Brexit — Our Perspective

Brexit — Our Perspective

By: Jared Kizer Britain’s decision to exit the European Union has brought with it all the expected trappings of a significant news event — projections of crazy market volatility, wild headlines and a fair dose of uncertainty about the long-term impact on the global economy and our individual financial lives here at home. Many questions immediately arise as we pay close attention to how the event will play out in the weeks and months to come. But our perspective is the same as it has always been in times like these. Your financial plan is built with diversification and your personal risk tolerance in mind — it’s designed to weather the ups and downs that inevitably follow significant world happenings. Jared Kizer, Chief Investment Officer for the BAM ALLIANCE, reminds us of this below: What did British voters decide? To the surprise of many — including stock and bond markets — Britain voted to leave the European Union (EU) by a margin of 52 percent in favor of leaving (i.e., “Brexit”) and 48 percent in favor of remaining. The general belief from the economic community is that this decision will weaken the British and European economies since Britain both imported and exported a significant amount of its economic consumption and production, respectively, to continental Europe. How have markets reacted? At the time of this writing, stock markets have fallen precipitously and bond interest rates have dropped as well. With the exception of precious metals, commodity markets are also generally down, and the British pound has dropped by about 8 percent against the U.S. dollar. Why have markets reacted so violently?...
All Fiduciaries Aren’t Created Equal

All Fiduciaries Aren’t Created Equal

By: Dan Solin Robo-advisors have had a significant — and generally positive — impact on the financial services industry. The term typically refers to services that use models and algorithms to invest client portfolios, often in exchange-traded funds (ETFs). A benefit much touted by some of these services is that there’s no interaction with a human advisor. The entire process is done online. Betterment and Wealthfront are the leading robo-advisors that fit into this category.   Lower fees Because these robo-advisors are automated, they have significantly lower expenses than traditional investment advisors. Here’s Betterment’s fee schedule, which it offers through a wrap fee program: 0.15 percent for accounts with balances greater than $100,000 0.25 percent for accounts with balances between $10,000 and $100,000 0.35 percent for accounts with balances below $10,000 Fiduciary duty Robo-advisors are SEC-registered investment advisors. Under both common law and federal statutes, SEC-registered investment advisors owe a “fiduciary duty” to their clients. There is much confusion over what a “fiduciary duty” entails. According to the Institute for the Fiduciary Standard, SEC-registered investment advisors have the following obligations to their clients: Serve the client’s best interest Act in utmost good faith Act prudently, with the care, skill and judgment of a professional Avoid conflicts of interest Disclose all material facts Control investment expenses A lower standard Most brokers are not SEC-registered investment advisors. They don’t have a fiduciary duty to their clients. They are held to a much lower “suitability” standard, which permits them to sell higher-price, higher-commission products to their clients, even though the expected returns of these products may be lower than readily available lower-cost investments....
Three Ways to Think About “Is It Worth It?”

Three Ways to Think About “Is It Worth It?”

By: Carl Richards In life, there are certain nonnegotiables we simply must have. Think food, water and shelter for starters. Nobody will ask, “Is it worth it to eat?” It’s just something you do to stay alive. But deciding what to eat? That’s a different question. Will I eat the bologna or prosciutto? Drink tap water or bottled? And anything discretionary — anything that has even the slightest element of choice in it — invariably deals with a question we find ourselves asking all the time. “Is it worth it?” I recently talked about this question with Adam Ketcheson. He is the vice president for marketing atArc’teryx, a manufacturer of very high-quality equipment for skiing, backpacking, climbing and hiking. The company’s gear is internationally renowned for its performance, durability, design and craftsmanship. Arc’teryx products also tend to be more expensive than rival equipment, often by a significant margin. Recently, Mr. Ketcheson was heli-skiing in British Columbia with a group of executives. When they learned that he worked at Arc’teryx, one turned to him and said, “Man, I love your gear, but is it really better than all the other brands?” The answer was: “Yes. Of course. One hundred percent yes.” But the next question his fellow skier asked was the one we’re talking about today: “O.K., maybe it’s better. But is it worth it?” This is a question Mr. Ketcheson gets a lot about Arc’teryx’s products, and his answer is always the same. “I don’t know,” he says. “The question is, is it worth it to you?” Alas, there is no objective answer to that question. Mr. Ketcheson can...
New Angles on the Size Premium

New Angles on the Size Premium

By: Larry Swedroe Many investors and advisors who implement multifactor portfolios tend to focus on capturing the value premium over the size premium, often for the simple reason that, historically, the value premium has been larger. Others have even challenged the size premium’s very existence, citing a weak and varying historical record. In both situations, it may be that the size premium—and specifically the construction of the size factor—is not fully understood. My colleague Sean Grover, a member of the investment strategy team at Buckingham and The BAM Alliance, put together the following analysis of size factor construction to help address and clarify this issue. He begins with some basic definitions. Defining The Size Factor The size factor, as defined by Eugene Fama and Kenneth French, is constructed by sorting all stocks by market capitalization, as determined by market capitalizations of NYSE stocks, into deciles and then taking the weighted average annual return of deciles 6-10 (small stocks) minus the weighted average annual return of deciles 1-5 (large stocks). In other words, it’s the top 50% of stocks ranked by size minus the bottom 50%. Contrast this with the value factor, which is constructed by sorting stocks on book-to-market ratio and then taking the weighted average annual return from deciles 1-3 (value stocks) minus the weighted average annual return from deciles 8-10 (growth stocks). In other words, it’s the top 30% of stocks ranked by valuation metric minus the bottom 30%. In this construct, deciles 4-7 are considered core stocks. The 30/30 construction is also used for other established risk factors, such as momentum, profitability, quality and low beta/low...
What If the DOL Rule Change for Financial Advisors Applied to Used Car Dealers?

What If the DOL Rule Change for Financial Advisors Applied to Used Car Dealers?

By: Joe Delaney If you follow financial news you have likely by now heard about changes to the way financial advisors are allowed to do business brought about by the Department of Labor (DOL). You may have recognized that the DOL’s ruling is probably beneficial to you as an investor and not thought much more of it. Yes, the new standards may be beneficial to you. Then again, they may not. Let’s briefly recap what the DOL has done. Advisors providing investment advice for retirement accounts are now subject to the more stringent requirements for service called the fiduciary standard than the previous suitability standard. This means they are legally obligated to act in your best interests as an investor. That ought to give you pause. “They didn’t have to act in my best interest before?” The answer to that question is pretty complicated. The suitability standard is essentially one where advisors have to justify a “reasonable basis” to recommend a transaction or strategy; one that is “suitable” in the sense that is not outright impossible for the investor to make money. By contrast, the fiduciary standard is one that requires an advisor to put themselves in the place of the client, ethically speaking. A fiduciary is legally obligated to practice a version of the Golden Rule: “advise unto others as you would have them advise unto you.” To simplify the issue, let’s pretend this change had happened not in the financial services industry, but in the used car business. The Suitability Standard … of Used Car Sales A “suitable” vehicle runs. The salesman can reasonably expect that at...
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