YOGI BERRA SAID “IT’S TOUGH TO MAKE PREDICTIONS, ESPECIALLY ABOUT THE FUTURE”
As we watch the securities market volatility and the uncertainty prevailing in the economy, Yogi’s words take on new meaning. Although the government seems to be working hard to assist the country out of its current economic malaise, what we see in the future is more “uncertainty”. The “uncertainty,” though, could potentially produce numerous investment opportunities, - but in our opinion, the time frame for these investments will be shorter than we would prefer.
Both Bulls and bears generally agree that for stocks to post a significant rally during the second half of this year it will require convincing evidence not only that the U. S. economy’s decline has slowed but that the economy will begin to turn higher by year-end. Corporate profits will need to at least match the forecasts for an upswing to prevail through the rest of the year and to even justify current market values.
Although the markets rallied significantly during the second quarter of 2009 (despite all the attention to the “green shoots”), the global economy faces many formidable challenges. There are many conflicting forecasts for both growth and demand, such as rising unemployment, lower corporate profits, the conflicting direction of commodity prices and increasing budget deficits as well as looming inflation and /or deflation concerns. The run-up in the securities markets since March 9th may mean the good news for the second half is already reflected in stock prices. Many market experts feel that we will see a range bound market for the next few years moving up and down in a relatively narrow sideways band. Under this scenario, we will have to work hard to produce satisfactory returns. We have already begun to do this. Our Client’s have probably noted that we have been more active investors recently. We believe that actively managed stock picking is a necessity in this new market environment. However, while always on the lookout for increased capital and growth appreciation, we continue to hold true to our key principals of preservation of capital and risk management.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
Tuesday, July 14, 2009
Wednesday, June 24, 2009
Does it Matter What Type of Financial Advisor You Work With?
The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? In our experience, many so-called “financial advisors” are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.
Stockbrokers
Commission-based advice is great, if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. In our experience, the products sold through this type of advice have been plagued with high costs and opaque disclosure—the higher the costs of an investment, the worse its performance will be. When a stockbroker is paid based on the products he recommends, his interests may not always be aligned with those of the client. The Broker-Dealer, for which a registered representative (stockbroker) works - unlike a Registered Investment Adviser - has no fiduciary duty to place the client’s interests first. As with any type of advice, inadequate disclosure coupled with conflicts of interest has resulted in a fair number of people who have been victimized by bad advice.
Because the commission-based fee structure of broker-dealers presents the conflicts of interest described above, the SEC requires them to add some variation of the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to inform your financial decisions:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest; if it were us, we would be running for the exits here.
Fee-Based Advisors
In our opinion, “fee-based” advisors can be just as bad, if not worse, than purely commission-based brokers in terms of the conflicts that exist between the interests of the adviser versus those of the client. We have found that commission-based compensation is sometimes presented as “fee-based” compensation, which is a particularly evil label when used to refer to compensation based on both fees and commissions. In this sense, fee-based advisors have the ability to charge a percentage “based” on the assets they manage, but they may also have the ability to sell you a commission-based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal, we feel is certainly immoral. The broker makes money from both the client and the commission on the product sold. What a guy! Don’t be fooled. We think it’s wise to stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.
Fee-Only Advisors
Fee-only compensation (not to be confused with fee-based) is based on the value of assets managed for the client, not commission driven; in this type of fee structure arrangement, financial advice is generally the only product offered by the firm, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you.
Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This principle requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes seeking the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors registered with the SEC and various states must adopt a Code of Ethics and all Registered Investment Advisors must fully disclose how they are compensated.
High net worth, high income households can be targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:
• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you have a clean regulatory record?
• How much experience do you have?
Finally, you should also request and review the advisor’s written disclosure statement, Form ADV Part I and II.
Other Considerations
Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers a robust, well rounded financial education for financial practitioners and it carries much clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, the CFP® designation can be held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/trust companies that may charge commissions or peddle proprietary funds and 2) the fee-only (or fee-based) side of the industry.
In summary, we advocate that a consumer should demand that their advisor sign on as a fiduciary in writing. In our experience, stockbrokers and Registered Representatives (RR) generally do not or will not do this. Conversely, an advisory representative at a Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where a representative of an RIA is also an RR, the investor must clearly understand in what capacity the individual is acting, because depending on the context, the individual may not be operating as a fiduciary when giving certain advice. Remember that credentials do not always translate into your success. Bottom line—do your homework before you hire!
Stockbrokers
Commission-based advice is great, if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. In our experience, the products sold through this type of advice have been plagued with high costs and opaque disclosure—the higher the costs of an investment, the worse its performance will be. When a stockbroker is paid based on the products he recommends, his interests may not always be aligned with those of the client. The Broker-Dealer, for which a registered representative (stockbroker) works - unlike a Registered Investment Adviser - has no fiduciary duty to place the client’s interests first. As with any type of advice, inadequate disclosure coupled with conflicts of interest has resulted in a fair number of people who have been victimized by bad advice.
Because the commission-based fee structure of broker-dealers presents the conflicts of interest described above, the SEC requires them to add some variation of the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to inform your financial decisions:
“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”
If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest; if it were us, we would be running for the exits here.
Fee-Based Advisors
In our opinion, “fee-based” advisors can be just as bad, if not worse, than purely commission-based brokers in terms of the conflicts that exist between the interests of the adviser versus those of the client. We have found that commission-based compensation is sometimes presented as “fee-based” compensation, which is a particularly evil label when used to refer to compensation based on both fees and commissions. In this sense, fee-based advisors have the ability to charge a percentage “based” on the assets they manage, but they may also have the ability to sell you a commission-based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal, we feel is certainly immoral. The broker makes money from both the client and the commission on the product sold. What a guy! Don’t be fooled. We think it’s wise to stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.
Fee-Only Advisors
Fee-only compensation (not to be confused with fee-based) is based on the value of assets managed for the client, not commission driven; in this type of fee structure arrangement, financial advice is generally the only product offered by the firm, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you.
Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This principle requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes seeking the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors registered with the SEC and various states must adopt a Code of Ethics and all Registered Investment Advisors must fully disclose how they are compensated.
High net worth, high income households can be targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:
• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you have a clean regulatory record?
• How much experience do you have?
Finally, you should also request and review the advisor’s written disclosure statement, Form ADV Part I and II.
Other Considerations
Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers a robust, well rounded financial education for financial practitioners and it carries much clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, the CFP® designation can be held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/trust companies that may charge commissions or peddle proprietary funds and 2) the fee-only (or fee-based) side of the industry.
In summary, we advocate that a consumer should demand that their advisor sign on as a fiduciary in writing. In our experience, stockbrokers and Registered Representatives (RR) generally do not or will not do this. Conversely, an advisory representative at a Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where a representative of an RIA is also an RR, the investor must clearly understand in what capacity the individual is acting, because depending on the context, the individual may not be operating as a fiduciary when giving certain advice. Remember that credentials do not always translate into your success. Bottom line—do your homework before you hire!
Wednesday, June 3, 2009
Why I Recently Left a Major Wirehouse and Why You Should Care!
The consolidation that has taken place within the financial services industry has resulted in a dilution of brand equity and a manic free-for-all by institutions. Banks are gaining brokerage capabilities and vice versa. In the rush to capture market share, many Investment Advisors are focusing on additional estate planning issues, and losing focus of their main objective, to provide sound financial advice. After nine years of working at Smith Barney - Citi Family Office, my company was guilty of just that, trying to be all things to all people, consequently diminishing the overall client experience.
That being said, I have recently left that company to pursue a career with a firm that exclusively provides investment counsel to high net worth clients. Having only one objective, managing client investment portfolios, allows us to concentrate solely on that one objective. What a concept! At L&S Advisors, we do not sell any products, nor are we constrained to any single strategy. Further, we do not hire third party or mutual fund managers to make our investment decisions, thus allowing our clients direct access to the fiduciaries guiding their portfolios.
The strengths of our core philosophy distinguish L&S Advisors from other providers. We adhere to an investment philosophy that ultimately manages risk by allowing flexibility towards the components of the securities markets in which we invest. As a result we can excel in a variety of market conditions, such as the turbulent times we are currently experiencing.
Simply put, if you are troubled with the investment advice or performance you are receiving, or don’t believe your risk management concerns are properly being addressed, I encourage you to send me an email so I can give you a brief introduction to how we may help with your financial challenges. I am confident after a few minutes, you will clearly be able to distinguish our investment philosophy and strategy from other providers, and how it has helped to contribute to our superior risk management and investment performance across several different market cycles in the past.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
That being said, I have recently left that company to pursue a career with a firm that exclusively provides investment counsel to high net worth clients. Having only one objective, managing client investment portfolios, allows us to concentrate solely on that one objective. What a concept! At L&S Advisors, we do not sell any products, nor are we constrained to any single strategy. Further, we do not hire third party or mutual fund managers to make our investment decisions, thus allowing our clients direct access to the fiduciaries guiding their portfolios.
The strengths of our core philosophy distinguish L&S Advisors from other providers. We adhere to an investment philosophy that ultimately manages risk by allowing flexibility towards the components of the securities markets in which we invest. As a result we can excel in a variety of market conditions, such as the turbulent times we are currently experiencing.
Simply put, if you are troubled with the investment advice or performance you are receiving, or don’t believe your risk management concerns are properly being addressed, I encourage you to send me an email so I can give you a brief introduction to how we may help with your financial challenges. I am confident after a few minutes, you will clearly be able to distinguish our investment philosophy and strategy from other providers, and how it has helped to contribute to our superior risk management and investment performance across several different market cycles in the past.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
Wednesday, May 20, 2009
Top Down Investing or Bottom Up...In the End, We Beleive You Need Both
When it comes to selecting companies to invest in, there has been much debate on the top down and bottom up approaches. With the top down approach, investors typically study the economic trends, and then determine the industries and companies they think are likely to benefit the most. For example, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the home-building industry would benefit the most from the macroeconomic changes and then limit your search to the companies in that industry. Conversely, bottom up investors typically conduct extensive research on individual companies. As long as they think the company’s prospects look strong, these investors often conclude that the economic, market or industry cycles are of less concern. What constitutes "good prospects," with regards to bottom up investing, is a matter of opinion. Some investors look for earnings growth while others find companies with low P/E ratios attractive. In addition there are numerous other factors that investors could use to evaluate the investment worthiness of a particular company.
The top down and bottom up approaches are two distinct and fundamentally very different methods to investing. There are great advantages and drawbacks to both methodologies, but too much reliance on only one may keep your portfolio from reaching its maximum potential. There are literally tens of thousands of stocks out there to choose from.
Investors can combine the two approaches by applying top down analysis on asset allocation decisions while using a bottom up approach to select the companies they believe fit the requirements of both kinds of research.
The combination of strategies is called Tactical Diversification and may help investors strike an attractive balance between seeking maximum capital appreciation and managing downside risk.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
The top down and bottom up approaches are two distinct and fundamentally very different methods to investing. There are great advantages and drawbacks to both methodologies, but too much reliance on only one may keep your portfolio from reaching its maximum potential. There are literally tens of thousands of stocks out there to choose from.
Investors can combine the two approaches by applying top down analysis on asset allocation decisions while using a bottom up approach to select the companies they believe fit the requirements of both kinds of research.
The combination of strategies is called Tactical Diversification and may help investors strike an attractive balance between seeking maximum capital appreciation and managing downside risk.
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.
Friday, April 24, 2009
What Happens When Good People Have Bad Ideas?
After realizing the effects of the recent market turmoil, many people have taken inappropriate actions at an inopportune time, and in hindsight wished they had planned accordingly for the global economic downturn we are now faced with. Many people are quick to say they have a “trusted advisor” whom they rely on to give them sound financial advice, yet still found their portfolios decimated at the end of 2008. What is worse, your advisor may have been smart enough to see the turmoil coming, but unfortunately was constrained as to what he could do to try to protect your assets.
In the early ‘90’s, Morningstar introduced a nine square grid that classifies securities by size, (large, mid, or small), along the vertical axis and by characteristics (value, core, and growth) along the horizontal axis, and thus style box diversification was born. Within this framework, Investment Advisors hire “best in class” managers, through mutual funds, third party managers, or exchange traded funds, to represent a particular box. Mangers are expected to invest only in stocks with characteristics fitting that box. In theory, the style box helps the investor construct a diversified portfolio that reduces overall volatility and, hopefully, increases return.
Unfortunately 2008 demonstrated that the style box approach has flaws and failed to shield investors from harm. If the manager/fund the Investment Advisor hires does not beat the index of the specific box he is hired to manage, they will fire him and replace him with another manager/fund. We believe that this approach is flawed in both its underlying assumption, that having money in all of the boxes is the best way to beat the market, and its implementation, that Investment Advisors are going to be able to identify the managers most likely to beat their assigned indexes.
Keeping managers constrained to a specific style box in our opinion actually limits investment performance, erodes purchasing power, and further results in a costly and inefficient portfolio. If investors employ nine traditional style box managers/funds, plus one that specializes in foreign stocks, and each manager/fund owns 50 securities, investors possibly own more than 500 stocks. Take into account the turnover between managers and trading costs, and at the end of the day with more than 500 positions, investors in effect would own a very expensive index fund, where the winners may be too small to have a significant impact on the portfolio.
In seeking to achieve superior returns, we feel that Investment Advisors should be free to roam the entire stock universe in search of opportunities and should not be constrained to one box. Proponents of style box diversification will tell you that from year to year there’s no telling which asset class will be the best performer, therefore portfolio diversification reduces risk by allocating assets across the various boxes. While it may be true that it’s very difficult to select the exact asset class that will perform best during any given year, for anyone willing to dig even slightly below the surface, it’s been very clear as to those that should be avoided. For example, the direction of the U.S. economy has been very clear, yet many fund managers are restricted from actively taking precautions against loses, such as raising cash or limiting exposure to a certain asset class, such as financials.
Warren Buffet, widely considered one of the worlds greatest investors built his wealth by concentrating his exposure, not through diversification. At times, he has held a mere five positions in his entire Berkshire Hathaway equity portfolio. He does not diversify, because with his level of expertise, he feels there is no need to do so. Further, he defines risk as “not knowing what you are doing,” and suggests if you are unsure of yourself, that diversification is the best strategy for you. In our view Investment Advisors that are truly on top of their game should concentrate their positions, as sustainable rewards can be reaped only by those that have the foresight and ability to invest in certain stocks and asset classes well ahead of the curve.
In an effort to achieve superior returns given today’s volatile market conditions, we believe that an Investment Advisor must be free of portfolio restraints or limitations. If economic conditions suggest a move to all cash, an advisor needs to be able to quickly act on that decision. If your advisor wants to hold a concentrated position in a certain sector or stock, we think he should have the ability to do so. The old rules of style box diversification are dead. If your portfolio is over diversified and achieving index type of returns, what are you paying your advisor for?
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
In the early ‘90’s, Morningstar introduced a nine square grid that classifies securities by size, (large, mid, or small), along the vertical axis and by characteristics (value, core, and growth) along the horizontal axis, and thus style box diversification was born. Within this framework, Investment Advisors hire “best in class” managers, through mutual funds, third party managers, or exchange traded funds, to represent a particular box. Mangers are expected to invest only in stocks with characteristics fitting that box. In theory, the style box helps the investor construct a diversified portfolio that reduces overall volatility and, hopefully, increases return.
Unfortunately 2008 demonstrated that the style box approach has flaws and failed to shield investors from harm. If the manager/fund the Investment Advisor hires does not beat the index of the specific box he is hired to manage, they will fire him and replace him with another manager/fund. We believe that this approach is flawed in both its underlying assumption, that having money in all of the boxes is the best way to beat the market, and its implementation, that Investment Advisors are going to be able to identify the managers most likely to beat their assigned indexes.
Keeping managers constrained to a specific style box in our opinion actually limits investment performance, erodes purchasing power, and further results in a costly and inefficient portfolio. If investors employ nine traditional style box managers/funds, plus one that specializes in foreign stocks, and each manager/fund owns 50 securities, investors possibly own more than 500 stocks. Take into account the turnover between managers and trading costs, and at the end of the day with more than 500 positions, investors in effect would own a very expensive index fund, where the winners may be too small to have a significant impact on the portfolio.
In seeking to achieve superior returns, we feel that Investment Advisors should be free to roam the entire stock universe in search of opportunities and should not be constrained to one box. Proponents of style box diversification will tell you that from year to year there’s no telling which asset class will be the best performer, therefore portfolio diversification reduces risk by allocating assets across the various boxes. While it may be true that it’s very difficult to select the exact asset class that will perform best during any given year, for anyone willing to dig even slightly below the surface, it’s been very clear as to those that should be avoided. For example, the direction of the U.S. economy has been very clear, yet many fund managers are restricted from actively taking precautions against loses, such as raising cash or limiting exposure to a certain asset class, such as financials.
Warren Buffet, widely considered one of the worlds greatest investors built his wealth by concentrating his exposure, not through diversification. At times, he has held a mere five positions in his entire Berkshire Hathaway equity portfolio. He does not diversify, because with his level of expertise, he feels there is no need to do so. Further, he defines risk as “not knowing what you are doing,” and suggests if you are unsure of yourself, that diversification is the best strategy for you. In our view Investment Advisors that are truly on top of their game should concentrate their positions, as sustainable rewards can be reaped only by those that have the foresight and ability to invest in certain stocks and asset classes well ahead of the curve.
In an effort to achieve superior returns given today’s volatile market conditions, we believe that an Investment Advisor must be free of portfolio restraints or limitations. If economic conditions suggest a move to all cash, an advisor needs to be able to quickly act on that decision. If your advisor wants to hold a concentrated position in a certain sector or stock, we think he should have the ability to do so. The old rules of style box diversification are dead. If your portfolio is over diversified and achieving index type of returns, what are you paying your advisor for?
Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice
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