Category: Press

By Steven Dudash

November 22, 2016

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As a wealth manager, more than a few things keep me up at night, including what the election of Donald Trump means for the markets, the country’s economy and how Brexit will ultimately unfold. Perhaps my biggest worry continues to be that investors – both on the retail and institutional side – have not adjusted their expectations in today’s interest-rate and equity market environment.

To illustrate, consider a meeting I had recently with a $250 million university endowment fund. Each year, it uses 5.25% of its assets to award scholarships and at the same time expects to keep pace with a long-term inflation projection of 2.5%. To meet these assumptions and keep the principal intact, basic math says the fund needs to generate returns of just under 8%.

Given that the next 30 years will not be anything like the last 30 years, when investors could rely on a 50/50 portfolio of stocks and bonds to produce that kind of return, that’s pretty implausible. This is not a fun message to deliver to a roomful of stern-face endowment board members. It’s equally unpleasant to have to look a retiree or pre-retiree in the eye and tell them that may be facing a future income shortfall. Nevertheless, it’s the truth. A big reason why can be found in two significant events that occurred over the course of the last three decades – the scale of which are not likely to repeat themselves anytime soon.

The first was the rise of the PC and the Internet during the 1980s and 1990s, which caused productivity to spike, breeding higher corporate profits and boosting stocks. But as technology has permeated more and more areas of the labor market, productivity growth has slowed in recent years, crimping earnings. While equities have hardly suffered, that’s a bit of mirage, having been propped up by an aggressive Federal Reserve.

The second has been the steady decline in bond rates. The U.S. ten-year bond yield hit an all-time high of nearly 16% in September 1981. Earlier this summer, it was 1.36%, and despite a rise in recent since the presidential election, yields are not expected to ramp up meaningfully in the coming years, thanks to interest rates that are all but guaranteed to remain below historical norms for an extended stretch.

Therefore, we now have a stock market that is fully valued and unlikely to repeat past performance (even if corporate tax rates decline under Mr. Trump), combined with a bond market that is depressed, and unlikely repeat past performance. So what should investors do?

Assuming that, unlike an endowment, you can’t adjust your income needs, think about upsizing your level of risk. A 50/50 portfolio simply won’t be enough anymore, period. So my advice, at least in the near term, would be to lower U.S. government bond exposure and look to European equities.

Granted, it will likely be a bumpy ride, riddled with stomach-churning ups and downs. But as the United States seems likely to begin gradually raising interest rates in the coming months, much of Europe is essentially in the middle of QE infinity, still injecting massive amounts of capital into their economies in an attempt to jumpstart lagging growth. Take advantage of this phenomenon.

Cynically, whether those efforts are successful isn’t the concern over the long haul. The more important point is that mainland Europe, for all its issues, is in many ways valued much more favorably than the U.S. market, and there as some opportunities to go bargain hunting. PE ratios aside, Euro markets are likely to appreciate, if for no other reason than the governments are willing to mortgage their futures to make that happen.

Skeptics will point to looming concerns over Brexit. But England was never fully integrated with the rest of Europe in the first place, and as we have seen in the wake of that vote earlier this year, the divorce may not be the nightmare many predicted. What’s almost certain, though, is that the rest of the European Union will remain intact.

The bottom line is that investors need to be realistic about what the next 30 years may hold. This is a case where the past is unlikely to repeat itself, which means you may need to change your outlook and be willing to venture into areas that may not be so popular in the present but offer the opportunity to achieve larger upside potential.

 

 

 

 

New Labor Department rule is pushing brokers to decide whether to continue use of commissions

By: MICHAEL WURSTHORN

Commissions are at the center of a new brokerage battle.

Stockbrokers for years have been moving away from commissions—payments per trade—as a way to charge their customers. Instead, they have been pushing fee-based accounts, where they charge a percentage of assets regardless of the amounts of trading.

For investors who rarely traded, though, commissions remained the more cost-effective approach.

Now a new rule from the Labor Department concerning retirement accounts is pushing brokers to decide whether to continue, or nix, the use of commissions.

Known as the fiduciary rule, the policy is aimed at eliminating incentives that might cause brokers to give conflicted advice—an inherent problem with commission-based retirement accounts that can have varying sales costs depending on the types of investment products. But a move away from commission accounts could mean investors may now end up paying more in fee-based accounts.

So far, brokerages are breaking into two broad camps: those that plan to offer some level of commission-based options and those that would rather avoid the thorny issues of trying to make commission accounts comply with the new rule, which begins to take effect in April.

“There’s definitely going to be a percentage of people hurt by these conversions,” said Steven Dudash, head of Chicago-based IHT Wealth Management. “Old-school, traditional investors who have nothing but bonds because they want ultrasafe security [and] your buy-and-hold investors are going to get hurt if they go to more costly fee-based accounts.”

The new order is being illustrated by two Wall Street bellwethers that have taken opposing views on the best approach under the new rule, with Bank of America Corp.’s Merrill Lynch effectively eliminating commission-based individual retirement accounts and Morgan Stanley attempting to retain such accounts.

Moving an IRA to a fee-based structure from commissions could mean higher costs for some investors, especially those who trade stocks occasionally or have portfolios consisting mostly of bonds, experts say.

Fee-based IRA accounts are typically charged a fee of around 1% annually. So a theoretical $1 million fee-based account would cost about $10,000 a year, brokers say. That doesn’t include other fees, such as embedded costs in exchange-traded funds and mutual funds, although those expenses are typically small, says Matthew Papazian, a financial adviser with Denver-based Cardan Capital Partner.

The costs associated with a commission-based IRA can vary more broadly depending on the frequency of trading, the investment products purchased and the fees that come with them.

If that theoretical $1 million was in a commission-based IRA at a brokerage, and the client did about 10 stock trades over a year, the cost could be around $3,000 or less, according to brokers. Those fees would be pushed higher if the client bought other products, such as structured notes, which can carry upfront charges of 2%

But an investor who trades more frequently or buys higher-cost products would incur higher costs. If that same investor executed 30 significant trades of a specific stock in a year, their costs could be as much as $13,000.

For bondholders, the cost difference between a commission-based IRA and one that charges fees is even greater, says Mr. Dudash.

Moving clients to a fee-based structure is a simpler step toward complying with the rule, as well as part of a broader industry shift over the last decade, observers say. Brokers say those costs are justified because they have to provide a higher level of service by spending more time understanding a client’s full financial situation.

“Some brokerages are seeing [commissions] not being offered at all as a competitive advantage,” says Bharat Sawhney, a managing director focused on wealth and investment management at consulting firm Gartland & Mellina Group in New York. “There could be an asset play here where firms like Morgan Stanley choose to offer commissions as others pull away.”

However, brokerages will have to justify such conversions to avoid violating the rule. A broker who recommends a fee-based account to a commission-paying retirement saver who trades little or doesn’t need close monitoring would be an “abusive practice,” according to guidance released by the Labor Department on Thursday.

Retirement savers also have the option of moving their account away from full-service brokerages like Merrill and Morgan Stanley to self-directed IRAs or an automated robo adviser that relies on an algorithm to provide advice, both of which aren’t significantly affected by the Labor Department’s rule.

Those options, especially a self-directed account, would mean investors no longer have access to advice.

“Unfortunately some of the fallout on some investors will be choosing between no longer receiving advice or paying higher fees for it,” Mr. Dudash said.

 

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Bonds investing involves risks. Bonds are subject to market and interest rate risk if sold prior to maturity.

 

Bank of England action means we’re in quantitative easing infinity, expert says

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The world is in quantitative easing infinity now, after the Bank of England cut interest rates for the first time in over seven years.

While many economists had predicted that the U.K.’s central bank would lower rates, the actions the BOE announced Thursday were slightly more aggressive than expected.

“I think we’re in QE infinity now and now they’re coming up with new ways of making QE because they can’t cut rates anymore than they already have,” Steven Dudash, president of IHT Wealth Management, said on CNBC’s “Power Lunch.” He added, however, that he doesn’t “see how that helps banks.”

“It’s hard to see how that’s going to help the bank world and I’d probably be avoiding them right now at least for the foreseeable future,” Dudash said.

But Robert Pavlik, chief market strategist at Boston Private Wealth, said banks could potentially benefit from this economic backdrop because they’re involved in trading bonds and issuing new bonds for corporations. He explained that the financial sector reaps an investment banking fee from these kinds of activities.

“I am at least somewhat more favorable on the banks because I think with this cut in interest rates and the additional bond purchases by the Bank of England, it’s going to help some of these international banks like JPMorgan, like Citigroup and so I think there is some favorable impact,” Pavlik said.

Pavlik said he is interested in financial stocks like Bank of America, JPMorgan Chase, Citigroup and BlackRock. “Lower interest rates means positive things for these companies going forward,” he said.

 

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5 Smart Investment Moves to Make Before Marriage
It’s important to have a financial discussion about your future.
By Dawn Reiss | Contributor

Having an honest conversation about personal finances can be difficult for anyone, especially for a couple that is planning a wedding.

“No one likes to talk about it,” says Steve Dudash, president of IHT Wealth Management in Chicago. “Because it’s not fun.”

Most married couples quickly realize their financial futures are tied to each other. Like everything else in life, financial experts say communication is the key and finding a healthy balance.

Discuss expectations and what is important. Before getting married, it’s important to learn your partner’s attitudes on money.

To understand their financial upbringing and mindset, ask your partner how their parents and grandparents handled money, says Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network.

Then have a conversation about your priorities and expectations for the future. Talk about savings and savings goals. How financially secure do you want to be when you retire and how much do you want to spend? What type of lifestyle do both of you want? Does that include buying a house, traveling, returning to school or starting a business? Maybe one spouse wants to train for a marathon or another wants to build up savings before starting a family. What everyday priorities are important, such as going out to eat or frequently buying new cars?

Having a conversation about short- and long-term life goals translates directly into financial priorities, Gallegos says. Then discuss how much you will need to accomplish these goals and write them down.

Learn about your partner’s current financial situation. Have a clear understanding of how much other person earns, their total assets, how much debt they are carrying and their philosophy on using credit cards. “The big one is checking someone’s credit report,” says Meredith Carbrey, wealth advisor for Bedel Financial Consulting, an Indianapolis wealth management firm.

Make sure to discuss student loan debt before getting married, especially if a spouse works for a government agency or nonprofit and is targeting the Public Service Loan Forgiveness Program, where loan debt will be forgiven after a 10-year period, says Joseph Orsolini of College Aid Planners, a financial planning firm in Glen Ellyn, Illinois.

“I am amazed at how many people get engaged and even married without ever having a conversation on student loan debt,” Orsolini says. “This is especially important if one of couple is on an income-based repayment plan. Adding a spouse’s income will impact eligibility for IBR and may cause their payment to increase.”

It’s OK to keep separate bank accounts. “Couples are getting married later in life and it’s harder to release control when you’ve been in charge of your own finances for a while,” Dudash says. “It’s fine to keep separate accounts as long as anything isn’t secret.”

Instead, he says both spouses should direct deposit a pre-determined amount – either a percentage based on their respective incomes if one person makes significantly more or an equal amount – into a joint account for anything related to the home, including rent or mortgage payments.

Dudash also encourages couples to open a joint credit card for household expenses from buying furniture to groceries. Then autopay the credit card from the joint checking account, which can simultaneously help build a couple’s joint credit score or improve a spouse’s score if it’s significantly lower.

Accept that your future spouse likely will have a different risk tolerance. “Rarely do you find a couple where both people are actively interested in investing,” Dudash says. “It’s usually one or the other.”

That’s why it’s important for couples to have an annual meeting with their financial advisor who can give an overview to the less-involved spouse about what has happened in the past year, coupled with a larger conversation about goals and objectives.

Before blending any investing accounts, it’s also important to assess each other’s risk tolerance.

Have an honest conversation about how each person will react when the market pulls back during normal market fluctuations which can cause a brokerage account to lose thousands of dollars. If one spouse is very aggressive and one is conservative, it’s going to be hard to blend investing strategies, Dudash says, because the more conservative spouse will worry about any losses and the more aggressive one will get upset about not making enough return.

To decide how much to invest, start by looking at your joint account and assessing any major expenses, including buying a house or car, you plan to make in the next 24 months. Then subtract that amount from useable funds for investing, Dudash says.

Talk about a prenuptial agreement. Besides discussing how investments are going to be made and bills are going to be paid, consider a premarital agreement.

“It’s very easy to get into marriage and very hard to get out it,” says Christopher Melcher, partner of Woodland Hills, California-based law firm Walzer Melcher. “A lot of divorce problems come from expectations that weren’t communicated, premarital discussions you should have had that become a harsh reality later on.”

Whether you have a prenup or not, having a conversation about it clarifies everyone’s assets and expenses, says Melcher, one of the lawyers who handled divorce cases for actress Katie Holmes and singer Frankie Valli. Even without a prenup, a person can typically maintain their premarital assets as separate property.

Most states follow equitable distribution laws, where the court has more discretion on how to divide things. Nine states, including California, Texas and Wisconsin are community property states with more definitive rules on how assets acquired during marriage are jointly owned.

Melcher also cautions against adding fault-based provisions. “I’ve seen all sorts of weird stuff, from how often sex should occur to nondisclosure agreements to prevent tell-all books,” he says. “Most of that doesn’t belong in a prenup.”

Although a nondisclosure agreement is enforceable, “anti-cheating” personal conduct provisions can later backfire and may invalidate an entire premarital agreement and all financial protection, Melcher says. Instead, he urges couples to create an equitable partnership, even if that means putting real estate into a joint account.

“I had a client who had a successful restaurant chain,” Melcher says. “He planned to open up restaurants during his marriage. He wanted his fiancee to be supportive of him and be excited about his business.”

That doesn’t happen if only one person benefits from a financial win. “It’s very important to create a team atmosphere and a sense of community,” he says. “The only way to do that is to create something together.”

 

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