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Avoiding the “
Retirement Crisis
”
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A recent New York Times article “The Looming Retirement Crisis,” written by Eduardo Porter, delves into three critical areas of investment management: running out of money after retirement, carefully selecting your advisor, and cost-effective portfolio asset
allocation. All three are timely issues, particularly for the baby boomer generation, as they prepare for retirement. Additionally, all three are relevant topics in setting portfolio objectives and achieving investment goals.
Let me start by saying I agree with the basis of the article and its message. It centers on two issues I believe to be at the heart of the “retirement crisis” discussion: active versus passive portfolio management and investors understanding the pros and cons in selecting their advisor. The end-goal for every advisor should always be making unbiased investment recommendations and providing transparent performance data to investors. Unfortunately, that is not the experience for the majority of the investing public. Instead, many investors receive incomplete performance reporting and distorted investment recommendations that typically favor their advisor, not their portfolio. The Times article referred to this segment of advisors as “super slimy.” The “super slimy” are not the brokers or advisors lurking in the dark shadows of various banks and brokerage firms. Rather, they are the advisors that are visible when you walk in the front door of their firm. A harsh statement, but it is based on my observations in the wealth management business. But, don’t rely on just my perspective regarding this cagey group rather, start with the Times article and add other recent news articles as evidence of the pervasive problem of advisors and their deceptive tactics.
As a CFP and subscriber to the Financial Analyst Journal, I read Jack Bogle’s article, “The Arithmetic of ‘All-In’ Investment Expenses,” with strong interest. The article discusses the pros and cons of passive vs. active portfolio management. Jack has always been a proponent of the low-cost fund approach evidenced by the Vanguard family of funds. The Vanguard approach of minimal expenses makes sense when supported by statistics from the last few years which demonstrate that the average fund lags its relevant index. So the question remains: Active vs. Passive. Which is better?
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I believe a combination of active and passive portfolio management is the correct answer. In fact, this style of portfolio management was approved by Legacy Trust’s
Investment Committee in 2014 and is now implemented in our clients’ portfolios. The rapid growth of passive investment vehicles (index funds and ETF’s) in recent years is driven in part by the challenges experienced by active managers. Some of the companies included in passive investing may succeed brilliantly, others may fail, and most will likely emerge
somewhere in between. Because passive strategies invest in all of these companies without regard to their relative attractiveness, they have the effect of lessening the differentiation in demand for the underlying stocks.
A further compounding influence has been the risk-on/risk-off environment of market recovery in the post-2008 Financial Crisis. Central Bank activity (Fed) has caused numerous broad-based moves in the markets over the past six years. In such a context, it has not been surprising to see passive vehicles outperform active strategies. In general, I would expect to see an environment where the currently-favored passive approach will be followed by periods where attractive fundamentals of stocks – that have been overlooked by passive investors – could see increased demand as their fundamentals become much more appreciated. In fact, we are experiencing this to-date in 2015.
In regards to investment performance reporting, Legacy reports using two methods: gross of fees and net of fees. Fees charged by Legacy are inclusive of both our professional
management fee and all transaction costs incurred within our portfolios. The one exception to this all-inclusive fee structure is imbedded mutual fund expenses that are netted out of performance by the mutual fund family. This method is an industry-wide accepted method of reporting performance. The final point is we are managing the portfolio allocation to optimize performance in the current market/economic environment by utilizing mutual funds, ETF’s, and separate managers. Various market indexes are also provided in our performance reporting statements. The indexes are not always a perfect match with a
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manager’s investment style – particularly with Alternatives due to their uniqueness –
nevertheless, the client ultimately benefits by being exposed to these market indices as they are an additional investment comparison tool. It is our strong belief that this type of performance reporting provides Legacy’s clients with full transparency.
The final component to achieving one’s investment goals is to take care in selecting your advisor. This is where it is important to distinguish between the various types of investment firms. First, there are the wealth groups whose advisors were, in the past, referred to as stockbrokers. Today, these brokers have rebranded themselves as “private wealth advisors.” Their mission is to boost earnings for the various “banks” they work for while
simultaneously increasing their personal payout. These advisors are influenced by how much they are paid and larger payments can certainly tilt them in a specific direction. We know this group as devoted more toward working the client than working for the client. In other words, if brokers, or “private wealth advisors,” do not sell investments, they cannot get paid. One last point is many brokers in this group have caught on to the practice of charging an asset based management fee (wrap fee) but also gaining compensation by investing with the same fund family or attaching a sales mark (commission) that is non transparent to the investor, more commonly known as double-dipping.
There are escape hatches that allow brokers to avoid acting as fiduciaries when offering investment advice. For example, the word “advice” is defined quite broadly within the industry. Thus, if the advice is provided in a single instance, a broker can avoid the more strict fiduciary guidelines that regulate trust companies such as Legacy. Brokers are only required to make recommendations suitable to their client’s financial needs and goals. Under this Suitability Rule, a broker’s loyalty is to the financial services firm that he works for, and not the client. In fact, the rules governing broker advice are so slanted in favor of the broker, that efforts to reform and protect the consumer have been squashed by the Securities
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At Legacy Trust, our charter requires strict adherence to the more narrowly defined fiduciary standard. The Fiduciary Rule is defined as: the legal duty to act in the best interests of the beneficiary, acts which the law requires be done or forborne. I have often heard
brokers/private wealth advisors claim they adhere to the highest standard. They go on to say, “after all, I have my good reputation to protect,” however, knowing the true guidelines regulating their actions, this statement is merely words unsupported by their actions or intentions – remember, brokers are only held to the less-rigid “suitability” standard.
At Legacy, our commitment goes beyond words. We have an inherent compliance
requirement in our trust charter as well as high moral standards set by our CEO, Kristin. In addition, as a Family Office, we draw up an investment plan with clients and stick to it. No hot tips or bets on markets that provide interesting so-called cutting edge
discussions. Rather, we provide a comprehensive level of financial services centered on what our clients demand, preservation of wealth. Due to our compliance with fiduciary standards, our manager selection and due diligence is handled by a carefully selected outside firm, Fortigent. As a third party, Fortigent selects, recommends, and monitors manager selection. Additionally, we subscribe to JP Morgan Chase, Goldman Sachs, and Blackrock as an investment strategy overlay, as they provide current and thorough research and serve as additional external sources for manager recommendations. Deriving investment strategy from external sources eliminates the frequent abuse by wealth advisors to steer clients improperly into house funds, structured notes, and other investments that generate fees for the bank and bonuses to the advisor.
We are always working in the best interest of our clients. Thus, in addition to portfolio management, Legacy offers families a holistic approach to lifestyle planning by advising clients in the areas of estate and tax planning, insurance reviews, collaborating with clients’ CPA’s and attorney’s, and educating second generation family members on the importance of responsible money management. Legacy employees are salaried instead of commission based, thus we have no monetary incentives to bias our recommendations. There are no
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rebates, hidden commissions or any type of internal or external sources of revenue. We are 100% fee based.
When selecting an advisor, the qualities Legacy Trust Family Wealth Offices embodies are the characteristics investors should look for in order to protect and grow their wealth long into retirement.
