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We wanted to provide a quick ’shout out’ to our esteemed Portfolio Analyst, Mark Hoppe, for learning on late Monday that he was among the 39% of world-wide candidates that passed Level II of the Chartered Financial Analyst exam. We empathetically watched him study diligently for an obnoxious amount of hours during the first half of the year, and were excited to learn that he passed the second of three exams with flying colors. The Chartered Financial Analyst designation is, in own my words, “the gold standard of the investment world.” Here is an simple overview from the CFA Institute site:
The CFA Program is a graduate-level self-study program that combines a broad-based curriculum of investment principles with professional conduct requirements. It is designed to prepare you for a wide range of investment specialties that apply in every market all over the world.
Nearly 90,000 CFA charterholders work in over 130 countries
Over 100 universities use parts of the curriculum in their courses
Numerous regulators accept the CFA charter as a proxy for many licensing requirements
Global media recognition of the CFA charter and CFA Institute events
If you are looking for an investment credential that will earn you instant credibility and respect anywhere in the world, look no further than the CFA charter.
Awareness of the CFA charter has grown considerably since it was first offered in 1963 as a means for investment professionals to prove their expertise and demonstrate their commitment to integrity.
Our friend Carl Richards, writing for the NYTimes.com Bucks blog, does an excellent job of speaking to the ‘waiting-until-I-get-back-to-even’ mistake many investors make. It’s called anchoring. Essentially, we create a value in our mind for an investment we want to receive before selling. The following are some excellent examples of how this can hurt you more than simply cutting your losses:
One of the more common behavioral mistakes we make when it comes to investment decisions is the tendency to anchor to a certain value or price. When we focus on, or anchor to, a price, it can lead to costly blunders. Here are a few examples:
1. You pay $800,000 for your home, and a few years later you need to sell it. We have a tendency to feel like we should at least be able to get what we paid for it. So you insist upon listing it for $800,000, even though the market value is less than that. You pass on offers around $775,000 and then ride the market all the way down to the point where you are just hoping to get $650,000 a year later. Now that first offer looks like a dream.
The reality is the market doesn’t care what you paid for you house. It doesn’t care how much you put in to it or what it cost you to landscape. All that matters is what it is worth today.
2. You buy a stock for $50 a share, and six months later it is $30. You decide that you really shouldn’t own it anymore but you want to wait until you “get back to even” before you sell. This idea of holding on to an investment that is no longer appropriate, or may have been a mistake in the first place, until you get back to even makes no sense. The fact that you paid $50 has no bearing whatsoever on what you should do now.
In fact, I think it is fair to say that getting back to even is never a good reason to hold on to an investment. If you find yourself saying that, it’s time to re-evaluate.
3. Your portfolio was worth $500,000 at the top of the tech bubble in early 2000, and you still think about that value each time you open your statement and see that it’s worth less than that. You just want to get back to your high-water mark of $500,000.
This may not have any impact on your decisions, but it sure is affecting your life. I know people like this, still holding on to a value in the past. It is like that guy next door who is still telling stories of his glory days in high school football.
The past is the past. All that matters now is making the correct decision for today.
The new 408(b)2 disclosure regs have been long awaited, and present a great opportunity for companies to better understand and benchmark the fees associated with their 401(k) provider. Additionally, it will be require 401(k) service providers to better articulate value in light of the fees they charge. ERISA requires plan fiduciaries to review the fee structure of, and I paraphrase, “reasonable fees for reasonable service.” What is reasonable? That is for plan fiduciaries to determine via the value proposition delivered by 401(k) service providers, which includes recordkeepers, TPAs, custodians, advisors and yes, participant advice providers.
While the impact of this disclosure does not directly impact us as a 401(k) participant advice provider since we have been transparent and conflict-free from the start, there are a lot of benefits for the companies and employees we serve. Here are a few:
Service Providers Must Disclose Whether They are Fiduciaries – There is so much confusion over this issue, it is great to see the regulations require this so to clarify for plan sponsors who is and who is not acting as a fiduciary. Most plan fiduciaries have been confused by this over the proliferation of the terms used by service providers such as fiduciary, co-fiduciary, fiduciary warrant and especially advice, which automatically makes someone a fiduciary. Per InvestmentNews.com:
“Along with requiring bundled service providers to break out costs of their record-keeping services, the new regulation also requires providers to disclose whether they are acting as fiduciaries to plans.”
Disclosure Simplifies Plan Reviews and Benchmarking – Understanding value will be much easier if there is some standardization and definition of what services are to be included under each term. Making an apples to apples comparison is critical for making a large decision on a large purchase, such as a 401(k) service provider.
Independence and Conflicts to be Better Articulated – Understanding the inherent conflicts of interest with various service providers. Per InvestmentNews.com,
“Under the rule, consultants — and many plan service providers — will be required to reveal to DB and DC plan sponsors hitherto undisclosed compensation they are receiving, including any revenue sharing or finder’s fees.”
Transparency Improves Clarity – It is obvious, but understanding what plans are paying for various providers has been extremely difficult to understand for many companies. Including us. We do not do plan-level consulting work, but when we are working on a plan that has a fiduciary plan consultant, the quality of the plan has a distinctly different flavor than the plans that do not. Service and value are the at the crux of the conversation, which ultimately resonate in greater outcomes for participants. Per InvestmentNews.com,
Alison Borland, retirement strategy leader at unbundled provider Hewitt Associates, Lincolnshire, Ill., said: “The regulations will put different types of service providers, including bundled and unbundled providers, on a level playing field.”
“Ultimately that means better transparency, more negotiating power and lower total costs for plan sponsors and plan participants.”
Cheaper is not always better. Receiving the best value for a reasonable cost is all this disclosure regulation is aiming at in our humble opinion, which is great for plan fiduciaries and their participants, which includes themselves.
Last year, we began the transition of moving from the name Actium to that of our flagship service, BeManaged. For many of you, you may have never noticed that our email was from @myactium.com, while we communicate ourselves as BeManaged. It just didn’t make a lot of sense why our participant clients knew us as BeManaged while companies and advisors knew us as Actium.
We are finally nearing the finish line due to our recent acquisition of the BeManaged.com URL. The following are some of the changes that will be taking place over the next 30 days:
Emails Change – If your spam filter is finicky, we will ask that you add/adjust us in your address book to the @bemanaged.com email suffix rather than @myactium.com. We will provide additional notices as reminders as we near the transition date.
Website - As you might assume, our website will be at bemanaged.com, not bemanagednow.com. However, your bookmarks will automatically redirect you to the new address, so no worries there.
We appreciate your patience in this process and apologize for any confusion it has caused over the years. If you have any questions, do not hesitate to reach out to us. Thank you!
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
It’s perfectly understandable why people do this, asking themselves, “why invest in something that is ‘losing’ money?” When the market is going down, you might have heard people say it’s on sale. However, it can feel hopeless as your contributions may look like they are evaporating as soon as you toss them into your 401(k). The most important thing to remember is you are buying an asset when you contribute to your account. They are called shares of the investment funds you have access to in your plan.
Shares are owned by you. If the market goes down, your contributions should be purchasing more shares for the same amount of money you always contribute. The more shares you own, the better, so investing during a down cycle in the market is a very good thing.
If the market decreases by 20% like the real estate market has in the past few years, you do NOT lose your shares. Instead, they simply decrease in value. For example, just because the value of your home has decreased by potentially 20% in the past few years, that doesn’t mean your garage will be gone when you get home. The physical asset is still there, it is simply devalued.
The following slides are from our Myths and Tips for Investing in Volatile Markets presentation. Make sure you take a look at the final slide illustrating the exponential growth in your account from investing through the down market. The shares you purchased at the ‘bottom’ are the ones that appreciate the most. In this case, the pain of the downturn can pay off in a big way for you once the market rebounds.
Our friend Carl Richards wrote yesterday on this subject at the NYTime.com Bucks blog, and it is very good advice. We have seen people follow guidance from the likes of the Jim Cramers, Suze Ormans and Dave Ramsey (though we are big fans of his debt reduction advice), which more often than not steers people into an inappropriate portfolio. Many 401(k) providers will even provide some general guidance as well, but they leave investors to figure out the ideal recipe (asset allocation) to create from their plan’s ingredients (investment options). Understanding some basics such as age and your prospective time horizon for retirement are easy, but understanding your risk tolerance can be tricky. Additionally, here is an easy way to distinguish general guidance from specific, personal advice:
Advice will tell you specifically which funds in your 401(k) plan you should be invested in as well as what percentage. Guidance only speaks to the types of investment options.
The following are some key excerpts from the Bucks blog post by Carl Richards:
It is dangerous to mix investing with entertainment. The classic example is thinking that Jim Cramer is your investment adviser rather than some sort of circus clown.
But what can be even more dangerous is taking what’s meant to be general financial information and acting on it, without first taking the time to figure out if it applies to your particular situation.
Making important decisions about how to invest your life savings seems to be getting more and more complex as the amount of information continues to grow.
Take this article, “A Market Forecast That Says ‘Take Cover,’” that appeared in the The New York Times this weekend. It offers up advice from a market watcher who suggests that individual investors “move completely out of the market and hold cash and cash equivalents, like Treasury bills, for years to come.”
The article has been among the most e-mailed articles for several days, so it’s clearly getting a lot of attention. But the question is what you’re supposed to do with information (general advice) like this. Should you follow this advice to “take cover,” regardless of your age, unique goals and family situation?
The financial press, personal finance bloggers and best-selling authors are all sources of information. But don’t confuse information with the real work of figuring out how it applies to your very unique situation. I know many of the best personal finance bloggers. As good as many of them are at providing a filter for information, and even providing general rules of thumb, you are the only one who can figure out how it applies to your life.
The reason is simple: planning for your financial future is personal. It has to be. A good plan will be unique to your situation, and what is right for your situation may be a disaster for your neighbor. So read as much as you want, but then make sure you spend the time to figure out how it applies to you before you make important decisions about your life savings.
Our friend Matthew Hutcheson, Independent Fiduciary, recently conducted testimony with the Congressional Ways and Means Committee. The goal of the testimony was to discuss fiduciary best practices as well as avoiding the potential conflicts of interest inherent to the broker dealer model in the 401(k) world. When the topic of 401(k) advice was discussed, information we provided him was cited. Our information spoke to the potential conflicts of interest that could have existed under the original January ‘09 proposal, which has since been replaced by a conflict-free proposal by the DoL in February of ‘10. The following is the testimony and the reference to us:
Independent Fiduciary Adviser, Chad Griffeth, AIF®, makes the following observation:
If the provider of the advice is being paid by the mutual funds in any way, trust is damaged dramatically. The reality of the situation is that the advice provider must earn participants’ and management’s respect, and the story of true independence, fiduciary prudence, and thus acting in the sole interest of the participant’s best interest is critical to the success of the advice provider, and thus the participants. If participants do not trust the source of the advice and account management, they will not use it, even though they need it. Thus, participants will likely not experience the success they need for a dignified retirement.[6]
The following are some highlights discussed in the July ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
The following are some of the highlights discussed in the June ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
Government Finance Bubbles Hit World Equity Markets
Carl Richard’s latest article illustrates a very interesting perspective on investing. The following sums it up pretty well,
We’re quick to focus on the reward but fail to appreciate the consequences of our choice. If an investment performs well, we like to think, “I picked a winner.” If it’s the reverse, and the investment fails, it’s someone else’s fault.
This reminds me of the time that I was mowing the lawn as a child and I hit a sprinkler head with the mower. I remember running inside to tell my mom that the lawnmower had hit the sprinkler head. She patiently taught me that lawnmowers don’t hit sprinklers, 10-year-old children do.
We do the same thing when it comes to investing. If we haven’t done our research (figured out where the sprinklers are) and we behave poorly (run over the sprinklers), we’re not going to like the results.
And we can’t blame the investment for our decisions. At some point, we must accept responsibility. Otherwise we’ll keep making the same mistake since we’re blaming the investment rather than accepting responsibility for our choices. And if that’s the case, we’d be better off in a certificate of deposit.
We wanted to provide a quick ’shout out’ to our esteemed Portfolio Analyst, Mark Hoppe, for learning on late Monday that he was among the 39% of world-wide candidates that passed Level II of the Chartered Financial Analyst exam. We empathetically watched him study diligently for an obnoxious amount of hours during the first half of the year, and were excited to learn that he passed the second of three exams with flying colors. The Chartered Financial Analyst designation is, in own my words, “the gold standard of the investment world.” Here is an simple overview from the CFA Institute site:
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
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