7 Questions to Ask Your Financial Advisor About the Fiduciary Standard

The Department of Labor recently finalized a rule that requires all retirement advisors to operate under a fiduciary standard, meaning the advisors must act in their clients’ best interests when providing advice. This contrasts with the so-called suitability standard that many commission-based agents and brokers use, which merely requires them to offer “suitable” advice to their clients, not necessarily the best advice.

In light of this new rule, which will go into effect beginning in April 2017, we’ve created a list of top questions to ask your retirement advisor regarding the fiduciary standard.

1. Do you operate with a fiduciary standard?  Retirement advisors who are fiduciaries are required to act in your best interests without first prioritizing their own commission or their company’s revenue. This standard is federally regulated and requires advisors to act in good faith and provide full disclosure about fees, commissions or potential conflicts of interest. Investment advice from a fiduciary won’t be based on pressure to sell particular company products or on a desire to earn a commission. The advice a fiduciary gives will be conflict-free and never directly tied to the retirement advisor’s personal potential to earn.

2. If you are a fiduciary, how long have you operated with a fiduciary standard?  Some advisors may make a switch well before the rule goes into effect, and others will wait until the very last moment. It is important to consider an advisor’s philosophy and mission. You may want to choose one who abides by this standard based on integrity rather than as a requirement or to avoid a negative perception.

3. If you recently changed to operate under the fiduciary standard, why?  If a retirement advisor made a hasty switch in light of the […]

Markets Punish Sinning Mutual Fund Investors

Investors who “sin” with their mutual fund portfolios may feel the poetic justice of lower returns.

At the 2016 Morningstar Investment Conference conference, investment gurus Rob Arnott and Cliff Asness said it was okay for investors to “sin a little” by timing their use of market factors, but a study of investor returns by Chicago-based Morningstar found that “sinning” investors experience lower returns than they would in a buy-and-hold strategy.

Those who attempt market timing cost themselves between .74% and 1.32% each year compared to a fund’s total returns across the 10-year period ending Dec. 31, 2015.

Morningstar defines investor returns as dollar-weighted returns as opposed to time-weighted returns typically listed for funds. The firm calculates investor returns by adjusting a fund’s total returns to reflect monthly flows and their compounding effect over time.

For U.S. equity funds, the average annualized gap between investor returns and total returns in the 10 years ending Dec. 31, 2015 was .74%. International funds had a wider gap at 1.24%.

“Investors tend to buy high and sell low, missing out on a fund’s gains in value,” said Russel Kinnel, chair of Morningstar’s North America ratings committee, in a released statement. “Our investor returns data has shown that investing decisions made a decade ago have an impact that compounds powerfully over time. Though investor return figures have somewhat improved year over year, the latest data shows that investors still face challenges in using mutual funds correctly.”

Generally, investor returns lag a fund’s time-weighted returns because of people’s natural inclination to buy after a fund has gained value and to sell after a fund has lost value, thus missing out on the fund’s return stream.

According to Morningstar, total investor returns lagging total fund returns by 1.13% […]

Every Financial Crisis Is Different

Looking Back
Stock-market declines are always obvious in hindsight. When technology stocks reversed course in spring 2000, after years of gains, the New Era was over. Prudent investors exited. Several years later, The Big Short informs us, the smart money understood that the housing market was dangerously overheated. Most shareholders failed to perceive the problem, being caught up in the excitement, but those who viewed the situation dispassionately realized that the game was up.

Perhaps the Brexit vote will prove the same. Perhaps 2025′s Best Picture Oscar will go to a sweeping satire on the collective foolishness of the nation’s wealthy, who reaped huge profits on their post-2008 portfolios only to give back those gains during the global depression caused by Europe’s breakup. The truth was directly in front of them–but they were blind! The audience leaves satisfied; the rich got what was coming to them.

That could be. Or it could be that Brexit will affect U.S. stock prices much like Greece’s financial crisis, Putin’s aggressions, S&P’s downgrade of U.S. debt, and Washington’s budget brinkmanship. Those items splattered against the U.S. marketplace like a water balloon hitting an elephant. At the time, each seemed to be globally important, causing several weeks’ worth of stock-market losses accompanied by anxious commentary.

A sample of the latter, from 2011:
But the move by S&P still could serve as a psychological haymaker for an American economic recovery that can’t find much traction, and could do more damage to investors’ increasing lack of faith in a political system that is struggling to reach consensus even on everyday policy matters. It could lead to the prompt debt downgrades of numerous companies and states, driving up their costs of borrowing. Policy makers are also anxious […]

Betting on the Election Is Bad Business

With the Republican National Convention and Democratic Conventions this month, there is a great deal of sound and fury in the media about presidential candidates and their effect on business and the markets. The presumption is that future economic and financial performance is highly contingent upon which party occupies the White House. But is it?

Media Politricks

Media reports may lead you to conclude that your financial decisions should be influenced by electoral outcomes, when in fact nothing could be further from the truth. Our own process relies on macroeconomic and financial fundamentals to guide our investment decisions—electoral outcomes only enter into our decision-making process indirectly, through their demonstrated effects on economic and market fundamentals.

Given these conditions, let’s review what academic research and years of experience tell us about elections and financial markets:

1. “Betting” your portfolio on electoral outcomes is a fool’s game. Not only would you have to predict the winner of the election, but you would also have to accurately gauge which markets, sectors, and individual securities are likely to benefit from your anticipated result.

2. Next, you must get the timing of your trade right. For example, consider that if you are able to accurately divine answers to the questions above, other investors are likely to have done so as well. As a result, any potential benefit from your election trade may well have already been arbitraged away! Said differently, the market likely has already discounted the probability of your candidate winning. This means that even if you guess right and can predict the political and economic winner of the election, you may not reap any financial benefits. In fact, it is possible that the market may move in the opposite direction depending on […]

Ten Worst Mistakes Beginner Investors Make

The idea of making your money work for you through investments is appealing. It is also one of the ways to accumulate wealth. However, if you are a beginner investor, be warned that investments are not a free lunch. You could lose all the money you have invested, making you worse off than you were before you started. To prevent this, here are ten mistakes to avoid:

Don’t confuse gambling or speculation with making an investment. If you are acting on a hot tip or blindly picking a stock, you are not investing. Investing means making a decision that you are comfortable with and prepared to stick with for a while.
Not researching the investment you are interested in. Research helps you understand an instrument or product and know what you are getting into. If you are investing in a stock, for instance, research the company and its business plans.
Also, don’t invest without a time horizon in mind. If you are planning to accumulate money to buy a house, that could be more of a medium-term time frame. However, if you are investing to finance a young child’s college education, that is more of a long-term investment. You will have to find investments suitable to your time horizon.
Remember that the return you expect comes with a risk. If an investment offers very attractive returns, also look at its risk profile and see how much money you could lose if things go wrong. And do not invest more than you can afford to lose.
Do not lose sight of your risk tolerance, or your capacity to take on risk. If you are the sort of investor who can’t stomach volatility and the multiple ups and downs associated with […]

D2 Capital Management Mid Year Report 2016


Bearish Investors Are a Bullish Sign for Stocks

Market expectations are that The Federal Reserve is unlikely to raise rates this year in light of weak growth and the deteriorating financial conditions associated with Britain’s vote to leave the European Union, known as Brexit.

We expect the U.S. economy and stock market to continue producing mixed results. One silver lining is that sluggish growth has kept interest rates low and inflation at bay.

Stock market valuations are slightly elevated, while earnings growth remains weak. The aftermath of Brexit, along with the highly contentious presidential election, are likely to bring continued bouts of volatility and uncertainty. But to us this uncertainty and pessimism of investors represents the most compelling support for stock prices longer term in terms of sentiment.

Volatility—recently and prospectively—has been partly a function of Fed policy uncertainty as it relates to the “loop” in which financial conditions have been over the past year or so (as shown in the graphic below).

Driven largely by the direction of the U.S. dollar, financial conditions have been waffling between easy and tight. This in turn has kept the Fed moving between a “hawkish” and “dovish” stance. The Brexit-related hit to financial conditions supports a more dovish Fed and suggests a continuation of the frustrating range-bound and volatile stock market behavior.

The U.S. economy continues to move like a SLUG—with Slow, Lumbering, Unstable Growth. Every time it seems to take two steps forward, it falters. This phenomenon is not new. There has been a meaningful slowdown in growth every year since the economic expansion began in June 2009, including this year.

In a couple of those years, recession risk appeared elevated. Yet the U.S. stock market has had an incredible run, with a total return of about 250% in the S&P […]