Congress Pushes Us to the Cliff's Edge

Well, here we are on December 31 and there’s still no deal on Capitol Hill to avoid the Fiscal Cliff. Negotiations on Sunday had Senate Majority Leader Harry Reid and Senate Minority Leader Mitch McConnell holding closed-door meetings. Their goal was to reach a compromise by mid-day, but they fell short, even as Vice president Joe Biden joined in.

Senator Reid announced the Senate would meet again Monday, December 31, at 11:00 AM, noting that “Although there is still significant distance between the two sides, there is still time left to reach an agreement.”

A major point of contention remains individual income-tax rates. President Obama has called for raising taxes on family income above $250,000. In the latest round of Senate talks, Republicans proposed a $550,000 threshold, which Democrats moved to $450,000.

Bitter disagreement on tax increases extends to how the money raised should be spent. Republicans want any tax increase, which they have reluctantly accepted, to go toward reducing the deficit. Democrats want any increased tax revenue to offset spending cuts that are scheduled to kick in as part of the fiscal cliff, and to pay for extending unemployment benefits.

Of course, with this much distance between the two parties on tax rates, there’s little hope of getting any resolution on the estate tax this year.

In the absence of a bipartisan deal later today, Senator Reid has said he will ask for a vote on a bill to carry out President Obama's backup proposal, which addresses only a few items on the long list of tax sunsets and budget cuts. Most significantly, the bill includes extending current tax rates for incomes up to $250,000 for couples filing jointly. Democrats say they could pass the bill through the Senate. However, it’s questionable whether the Republican controlled House would approve it.

We’ll know the outcome in just a few hours. As all the political rhetoric and posturing on the Hill continues, I think Senate Chaplain Barry Black’s opening prayer for last weekend’s session accurately describes the desperate situation our elected leaders have put us in. “We gather this weekend with so much work left undone,”  he said. “Look with favor on our nation and save us from self inflicted wounds.”

I will address this once again in the New Year.  In the meantime, my wish to you is that you will have happiness, good health and prosperity in the New Year!  Happy New Year!

A Way to Honor the Precious Lives Lost

“When we meet real tragedy in life, we can react in two ways -- either by losing hope and falling into self-destructive habits, or by using the challenge to find our inner strength.” That inspiring thought comes from the Dalai Lama and it is certainly applicable in the wake of the unfathomable tragedy in Newtown, Connecticut. Last Friday, as the nation came together to reflect in a moment of silence and ring church bells 26 times to honor the lives lost at Sandy Hook Elementary School,  the “26 Acts of Kindness” campaign was gaining steam. The idea’s as simple as it is cathartic -- commit to performing one act of generosity for each of the victims lost at Sandy Hook, and share the results.

NBC journalist Ann Curry, who tweeted about her 20 acts of kindness in honor of the child victims, is leading the charge.  “Right now, this country wants to heal,” she wrote in a blog post. “I think the only thing comforting in the face of a tragedy like this is to do something good with it if you can. Be a part of that wave.”

The idea, which invites everyone to carry out acts of kindness has evolved into a viral effort known as 26 Acts of Kindness on Facebook and #26Acts and #20Acts on Twitter.

The Facebook page was started on the day of the tragedy Warren Tidwell, a 34-year-old auto parts salesman. He posted a photo of his first act, giving a box of chocolates to a woman at his local supermarket in Auburn, Alabama. His note read, “To honor the 26 taken from us at Sandy Hook we are doing 26 acts of kindness. You are #1.”  Later, he and his four-year old son donated toys to the local firemen's Toys for Tots drive.

“I felt empowered, instead of the helplessness, hurt, and fear,” Tidwell said in an interview with NBC. “I can put the good back in the world that was taken from it.”

Students nationwide, struggling to understand the tragedy and to feel safe in their own schools, spent the days before their holiday vacation trying to do just that. They gathered Christmas gifts for underprivileged kids, collected canned goods for local food banks, acknowledged their own teachers, and created artwork to send to the new Sandy Hook School. All of these efforts are helping our nation to hold on to hope and to heal.

As Ann Curry asks at #26 Acts on Twitter, “An act of kindness, big or small. Are you in?

It's Christmas time.  Give charity, spread some smiles and bring cheer to hearts!

Know How Your Advisor Gets Paid

Know what you are paying for; and know how your advisor gets paid.

Amazingly, studies continue to show that many clients of financial advisors have no idea how they pay for the financial advice they receive. That’s certainly not how we transact with our doctors, lawyers, or contractors, so why is it true in the financial services industry? The root of the confusion could be that financial advisors use so many different compensation models.

To set things straight, it’s first necessary to divide the advising world into three camps.  First, there are advisors who earn their living by commission and therefore may have an incentive to sell you particular products.  Second, there are fee-only financial advisors like Bernhardt Wealth Management that charge clients a percentage of assets under management and operate as fiduciaries who always put the needs of clients first.  And third, there are advisors who utilize fee-based accounts but can also earn commissions on other products they sell.

Calculating fees as a percentage of the assets we manage enables us to operate on a relationship basis, rather than a transactional basis. That is, we get to know each client so that we thoroughly understand their values and goals. We then develop a long-range investment strategy that is true to those values and goals, and systematically review portfolios to ensure our clients stay on course as their circumstances and the markets change.

Further, we seek to add value for clients on a range of financial issues, well beyond managing an investment portfolio. Our fee encompasses a broad suite of personalized services, including tax planning, college planning, insurance planning, retirement planning, estate planning and philanthropic planning.

In all aspects of our relationships, we are motivated by one goal: Do what’s right for each and every client. Our clients know what they pay for our advice and that we will always recommend the course of action that is in their bests interests.

(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.)

Retail Investors, Out of Sync and Stymied by Choices

When State Street's Applied Center for Research recently asked retail investors what steps they needed to take over the next ten years to prepare for retirement, the number one response (40 percent) was to become “more aggressive.” However, when they analyzed the respondents’ portfolios, they found that cash was the number one allocation, at an average of 31 percent. More alarming, when asked to project their allocation 10 years into the future, respondents still chose cash as the dominant asset class. Clearly, these allocations seem out of sync with the stated long-term goal of becoming more aggressive. So what gives, especially as nearly two-thirds of these retail investors rated their current level of financial sophistication as advanced?

It could be that too many investment choices have resulted in cash paralysis. According to the 2012 MFS Investing Sentiment Survey, 40 percent of investors think investment products are “overly complex,” and 34 percent feel “over-whelmed” by the investment choices available.

Psychologist Barry Schwartz has demonstrated that too much choice leads to reduced happiness and a feeling of missed opportunities. As he writes in The Paradox of Choice, “Choice no longer liberates, but debilitates. It might even be said to tyrannize . . . the fact that some choice is good doesn’t necessarily mean that more choice is better.” And in Pension Design and Structure: New Lessons from Behavioral Finance, Sheena Sethi-Iyengar, Gur Huberman and Wei Jiang highlight reported that participation rates in company retirement plans decrease between 1.5 and 2.0 percentage points per every additional 10 mutual funds offered.

The paralyzing effect of too many choices was illustrated again when researchers conducted an experiment in a California grocery store involving a display of jams. In the first test, they featured 24 different jams to taste; on another day they displayed just six. The results? Although more shoppers stopped at the display of 24 jams, just 3 percent made a purchase. And while fewer shoppers stopped to sample at the table of six jams, 30 percent purchased a jar.

Investing doesn’t have to be an overwhelming shopping experience. Working with a trusted advisor, your personal shopper, can narrow your choices and align your investments with your risk tolerance and financial objectives to ensure you meet your short- and long-term goals.

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.)