Monthly Archives: September 2018

What Nick’s Reading | Why Your Financial Advisor Should Be Your Wrong Decision Watch Dog: Guarding Your Investments Against Emotional Influence

I was in Dallas last week attending Fidelity’s Inside Track conference, an educational event for Registered Investment Advisors (RIAs) who utilize Fidelity’s platform.

 

These conferences have top-tier technical specialists speaking on a variety of subject matter, which I love, but they also allow me to step away from the office and gain a different perspective on the advisory business and the value we provide to our clients.

 

While at the conference, I had the opportunity to network with others from successful advisory practices and listen to expert insight regarding today’s financial planning industry. This information prompted me to reflect on the unique value-add provided by top-notch financial advisors like ourselves. Despite what most people think, this value differentiator is not money management, financial planning, or even tax advice—though I do believe we add significant value to each of those areas.

 

Ron Carson (from the Carson Group) has said that “our job as advisors is to keep people from doing the wrong thing at the wrong time.” David Geller from JOYN put it another way, “Money is emotional. No matter how analytical you are, you can’t rationalize your way out of emotional concerns.”

 

Today, there is a growing concern in our industry regarding expense ratios and cost. So much of the world is debating over the effectiveness of passive versus active management, and passive managers are winning. They are seeing considerable inflows—primarily from retail accounts (the average investor’s accounts). What’s not part of the conversation, and should be, is how the major determinate of long-term investment success is not the difference between the 0.1% expense ratios on passive funds and the 0.75% expense ratios on active funds, but the timing and selection penalty that the average investor incurs when they make poor investment choices about when and what to buy and sell in the market. I like to refer to this loss as the “emotional gap.”

 

The below study produced by Dalbar illustrates the cost penalty incurred from investment expenses (2.9%) that reduce the investor’s net of fee returns compared to the market.* However, what’s an even greater and widely unbeknownst concern is the timing and selection penalty (6.7%). Again, I often like to refer to this as the “emotional investor penalty.”

*Refer to Vanguard’s blog for more details on the Dalbar study.

 

The stock market, funds, and fund owners

 

The Average Investor’s BIG BAD Decision: Behavioral Decision Making and Its Effect on Investment Returns 

 

It’s not unusual for investors to make one truly bad decision every few years. This decision can be something that seems harmless at the time, like feeling uncomfortable about the current market and deciding to wait it out.  We frequently observed this kind of emotional decision making in 2011 as many people suffered from post traumatic stress following the 2008 recession. They thought the market had run a huge amount from the bottom, which resulted in their preference to sit in cash, bonds, or an overall much more conservative allocation than they would have in otherwise normal times. Having cash in the bank provided reassurance, but what it did not provide was growth. As a result, the opportunity loss investors experienced from 2012 to 2018 was massive and is unlikely to be compensated for in future years.

 

The nearly 300% run in the S&P 500 in 2018 from the bottom in March of 2009, as well as the fact that we are now in the longest bull market in history, has elicited concern among a number of our clients who are worried about the market’s future.  I have talked to some clients who believe it makes sense to dump all of their international holdings. Others believe that bonds do not make any sense and we should simply be holding cash. Still, others see this bull market as never ending and have asked if we should be rotating all of their conservative fixed income positions to aggressive equities.  

 

Impact of Emotional Investing

 

The dilemma with the emotional influence on investment decisions is that it can feel subtle but have an outsized impact. For example, there is a general consensus among investors that:
• Trump and his tweets will cause the economy to tank
• Interest rates are going to go up (which, believe it or not, has been the consensus and been wrong for almost a decade as seen below)
• International equities should not be part of the portfolio due to recent poor performance

 

What all of these thoughts turn into is poor asset allocation and timing decisions—the “emotional gap.”

 

Forecasters Have Been Expecting Rates to Rise

 

One of the conference’s more intriguing data points was presented by Fidelity. They illustrated how investors tend to buy what is working and sell what is not. In light of this strategy, let’s take a look back at the 2009 market crash. As you may know, Fidelity is a giant in the 401(k) world. As such, they have a massive amount of data concerning how 401(k) plan participants are investing. According to Fidelity, at the peak of the market in 2007, baby boomer 401(k) participants who were not working with an advisor were allocating about 74% of every dollar contributed to equities.

 

At the bottom of the market in 2008, these same plan participants were only allocating 64% of every dollar contributed to equities—that’s a 10% decrease. Now, that may not sound like much, but the absolute best time to be purchasing stocks is near the bottom of the market. According to Fidelity, baby boomer plan participants that were working with advisors only saw a 1% decrease in equity allocation from before 2008 to the bottom of the market, while retail investors suffered a 10% decrease. In this case, the financial advisors were able to convince clients who were reacting emotionally to take a potentially large mistake and turn it into small ones. As a result, the advisors reduced the negative impact of emotional decision making and increased the long-term value of their clients’ investments. For a majority of client-advisor relationships, this is viewed as a success and is a common example of how proactive advisors can provide value to their clients through active consulting and custom financial planning.

 

Your financial advisor should work to remove emotion from your financial life and assist you in making prudent decisions based on complete information instead of gut-checks or the most recent news headlines. The industry is aware of this. For example, Vanguard, the original leader in low cost investing, has been hiring a record number of CFPs to assist in advising clients because they know having low cost investment options alone will not result in optimal long-term returns. Robo-investing mammoths such as Betterment and Personal Capital have been hiring advisors that investors can call and consult with before adjusting their portfolio. This service functions to help investors avoid emotional decision making that can significantly impact their financial future. Dimensional Fund Advisors (DFA) only sells their passive plus mutual funds that focus on five-factor beta based on modern portfolio theory to investors through advisors. They do this because they know that to keep clients from making irrational choices with their timing and asset allocation decisions, clients need a watchdog advisor.

 

Whether or not you’re concerned about the long-term optimization of your investments, it is always worth getting a second opinion about your future financial health. Contact us to schedule a meeting with a Willis Johnson & Associates professional today. 

 

 


nickNick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.

 


Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold through individually licensed and appointed agents in various jurisdictions. 

Financial Fact | Will You Optimize Your Employee Benefits Elections This Fall? Here’s What You Should Consider BEFORE Open Enrollment

Published: September 14, 2018

Open enrollment is fast approaching for many of Houston’s corporate professionals and executives.

 

Employee benefits are an often overlooked piece of a corporate professional’s total compensation. However, if optimized properly, the benefits one elects can make a drastic difference in their cash flow and help mitigate their potential financial risks.

 

Employees at many major energy companies can make elections on a wide range of coverage such as life insurance for themselves and their spouse, short and long-term disability, and more. Many of our clients work for companies like BMC, Shell, Chevron, and Chevron Phillips and will be required to make the benefit elections during the open enrollment periods listed below:
• Chevron and Chevron Phillips: October 15 through October 26, 2018
• Shell: October 10 through October 24, 2018
• BMC Software: October 30 through November 10, 2018

 

Optimizing Your Employee Benefits Election: What You Should Consider Before Your Open Enrollment Term

 

Our firm seeks to help employees optimize their coverage by assessing their actual needs based on a number of factors. Too often, we see corporate professionals and executives rely on a basic rule of thumb to determine how much coverage they should purchase. They inevitably find themselves either under or over-insured. We find that a majority of the clients we begin working with are over-insured and are unknowingly spending money on unnecessary coverage.

 

What do we assess to determine the right amount of coverage for each client?
• Income
• Asset base
• Current health status
• Family health history
• And more depending on their unique situation

 

It’s necessary to take an in-depth look at these factors of an employee’s life to determine an appropriate level of coverage for their dynamic financial journey. A proactive financial advisor will use this assessment to build out a comprehensive cash flow analysis that models various disability and premature death scenarios. These models closely reflect the proper level of coverage needed to ensure an individual is not paying excess premiums while continuing to protect their loved ones in the case of an unforeseen incident.

 

An employee’s benefits elections occur once annually, and the coverage they choose will determine their respective premium payments. Once an employee makes the election, they are locked into their benefits plan until the next year’s election period.

 

Analyzing the coverage you need is not something that should be put off until the last minute as it’s a decision that will affect your net and gross pay for the year ahead.

 

Short-Term and Long-Term Disability Insurance: The Cost of Employee Benefits and How to Determine the Value of Your Options

 

Short and Long-Term Disability Insurance

Some premiums, such as short-term disability insurance are relatively cheap. However, we often find that the corporate professionals and executives we begin working with have a large enough asset base to support their financial needs in the event they cannot work for a brief period of time.

Although long-term disability insurance is accompanied by more expensive premium payments, it’s something we strongly recommend purchasing for our clients that have a longer period of time before retirement.

 

Life Insurance

Many of Houston’s corporate professionals and executives are provided with life insurance coverage that covers one to three times their base salary for free by their employer. We often see clients purchase additional insurance through their employer for themselves, their spouse, and even their children. We always tell clients to bear in mind that life insurance should be used as income replacement in the event they pass early, not an investment. In other words, it should be viewed in terms of maintaining your household’s standard of living when you’re no longer around to provide the income to do so.

 

Ask yourself what level of financial support your family will need to cover your household’s expenses without your contributed income. Such expenses may include your mortgage, a child’s college costs, your spouse’s current and future retirement needs, and more.

 

Again, it’s important to note that by being over-insured, you are giving up after-tax money that could otherwise be invested, used to buy a new car, put children through college, make home improvements, set aside for a rainy day fund, etc.

 

These are only a few examples of the common coverage missteps we have observed among corporate professionals and executives who complete their benefits elections without seeking a second opinion. If you have questions about your coverage options and needs, please reach out to our firm to schedule a free cash flow consultation before your company’s election season begins.

 

Related Articles:

Financial Fact | What You Need to Know About Medicare BEFORE You Turn 65
Financial Fact | What Shell Retirees Need to Know About the NEW Shell Medicare Advantage PPO Plan
Thoughts From Willis | What it Means to Have a Proactive Versus a Reactive Advisor
Thoughts From Willis | Are You Ready for the Big Game? How to Avoid Financial Planning Risks and a Nail-Biting Finish

 

 


person1Robert (Bobby) Cope, M.S.

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Robert (Bobby) Cope joined Willis Johnson & Associates as a financial paraplanner in May of 2017. For Bobby, entering the financial planning profession allows him to not only assist the associate wealth managers of the firm in daily operations but more importantly assisting client’s in many other facets of their lives. Bobby graduated Summa Cum Laude from the University of Alabama Honors College in May of 2017.

 

 

He completed a dual degree program that awarded him an M.S. in Human Environmental Sciences, with a concentration in Family Financial Planning and Counseling, as well as a B.S. in Human Environmental Sciences, with a concentration in Consumer Sciences. At Alabama, Bobby was a member of Delta Kappa Epsilon social fraternity, as well as many other groups and honor societies on campus.


 

Willis Johnson & Associates is a registered investment advisor. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Insurance products and services are offered or sold thro

Market Update | The Markets (as of market close August 31, 2018)

The Markets (as of market close August 31, 2018)

Stocks enjoyed a record-setting month in August as several of the benchmark indexes reached new all-time highs during the month.

 

Of the benchmark indexes listed here, only the Global Dow lost value. Otherwise, indexes representing large caps, small caps, and tech stocks all posted noteworthy monthly gains. A strong employment situation, positive economic growth, and relatively stagnant inflation have contributed to investor confidence, despite ongoing global trade wars. Tech stocks soared in August, as the Nasdaq jumped almost 6.0% — its strongest August showing in 18 years. Following the Nasdaq was the Russell 2000, which gained over 4.0%. The large caps of both the Dow and S&P 500 also posted notable gains.

September 2018 Market Update

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

By the close of trading on August 31, the price of crude oil (WTI) was $69.90 per barrel, up from the July 31 price of $68.43 per barrel. The national average retail regular gasoline price was $2.827 per gallon on August 27, down from the July 30 selling price of $2.846 but $0.418 more than a year ago. The price of gold decreased by the end of August, closing at $1,206.90 on the last trading day of the month, down from… Click here to read the full article.

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