"August can be a very tricky month. Be Careful."

As I drove to meet my son for lunch on Monday, a Wall Street analyst on CNBC made the above comment, which I heard while listening on Sirius radio.

Is this a realistic comment? Is this the kind of advice you want from your financial advisor? Is it really helpful?

Do you want planning and recommendations for the long term?  Or do you want investment advice focused only on the next month?

Do you want a financial advisor who will advise you with your investments, as well as assist with your estate planning, retirement planning and reducing your taxes?  Or do you want predictions and guesses?

Do you want a financial advisor that utilizes a rational investment philosophy that is understandable and provides you with comfort, peace of mind and security? Or do you want an advisor that tries to time the market with unproven forecasts?

We do not know what August will bring. We don't know what will happen in any future month. Do you?

We do know that we can provide you with comprehensive financial guidance and advice that will be valuable to you and your family. We do know that it will be more valuable years from now than a prediction for the month of August, 2013. 

Honesty

At dinner Friday night at a crowded Bella Piatti restaurant in Birmingham, the most striking part of the evening was the honesty of our server.

When ordering appetizers, our server was very clear which items he recommended and a few to avoid. He provided advice and was helpful. When he returned with the appetizers, they were all wonderful and we were pleased with his guidance.

After a while, it was time to order our entrees. Again, when asked about certain dishes, his verbal and facial responses made it clear what his recommendations were. We had quickly developed trust in him. His clear recommendations were so much more helpful than the usual "everything is good" reply. He guided us in the right direction, as all 5 people at the table enjoyed their main courses.

As the evening continued to desserts, he again advised us which items were very good and which are not his preferences. Being a huge fan of cannoli's, I disregarded his advice against getting the "deconstructed cannoli." When it arrived, we enjoyed it (shared amongst the group), but he was right. It was good, but not great.

During the evening and on the way home, we discussed how much we appreciated his recommendations and advice. One person asked why he was so forthright, much more so than at most restaurant experiences. My thought was that the more we enjoyed our meal, the more likely we are to return. Every business desires repeat business and he was doing his part to ensure this.

As Billy Joel's song "Honesty" says...

     "Honesty is such a lonely word
      Everyone is so untrue
      Honesty is hardly ever heard
      And mostly what I need from you"

As a financial advisor, we are morally and legally obligated to act in our clients' best interest. This is not the standard for all investment advisors and brokers. We are very transparent about how we are paid. We are fee-only financial advisors. We do not get paid commissions from any of the investments that we recommend. Unlike brokers at major financial institutions, where fees may be hidden or not fully disclosed, we are open and honest about our fee schedule.

The server of our delicious meal gave us the best opportunity to have a great experience at the restaurant. Our interests as a wealth management firm are fully aligned with our clients so they have the best opportunity to have a positive long term investment experience.

At our firm, our fees are based on what we manage for a client, not on what fund or product we sell (as we do not sell anything). If your investments increase, we both do better. If your investments decline, we both feel the pain. Doesn't that make sense?

Isn't honesty and clarity the best way to build a relationship and do business?

A Philosophy You Can Stick With

"The important thing about a philosophy is that you have one you can stick with." David Booth, founder and chairman of Dimensional Fund Advisors (DFA).

  

Prior to founding this firm in 2003 after the tech bubble crash, I spent many years researching how best to provide investment advice. How would we be different? How could we provide a better experience for our future clients than they were experiencing with their existing financial advisors or by investing on their own.

I read extensively. I went to conferences. I read more. And more. I attended my second AICPA Personal Financial Planning conference, in Philadelphia. I went from exhibitor to exhibitor and talked to many firms. And then, it happened. I got the book that would change my business life and the lives of my clients. It was my "aha" moment.

On the Friday afternoon train ride after the conference ended, I started reading "The Only Guide to a Winning Investment Strategy You'll Ever Need," by Larry Swedroe of The BAMAlliance . I could not put it down. I didn't want to put it down. And I didn't. I read it that night and throughout the weekend. I had found an investment philosophy that we could stick to. Over a decade later, I believe in it more every day.

Most people view investing and the stock market in some form of trying to make accurate predictions or forecasts. They think:

•      Is Ford a good buy now? Great, then I'll buy it. But what if it isn't a good time? How do you know?
•      Is it safe to invest now, since the economy seems to be recovering? Great, in which case I'm going to move $XXX,XXX from cash into stocks. But what if the market has already made a big move? How do you know the right time?
•      A few years ago everyone thought Apple was a great company and could do no wrong. The stock price was soaring. Onwards to $700 per share, until suddenly things changed and now it trades in the $400s. How? Shouldn't someone have been able to predict this? 

We take a different approach. One that is rational, understandable, consistent and provides our clients with peace of mind.

• We do not have a crystal ball. We don't make forecasts and readily accept that we cannot see the future (just like Warren Buffet). Doesn't this make sense?

• We don't believe that active mutual fund managers can consistently beat their respective benchmarks over a long term period. And even if they could, can they be identified well in advance, and consistently? We don't think so.

• We believe in using mutual funds with very low costs. Focus on what you can control.

• We believe in holding mutual funds that each own a group of stocks (say US small value or International Value) that most of the time will outperform actively managed mutual funds (where the manager is trying to predict which are the best stocks to own). And we have tons of academic data to support this.

• We spend a lot of time talking with our clients. We educate our clients about our philosophy. We want them to be prepared for bad markets, as they occur every 3-5 years, on average.

• We emphasize international investments and owning small company and value company stocks. Why? Because they provide better diversification and greater expected (and historical) returns than just owning US large company stocks (which is what most people own). And we have lots of data to support this too.

Having a philosophy that we believe in passionately enables us to provide our clients with a better investment experience.  It enables us, and them, to be more disciplined and adhere to their financial plan. We are fee- only financial advisors. This enables us to be independent and always act in our clients' best interest.

There is much more to our philosophy, but I will save that for future blog posts or personal conversations.

Sticking with our philosophy has allowed our clients to feel comfortable and secure. It allows them to sleep well...and isn't that what is most important?

And even though we are responsible for millions of dollars of our clients' money, because we have a solid philosophy we believe in and stick to, we also sleep well at night. And that is comforting also.

Learning, Connections and Dinner

I read a lot. I consume information from many sources (newspapers and books, both in print and electronic, as well as via Twitter). I have always been this way, just the sources and methods have changed. Since I was a teenager working at my local public library, I have read the Wall Street Journal every business day.

An essay I read on Monday has stuck in my head. David Butler of  Dimensional Fund Advisors wrote about the "Currents of Success" that flow through great financial advisor firms. He wrote that one aspect of successful financial advisor firms is "intellectual curiosity." He wrote that "building a great firm requires genuine intellectual curiosity and openness to new ideas..."

Which leads me to dinner last night. I attended an event sponsored by Lynne Golodner, of  Your People, LLC  a Southfield Michigan public relations, marketing and business development firm. I joined a group of 10 other business owners and Lynne, to share thoughts and ideas about our businesses and learn from her.

The food was delicious (glad I finally got to go to Cafe Via in Birmingham). The conversation was good. Interesting. Thought provoking. Questions were direct and challenging, but in a respectful manner.

As I drove home, my mind connected the DFA essay and the dinner together. Why had I attended? To learn more, as I always learn more by attending a conference, seminar or hearing a speaker. For the same reason that I traveled to Florida to spend a day with Bob Burg and many other speakers in May, 2012. For the reason I spent 3 days with  Michael Port in 2011 outside of Philadelphia. Why I spent years working with John Bowen and I now participate in the Strategic Coach program. For the same reason I participate in a peer group phone call with my BAMAlliance financial advisor colleagues nationally, every two weeks and attend many BAMAlliance seminars throughout the year.

Attending events or programs like these can be expensive, both in time and money. But if viewed as an investment, as a way to grow, to learn and improve, and possibly to build new relationships, then the investment is almost always worthwhile. There is always more to learn to better serve and advise my clients, as well as to grow intellectually.

Each time I attend an event or conference, there are new ideas to implement, things to change and new people that I've met. The challenge is to implement and develop the personal connections. The challenge is to prioritize to adopt new habits. Lynne challenged us to blog more. Share our ideas. Write in a more personal manner. I know if I blog more there will be benefits.

Will I blog more regularly in the future? If I do, then the evening with Lynne will be even more worthwhile.

Detroit Bankruptcy and Important Lessons

The bankruptcy filing by the City of Detroit is the culmination of decades of decline. As a wealth management firm based in suburban Detroit, with clients in metro Detroit and nationwide, we hope this difficult step is the beginning of a process that will have long term benefits. What can be learned from it?

Pensions

For the retirees of the City, the future of their retirement benefits is now unknown. These benefits will be subject to litigation and the outcome of the bankruptcy process. As I'm not an attorney, I can't provide a legal opinion. From a financial standpoint, as these are segregated pension assets, it would be reasonable for future benefits to be actuarially recalculated based on the existing assets, not practically eliminated. However, that is far from what may occur. (See my disclosure below)

Nationally, the pension benefit issue could have dramatic implications. If the bankruptcy courts determine that these pension benefits can be drastically reduced, it could set a wide-ranging precedent for other municipalities throughout the country. Thus, this is a major legal issue.

A national problem

This should be a wake-up call for voters/citizens and leaders of other organizations (the Federal government, state governments and other municipalities, companies and non-profits that provide retirement and health care benefits). Many entities of all types have huge unfunded pension obligations and are not taking steps to reduce them. They continue to kick these liabilities down the road. Leaders from Washington to local governments need to be realistic about their investment assumptions and figure out how to balance their budgets. For more on this topic, see the excellent article, "Detroit, tip of pension liability iceberg" by the Guardian's financial journalist Heidi Moore, http://t.co/0pcM04URGi

This is an urgent need. Politicians can no longer put off resolving tough issues. We as citizens need to realize that if we are not going to pay more in taxes, then our governments must reduce the benefits and services that we receive. Washington needs to take steps such as addressing social security benefits (reducing them for the wealthiest Americans?). Congress has to find a way to make logical but difficult political decisions. The pain of these choices must be shared. It is time to close post offices in many remote areas and reduce Saturday mail delivery. We cannot continue to have our cake and eat it too.

Small actions today can result in pay significant long term benefits. Change can be difficult and unwanted, but change can also eventually be good. If these issues are not addressed, there will be future crises and bankruptcies like the City of Detroit's, in other parts of the country.

Municipal bond investors

The action by Detroit may have negative ramifications for municipal bonds throughout the entire State of Michigan, and possibly beyond. The lesson: muni bond investors should invest in a much more diversified manner, not just primarily in one state. All too often, residents of one state concentrate their muni bond holdings in their state of residence, for the state tax exemption.

We have recommended to our clients to invest in municipal bonds across the country, so they are diversified by states and localities, not just in their state of residence. Detroit's bankruptcy shows that municipal bankruptcies are possible, and depending on how the courts handle the pension liability issue, the risk of other bankruptcies may be more likely in the future.

As with so many aspects of investing, diversification is vital. Broadly diversifying a portfolio of municipal bonds across states is even more important now. Will investors review their portfolio and make the needed changes?



Disclosure: My stepfather is a City of Detroit retiree and recipient of Detroit pension benefits.

Federal Reserve actions: A "Q & A" to explain recent events

Our goal is to provide our clients with comfort and security.  To achieve this, providing clarity and understandable explanations about financial matters is important.

What is the mission of the Federal Reserve?

The Federal Reserve has a legal dual mandate: to foster maximum employment and price stability (which they have defined as keeping inflation around 2% annually). The Federal Reserve feels inflation is currently running below 2% and longer term inflation expectations remain stable. The Fed wants to bring the unemployment rate to at least below 6.5%, from its current level of around 7.5%.

What occurred at the Fed meeting on June 19th?

Last Wednesday, the Federal Reserve held their regular meeting, which concluded with their written press release regarding interest rates and the economy. Fed Chairman Ben Bernanke then held a press conference and further elaborated on Fed policy.

The Fed's statement following their June 19th meeting did not change significantly from their May meeting. To meet the above goals, the Fed plans to continue their current asset purchase program (referred to as QE, for quantitative easing). They will continue to purchase $40 billion per month of mortgage securities and longer term US Treasury securities of $45 billion per month. The Fed feels these steps are needed to maintain downward pressure on long term interest rates, support mortgage markets and "make broader financial conditions more accommodative."

How have interest rates been changing?

Interest rates, as defined by the 10 year US Treasury note, have risen dramatically over the past year and since the Fed meeting in particular. The 10 year rate was around 1.6-1.7%% during June-September 2012.  In January 2013, it had risen to around 2.0%. From June 3 to June 24, 2013, the rate rose from 2.13% to 2.5-2.6%.

What is our view of future interest rates?

While we do not have a crystal ball and do not make interest rate predictions, a few things are clear. Interest rates have been historically low due to the long time it has taken for the economy to recover. We think the bond market may have over-reacted to Bernanke's comments.  There was initial fears that the Fed was going to influence long term rates to rise higher and sooner than many on Wall Street had anticipated prior to June 19th.

We think short term interest rates will be still be very low for the next year, and maybe longer, based on the Fed's comments. The vast majority of Fed governors expect short term rates to continue very low until 2015 or 2016. The Fed has a harder time "controlling" longer term interest rates, such as mortgage rates and the 10 and 30 year US bonds. The Fed's intent is to hold these rates low until either the unemployment rate has declined to 6.5%, or even lower, and/or inflation expectations are greater than 2%.

What do we think of the recent rise in longer term interest rates?

As shown above, rates have been rising for a year, though not in a straight line. The rise did not begin just in the past few weeks. As many economic indicators show, the economy has improved from 2008-2009 levels (such as car sales, housing starts and sales, housing values, employment growth). We think the rise in interest rates is a gradual process that is good and healthy for the economy, as long as the increase is not too fast or high. We do not anticipate this occurring.

What actions should you take or consider, based on these events?

As interest rates rise, the prices of bonds and bond funds will drop in value. For nearly all of our individual clients, we have recommended to hold individual bonds for this reason. While a bond's price may temporarily decline, it will not be a permanent loss upon the bond's maturity. If you hold a bond fund, you will incur a permanent loss in value as interest rates rise. If you own a bond fund or know someone who does, particularly intermediate to long-term funds, please contact us to review whether a change in your portfolio is in your best interest.

If you have not refinanced in the past few years, and you can qualify, you should begin the process immediately.  Though mortgage rates have risen, they are still historically low and refinancing still makes tremendous sense.

Given the very low historical interest rate levels that currently exist, we do not recommend paying additional principal on mortgages and other low interest rate debt. We think debt at these interest rate levels will be viewed very positively in the next 3, 5 and 10 years. So, it generally does not make sense to pre-pay these debts at this time.

What is the impact on the stock market of the recent events?

The stock market in the US has been quite strong for the first 6 months of 2013, up over  10%. We think volatility will increase, as Wall Street tries to understand and predict future Fed actions. Wall Street will also have additional anxiety over the naming of the next Federal Reserve Chairman, which will play out through the remainder of 2013.

We continue to be long term investors and have a long term positive view of companies and countries' general resilience and ability to adapt and innovate. It is not possible to accurately time the stock market. Thus, we will continue to adhere to our core investment principles, which are not affected by the rise in interest rate increases.

Please contact us if you would like to discuss these matters further.

The Value of an Expert, for Planting and Investing

What a success. Or so I thought.

 Last summer, I planted a number of Canna Australia plants on my front porch in two large pots. I watered them diligently. As the summer was extraordinarily hot, many days I watered them before work and again in the evening. As I was enjoying their progress and growth it was well worth the effort.

I was thrilled with the results. When I purchased them, the little marker said they would grow to 4 – 6 feet and a colorful flower would develop at the very top. And grow they did, as both sets seemed to be my own “Jack and the Beanstalk.” Their deep purple stalks and leaves reached well over 6 feet tall. And near the end of the summer, a few beautiful orange flowers appeared from some of the shoots of the plants. A glorious success!

This weekend, I went to purchase the same plants for the same pots. I told the "salesperson" at the gardening store about my success of last year. She asked if the plant flowered all summer, as she told me this was the real highlight of Canna Australias. “No,” I told the woman, as mine only flowered a few times toward the end of the season. She was quickly going from a salesperson to a "plant expert." She asked a series of questions, mostly about how much sunlight the plants received.

I learned the lesson of receiving good advice from a knowledgeable expert. I thought I had done well. However, I was like many investors who think he or she has done well, but do not really know how well they have done.

• Most investors do not track and monitor their performance against proper benchmarks over a long period of time. Your portfolio may have gone up, but could it have done better with the assistance of a skilled advisor?
• Could an advisor have reduced your costs or minimized your taxes by selecting tax efficient stock funds?
• With rebalancing, could your portfolio have done the same or better, with less risk (which is even better)?
• Would you have had more money or a more successful investment experience as a result?

My plants needed to be placed in full sunlight. Due to trees in my front yard and the porch which extends above the plants, they did not receive adequate sunlight last summer. Thus, while the plants grew well, they did not blossom and reach their full potential.

With good advice, I purchased the plants and placed them in my backyard over the weekend, where they will receive full sunlight. They should grow even better and orange flowers should bloom throughout the entire summer, not just in August.

This morning, thanks to a caring plant expert, the first orange flower blossomed. An expert advisor can provide many benefits.