Barron's Broker Ranking

Here is a good article ranking various brokers ratings.

Why So Many Fail at Investing | The Motley Fool

Professor Barber who is referenced in this article, was one of my professors in my MBA program.  This article provides great insight into the psychological dynamics behind investing.  Here is the link and article below.

Most investors underform the market

This might be the most important investment statistic you ever hear. According to a US study of investor returns, over a 20-year period ending in 2008, the S&P 500 index gained an average of 8.4% per year but the average investor earned just 1.9% a year. 

Not only do most investors underperform the market, but they do so by quite a wide margin.

Why do investors do so badly?

This has long been a matter of debate. The most convincing answers usually come from the world investor psychology. Emotions cause us to buy high and sell low. We think we can time the market. We act impulsively on rumors. We have very short memories. We're just not hardwired to be good investors. Terrible, actually.

A paper from the Center for Financial Studies adds a twist to this discussion. The paper's conclusion might not be surprising, finding "that lack of understanding of economics and finance is a significant deterrent to share ownership."

Even after controlling for age, education, and income, financial literacy has a profound effect on people's willingness to invest in the stock market. The more financially literate we are, the more comfortable we become around stocks and shares.

That's how it should be, right?

Can financial education help?

Maybe. A separate paper by Lauren Willis at Loyola Law School adds yet another twist. Willis shows, quite convincingly, that financial literacy can actually be detrimental to people's financial health. 

Here's a few examples:

"Data from the Jump$tart nationwide survey of highschool seniors has consistently shown that financial education does not increase financial knowledge among high-school students and that students who take a personal finance course 'tend to do a little worse ... than those who do not.'"

"A program to teach low- and moderate-income consumers about money management and Internet banking ascertained one year afterward that 'members of the treatment group were less likely to plan and set future financial goals at follow-up than they were at baselines.'"

"A study comparing bankruptcy debtors who received financial training with those who did not found that, once controls for other differences between the groups were added, the training was associated with a small negative effect on outcomes."

Willis offers a few explanations. One, literacy itself isn't enough to overcome the emotional hurdles of finance. More importantly, financial education "appears to increase confidence without improving ability, leading to worse decisions."

Willis doesn't explicitly tie her findings to the stock market, but the jump seems logical. A major reason many investors fail at investing may indeed be because their financial education and literacy improve confidence without improving ability. 

An often-quoted study by Brad Barber and Terrance Odean (pdf) found that investors "who trade the most realize, by far, the worst performance." Those who think they're savvy enough to trade in and out of the market and for short-term profits almost invariably fail. 

Delusions of grandeur are one of the biggest poisons of successful investing.

What should we do?

The answer to this problem isn't to discourage financial education. Nor is it to discourage people from investing. It's acknowledging that the single most important aspect of personal finances and investing is not technical expertise, or even financial literacy. It's understanding investor psychology, knowing our limits, having control over our emotions, and recognizing the myriad biases we fall victim to.

Warren Buffett gets the last word: 

"Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Repost | Crazy Lies (or mis-statements) of Annuity Sales People (who call themselves financial advisors)

I came across this blog today from a financial advisor in Michigan.  He posted the following on his blog and I thought it was worth sharing.  Here is the link to his post.

Crazy Lies (or mis-statements) of Annuity Sales People (who call themselves financial advisors)

Hello All,

In my last post I talked about what was shaking in the world of the fantasitc (sarcasm noted) prodcuts known as index annuities.  What we learned, I hope, is that there are a lot of expenses you never know exist and a lot of people, companies, etc – that get paid when you buy said annuities.

I also wrote about how the marketing companies that promote the annuities to advisors, who in turn promote them to investors, position the annuities.  In the end, they focus on all the ways the advisor gets paid and how little flexibility there really is in equity indexed annuities – and of course, how to overcome those shortcomings so you actually buy them.  It’s a lot of work for something that is supposedly so great for “safe money” investors.

Hopefully if you’ve been pitched these things, or are considering buying one – my post helped you avoid something that may not be nearly as good as it sounded when the well-trained financial advisor pitched it to you.

Which brings me to today’s post.

Just last week I heard the unthinkable.

I met with a great guy who was awesome to meet with.  This gentleman was polite, hard working, and spent most of his life as an educator and coach.  From what I experienced he was a heck of a nice guy who through hard work and dilligence accumulated a nice nest egg for retirement.

As I got to know him I learned that he recently retired and had a pretty sizable retirement plan he was looking to roll over to something safe that he wouldn’t have to worry about so he could focus on the things in life that truly are more important than money.  To my dismay, I then learned he was convinced by a fancy radio show host advisor who “specializes” in safe money investments convinced him that putting $1,000,000 into some indexed annuities was a great idea.  And it’s not like that was the worst part.

Here’s the worst part.

This supposedly honest advisor who helps his clients told his new client something incredibly mis-leading.  And it had to do with the advisors compensation for selling the million bucks worth of annuities.

The line was something like this:

“Mr. Client – when you invest in these here indexed annuities all of your money goes to work right away.  In fact, you even get a guaranteed bonus right up front.  There’s no commission taken out of your account for my services – I just get a small setup fee for helping you establish your accounts.”

I’d like to highlight a particular line in this sales pitch: “…a small setup fee…”

So let me break this down.

The advisor actually split the money into two separate annuities, each one with $500,000 each.  After looking up the exact contracts the investor was sold we found exactly what the “small setup fee” actually was in terms of commission.

Ready?

One was 10% and the other 8%.

So this small setup fee was $90,000.

$90,000!!!!!

I’m sorry, but that is not a SMALL setup fee.

Look, I share this not because I have a problem with the annuities (even though I actually do).  What I have a problem with is that the advisor told his new client he was only getting a “small setup fee.”  What a load of crap.  Some might call it a little white lie.  I think it’s a blatant, huge lie, that if fully disclosed with honesty would make any logical investor more than a bit weary about the real suitability of the recommended annuity.

In future posts I’ll talk about other topics but this sort of action by financial advisors really disgusts me.  I can’t think of any good reason to mislead someone into believing complex financial products that pay ridiculous commissions should ever be proposed as no-load investments.  I don’t care if there isn’t an apparent commission – the reality is the sales people get paid huge, and most investors have no idea.

So next time someone tries to sell you something, just ask: “What exactly will your compensation be if I purchase this investment?”  If you don’t think the number jive, then RUN.

’til next week,

Jason Wenk

3 Tips for Tax Efficiency

A more refined version of this is posted here on seekingalpha.com.

Most investors only consider tax strategies at year end and when they do their taxes.  While no one wants to spend too much time thinking about Uncle Sam, doing a few things throughout the year can make a huge impact on your after tax returns.  Below are a few excerpts and concepts from my "Tax Efficient Investing" paper.

For most investors, absolute portfolio return is the most important factor.  This is somewhat unfortunate because there are many other factors to consider such as inflation-adjusted return, risk adjusted return, benchmark performance, and post tax return.  This paper will cover some of the basic steps to take to increase your after tax returns.

1.  Structure your portfolio for tax efficiency

It is critical to put tax dis-advantaged products such as fixed income, mutual funds (especially if they have turnover issues), and short-term investments into the tax deferred accounts.  If there are additional funds to be invested outside of these vehicles, this money should be put into more tax advantageous products such as stocks and exchange traded funds.  It can become tricky to balance this with liquidity needs for emergency funds etc. but it can be done. 

2.  Be cognizant of tax effects

For example, a $10,000 long term stock holding in ABC Co. has a 50% gain and the investor is considering selling this holding for XYZ Co. because he believes XYZ will have higher returns.  The question becomes, will the increased returns make up for the fact that the investor will no longer have $10,000 to invest but will instead only have $9,250 after paying the 15% capital gains tax on ABC.  The answer lies in the investor’s time horizon as well as any external factors.

3.  Harvest taxes

This technique is typically used to offset capital gains an investor has but it can also be used to take full advantage of the $3,000 maximum allowable capital loss deduction.  The basic idea is simple; sell the assets in which you have a loss in taxable accounts.  All of the losses can be used to offset any gains you have and an additional $3,000 can be deducted from your ordinary income. ...

First of all, you cannot repurchase the asset or a substantially identical asset for at least 31 days from the time you recognize the loss.  Secondly, if you only do this at year-end, your portfolio performance will likely suffer.  Securities that are down in a given year can come under selling pressure at year-end, which causes performance abnormalities.  Therefore, tax harvesting is best done throughout the year.

If you would like a copy of the complete paper or you would like me to contact you, please click here.

Planning | Asset Protection Basics

Asset protection is all about planning and using legal techniques to prevent creditors or judgments from taking away your wealth.  There are several steps that should be taken to protect yourself.

1.  Put your assets in the most protected shelters.  401k and IRA plans offer significant protection from creditors 

2.  Purchase enough liability insurance to protect you major exposures.  In dealing with my insurance clients, I often analogize an umbrella to a wall that stands between you and the person sueing you.  Make sure this wall is large enough to protect your assets.

3.  Use business entities such as corporations and LLC's to separate yourself from your business interests.  Keep you business assets and personal assets as separate as possible.  While this is a critical step that should never be overlooked, it is important to remember that closely held business entities face the possibility of piercing the corporate veil so make sure you have proper legal advice to prevent such an incident.

4.  Do not put vehicles in your company name.  This increases the likelihood of your company being sued if you are in a collision.  There are other ways to manage and deduct vehicle expenses so talk to your CPA.

5.  Diversify your holdings.  Make sure an adverse event in one business or holding doesn't wipe you out.