As consumers we are constantly asking ourselves if the value of a particular product or service warrants its cost. Some products and services are relatively easy to quantify and others much more difficult to assess.
When considering the engagement of a wealth management firm, how do you determine if the value of an advisor justifies the cost – or if you are better off just handling your own finances?
Until recently, the answer to this question was not always clear. However, in 2013, Morningstar, an independent investment research organization, published a groundbreaking analysis in a white paper entitled Alpha, Beta, and Now…Gamma. The report’s findings? Advisors can add additional income to investor portfolios by helping their clients make better financial decisions in five key areas. The Morningstar study quantified this value at a 29% increase in retirement income, or the equivalent of generating 1.82% of additional return annually.
What may be surprising to some is that the selection of investments is only a portion of the overall value derived from advisors. The five key areas discussed in the Morningstar study are asset allocation, withdrawal strategy, tax efficiency, product selection, and liability investing (or investing toward a specific goal).
By owning a number of different assets that are not highly correlated, investors can reduce risk substantially without dramatically lowering returns. Long thought to be the only meaningful lever of investment return, studies now show asset selection as only one determinant of total portfolio return. The assets used in the Morningstar study included U.S. stocks and bonds as well as foreign stocks and bonds.
In concert with asset allocation, tax efficiency is the proper positioning of assets. For example, it generally makes sense to place high income-producing assets, such a corporate bonds (that pay taxable dividends and will be taxed at ordinary income rates), into IRAs or retirement plans. More efficient assets, such as stocks or real estate (taxed at potentially lower capital gains rates), are placed into taxable accounts.
The utilization of an asset or strategy that guarantees a series of principal payments regardless of how long one lives. In the Morningstar analysis, an immediate annuity was used for a small portion of the overall portfolio. This approach serves to remove the risk of outliving your assets – as payments from the annuity are guaranteed by the insurance company. Other means to accomplish this end could include a ladder of zero coupon bonds that would mature every year for a period well beyond one’s life expectancy.
Dynamic Withdrawal Approach
Historically, people take a set percentage or a dollar amount of income from a portfolio every year. Morningstar used a dynamic approach that adjusted the annual distribution based on the amount of money left in the portfolio and the individual’s life expectancy.
This strategy is the focus on achieving financial goals, including retirement, education, or the purchase of a property, to name a few. If your portfolio temporarily drops 10% in value due to a stock market swoon, how does this impact a goal that is 10 years away? By concentrating on the objective, investors are less likely to make rash judgments by watching their portfolios on a daily basis. Conversely, if you have a very short-term goal, market risk should certainly be taken into consideration.
Morningstar has published a very beneficial report that has been long overdue. As we’ve learned, in order to accurately evaluate the value of an investment management firm, consumers and advisors must better understand the factors that influence financial success.
Mark McClanahan, CFP®, is a Managing Director at RGT Wealth Advisors.
Long gone are the days when identity theft was confined to a poorly crafted email from a Nigerian prince offering you riches. Today, your sensitive information is at risk every time you swipe your credit card, access public Wi-Fi, file a tax return, or entrust your data to a third party. There is no perfect defense against identity theft, but like getting a flu shot or buckling your seat belt, you can still reduce your exposure by being proactive.
Javelin Strategy & Research reports that approximately 13 million people a year are victims of identity theft. Fortunately, there are many protective tools and strategies available to consumers. Below are a number of proven methods to protect you from fraud.
- Strengthen your password anywhere data are stored (phones, tablets, PCs, etc.) and take advantage of two-factor authentication whenever possible. An example of two-factor authentication is a log-in process that requires you to enter: 1) your alpha-numeric-symbolic password, plus 2) a unique code that is texted to your phone.
- Monitor bank account and credit card activity continually, as early detection is critical. Opt-in to any alerts they provide as a heads up that something may be afoul.
- Shred any sensitive documents rather than discard them in the trash. When you get tired of shredding, convert eligible sensitive correspondence to paperless notification.
- Install security software on your electronic devices.
- Be particularly sensitive to what you access while on public Wi-Fi.
- Scrutinize anyone requesting personal information.
- Review credit reports from each of the three credit bureaus. A free report is available from each bureau annually, so request one from a different bureau every four months at www.annualcreditreport.com.
- If available, request and use a smart credit card, as the security chip is more difficult to counterfeit and the use of the card requires a unique PIN.
- Utilize a credit monitoring service. These are generally designed to promptly alert the consumer when someone attempts to use their personal information in a suspicious manner. This includes misuse of your name, Social Security number, address, date of birth, etc. For a nominal cost, these organizations provide near real-time detection and a dedicated response team. Each service is distinctive, but LifeLock® (https://secure.lifelock.com/enrollment) and Identity Guard® (http://www.identityguard.com/compare-plans/) are leading providers.
- Consider opting out of unsolicited credit card and insurance offers at www.optoutprescreen.com.
- Have a cybersecurity audit. Depending on your carrier, some high-end insurance companies have services that can conduct a security assessment of your home network and computing devices. Certain services include an analysis of your social footprint to determine what personal information exists online – an area in which children can be particularly vulnerable.
- Consider restricting your credit profile with the credit bureaus. The two types of restrictions are a fraud alert and a credit freeze (aka security freeze). These restrictions are the best defense against a fraudulent account or credit line being opened in your name. Understand that each defense comes with some inconvenience when trying to establish future accounts or obtain credit. Alerts and freezes should absolutely be deployed if someone’s data has already been compromised.
Unfortunately, you can exceptionally enhance your safeguards and still be victimized by unforeseen attacks. Knowing how to respond, in the event of a breach, is extremely important. The Federal Trade Commission has a comprehensive guide entitled “Taking Charge: What to Do if Your Identity Is Stolen” (https://www.consumer.ftc.gov/articles/pdf-0009-taking-charge.pdf). It provides detailed advice and information on actions you can take based on the type of fraud that occurred.
Credit Bureau Contact Information
Frank Fairbanks, CFP®, CPA, is a Director of Financial Planning at RGT Wealth Advisors in Dallas, Texas. You can reach him at firstname.lastname@example.org.