If the Pros Can't Win, How Will You?

We provide many services to our clients. One of them is investment management. Our philosophy for implementing our investment strategy is a clear differentiator from most other financial advisors or investment professionals.


There are two main investment implementation strategies: active management or passive management. In active management, you believe that you can identify, in advance, an investment manager, who can consistently outperform his benchmark for an extended period of time. Academic research shows that this is extremely difficult to do, over a long period of time, for all asset classes, both domestically and internationally.


We believe in a passive approach, which means that we will retain an investment advisor who will purchase stocks based on their respective asset class. Academic research shows that over various time periods, this strategy outperforms “active” management, particularly when costs such as trading and taxes are included in the analysis.


Further real world evidence of this is presented in Morningstar’s “Fund Times” weekly column. In this column, Morningstar reports fund management changes. In recent issues, they have described how Vanguard and SEI (a company that selects money managers, for the various funds they manage, under the SEI name) have made significant changes to some of their largest funds.


Why is this important? This shows that companies such as Vanguard and SEI, with all of their extensive resources and research, selected money managers for their funds a number of years ago, and have now determined that those decisions were poor. The fund managers they selected vastly underperformed their respective benchmarks. After enough years of underperformance, they needed to change managers. But how can they know that the new managers will outperform their benchmarks in the future? They can’t!

Every week, Morningstar reports the numerous changes of mutual fund managers. Sometimes good managers move to other funds. In that case, future investors in that fund may purchase these funds thinking current management built a good record. But that would not be the case. In other situations, changes are made because the managers underperformed. It is a continuous revolving door, without an ability to reliably predict future sucess.


In our strategy, this is not an issue. We purchase an asset class, a set of stocks within a given criteria, such as US small stocks. Academic research shows that this type of fund will outperform most active managers, over most years. Generally, the longer the time period, the more likely it is that a passive fund will outperform most active fund managers, in each asset class.

While these concepts may be new to non-clients of our firm, we welcome the opportunity to discuss this with you further.


We focus on the big picture, your goals and how to achieve them. We want to provide our clients with clarity and a good investment experience. This important implementation aspect is critical to the long term success of our investment philosophy.

Tax & Estate Planning Update

As a result of Congressional inaction since late 2009, the country faces continued uncertainty regarding future individual income and estate tax rates. The purpose of this post is to briefly explain what is known and unknown, and provide an analysis of how these issues may be resolved.

Income tax rates:

At the end of 2010, the “Bush tax cuts" expire (enacted earlier in the decade), and individual income tax rates would increase at each level. For top taxpayers, the rate would raise from 35% to 39.6%. For lower brackets, without any congressional action, rates would increase a few percent, respectively. The rates for dividends would increase significantly, from 15% to ordinary income tax rates (so as high as 39.6%, for taxpayers in the top bracket). For long term capital gains, the rate would increase from the current 15% to 20%.

Congress will not be addressing this issue until after the November election, and based on most estimates, probably not pass any legislation on this matter until just before Christmas. At a conference that we attended last week, the thought from a top Washington political strategist was that Congress would most likely extend the “Bush tax rates" across the board, for all taxpayers. Thus, income tax rates in 2011 would remain at current levels. This analysis is based on anticipated results in the November election and pressure not to increase tax rates, as it would be a negative factor for the economy.

What we recommend to do now:

In most years, the tax strategy is to delay income and accelerate deductions. For 2010, we recommend the opposite, to accelerate income into 2010 and delay deductions into 2011. We advise this now, as there is no way to know when the tax rate issue will be resolved. It is pretty clear that rates will not be lower than they are now in 2011, particularly at the higher levels. If rates are to increase for 2011, it would likely be for only the top tax brackets.


Estate Tax:

The estate tax expired as of 12/31/09, so there is no estate tax in effect for 2010. For 2011, per current law, the estate tax rate would be 55% for a large estate, with only a $1,000,000 per person exemption.

There are no reasonable projections of when Congress will enact new legislation for the estate tax or at what tax rates. It is possible that this legislation will be enacted as part of the income tax legislation that is discussed above, and occur sometime between the November election and Christmas.

As a purely speculative guess, it would be reasonable for the estate tax to be re-enacted for 2011 at a top rate of 35-45%, with a personal exemption in the range of $3-5 million. However, there is no clear indication of this, or when Congress will address this matter.

If you have questions about any of these matters, or how they impact your personal situation, please contact us. If you have a significant issue, it would be important to consult with us, along with your estate planning attorney.

What we recommend that you do now:

As has been advocated throughout 2010, your estate plan should be reviewed if you are married, as the formulas that are the basis for marital allocations may be distorted, due to the lack of 2010 estate tax. If someone in your family is very sick, we recommend that you consult with a well-qualified estate planning attorney, as there are important steps that may be advantageous, even though there is no estate tax in 2010. While this may be emotionally difficult to do, it is important for your family.