Protecting Your Accounts from Thieves

Did you see USA Today's report where a would-be thief tried to dupe a financial advisor into making a withdrawal from a client’s account? The impersonating e-mail carried instructions to wire $15,850 into an account at PNC Bank and was worded in a casual style similar to old e-mails the financial advisor had received from his executive client. Luckily, the advisor phoned his client and the fraudulent request was exposed.

Red flags we watch for were part of this attempted theft – a balance inquiry via e-mail followed by an unexpected disbursement request via e-mail and the “client” offering excuses for not being able to talk on the phone.

Obviously knowing our clients’ voices and their spending patterns also deters theft. And because as TD Ameritrade cautions, “Fraudsters prey on our natural service instincts,” we carefully review all requests for funds.

What can you do to help us? The FDIC offers these tips:

• Ensure your transactions are encrypted. Encryption is the process of scrambling private information to prevent unauthorized access. To show that your transmission is encrypted, some browsers display a small icon on your screen that looks like a "lock" or a "key" whenever you conduct secure transactions online. Avoid sending sensitive information, such as account numbers, through unsecured e-mail.
• Choose your passwords carefully. Your password should be unique to you and you should change it regularly. Do not use birthdates or other numbers or words that may be easy for others to guess.
• Protect your personal computer with virus protection. Contact your hardware and software suppliers or Internet service provider to ensure you have the latest in security updates.

What Makes a Competent Advisor?

A trusted, competent advisor must provide the knowledge and insight necessary to chart an investment course for his clients – as well as the discipline necessary to keep them invested when markets get choppy. Moving away from the nautical metaphors, I recently heard an advisor’s role compared to a pedestrian bridge over an eight-lane highway. Yes, it’s possible to cross those lanes of traffic on your own, but getting to your destination will be a little more harrowing than if you cross safely over a pedestrian bridge.

In addition to providing investment expertise, getting clients safely over the bridge requires helping them to make good decisions. Naturally, those situations are intensely personal. However, if asked for some generic financial decision-making advice, I would say to avoid “trusting your gut.” In fact, our instincts can lead us astray when it comes to our finances. For example, the primitive “flight or fight” impulse that causes us to flee from danger is the same feeling that prompts many investors to sell on a stock’s downturn, precisely at the wrong time. The flip side, of course, is that, pumped up by what Alan Greenspan referred to as “irrational exuberance,” investors are more than willing to overpay for hot stocks.

The emerging field of neuroeconomics probes these financial decision-making idiosyncrasies—and opens pathways to better decisions. Importantly, neuroeconomics teaches that the instinctive regions of the brain constantly, and more immediately, react to stimuli all day long. Yet, we only intermittently apply the slower, more advanced cognitive part of the brain because it requires more time and energy.

Therefore, the competent advisor must ask questions, listen to clients’ answers, develop thoughtful investment and wealth management strategies, carefully monitor their progress, and serve as his or her clients' personal Chief Financial Officer. This process keeps clients from reacting emotionally in times of market stress and keeps them on the road to reach their goals.

(Note: For a discussion of the six core characteristics--Six Cs--an advisor should have, read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)

Is Apple Another Polaroid?

For anyone who wonders if Apple can maintain its creative edge and remain on top without Steve Jobs, Bill Frezza, a fellow at the Competitive Enterprise Institute and a Boston-based venture capitalist, poses another simple question – Remember Polaroid?

As Frezza chronicles in Forbes, Polaroid was once the apple of Wall Street’s eye. Like Apple, Polaroid had a charismatic founder, Edwin Land – who is second only to Thomas Edison in the number of patents he received. “Where Jobs was the impresario of form, function, and business model, Land was the wizard of optics, chemistry, and physics,” writes Frezza. He also notes that Land’s patent victory over Kodak, a supplier that tried to steal Polaroid’s technology to launch a competitive instant camera, is strikingly similar to the recent Apple/Samsung battle won by, you guessed it, Apple.

Yet Polaroid’s time at the top was short-lived because the limited capabilities of Polavision instant movies couldn’t compete with emerging videotape technologies. And, today, little remains of Polaroid.

Could competition take a bite out of Apple’s seemingly untouchable market share? According to Frezza, the day Apple “stops building insanely great products, the day it loses its knack for thrilling loyal customers with new releases, the day a younger generation turns up its nose to chase a brand that’s fresh and new is the day the grim reaper goes to work. And this is as it should be, freeing up the capital and talent necessary to build the next great company, the consumer making the ultimate choice between winners and losers.”

He concludes with a simple statement that rings true throughout the decades. “Capitalism only works if companies are allowed to succeed and fail – on their own merits, in their own time, with their fate dependent on pleasing customers, not politicians.”

Clearly, Frazza is no fan of the notion that some companies are “too big to fail.” He notes, “The death of companies is always painful. But out of death comes rebirth, a cycle we interfere with at our peril.” I couldn’t agree more.

And, if you are interested in learning more about Polaroid’s founder, check out his biography Insisting on the Impossible.

Passive Beats Active, Again

Study after study confirms the same thing – passive investing beats active management. The latest data comes from financial advisor Harold Evensky, president of the financial planning firm Evensky & Katz, in the latest issue of the Journal of Investing. Along with Shaun Pfeiffer, a professor at Edinboro University in Pennsylvania, Evensky, who is also a professor at Texas Tech University in Lubbock, examined 20 years of mutual fund performance data, tracking expansions and recessions separately and collectively.

Specifically, the two researchers were interested in testing the widely held notion that actively managed funds outperform in bear markets. After all, an active manager could make defensive moves to protect portfolios and preserve investor capital in a significant downturn. However, a passive index fund would simply continue to own the stocks in the index and would fall victim to falling prices.

In fact, the researchers found that active fund managers do indeed generate enough outperformance to cover their fees in recessions. However, in bull markets, active managers’ returns do not beat passive index funds. And, in addition to underperforming passive strategies in periods of economic expansion, active managers also fall short of passive managers over longer investment horizons that encompass both expansions and recessions.

The study’s findings further weaken the case for active management by reporting on the wide variance among actively managed portfolios and their inconsistency across business cycles. Generally speaking, the top decile of actively managed funds generated alpha, but the bottom-decile funds performed poorly.

The bottom line is that the alpha generated by active managers in recessions isn’t enough to justify their under performance across full market cycles.

Who are the 1%?

Nina Easton’s recent article “Stop Beating Up the Rich” begins by quoting the French historian Alexis de Tocqueville who chronicled American society’s often contradictory pursuit of both equality and the almighty dollar. “The love of wealth is at the bottom of all that the Americans do,” he wrote.

Between the Occupy Wall Street movement and the Presidential campaign, we’ve certainly heard a lot about the wealthy 1%. All the rhetoric encourages us to conjure images of powerful executives who make hundreds of times what the average worker earns, fly about the country on private jets, and would rather take federal bailout money than pay their fair share of taxes.

But, as Easton points out, it’s inaccurate to categorize the 1% as “greedy, tax-avoiding, selfish capitalists.” In fact, she notes that most of the 1.4 million taxpayers who comprise the top 1% gained their wealth through hard work rather than by inheritance. “This group consists of a large number of doctors, lawyers, engineers, and small-time entrepreneurs, many of whom are working hard to create jobs. To vilify them is the wrong debate,” she writes.

Yes, the number of millionaires has grown over the past decade. In fact, a 2011 study by the Deloitte Center for Financial Services found that over the past decade the number of millionaire households rose from 7.7 million to 10.5 million. And the number of American millionaires is expected to double by 2020.

However, Easton suggests that pitting Americans against one another “distracts from the harder and far more important conversation: how to jump start the escalator for 23 million unemployed and underemployed -- and for those whose incomes were stagnating well before the 2008 recession.” She also shares the perspective of Harvard Business School professor Michael Porter, who studies competitiveness in the United States. Although he is critical of unfair executive compensation practices and corporate America’s failure to invest in the entire American workforce, he says, “It’s not a good idea to declare that people who are successful are bad. The better question is: Do we have a fair system for getting that education and skill? Are people unfairly handicapped? Are we doing enough to open the gateways?”

That’s food for thought.

Caring -- One of the Six Cs

Theodore Roosevelt once said, “Nobody cares about how much you know until they know how much you care.” That old adage has become almost a customer service cliché, but nowhere does our 26th president’s advice ring more true than in the financial planning profession. Make no mistake -- It is impossible to provide useful financial advice unless you really know -- and care about -- your clients. Simply, our knowledge of our clients’ current circumstances and future aspirations serves as the essential foundation for building both portfolios and solid, long-term, caring relationship.

“Caring” is the third of the six core characteristics I mentioned in What Makes a Great Financial Advisor? (I’ve written blogged about character and chemistry; competence, cost-effective and consultative round out the list.)

Caring factors into the advisor/client relationship because financial decisions are always about more than money. In that regard, it helps to have someone on your side who really understands you. Because we know and care about your family, values and goals, when we discuss your investments, we view your finances in the context of who you are as a person rather than allowing your net worth to define you and dictate a particular course of action.

Without an advocate, someone who really cares about you, it can be easy to let daily life get in the way of pursuing your dreams. We guide clients through a financial planning process that aligns their dreams with their financial resources. And, our ongoing planning ensures they have the freedom to dream big for tomorrow.

(Note: For a discussion of the six core characteristics--Six Cs--an advisor should have, read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)

Too Big for a Single Regulator?

Think back to America History class. Do you remember learning about the Glass-Steagall Act? The law dates back to the Great Depression and enforced a strict separation between banks that take deposits and those that invest in capital markets – that is until it was repealed in 1999.

Ironically, former Citigroup chairman Sanford "Sandy" Weill, who was the architect behind the 1998 merger of Citigroup and Travelers Group (which also owned the investment firm Salomon Smith Barney at the time) that resulted in the repeal of Glass-Steagall recently suggested adopting a new two-tiered banking model. Weill would split banks into the traditional deposit takers who could make loans and more “creative” institutions that could take more risk. In a recent interview, he urged, “Let's have a creative banking system, like we always had, where the financial industry can again attract the best and the brightest young people like they do in Silicon Valley, so that we can lead innovation that is necessary and [encourage] the entrepreneurship that's necessary. We can't have a world where it is impossible to make a mistake."

Allowing bankers to makes mistakes will be a tough sell in the wake of the recent financial crisis, and with the recent London Whale trades and Libor scandal now playing out. While Weill’s unlikely to garner much support to allow bankers to operate in a more risky fashion, the question of just how commercial banking and investment banking should be regulated will persist.

In an article in Knowledge@Wharton, Wharton management professor Mauro Guillén expressed his preference for central regulation for the big banks, noting, "When a bank is in 10 kinds of financial services, it does not need more regulation; it needs one regulator." He says the Dodd-Frank Wall Street Reform and Consumer Protection Act “hands more powers to the Fed, the Treasury and other agencies with authority over systemically important financial institutions. But owing to political pushback, none have full powers.”

Let’s hope that financial regulation and reform stay at the forefront of Washington’s agenda because, as Guillén wisely notes, “Untrustworthy banks are the last thing that’s needed if we are to overcome this crisis.”

Consider These Three Tax Planning Opportunities

With all the talk of higher taxes when the Bush tax cuts expire at the end of the year, it’s important not to become so focused on future tax policy that we overlook some short-lived opportunities.

• Prior to the implementation of the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA or the second Bush tax cut), dividends were taxed as ordinary income. With the passage of JGTRRA, qualified dividends became eligible for the more favorable capital gains rate of 15%. At the end of this year, however, the qualified dividend rules will sunset, and dividends will once again be taxed at ordinary income rates. At the same time, the highest tax bracket will increase from 35% to 39.6%, and high wage earners will be subject to a new 3.8% Medicare tax on investment income. Therefore, the dividend tax could shoot up to a high of 43.4%, not including state tax. This means owners of closely-held businesses have a unique tax planning opportunity to pay dividends this year and take advantage of the 15% tax rates.
• Until the end of 2012, couples with taxable income up to $70,700 (or $35,350 for individuals) do not have to pay capital gains tax. That presents a great opportunity for parents to gift appreciated stock to their adult children. (Remember, children over age 18 are not subject to the kiddie tax.) However, it’s important to watch that parents’ gifts of highly appreciated mutual funds or stocks don’t push the child into the next higher tax bracket.
• If you have been thinking about converting your traditional IRA (where distributions are taxed at ordinary income rates) to a Roth IRA (where, after five years, distributions are tax-free), 2012 may be the year to convert. Why? If you convert this year, you will be taxed according to this year’s tax rates, which are scheduled to increase across the board when the Bush tax cuts sunset at the end of the year.

As always, you should consult your accountant on these and other tax planning opportunities.

Short-term Thinking Magnifies Risk

We always talk about the harm short-term thinking can inflict on your investment portfolio. Now, a new study from Professors Francois Brochet, Maria Loumioti, and George Serafeim at Harvard Business School further explores the risks for companies and investors who are attracted to short-term results.

Not surprisingly, their research shows that companies with short-term mindsets attract short-term investors looking for quick payouts. This naturally puts pressure on the company’s executives to generate positive returns, and short-term oriented corporate managers are therefore more likely to take risks to deliver the performance their investors demand. In fact, the short-term companies studied had more volatile stock returns and higher estimated cost of equity capital, two characteristics that make them riskier than companies with longer-term investment views.

It follows, then, that investors looking to temper the volatility of their portfolio should consider the short- and long-term goals of the company before they invest. But just how does one determine whether a company thinks long- or short-term? The Harvard professors studied transcripts of 70,042 earnings calls held by 3,613 firms from 2002 to 2008. They searched for 14 terms used by management such as "latter half" and "weeks" that would suggest a short-term view, versus 15 words or phrases such as "long term" and "years" that likely would dictate a longer time horizon.

Harvard Business School Assistant Professor George Serafeim said one important takeaway from his research is that many companies are, in fact, being managed for the long term. he noted. According to the researchers, industries focused on long term include beverages, retail, pharmacy, and medical goods. In particular, they singled out Coca-Cola, Ford, and Nordstrom as long-term thinkers. Short-term-oriented industries included banking, electronic equipment, business services, and wholesale, with Cisco, Goldman Sachs, and Chevron on the short list.

Of course, investors should still focus on building a diversified portfolio with the proper allocation based upon their goals and risk tolerance.

Turner Gill, A Class Act

As many of you know, I am an avid Nebraska football fan. One of my favorite players is Turner Gill. Turner led the Cornhuskers to a 28-2 record as a starter and is one of the most beloved Husker players of all time. He was an incredible leader and athlete in college. Today, he represents everything that is good—he is an incredible role model, leader and coach; his integrity, character and values are beyond reproach; he is simply a very classy individual.

Turner is now in his first season as the Head Coach of the Liberty Flames in Lynchburg, Virginia. Since Lynchburg is only a few hours from Northern Virginia several Nebraska fans in the area decided to attend a Liberty football game to show our support for Turner Gill. After comparing the Liberty and Nebraska football schedules we decided to attend the Liberty-Lehigh football game on September 22nd.

We bought 20 tickets so that we would be able to have an assigned tailgate spot. Unfortunately, only 11 Husker fans committed to attend. Not wanting to waste any tickets we reached out to the Opportunity House and invited them to bring some of their young men to tailgate and attend the football game with us.  We enjoyed sharing our experience with those young men and bought Nebraska T-shirts to give them.

Liberty University learned what we were doing and on game day came to our tailgate to take video and photos of us. Even Coach Turner’s wife, Gayle, came to our tailgate to thank us for our support. And Turner Gill met us after the game, talked with us, and signed autographs.

As a huge fan of Turner Gill, this is one of my fondest memories. However, the real reward was the reaction of the young men. Many of them told me after the game that it was the best day of their life. In fact, Martin Cox, the Casework Supervisor at the Opportunity House, sent me the following note:

Mr. Bernhardt,

Just wanted to thank you and your group of Nebraskans for showing our young men a great time. During the game, I received a few messages from Mr. Allen expressing how well they were being treated and about how well the guys were enjoying themselves. Also, I was present at the facility when they returned and their faces expressed what a great time they had even before they opened their mouths. When they did begin to tell me about their experience there was no doubt each of them was truly grateful.

You and your group have truly given these young men an experience they will not soon forget, and shown them that nice things can happen when you make good decisions.

Thank You Again,

I didn’t think many things could top meeting someone like Turner Gill but making an impact on these young men while meeting a class act like Turner Gill will make September 22nd stand out as one of the best days of my life.