Investing


Disclosure: For investment professional use only. This is not intended as investment advice, but rather to provide an opinion by a financial professional to other financial professionals about a type of investment product. Earlier this year, the Department of Labor (DOL) issued a final rule requiring new fiduciary responsibilities for advisors who manage 401(k) plans and individual retirement accounts (IRAs). When it comes to the best interest of clients, undoubtedly one of the leading financial items being sold by advisors today are variable annuities. While there are many benefits this retirement vehicle offers, variable annuities can be difficult to decipher. It is therefore critical to understand the multitude of options that accompany variable annuities in order to know what is best for your client. Creating Profit from Projections Getting the most out of a variable annuity requires extensive research in order to understand exactly what is in store. The guarantees from variable annuities are favorable compared to what the S&P 500 has provided over the last 14 years. In recent years, the stock market has fluctuated in both directions, yet the S&P 500 has only returned a total of 34.8% since September of 1999 to March of 2016. Put simply, this is a 2% return each year. With numbers like these, it is no wonder variable annuities with guarantees of 5% and 6% returns are selling well. You may be wondering why not everyone is jumping in? When I was 22 and beginning my position as a research analyst at the Gartner Group, a broker for Northwest Mutual came to my office and delivered a pitch on buying life insurance. At the time, I had no concerns and certainly no beneficiaries that I needed to take care of. I couldn’t imagine what I would need life insurance for. I told her I would look at the numbers. As any analyst would, I dove into the numbers and calculated what the expected returns would be versus investing. I compared the outlook I had for investing against the idea of putting my money in the Northwest Mutual policy. I concluded that the policy would not begin generating money for three years and at the time, I had a host of solid investments that were significantly undervalued. Even after taking into account the tax benefits I would receive with the life insurance policy, it was evident that the cost outweighed the returns and therefore, I took a pass. Looking back, I am pleased with my decision, as my investments in Gartner Group, Coca-Cola, Dairy Queen and Gen Re far surpassed the S&P 500 and certainly the life insurance policy. Comparing Variable Annuities In order to provide your...

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The financial advising world is continuously changing; however, one topic of concern seems to remain on everyone’s mind: how can the accessibility of financial planning become more apparent to consumers? Marcio Silveira, financial planner and founder of Pavlov Financial Planning believes that Americans are not in the best financial situations, as many companies no longer provide pension plans and benefit packages. Yet, clients do not have to fend for themselves. It was through Implement Now, the next generation practice management virtual summit that I first learned of Marcio and his unique approach when it comes to coaching clients. Marcio is holding off on the assets under management model, and is steadily evolving towards the idea of receiving payment for financial planning advice. In addition, he is eschewing his reliance on traditional insurance and investment products and consequently is opening the door for younger clients by offering them help in this “do it yourself” culture. It is important to note than this transition does not simply suggest that Marcio and other younger advisors will renounce its product-and implementation-based services. While the AUM model just “doesn’t work” for much of the middle class and younger folks, it is still a good business model for many advisors. Financial planning provides advice for a wide range of insurance and investment products, and many people do need or want help implementing them. The Age of Innovation – A New Approach to Financial Advising As his financial planning continues its evolution towards getting paid for advice, Marcio is among a new wave of advisors supporting a different model – building a business that advocates the delivery of financial planning advice for a fee. Given the unique needs for Marcio to operate under this monthly retainer business model (obtaining CRM for workflows, payment mechanisms, oversight software, etc.), organizations are collaborating to help young advisors with tools, templates and access to technology to help support new models. The XY Planning Network  is a prime example of an original model. XY Planning Network’s model contains a convenient month-to-month payment structure and a recurring revenue model. This allows advisors to grow their business and increase their income over time by developing a base of clients who pay an ongoing fee for advice. Michael Kitces, partner at Pinnacle Advisory Group and founder of Kitces Report, along with fellow financial advisor, Alan Moore, created XY Planning Network to support fee-only CFPs who use the retainer model. So far, more than 35 firms have joined and the network continues to grow, with 72 current members. For just $397 a month, financial firms receive marketing and technical support, low-cost compliance services, and coaching on business development. The primary goal of XY...

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Now—today—is a great time to find your niche and determine who you want to serve. Some people know just by looking at the existing client base while others look around their community.  Then there are some who will be helped based on the pure numbers of it all. One source that might help you narrow your market is CEG Worldwide and WealthEngine’s, The State of the Affluent 2014. The survey provides an in-depth look at the affluent and their characteristics. There is more than enough affluent in the United State for advisors to serve well, as the median net worth of families in this group is $1,864,100 with a median annual income of $163,200. If you think targeting the affluent might be for you—or if you’re looking to join the affluent club—then read on as this is the first of three posts to analyze The State of the Affluent 2014. How Wealth is Held It may not be the value, or even what a client does that you focus on as a financial advisor, but rather, what the client owns. CEG Worldwide analyzed the debt held by the 10th percentile from the Federal Reserve Survey of Consumer Finance in 2010 and found these individuals own a mortgage 58% of the time with a median value of $216,500.  Eighteen percent of the time, they also own a mortgage on a second residence with debt valued at $195,000. The third largest area of debt comes from credit cards and installment loans – primarily car loans and credit cards ranging from $5,000 to $17,700 respectively. These values may not represent much to the overall wealth of the individual, but they do represent an area that individuals could use help with. As a coach and consultant to financial advisors, I urge planners to look at other ways to serve individuals. In this case, you can benefit the individual by accumulating debt wisely. The second area of what the affluent own is based on assets. As you would expect, 97% own a primary residence and 51% also own a secondary residence. Even more interesting is that 47% have ownership in a business and 28% have ownership in commercial property. The last category of assets that is held by the affluent is the area of investment assets. This is what primary financial advisors focus on when working with clients. Investable assets hold a median value of about $1,400,000. Retirement accounts are held by 88% of the affluent and median values are around $413,000. The second greatest value is in pooled investments – such as mutual funds, while the third and fourth investments are bonds and...

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As financial advisors, dealing with predictions ultimately leads to errors or, even worse, disaster.  But rather than grapple with all of the decisions that need to be made, such as the future of the economy, stock market, health or longevity, there is a simpler way of dealing with uncertainty—focus on the magnitude of the occurrence not on the probability. To deal with outcomes, financial advisors have been fed a trove of statistics as to why they should invest in an asset allocation of stocks and bonds or whether or not to buy long-term care insurance or self-insure. But these concepts have missed a significant point.  It is not the probability of something occurring, but the magnitude of that occurrence happening that is so important about planning. What do I mean? This post will explain as I dive into how you as a financial advisor and business owner can live with uncertainty as well as help your clients plan for the unknown. Embracing Uncertainty Let’s look at an example. Having life insurance on the sole breadwinner is not a bad idea. Of course, this person may be healthy and survive until he is 90. But the benefits to his family of having insurance are insurmountable if something unexpected were to happen to the breadwinner. A friend of my wife’s family survived the unexpected death of her husband because of life insurance. When the breadwinner passed, he left his wife and four kids. Thanks to his life insurance, the family was able to stay in their house, pay for the wife to go back to school and live like they had before the death without too much sacrifice. The concept of how to thrive in uncertain times is highlighted in Nassim Nicholas Taleb’s book Antifragile: Things That Gain From Disorder as well as in his article “Learning to Love Volatility”, which appeared in The Wall Street Journal. Mr. Taleb is also the author of Fooled by Randomness and The Black Swan, which also focus on making decisions in uncertain times. What cultivating antifragility does, Taleb says, is enable us to minimize the potential harm from negative “black swans” (large events that are both unexpected and highly consequential), while capturing the benefits of positive ones. As in past posts on www.auminabox.com, let’s look at an analogy from nature and how wildlife has thrived amidst uncertainty. The research article “Flowers help bees cope with uncertainty: signal detection and the function of floral complexity” highlights how flowers have adapted to thrive in a world of the unknown. The article proposes that flowers thrive by enticing pollinators through smell, feel, taste and sight. Flowers have...

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