To clarify, there is nothing wrong with selling products, many salesman have become successful by being honest when others are not and by giving honest opinions even when it means they don’t get the business.

However, would you see a cancer doctor who was only compensated by selling drugs by certain drug manufactures?  Would you hire a lawyer that was selling something?

So, why would we seek investment advice from those whose main source of revenue comes from selling mutual funds, annuities, and stocks trades?  This happens all the time, under the guise of “Financial Advisor”.

Not all Brokers take advantage of clients; they usually just do not have the freedom not to.

Trading Tips

A while back on the Front page of the Wall Street Journal was an article uncovering some disturbing practices by Goldman Sachs.  Goldman Sachs has been sending out written research reports by its analyst to thousands of its clients, all the while holding weekly analyst conference calls with select clients called the “trading Huddle”.  During these conference calls analyst give their true opinions about company stocks, the overall market, and which stocks are likely to rise in value over the short run.  Often these conference calls go against the written reports.

There is also an example given that after one day after the Janus Capital Group, Inc was given a neutral rating, research analysts called 50 of the firm’s selected clients to tell them the stock was likely to move higher.  Unfortunately, news leaks out like this all the time, where unethical practices take advantage of clients to the gain of the company.

Other major brokerage houses do the same thing; however they disclose that they may give advice to premium-paying clients that differs from the written reports.

T.V. Selling

When you watch interviews with CEOs and leading market strategist they explain with great enthusiasm what they are doing for their clients-today. To be clear, chief strategist and research analysts are hired by large security firms to sell advice to clients in order to generate income through the trading of stocks and bonds.

Something that drove this home for me was one day a guest host-a chief strategist for some well-known securities firm, said in a very long winded speech that he agreed with others at the table that traders should raise their cash allocations but should do so by taking a short position in their stocks equal to their long position in order to quickly reenter the market when they became more bullish.  If you’re confused about this, know that I am too.

Close to Home

We use TD Ameritrade to hold all our client’s assets and also use them to execute transactions for us.  TD Ameritrade is responsible for a large percentage of daily trading on the US stock exchanges.  They have two main “sides” to the business; retail and institutional.  Retail, is for individuals to keep traditional and Roth IRAs at or to have a regular trading account at.  Institutional is for professional money managers to keep asset there, this is called a custodial relationship.  The institutional side has many features and functions retail investors do not have access to.

The main difference between the two sides is that, the retail side of individuals is flooded with reports and features for the technical, frequently trading, active investor.  On the institutional side there is no such push or functionality for this kind of charting.  Why? Because most professionals, who do not receive compensation for trades, do not invest clients’ assets in this way.

Most, independent money management firms invest with a long term outlook.  This is true of most pension consulting groups, endowments, bank trusts, mutual funds, and privately, financial journalist.

The reason for this difference is because TD Ameritrade receives a very reasonable $9.99 per trade.

What It Comes Down To

The problem with financial advice comes down to this fact; advice should be paid for separately from products and products should not pay the advice giver.  And guess what, the overall cost of paying for independent advice will most certainly cost less than the expensive products being sold to you.

An industry word we throw around a lot called fiduciary is the difference here.  Doctors, lawyers and even real estate agents have this same standard.  Fiduciary means to act on someone else’s behalf, simply to act in a person’s best interest.  Brokerage houses have a lot of power in lobbying to Washington and have thus far kept themselves out of being fiduciaries to clients.

What most independent, fee-only, Registered Investment Advisors see as the largest problem, is that the general public and many politicians see brokers and Registered Investment Advisors the same.  Brokers, for years now have put “Financial Advisor” on the business cards and in their titles.  Titles like financial advisor and financial planner blur the lines between the two.  All major brokerage houses run commercials that further blur the lines.  Many people, now, are not even aware that there is anything else.

Many clients that come to us from Brokerage houses are confused when we plainly disclose the predetermined fees we bill them each quarter.  This is because when you work with “financial advisors” or brokers, fees are hidden and reported as decrease in return.  In this way, “financial Advisors” can charge you fees no one would agree to if they knew.  This is how, not even the most honest, most genuine financial advisor could possibly serve the best interest of their clients.

ABOUT WISER WEALTH MANAGEMENT. INC

Wiser Wealth Management, Inc is a private fee only investment firm located in Marietta, Georgia on the Historic Square. As a Fee Only investment firm we do not receive commissions from any financial products. Wiser Wealth Management is a registered investment advisory firm licensed in the State of Georgia, as such, we have a fiduciary responsibility to act in the best interest of our clients.

FIDUCIARY

Fiduciary responsibility is what sets Wiser Wealth Management, apart from other advisors. This mandates that Wiser Wealth Management…

• Finds the most efficient and cost effective investment options
• Acts prudently in the client’s best interest
• In contrast, brokers are not held to the same standards

OUR INVESTING PHILOSOPHY

• Maintain a Diversified Portfolio
• Keep the cost of investing low
• Always invest for the long term

DIVERSIFICATION

Through DIVERSIFICATION an investor can REDUCE 1 of the 2 kinds of investing RISK

1. Systematic risk is the risk of the entire world stock market and can not be reduced
2. Non-systematic risk (business risk), is the risk of owning individual securities. This risk can be eliminated through diversification

Examples of business risk: Enron’s bankruptcy, World Com’s accounting fraud, Overpriced tech stocks during the technology bubble, etc.

Wiser Wealth Management believes proper diversification is obtained by allocating assets across many different asset classes. Optimizing the type of funds in a portfolio is essential to reducing risk. This is why at Wiser Wealth Management we create our portfolios to capture the entire world market. The most effective way to gain exposure to market diversification is through index funds via exchange traded funds.

WHAT IS AN INDEX?

An index is a basket of securities that represents a segment of the stock market. For example:

The S&P 500 represents the 500 largest companies in the United States

The MSCI EAFE Index is a foreign index that holds companies incorporated in Europe, Australia, and the Far East, totaling over 1,400 securities.

WHY INDEX?

A recent study shows that between 1975 and 2006, 99% of active Domestic US Mutual Fund Managers failed to beat the S&P 500.* Indexing removes human behavior, inaccurate market timing and poor stock picking which leads to the under performing of fund managers.Through indexing we can obtain less business risk through diversification and higher returns from lower cost.

*False Discoveries in Mutual Funds: Measuring Luck in Estimated Alphas   University of Maryand-Robert H. Smith School of Business

INDEXING THROUGH EXCHANGE TRADED FUNDS (ETFs)

An ETF (Exchange Trade Fund) is an investment vehicle that allows investors to invest directly into an index, at a much lower cost than traditional mutual funds. Since 1993, the ETF industry has responded to the incompetence of active fund managers and the limitations of index mutual funds. ETFs have experienced tremendous growth in assets under management compared to mutual funds since their introduction in 1993.

MAJOR DIFFERENCES BETWEEN MUTUAL FUNDS & ETF’S

Mutual Funds are traded at NAV (Net Asset Value) after market close and only have to report their holdings quarterly. ETF’s trade during market hours just like a stock and their holdings are reported virtually real time. Mutual Funds depend on a fund manager to pick stocks, where an ETF simply purchases and holds the stock in its assigned index. The average cost of an ETF is .50% where the Mutual Fund average is 1.5%.

WHAT MUTUAL FUNDS DON’T TELL YOU!

Mutual Funds incur additional unreported fees from trading securities in the market place. These transactions are deducted from the funds master account.

HOW MUCH DOES THIS COST YOU?

It depends on the turnover rate of the fund. For example if a fund manager turns over the securities in the portfolio 100% during the year, this means he never held a security for more than 12 months. 100% in turnover can equal roughly 1.0% in additional fees. A 25% turnover ratio will equal .25% in additional fees as would a 300% turnover ratio cost an investor 3% in more fees. In contrast, Exchange Traded Funds usually have no to very little turnover, making your cost much lower.*

*”Mutual Funds: Risk Without Reward” Personalfund.com

WHAT DOES AN INDEX PORTFOLIO LOOK LIKE?

Here is a sample of our Moderate Risk portfolio:

• Short Term Government Bond Index
• Barclays Aggregate Bond Index
• High Yield Bond Index
• Emerging Market Bond Index
• S&P 500 Index (Large Companies)
• S&P 400 Index (Mid Size Companies)
• S&P 600 Index (Small Companies)
• International Treasury Bond Index
• MSCI Europe Australia Far East International Index
• Emerging Markets
• Dow Jones Commodity Index

DIVERSIFICATION THROUGH INDEXING WINS!

This Moderate Portfolio has a annualized 9.5 year rate of return of 8%. In Contrast the S&P 500 has had an annualized rate of return of 1.5% over the same period.

* Return calculated from January 1999 to July 2008

INDEXING IS FOR INCOME INVESTING TOO

Most financial institutions will place you in expensive annuities, undiversified bond holdings or mutual funds to achieve income. Wiser Wealth Management purchases indexes holding High yield stock, bonds, REIT’S, and or Preferred Stock, creating income for those in search of diversification and regularly scheduled withdrawals.

WISER INVESTING

Indexing is certainly not as thrilling as picking a stock your friend or colleague said is the next Google, but in the long run academic and professional research shows us that diversification and a long term time horizon wins the race.

IF I INDEX, AM I JUST GOING TO BE AVERAGE?

We use an indexing strategy because history tells us it performs better than stock picking and market timing over the long term. We invest in indexes across many different asset classes. This allows us to either track the S&P 500 with less risk, or beat the S&P 500 over the long run with the same amount of risk. If you only buy the S&P 500 index, you will just be average, but the average is what the mutual fund managers can’t seem to consistently beat over the long term.

Remember: Keep Cost Low, Stay Diversified, and Invest For the Long Term.

Wiser Wealth Management has a fiduciary responsibility to act in the best interest of its clients at all times. Brokerage firms generally are not fiduciaries to their clients and therefore may not make decisions that are solely in their clients best interest.

Wiser Wealth Management provides its clients with a Form ADV that describes exactly how we do business and obtains our clients consent to any conflicts of interest that may exist in our business. Brokerage firms are not required to provide clients with any comparable type of disclosure.

Wiser Wealth Management charges our clients a fee negotiated in advance and cannot earn any other profits from their clients without the clients’ prior consent. We charge an asset-based fee, so that our interest are aligned with our clients. Brokerage firms’ revenues may increase even if the customers’ assets shrink.

Wiser Wealth Management manages money in the best interest of our clients. We do not engage in business activities like investment banking or underwriting, which brokerage firms do. These other businesses may cause a brokerage firm’s interest or attention to focus on other areas of the firm outside of their retail brokerage business and clients

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WHAT ARE THE ADVANTAGES OF WORKING WITH WISER WEALTH MANAGEMENT, INC OVER A BANK OR STOCKBROKER?

Wiser Wealth Management is held to a higher standard than stockbrokers when it comes to putting investors’ interest first and doing the right thing for our clients’ investments. Independent RIA’s have a fiduciary duty to their clients which means we must:

Act in the best interest of our client

Identify and monitor illiquid securities

Employ fair market valuation procedures where appropriate

Observe procedures regarding the allocation of investment opportunities: including new issues and the aggregation of orders

Have policies regarding affiliated broker-dealers and maintenance of brokerage accounts

Disclose all conflicts of interest

Have policies on use of brokerage commissions for research

Have policies regarding directed brokerage, including step-out trades and payment for order flow

Abide by a code of ethics

Stockbrokers are held to suitability obligations on the part of their broker dealer:

Reasonable Basis Suitability – the broker dealer must believe that the recommended security is suitable for any investor

Customer Specific Suitability – the broker dealer must believe that its recommendation is suitable for that particular investor.

Diversification

Diversification when investing is spreading your investments out to eliminate business risk.  Business risk is the risk one company, industry, or sector has.  This does not include the risk of the economy but the risk of a particular business model and the risk from management making poor decisions.  Proper diversification takes this risk away.  The other risk that can not be taken away is market risk.  Market risk is the risk of the overall economy on the stock market.  ‘Cashing out’ of the stock market is a common method of trying to eliminate this risk but the difficulties of forecasting downturns often makes this method hard to act on.  September 2008 showed how hard it is to avoid market risk.  When the giant, Lehman Brothers filed bankruptcy many money market funds’ value dropped below $1.  This means that what people thought of as cash lost value.  A dollar invested in cash became at that time $.98.  If you are following this, you know that a money market fund breaking a dollar is business risk gone badly.  This is a small example, and those holding any insurance or banking stock will know, business risk has been abundant in 2008.

In the past, it was thought that proper diversification could be found in 15 stocks, than it was 30 stocks.  Now, finance books report 50 stocks are needed to supply diversification.  So what does that mean, 50 stocks are needed to gain diversification?  It means that the there is no more additional benefit in adding one more stock.  However, William Bernstein has written about the research done by Burton Malkiel, author of “A Random Walk Down Wall Street.”  In Burton Malkiel’s research he shows that proper diversification requires a lot more than 15 stocks.  Berstein goes further to add that 200 stocks are not enough and that the only way is to hold all the stocks in the stock market.  This may be new to you but in affect, this is called indexing.  He does not provide a recipe for the weightings of all the stocks in the stock market but he is clear that there is no point where adding another stock is not beneficial.  It is clear by looking at all the research that there is the most addition benefit in adding stocks to a portfolio with less than 50 securities, however what this research says is that risk reduction can still be had by having highly diversified portfolio representing all the stocks available.  In affect, this is free and easy risk reduction.

Diversifying Through ETFs

To obtain and build a highly diversified portfolio is very costly for most investors, since they must incur trading costs.  Exchange Traded Funds (ETFs) can solve this problem.  ETFs are like mutual funds, except they make no management decisions, are designed to track an index like the S&P 500 or Russell 1000.  Investors can trade ETFs intraday like stocks.  ETFs can be considered investable indexes.  Investors wanting to use indexing or add an indexing component to their portfolios can utilize the benefits of constructing portfolios or different asset classes.  Building efficient portfolios can be done easily with knowledge of modern portfolio theory and its techniques.

All investments have fluctuations.  Houses, property, oil, and of course stocks and bonds.  We call the amount of variability standard deviation (variance is the square root of standard deviation), remember high school statistics class.  So, we measure the fluctuations of our portfolios and the stock and bond market by standard deviation.

Since all assets have fluctuations, we define more risky assets as having higher fluctuations about the mean or higher standard deviation.  Therefore in highly diversified portfolios, we can minimize the amount of risk of a portfolio by adding assets that have different fluctuations at different times or low statistical correlation.  This is a very simple version of Modern Portfolio Theory (MPT), which Harry Markowitz won a Nobel Prize for and detailed in his book, “Portfolio Selection”.  Using MPT one can ‘optimize’ a portfolio, minimizing risk and maximizing expected return.

This can give a portfolio made of many assets lower risk than each individual asset.