2016’s Biggest “Unseen” Concerns...

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2016’s Biggest “Unseen” Concerns...

There is no doubt 2016 has been a rollercoaster year, a year where uncertainty has plagued the political and economic environment.  Although the quantifiable data and statistics from government departments (The Department of labor; The Department of Commerce; The Federal Reserve) have shown steady improvements:  it is now apparent that these statistics are not uniform across our economy.  A decrease in the unemployment rate to 4.6% the lowest jobless rate since August 2007, has not decreased uniformly across the United States, with rust belt states such as West Virginia and Pennsylvania trailing the nation with unemployment rates of 6.0% and 5.7% respectively.  The Bureau of Economic Analysis also indicates West Virginia and Pennsylvania per capita income has grown at2.5% and 3.8%, far below the national rate of 4.5%.  A Trump victory, however, has boosted consumer confidence, in these states, as the index climbed to 113.7 in December, a 15 year high.  Given Donald Trumps ‘Wall St. friendly demeanor’, the year ahead looks promising to investors of equities, and we have identified our sector and geographical confidence in our “Year Ahead” commentary report to be released in January.  

The media in 2016 focused on many issues, however, left investors underserved in areas that will impact the majority of investors.  We have identified the following 5 areas of concern:

  • Investing without a Plan
  • The Case Against Robo-Advisors
  • The Department of Labor Fiduciary Rule
  • Hidden Fees (Capital Gains)
  • Tax Loss Harvesting

The biggest hurdle for investors over the last two decades has been mixed market performance, consisting of 9.3% annualized returns; 3 cumulative years of declines over 10% (-10.14 in 2000; -13.04 in 2001; -23.37%), and a perfect storm scenario in 2008 with a market decline of 38.49%.  Inconsistent returns have caused fear in many investors, who have chosen to stay on the sidelines, and invested in low-yielding CD’s and Annuities, or have stayed out of the markets entirely, holding cash.  With the financial media causing unnecessary concerns, with talks of “market-bubbles”, the fact is, in the last two decades the market has returned annualized returns of 9.3% (with dividends reinvested), and a cumulative return of 597.58% (with dividends reinvested), results far better than what the average investor expects, or by the low guarantee, typically 3.5%, provided on variable annuities.  At Samra Wealth Management, we understand the importance of investing with a plan, and ensure every client has a dynamic goals-based financial plan, customized with their personal and financial goals.  This approach helps takes the “guess work” out of investing, and allows us to quantify for our clients, the progression towards reaching their financial goals.  This method of financial planning allows investors to invest with goals in mind, and helps to eliminate the emotional component of long-term investing, by planning for more than just investment returns, as investors often overlook the importance of Trust & Estate Planning; Wealth Transfer Strategies, Long-Term Care & Disability Planning, Asset Protection and Tax Efficiency Planning. 

Increased adoption of FinTech (Financial Technology), and the need for financial services firms to increase profitability has led to the advent of Robo Advisors.  A class of financial advisor that provide financial advice or portfolio management online with minimal human intervention.  Robo Advisors appeal to millennials, and to those with investable assets of less than $250,000.  Although this technology will cannibalize segments of the wealth management industry, investors with over $1 million of assets, tend to have sophisticated needs, that are beyond the capability of Robo Advisors.  With the large brokerage firms doubling-down on the capital investment needed for this platform in a hope to capture additional client segments, they may be making the mistake many other institutions have made prior with the implementation of technology: diluting their brand.  As sophisticated investors come to realize their investments are managed alongside their mailman's retirement plan, these sophisticated investors will look elsewhere for wealth management. 

With the Department of Labor’s “Fiduciary Rule” set to come in to effect, in April of 2017, this will start the overhaul of past financial advisor practices, and bring more attention to how financial advisors are compensated.  This change is long overdue, as it is not unheard of, for salespeople to enter the insurance industry, where few barriers exist.  Insurance sales staff, are able to represent themselves as financial advisors, and benefit from the comparatively high compensation paid out by variable annuities and other insurance products, without disclosing compensation to the client.  Technically, insurance salesman are not directly paid a commission, however, they receive compensation on the sale of insurance products, directly from the insurance company.  Typically, the sale of a variable annuity contract, can earn the advisor 5-8% of the initial contract value, while charging the client up to 2% a year for investment management, an additional 1.4% for (M&E) Mortality & Expense, and additional charges for added waivers.  The DOL’s Fiduciary Rule would require Financial Advisor to fully disclose their compensation to the client, when discussing retirement funds. 

Hidden fee’s are not only abundant within annuities, and are oftentimes overlooked in mutual funds.  These fee’s can be broken down into 4 categories: (1) Transactional Costs: essentially the cost of trading.  In the United States, these fees average 1.44%  (2) Expense Ratio: the cost of marketing, and management of the fund.  On average these expenses cost investors 0.90% each year.  (3) Brokerage Commissions: Typically, most individual investors are sold either a “Class A” or “Class C” Mutual fund.  “Class A” mutual funds can charge clients up to 5.75% as an upfront fee, while “Class C” mutual funds do not charge an upfront fee, however, do charge a higher annual expense over 2%. (4) Capital Gains: are the funds paid out by the mutual fund once they have sold a position, and are typically deducted from the mutual fund, annually, in December.  Unfortunately, most investors are unaware of these fee’s as mutual fund companies provide fee disclosures, hidden within hundreds of pages of the annual fund prospectus.  Furthermore, capital gains distributions can not be determined until the end of the year. 

Loss of portfolio values come not only from market losses and fee’s, however, from tax inefficiencies. Investors of mutual funds do not have the benefit of tax loss harvesting, the practice of selling a security that has experienced a loss, to offset a gain or income, since investors of mutual funds own a share of the mutual fund, and not own the underlying securities.  Most investors, are unaware of this strategy, and as a result, do not profit due to tax inefficiencies, in their wealth management strategies. 

2017 looks to be a promising year for investors, and the financial industry, however: investors of mutual funds and annuities should remain cautious, given their inefficient wealth management strategies. 








All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed.  All economic and performance data is historical and not indicative of future results.  All views/opinions expressed herein are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The information and material contained herein is of a general nature and is intended for educational purposes only.  This does not constitute a recommendation or a solicitation or offer of the purchase or sale of securities. Before investing or using any strategy, individuals should consult with their tax, legal, or financial advisor

Samra Wealth Management, A Member of Advisory Services Network, LLC is not in the business of providing tax or legal advice, and any information contained within, is for the purpose of commentary, and not advice.  Prior to acting on any information contained in this publication, it is recommended you consult with your tax advisor or legal counsel.

Samra Wealth Management, A Member of Advisory Services Network, LLC