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The Top 5 Most Read Articles in my Investing Blog During 2015

29 Tuesday Dec 2015

Posted by wmosconi in asset allocation, bond market, bonds, Consumer Finance, Fed, Federal Reserve, finance, finance theory, financial advice, Financial Advisor, financial advisor fees, financial advisory fees, financial goals, financial markets, financial planning, financial services industry, Individual Investing, individual investors, interest rates, investing, investing advice, investing information, investing tips, investment advice, investment advisory fees, investments, passive investing, personal finance, portfolio, reasonable fees, reasonable fees for financial advisor, reasonable fees for investment advice, reasonable financial advisor fees, rebalancing, rebalancing investment portfolio, rising interest rate environment, rising interest rates, risk, risk tolerance, statistics, stock market, stock prices, stocks, Yellen

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asset allocation, bond market, bonds, Federal Reserve, finance, financial advisor fees, individual investors, interest rates, investing, investing advice, investing blogs, investing tips, investment costs, portfolio rebalancing, reasonable fees for financial advisor, reasonable fees for investing, rebalancing, rising interest rate environment, rising interest rates, stock market, stocks

The most popular articles read over the past year included some writings from a couple of years ago and were also on a myriad of topics. The listing of articles below represents the most frequent viewings working downward.

  1. Are Your Financial Advisor’s Fees Reasonable? Are You Actually Adding More Risk to Your Ability to Reach Your Long-Term Financial Goals? Here is a Unique Way to Look at What Clients Pay For.

 

This article has consistently drawn the most attention from readers of my investing blog. Individual investors have learned from me and many others that one of the most important components of being successful long-term investors is by keeping investment costs as low as possible.  This particular writing examines investing costs from a different perspective.  In general, the higher the investment costs an individual investor incurs, the higher the allocation to riskier investments he/she must have to reach his/her financial goals.

Link to the complete article: https://latticeworkwealth.com/2013/10/26/are-your-financial-advisors-fees-reasonable-are-you-actually-adding-more-risk-to-your-ability-to-reach-your-long-term-financial-goals-here-is-a-unique-way-to-look-at-what-clients-pay-for/

2. Are Your Financial Advisor’s Fees Reasonable? Here is a Unique Way to Look at What Clients Pay For.

 

This article is closely followed by the previous one in terms of popularity and forms the basis for that discussion actually. The general concept contained in this writing is that most asset managers now charge investors a fee for managing their investments based upon Assets under Management (AUM).  The fee is typically 1% but can be 2% or higher.  The investment costs to the individual investor per year are the total balance in his/her brokerage account multiplied by the fee which is commonly 1%.  However, the 1% grossly misrepresents the actual investment costs because the individual investor starts off with the total balance in his/her brokerage account.  The better way to express the fees charged per year is to divide the AUM percentage by the growth in the portfolio over the year.  That percentage answer will be quite a bit higher.

Link to the complete article: https://latticeworkwealth.com/2013/08/07/are-your-financial-advisors-fees-reasonable-here-is-a-unique-way-to-look-at-what-clients-pay-for/

3)  Rebalancing Your Investment Portfolio – Summary

 

Earlier in the year, I compiled a three-part series that examined the concept of rebalancing one’s investment portfolio. Rebalancing is an excellent investing strategy to learn about and apply at the end of the year.  Rebalancing in its simplest definition is the periodic reallocation of the investment percentages in one’s investment portfolio back to an original model after a passage of time.  This summary of rebalancing provides a look at rebalancing that is helpful for novice individual investors through more advanced folks.

Link to the complete article: https://latticeworkwealth.com/2015/11/25/rebalancing-your-investment-portfolio-summary/

4)  How to Create an Investment Portfolio and Properly Measure your Performance: Part 2 of 2

 

While this article is the second part of a discussion on the creation of an investment portfolio, it is arguably the more important of the two because it looks at a topic too often not relayed to individual investors. This writing talks about the importance of measuring the performance of your investment portfolio’s investment returns.  The financial media tends to focus solely on comparing your portfolio to the performance of the S&P 500 Index.  That comparison is “apples to oranges” the vast majority of the time because most individual investors have many different types of investments in their portfolios.  Therefore, I show you how institutional investors measure the performance of their investment portfolios.  The concept is broken down into smaller parts so it is very understandable and usable for individual investors.

Link to the complete article: https://latticeworkwealth.com/2013/07/19/how-to-create-an-investment-portfolio-and-properly-measure-your-performance-part-2-of-2/

5)  How Can Investors Survive in a Rising Interest Rate Environment? – Updated

 

Although this particular article was first published a couple of years ago, the content is even more valuable today. The Federal Reserve increased the target range for the Federal Funds Rate by 0.25% on December 16, 2015 and has indicated that more interest rate increases are likely in the future.  Thus, we have entered a period in which interest rates are generally headed higher over the next several of years.  Most financial pundits will bemoan this type of environment because higher interest rates mean that the prices of most bonds go down.   It makes it harder to earn any investment returns from bonds.  However, there are a number of investments and investment strategies that benefit from an increasing interest rate environment.  This article examines six different things individual investors can do.

Link to the complete article: https://latticeworkwealth.com/2013/11/30/how-can-investors-survive-in-a-rising-interest-rate-environment-updated/

 

I hope you enjoy these popular articles from my investing blog. My goal is to keep on releasing more information in 2016 to assist individual investors in navigating the world of investing.  Thank you to all my readers in the United States and internationally!

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Is There a Way to Discern Whether or Not a Prospective Financial Advisor Will Provide You with Top-Notch Service? Short Answer is Yes.

06 Thursday Mar 2014

Posted by wmosconi in asset allocation, bonds, business, Consumer Finance, Education, finance, financial advisor fees, financial planning, Individual Investing, investing, investment advice, investment advisory fees, investments, personal finance, portfolio, reasonable fees, reasonable fees for financial advisor, reasonable fees for investment advice, statistics, Suitability

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asset allocation, AUM, AUM fees, business, CFP, education, finance, Financial Advisor, investment advisor, investment advisory fees, investments, portfolio, reasonable fees, reasonable fees for financial advice, retirement, RIA, selecting a Finnacial Advisor

Most individual investors rely primarily on trust and the ability to develop a long-term relationship primarily to determine whether or not a prospective financial professional is the right choice.  Turning over the management of your investments to someone else is a major decision that has many implications.  Your current lifestyle in retirement or future lifestyle in retirement and meeting your other financial goals along the way are of paramount importance.  The assessment of your personal risk tolerance and understanding of how the financial markets work is inextricably linked.  With so many choices out there in terms of whose investment advice to value, it can be extremely challenging to decide who to pick or what firm offers the best investment, financial planning, and tax/legal advice.  With that being said, there is a critical step that I wanted to share with you that can limit the possibility that you might end up with a financial professional or firm that will not work as hard as you would like to ensure that your financial future is secure.

The answer to this question lies in the compensation to the financial professional as a result of taking on your business.  Now keep in mind that not all financial professionals will fall into this generalized group.  However, financial incentives and time constraints make this a significant factor in the servicing of your account.  The single most important question you can ask a prospective financial advisor, as it relates to this topic, is how much the average value of a client account is.  Why is this so important?  The reason it is so important is that any financial professional has a number of client accounts to service, and time is limited and constrained of course.  From the financial professional’s perspective, the ideal would be to acquire new clients that offer the most potential revenue.  Let’s go over some of the specifics of the financial services industry to illustrate the importance of this average account size bogey.

Most full-service financial services firms will categorize the client accounts of a financial professional in various tiers.  There are normally tier one, tier two, tier three, and other clients.  Tier one clients are those who offer the most revenue potential.  These clients tend to have the largest amount of assets.  Tier two clients are clients that have less assets than tier one but offer the promise of moving into tier one in the near future.  Tier three clients have below average assets in comparison to the other tiers and show no immediate promise for a lucrative revenue opportunity in the coming years.  There are then all other accounts that really should be transitioned to another financial services firm.  When the firm considers all the costs associated with maintaining that client account, it does not make economic sense.  It is far better for the financial professional to recommend that the client picks another financial services firm and professional most always does so via a referral.  Note that different firms have different terms to describe these classifications.  However, the general concept holds across the entire industry.

Here is the key component as it relates to individual investors specifically.  Tier one clients tend to be the top 20% clients in terms of account size for a financial professional.  Typically a certain relationship holds in these cases.  This tier of clients usually will yield roughly 80% of the overall revenue for financial professional.  Oddly enough, it follows very closely with the famed Pareto Principle.  The tier two clients fall below that top tier, but they show promise for the future.  Many times these individuals have investment accounts at other financial firms or will be coming into a good deal of new monies in the future.  They might be converted to tier one status.  These accounts tend to fall into the 21%-50% of clients managed by the financial professional.  The tier three clients are the bottom half of the accounts managed by that financial professional.  There also are “legacy” accounts that really offer little to no revenue and sometimes are unprofitable under certain circumstances.

Now you can look at the financial incentives from the financial professional’s prospective.  Let’s say that the financial professional earns a 1% fee on all assets under management (AUM) which is very common across the industry.  Therefore, if a client has $1,000,000, the annual fee is $10,000 ($1,000,000 * 1%).  A client with $250,000 at the same AUM fee will yield an annual fee of $2,500 ($250,000 * 1%).  Thus, it would take four of the latter clients to equal the revenue from the other single client.  Given that any financial professional has limited time to meet with clients, it makes perfect sense that he/she would prefer to have only one client since the compensation is the same.  The financial professional with the $1,000,000 client can service that account and look for another three clients to increase that revenue (i.e. similar time/effort expended overall).  The general key is to garner the most assets under management with the fewest amount of clients.  That allows the financial professional time manage his/her time most effectively and efficiently.

Here is the most important question you can ask any prospective financial professional:  What is the average account size of your clients?  If the average account size is higher than your investment portfolio, the chances are quite high that your account and relationship will receive much less attention than that financial professional’s larger account.  Now there can be extreme cases where a few large client accounts distort the average account size to the upside, but you can always ask the general range of client account size overall.  Two things will be at play in a situation where your investment account value is less than the average.  First, it makes more sense for the financial professional to spend more time with the tier one clients from a compensation perspective.  Other financial firms are constantly trying to “steal” these accounts to their firms by offering more services and additional financial product offerings.  Second, depending on the amount that your account size strays from the average, you will most likely receive customer service contact from a junior member on the team and/or a “cookie-cutter” investment portfolio recommendation.

I will expand a bit more on the last comments.  Most financial services firms use what is termed a “turn-key approach” for tier three clients.  There are set asset allocation models with a limited amount of components in the recommended portfolio.  The advice can be nearly identical to what you might find by simply going onto the websites of Vanguard, T Rowe Price, Fidelity, or Morningstar for free.  Now please do not infer that I am intimating that the asset allocation models of those websites are not valuable or match your particular risk tolerance and financial plan.  The point is why should you pay a financial professional to get a recommended asset allocation that is virtually identical to these offerings.  You would be better off not paying a fee whatsoever since you can replicate those portfolios for free and follow the ongoing changes to these model portfolios over time.  Note that the underlying investments in these model portfolios are quite transparent and regularly updated on the websites and in many cases come from regulatory filings to the SEC.

While it is true that some financial professionals provide the same level of service without regard to client account size, but these financial professionals predominantly tend to charge a flat-fee or hourly fee for investment advisory and financial planning services.  Financial professionals that are compensated with AUM fees or via commissions have a very tempting incentive to not only spend more time with larger client accounts to retain the client over time but concentrate on obtaining new clients with potential to be in the aforementioned tier one category.

To summarize at this point, the primary question to weed out the vast majority of potential financial professionals to manage your money is to ask “What is your average client account balance?”  If your account would be less than that average, there is a strong probability that the future attention to your account relationship will be less than the other client accounts.  If you have questions in the future, especially during volatile times in the global financial markets or major life changes, you may not be able to get a hold of your financial professional for guidance in a timeframe acceptable to you.  The other options you have are to find a financial professional where you are above the average or find a financial professional that charges a flat-fee or on an hourly basis.  At least in the latter option, you know that the financial profession spends more of an equal amount of time with each client.  Every client account tends to get the same amount of attention, and there is very little distinction in terms of importance.  Think of it this way, it is your hard-earned money and your future is on the line, you deserve to be one of the important clients of your financial professional.  Not just a name and account number.

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