Mr. Smith Quits Goldman Sachs

With all we read about wirehouse brokers moving to the more consumer-centric independent registered investment advisor (RIA) business model, it is rare that these brokers publically share their rationale for doing so. While they certainly must address the issue with clients, a strict code of silence generally protects the wirehouse from any bad press. That’s why a recent opinion article for The New York Times from Greg Smith explaining his resignation from Goldman Sachs was such major news.

Smith, who was head of Goldman’s United States equity derivatives business in Europe, the Middle East and Africa, wrote, “Today is my last day at Goldman Sachs. After almost 12 years at the firm--first as a summer intern while at Stanford, then in New York for 10 years, and now in London--I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it. To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”

Smith placed the blame for Goldman’s “toxic” environment on top management, including Goldman’s chief executive, Lloyd C. Blankfein, and its president, Gary D. Cohn. And that ignited an industry firestorm and public relations nightmare. In fact, Goldman’s stock dropped 3% in afternoon trading. Asked about Smith’s future on Wall Street, William Cohan, the author of Money and Power: How Goldman Sachs Came to Rule the World, responded, “He’s toast. He is in the witness protection program right now.”

So, if you tell the truth, you’ll never work on Wall Street. That observation certainly illustrates that Wall Street firms and brokers face conflicts of interest that independent registered investment advisory firms do not. In order to get justice for all consumers, our industry must adopt a universal fiduciary standard.

In thinking of how Smith might respond to the industry’s backlash, I’m reminded of Al Pacino’s memorable line when he played a lone honest lawyer in the 1979 film And Justice for All: “I’m out of order? You're out of order! This whole court is out of order.”

Client Survey Results

Our goal is to help our clients make informed decisions with their money so they can make work optional and can focus on creating a quality of life that reflects their deepest values. Critical to that process is providing a consistently high level of service that meets the needs of individual clients. This year we contracted an independent consultant to conduct an audit of our client base to ensure that the service we provide is appropriate. We are very pleased to say that the results were overwhelmingly positive.

Summary of Results
(All scores are out of five.)

4.9  -  Overall satisfaction with Bernhardt Wealth Management
5.0  -  Bernhardt Wealth Management (BWM) is trustworthy
4.8  -  BWM is helping me create a better financial future
4.7  -  BWM gives me peace of mind
4.8  -  BWM is proactive in managing our relationship
4.7  -  BWM understands my goals for the future
4.7  -  BWM regularly reviews my goals and objectives
4.8  -  BWM puts my needs first when making recommendations
4.9  -  BWM demonstrates leadership during turbulent markets
4.8  -  The frequency with which BWM contacts me is appropriate
4.9  -  I am confident in the skills of BWM's team
4.8  -  I would recommend the services of BWM to others

You might also be interested to know that our clients say that the four things that are most important to them in any relationship with a financial advisor are as follows:

• Working with an advisor who is trustworthy
• Receiving advice to help create a better financial future
• Working with someone who places my needs first when making recommendations
• Having confidence in the advisor's team

We were, therefore, pleased to receive such high ratings on these dimensions and want to extend a heartfelt thank you to each of our clients for the opportunity to serve them.  Thank you!

In Defense of Buy and Hold

Seventy-five percent of financial advisors believe they can beat the market using tactical asset allocation strategies that shift money among different investments in an attempt to time the market according to a recent Jefferson National survey. The goal, of course, is to move out of an asset class before the decline and to invest in another asset class before returns begin to skyrocket. Yet, study after study proves that attempting to time the market is a loser’s game. For instance, the Investment Company Institute reported that bond funds had net inflows of $130 billion in 2011 and that stock funds had net outflows of $100 billion. Yet, the S&P 500 Index closed at 1099.23 on October 3, 2011, and was up 27.7% as of March 16, 2012.  Unfortunately, those who fled equities will find it difficult to ever catch-up.

So often, these ultimately harmful tactical portfolio moves are fueled by emotions -- fear and greed -- whereas an asset allocation plan is rationally based upon an investor’s goals and risk tolerance. I continue to believe that, in all markets, an advisor’s biggest value is not to attempt to predict the markets, but to help clients establish a solid investment plan based upon their long-term goals and to counsel them to stay the course while the market zigs and zags.

Long Term Care Insurance

As many of our clients know, I have retained Allen Hamm of Superior LTC Planning Services, Inc. to assist our clients with planning for long term care. Our clients who have utilized this service have given us high marks about the service, its benefits and the experiece of working with Allen. (If you haven’t seen the recording of the short webinar that Allen did for our clients that explains the services available to our clients, you can view it by clicking on this link:  Long-Term Care Webinar. There’s no charge to you for these services because we pay his fee as a way of adding value to our relationship with you.)

Recently, I went through a long-term care planning analysis with Allen.  I wanted to have the same discussion he has had with many of our clients and I wanted to go through this analysis because I wanted clarity on my best option for paying for a potential long-term care need.

Allen explained, there’s 4 ways to pay for long term care: Rely on Medicaid, the welfare program; rely on family members; rely on your assets; or rely on LTC insurance. Obviously, the first two options (welfare and family) are not viable for me--I wouldn’t choose one of those even if I could. So the analysis came down to choosing between relying on my assets or relying on LTC insurance.

During the process, Allen asked several questions designed to help me get clarity on my personal odds of needing long-term care. Even though the government and the insurance industry offer lots of “general statistics” related to the odds of needing care, what’s more relevant are my personal odds. We talked about my genetic history and whether or not the need for care is prevalent in my family. The answers to those questions were mixed. But longevity appears to be something I’ll face, for better or for worse: I take reasonably good care of myself, and my father is healthy as a horse and he’s in his mid-80s.

By the end of the analysis, we concluded that my personal odds of needing care are at least reasonable. So how would I pay for it?

Like all small business owners, my focus is on serving my clients well and so my major asset is Bernhardt Wealth Management. That’s likely to remain the case over the coming decades. So one option for paying for care could be to use the assets I’ve accumulated from my business or to take income from the business to pay for my care. After thinking about it, I’m not completely comfortable with that option, at least for now. I’ve decided that I can better protect myself and my firm by relying on LTC insurance. But I’ll be talking with Allen at least once a year about this decision, reviewing the insurance coverage and discussing whether or not changes have taken place in my life that warrant making a change. In other words, having the insurance puts me in the driver’s seat: the insurance company can’t cancel the coverage but I certainly can if my circumstances change.

If any of you have not yet gone through an LTC planning process with Allen, I encourage you to do so and believe you’ll find it valuable.  He can conduct a policy audit of an existing policy, explain what you have, and/or look at options you should consider.  Let me know if I need to coordinate a conference between Allen and you.

Time for a Financial Spring Cleaning

Although you may currently be focused on the looming deadline for filing taxes for 2011, we’ll soon find ourselves at the mid-point of 2012. Accordingly, spring’s a great time to get your financial house in order with a mid-year checkup.

• Construct your balance sheet. Take inventory of your assets held in brokerage and savings accounts, college savings and 401(k) plans, insurance policies, and real estate. How have your stocks, bonds, and mutual funds performed relative to their benchmarks? Has there been a change in your home’s value? Next, list your liabilities including your mortgage, auto loans, and credit cards. This exercise always generates a to-do list: Shop for a higher rate on a soon-to-renew CD, increase your 401(k) contributions, or attack consumer debt.
• Check your emergency fund. Today’s uncertain economy underscores the wisdom of keeping at least six months of your current income in a liquid, conservative investment so you can manage an illness, unemployment, or the unexpected car repair without tapping into investments or retirement savings. If you dipped into your emergency stash last year, replenish it to reflect your current income.
• Evaluate retirement savings. Have you increased your 401(k) contributions to keep pace with your salary? Minimally, you need to be contributing enough to maximize your company’s matching dollars. Many companies that stopped matching funds during the peak of the financial crisis have re-instituted the program, so make sure you’re not leaving money on the table.
• Evaluate your health benefits & insurance. Fall’s often the time for open enrollments for health plans. Get a head start on assessing your needs. Is your current plan still the best choice? Additionally, review your life, homeowners/renters, and auto insurance to ensure you have adequate protection.
• Consider consolidating investment accounts. If you have multiple 401(k) plans from old jobs, rolling those funds into one Rollover IRA could be advantageous. Consolidating your accounts not only cuts down on maintenance fees and paperwork, but you can take advantage of more investment options.

What's to Become of the Fiduciary Standard?

I’m disappointed to report that the Securities and Exchange Commission (SEC) recently decided to put off implementing a key part of the Dodd-Frank Act: creating a fiduciary standard to govern all investment advisors who give financial advice. As an SEC-registered Registered Investment Advisor, I already operate under the fiduciary standard that the Dodd-Frank Act sought to apply equally to brokers who make investment recommendations.

For all the industry’s feet dragging and debate, the fiduciary standard is not a new or complicated concept. In fact, in a recent column, Bob Veres notes that the fiduciary standard can be found in the very first written legal code, the Code of Hammurabi (roughly 1770 BC) and in Cicero's orations during the Roman Republic around 50 BC. Write Veres, “In the ancient world, a trader would take his caravan (or sailing ship) to some distant land to trade Mesopotamian clay pots or bronze artifacts for furs, tin or copper. Since the trader would be gone for months or sometimes years, somebody had to make basic business and financial decisions on that person's behalf while he was on the road. And it was important that this person make decisions that were in the trader's interest, not his own.”

Veres then goes on to quote Cicero’s Oration for Sextus Roscius of America:

“…in cases where we ourselves cannot be present, the vicarious faith of friends is substituted; and he who impairs that confidence, attacks the common bulwark of all men, and as far as another depends on him, disturbs the bonds of society.”

For all the legal wrangling, working as a fiduciary involves a simple standard of behavior. As a fiduciary, you protect the interests of someone who trusts you. In my line of work, that means making recommendations and investment decisions that are 100% in my clients’ best interest. It astounds me, especially in the wake of the credit crisis and Bernie Madoff’s Ponzi scheme, that industry regulators can’t agree on the importance of supporting and enforcing the fiduciary standard.

Kudos to Generation Y

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

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?

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

“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.