The Benefits of this Anniversary to You

Ten years ago this summer, I was asked to join a study group with 20-25 selected financial advisors from around the country.

Ten years ago, I could not have imagined the impact this would have on my practice, as it has helped me and my firm to develop and provideCommittment to Excellance better advice and service to our clients.

This commitment to bettering ourselves has continued over the past 10 years.

This weekend, I will again be traveling to meet with many of the same financial advisors to celebrate the 10th Anniversary of the BAM Masters Forum, as the group was later named. We are committed to improving ourselves and our firms, for the benefit of you, our clients.

Over the past 10 years, the BAM Masters Forum has met in person at least 2 times each year, for approximately 6 days per year. I have not missed a single one. Additionally, we talk in smaller groups every other week throughout the year by phone. During this period, I have probably had over 200 hours of these bi-weekly peer call discussions.

If you are a client, this should give you confidence regarding our commitment to excellence. Participating in this study group has provided exposure and an environment to ideas and concepts. We have heard from top speakers, thought leaders and investment experts. It is a way for us to talk and listen to others, learn and to think about how to provide better advice to you, our clients.

While I have participated in the BAM Masters Forum group, my partner Keith joined a similar group which was formed a few years later. His group meets at different times, but the goal and commitment are the same, to exchange ideas with fellow advisors and hear from experts on a wide variety of topics.

In an ever-changing and uncertain world, it is re-assuring for us to know that we can talk and learn with others who are also committed to providing excellent advice and service to their clients. By participating in these groups, Keith and I have formed numerous relationships with advisors across the country. When we have our peer calls or get together as groups, it is an opportunity to discuss issues which you face as clients or challenges that may be going on in the world.

If you work with another advisor, ask them about their commitment to self-improvement. How do they learn? How do they work to improve themselves, for the benefit of their clients? What is the focus of the meetings and conventions they attend? Are they focused on sales? Or like us, are they focused on topics like financial, estate and tax planning as well as investment concepts and planning?dining pic (2)

The sessions we attend are not rewards for selling the most of mutual fund ABC or hitting a commission goal. We pay for our sessions and all of the related costs. We are not going to three hours of speakers in the morning and then hitting the golf course in the afternoon (though that would be fun).

Yes, we have had good times and enjoyed some great experiences together. One of my most memorable experiences with this group was our meeting in Napa, CA in May, 2013. I wrote about this in a blog post dated May 14, 3013, which I strongly encourage you to read. Great Relationships, Advice and Wine.

During this meeting, we visited the Staglin Family Vineyards and I was fortunate to experience one of the best meals of my life. I ended that blog post with the following, which is just as true today as it was a few years ago:Staglin bench (2)

Opposite from the entry to the Staglin caves, was a large bench. On the bench’s huge backing, is the following inscription:

Staglin Family Vineyards: where shared values are the keystone of relationships.

The meetings I had with my fellow advisors and the time spent at the two vineyards shared a common message. Having shared values with our clients will produce great client relationships. Having great business partners that we can trust and interact with, like the BAMAlliance and DFA, will benefit our clients. It will enable us to provide our clients with a successful lifetime of integrated financial experiences, so our clients can be comfortable and secure.

Are you patient enough to get the returns?

Investing is a long term commitment. It is full of uncertainty and unknowns.

If you are 50-60, you should be planning for a 30+ year time horizon.

When we develop an investment plan for a client, we base it on academic data and concepts, not on short-term market guesses, or “forecasts.”

We also understand the correlation between risk and reward. If you own a riskier asset, you expect to be compensated with greater expected returns over the long term.

Just as if you were a bank lending money, you would demand a greater interest rate on a loan to a small, new company than you would from a well established, profitable Fortune 500 company.

Emerging markets is one of the riskier asset classes and can be quite volatile. So why do we recommend owning it, as part of a globally diversified portfolio? Because of it’s greater expected return. Emerging Markets funds invest in companies in lesser developed countries, mostly in Asia, Africa and Latin America.

In past years, the emerging market asset class has not done well. We have not reacted to this underperformance by selling this asset class. Just the opposite. We have maintained our positions in emerging market funds, as we know that over the long term, the expected outperformance should appear.

We don’t know when the rewards for owning emerging market funds will occur. It could be this year or many years from now, but we are confident that this exposure is worthwhile and will be to your benefit.

In 2015, this asset class trailed nearly all other asset classes, except for commodities, which we generally do not invest in. However, for 2016, emerging markets have been by far the best performing asset class.

Let’s compare the past 15 years and you will understand the potential benefits. Over the past 15 years, the S&P 500, which is composed of US based large companies, has averaged 5.60% per year. However, the DFA Emerging Markets Value Fund (DFEVX) has an annualized return of 12.1% per year over the same 15 year period. That is an outperformance of 6.5% per year, over the past 15 years.

Without an advisor to guide you and help you maintain this exposure, you may have sold off your emerging market fund already, as you may have been disappointed by its recent underperformance as compared to other asset classes.

Investing and your financial future are not about the next year. To reach your financial goals, you need excellent planning, discipline and research to make sure that you are doing the right thing for decades to come.

Our firm can provide value to you in many ways. You may not always see our value appear in every monthly or quarterly statement. But our value will definitely appear over time in your statements, as well as in the advice we provide in conversations and when you have questions or concerns.

And sometimes the value we provide will come when you don’t expect it, or when the market reacts in ways that you least expect. And that’s when we will be here for you.

A different perspective on taxes

In most years, today, April 15th is tax day, when Federal and state taxes are due.

Most people want to pay as little in taxes as possible. They are resentful about taxes.

I recommend a different perspective….you should feel fortunate and happy that you are able to pay a lot in taxes, as that means that you are more financially successful and should be more secure.

Many years ago, when I was a young CPA meeting with one of my largest clients, I brought him his tax return near April 15. He had to write a huge check, for maybe $300-400,000. I was actually nervous to go into his office, even though he was expecting this large day image

My client taught me a lesson I’ve repeated numerous times.

He told me he was very pleased to be writing this large check, as he knew this meant that financially, the year had been incredibly successful. Though he was paying the government a lot, he and his family had benefited far more. His key employees also shared in this success.

Having an abundance mentality is important. If one of your goals is to be financially secure and successful and want to enjoy the freedoms, opportunities and benefits of our country, than you should be OK with paying taxes.

I’m not suggesting that you pay more than the minimum you should pay. We actively work with our clients to minimize what they owe, through our investment approach, planning, and looking for tax saving opportunities year-round.

I’m not talking about tax rates or what they should be.

The reality is simple. The greater your income is, the more taxes you pay and the more that you and your family will have.

If you want to be financially secure and have a good retirement, you will need to pay a good amount of taxes during your lifetime. That is not something to be resentful about. It is something you should be pleased about.

So, if you have been successful and are paying a lot in taxes, you should feel fortunate.

Are you staying at the Hotel Independent?

Imagine you are traveling for a weekend stay at a hotel in San Francisco. You want the advice of the hotel’s concierge for your dinner reservations.

If you are staying at the Hotel Independent, you would know that the concierge’s recommendations are only in your best interest. She would explain this to you. You told her your goals were to go to an Italian restaurant and a Steakhouse where you would have the best overall experience. Each restaurant should have the right balance of great food, wine list, value and atmosphere. She was clear with you that she would not be compensated by the restaurants for providing her advice. Her only compensation was a fee you paid her, so you know that she will have your best interest in mind.

If you stayed at the Hotel Big Brokerage Firm, things are different. When you told the concierge that you wanted to go to an Italian restaurant and a Steakhouse, he was not as clear with you. He provided you with two suitable recommendations, but they were not the great combination of all of the factors you desired. The recommended steakhouse was: Hotel Big Brokerage Firm Steakhouse Class A. You are not sure if there are better steakhouses nearby, or did the concierge choose the hotel’s restaurant because it is owned by Hotel Big Brokerage Firm? You later may find out that the concierge received some compensation from the restaurants he recommended.

Did the concierge at Hotel Big Brokerage Firm really provide you with advice that was in your best interest?

Or did the concierge at Hotel Big Brokerage Firm provide you with good, but not optimal recommendations, because he was being paid by the restaurants?

The above analogy of a hotel concierge is relevant because of a major Department of Labor (DOL) ruling issued Wednesday, which impacts investment advice to be provided for various retirement plans, such IRAs and 401(k)s.

Since inception, our firm has always held itself to the financial industry’s highest standard, which is called a “fiduciary” standard. This means that we must provide all advice with your best interest in mind. We are not compensated by the investments or the investment providers we recommend. We do not receive any commissions. We are only compensated by you, our clients. We are like the concierge at the Hotel Independent.

Unlike our firm, major brokerage firms and financial institutions which are not
established as a Registered Investment Advisor (RIAs), as we are, do not have to meet this high fiduciary standard when providiThe-Fiduciary-Standardng any investment advice and recommendations. These firms, similar to the concierge at Hotel Big Brokerage Firm, only have to provide “suitable” recommendations. This means they can recommend investments which pay them commissions, may cost you more and may not be the best investment for you. But as long as the recommendation is reasonable, they can do that, even if it is NOT in your best interest.

The new DOL ruling, effective April, 2017, will generally require all financial institutions and advisors who provide advice on IRAs, 401(k)’s and decisions about rollovers from 401(k)’s to IRA rollover accounts to meet or comply with a version of the higher fiduciary standard. These rules are long and complex, which is why I am providing an analogy throughout this essay.

But as they say in the infomercials….wait….there’s more. The new DOL rules only apply to retirement accounts. The new rules do not apply to taxable investment accounts.

So even after April, 2017, big brokerage firms and non-RIAs can continue to provide investment advice for taxable accounts which do not need to meet the higher fiduciary standard of acting in your best interest. What does this mean?

Say you go back to the concierge at Hotel Big Brokerage Firm after the new DOL rule takes effect in April, 2017, and again want recommendations for Italian and Steakhouse restaurants.

• The Steakhouse recommendation (Taxable account) after April, 2017 by Hotel Big Brokerage Firm’s concierge does not need to meet the fiduciary standard, so the concierge can receive a commission from the restaurant they recommend. The restaurant may only be suitable for you, but not necessarily in your best interest. The concierge has conflicting interests and not a legal requirement to act in your best interest.
• However, the Italian restaurant recommendation after April, 2017 (Retirement account) must be in your best interest and meet the fiduciary statement.
• So if you use a brokerage firm or non-RIA after April, 2017 they may have two different standards of advice and methods of compensation, based on whether it is a retirement account or not.

For purposes of this essay, I have simplified the DOL rules to provide you with an overview of this significant upcoming change in the financial industry. The big brokerage firms, insurance companies, other large financial institutions, their trade groups and lobbyists have fought against many of these changes and the DOL rule, as the new DOL rules are not in their best financial interest.

For you, we think this should be simple.

Wouldn’t you want to get a restaurant recommendation that is not conflicting and in your best interest, like from a concierge at Hotel Independent?

If you want financial advice which is always and only in your best interest, wouldn’t you work with a firm that adheres to a fiduciary standard, like ours?

If you are a client of our firm, we always have and always will follow the fiduciary standard to provide you with advice that is in your best interest. We are only compensated by our clients. We do not get paid any commissions based on the investments we recommend.

If you are not a client, do you know whether your financial advisor is similar to the concierge at Hotel Independent or the concierge at Hotel Big Brokerage Firm? Is the advice you are receiving for all of your accounts in your best interest, now and after the new DOL rules go into effect in April, 2017?

This is way more important than just a few dinner reservations. It can have a significant impact on your financial future.

Make sure you are working with the right type of financial advisor. We would be pleased to discuss this with you further….and we will even make sure to get excellent dinner reservations.


For further information on this topic, please see this New York Times article: What New Rules on Retirement Savings Mean for Investors.

Tax Update: Please note that due to a holiday observed in Washington, D.C. on April 15, 2016, income tax returns are due on Monday, April 18, 2016 this year, not on Friday April 15th.

Disclosure: This essay is intended to provide a contrast in general terms between a fiduciary and a firm that is subject to the suitability standard, as well as to provide an overview of the new DOL investment standards, issued 4/6/16. This is not intended to provide a detailed analysis of the new DOL ruling. We do not expect the new ruling to impact how we provide advice to our clients, as we already meet the fiduciary standard. The greatest impact of the DOL rules are to firms that do not currently comply with the fiduciary standard.