge incentive to get you to shop until you drop this season. As the NRF notes, about 20% of their sales occur in the less than 30 days between Black Friday and Christmas. For some retailers, such as jewelers, that percentage could be as high as 40%. To resist the holiday message to spend, spend, spend, think of other economies that stress the merits of saving. Over the past three decades, Germany, France, Austria, Belgium, and Sweden have maintained household saving rates between 10 and 13 percent. Conversely, saving rates in the United States dropped to nearly zero in 2005 before inching up to 5% during the credit crisis of 2008. Most recently, our savings rate has fallen to less than 4%, far less than half of what many Europeans save. Think about that as you head to the mall….

Think Twice About an Indexed Annuity

2011-11-28T07:00:00.002-05:00

We all enjoy playing a game we can’t lose, but investing in the stock market is not one of them. However, the promise of “guaranteed returns” led shell-shocked investors to pour nearly $30 billion into index annuities in 2009, even as they pulled $9 billion out of U.S. stock funds.

Index annuities are a close cousin of a traditional deferred fixed annuity, an investment vehicle in which an insurance company invests your money in bonds during an "accumulation period" of seven years and then converts your account into a steady stream of guaranteed income payments. An index annuity has the additional twist of tying those guaranteed payments to the performance of a stock market index, such as the S&P 500.

Guarantees are tempting in the wake of the Great Recession and continued market turbulence, but dangers lurk in the indexed annuity’s structure and fine print. In my view, the top three stumbling blocks are:

High commissions, up to 9 percent in some cases, that can tempt the selling agents to act against your best interests.
Steep surrender fees, as high as 20 percent, that can be imposed if you cash out before 10 years.
Product complexity that makes it tough to know what you are buying.

Beyond those concerns, according to William Reichenstein, an investment management professor at Baylor University, over the long term a very conservative portfolio easily beats an index annuity. Why do indexed annuities almost always underperform? The issuing insurance company caps your return and can adjust the cap each year. A common cap for an annuity tied to the S&P 500 is 4.5 percent. And, according to the research firm Advantage Compendium, for the five years ended in September, the average index annuity paid an annualized 3.89 percent, just slightly better than the 3.81% you would have earned in a five-year CD and less than the 5.1 percent from taxable bond funds.

Finally, please be aware that fixed annuities are often marketed at “informational lunches” that are really over aggressive, high pressure sales pitches. Remember, the old adage “There is no such thing as a free lunch” applies to the market as well.

In Praise of Rebalancing

2011-11-21T07:00:00.002-05:00

If buying low and selling high is the secret to investing success, should you buy every time the market drops significantly? Jason Zweig argues convincingly in a Wall Street Journal article that investing during the market’s equivalent of retails’ Black Friday is not a simple path to increased returns. Sure, buying low helps, but how low does the market have to go before you buy? Also, you have to correctly identify how high is high enough to sell.

Zweig correctly identifies rebalancing—selling one asset that has gone up in price to buy another that has gone down—as the key to improving returns over time. Rebalancing works as your portfolio’s GPS. That is, you set your course with your initial asset allocation, but when you encounter roadblocks or the unexpected along your route, the GPS re-calculates your driving directions, or rebalances, to keep you on course to reach your destination.

Zweig quotes research from Francis Kinniry Jr., an investment-strategy analyst at Vanguard Group, that found that, over the past decade, regular rebalancing between stocks and bonds would have added about 0.3 percent in average annual return to a strategy of buying on dips of 2 percent or more. Further, he shares the finding that an investor with 40 percent in U.S. stocks, 20 percent in international stocks and 40 percent in U.S. bonds who rebalanced at year end over the last decade would have earned 5.6 percent annually —versus 4.9 percent for someone who merely bought and held.

Here’s another analogy to underscore the value of rebalancing. It feels great to buy a new car far below the sticker price, but you need to regularly maintain your vehicle for it to serve you well over the long-term. Rebalancing is required maintenance for your portfolio. As I look back on the technology bubble that burst, 9/11 and the financial crisis/Great Recession, our disciplined rebalancing is one of the major reasons our clients have had a better investment experience.

Don't Let Fear Thwart Your Investment Strategies

2011-11-14T07:00:00.001-05:00

With Paranormal Activity 3 setting records at the box office, it’s a good time to talk about how fear can impede sound investment decisions. Certainly, the acute market volatility we’ve experienced over the last few years has sparked a growing fear among investors of incurring additional losses. How does this attitude impact your portfolio? Interestingly, a Fidelity survey of participants in workplace retirement plans during the turbulent 18-month period from October 2008 to March 2010 quantifies just how much letting yourself fall into fear’s grips can hurt.

Fidelity found retirement investors who kept contributing to their plan and who maintained some exposure to equities throughout the period were better off throughout the market’s roller coaster ride than those who moved in and out of the market in an attempt to avoid losses. Specifically, the 81,400 who sold all stocks in 2008 had an average return of -6.8 percent over the period. On the other hand, the 7,332,000 who sat tight and kept investing in equities earned an average 21.8 percent over the 18 months.

We tend to retreat during market turbulence because, as behavioral finance pioneers Daniel Kahneman and Amos Tversky have shown, human beings have a stronger preference for avoiding losses than for registering gains.

Recognizing and adjusting for this innate bias may help prevent you from making fear-driven decisions during dark days in the market. Think about your own behavior during past downturns. Did you make any fearful decisions that you now regret? With volatility looking like it’s here to stay, has your risk tolerance changed? If so, it may be necessary to make adjustments to your portfolio. Otherwise, the best advice to keep short-term volatility from prompting emotional fear-based decisions that can negatively impact your portfolio is to stay focused on your long-term goals.

As Benjamin Graham, a pioneer in security analysis said, “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” As our clients' trusted advisor, it’s our job to help minimize the impact of inescapable emotional swings and maintain disciplined investing.

Stick with Stocks

2011-11-07T07:00:00.001-05:00

Many investors believe step one in dialing down their portfolio’s risk should be reducing equity exposure. Yes, stocks are riskier than bonds, but that’s an oversimplification that can result in some misguided moves. First, stocks provide a greater return than bonds over the long term According to Standard & Poor’s, the S&P 500 Index has had an average annual return of 9.9 percent annually from 1926 to 2010. Over the past 50 years, it’s returned 9.8 percent, and over the past 25 years, the return has been 9.9 percent. According to Ibbotson Associates, long-term government bonds have averaged 5.5 percent, 7.1 percent, and 8.9 percent during these same three time periods.

Stocks are also a better hedge against inflation. On an inflation-adjusted basis, the S&P 500 Index has provided average annual returns of 6.7 percent from 1926 to 2010, 5.4 percent over the past 50 years, and 6.9 percent over the past 25 years. There were a total of 10 rolling-year periods when the S&P 500 Index did not keep up with inflation. While long-term government bonds provided inflation-adjusted returns of 2.4 percent, 2.9 percent, and 5.9 percent over those same three periods, there were 33 rolling-year periods when long-term government bonds did not keep up with inflation. One factor influencing the gap between stocks and bonds is that, even in difficult markets, companies can increase their prices to remain competitive.

If you want another reason to invest in equities, consider this prediction by Professor Sylla, a financial historian at New York University's Stern School of Business who has studied market behavior all the way back to 1790. A recent Wall Street Journal article--A Long-Term Case for Stocks--reported his view that if the market sticks to its long-term pattern, the Dow Jones Industrial Average could climb to 20250 by the end of 2020, up 84% from its recent 10992. Additionally, he says the Standard & Poor's 500-stock index might hit 2300, up 99% from its recent close of 1154.23.

Using 10-year averages of annual market returns, including dividends and adjusting for inflation, Prof. Sylla found when 10-year-average annual returns drop below 5% as they did in 2008 and 2009, markets tend to transition to recovery.

Of course, we all know that past results cannot be used to guarantee future returns…

The real lesson in this research is that investors are best served when they take a long-term view of the market and think in terms of decades and years, not quarters.

BofA's Move Increases Brokers' Conflict of Interest

2011-10-31T07:00:00.000-04:00

When Bank of America management decided to relieve Sallie Krawcheck of her duties as head of Bank of America’s wealth management division, they put more than 16,000 Merrill Lynch brokers in the hands of a new boss who presumably has a different corporate agenda. It’s expected that David Darnell, who hails from the banking side of B of America, will likely spearhead a renewed effort on the part of the nation's largest bank to further integrate Merrill Lynch and encourage its brokers to cross-sell more bank products.

This initiative for brokers at Bank of America Merrill Lynch clearly illustrates the conflicts of interest that brokers operate under. However, remember that anyone who is a registered representative of a broker/dealer also has a conflict of interest. Also, an advisor who is dually registered with a broker/dealer and RIA still is not a full-time fiduciary.

Bernhardt Wealth Management is a registered investment advisor and a fiduciary. That means we always put our clients’ interests ahead of our own -- in all cases. To fully appreciate the role and responsibilities of a fiduciary, we return to its Latin roots: fides, meaning faith, and fiducia, meaning trust or confidence. Traced back to English Common Law, fiduciary describes a person who holds a position of great trust. Most often, a fiduciary would administer trusts or handle the conveyance of property. Particularly in today’s complex and challenging market, you deserve nothing less than a fiduciary.

To determine if the advisor you work with is a fiduciary, consult the National Assocation of Personal Financial Advisor's “Fiduciary Questionnaire.”

Is Social Security a Ponzi Scheme?

2011-10-24T07:00:00.000-04:00

Governor Perry generated quite a stir during a recent Republican debate when he referred to Social Security as a Ponzi scheme. According to Governor Perry, Social Security is a “monstrous lie…a Ponzi scheme to tell our kids that are 25 or 30 years old today you're paying into a program that's going to be there."

We can debate how long Social Security can remain solvent, but it is not a Ponzi scheme. In fact, this article in the New York Times offers details on just how Social Security differs from a Ponzi scheme.

That said, we all know there’s plenty about Social Security that needs fixing. Simply, last year Social Security began paying out more in benefits than it received in taxes. And as more Boomers retire, that shortfall is expected to grow, especially given high unemployment rates. The New York Times article points to the nonpartisan Congressional Budget Office’s estimate that the combined Social Security trust funds would be exhausted in 2038. However, a number of steps could keep the program afloat. Washington could choose to increase taxes, reduce benefits by raising the retirement age, or reduce cost-of-living increases. Of course, none of these options will be popular with voters, so it remains to see what our elected officials who often are more concerned with keeping their jobs than with attacking our nation’s most serious problems will do. If the debt ceiling debates are any indication, we could be in for a rough ride on the way to Social Security reform.

Celebrating the Spirit of Volunteerism

2011-10-17T07:00:00.000-04:00

After my niece, Dorothy, graduated from high school this year, she spent the summer with me. She did some work in my office, and we spent very enjoyable weekends sightseeing in the D.C. area. After a tour of Mount Vernon one Saturday, we had the pleasure of having a conversation over lunch with a couple--Don and Virginia--who had recently retired. They sold their home in Texas and travel the country in their trailer.

However, the most unique element to their new lives is that they spend three months at a time in different parts of the country volunteering at various U.S. Fish & Wildlife Service locations. When they take a break from these rewarding volunteer commitments, they may take a cruise; schedule a visit with their kids and grandkids, or see another part of the country. They love their new lifestyle. They use Volunteer.gov to apply to various locations from Alaska to Florida and from California to Maine.

We’ve all heard the expression, “Put your money where your mouth is,” and American’s certainly do that. According to the recently released Giving USA 2011: The Annual Report, Americans donated 2 percent of their disposable personal income to charitable causes in 2010, amounting to $290.89 billion. This was an increase over 2009 and two years of declines during the Great Recession. However, it must be especially gratifying in retirement to so actively contribute to the causes you have long supported financially like Don and Virginia--our new friends from Mount Vernon. You can see a photo of Don, Virginia and Dorothy below.

Debating Tax Reform

2011-10-10T07:00:00.001-04:00

“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it,” declared President Obama when he announced his deficit-reduction plan. “It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”

The President’s reference to the Oracle of Omaha was a response to Buffett’s recent editorial in the New York Times where he noted that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office – and suggested that the rich should pay more in taxes.

In an interview with ABC’s Christiane Amanpour, Buffett clarified his views further when responding to her question on whether the wealthy need tax cuts to increase business activity and further economic growth. Said Buffett, “The rich are always going to say that, you know, 'Just give us more money, and we'll go out and spend more, and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”

Is the middle class paying more in taxes than millionaires? Remember, election season is heating up, so it’s worth doing some fact checking. According to data from the IRS quoted by the New York Times, in 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax. However, that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million. This year, those millionaires are expected to pay an average of 29.1 percent of their income in federal taxes, according to the Tax Policy Center. Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.

Yet, projections are just that. Taxes are determined based on where income comes from. Wages are taxed higher than capital gains, for example. Additionally, the tax code is riddled with deductions, exemptions and credits.

As the quest for the White House continues, I’m sure we’ll see tax figures spun a dozen different ways. Certainly, the debate over the “Buffett rule”--that suggests that people making more than $1 million a year should pay a larger percentage of their income in taxes than middle-class families pay--will continue. But it seems to me true tax reform will be a little more complicated than that.

Diversification, Diversification, Diversification

2011-10-03T07:00:00.000-04:00

In their well-known and oft-quoted 1986 study of 91 large pension plans, “Determinants of Portfolio Performance,” published in the Financial Analysts Journal, Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower found 94% of portfolio returns were determined by the asset allocation plan and just 6% attributable to market timing and security selection. Interestingly, however, most individual investors spend little time constructing an appropriate asset allocation plan. Rather than determining the ideal percentage to invest in stocks, bonds, and cash and spreading assets among various sub asset classes, most investors look for the hot stock. This return chasing results in portfolios that are overly concentrated in specific stocks or funds, which increases overall risk.

In Are stocks a loser's bet? another industry influential, William J. Bernstein, quotes research from Dimensional Fund Advisors that found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago's Center for Research in Security Prices (CRSP) database of the U.S. total stock market. So why not invest in only those carefully chosen "superstocks?" Bernstein’s answer, “Simple: Because a portfolio of 'carefully chosen' equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target.”

Bernstein notes further that if you missed out entirely on the top 10% performers from 1980 to 2008, you would have cut your annual returns to 6.6% from 10.4%. How does translate into dollars? Bernstein says, “A $100,000 investment in 1980 would have grown to $1.8 million by 2008 at 10.4%. That same amount, at 6.6%, would have grown to only $640,000.” That’s quite a difference.

Here’s the bottom line: It is not worth risking your family’s financial security by speculating on a few stocks, no matter how carefully chose or how much inside insight you think you have. Think of your mother’s advice. “Don’t put all your eggs in one basket.” Spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. As you see from the Callan Periodic Table of Investment Returns, one asset class never stays at the top or bottom forever. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses.

Our clients don’t expect us to help them outperform the stock market. Rather, they want our help to develop a plan pay for college, or maintain their lifestyle in retirement, or achieve other important goals. The best way to do this is to invest each client's money in a globally diversified portfolio based upon their goals and risk tolerance. This does not mean they will never have losses but it is the best way to ensure they get the market return rather than hoping someone can identify the year’s top stocks for their portfolios.

Is a College Degree Worth What It Costs?

2011-09-26T07:00:00.001-04:00

PIMCO bond fund legend Bill Gross grabbed the spotlight a few weeks ago when he questioned the value of a college education in today’s economy. In “School Daze, School Daze, Good Old Golden Rule Days,” he wrote, “College was great as long as the jobs were there.” Gross also described the liberal arts education as a “four-year vacation interrupted by periodic bouts of cramming or Google plagiarizing.” That’s not something parents wanted to read as they packed up their cars to take this year’s incoming freshmen class to college.

The facts Gross offers to lay the foundation for his thesis include: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Also, the average college graduate now leaves school with $24,000 of debt. College graduates, he reasons, “can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.”

Certainly, we all know college graduates who are struggling to find employment. And we all know students who are in college who, for whatever reason, would be better served elsewhere. However, it seems a bit of an overreaction to let the current job market, influenced by a confluence of unprecedented market events, dictate how we prepare the next generation of thinkers to compete in global marketplace. Surely, the goal at the end of a college education is meaningful employment, but higher education cannot be governed by the economy alone. The business leaders I have interviewed typically recommend a college education for today's young people.

What do you think?

Is Now a Good Time for Wealth Transfers?

2011-09-19T07:00:00.000-04:00

Our ever changing tax laws seem perpetually riddled with sunset clauses. And that makes estate planning opportunities fleeting. For instance, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), increased the federal gift tax exclusion to $5 million. Accordingly, you can make $5 million in gifts in your lifetime without paying a gift tax. However, the TRA is scheduled to sunset at the end of 2012. Post-sunset, the federal gift tax exclusion will revert to its previous lower level of just $1 million. Therefore, if you have been considering making large gifts to your children or grandchildren, it may be advantageous to move those assets before the end of next year.

Also on the estate planning radar screen is the fact that Standard & Poor’s recent downgrade of long-term credit rating for U.S. Treasury debt from AAA to AA+ may cause an increase in the safe harbor interest rates for intra-family debt transactions. These so-called Applicable Federal Rates (AFRs) are currently near historic lows -- and that obviously works to your advantage when making lifetime transfers of business interests or property to your children or grandchildren. We’ll keep a watchful eye on interest rates so we can effectively guide your estate planning decisions.

If you want to discuss how to take advantage of the increased gift tax exclusion under the TRA or how a potential increase in AFRs might impact your estate planning, you should consult your attorney, accountant, or wealth manager.

The Truth about the Downgrade and the Downturn

2011-09-12T07:00:00.001-04:00

After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a lesser AA+ credit rating. (See the “S&P Downgrades the U.S.: Five Things” for details.)

While the downgrade is unprecedented, in my view, it is not responsible for the profound market volatility we’re experiencing. More likely, the steep decline reflects the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, half of the figure initially debated.

Standard & Poor’s has grabbed all the headlines, but it’s important to note that the other two major credit agencies, Moody’s and Fitch, elected not to downgrade U.S Treasuries. Although sticking with their top rating of Aaa, Moody's Investors Service did assign a negative outlook on United States government bonds on August 2. The firm noted that it could take “further action if: (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.”

Regardless of being on a kind of watch list, U.S. debt still remains among the world's safest investments. In fact, we’ve seen a rally in the Treasury market with the traditional “flight to quality” that occurs when we experience dramatic market downturns. It’s also worth noting that the downgrade to AA+ does not apply to short-term Treasury securities. Accordingly, money market funds, which generally hold a lot of short-term Treasury securities, should be unaffected by the downgrade. There may be long-term negatives, however. China and other foreign countries could demand a higher interest rate to hold U.S. debt. Additionally, consumers could face higher rates for mortgages, car loans, and student loans. Stay tuned.

A Moment to Reflect on 9/11

2011-09-11T07:00:00.006-04:00

I am sure the hearts and minds of every American reflected with great sadness on the events that took place ten years ago. Our thoughts and prayers go out to everyone who lost a loved one on 9/11 or as a result of the terrorist attacks on America.

As I was reflecting on 9/11, I wanted to share two articles and one video that are worth reading and seeing.  The articles are written by Peggy Noonan--one on the five year anniversary of 9/11 and the other on the ten year anniversary. They are:

     The Sounds that Still Echo from 9/11

     We'll Never Get Over It, Nor Should We

To watch the video click on this link for an eight minute video on the World Trade Center Memorial.

God Bless You and God Bless America!

The Numbers are Staggering

2011-09-05T07:00:00.005-04:00

Following Standard & Poor’s downgrade of U.S. debt during the week of August 10th, investors pulled $40.3 billion out of long-term mutual funds of all types, according to the Investment Company Institute (ICI). Put in perspective, the outflow of $40.3 billion was roughly 25 percent more than was pulled out in the previous four weeks combined and more than double the $17.0 billion pulled out the previous week. Since, May 1, according to the ICI, investors have pulled out more than $85 billion.

The extreme volatility of the last few weeks not withstanding, the economic recovery continues to follow an atypical course. Generally, the more significant a market downturn is, the stronger the rebound. Yet, although the economy contracted about 4% during the “Great Recession,” the worst since the Great Depression, this recovery has been lackluster. In fact, growth is running at about half the expected speed due to tight credit conditions, a depressed housing market and a pervasive lack of consumer and corporate confidence. Unsure whether better days are around the corner or further down the road, investors have been focused on capital preservation and the search for decent yield.

If the “Super Congress” makes essential budget cuts and positive signs like strong corporate earnings and robust exports continue, we’ll see a real improvement in investors’ confidence. That optimism will move steadily from Main Street to Wall Street and give our recovery the boost it needs. In the meantime, diversification and investment discipline will continue to be the best policy in this environment.

Get the Raise You Deserve

2011-08-29T07:00:00.001-04:00

Articles instructing us how to trim our budgets often target the coffee shop specialty coffees: $3.00 a day, compounds to $15 a week, $60 a month, and so on through your working career. I recently heard a compelling rebuttal to the instruction that we do without our morning caffeine stop. “I’m not expecting any great inheritance,” the twenty-something employee declared. “I figure the money I spend in the morning to fuel my day is a great investment in my own productivity.” That statement got me to thinking that more than ever today’s young workers rely on themselves, not their parents or fabulous market gains to achieve their goals. Accordingly, their salary is more important that ever.

With high unemployment making it a hirer’s market, it’s more important than ever not to sell yourself short when it comes to salary negotiations. A recent article by Greg Robb for Market Watch offered some stellar advice for those about to tackle salary negotiations.

Set your expectations, says Don Hurzeler, author of the book The Way Up: How to Keep Your Career Moving in the Right Direction. If you are unemployed and applying for work, he says to expect to earn approximately what your old salary was or slightly less. However, if you are being hired away from an existing position, look for a 20% salary increase.

Charlotte Weeks, a Chicago-based career coach advises clients to avoid answering questions about expected salary early in the interview process. She says to deflect money questions by turning the tables and talking about what you can offer the company. Later in the interview process, you might offer an acceptable salary range based on your research into what others in the field earn, says Karen Lawson, a management consultant.

Finally, before you accept an offer, be sure to calculate the value if a company’s benefits, including health insurance, 401(k) plan, deferred compensation program, and even vacation and sick leave.

Should Your Small Foundation Convert to a Donor-Advised Fund?

2011-08-22T07:00:00.002-04:00

In an investment environment that’s seen endowment assets drop and administrative costs climb, many families nationwide are eschewing the cache of small foundations for donor-advised funds. Why? Lower administrative costs and flexibility mean that more money goes to their charitable causes.

According to a recent article in Investment News, Fidelity Investments' Charitable Gift Fund, the largest donor-advised fund with $5.6 billion in assets, took in about $30 million from foundations in the one-year period ended June 30, 2011, up from $16 million a year before. Similarly, Schwab Charitable, the second-largest donor-advised fund with $3.1 billion in assets, saw roughly $28 million converted from foundations to donor-advised funds, double the amount from last year.

A donor-advised fund is an account established at a sponsoring charity. You make irrevocable contributions of cash, securities, or other assets to the giving account and receive an immediate tax deduction. As the account advisor, you then make distributions from the account to other operating non-profits, such as hospitals, schools, environmental organizations, or the Red Cross. The fund handles all the due diligence, tax filing, compliance, and administration. Approval of your grant recommendations is essentially automatic as long as your designated charity is a 501(c)3 in good standing.

The benefits of donor-advised funds I’ve long stressed for individuals also hold true for foundations. For example, whether an individual directs funds to a foundation or a donor-advised fund, they qualify for the charitable deduction that year, and can disperse the funds later, on their own timetable. (Note: There are some limitations on securities so be sure to check with your tax advisor.) Donor advised funds also facilitate donations of stock and other assets, allow donors to maintain privacy, and deliver the benefits of professional recordkeeping at a lower cost that a foundation can.

Of course, you need to consider your foundation’s goals before making the move to a donor-advised fund. Although you may realize tax and administrative benefits with a donor-advised fund, foundations do offer greater grant-making flexibility, allowing you, for example, to establish an endowed scholarship.

Brokerage Firms Must Report Investment Gains; Plus S&P Downgrade

2011-08-15T07:00:00.013-04:00

In an effort to ensure everyone pays their fair share of taxes, on January 1st of this year, the Federal government began requiring brokerage firms and other custodians to calculate and report gains or losses on certain customer trades to the IRS. This requires knowing not only the cost basis (the amount paid for the security), but also establishing the method to calculate gains. Most custodians use the “first-in, first-out” method for equities and the average cost method for mutual funds to determine cost basis.

You should consult your custodian to determine what methods are available to you and to determine how your portfolio is setup. For our clients we utilize a hybrid of the "high cost" method. We first try to determine if there are any trade lots that can be sold at a loss. Once that has been done we sell the lots with the highest cost basis that are over 12 months old first. This gives us the maximum tax efficiency on any trading in our client accounts.

Our portfolios’ tax-efficiency has always been a major concern. While many give up on tax loss harvesting in years when investors have not registered significant gains, the exercise is never a waste of time. Remember, harvested losses can offset any gains and up to $3,000 of net capital losses can be deducted from their ordinary income on their tax return for the year. Net losses above that $3,000 can be carried over to future years until they've all been used up by future portfolio gains.

As we expect capital gains tax rates to increase in the future, the tax loss harvesting approach makes even more sense. Simply, losses you book today mean gains that are otherwise likely to be taxed at a higher tax rate in the future could be tax free.

Utilizing “tax swaps” whereby we sell a losing position and simultaneously purchase a similar security (mindful of wash sales rules which prohibit selling and then buying the same security within 30 days) allows us to maintain exposure to the asset class while we harvest losses.

S&P Debt Downgrade:

Unrelated to this blog topic is the subject of Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+. This will be brief but as I mentioned to many, I felt investors and the media made more of this matter than what it deserved. The U.S. dollar is still the global reserve currency and Standard & Poor's and others don't exactly have a pristine record when it comes to making accurate credit ratings.

On the lighter side, I wanted to share the formula below that a friend shared with me. I don't know where he got it, and I am unable to give credit to the person who created it. If someone knows who created it, I will gladly give them credit. In the meantime, I hope you can enjoy the humor of it:

No offense is intended to be directed at the POTUS, Senate Democrats, House Republicans, Tea Party or Wall Street. Just enjoy it!

Protecting Seniors from Financial Scams

2011-08-08T07:00:00.001-04:00

We’ve all received emails riddled with misspellings from scam artists notifying us that a vast amount of cash is just waiting for us to claim, or that something’s amiss with our bank account. All we need to do is enter our bank information and money will be wired immediately and we’ll live happily ever after. Many of these scams are targeted at older people.

A recent MetLife study found older Americans are financially abused by family members, strangers and businesses to the tune of $2.9 billion a year. Alarmingly, despite increased efforts to educate seniors about the dangers of sharing their financial information, the sum of swindled funds is 12% higher than in 2008. The real tragedy, of course, is that both numbers may grossly under-estimate the thefts as experts figure that more than 80% of cases are not reported because the victims are too embarrassed to report the thefts to their children or authorities.

Why are our seniors so vulnerable? A recent Investment News article mentions research from behavioral economist David Laibson that found that people tend to make poorer financial decisions as they age. Laibson’s take on this sad reality is that because seniors are often lonely, they may be more willing to talk to strangers.

To protect your older relatives, I suggest sharing two simple investment adages: If it sounds too good to be true, it probably is a scam. And if you don’t understand it, you should not own it.

If you’re charged with reviewing the bank accounts of a loved one, any large withdrawal should prompt questions. Of course, seniors working with an independent financial advisor who is a fiduciary (i.e., a firm like Bernhardt Wealth Management) have the added assurance of a trusted professional reviewing their financial accounts and activities in their accounts.

Credit-Report Firms to Face Scrutiny

2011-08-01T07:00:00.001-04:00

On July 21st, the newly formed Consumer Financial Protection Bureau (CFPB) took over a range of consumer-product regulatory functions from bank regulators. In addition to mortgages and other credit products, the CFPB also is now responsible for the oversight of the three major consumer credit-reporting companies, Equifax, Experian PLC, and TransUnion. In spite of this new level of fresh oversight, presumably to do something about the high rate of errors in credit reporting, my advice still holds: It is wise to request a copy of your credit report at least once a year to make sure that a mistake isn’t damaging your credit score and resulting in your having to pay high interest rates. You can go to AnnualCreditReport.com to request a copy of your credit report.

It will be interesting to see whether this new agency will be able to do anything about the high rate of credit report errors. I would hope that the credit reporting companies would have to open up their own books and processes for thorough examinations.

July 21st was also the year anniversary of the passage of the Dodd-Frank Act. And Securities and Exchange Commission (SEC) Chairman Mary Schapiro, speaking before Congress, used the occasion to warn that the SEC needs “significant additional resources” in order to fully address their new responsibilities under Dodd-Frank. “There’s only so much you can achieve by wringing funds out of the existing budget,” she said. Over time, she says, “full implementation of the Dodd-Frank Act will require a total of approximately 770 new staff,” including experts in derivatives, hedge funds, data analytics, and credit ratings. She also noted that the SEC “also will need to invest in technology to facilitate the registration of additional entities and capture and analyze data on these new markets.”

Let’s hope the SEC gets the resources it needs to fulfill its broader responsibilities under Dodd-Frank.

Think About It: Stock Market Quotes

2011-07-27T15:21:00.003-04:00

For over ten years we have preached the the merits of the efficient markets hypothesis and why investors should use low-cost, tax-efficient, broadly diversified asset class funds in an asset allocation plan tailored to their unique concerns, goals and risk tolerance. We believe this strategy is the optimal way to grow and protect wealth. And many of the greatest minds in modern finance agree:

"It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others."
--John Bogle, Founder of The Vanguard Group

"Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees."
--Warren Buffet

"Investors should remember that excitement and expenses are their enemies."
--Warren Buffet

"Again, the problem is not that investment research is not done well. The problem is that it is done so well by so many...that no single group of investors is likely to gain a regular and repetitive useful advantage over all other investors."
--Charles Ellis, Vanguard Director and author of "Winning the Loser's Game"

"I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities."
--Benjamin Graham, Warren Buffet’s mentor and "Father" of security analysis

"All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage."
--Peter Lynch, author of "Beating the Street"

"Don't try to beat the market, and don't believe anyone who tells you they can—not a stock broker, a friend with a hot stock tip, or a financial magazine article touting the latest mutual fund."
--Burton Malkiel, Professor of Economics, Princeton University

"Don't try to beat the market. Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost."
--William Sharpe, Professor of Finance, Stanford University, Nobel Prize in Economics

"Invest in index funds. Your odds of beating the market in an actively managed fund are less than 1 in 100."
--David Swensen, Chief Investment Officer, Yale Endowment Fund

"As a general rule of thumb, the more complexity that exists in a Wall Street creation, the faster and farther investors should run.”
--David Swensen

Quotes on the Lighter Side
"Every day, self-proclaimed stock market "experts" tell us why the market just went up or down, as if they really knew. So where were they yesterday?"
--Anonymous

"If stock market experts were so expert, they would be buying stock, not selling advice."
--Norman R. Augustine

"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor--the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."
--William Bernstein

"Prediction is very difficult, especially if it is about the future."
--Niels Bohr, 1922 Nobel Laureate

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."
--Warren Buffett

"In the business world, the rearview mirror is always clearer than the windshield."
--Warren Buffett

"...there's no better advice on how to live longer than to quit smoking and buckle up when driving. The lesson: advice doesn't have to be complicated to be good."
--Charles Ellis

"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."
--William Feather

"There are two times in a man's life when he should not speculate: when he can't afford it, and when he can."
--Mark Twain

58 Percent of Investors Have Lost Faith in the Stock Market

2011-07-25T07:00:00.002-04:00

Surveys are beginning to record what we all know is true. The financial crisis has had a profound impact on investors. In fact, 58 percent of investors have lost faith in the stock market, according to a survey of 1,274 Americans conducted by Prudential Financial. Forty percent say they have a conservative portfolio, up from 33 percent before the recession, and 44 percent say they are unlikely to ever again invest in stocks. Only 37 percent describe their portfolios as aggressive, down from 46 percent prior to the recession.

While 70 percent of the respondents said they have taken steps to improve their financial situation by saving more or reallocating their investments, the majority have moved their money to more conservative investments. This move to safety creates a new risk that they might fall short on achieving their retirement goals.

For most investors, the biggest threat to a financially secure retirement is not short-term market volatility, but inflation. Consider this: Even if inflation stays at the historical level of 3 percent, the cost of almost everything will double in 24 years. That means if you are living on $80,000 in 2011, by 2035, you’ll need $160,000 to maintain your standard of living. Accordingly, as we plan for retirements to span greater than three decades, it’s clear that portfolios comprised solely of bonds and cash will not protect against inflation. Today, the increased length of retirement requires an allocation to global equities for growth potential and diversification.

Yet, investors may not be as reluctant to invest in equities as they report. According to Strategic Insight, year-to-date cash contributions through April to equity and hybrid funds have surpassed inflows to fixed income funds for the first time since the financial crisis. Equity funds netted $110 billion through April, mixed funds $30 billion and bond funds $100 billion as investors acknowledge higher equity allocations to meet their long-term financial objectives.”

401(k) Plans Hit the Big 3-0

2011-07-18T07:00:00.003-04:00

It’s been three decades since the 401(k) arrived on the retirement saving scene. And to celebrate the tax-deferred account’s milestone, many U.S. companies that eliminated their 401(k) matching contributions during the Great Recession are beginning to restore this valuable benefit.

According to the consulting firm Towers Watson, during the recent recession, almost one in five U.S. companies with at least 1,000 workers suspended 401(k) matching contributions. Now, many of those companies are reinstating the perk – albeit often at a reduced level. Today, the once standard 3% match is considered generous. In addition to offering smaller matches, some companies are linking their contributions to corporate profits or requiring employees to reach a particular dollar level in their account before any matching occurs.

With traditional pension plans going the way of the drive-in movie and concerns mounting over the long-term health of Social Security, 401(k) accounts are a critical leg to the retirement stool. According to the Employee Benefit Research Institute (EBRI), 79 percent of eligible workers (36 percent of all workers) say they participate in retirement savings plan with their current employer. Furthermore, 28 percent of participants report that they have increased the percentage of their salary that they contribute to the plan in the past year, and just 4 percent report they decreased the percentage. EBRI also found that workers who currently participate in this type of plan are more than twice as likely as those who do not to report retirement savings and investments of at least $50,000 (52 percent vs. 23 percent).

While 401(k) participation levels have certainly increased since the plan’s introduction and held steady even throughout the recent financial crisis, the industry can do a better job with education. In fact, EBRI found less than half of workers (42 percent) report they and/or their spouse have tried to calculate how much money they will need to save to secure a comfortable retirement. Disappointingly, this percentage is lower than the 53 percent recorded in 2000 and the 47 percent in 2008.

Dodd-Frank Debated

2011-07-11T07:00:00.005-04:00

In a recent news article, “Old Fears Resurface as Lawmakers Confront Basel III, Dodd-Frank Changes,” Donna Borak reported that U.S. lawmakers at a House Financial Services Committee recently addressed whether requirements of the Dodd-Frank Act, combined with tougher international capital and liquidity rules are driving financial institutions overseas.

The article offered dueling perspectives. Rep. Shelley Moore Capito, R-W.Va., told top regulatory officials, "I think failing to examine the aggregate cost of compliance with Dodd-Frank could lead to job losses and, in the worst case, a downgrade of the United States as a financial center

Conversely, Lael Brainard, Undersecretary of the Treasury for International Affairs stated, “There are some who would argue that the United States is moving too fast on financial reform, that we should slow it down, wait to see what other countries implement. I don't agree. By moving first and leading from a position of strength, we are elevating the world's standards to ours."

Borak also quotes Brainard as stressing that in passing Dodd-Frank, that “policymakers were not choosing between stability and growth, as critics charge” The “real point,” she says, “is that we will have much healthier growth if, in fact, we put in place a safe and sound financial system."

I couldn’t agree more, but am sure that the Dodd-Frank debate will continue – especially later this month when the SEC presents to Congress its cost benefit analysis of requiring that broker-dealers be subject to the same fiduciary standard of care as investment advisors. That’s something all investors deserve.

Investing is Boring

2011-07-05T08:15:00.000-04:00

I came across an article in the Financial Post that I thought was worth sharing. The article was titled Investing is Boring: If You Want Excitement, Go to Vegas.

The entire article is well worth reading but I particularly liked the following quote: "timing the market is impossible, forecasts are for the gullible, and stock-picking is a mug’s game."

Recovery? What Recovery?

2011-07-05T07:00:00.003-04:00

Soft. Stalled. Uneven. These are the words we’ve read in headlines that describe the market’s recovery. The economy grew at just an 1.8% annual rate in the first quarter of this year, down from 3.1% in the fourth quarter of 2010. Experts agree that two factors critical to any market recovery have been absent in our transitioning market. To get the recovery into high gear, home prices must stop declining and begin their ascent. Second, consumers, the driving engine of our economy, must regain their confidence and begin to spend more freely.

According to Susan M. Wachter, a Wharton real estate professor, we are three to five years away from being back to what might be considered the “new normal” in the commercial and residential real estate markets. She points out that construction is a job-intensive sector, and therefore, the sector that generally leads the job recovery. Without the boost from robust construction activity, she says the overall recovery is “far more vulnerable to other negatives.”

Mark Zandi, chief economist and cofounder of Moody's Economy.com. put a graphic spin on the market’s recovery. He says to have a vibrant recovery and economic expansion, housing has to go from “being a headwind to a tailwind.” Yet, with average housing prices having declined for six consecutive months, we have a ways to go before that happens.

As for consumer confidence, a survey by the Certified Financial Planner Board of Standards found that a majority of Americans are still experiencing negative fallout from the recession. Fifty-five percent say they have delayed a big purchase and 45 percent have dipped into their savings to stay afloat in tough markets.

However, The CFP Board of Standards survey also recorded hope: 83 percent of respondents said their own personal financial situation will remain the same or improve in the coming year. That optimism is a powerful first step in jumpstarting consumer spending and getting the economy moving full steam ahead.

Does Your College Aid Package Include a Loan?

2011-06-27T07:00:00.020-04:00

According to Finaid.org, more than $100 billion in federal education loans and $10 billion in private student loans are originated each year. Of course, the terms of various loans can vary greatly.

Stafford Loans are federal loans that come in two varieties: Subsidized (based on financial need) or unsubsidized. Subsidized Stafford loans have a lower interest rate than the unsubsidized loans and interest doesn’t start accruing until after graduation. Unsubsidized Stafford loans start accruing while the student is in school, but payment can be deferred until after graduation.
PLUS Loans are designed for parents and interest rates are usually higher than other types of federal loans.
Perkins Loans are made through the schools and interest does not begin to accrue until after graduation.

To compare various loans’ terms, you can use the Loan Comparison Calculator at Finaid.org. And remember that if your aid package includes a loan with a very high interest rate, you can decline that part of the package.

Inevitably, evaluating financing options prompts the question: How much college debt is too much college debt? Getting a sense of national averages may help you to answer that question. Using data from the 2007-2008 National Postsecondary Student Aid Study (NPSAS) conducted by the National Center for Education Statistics at the US Department of Education, Finaid.org offers the following table showing the percentage of students borrowing and the average cumulative debt per borrower (excluding Parent PLUS Loans) at graduation according to type of educational institution.

Who Doesn’t Dream of Working for the Next Google?

2011-06-20T07:00:00.001-04:00

U.S. job growth is driven by startup companies, but if you’ve been offered the opportunity to get in on a company’s ground floor, it’s important to consider potential risks along with the rewards.

Drawing from a 2010 Kauffman Foundation study, Polly Black, Director of the Center for Innovation, Creativity and Entrepreneurship at Wake Forest University, has developed a list of five important considerations for those contemplating joining a startup:

Passion. Look in the mirror, advises Black. Long hours and low pay require that you have a real passion for what the small startup company is doing.
Financial stability. Evaluate the company’s financial backing. Is it profitable? If it hits a major roadblock, what are the plans to stay afloat?
Chemistry. Start ups require a lot of team work, so you need to decide if you fit in with the other employees.
Market need. Black says company leaders should be able to clearly articulate the market need they are meeting with their product or service in a sentence or two. If they can’t, that may indicate a lack of focus that could impede the company’s success.
Experience. How will your work be balanced between job responsibilities and decision decision-making? Will you be comfortable with the level of autonomy offered?

Interestingly, your evaluation of risk and reward on the employment front is not unlike the work we do to accurately identify your risk tolerance that informs the construction of your portfolio. In both cases, if you take on additional risk, you have the potential to reap greater rewards. Also, as with investing, there are different periods in your life that may be more conducive to taking on additional risks.

Pessimistic Mass Affluent Need a Plan

2011-06-13T07:00:00.002-04:00

MFS' recently released findings from its Investing Sentiment Survey show that mass affluent investors (those with between $100,000 and $1 million in household investable assets) have pessimistic attitudes toward investing. Primary factors contributing to the negativity include the impact of 2008's financial crisis and concerns over potential reductions in Social Security. Interestingly, although many have accumulated significant assets, these investors are not optimistic about the future. In fact, 32% describe themselves as protective, 17% as pessimistic, and 16% as fearful. Only 41% describe themselves as hopeful. Other findings include:

44% reported reducing their discretionary spending over the last 12 months; only 14% reported an increase in discretionary purchases.
59% agreed with the statement: “I am more concerned than ever about being able to retire when I thought I would,” with only 16% disagreeing.
49% agreed with the statement: “Over the past few years, I've lowered my expectations about what life will be like in retirement.”

It seems to me that the mass affluent need a financial plan. I would point out that in the October 2010 Dow Jones Affluent Investor Study of 1,287 investors with more than $500,000 in investable assets, approximately half reported that they prefer to manage their own investment portfolios. Additionally, the study found that of those investor working with an advisor, one-third said they had not developed a retirement plan.

As our clients know, an investment policy statement (IPS), a written plan that details their goals and a plan to meet them, is integral to feeling secure. To ensure investment decisions are based on reason rather than emotions and support short- and long-term goals, an IPS specifies an investor’s time horizon, risk tolerance, and standards for a diversified, risk-appropriate portfolio he or she can live with in all markets. In addition to keeping investors grounded during times of market stress, an IPS helps them measure their progress towards their goals.

CFA to Congress: Ignore Misleading Industry Arguments and Allow SEC to Proceed with Fiduciary Rule

2011-06-06T07:00:00.001-04:00

In January, in response to a requirement of the Dodd Frank law, the SEC delivered a report to Congress recommending that broker-dealers be subject to the same fiduciary standard of care as investment advisors. However, the SEC delayed imposing the fiduciary rule to conduct a cost benefit analysis. In advance of the SEC’s planned July meeting to address those findings, advocates for imposing a universal fiduciary duty are urging the SEC to enact the rule.

Notably, the Consumer Federation of America’s (CFA) Director of Investor Protection Barbara Roper recently wrote to U.S. House members urging them not to be swayed by misleading arguments from a small segment of the broker-dealer community. In her letter, Roper contested the view set forth mainly by brokers whose business model depends on the sale of high-cost variable annuities, that imposing a universal fiduciary standard could have “unintended consequences” for middle income investors.

Roper wrote, “The SEC has proposed a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption. In doing so, it has won broad support from industry and investor advocates alike. It would be tragic if opposition from a few industry members intent on maintaining the status quo were able to derail that progress. Despite the self-interested claims of certain industry members, it is the middle income investors who must make every dollar count who are most in need of these enhanced protections.”

I couldn’t agree more. I am proud that the Bernhardt Wealth Management team serves our clients as a fiduciary and look forward to the day when all investors can be confident that all financial advisors act only in their clients’ best interests.

Nebraska

2011-06-04T11:30:00.003-04:00

I was recently reminded of this video and thought I would share it. The song was written by Kevin Marcy and sung by The Marcy Brothers. (Kevin was two years behind me in high school.) The video was shot in and around my hometown of Hay Springs, Nebraska--where I spent the first 18 years of my life before I attended college. I hope you enjoy it!

Time to Re-assess Market Risks/Rewards?

2011-05-30T07:00:00.005-04:00

According to Jim Parker, Vice President, DFA Australia Limited, understanding investment risk begins with accepting that “the market itself has already done a lot of the worrying for you.” As Parker notes, “Markets are highly competitive, which means that new information is quickly built into prices. Instead of trying to second guess the market, you work with it and take the rewards that are on offer.”

To put yourself in the best position to “take the rewards,” it’s wise to work with an advisor to build a diversified portfolio designed to meet your long-term goals – and meet periodically to review your progress and make necessary changes to ensure you are still on course.

If the Great Recession has altered your perception of risk, now may be a good time to meet to re-assess your risk tolerance. Remember, how much risk you decide to take involves assessing three inter-related factors: your future goals; your age and investment time horizon; and additional personal factors such as your current net worth and natural temperament.

As you consider where you fit in the risk spectrum, remind yourself of the Catch 22 inherent in the risk and return equation. That is, while Merriam-Webster’s Collegiate Dictionary defines risk as “possible loss or injury,” risk also is present in opportunities that will be lost if you totally avoid risk. The simple truth, according to Parker, is: “If there were no risk, there would be no return.” Your chances of getting the balance just right are much greater if you work with a financial advisor who combines what Parker refers to as the “accumulated knowledge of financial science” with in-depth knowledge about you.

Ready for a Challenge?

2011-05-23T07:00:00.007-04:00

Last month I wrote about a recent article, Why We're Not Wired for Successful Retirements by Philip Moeller, that was based on a financial literacy test given to consumers in Chile. I noted how many of those surveyed misunderstood the power of compound interest. Since then, blog readers have asked about the other questions. So, here they are, reprinted directly from the article. Only 68 out of nearly 14,250 tested answered all six correctly. See how you do. (The correct answers follow, but no peeking!)

Chance of Disease: If the chance of catching an illness is 10 percent, how many people out of 1,000 would get the illness?
Lottery Division: If five people share winning lottery tickets and the total prize is two million Chilean pesos, how much would each receive?
Numeracy in Investment Context: Assume that you have $100 in a savings account and the interest rate you earn on this money is 2 percent a year. If you keep this money in the account for five years, how much would you have after five years? Choose one: more than $102, exactly $102 or less than $102.
Compound Interest: Assume that you have $200 in a savings account, and the interest rate that you earn on these savings is 10 percent a year. How much would you have in the account after two years?
Inflation: Assume that you have $100 in a savings account and the interest rate that you earn on these savings is 1 percent a year. Inflation is 2 percent a year. After one year, if you withdraw the money from the savings account, you could buy more/less/the same?
Risk Diversification: Buying shares in one company is less risky than buying shares from many different companies with the same money. True/False

Answers:

100
400,000 pesos
More than $102
$242
Less
False

How did you do?

Do You Have a Lead Advisor?

2011-05-16T07:00:00.003-04:00

A new report from State Street Global Advisors and the Wharton School Taking on the Role of Lead Advisor: A Model for Driving Assets, Growth and Retention offers some insights into how investors’ loss of confidence in markets during the recession prompted many to begin managing their money themselves or to engage multiple advisors to diversify the risk they perceived of working with just one advisor.

However, because multiple advisors rarely share information about the clients, the report found that investors working with multiple advisors can easily and mistakenly take on too much or too little risk relative to their financial goals. Specifically, the report notes, “Using multiple advisors to work out portfolio strategies independently often can lead to overlapping exposures or to divergent allocations that result in neutral market positions.”

To guard against this risk, the report suggests that investors may want to consider appointing a lead advisor to oversee the entire investment portfolio. That’s how I think of myself – as my clients’ personal chief financial officer – working to identify and prioritize goals and develop a clear plan for how they will reach them.

As the State Street/Wharton report points out, this “lead advisor model” is one successfully used by advisors to the ultra high net worth. Especially because, more than ever, investors desire unbiased, personalized financial advice they can trust, it makes good sense to working with a fiduciary who oversees all your investments, across all accounts and among other professionals and coordinates with other professionals, such as CPAs and estate planning attorneys.

What’s the Future of Social Security?

2011-05-09T07:00:00.003-04:00

Do American workers have confidence that they will receive future benefits from Social Security? Results from the Employee Benefit Research Institute’s 2011 Retirement Confidence Survey (RCS) show most American workers are skeptical about the program. Here are some statistics from the report:

Seventy percent of workers are not too or not at all confident that Social Security will continue to provide benefits of at least equal value to the benefits retirees receive today.
Three-quarters of workers express concern that the age at which they become eligible for Social Security retirement benefits will increase before they retire.
Today’s workers are less likely to expect Social Security income in retirement (77 percent total major and minor source of income, down from 88 percent in 1991) than today’s retirees are to report having Social Security income (91 percent total).
Workers are half as likely to expect Social Security to provide a major share of their income in retirement (33 percent) as retirees are to say Social Security makes up a major share of their income (68 percent). However, EBRI research found in 2009 that 60 percent of those age 65 or older received at least 75 percent of their income from Social Security.
Workers who are closer to retirement are more likely to expect Social Security to be a source of income in retirement than are younger workers (92 percent of workers age 55 and older vs. 63 percent ages 25–34).

The message here is clear: The unsure long-term status of Social Security coupled with the significant decline of defined benefit plans mean that working Americans must shoulder an increased responsibility to fund a financially secure retirement.

Mother Knows Best: Don’t Put All Your Eggs in One Basket

2011-05-02T07:00:00.002-04:00

We probably all can recall hearing our mother say, “Don’t put all your eggs in one basket.” That solid advice to diversify is often misapplied to the investing front. Some investors think that buying 50 blue chip stocks complies with that adage. Others figure that buying ten mutual funds properly diversifies their portfolio, only to find that those ten mutual funds invest in many of the same stocks. Still others think hiring multiple advisors will ensure a truly diversified portfolio, but soon discover that those advisors use similar funds and that the management fees are higher than they would be with just one advisor. So what does not putting all of your eggs in one basket mean?

True diversification means owning all of the stocks that make up the market, and it is the only true way to ensure you get market returns. Further, spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses. Additionally, you should diversify within asset categories by sub-asset class, even by investment style. Note, too, that diversification in any asset category is achieved more effectively through asset class mutual funds rather than with individual stocks. Building a diversified portfolio requires identifying your asset allocation strategy, diversifying within each asset class, and then periodically rebalancing your portfolio.

In honor of Mother’s Day, think back to what your mother told you about life: Be patient. Do your best. Look before you leap. Remarkably, her words of wisdom have a direct application in today’s markets.

EBRI’s 2011 Retirement Confidence Survey: Gender Comparisons Among Workers

2011-04-25T07:00:00.008-04:00

Do men and women plan and save for retirement equally? The 21st annual Retirement Confidence Survey (RCS) provides some answers. The RCS found men and women are equally likely to save for retirement. Also, women are statistically as likely as men to report they are offered (43 percent vs. 49 percent) and contribute to (34 percent vs. 39 percent) a work place retirement savings plan. However, men (17%) are more likely than women (10%) to say they are very confident about several of the financial aspects of retirement.

Interestingly, although women tend to face higher health care expenses in retirement due to their greater longevity, women (35 percent) are more likely than men (26 percent) to think they will need to accumulate less than $250,000 for retirement. Another point of departure is that women are more likely than men to be very concerned about the possibility that Social Security payments will be reduced (68 percent vs. 52 percent) and the age at which they become eligible for Social Security retirement benefits will increase before they retire (54 percent vs.44 percent).

Apart from gender comparisons, the 2011 RCS reported some disconcerting news -- Americans’ confidence in their ability to afford a comfortable retirement has plunged to a new low. The percentage of workers not at all confident about having enough money for a comfortable retirement increased from 22 percent in 2010 to 27 percent this year, the highest level in the RCS’ 21 years. Also, instead of reducing spending and/or saving more to shore up retirement accounts, most workers are planning on delaying retirement and/or working part-time in retirement. My caution is always is that health concerns may not allow you to work as long as your figure to.

Decisions, Decisions

2011-04-18T07:00:00.006-04:00

In Which Risks Are Worth Taking Jim Parker, a vice president at Dimensional Fund Advisors, writes, “Even the most self-declared risk-averse people take risks every day.” Parker notes that routine risks to our safety include crossing the road, exercising at the gym, choosing lunch and using electrical equipment. He adds, “There are the big decisions like selecting a degree course, choosing a career, finding a life partner, buying a house and having children. These are all risky decisions, all uncertain, all involving an element of fate.”

In making these decisions, Parker says we seek to “ameliorate risk by carefully weighing up alternatives, researching the market, judging possible consequences and balancing what feels right emotionally and intellectually, both in the short term and in the long.”

New research from Harvard Business School’s Michael Norton addresses how managers making decisions often err in one of two directions—either overanalyzing a situation or ignoring helpful information to go with their gut. More specifically, when deciding among potential products or employees, managers routinely take too much time considering all the attributes of their choices—even attributes that are irrelevant. Equally troublesome, their fear of the decision paralysis that can occur when evaluating too much information, often cause managers to decide to trust their instincts.

In an article discussing Norton’s finding, a sentence Dr. Seuss might have written caught my eye: “We know that sometimes people think too much, and sometimes they think too little. But we still don't know the right amount to think.”

I suggest that when it comes to financial decisions, it’s always wise to have a trusted financial advisor in your corner who understands the tradeoff between risk and return and how to build a portfolio that suits your risk tolerance level. A financial advisor can help you think and make solid decisions, giving you the best chance of achieving your goals.

Parker also believes investors need help making financial decisions about risk. “Advisors,” he writes, “help us take an objective assessment of the potential risks and rewards of various alternatives, by taking a holistic view of our circumstances and by keeping us free of distraction and focused on our original goals.”

I couldn’t agree more. Invest without the help of an advisor and you may be exposing yourself to unnecessary risks -- whether you’ve thought long and hard about your decision, or just gone with your gut.

Is Cash in the Pocket Better Than Waiting for More?

2011-04-11T07:00:00.003-04:00

In a recent article, Why We're Not Wired for Successful Retirements, Philip Moeller explores the psychology behind the answers to that question as documented in new research by Justine Hastings of Yale University and Olivia Mitchell of the University of Pennsylvania. Their paper for the National Bureau of Economic Research reveals the results of two tests they conducted to ascertain why people often fail to make sound financial decisions.

Interestingly, the findings Moeller reports on were based on research with consumers in Chile, not the United States. The first test involved posing six relatively simple questions to gauge respondents’ financial literacy. (Nobody scored 100 percent.) In the second test, people were offered the option of receiving the equivalent of about $8 if they filled out a shopping questionnaire right away, or a larger amount of money if they took the questionnaire with them and mailed it back within four weeks. (Not surprisingly, more than half the people chose the immediate payment; 30 percent chose to wait for more money and 17 percent took the questionnaire with them, yet failed to return it.)

Said the researchers, "We find that the impatience measure strongly predicts respondents' self-reported retirement saving and health investments. Financial literacy is also associated with more retirement saving, but it is less closely associated with sensitivity to framing of investment information."

For me, the research’s real lesson for those saving for retirement comes from reviewing the question most people answered incorrectly. Addressing compound interest, the question asks: Assume that you have $200 in a savings account, and the interest rate that you earn on these savings is 10 percent a year. How much would you have in the account after two years? Not too many people came up with $242. (You earn $20 the first year on 200, then $22 on $220 during the second year.) Understanding the long-term power of compound interest in tax-deferred savings accounts is crucial to motivating investors to sacrifice today for their benefit tomorrow.

The need for immediate gratification, a uniquely American characteristic, can be difficult to overcome, but doing the math may convince you.

Our Thoughts and Prayers are with the People of Japan

2011-04-04T07:00:00.000-04:00

The massive March 11th earthquake and tsunami that devastated northeastern Japan left more than 18, 000 people dead and thousands more are still missing. Close to half a million people have been displaced and the nuclear crisis at the Fukushima Dai-ichi plant has the public’s fear mounting. While the overwhelming cost to human life is of paramount importance, many also worry about how Japan's economy will be impacted.

The World Bank recently estimated rebuilding from the worst earthquake and tsunami in 300 years may cost the world’s third largest economy upwards of $235 billion Other numbers, many noted in a recent story Economic Impact of Japan's Quake by Kimberly Amadeo, are staggering.

According to Carl Weinberg, High Frequency Economics, 11 of Japan's 50 nuclear reactors have been shut down. Given that Japan's nuclear industry supplies a third of the country's electricity, production will be limited to less than 80% of pre-quake/tsunami potential for a long time.

According to Kyohei Morita and Yuichiro Nagai of Barclays Capital, the quake hit the north-east section of the country, responsible for 6-8% of Japan's GDP. They figure damages could exceed 15 trillion yen, or 3% of GDP.

With a total of 22 manufacturing plants, including Sony, still closed, the global supply chain of semiconductor equipment and materials will clearly be impacted.

Here are two more numbers to consider: The American Red Cross now lists “Japan Earthquake and Pacific Tsunami” as one of the choices for online donations at the Red Cross. Alternatively, you can make a $10 donation by texting REDCROSS to 90999. Among countless other organizations, UNICEF is also coordinating efforts to help the children of Japan. You can use the form on UNICEF's website to donate 100 percent of your desired amount to their fund designated for victims of the earthquake. Or you can simply text JAPAN to 864233 to donate $10.

Dimensional Stories: People Putting Ideas Into Practice

2011-04-01T15:41:00.006-04:00

Someone recently asked me for information about the story of Dimensional Fund Advisors. I recalled this video and provided a link to it. I enjoyed watching the video again and decided I should share it on my blog. I hope you find it informative.

If you have questions about Dimensional Fund Advisors, you should consult with your independent registered investment advisory firm.

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If you want to see a bigger version of this video, click on this link. Click Here>>

Disclaimer: This video contains the opinions of the participants but not necessarily Dimensional Fund Advisors, DFA Securities LLC, or Bernhardt Wealth Management, Inc., and do not represent a recommendation of any particular security, strategy or investment product. The participants' opinions are subject to change without notice. Information discussed in the videos has been obtained from sources believed to be reliable, but is not guaranteed. These videos are made available for educational purposes only and should not be considered investment advice or an offer of any security for sale. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

In the News -- USA Today & WTOP

2011-03-28T07:25:00.007-04:00

The USA Today did a series of articles on insurance on Friday, March 25th, and I was a contributer to the article as noted below. And WTOP Radio also called me at 6:50 AM this morning and asked a few questions about last minute tax planning ideas.

As published in USA Today
Common insurance pluses, pitfalls
Cutting back now can leave you in a lurch
By Christine Dugas USA TODAY
"As American families are struggling just to pay their bills, it’s not surprising that many are putting off life insurance. Individual life insurance hit a 50-year low last year, according to LIMRA, an industry-sponsored group.
But during tough economic times people should not sit back and think they’re immortal, says Gordon Bernhardt, a fee-only financial planner in McLean, Va."
Click here to read the full article

Money and Marriage

2011-03-28T07:00:00.003-04:00

They say opposites attract. So, what happens when a saver marries a spender? Differing fiscal philosophies don’t have to spell trouble for a marriage. To co-exist peacefully, follow these five tips:

Share your past. Experts say we form our attitudes towards money in childhood. Understanding your partner’s roots may help you to appreciate his or her point of view.
Care enough to compromise. Enumerate and negotiate your short- and long-term goals. Your budget should include the top goals of each partner as well as an appropriate amount of “mad money” for each partner to spend or save.
Make it automatic. Having money automatically deducted from your paychecks ensures you both contribute regularly toward your goals – and avoid arguments.
Talk money. Routinely scheduled discussions of just ten minutes a week can help avoid major money battles.
Periodic reviews. Have an annual "board" meeting to review all of your accounts and remind each other where important documents are stored.
Swap roles. If the saver hasn’t been to the grocery store in a decade, he or she should take the list and go food shopping, while the shopper/spender takes a stab at paying the monthly bills. This role reversal may result in an appreciation for your partner’s talents and perspective.

If the tension persists, seek out a neutral third party--a financial advisor, a marriage counselor, or both--to help you work through your issues.

The Article’s Title Sums It All Up

2011-03-21T07:16:00.003-04:00

The title of a new article on Knowledge@Wharton caught my eye: "If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" Although multiple academic studies have found that index funds, which seek to match the performance of a broad market sector, consistently perform better than expensive actively managed funds where money managers try to beat the market, indexing (or passive management) accounts for only about 13% of assets in equity mutual funds.

Noting that most answers to the question, "Why do a majority of investors choose active management when passively managed funds perform better?" could be categorized under the umbrella "Investors aren’t very bright," Wharton finance professor Robert F. Stambaugh in a paper entitled, "On the Size of the Active Management Industry," co-authored with Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, concludes that investors aren’t making foolish choices, but choose active management in a "kind of arms race to unearth a limited number of bargain-priced investments."

"We wanted to come up with a rational explanation for why, despite this rather mediocre track record for active management, the lion's share of money is still managed that way, as opposed to passively," Stambaugh says in the article.

"If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" summarizes Stambaugh’s argument this way: "Investors' rational belief that active managers have a better chance of sniffing out good deals if there are not too many managers looking. A rational investor will pull money out of actively managed funds if the results are disappointing, but he will not pull out entirely because he realizes that other investors will withdraw money, too. That will leave less money to chase the few bargains, making them easier to find."

Acknowledging that industry marketing also has a hand in investors’ preferences, Stambaugh concludes, "There's no reason to resort to calling investors stupid if you can explain [their behavior] without doing that."

The Unexpected Recovery

2011-03-15T12:08:00.004-04:00

Last week on March 9, 2011, the world celebrated the two-year anniversaryof the low point in the global markets, the point of maximum pain and panic following the 2008 financial crisis and Great Recession.

On March 9, 2009, the S&P 500 Index had fallen to its low of 676.53, which is about where it had been almost 13 years before--on June 10th and October 3rd of 1996 it closed at 672.16 and 692.78, respectively. On March 9, 2011, the S&P 500 Index closed at 1321.15--a 95% increase from its low two years earlier but still down 18% from its all time high of 1565.15 on October 9, 2007. During the same two year period of time the Russell 2000 Index--an index that tracks small cap stocks--rose almost 140% from 343.26 to 821.19.

If you look back at the economic forecasts and market reports in March of 2009, you will not find a prediction that the markets would recover as they have. There was even some doubt whether the U.S. economy would survive intact, and the most common prediction was deflation, continued recession and more downside in the stock markets.

In retrospect, this most frightening time was the ideal time to shove all the chips on the table and bet everything on a stock market recover--but who had the intestinal fortitude for that? After the losses that virtually all investors had sustained, no matter where they had deployed their assets, few had the stomach, or the heart, to bet on a robust recovery. This is a terrific lesson in the value of disciplined investing; the consensus and our own gut feelings are often wrong and inevitably point us in the opposite direction from where the returns are going to come from next. In the past, every long-term upturn has been greater than the losses sustained in the prior bear market. We don't know how this one will end, but it seems to be following the same seemingly unlikely, but not unusual, course.

Has the Recession Changed the Conspicuous Consumer?

2011-03-14T07:17:00.002-04:00

We’ve all read articles suggesting that the Great Recession was a “generation-changing moment” where fast-spending consumers realized the errors of their ways. I remember reading the comment Jeff Immelt, chief executive officer of General Electric Co., made to a shareholder group, “If you think this is only a cycle, you’re just wrong. This is a permanent reset. There are going to be elements of the economy that will never be the same, ever.”

Although the recession is behind us, we are still dealing with slow economic growth, diminished investment returns, higher unemployment, tighter credit, the threat of inflation and higher taxes. These circumstances certainly will make the journey to your financial destination more difficult. But just how much has the American consumer changed to account for a new grade of difficulty? According to a recent study, not much.

“Conspicuous Consumption in a Recession: Toning it Down or Turning it Up?” forthcoming in the Journal of Consumer Psychology and co-authored by USC Marshall School of Business Associate Professor Joseph Nunes along with Xavier Drèze, Associate Professor of Marketing at UCLA's Anderson School of Management and USC Marshall School of Business doctoral student Young Jee Han, suggests that conspicuous consumption endures.

The authors conclude consumers remain interested in logo-laden products and are willing to pay premium prices for them. Whereas before the recession, consumers used luxury brand logos as a badge signifying their fiscal strength, and during the recession, consumers clung to luxury goods to prove that they were prospering even during the economic downturn.

Utilizing data from Louis Vuitton and Gucci, the researchers found that products introduced during the recession, at a time when one would think frugality would be “in,” displayed the luxury brand logo even more prominently than in previous years. More surprising was the fact that handbag prices actually increased during the recession. Said Professor Nunes in a university press release, “These are savvy companies that really understand their customers; they understand that they cater to a certain segment that desires products used to signal their status. That desire doesn’t go away, even in hard times.”

Interesting. Study after study indicates that American workers are delaying retirement to make up for losses suffered in the recession. Could it be we are willing to work longer to ensure we don’t have to lower our standard of living? Perhaps we should be asking ourselves – Are designer handbags, and other luxury trappings, essential to our happiness?

Is College Worth It?

2011-03-07T07:00:00.004-05:00

Here’s a statistic that recently gave me pause: 45 percent of college students demonstrate no significant improvement in a range of skills, including critical thinking, complex reasoning, and writing during their first two years of college. The findings come from an analysis of more than 2,300 undergraduates at twenty-four institutions and are shared in Academically Adrift, a book written by Richard Arum and Josipa Roksa. The author’s research draws on survey responses, transcript data, and results from the Collegiate Learning Assessment, a standardized test administered to students in their first semester and again at the end of their sophomore year.

For parents struggling to pay soaring tuition costs, many from savings they’ve been contributing to since their children were born, this statistic will be alarming. Many will no doubt counter the findings shared in Academically Adrift with the bevy of statistics about how much more college graduates earn over their lifetime, or how, as a recent College Board study “Education Pays 2010” finds, they have been less negatively impacted by the recession than those with just a high school diploma. Turning the tables, in Academically Adrift, the authors offer their analysis of who profits from college and, most importantly, how colleges must transform themselves to respond to the changing needs of today’s students is illuminating and instructive.

If you’re wrestling with college costs, you’ll be interested in an article on my web site, “Give College Funding the Old College Try.”

One of My Favorite Days

2011-03-04T08:36:00.005-05:00

Several years ago my sister sent me the following poem, and I wanted to share it with you today:

One of My Favorite Days

(March Fourth)

We all love Christmas. Halloween is scary sweet.
I'm thankful for Thanksgiving, boy how we eat!
Then there's our birthday which is really fun.
New Year's Eve is festive but we're a little tired come January One.

Easter is delightful! Fourth of July fireworks are great!
There is St. Patrick's, Presidents, Valentines, Veterans, Labor,
Columbus, Flag, Father's, Mother's, Martin Luther King, . . .
How do we keep track of all of these darn dates?

When I look at my one year calendar,
March Fourth is one of my favorite days.
Nothing much happened in history.
It's just what the day has to say!

When you have problems,
March Forth!
When things don't work out,
March Forth!
When bad things happen,
March Forth!
When you lose,
March Forth!

When anything can happen, March Forth says it all.
When something does happen,
Get up, Brush off, and March Forth,
Because we're all bound to fall.

--Anders Rasmussen

More Households Risk Running Short in Retirement Due to 2008–2009 Recession

2011-02-28T07:00:00.003-05:00

Between 4 percent and 14 percent of Americans who otherwise would have had a sufficient income stream in retirement became “at risk” of running short because of the housing and financial crisis of 2008-2009 according to a new report, “A Post-Crisis Assessment of Retirement Income Adequacy for Baby Boomers and Generation Xers,” by the Employee Benefit Research Institute (EBRI). Not surprisingly, the likelihood of becoming “at risk” depends on the size of the retirement account balances as well as exposure to the housing market.

A recent EBRI press release poses the question: How much additional money would these households need to save to make up for their losses from the crisis? According to EBRI, “early Boomer” households “would generally need to save between 1 percent and 4 percent of compensation more each year between now and retirement age.” Of course that percentage is quickly followed by a disclaimer that the answer “varies greatly and depends on several key factors, such as the size of account balances and exposure to the equity market, proximity of the household to retirement age, the relative level of preretirement income, and the desired probability of adequate retirement income.”

There’s never a painless fix when you are caught short. You can work longer, save more, or cutback on your retirement lifestyle. According to a report, “Responding to the Downturn: How Does Information Change Behavior?” by Norma B. Coe and Kelly Haverstick, from the Center for Retirement Research at Boston College most pre-retirees would choose to work longer rather than save more or reduce their standard of living in retirement.

Could Interaction with Another Person Increase Your Productivity?

2011-02-25T07:05:00.002-05:00

Wharton management professor Adam Grant has devoted his career to examining what motivates employees in the workplace. No matter the industry or job he says employees who know their work have a positive impact on others, are happier, and more productive than those who don't.

One experiment studying fundraisers at a public university’s call center quantifies just how much more productive an employee can be. To motivate callers to stay on the phone and raise donations, Grant introduced some to a scholarship student who benefitted from their work. What happened? The callers who met the student spent two times as many minutes on the phone on each call than those with no student contact. What’s more, those who met the student brought in a weekly average of $503.22, compared to $185.94 for other callers.

I understand how connecting with a person can serve as a powerful motivator. Early in my career when I worked as an auditor, I knew the information I provided was essential to investors, banks, and owners. Yet, I did not have the job satisfaction I desired. When I transitioned to wealth management, I realized it was the satisfaction I gained from interacting with clients one-on-one, and doing all I could to help them reach their goals, that was missing from my previous work.

Grant says establishing “task significance” is the key to motivating employees and that face-to-face interactions, however brief, are hugely beneficial. That’s certainly something that in our increasingly technology-driven world we--business owners and employees alike-- should strive to remember.

In the News -- Fox 5 News

2011-02-24T14:51:00.003-05:00

I had the privilege of appearing on Fox 5 News on the morning of February 22nd with Tony Perkins. You can watch the clip below to see my brief appearance on Fox 5 News.

In the News: The Fiduciary Standard

2011-02-21T07:00:00.000-05:00

After six months of study required by the Dodd-Frank Act, the Securities and Exchange Commission (SEC) recently announced that all advisors, including brokers, should be held to a fiduciary standard because investors already assume their brokers are acting in their best interests. “Retail customers should not have to parse through legal distinctions to determine whether the advice they receive was provided in accordance with their expectations,” the SEC study noted.

Response was quick and positive from the Securities Industry and Financial Markets Association (SIFMA): “We support a uniform fiduciary standard of care for broker-dealers and investment advisers, and upon initial review we believe that the SEC has appropriately articulated a workable comprehensive approach for personalized investment advice for retail customers.” SIFMA further commended the SEC for not favoring one business model over another and asked the Commission to issue guidance to help firms enact this new standard.

I have long argued that brokers and investment advisors should be governed by a comparable standard of care. The SEC report is a step in the right direction, but does not specify a deadline for everyone to adopt the fiduciary standard. What’s more, it’s also unclear if the SEC will now re-define what it means to be a fiduciary and put your clients’ needs ahead of your own – in all situations. Also, it’s still unclear what organization will be charged with oversight and enforcement. In spite of all their work in the fiduciary debate, the SEC has instructed Congress it doesn’t have the resources to oversee advisors, noting that the best option would be for a self-regulatory organization like FINRA to serve in that capacity.

As we work toward changing industry definitions and regulations, those of us who have always worked as a fiduciary and puts clients’ needs first, continue to insist that the investing public deserves nothing less.

TD Ameritrade Conference

2011-02-18T07:00:00.004-05:00

Tim and I attended the 2011 TD Ameritrade Conference in San Diego earlier this month. There were over 60 educational or keynote speakers to see and hear. I thought I would briefly share a few highlights from six of the sessions I attended.

General Colin L. Powell

General Powell was the conference keynote speaker. He was a last minute replacement for Former Prime Minister Tony Blair who was called to Egypt as a result protests and unrest in that country. Tony Blair brought a round of laughter from the crowd of over 2,500 when he said in a recorded message that he thought he would tackle something easy like peace in the Middle East after he retired as prime minister.

Powell was humorous and thoughtful as he shared experiences from his career and life. Powell shared his thoughts about President Reagan's optimism in America and his belief in Americans and wished he "could put all of Reagan's optimism in a bottle and pour it over the heads of politicians in Washington."

I loved the story of his favorite hot dog vendor in New York City and how he would always stop to get a hot dog when he was in public service. Powell shared that when he was in New York City after he left public life he stopped to get a hot dog. After pulling cash from his wallet to pay for the hot dog, the vendor, who came to this country 40 years before, refused to take his money and told Powell the following: "I know who you are. You are Colin Powell. I've been paid. America has paid me. You paid me with your public service. I have taken the opportunity that you have given me, and I am grateful."

Professor Jeremy Siegel

Dr. Siegel is a professor at the University of Pennsylvania's Wharton School of Finance and author of Stocks for the Long Run. He was very dynamic and shared some charts and thoughts.

One chart showed what $1 after inflation would have grown to in various asset classes from 1802 through 2010. It was surprising to see that Gold grew from $1 to $4.02 and U.S. Stocks grew from $1 to $699,088. He believes that "people who recently bought gold are going to be disappointed in five years."

He also showed a chart of U.S. stocks going all the way back to the 1800s. This chart showed a trend line for U.S. stock prices going back to the 1850s with annual price fluctuations above and below the line. If stock prices were above or below the trend line during various years, the prices were eventually drawn back to the trend line. Siegel believes that as of December 31, 2010, the U.S. was 20% below it's long term trend. During the Financial Crisis and Great Recession the U.S. stock market fell to 39.4% below the trend line--the fifth largest deviation during this period of time.

Siegel shared many other statistics but it was clearly obvious that he believed in "Stocks for the Long Run."

Alan Simpson and Erskine Bowles

Former Senator Alan Simpson and former White House Chief of Staff Erskine Bowles shared their experiences and thoughts as co-chairs of the National Commission on Fiscal Responsibility and Reform. Simpson started the discussion by saying they had 14 reasons to inject themselves into the deficit-reduction debate. "He [Bowles] has eight grandchildren and I have six."

According to Simpson and Bowles balancing the budget is a matter of addressing the substantive areas of Medicare, Medicaid, Social Security and defense. Simpson said, “If you don’t cut these, you have to cut everything else by 75%.”

The Commission’s report addresses getting rid of loopholes, broadening the base and simplifying the tax code. They believe that by getting rid of the $1.1 trillion of earmarks in the tax code, “we can take the rates to 8 percent up to $70,000, 14 percent up to $210,000 and 23 percent above that, with a corporate tax rate of 26 percent.” At that point, they agree, America will again be a great place to start and grow a business.

Craig Alexander

TD Ameritrade Chief Economist Craig Alexander shared his insights. He reminded us that two years ago the media was talking 24/7 about the long-term global depression and failed to predict we would be where we are today.

He made the point that "we are a year and a half into recovery but consumers and businesses clearly don't feel like they've reached the far end of the valley." He said said it typically takes twice as long to recover from a financial crisis than it would take from a normal recession.

He felt that inflation would not be an issue for several years due to the huge overhang of inventory at the present time. But he thought the job market would continue to disappoint since you need 200,000 new jobs each month to keep unemployment from rising. And with the people leaving the labor market the REAL unemployment rate was closer to 16%. However, he was not concerned about unemployment as a predictor of the economy since unemployment is a lagging indicator of the economy and stock market.

Alexander said the consensus among economists is for 3% growth of U.S. GDP this year and next year. However, Alexander felt this was too conservative and was projecting a 3.5% to 4% growth.

For the most part, Alexander agree with Professor Siegel and felt that investors who are not participating in the market will be kicking themselves.

Dewitt Jones

We also had the privilege of listening to Dewitt Jones, a motivational speaker and former photographer for National Geographic. What made him unique was that he shared his photographs and stories behind the photographs as he spoke on his theme of "falling in love with the world" and "celebrating what is best in the world."

If you ever have the chance to listen to him, don't pass on it. In the meantime, you can see many of his beautiful photographs by clicking on this web site.

Andy Hill

Any Hill shared his view for life successes and happiness based upon principles he learned from Coach John Wooden. Andy was a member of three consecutive NCAA Championship basketball teams under the guidance of Coach Wooden. Any later served as President of CBS Productions from January 1991 through April 1996 and was responsible for successful shows including Touched by an Angel, Dr. Quinn: Medicine Woman, Walker Texas Ranger, etc.

I enjoyed learning about Coach Wooden's pyramid of success and used it to inspire boys to be men and better citizens. I have included it below:

I also loved the following poem that Coach Wooden would often recite:

No written word, no spoken plea

Can teach our youth what they should be,

Nor all the books on all the shelves.

It's what the teachers are themselves.

Qualified Charitable Distributions

2011-02-14T07:00:00.001-05:00

Perhaps lost in all the posturing about what would become of the Bush tax cuts was a valuable extension for qualified charitable distributions. The 2010 Tax Relief Act extended the tax-free distributions from Individual Retirement Accounts (IRAs) for charitable purposes through 2011, i.e., Qualified Charitable Distributions (QCDs).

Briefly, we all know distributions from IRAs must be included in gross income in the year of distribution, and income taxes must be paid on the taxable portion of distributions. A QCD allows IRA owners and beneficiaries age 70½ and older to make tax-free distributions of otherwise taxable dollars from traditional IRAs to qualified charitable organizations. These distributions are also allowed to be made from SEP IRAs and SIMPLE IRAs as long as no employer contributions were made for the same tax year. These QCDs are limited to $100,000 per year, per IRA owner or beneficiary, and the check has to be payable directly to the eligible charity.

I will be sharing more details about this excellent charitable planning opportunity in the coming months. If you are interested in learning more, please consult your financial advisor.

Power to the People: U.S. Shareholders Have a Say on Corporate Pay

2011-02-07T07:00:00.002-05:00

Starting on January 21, 2011, shareholders of U.S. companies will be able to give a thumbs up or a thumbs down to executive pay packages. You may remember that the "say on pay" vote was first introduced as a safeguard when U.S. financial institutions dubbed "too big to fail" received federal bailout funds thanks to the Troubled Asset Relief Program (TARP). Today, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires that all public companies conduct say-on-pay votes at least once every three years. According to Say on Pay: Will U.S. Shareholders Give Executives the Thumbs Up on Compensation?, an article published in the online business journal Knowledge@Wharton, shareholders will also be asked for their views on golden parachute awards after a merger or acquisition and pension funds and other large institutional investors that cast ballots must disclose how they voted.

In the article, Wayne Guay, a Wharton accounting professor who consults on executive compensation plans, questions whether the new voting system can help improve pay packages. In his view, any analysis of pay packages by institutional investors would be trivial when compared to the work of various corporate boards. Interestingly, the article includes data from Towers Watson, a compensation advisory firm, that backs Professor Guay. According to Towers Watson, of the companies that voluntarily adopted say-on-pay voting in advance of Dodd Frank, only three companies failed to receive majority support for their compensation programs in 2010, and no company failed to receive majority support in 2009.

In my view, Wharton Professor Micahel Useem sums the pros and cons of the new law nicely. While he says the big benefit will be the increased transparency into the design of executive pay structures, he cautions that if boards become too focused on compensation issues, they may fail to dedicate the time necessary for long-term corporate planning.

You Deserve a Fiduciary

2011-01-31T07:00:00.016-05:00

Who can you trust to give you the best possible financial advice? Interestingly, during times of personal crisis such as job loss, divorce or death of a spouse, the vast majority of Americans turn to family and friends rather than financial advisors, according to a recent survey from AARP Financial.

I understand that impulse. It is natural to turn to those you know care most about you in your time of need. However, as is the case when you require medical care or legal advice, or even home maintenance, it is crucial to work with someone who is well-informed in addition to being well intentioned. Ironically, although the combination of expertise and care is especially necessary for your finances, it can be exceedingly difficult to find. That is, of course, unless your financial advisor is a fiduciary who is bound to put your needs and interests first, in all cases.

You might assume that all “financial advisors,” like attorneys and CPAs, have a fiduciary duty to act in the best interests of their clients. That is not the case. When I meet with prospective clients, they are surprised to learn that there are professional financial advisors who practice at a lower standard.

In fact, federal and state law holds only Registered Investment Advisors (RIAs) to a Fiduciary Standard that requires those advisors to act solely in the best interest of the client, even if that interest is in conflict with the advisor’s own financial interest. Further, RIAs must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement, as well as adopt a Code of Ethics and fully disclose how they are compensated.

Bernhardt Wealth Management is a Registered Investment Advisor and my team and I are proud to call ourselves fiduciaries. Investors should accept nothing less from advisors managing their money.

What is One of Your Greatest Life Experiences?

2011-01-24T07:00:00.041-05:00

One of the greatest rewards my team and I receive is the knowledge that by serving as our clients' personal chief financial officer our clients have more time to to spend with their family, focus on their business and/or profession, give back to their community or pursue other things that are important to them. It is our hope that they can then lead a fuller life as a result of our service. Or as Horace said "“Carpe diem! Rejoice while you are alive; enjoy the day; live life to the fullest; make the most of what you have.”

What is one of your greatest life experiences? I recently had one of the best life experiences I have ever had. I hiked four days and 52.6 miles in the Grand Canyon.

On January 5th I hiked down the South Kaibab Trail to Phantom Ranch. The photo below is me on the South Rim of the Grand Canyon at the South Kaibab Trailhead.

On January 6th, I left Phantom Ranch and hiked part way up the North Kaibab Trail. On my way back I stopped to have lunch at Ribbon Falls.

On January 7th, I hiked part of the Clear Creek Trail from Phantom Ranch.

On January 8th, I left Phantom Ranch at 6:00 AM to begin my hike out of the Grand Canyon on the Bright Angel Trail. Here is a photo of me at the Bright Angel Trailhead after I reached the South Rim.

A couple in their 60s stopped me as I left the Grand Canyon and asked questions about my experience. I answered all of their questions and could not say enough good things about my four days in the Grand Canyon. Her final comment to me as we parted was “the glow on your face says it all.”

The combination of the beauty and grandeur of the Grand Canyon plus not having access to news, television, internet, cell phone service, etc. made this one of my favorite experiences. What is one of your greatest life experiences?

I invite you to post your comments to this blog and list one or more of your greatest experiences. For some I am sure it will be a marriage or birth of a child. For others it may be an award or achievement. I would love to learn what is one of your greatest experiences and hope you will take the time to post your comments.

You can click on the following links for Album #1 and Album #2 if you want to see other photos and my comments about each photo.

And may each day of your life be lived to its fullest!

I Invite You to Visit ExecutiveLeadersRadio.com

2011-01-24T06:59:00.003-05:00

As a farm boy from Nebraska I grew up in a close knit community where your word was your bond. A personal connection to both my community and my work has always been integral to my happiness. Early in my career when I was an accountant, I changed professions primarily because I did not have self-satisfaction in my work. When I transitioned to the wealth management industry, I realized it was the satisfaction I gained from interacting with clients one-on-one, and doing all I could to help them reach their goals that was missing from my previous work.

Today, I enjoy trusting and productive long-term relationships with a wonderful group of clients. And through my involvement with Executive Leaders Radio, I get to help share the inspirational stories and words of wisdom of successful business owners and executives. We hope their stories inspire and motivate young men and women.

You may want to encourage the young people you know to listen to past broadcasts of the show at Executive Leaders Radio. And please feel free to contact me if you would like to recommend a business owner or executive we should interview on the program.

What You Don’t Know Can Hurt You

2011-01-17T07:00:00.003-05:00

The Role of Financial Literacy in Determining Retirement Plans by Robert Clark, Melinda Sandler Morrill, and Steven G. Allen is the latest publication in the National Bureau of Economic Research’s Working Papers series. Based on responses from more than 1,500 workers nearing retirement at three large U.S. companies, the researchers arrive at a sobering conclusion. They state, “Although retirement-related decisions will affect workers’ well-being for the remainder of their lifetimes, many do not possess enough basic financial knowledge to confidently make optimal choices.”

Just where do the employees fall short? While nearly all of the workers surveyed were covered by defined benefit pension plans, 56% didn’t know what their pension would be once they retired. And when asked about national retirement programs like Social Security or Medicare, workers got only 50% of the answers correct. Alarming, just 37%, knew 66 was the age that they could retire with full benefits.

Make this year the year you take maximum advantage of your retirement plan at work. Contribute all you can to your 401(k), at least enough to qualify for any company matching funds. If you receive a raise, increase your contributions. This year’s plan limits are $16,500, or $22,000 if you're over age 50. If you are self-employed, or have self-employment income from consulting work or a hobby, there are additional retirement savings vehicles you can use, including Individual 401(k) plans, SEP-IRAs, SIMPLE IRAs, or Keoghs.

You should also consult with an independent financial advisor if you have questions about your retirement plan.

Now Law: Estate Tax Rate and Exclusion

2011-01-10T09:49:00.003-05:00

I have previously written on my amazement that Congress allowed the estate tax to lapse last year and of the many plans put forth to reinstate the death tax. With the signing of The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the estate tax has been reinstated for 2011 and 2012 at a maximum rate of 35% with a $5 million per person exemption. In 2009, a 45% maximum tax rate was accompanied by a $3.5 million exclusion. Beginning in 2013, however, the exclusion drops to $1 million per person and the estate and gift tax rate increase to 55% – that is, of course, unless further legislation is enacted.

Interestingly, the new law retroactively reinstates estate taxes for 2010 at the rate of 35%. However, executors of estates of decedents who died in 2010 are permitted a taxation choice. They can distribute assets to heirs estate-tax-free but with a carryover basis (generally the original purchase price), or step up the basis to the market value (generally at time of death) and pay the current 35% rate on anything above the $5 million exemption. A step-up in basis means the value of an appreciated asset is readjusted at a higher market value for tax purposes upon inheritance versus what the value of the asset was when it was originally purchased.

Because this is a complex decision for estates over $5 million with highly appreciated assets, be sure to contact your financial advisor, attorney, or tax advisor for advice.

Other notable estate tax changes for 2011 include:

New portability rules that allow any unused exemption to be passed to a surviving spouse. Therefore, a married couple can exempt up to $10 million.
A new lifetime gift tax exemption of $5 million per person ($10 million per couple.) Taxable gifts made in 2011 and 2012 will be taxed at the rate of 35%.
A generation skipping transfer tax (GSTT) exemption of $5 million per person ($10 million per couple) with a 35% tax rate. Note: The GSTT is not portable.

If you are unsure if the new law impacts your estate plan, you should consult your attorney to determine whether your estate plan needs to be updated or modified.

Ring in the New Year with a Financial Check-up

2011-01-03T07:00:00.003-05:00

January is a great time for an annual financial check-up. These five steps can help you plan for your future:

Construct your balance sheet: List assets held in brokerage and savings accounts, college savings and 401(k) plans, insurance policies, and real estate. Then, list your liabilities including your mortgage, auto loans, and credit cards. This exercise may generate a to-do list. Maybe you’ll want to up your 401(k) contributions or attack consumer debt.
Update your budget: You need to plan for any life changing events on the horizon--the birth of a child, a new home, children going to college so you can continue to fund what matters most to you.
Check your emergency fund: In the wake of the recession and with unemployment still high, it’s absolutely necessary to keep six months of your current income in a liquid, interest-bearing account to manage unexpected expenses or a job loss. If you dipped into your emergency fund last year, replenish your account.
Check your credit score: Routine credit checks uncover costly mistakes and can protect you from identity theft. You can request your report for free, once a year. Contact any of the three major credit agencies: Equifax, 800-685-1111; Experian, 1-888-397-3742; or TransUnion, 800-888-4213 or visit them online.
Review your legal documents: Take a look at your will (or trust), power of attorney, and advance medical directive. Also, as retirement accounts and life insurance normally pass outside of your will, you’ll want to check that your named beneficiaries still reflect your wishes.

An independent financial advisor can answer any questions on the above or other matters that you have as you review your financial situation in the New Year! Happy New Year!

Giving’s on the Rise—and a Deadline Approaches for Foundations

2010-12-27T07:00:00.002-05:00

Now’s the season for helping others who are less fortunate than you by giving your time, talents and resources to a worthy charitable cause. According to “The Nonprofit Fundraising Survey: November 2010,” compiled by the Association of Fundraising Professionals, Blackbaud, the Center on Philanthropy at Indiana University, the Foundation Center, GuideStar USA Inc., and the Urban Institute's National Center for Charitable Statistics, charitable donations in the U.S. are on the upswing, but still have not climbed back to pre-recessionary levels.

Specifically, 36% of the charities surveyed recorded an increase in donations during the first nine months of 2010, compared to just 23% that saw an increase in 2009. Additionally, just 37% of the charities reported lower donation levels this year, versus the 51% that experienced declines last year. Other findings: Organizations focused on international causes such as the Haitian earthquake and Pakistani flood relief efforts reported the greatest increase in donations. Domestic health organizations and religious charities reported the greatest declines in contributions.

Overall, charitable organizations remain “guardedly optimistic” about 2011. In fact, 47% plan to spend more, while only 20% expect to make budget cuts.

If you have a family foundation, you know that to avoid taxes for under-distribution, you must generally distribute at least 5% of the value of investment assets (minus fees and investment taxes) each year. Ideally, of course, this annual amount has been calculated and distributed throughout the year. However, as the year draws to a close, it’s often wise to take a look at the year’s distributions to avoid shortfalls.

Missing the 5 percent distribution can result in penalties from the IRS, but often the agency allows the offending foundations to make up for their miscalculations by contributing more than 5 percent in the following year. However, missing your mark could also result in higher taxes on investment income.

A Question of Ethics

2010-12-20T11:58:00.001-05:00

In her recent article “Why do investors trust advisors, but not Wall Street?” Susan Antilla explores the disconnect between investors who proclaim their distrust of the financial securities industry, but exempt their financial advisors from that profound mistrust. In fact, it seems many investors are so trusting of their advisor that they fail to vet them properly. For example, the article includes details of an arbitration won by actor Larry Hagman where Citigroup Inc. was ordered to pay $1.1 million in damages, plus $439,000 in legal fees for the mishandling of his account by a broker who had seven customer disputes registered with the Financial Industry Regulatory Authority.

Investors looking to work with an advisor can avoid such a situation by working with a fiduciary, someone who is sworn to act in their best interests. In addition to being a fiduciary, I am governed by the professional codes of conduct that accompany my CPA, CFP^® and AIF^® designations.

While Citibank was justly punished, our society has become too willing to excuse serious ethics violations. For example, although Congressman Rangel was convicted of 11 ethics charges, amazingly, he is not going to lose his seat. What does this teach our children? Our kids are certainly getting mixed messages – like the one highlighted in a recent Washington Post story about a Fairfax County high school that allows cheaters to retake tests.

Sadly, we have witnessed too many examples of unethical behavior from political leaders over the last two decades. And the same is true in business world with Enron, Worldcom, Madoff, the list goes on. As is the case in my business, there must be consequences to ethical violations. All politics aside, we must strive to set a positive example for our young people and underscore that there are consequences for ethical violations.

Passage Likely for Estate-Tax

2010-12-14T08:35:00.001-05:00

Although agreement seemed highly unlikely just weeks ago, Democratic support for a plan put forward by Republicans and accepted by President Obama seems to be gaining steam. The compromise in waiting would reinstate the estate tax at 35% for two years starting next year, with the first $5 million of an individual’s estate exempted. According to data from the nonpartisan Tax Policy Center, this plan would result in about 43,540 taxable estates in 2011, and raise about $34.4 billion.

Arizona Republican Jon Kyl authored the current estate tax provision accepted by the President. Although House Democrats offer tough opposition, it’s likely there are enough moderate Democrats to side with Republicans and President Obama to pass the bill. If Congress doesn’t act before the end of the year, the estate tax, which lapsed in 2010, is set to return at a 55% rate, with a $1 million exemption on January 1, 2011.

The battle over the state tax has long provoked heated philosophical debate. As Lee Farris, senior organizer on estate-tax policy for United for a Fair Economy, has noted, there’s more than simple politics at work as Congress works towards forging an agreement. According to Farris, “an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue” being debated between those who believe the estate tax destroys family businesses and those who argue it is necessary to preserve meritocracy in the U.S.

Interestingly, if a plan is passed this year, Congress may allow this year’s heirs to choose whether they factor taxes based on this year’s rules, whereby some inherited assets are subject to higher capital-gains taxes, or next year's rules – whatever they may be. Stay tuned.

Still Dreaming of Early Retirement?

2010-12-13T07:00:00.009-05:00

In spite of all your best laid plans, there may be a glitch in your retirement dreams. If you retire early, before you would qualify for Medicare, you may be looking at a costly gap in your health insurance. If you figure you will simply keep the coverage you have from your employer, think again. The nonpartisan Employee Benefit Research Institute (EBRI) recently examined data for private-sector establishments to answer the question: How many employers offer retiree health benefits to early retirees? Here’s what EBRI found:

Overall, 444,150 private-sector establishments offer health benefits to early retirees, or about 11.2 percent of the total.
Large employers are much more likely to offer retiree health benefits than small employers; 34.5 percent of employers with 1,000 or more workers offered them, compared with 1.2 percent of employers with fewer than 10 workers.
Of the 984,697 employers with 1,000 or more workers, the 34.5 percent account for 339,720 employers that offered early retiree health benefits.

While these statistics don’t boost your confidence in your plans to rely on your employer, keep in mind that there is plenty more uncertainty in the mix. As companies cut costs to survive in an increasingly challenging economy, keep in mind that health benefits to retirees could be on the chopping block. Also, it is anyone’s guess what will happen to healthcare reform when the new Congress takes over.

A Trusting Relationship is a Two Way Street

2010-12-06T07:17:00.001-05:00

Trust is a curious thing. Having faith in someone – trusting a person or an institution can be a bond that is stronger than steel. Witness a mother bonded to her young child, or a soldier’s unflinching obedience to a commanding officer, or how you feel when you board an airplane for a flight. The weight of the world can hang on the bond of trust. We will literally step into the void holding only a thread of trust.

Naturally, you want to work with a financial advisor who tells the truth and looks out for your best interests. As I’ve said before, you owe it to yourself to work with an advisor who is sworn to act as a fiduciary and therefore bears the legal obligation that requires them to act in your best interest at all times.

However, trust is a two way street. To gain the most from your financial advisory relationship, don’t keep secrets from your financial advisor. That is, you also must trust your advisor enough to fully disclose all your financial assets and liabilities, your dreams and desires, your hopes and your needs, your fears and worries, even if the truth isn’t comfortable to discuss.

Interestingly, many investors apply the concept of diversification as a risk reducer to purveyors of financial advice and work with multiple financial advisors. There’s no question that in today’s complex, challenging market you require the expertise of financial advisors, CPAs, estate planning attorneys, even insurance professionals and bankers to manage your wealth accumulation, preservation, and transfer. However, new research from State Street Global Advisors and the Wharton School at the University of Pennsylvania illustrates how using multiple advisors -- who often do not communicate with each other -- can increase rather than dilute risk and put you in danger of not achieving your short- and long-term goals.

Specifically, because multiple advisors work out portfolio strategies independently you might be left with overlapping exposures or an unintended over concentration in an asset class. Especially in this challenging market, you need a firm like ours that functions as a personal chief financial officer to take a complete, aggregated view of your finances and prioritize sometimes conflicting needs and goals.

What Is It Going to Take for Housing to Rebound?

2010-11-29T07:13:00.001-05:00

Changing demographics are the main cause of today's housing surplus, according to new research by University of Virginia urban and environmental planning professor William Lucy. He says the path to a housing market rebound doesn't lie in new construction, but in rethinking housing needs based on changing demographics.

Lucy’s study of U.S. Census Bureau data, U.S. Housing Market Conditions: Historical Data, U.S. Department of Housing and Urban Development reports, Joint Center for Housing Studies and research by the Urban Land Institute and other scholars, resulted in this conclusion publicized in a University of Virginia press release: "Today’s surplus housing is not caused by either excessive new construction or by foreclosure.” In fact, Lucy found only 20 percent of housing units for sale or sold from 2009 to 2010 were new houses and foreclosures.

Lucy says our excess housing supply is not linked with the economic downturn, but caused by the increase in homeowners over age 55 who want to sell and downsize, coupled with the decrease in number of 30- to 45-year-olds who want to buy. He found from 2000 to 2009, the number of homeowners 55 and over who may want to sell increased by 8 million, while the number of potential 30- to 45-year-old homebuyers decreased by 3.6 million. Moreover, the ratio of aging baby boomers to young adults was 5 to 1 in 2010, a dramatic increase from 3.5 to 1 in 2000 and 3 to 1 in 1990.

Because the demographic shift of too many sellers and too few buyers is not likely to change anytime soon, Lucy says economic drivers of the future housing market will be “more decentralized, multidimensional and shared solutions by developers, builders and government and opportunities for fix-up, remodeling, expansion and condominium projects in cities and inner suburbs, fueled by preferences for convenient locations.”

Read the full Report, where Lucy stresses that “location, location, location” is still a real estate mantra, but that homebuyers will continue to favor more urban settings over distant suburbs.

Take Maximum Advantage of Your 401(k)

2010-11-22T07:04:00.002-05:00

I always tell my clients not to leave money on the table, but according to a recent 401(k) study, many American employees are doing just that. In fact, of the 2.8 million 401(k) participants Financial Engines surveyed, 39 percent were not saving enough to receive their employer’s full matching contribution (or they weren’t saving at least 5 percent of salary in companies with no match). That figure is up from 33 percent in 2008. Younger workers (presumably with lower salaries) are most likely not to secure the free cash: 53 percent of participants under age 30 did not save enough to receive the full match. That percentage dropped to 47 percent for participants under age 40.

And while my standard advice for retirement saving is to max out your 401(k), only 6% are saving within $500 of their annual pre-tax IRS limits, down one percent from 2008.

According to Financial Engines, the key to participant savings comes from automatic escalation, where a participant’s savings rate is increased automatically on an annual basis to a pre-determined maximum. Sixty-seven percent of participants in plans with automatic escalation save enough to receive the full employer match, compared to just 52% of participants in plans without automatic escalation.

Remember, increasing your 401(k) contribution as your salary increases is especially important given the fact that many companies eliminated 401(k) matches during the recession. So you may have some catching up to do.

Family Businesses: Make Lemonade out of Lemons

2010-11-15T07:00:00.001-05:00

According to the Small Business Administration, 90% of the 21 million US businesses are family owned. Amazingly, less than one third of these companies will transfer successfully to the second generation, and only 15 percent will survive by the third. Why the low survival rate? Most of these businesses lack a succession plan, or an exit plan.

Exit planning is the process of ensuring the future success and continuity of your business after you retire. Your exit plan should address business, personal, financial, legal, and tax questions and includes contingencies for illness, burnout, divorce, and even your death. Ideally, your exit plan should maximize the value of your business at the time of exit, minimize the taxes paid, and position you and your family to achieve your future goals.

In one of the most compelling opportunities found in the down market, low valuations makes this an ideal time for family business owners interested in moving assets out of their estate to transfer ownership of their business to their heirs. For example, if your business was worth $8 million five years ago, but revenues are down 50 percent, consider selling 25 percent to a child. You could even provide financing for the transaction via an interfamily loan. Ten years from now when you are that much closer to retirement and the 25 percent you sold could well be back to being worth $2 million, you will be pleased with your foresight. Of course, you could also gift stock that has plummeted in value to your heirs. Advantageously, the tax consequences of your gift will be figured based on the fair market value of your company stock at the time you gift it.

Especially in today’s uncertain market and increasingly crowded marketplace, there is no substitute for getting a head start on your exit plan.

CAUTION: Long-Term Care Insurance through Your Employer!

2010-11-12T14:34:00.004-05:00

Long-term care insurance (LTC) pays for the things Medicare does not--assisted living, in-home care, adult daycare and nursing homes. One of the biggest trends in LTC insurance is group coverage sold through your employer, an association you’re a member of, or even through your bank or credit union. We’ve heard from clients who have asked us if they should buy group long-term care insurance.

First things first

The first step in LTC Planning is just that--planning! Bernhardt Wealth Management has retained the services of a nationally recognized expert in LTC, Allen Hamm and his company Superior LTC, to help our clients with planning for long-term care. There’s no additional charge to our clients for this service. Allen is the author of the book “Long-term Care Planning: Assuring Choice, Independence & Financial Security” which is available at Amazon online.

Allen uses a seven step LTC planning process and insurance may or may not be the best option for you. He starts by assisting you with understanding the implications of relying on each available option to pay for long-term care, not just insurance.

But let’s say that you’ve gone through this process and it’s been determined that LTC insurance is the best option for your particular situation. Is Group LTC insurance a good value for you? The answer is: Usually not, but there may be an exception.

Adverse Selection

Unlike most types of group insurance, LTC is usually more expensive than individually issued coverage. This is because group LTC insurance is normally issued on a guaranteed or modified guaranteed issue basis. This means that unhealthy individuals, who would not otherwise pass the underwriting requirements of the insurance company, can obtain coverage through the group. This causes “adverse selection”: a disproportionate number of people buying coverage through the group who are in poor health and likely to have early claims, resulting in higher premiums for everyone.

In future years, adverse selection can also cause premium rates to be raised more frequently and more dramatically than premiums for individually issued coverage. Rates on some older group policies have been raised to the point where people have been forced to cancel the coverage.

The consequences of adverse selection are particularly negative if you’re healthy. By purchasing group coverage, you’ll heavily subsidize higher premiums for those in poor health, and will continue to subsidize increasingly higher premium rates in the future.

“But the Premium Seems so Low!”

Group LTC coverage has the appearance of a lower premium than individually issued coverage, which is why it’s common for people to automatically jump to the conclusion that they should buy it. But when comparing the details and benefits apples to apples, group LTC coverage premiums are higher than individually issued coverage.

The initial appearance of lower premiums for group coverage has to do with the fact that group coverage does NOT include the automatic inflation protection benefit as a component of the base policy. Yes, you may be able to purchase additional coverage later through the policy’s Guaranteed Purchase Option, but the new benefits will charge a premium at your new attained age rate. Based on Mr. Hamm’s experience in auditing older group policies for clients, people normally don’t exercise the option to increase their coverage, due to the increasing higher premium. In fact, people rarely revisit the group LTC insurance decision until several years later, after premiums have gone up dramatically.

Is Group LTC Coverage Ever a Good Value?

If you’re not in good health and you’re unable to qualify for individually issued LTC insurance, group coverage may be a viable alternative for you. But when people are educated about the higher premiums, the likelihood of increasingly higher premiums in future years, and the limited coverage options available through group coverage, they usually choose an option other than insurance as their plan for long-term care. The rare exception is if you have a strong desire to obtain coverage due to health conditions that make the odds of you needing long-term care very high.

Summary

Planning for long-term care can be confusing. If you haven’t yet developed a plan for long-term care or if you’re being offered group LTC insurance, please contact your independent advisor to begin the planning process . LTC insurance may not be the best option for you and your family - so paying for it, even at low cost, is a bad investment.

What the new Congress means for you?

2010-11-08T07:00:00.000-05:00

What does the new Congress--with a Republican controlled House and Democratic controlled Senate--mean for your investments?

In my mind it’s too early to answer that question. While we will almost certainly be dealing with some measure of the gridlock we are so accustomed to in D.C., I worry that gridlock will be paramount in the two month lame duck session before our newly elected representatives and Senators take their oaths. If so, we will wait for answers to our most pressing questions: Will the Bush tax cuts be extended? If so, for whom and for how long? Will the estate tax be allowed to be reinstated at pre-2009 levels? Trouble is, if our representatives fail to address these questions by the end of the year, taxes will increase for nearly everyone unless a retroactive provision is passed.

As for the election’s impact on the investment environment, market commentator Todd Schoenberger has noted that we are closer to the optimal formula for investment success of a Republican-controlled House; Republican-controlled Senate; and a Democrat in the White House. Going back to back to 1940, he says the RRD combination has provided investors with an average stock market return of 15.3% per year, whereas the DDD combination we’ve had for most of this year has lifted stocks only 5.0% on average.

Wall Street Journal writer Brett Arands reminds us, however, that the historical basis for this analysis--data since 1949 via the Stock Trader's Almanac--is meager. I agree with Arands’ observation: “You can't extrapolate universal rules from such a small amount of data. The results are too heavily skewed by the Reagan (1981-86) and Clinton (1995-2001) booms under divided governments."

Could it be we are falling into the behavioral trap of identifying pattern where none exists in order to help ourselves feel more in control? I certainly don’t blame anyone for desiring a measure of predictability in the wake of such recent volatile markets, but markets are just that–unpredictable.

Do Expense Ratios Matter?

2010-11-05T07:43:00.003-04:00

Russell Kinnel, Morningstar’s director of mutual fund research, wrote an article on August 9, 2010, titled “How Expense Ratios and Star Ratings Predict Success.” It is a must read and can be found online at Morningstar by clicking on this link.

Morningstar examined five broad categories of mutual funds—domestic equity, international equity, balanced, taxable bond, and municipal bond—over multiple periods beginning in 2005, 2006, 2007 and 2008 and ending in March 2010. The funds were sorted into quintiles based on expenses and the performance of the cheapest funds was compared to that of the most expensive.

We have always preached that investors should focus on the things they can control—expense ratios, turnover (i.e., tax efficiency), diversification, and asset allocation. Therefore, it did not surprise me that Morningstar’s research showed that cheap funds outperformed their expensive cousins in every time period tested. Kinnel observed “if there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.”

Among both domestic and international equity funds, total returns in every time period were higher for the cheapest funds compared to the 5-star funds. Kinnel concluded by saying that "investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

All I can say is Amen!

IRA Assets Top $732.9 Billion

2010-11-01T07:17:00.001-04:00

According to a new Employee Benefit Research Institute (EBRI) report based on the organization’s own data, total assets in IRAs are up 25% on average. At $732.9 billion, IRAs represent the bulk of the $13 trillion in 14.1 million retirement accounts across the United States.

According to EBRI, traditional IRAs, including rollover IRAs from employer-based retirement plans, account for 67% of all IRAs, whereas Roth IRAs, funded with after-tax dollars and where qualified withdrawals are treated as tax-free income, account for roughly a quarter of the market. The report also disclosed a host of other interesting statistics. For example, more than half of IRAs have a balance of at least $25,000. The average IRA owner has $68,498 invested in one or more accounts, with men (56.6%) being slightly more likely to own an IRA than women (43.4%). Along a similar vein, men ($91,063) tend to have higher average balances than women ($51,314).

Notably, most investors don’t make the maximum annual IRA contribution of $5,000 ($6,000 for those 50 and older). The average annual IRA contribution is $3,798 for traditional IRAs and $3,582 for Roth IRAs. What’s more, the volatile market seems to be taking its toll, with just 7.2% of traditional IRA owners adding to their accounts in 2008.

Remember that when you change jobs, you have the option to rollover your 401(k) or pension plan lump sum into an IRA. And don't forget that you have until the end of the year to consider whether converting an IRA (fully or partially) to a Roth IRA is right for you. You should consult your advisor with questions about Traditional IRAs, Roth IRAs, rolling over your 401(k) into your IRA, or converting an IRA to a Roth IRA.

Who Are You Going to Trust?

2010-10-25T10:43:00.001-04:00

With trust in banks and the nation’s financial system at historic lows, new market research reveals that 86 percent of investors are thinking twice about their financial advisors.

If you don’t trust your financial advisor, get a financial second opinion. Above all, you want to work with a financial advisor who tells the truth. The best definition of truth is when the word and the deed are one. Find an advisor who truly looks out for your best interest--someone who isn’t just there to tell you what you want to hear, but someone who is there to tell you what you need to hear. An advisor who makes commissions from selling you a financial product has an inherent conflict of interest. Remember, an advisor who swears to act as a fiduciary bears a legal obligation to act in your best interest at all times.

An industry survey recently revealed how confused investors are about which financial professionals operate under a “fiduciary standard” that mandates putting their clients’ interests ahead of their own. Although most investors don’t understand that brokers and registered investment advisors work under different legal obligations, 97 percent of investors agree that “when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”

The Dodd-Frank Act gives the SEC the chance to craft a pro-investor policy that requires all financial professionals to operate under the fiduciary standard. The investing public deserves nothing less.

You Can be Excellent at Anything

2010-10-18T07:00:00.001-04:00

In The Way We're Working Isn't Working, Tony Schwartz lays out a guide, grounded in the science of high performance, promising he can “systematically build your capacity physically, emotionally, mentally, and spiritually.”

Says Schwartz, “It's possible to build any given skill or capacity in the same systematic way we do a muscle: push past your comfort zone, and then rest.” There is something wonderful about his observation. It suggests that hard work, not innate talent, plays the biggest role in determining our successes. Keep that in mind as you set your financial goals and as you pursue your chosen career – or your golf game!

Here are the six keys to achieving excellence that Schwartz has found most effective in helping his clients reach their goals:

Pursue what you love.
Do the hardest work first.
Practice intensely
Seek expert feedback, in intermittent doses.
Take regular renewal breaks.
Ritualize practice.

He also recommends additional books on this subject:

     Talent is Overrated by Geoffrey Colvin
     The Talent Code by Daniel Coyle
     Outliers by Malcolm Gladwell
     The Genius in All of Us by David Schenk.
     Bounce by Mathew Syed

The Recession is Officially Over

2010-10-11T07:00:00.001-04:00

On September 20, 2010, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a non-profit group based in Cambridge, Massachusetts and the arbiter of when U.S. recessions begin and end, officially declared that the recession ended in June 2009 when a trough in business activity occurred in the U.S. economy. The trough marks the end of the recession that began in December 2007 and lasted 18 months, making it the longest of any recession since World War II. Previously, the longest postwar recessions were those of 1973-75 and 1981-82. Both of those recessions lasted 16 months.

While economic indicators now make a double-dip recession seem unlikely, NBER states that it will categorize any potential future economic downturn as a new recession, not a continuation of the recession that began in 2007.

Notably, however, the Committee did not conclude that our economy has returned to normal capacity. We are simply on what may be a long and winding road to a recovery that likely will require multiple quarters to achieve.

As an aside, NBER defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Absent from that definition is the commonly-held public opinion that a recession is marked by two consecutive quarters of decline in real GDP.

The Art of Getting Along

2010-10-04T18:54:00.006-04:00

I had a meeting with a gentleman last week. He shared a personal story about a high school graduation gift that his grandfather gave him. It was a print of "The Art of Getting Along." The gift was not appreciated at the time; but today it is one of his prized possessions and is displayed prominently in his office. I liked his story so much that I wanted to share this and share the words of "The Art of Getting Along." Thank you for sharing your story with me, Chris!

THE ART OF GETTING ALONG

Sooner or later a man, if he is wise, discovers that life is a mixture of good days and bad, victory and defeat, give and take.

He learns that a man's size is often measured by the size of the thing it takes to get his goat...that the conquest of petty irritations is vital to success.

He learns that he who loses his temper usually loses.

He learns that carrying a chip on his shoulder is the quickest way to get into a fight.

He learns that buck-passing acts as a boomerang.

He learns that carrying tales and gossip about others is the easiest way to become unpopular.

He learns that everyone is human and that he can help to make the day happier for others by smiling and saying, "Good morning!"

He learns that giving others a mental lift by showing appreciation and praise is the best way to lift his own spirits.

He learns that the world will not end when he fails or makes an error; that there is always another day and another chance.

He learns that listening is frequently more important than talking, and that he can make a friend by letting the other fellow tell HIS troubles.

He learns that all men have burnt toast for breakfast now and then and that he shouldn't let their grumbling get him down.

He learns that people are not any more difficult to get along with in one place than another and that "getting along" depends about ninety-eight percent on his own behaviour.

--Wilferd Peterson

Who Do You Trust?

2010-10-04T07:00:00.002-04:00

Trust in banks and the financial system in general is at historic lows. The Dow Jones Industrial Average dropped 700 points in just ten minutes on May 10, 2010. Since the Great Recession started in mid 2007, over two trillion dollars of wealth has evaporated. According to the Conference Board, consumer confidence in 2009 plunged to an all-time 41-year low. Market research into the continuing turmoil has discovered that 86 percent of investors are thinking twice about their financial advisors.

If you are looking for advice in today’s uncertain market, look for an advisor who is a fiduciary. What does it mean to be a fiduciary? When you are a fiduciary, you put the needs of your clients ahead of your own--in all cases.

According to Professor Steven Blum, a business ethics professor at the Wharton School, acting as a fiduciary encompasses both a “duty of care and a duty of loyalty.” He insists that our industry embrace a new definition of a professional, noting, “A true professional uses his or her ability and power solely to advance the best interests of the client. When the professional's interests diverge from those of the client, the professional always follows only the client's interests.” That’s a definition, I have embraced since day one in the business and one I hope will soon be more widely practiced. The investing American public deserves nothing less.

If you want to read more on this topic, read my article titled "Defining My Fiduciary Standard" by clicking on the title.

What Can Investors Learn from Meteorologists?

2010-09-27T07:01:00.002-04:00

What can economists and investors learn from meteorologists? Economics and finance professors in the Tippie College of Business at the University of Iowa are researching whether using multiple economic and financial models running concurrently can deliver more accurate economic forecasts than one model can. Of course, the concept of relying on a pool of models to predict the future has its roots in weather forecasting.

The researchers recently ran a series of “model pools” to see how they would predict returns on stock portfolios between 1932 and 2008. After comparing the prediction to actual market performance, they found that a two-model pool led to more accurate predictions than any one model. Better yet? The three-model pool.

Thus, the researchers concluded that model pooling can potentially produce more accurate predictions for a wide range of economic forecasts, whether it’s charting real estate values or tracking changes in unemployment.

Here’s my take: Modeling to control risk has its place, but when it comes to your portfolio, the best defense against market volatility is to maintain a diversified portfolio, stay true to your asset allocation, utilize low-cost investments, and periodically review and rebalance your portfolio.

Planning Amid Tax Uncertainty

2010-09-20T07:00:00.019-04:00

Ben Franklin famously quipped that the only certainties in life were death and taxes. Of course, with the Bush tax cuts scheduled to sunset at the end of the year and the midterm elections capable of changing the balance of power on Capitol Hill, there is nothing certain about future tax policy. We can only surmise that taxes will, one way or another, likely increase at some point in the future.

If the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)--the official names for the “Bush tax cuts”--sunset as originally legislated at the end of 2010, tax rates on ordinary income, long-term capital gains, and qualified dividends will revert to the higher, pre-2001 levels.

This table illustrates the differences in marginal tax rates after the sunset:

      Marginal Tax Rates         Marginal Tax Rates
                 for 2010                  as of January 2011
                     10%                                 15% (indexed and expanded)
                     25%                                 28%
                     28%                                31%
                     33%                                 36%
                     35%                                 39.6%

Investors will also face higher capital gains tax rates. On January 1, 2011, the capital gains rate is scheduled to revert from the current maximum rate of 15% back to the 20% capital gain tax rate that was in effect prior to 2003.

Also, dividends which under the Bush tax cuts were taxed for the first time at the same low 15% rate as capital gains, will be reclassified and grouped with interest to be taxed at the higher rates levied on wages. In fact, unless Congress acts before the end of 2010, next year the top dividend rate will revert to 39.6% from 15%. That’s quite a leap.

What’s an investor to do? In anticipation of higher tax rates, if your portfolio includes appreciated assets, this year might be a good time to realize some gains at the maximum capital gains rate of 15%, rather than the 20% capital gains rate currently slated for 2011.

Investors in the 15% tax bracket or lower have a greater opportunity to save. For these investors, no gains are due on appreciated assets sold in 2010 if their gains are below a specified threshold. They would, however, be taxed at the 10% capital gains rate in 2011.

You should not, however, embark on a selling spree just to avoid what you think may be higher taxes down the road. Generally, you would want to have a purpose for the cash a sale would generate. For example, it may make sense to sell investments at gains this year if you have college tuition due next year for a son or daughter. It also makes sense to sell individual, concentrated stock positions to adopt a more diversified and properly allocated portfolio.

If you are a business owner nearing your planned exit date, you may want to accelerate the sale of your business to avoid higher tax rates in the future.

And lastly, it is important to realize that the "wash sale rules" do not apply when selling an investment at a gain. In other words, you can sell an investment today, record your gain, and buy it back immediately without waiting 30 days like you would when you harvest losses in your portfolio.

Economic and Political Pressures Will Influence Tax Policy

2010-09-15T07:00:00.001-04:00

It is an interesting time in our nation’s capital. The latest polls show that the Republican Party may gain more than the 39 seats necessary to tip the balance of power their way in the House. Noting in a recent blog post that control of the Senate is also up for grabs, Washington insider and CNBC commentator Greg Valliere, said the Democrats need a “pre-election Hail Mary pass.”

Valliere floats the possibility for the following scenario: What if, now that lawmakers have returned to D.C., President Obama brings together leaders of both parties and negotiates a deal to extend the Bush tax cuts indefinitely for 97% of Americans, and perhaps for two or three years for the wealthiest Americans whom he initially targeted for tax increases?

While Valliere says a tax cut deal should be a “no-brainer” given the struggling economy, he expects politics to get in the way – on both sides of the aisle. He questions whether there are enough moderates who “recognize that this is a terrible time to raise taxes on anybody” and sees little possibility that the Republican leadership that has refused to compromise thus far would do so on an issue that has great potential to help them win seats and gain Congressional control this fall.

Only time will tell. However, in the meantime tax planning is a challenge as we are still unsure how tax policy will change next year.

Yes, You Can Raise Prices in a Downturn

2010-09-13T07:00:00.001-04:00

When was the last time you got a raise? Corporate America has been stingy with raises during the downturn, but pain has also been felt among the ranks of small business owners who have been hesitant to raise prices in a tough economy. In fact, the uncertain economy has promoted many companies to cut internal costs, and even lower prices. Over the last few months, your mailbox likely was full of flyers from local companies or restaurants offering you a deal. Late night infomercials take the marketing pitch to an extreme -- Order now, and you get two of whatever they are selling, and something tacked on for “free.” However, new research from Harvard Business School, “Performance Pricing in Tough Times,” suggests that businesses can, and should, charge more for delivering more -- even in a market downturn. Companies should compete “on the basis of initiatives for which their customers willingly pay higher prices,” says study co-author Frank V. Cespedes, a senior lecturer at Harvard Business School who spent 12 years running a professional services firm.

The key in selling your price increase, say the Harvard researchers, is that your customers understand the value represented in your pricing. To further explore the researchers’ assertion that “Pricing builds or destroys value faster than almost any business action,” check out the HBS interview where authors Frank Cespedes, Benson P. Shapiro, and Elliot Ross discuss pricing strategy and how to convince your customers that higher prices are worth the cost.

Would You Pay a Fund Manager to be Lucky?

2010-09-06T07:00:00.002-04:00

How many of us would list luck as the key ingredient for a top performing mutual fund? That’s certainly not the message we receive from most mutual fund companies that stress the expertise and trading skill of their top managers. Interestingly, however, a new study by internationally renowned finance professors Eugene Fama and Kenneth French finds that luck plays a bigger role than skill in determining a fund’s success.

Although investors pay well over $10 billion annually in fees to managers of actively managed funds, Fama and French found that active funds’ returns actually trail their passive benchmarks by approximately the level of the funds’ expense ratios (around one percentage point per year). Furthermore, the professors found that even the small number of managers (just 3%) who cover their costs are unlikely to noticeably outperform a large, efficiently managed index fund in the future.

The current Fama and French study is another in a substantial body of academic research that clearly illustrates the folly of chasing past returns. It also underscores the wisdom of taking a passive approach to investing to secure the superior long-term results upon which your retirement depends.