Investing bonus

You’ve heard it before and I hope that you have seriously considered it. Investor success is impacted more by behavior than it is “technical know-how”. The 2014 Dalbar report shows that over the last 20 years the average investor earns 5.0% compared to the S&P500 return of 9.2%. The difference is completely attributable to investor behavior. For the record, the Dalbar report (not a quick read) can be found here. In February of last year an interesting 4-page paper “How Biases Affect Investor Behaviour” was published in the European Financial Review. Click here for the paper. The paper describes several common behavioral biases and suggests ways to mitigate the impact. The biases covered in the article (pretty quick read) are representativeness, regret aversion, disposition effect, familiarity bias, worry, anchoring, self-attribution bias and trend-chasing...

Fiducaries vs. Financial Product Salesperson (8/10/2010)

Follow the Money It’s important to know how your advisor gets compensated because it impacts their behavior: so follow the money! Two ways for a financial advisor to get paid: 1) Commissions from the products they sell you, or from security trades they make for you or 2) A percentage fee charged on the assets under management  – called “fee-only advisor”. The problem with commissions is they influence advisor loyalty toward their boss or to the products they sell, rather than to you.   It’s not an indictment of the person receiving the commissions.  Their intentions are probably good, but all things being equal why deal with the possibility that their judgment could be impacted?  Often hidden fees and penalties are present in this environment as well as we point out in an example below. The only investment professionals held to a fiduciary level of responsibility are Registered Investment Advisors (RIA) often called fee-only advisors. Lynn O’Shaughnessy wrote a wonderful article, “Financial advice better from fiduciary than broker” on this important topic. Common Mistakes 1) Using a commission-based advisor (broker) and not demanding (in a nice way)complete disclosure of all fees.    Be specific and get it in writing. 2) Comparing expenses of a fiduciary RIA vs. a broker before getting a complete disclosure of the broker’s fees.    You may mistakenly assume the RIA is more expensive since they fully disclose.   Usually RIA’s are competitive, and often provide superior service for the same or less cost. (We know of a recent situation where an RIA was charging an initial one-time financial planning fee of $2,000 with ongoing planning at no...

401(k) – How many fund choices in my plan? (7/20/2010)

Myth: Choice is Good inside a 401(k) Plan (see Tyranny of Choice article) Americans love freedom and choice! So isn’t it good to have many fund choices in 401(k) plans? To answer that question, we have to address diversification. Diversification: The Employee Retirement Income Security Act (ERISA), the Uniform Prudent Investor Act (UPIA) and the Restatement 3rd of Trusts (Prudent Investor Rule) all agree that the key to long term investment success is broad diversification of risk. Therefore as a plan overseer, one of your most important duties is to increase the probability that each participant has maximum diversification in their account. If you want to know more about why diversification is so critical, please contact us. Too many funds choices is bad because it takes away from diversification. What’s “too many”? See common mistakes, next section below. Common Mistakes 1) Tyranny of Choice: If your plan participants invest in more than one fund in the same asset class – they unknowingly concentrate their assets, causing less diversification, more volatility which hurts their long term returns. This problem occurs most often in the large cap space. Here’s a great article on this problem, “The Tyranny of Choice.” 2) Bundled Plans: Often a bundled plan of funds – one fund family – will share their “best investment ideas” among the funds. So you will find the same stock in many different funds and participants’ assets become concentrated in certain individual stocks. Again, this lowers diversification, increases volatility and hurts long term returns. 3) Retail mutual funds: Often retail mutual funds have the problem of style drift or not investing as...

Investing 101: Discipline & Diversification (7/13/2010)

New, Practical & Brief Newsletter One of these newsletters could save you from making a big mistake. This is basic and “ready to act on” advice for those serious about making smart choices. By Luck or On Purpose? We want to help you grow your wealth. To prove that, we are willing to show you how to implement these ideas on your own. If you can invest with discipline and diversification over long periods of time, your returns will be higher than most everyone else. Your success will be purposeful; the few that exceed your results were lucky. Luck or on purpose? Your choice! Discipline: 1) Stay in the market, 2) stick to your strategy long term and 3) manage other aspects of your finances so that your portfolio can grow undisturbed. Diversification: Own a little bit of everything using low expense ratio funds. To accomplish this we use Dimensional Fund Advisors (DFA) which is available only to select advisors. The next best approach is using Vanguard index funds as your portfolio building blocks. We are willing to share our Vanguard portfolio designs, contact us. Discipline and diversification are fundamentally sound and can be found in lofty documents like the Uniform Prudent Investor Act (UPIA) and Restatement 3rd of Trusts (Prudent Investor Rule). There are many great articles on these concepts, click here for one of our favorites. These complex concepts have been presented briefly. Not convinced; need more explanation? We would happy to help, just contact us. Common Mistakes Typically mistakes can be traced to, you guessed it, poor discipline and diversification. 1) Poor Discipline. Moving in and...

O’Reilly Wealth Advisors Inaugural Prudent 401(k) Fiduciary Newsletter

O’Reilly Wealth Advisors Inaugural Prudent 401(k) Fiduciary Newsletter Greetings! Welcome to our inaugural issue! In these newsletters, we will expose the myths about 401(k) Plans. Does your 401(k) Plan have an ERISA Section 3(38) fiduciary? In our first article, you’ll learn more about Plan Sponsors delegating investment decisions to an ERISA 3(38) fiduciary advisor. You might want to click on the article, “Prudent Fiduciary Part 1”, to the right, and come back to this introduction once you’ve read the first article. What are the ERISA 3(38)-advised plan benefits? Complete fee transparency Far less fiduciary liability on plan overseers Much higher quality investment vehicles Advisor-managed portfolios Built-in checks and balances due to the independence of the team members. No mutual fund 12b-1 fee-sharing (and the resulting conflicts-of-interest & lack of transparency) The most significant improvements available to be made to 401(k) plans cannot be made without moving to an ERISA Section 3(38)-advised plan. At the end of this introduction we reveal how to find out if you have a 3(38)-advised plan. (It is highly unlikely.) Why are there so few 3(38)-advised plans? Because mainstream providers are making plenty of money without having to take on the increased fiduciary responsibility. Bundled 401(k) plans that dominate the 401(k) market have fewer and in some cases NO checks and balances. In our 3(38)-advised plans – O’Reilly Wealth Advisors is an independent 3(21) fiduciary, Advisors Access is an independent 3(38) fiduciary, McCready & Keene is an independent TPA/record-keeper that will not accept 12b-1 revenue streams and TD Ameritrade is an independent custodian with strict fiduciary requirements. Checks & balances are built into our plans....