During the later stages of a bull market, technical’s and market sentiment tend to play a lesser role than fundamentals. With the major indices lower than where they started the year, and far below their highs, media scare tactics and rhetoric from the White House continue to create volatility in 2018. The market has stepped outside of its 2-standard deviation comfort zone 12 times this year, a 400% increase over the same duration in 2017. “It’s natural for investors to question their investment strategy, but one of the benefits of professional management is decision-making based on facts, not emotions.” This month’s issue of The Samra Report focuses on flawed foundations in the financial planning arena, and flawed use of data in investment strategy.
Nine years into a bull market, investors tend become over-confident and start to believe a self-directed strategy can beat the market, or at the very least out-perform their financial advisor. It is a common belief that a strategy of buy and hold works during bull markets. However, a study by Vanguard, an investment company with over $2.9 trillion in index funds, showed that a buy and hold strategy in index funds saw an appreciation of client assets to a far lesser degree than that of clients invested in an actively managed strategy. During a bull market, investors can invest blindly, “in short, equities are purchased for exposure to the asset class as opposed to purchasing a company’s shares based upon the individual growth and value prospects of its business.” This flawed system of implementing a strategy during unfavorable market conditions where economic indicators show a slowing economy, and using an identical portfolio during a bull market, exhibits a fundamental lack of understanding of the world of financial markets, and economic trends. It is true, that investors are unlikely to see losses in their passive portfolio’s during a bull market. However, a study by Raymond James found actively managed portfolios “outperformed the index in bear and neutral markets at a statistically significant level.” With more firms competing for market share, investing in robo-advisor technology, this hands-off approach to investing shows signs of deterioration. “Thanks to market volatility, all 28 taxable robo-advisors tracked by Backend Benchmarking were in the red for the first quarter of 2018,” while actively managed portfolio’s outperformed during the same volatile period. Investment companies have doubled-down in an effort to capitalize on the mass-affluent segment. However, it should be known that although there may be an incremental cost saving with robo-advisors, clients may be misled into believing they have an individualized managed portfolio. Answering robo-advisor questions, typically leads to pigeon holing the client into a prepackaged investment product, with disregard to the client’s individual tax situation. With that being said, robo-advisors are not going anywhere, and will be around for a long time, similar to how Harvard college and the University of Phoenix co-exist, however, have little need to be mentioned in the same sentence.
The term financial advisor is unfortunately a broad term, used to categorize insurance and mutual funds sales agents, with financial advisors acting as fiduciaries. At Samra Wealth Management, it is our belief that every client needs a dynamic financial plan, broken into six segments:
1. Financial Plan & Portfolio Construction
The Financial plan starting at the present time, takes into consideration the clients financial and personal situation, and provides a detailed picture of how the client will reach their end goals, planning for life events and market volatility. Once the client and the advisor have an understanding of the client’s expectations, the advisor will then construct a portfolio to help the client reach their end goals. The dynamic financial planning process, provides the client with quantifiable progress towards their goals.
In order for a financial plan to work effectively, all assets and liabilities must be accounted for, including assets held away such as 401(k)’s, life insurance, and investment properties.
2. Trust & Estate Planning
The Trust & Estate segment requires the financial advisor work with a Trust & Estate Attorney, and in cases where the client’s needs are more sophisticated a CPA specializing in advanced planning may also be involved. This segment looks to provide peace of mind by helping the client with the following:
* Advanced Medical Directives
* Asset Protection
* Lowering Taxable Estate
* Wealth Transfer Strategies
* Charitable Contributions
* Elder Law Planning
* Business Buy/Sell Agreements
The Trust & Estate portion of the financial plan is often the most difficult, however, provides the most peace of mind. At Samra Wealth Management, we believe that asking tough questions, such as “How much is your business worth should you die?” and “Have you and your spouse talked about remarrying should one of you pass”, provides our clients with confidence in their financial plans.
3. Life Insurance Planning
Contrary to popular belief, clients need to have a life insurance plan. Although the majority of folks purchase a policy they believe will cover their family, should a breadwinner pass. These policies oftentimes fall short, as most individuals rush out to buy a $1 million policy when a new addition to the family arrives. This irrational approach takes no planning and is costly. At Samra Wealth Management, we believe in working with your insurance company to calculate how much coverage is needed and help to create a hybrid model combining term insurance with whole life, creating a more economical option. For highly compensated individuals, advanced life insurance planning is combined with the client’s taxation strategy.
4. Long-Term Care & Disability Planning
With 52.3% of Americans needing long-term care by the age of 65, we believe that it is irresponsible for a financial advisor not to plan for LTC life events, especially when the median annual nursing home cost for a private room is $92,378. Regardless of the clients physical and mental well-being with conditions such as Alzheimer's dementia on the rise, this type of planning helps to alleviate family members from situations that can become extremely stressful. At Samra Wealth Management, we look into how much coverage our clients, and their parents may need.
5. Taxation Analysis
This multistep process requires we work with the clients CPA or advise the client to consider employing a new CPA more suited to their needs. An analysis of the clients’ portfolio holdings, provide insight into whether the client has a tax efficient portfolio, and in select cases looks to provide clients with tax mindful income.
6. Social Security Planning
90% of Americans collect social security at or before full retirement age. At Samra Wealth Management we work with our clients, to advise the best time, and strategy for them to collect. Hybrid strategies, for those clients born before 1953 may advise for one spouse to collect at full retirement age, and their spouse to delay their own social security, and collect spousal benefits.
During times of volatility, financial advisors have a tendency to plant the seed of concern, amongst prospective clients. Using aggressive sales pitches, such as “Has your advisor called you, to inform you of what is happening in the market?”, followed by an opportunity to learn more about how the financial advisor employs a strategy to help mitigate portfolio risk. At Samra Wealth Management, we work with our clients by not setting false expectations and educating our clients to the importance of having a dynamic plan, helping them reach their personal and financial goals.
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.
Stock Index prices are listed as of the close of business April 30, 2018, and do not take into consideration any reinvested dividends.
Benz, C. (2018). 75 Must-Know Statistics About Long-Term Care. [online] Morningstar.com. Available at: http://www.morningstar.com/articles/823957/75-mustknow-statistics-about-longterm-care.html [Accessed 28 Apr. 2018].
Bloomberg.com. (2018). SPX Quote - S&P 500 Index. [online] Available at: https://www.bloomberg.com/quote/SPX:IND [Accessed 30 Apr. 2018].
Center on Budget and Policy Priorities. (2018). Social Security Benefits Are Modest. [online] Available at: https://www.cbpp.org/research/social-security/social-security-benefits-are-modest [Accessed 28 Apr. 2018].
D’Alessandro, G. (2018). Navigating the Global Cross Currents. [online] City National Bank. Available at: https://newsroom.cnb.com/navigating-the-global-cross-currents [Accessed 28 Apr. 2018].
Haefele, Mark. (2018). UBS House View: Planning is Everything. [online] Available at: https://www.ubs.com/us/en/wealth/ubs-house-view/uncovering-opportunities.html [Accessed 28 Apr. 2018].
Kapadia, R. (2018). Active or Passive? Why You Should Use Both. [online] Barrons.com. Available at: https://www.barrons.com/articles/active-or-passive-why-you-should-use-both-1501305557?ns=prod/accounts-barrons [Accessed 28 Apr. 2018].
O'Rourke, M. (2018). Hedgeye Risk Management | Guest Contributor: Current Market Psychology Reminiscent of 2005 Housing Bubble. [online] Hedgeye. Available at: https://app.hedgeye.com/insights/56362-guest-contributor-blindly-buying-this-bull-market-hang-on-a-sec [Accessed 28 Apr. 2018].
Raymondjames.com. (2018). ACTIVE AND PASSIVE INVESTING IN BULL, BEAR AND NEUTRAL MARKETS. [online] Available at: https://www.raymondjames.com/-/media/rj/dotcom/files/corporations-and-institutions/related-services/institutional-consulting-services/ams_activepassive_white_paper_ics.pdf [Accessed 28 Apr. 2018].
Samra, I. (2018). What Happened in February. [online] SAMRA WEALTH MANAGEMENT. Available at: http://www.samrawealthmanagement.com/market-commentary/2018/3/1/what-happened-in-february [Accessed 28 Apr. 2018].
Schreiber, Jr, D. (2018). The Ugly Truth About Buy and Hold - 2018. [online] WBI Investments. Available at: http://wbiinvestments.com/news-and-insights/19-white-papers/209-the-ugly-truth-about-buy-and-hold-2018 [Accessed 28 Apr. 2018].