Tag:

funds newsletter

Can Index Funds Replace an Advisor?

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

In a few short days – Aug. 30, to be precise – billionaire Warren Buffett will turn 89 years old. Worried investors should note that Charlie Munger, Buffett's sidekick at Berkshire Hathaway (ticker: BRK.A, BRK.B) in Nebraska, is a very sharp 95.If you're wondering at this point what the devil counting birthdays has to do with investing, consider how Buffett wants to provide for Astrid Menks, his wife since 2006. For fund managers, Buffett's 2013 letter to Berkshire Hathaway shareholders might as well serve as a sharp stick in the eye:"One bequest provides that cash will be delivered to a trustee for my wife's benefit," Buffett wrote. "My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund." (He suggested Vanguard, by the way.)The Oracle of Omaha concluded: "I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers."Or, you could say, Ouch. Buffett insists you don't need a Wall Street type to manage your investments after all. Invest in the index, cut out the middleman and reinvest those saved fees to realize huge rewards over time through the magic of compound interest.The subject of fees and the financial managers who charge them has hardly been a sweep-it-under-the rug affair for investors. The conversation has in fact heated to contentious levels, some of the credit or blame courtesy of the "Freakonomics" public radio show. In case you might've missed it, episode 297, dated March 21, 2018, was titled "The Stupidest Thing You Can Do With Your Money."On it, Stephen J. Dubner reaches a well-reasoned conclusion – backed by financial industry immortals – that the money spent on fees is a waste when compared to the strategy of the passive fund that tracks a market index. He cites a study where only the top 2% to 3% of active fund managers had enough skill to cover their cost. But how far can Buffett's stock market strategy be taken portfolio-wide for the typical investor? After all, 99.99% can't leverage a Buffett-sized fortune and place it in an index fund. Thus many industry experts contend that if you try Buffett's approach as a one size fits all, you might as well climb into a potato sack and call it a three-piece suit."Without an advisor what factors would an investor use to decide which indexes to invest in, at what percentage and how should the investment allocations change over time?" says Ken Stern, senior managing director of Lido Advisors in Los Angeles."I disagree that low-fee index funds are an adequate replacement for an advisor," says John Foxworthy, founder of Foxworthy Wealth Advisors in Fort Wayne, Indiana."These vehicles are changing the concept that an advisor is a 'stock picker,' but there is much more to it than that," Foxworthy says. "The individual exchange traded funds are just ingredients. It takes a good chef to be able to combine those ingredients into a delicious meal.""If the goal is simply to invest money indefinitely then a low-cost index is perfect and a great part of executing a financial plan," says Adriel Tam, CEO and co-founder of Viridian Advisors in Seattle. "However if you have a time horizon like retirement, college planning or a need to use the investments at a later point, then no."Tam's observation raises a salient point: Market index funds and paying an advisor need not represent an all-or-nothing choice."We do not believe the decision to use index funds or to have an advisor are necessarily mutually exclusive," says Geoffrey Sulanke, director of manager research at Davenport & Company in Richmond, Virginia. "Just as you would not try to build a house without a blueprint, you should not approach your finances without making some type of plan before you begin."Ah, ha! No two homes are alike, nor are the resources to build them or the ultimate goals they serve. So getting your financial house in order can be risky business if you spend too much time making sidelong, envious glances at your neighbor's pad.Likewise, no two advisors charge the same amount."There are so many advisors that you can shop around for advisors who charge the least fees," says Mayra Rodriguez Valladares, managing principal at MRV Associates and a bank regulatory and capital markets consultant based in New York. "Always make sure to ask your advisor what he or she invests in to see if they have skin in the game."Investors will benefit from periodically reviewing their assets, how they are allocated and how their efforts to diversify are faring in the stock market.Robert Johnson, a finance professor at Creighton University and longtime follower of Buffett, understands the billionaire's approach in fine detail. Thus he's able to break down The Oracle's proclamation in everyday investing terms.That is: While the numbers say one thing, investors too often do another and it's often frustratingly flawed. So the purpose of a great advisor might be – and often is – to protect people from themselves."The biggest advantage of an advisor is not the financial expertise provided or the investment decisions made," Johnson says. "It's that she will calm you down during times of market turmoil, talking you out of panicking and making sweeping changes to your portfolio."Daniel Kern, chief investment officer at TFC Financial Management in Boston, agrees with this brake on investing emotion."Advisors are a necessary counterweight to many self-destructive behavioral tendencies," Kern says. "It's easy to lose perspective in a soundbite-driven environment that magnifies the natural fight or flight response under stress, which often leads investors to trade too much and to trade at the wrong times."And unfortunately, some investors – even those ensconced in an ETF – feed off manic energy to reckless ends."Anyone can buy an index fund," says Steven Jon Kaplan, CEO at True Contrarian Investments. "A true advisor will keep their clients in alternatives during bear markets even if that means something boring like four-week U.S. Treasurys and/or bank CDs."That said, you could ride out the biggest of bears if you're willing to adopt the supremely patient modus operandi of Buffett. He famously said his favorite holding period for a stock is "forever." And as he closes in on 90, he's as close to that mark as anyone.

February 21, 2020 0 comment

Financial Advisors

What Is Direct Indexing?

by sshrx_ns3li1 February 21, 2020

written by sshrx_ns3li1

Index mutual funds and exchange traded funds can offer all-in-one exposure to the stock market through the indices they track. But there's another way to match the performance of a benchmark index without buying into funds: direct indexing.What Is Direct Indexing?"Simply put, it attempts to replicate the performance of an index by purchasing the underlying individual equities instead of using an ETF or mutual fund in an investor's portfolio," says Rob Cavallaro, chief investment officer at RobustWealth.Though the concept has been around for decades, it's only recently begun to move into the mainstream. Digital investing platforms and fractional share trading have made the direct index method more accessible to a broader range of investors, beyond just the ultra-wealthy.With more financial advisory firms and robo advisory platforms offering this option, it could give traditional index funds and ETFs a run for their money.How direct indexing works.The direct index advantage.It may not be right for every investor.How Does Direct Indexing Work?It may sound complicated but it's a simple enough concept."At its core, direct indexing is the idea of owning an index," says Michael Neuenschwander, a certified financial planner at Outlook Wealth Advisors in HoustonRather than purchasing a mutual fund that holds all of the stocks in the S&P 500, for example, investors can purchase shares of all 500 stocks individually. This is made easier through fractional investing."Fractional share trading allows very small amounts of money to be invested in each position, allowing even the smallest investor to participate, Cavallaro says." That's a boon for investors who want to own larger companies, such as Alphabet (ticker: GOOG, GOOGL) or Amazon (AMZN) but doesn't have thousands of dollars to tie up in a single share.Daniel R. Hill, president and CEO of D.R. Hill Wealth Strategies, says this approach hinges on the idea that owning all the securities in an underlying asset class will provide some premium above the index return."This concept was developed when the research showed that the active manager fails to beat the market the vast majority of the time, so investors have a higher probability of success if they just own the index," he says.The Direct Index AdvantageThere are several benefits this approach can offer over other investing strategies. The first is tax-efficiency, says Shana Sissel, senior portfolio manager at CLS Investments in Omaha, Nebraska. "With a direct indexing portfolio, the portfolio manager can go in and harvest tax losses at the individual position level for the client when the opportunity arises," Sissel says.This offers more control over gains and losses throughout the year, while still maintaining the risk-return profile of the benchmark the investor is attempting to match. It becomes easier to optimize tax outcomes and minimize the chances of receiving an unexpected tax bill for capital gains. With an indirect strategy, the entire fund would have to be bought or sold to harvest losses, offering a lower level of customization to investor needs and objectives.Customization also extends to building a portfolio that reflects individual values. "Investors and advisors can select individual securities that align with their ethical and moral beliefs or avoid securities that don't," Cavallaro says. The result is a completely personalized portfolio.Another advantage is reduced operating costs for the do-it-yourself investor who's trading securities from a chosen index themselves through a brokerage account. Kip Meadows, founder and CEO of fund administration firm Nottingham, says cost benefits are realized when the trading account is large enough to absorb transaction costs associated with making trades.When trading index mutual funds or ETFs, investors pay not only transaction costs but the individual expense ratios for each fund. The expense ratio reflects the annual cost of owning the fund, expressed as a percentage. Buying full or fractional stock shares individually avoids that cost.Finally, direct indexing can be a pathway to managing risk."Research shows that investors can reduce company risk by owning more companies," Hill says. "By owning the index instead of some lesser portion of the index one reduces the overall volatility of their portfolio."It May Not Fit Every InvestorWhen considering any new investment strategy, it's always important to look at the potential drawbacks. The first challenge associated with direct indexing is that it requires the willingness to be a hands-on investor."There is an intensive management aspect to it," Sissel says.Indexing directly may be fairly straightforward when buying securities for an index such as the S&P 500. But it can get more complicated when attempting to replicate something like the Russell 2000, where liquidity issues may exist with underlying assets, or an international stock index.Aside from that, the trading frequency may be higher, particularly if the stock market enters a volatile period. That could mean paying more in trading or management fees.Neuenschwander says this is true for both the DIY investor and one who indexes directly with the help of an investment firm or advisor. "If all you're getting for those trading and management fees is the risk and return of the index, the extra expenses may not be worth direct indexing," he says.Comparing transaction fees against fund expense ratios can put costs in perspective."With an index like the S&P 500, transaction costs for 500 securities, even at $5 per transaction, still total $2,500," Meadows says. "If your index portfolio is $250,000, that equals 1%, which is likely significantly higher than a comparable index fund or ETF."For that reason, experts often agree that direct indexing may be most appropriate for investors who have large after-tax investments. Smaller investors, on the other hand, or those who are newer to the stock market may continue to be better served by the simplicity and cost-efficiency of an index fund or ETF.There's also diversification to consider. Hill says investors should take time to understand how a particular index is cap weighted such as large cap versus mid cap or small cap indexes.The Dow Jones Industrial Average, for example, is composed of large cap, blue chip companies. An investor who indexes directly would need to ensure they're balancing out those large cap holdings appropriately elsewhere in their portfolio."For investors where direct indexing does fit, then the natural next step is to determine what combination of indices fit your goals and objectives," Neuenschwander says. That means keeping risk tolerance, risk capacity, which refers to the amount of risk needed to achieve investment targets, and overall portfolio diversification in view.

February 21, 2020 0 comment

Financial Advisors

8 Facts to Know About No-Commission Trades

by sshrx_ns3li1 February 20, 2020

written by sshrx_ns3li1

More firms are announcing free trade options.
Major brokerages such as Interactive Brokers, Charles Schwab and E-Trade, among others, recently announced that they would stop charging commissions to their clients who trade stocks and exchange-traded funds. Anytime people can pay less or nothing to invest, it helps them boost returns by keeping more money. Market watchers say brokerage houses' decision to drop certain trading fees is part of a trend of lower investment costs in general over the years such as falling expense ratios. But brokerages aren't offering free trading services because they're altruistic. These companies are fending off competition from newer online brokerages. Here are eight facts you should know about free trades.

Brokerage firms are looking to retain clients.
Scott Coyle, CEO of Click IPO, which allows investors to buy individual initial public offerings, says these bigger firms likely made the move to retain clients as they may have seen customers transfer to newer platforms like Robinhood, which has been offering free trades for about seven years. If the more established brokerage firms see less attrition in their customer base, they not only keep those customers but can now recruit newer customers with the added lure of free trading. "These broker dealers that have been around much longer have more robust platforms, they offer a lot more things than some of the newer free-trading firms do," he says.

Mutual funds are not included.
The brokerage firms touting their free stock and exchange-traded fund trades were silent about mutual funds. That’s because mutual funds aren’t part of the no-commission deal, says Kevin Dorwin, managing principal at wealth management firm Bingham, Osborn & Scarborough. “Mutual funds, for the most part, are still priced much higher because they're harder for the brokerages to administer. And I think a lot of people use mutual funds, so they're not really saving on that at this point,” he says. Fees vary widely by brokerages and the type of mutual fund but they can cost between $20 to $40 to trade. Many brokerage houses are also allowing people to trade options commission-free, although option traders may still need to pay a fee of 65 cents per contract.

The average investor may not save much money.
Trading fees and expense ratios for stocks, ETFs and options have dropped over the past several years, which benefits investors overall. The trend of lower expense ratios for ETFs and mutual funds has helped average investors. But this move by brokerage houses to eliminate trading commissions may not save the average person who doesn’t trade a lot, Dorwin says. “Most ordinary people don't trade so much for that to be a huge benefit. The people who do truly win are those who trade frequently, and that's not always a great strategy for individual investors,” he says.

Free stuff isn’t always a good thing.
Todd Rosenbluth, director of ETF research at CFRA Research, says if people don’t have to pay a commission to trade, it could entice more trading. “The key takeaway to me is just because something is unlimited, it doesn’t mean that investors should take full advantage of it,” he says. The downside to no-cost trading may mean people will trade more than they do now, which means they could be moving in and out of the market and trying to make short-term calls because there’s no cost to do so. “It’s a lot harder to time the market and you’re a lot better off having time in the market,” he says.

Brokerages make money in other ways.
Jim Besaw, principal and chief investment officer at GenTrust, says it was easy for brokerages to offer free trading since the money earned on commission by many of the custodians wasn’t a large portion of revenue. They make more money on other services, he says. Payment for order flow, which is the pay that firms receive for directing orders to different parties to execute trades, can generate revenue particularly in low-liquidity markets, he says. Firms also make money on securities lending programs, when investors loan stock to other traders who want to sell short the security. Investors and brokers are supposed to split the revenue earned, but the divide isn’t always clear. These money-generating activities are fine. But Besaw says it’s not easy for customers to easily figure out these costs as some brokerages are less transparent than others.

Watch cash sweep accounts.
Besaw says cash sweep accounts, which is where brokerages deposit investor cash until investors deploy it into another investment vehicle, are a top money-generator for firms. That’s because firms often pay low interest rates on these cash deposits or move these funds into a in-house money market mutual fund, with a high expense ratio. “In many cases, that’s a much higher number than the other fees,” he says. “If a client has 5% or 10% of their money in cash, in many cases, the custodian's paying them 1% less than they should. So the custodians really making 1% on that 10%, which is 10 basis points, which are pretty big numbers.” Investors can avoid this by not letting their money sit long in a cash sweep account.

Investors may make better fund choices.
Before eliminating trading fees, some brokerages had a list of ETFs they offered for no-commission trading and Rosenbluth says fee-conscious investors often gravitated to those without considering other investing aspects. “Now the whole universe is open,” he says. Investors can now sort through ETFs based on expense ratios, liquidity, performance and other factors without being influenced by trading fees associated with the funds. It may also encourage better portfolio maintenance. Investors who use a broadly diversified strategy with five or six ETFs might be more likely to rebalance that portfolio regularly because there isn't a cost to buy and sell those positions, he says.

Investors may be less likely to liquidate accounts.
Rosenbluth says he’s heard discussions that axing trading fees may increase demand for highly liquid, ultra-short-term bond ETFs during volatile times. These ETFs have maturity and duration of less than one year, such as iShares Short Treasury Bond ETF (ticker: SHV), which has a yield of 2% and an expense ratio of 0.15%, a cost of $15 for every $10,000 invested. With no trading fees, investors could move to these safer ETFs, rather than liquidate all their holdings and stuff it in a low-interest bank savings account. Investors may return to the stock market quicker when they feel like taking more risks since there’s no cost to trade, he says.

Facts about no-commission trading:
Brokerage firms are looking to retain clients.Mutual funds are not included.The average investor may not save much money.Free stuff isn’t always a good thing.Brokerages make money in other ways.Watch cash sweep accounts.Investors may make better fund choices.Investors may be less likely to liquidate accounts.

February 20, 2020 0 comment

Financial Advisors

5 Best Robo Advisors for Managing ESG Funds

by sshrx_ns3li1 February 20, 2020

written by sshrx_ns3li1

Environmental, social and governance funds, or ESG, belong to the family of sustainable, responsible and impact investing, sometimes referred to as SRI. This alphabet soup of investment strategies is a newer investment approach that strives to generate high long-term returns and positive societal results.ESG investing can be accomplished by investing in individual stocks and bonds, specifically targeted SRI funds, and employing a digital or a robo investment manager who specializes in this approach.From minimal ESG investing opportunities in the 1990s to about $12 trillion in assets under management in 2017, socially responsible investing is growing in popularity. The US SIF Foundation's most recent biennial report found that one in four dollars of professionally managed funds is directed toward ESG investing. (https://www.ussif.org/sribasics)Not only individual investors but credit unions, community banks hospitals, foundations, religious institutions, venture capitalists and public pensions invest in ESG investing companies.Answering to public demand, robo advisory digital investment managers, a type of nonhuman advisor, are now in the movement.The best ESG robo advisor will incorporate SRI investing criteria that matter to you, the opportunity to customize the investment options and low fees. Here are five of the best ESG robo-advisor services:M1 Finance.Betterment.EarthFolio.Wealthsimple.Motif Impact Portfolios.M1 FinanceThis unique platform offers both managed robo advisors and do-it-yourself investing under one roof. Investopedia's editor in chief, Caleb Silver, (https://www.linkedin.com/in/caleb-silver-9639585/) OK on this source this time. But Investopedia is one of our direct competitors so please avoid in the future.ranks M1 as a top ESG platform. "They have two socially responsible portfolios made up of Nuveen ETFs, listed under Expert Pies or you can construct a collection of stocks that meet your criteria." The account minimum is $100 and there are no trading fees, provided an account has at least a $20 balance. Experts say M1 Finance is unique among the SRI robo advisors in that it doesn't charge any management fee to use the platform.BettermentBetterment customers can choose to invest in their SRI portfolios with low fees and strong socially responsible metrics. This investment choice adheres to Betterment's low-cost and diversified approach while increasing exposure to companies that meet delineated SRI criteria. The Betterment socially responsible investing avoids companies with unsavory corporate governance and unfair labor practices."We'll prioritize excluding inappropriate stocks from the SRI portfolio and replace them with companies deemed to have strong social responsibility practices such as Microsoft (ticker: MSFT), Google (GOOG, GOOGL), Procter & Gamble (PG), Merck (MRK), Coca-Cola (KO), Intel (INTC), Cisco (CSCO), Disney (DIS) and IBM (IBM)," says Adam Grealish, Betterment's director of investing(https://www.linkedin.com/in/adamgrealish/) thank you. For example, in the U.S. large-cap stock allocation, selections include the iShares MSCI KLD 400 Social ETF (DSI). Betterment's low 0.25% management fee is reasonable when compared to other robo advisors and financial planners.EarthFolioEarthFolio is one of a handful of SRI investing robo advisors. This robo advisor invests exclusively in funds classified as sustainable or responsible. To make the cut, the fund's prospectus must delineate the specific ESG criteria used in the stock or bond selection. Unlike some ESG robo advisory competitors, EarthFolio offers bond funds in addition to other ESG funds.Earthfolio requires a $25,000 minimum investment amount and thus may be out of reach for new investors. EarthFolio offers a wider range of ESG investments and also provides a free head-to-head comparison of an investor's current portfolio with the EarthFolio recommendation. With a 0.5% management fee, it is one of the more expensive SRI investment robo advisors, although it compares favorably with traditional financial advisory fees.https://www.earthfolio.net/FAQ/WealthsimpleThere are a few fund names in this graph that don't match up with the tickers that you've given. Take a look. I've provided a few links, too.Launched in 2017, this Canadian robo advisor also operates in the U.S. and the U.K. The SRI options include ETFs representing iShares MSCI ACWI Low Carbon Target ETF (CRBN), Invesco Cleantech ETF (PZD), iShares MSCI KLD 400 Social ETF Is this what you mean?YES, SPDR SSGA Gender Diversity Index ETFIs this what you mean?yes (SHE), Invesco Taxable Municipal Bond ETF (BAB For BAB I'm getting this fund: https://money.usnews.com/funds/etfs/long-term-bond/invesco-taxable-municipal-bond-etf/bab. So do you mean BAB?yes-Investco Taxable Municipal Bond ETF) and iShares GNMA Bond ETF (GNMA) For GNMA, do you mean https://money.usnews.com/funds/etfs/intermediate-government/ishares-gnma-bond-etf/gnma YES iShares GNMA Bond Fund . Around 25% of Wealthsimple's clients have socially responsible portfolios.Wealthsimple offers three investment levels with management fees ranging from 0.4% to 0.5% of assets under management. All Wealthsimple clients have access to financial advisors, and halal portfolios are available for those who want to align their portfolios with Islamic religious beliefs.Motif Impact PortfoliosMotif Impact Portfolios encompasses both robo advisory services, investing in theme-driven portfolios, and more. One of the earlier platforms to use data and analytics to find unique investment opportunities, there are managed portfolios and DIY investing options.Silver recommends the Motif Investing Impact Portfolios which are populated with individual ESG stocks not exchange-traded funds. The ESG offerings fall into one of the categories: sustainable planet, fair labor and good corporation behavior.Motif requires a $1,000 minimum investment amount and charges 0.25% in management fees. The Motif Impact Portfolios offer stocks from five distinct asset classes that adhere to tax-aware rebalancing and minimize asset sales. In addition to the preselected ESG offerings, investors may create their own collections of ESG stocks.More Socially Responsible ESG Robo-AdvisorsThe following list includes other ESG investing companies in alphabetical order: Axos Invest.Ellevest.OpenInvest.Personal Capital.SustainFolio.TIAA Personal Portfolio.More socially responsible robo advisors will likely be added as the socially responsible investing field expands. For those who are seeking a set it and forget it socially responsible platform, there are many SRI robo advisor options from which to choose. It's likely that even if a current robo advisor lacks socially responsible investing choices today, it will offer it in the future. Ultimately, as younger investors more frequently seek to match their money with their hearts, the robo advisory market will continue to meet their needs.