Stealth Wealth: How to Keep Your Cover

Sue BerginSue Bergin, President, Bergin Communications

The lifestyle of many affluent investors today is shaped by the “stealth wealth” mindset, according to the authors of New Elite: Inside the Minds of the Truly Wealthy. Stealth wealth refers to the general avoidance of conspicuous consumption – not “flaunting it.” These are the individuals who take steps to blend into the crowd, dress down or indulge only when surrounded by others of similar means.

According to the authors, over 90% of the wealthy spend on regular services, ranging from child care providers to cleaning services, pet sitting, cooks to personal trainers. Spending on services to make life easier brings a new challenge to the stealth wealth approach. As personal service providers are brought on board to help a family manage their busy lives, the likelihood of exposure to financial and personal matters increases.

Personal service providers often have access to the inner dealings of an individual, putting the wealthy at an increased risk for identity compromising crimes including financial, information, and medical identity theft.

  • The most common is financial identity theft, which will impact approximately 15 million Americans this year. Typically, the thief accesses a victim’s accounts to steal funds or apply for credit in the victim’s name.
  • Medical identity theft involves the use of another’s identity to get medical goods or services, like prescription drugs, cosmetic surgery, or to apply for disability benefits.
  • Information theft involves seizing private information and on some occasions, requesting a ransom in exchange for releasing that information. For business owners, this can have a negative impact on future business if private information about clients were leaked.

Although CPAs, lawyers, and financial advisors may be among the service providers assisting a wealthy individual, they may not provide the level of oversight necessary to detect identity fraud.

A wealthy victim to identity theft has more than just money to lose. When someone gains access to personal and account information, the stealth wealth persona goes out the window. In addition to the financial toll, the victim often feels exposed, embarrassed and unsettled. Victims also typically become quite frustrated by the time-consuming task of trying to unravel the effects of the crime.

The longer a thief has unfettered access to your information, the greater the potential harm. The following five steps won’t help you prevent identity theft, but could minimize the potential harm caused:

  1. Enroll in a proactively monitoring service that alerts you to any potential breaches in your information security. Keep in mind, however, that a credit monitoring service is helpful in detecting unauthorized new credit accounts. The services will not detect unauthorized transactions on existing accounts.
  2. Ask your financial advisor if the wealth management software he or she uses to track accounts have any alert features which could notify you of investment or spending activity that extends beyond a certain threshold.
  3. Review and verify accounts statements and your records. Make sure each transaction makes sense and contact your brokerage firm or other financial institution immediately if something is amiss. The faster you respond the quicker the problem can be fixed.
  4. Check your credit report using AnnualCreditReport.com
  5. Consider freezing or locking your credit to prevent credit bureaus (e.g., Equifax, Experian, TransUnion) from releasing your credit report without your permission. Most businesses will not lend or allow someone to open a new account without first doing a credit check. Freezing or locking credit helps prevent someone from opening an account under your name. The three websites needed to freeze credit include: www.equifax.com/credit-report-lock/; www.experian.com/freeze; www.transunion.com/freeze

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Retire Healthy, Retire Happy

Sue BerginSue Bergin, President, Bergin Communications

Most retirement planning focuses on the nest egg. It involves making sure you have enough saved to live your retirement years the way in which you have dreamed. The laser-like focus on the bottom line, however, could prevent you from paying attention to the single most important predictor of retirement satisfaction. Your health.

According to MassMutual’s Health, Wealth and Happiness in Retirement study, health is typically more important than wealth when it comes to determining the well-being of American’s retirees. Retirees in better health are more likely to feel financially secure, enjoy retirement, feel fulfilled, and are less likely to experience negative emotions.

The study shows that the loss of health is more costly to a retiree’s overall experience than the loss of wealth. Consider these stats:

  • 76% of those with $250,000 or more in assets report having a positive retirement experience, compared to 68% of those with less than half the assets.
  • 80% of those in better health report having a positive experience in retirement, compared to only 59% of those who are in poorer health, regardless of their balance sheet.
  • 73% of retirees in better health report feelings of financial security compared to 51% of retirees in poorer health.
  • Retirees in poorer health were twice as likely to feel anxious about their finances and lack a sense of purpose, and three times more likely to feel lonely.

The bottom line…focus on your health!

To make the most of your retirement, your planning and preparation should focus as much on your health as it does your wealth.

AARP provides these helpful tips to incorporate into your retirement readiness checklist.

  • Seek preventative medical care by scheduling checkups and routine examinations, from annual physicals to teeth cleanings.
  • Work with your health care providers on a plan to improve or maintain your health.
  • Commit (or recommit) to eating healthy, exercising and adequate sleep.
  • Commit to staying mentally sharp with brain games, puzzles and books.
  • Stay in close contact with family and friends. Typically, your friends and family will be the first to notice if your health starts to slip.

For more tips from AARP, see 10 Steps to Get You Ready for Retirement.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

8 Ways to Create a Satisfying Retirement

Sue BerginSue Bergin, President, Bergin Communications

Much of the retirement planning process focuses on dollars and sense. Specifically, how much you can save to live comfortably in retirement and how to create an adequate income stream to meet your expected expenses. While financial planning is a critical component, it doesn’t stand alone in preparing to retire on the terms you wish.

Here are eight other ways to help you create a satisfying retirement:

  1. Maintain healthy habits. When it comes to determining retirement well-being, health is typically more important than wealth. Retirees in better health have the added peace of mind that comes from financial security. They tend to enjoy retirement more, feel fulfilled, and are not as prone to negative emotions as their less healthy counterparts.[1] For most, health care costs top the retirement expenses charts. It makes good financial and medical sense to establish and adhere to healthy habits as a cost-containment measure and lifestyle booster.
  2. Enjoy retirement with a spouse or partner. Married or cohabitating couples are more likely than singles to be happy in retirement. The percentage of married couples who report that they are happy in retirement raises even higher when both spouses retire together.
  3. Set and stick to boundaries with adult children. Six out of ten parents in the U.S. provide financial support to adult children. In doing so, many parents put their retirement outlook in jeopardy. Whether you should support an adult child or children, is of course a personal choice. However, if you decide to do so, you should establish clear parameters to make it clear just how far the support will stretch.[2]
  4. Forge close bonds. Quality social relationships become increasingly important in retirement. Once work no longer fills the time in a day, those who lack solid relationships with friends and relatives are more prone to feelings of depression.
  5. Touch base frequently with family and friends. Typically, your friends and family will be the first to notice if your health starts to slip.
  6. Expect the unexpected. According to a recent survey, 90% of Americans have endured at least one setback that harmed their retirement savings. Setbacks vary from caring for adult children, as mentioned above, to college expenses stretching over six years instead of four. Others include loss of a job, assisted living expenses, and disappointing stock performance. Unexpected life events cost the retirement accounts of the survey respondents on average $117,000.[3] An emergency fund can serve to prevent you from having to resort to retirement savings during hard financial times.
  7. Volunteer. Recent studies show that volunteering your time and talents in retirement provide health, happiness and longevity benefits similar to those enjoyed by retirees who return to work in a bridge-employment scenario. Bridge employment refers to the part-time jobs, self employment, or temporary jobs retirees take after leaving their career but before full retirement.
  8. Dabble in different hobbies. While you may have more time to enjoy a hobby in retirement, it is wise to start exploring hobbies while still employed. Hobbies often require an outlay of capital, and it is often the case that you don’t know just how much it will cost to maintain the hobby until you get fully into it. If you explore hobbies during your working career, you will presumably have more slack in your budget to absorb the costs and it will give you a good idea of whether the hobby is, indeed, how you want to spend your time in retirement.

[1] MassMutual’s Health, Wealth and Happiness in Retirement
[2]
LIMRA Secure Retirement Institute, October 30, 2014
[3] http://money.cnn.com/2013/05/15/retirement/retirement-savings/index.html

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Managing Emotions During Life’s Disruptions

Sue BerginSue Bergin, President, S Bergin Communications

It seems like a new survey comes out daily revealing how ill-prepared Americans are for retirement. Well, to reference one, now there is a study that shows two-thirds of those who have saved for retirement may still fall behind.

TD Ameritrade’s 2015 Financial Disruptions Survey shows that unexpected events have cost Americans $2.5 trillion in lost savings. [1] Typical scenarios involve unemployment or having to take a lower-paying job, starting a family and/or buying a home, assuming a care-taking role, experiencing poor investment or business performance, suffering an accident/illness or disability, divorce, separation, or becoming a widow or widower.

No surprise that any one of these events would cause stress. As explained in the best-selling book, Personal Benchmark, Integrating Behavioral Finance and Investment Management, stress triggers a move away from a rational and cognitive decision-making style in favor of an effective style driven by emotions. Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee. [2]

When under stress, emotional decisions tend to be myopic. We privilege the now and forget about the future. Decisions made under stress are also reactive. Since our body is being signaled that something dangerous is imminent, we tend to react rather than reason. Reacting is great for swerving to miss a car, but not such a great impulse to follow when it comes to setting a course that will traverse the next five years.

What we learn from the study is that the average length of the disruption was five years. These weren’t one-time events or blips on a radar screen. They were prolonged periods over that necessitated several financial decisions.

84% of those who suffered from disruptions indicated that prior thereto, they had been saving $530 per month for long-term financial goals/retirement. During the “disruption” savings were reduced by almost $300, which had a cumulative adverse impact on their long-term goal, on average of over $16,200.

Interestingly, the TD study asked how they could be better prepared for the unexpected. The vast majority focused on what authors of Personal Benchmark suggest in helping to manage emotions during stressful times, which is to focus on matters within their control. The top five responses included:

  • save more (44%)
  • start saving earlier (36%)
  • better educate self on investments (26%)
  • consult with a financial advisor (19%)
  • pay closer attention to investments (15%)

There are two key takeaways from this study. Expect the unexpected by doing as much advanced planning and saving as possible. And, when life does throw you a curve ball, manage your emotions by focusing on matters with personal significance and those that are within your personal control.

[1] http://www.amtd.com/files/doc_downloads/research/Disruptor_Survey_2015.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

New Years Resolutions for Investors

Sue BerginSue Bergin, President, S Bergin Communications

  1. I will not try to control the markets.
  2. I will not think, “This time, things will be different.”
  3. I will leave the forecasting to the meteorologists.
  4. I will be less impulsive in my decisions.
  5. I will try to control my poor investment behaviors.
  6. I will focus on achieving my personal goals; not beating the benchmark.
  7. I will remain calm in the face of large market swings.
  8. I will choose a path and invest towards the future.
  9. I will be confident.
  10. I will let my “why?” always guide my “how.”

Yale Endowment Proves, Once Again, That A Free Lunch is Not a Thing of the Past

Sue BerginSue Bergin, President, S Bergin Communications

In 1952, Harry Markowitz, an unknown 25-year old graduate student at the University of Chicago, defined risk mathematically for the first time. He also explained how investors could lower volatility while preserving expected returns if they incorporated different investments that are not highly correlated. He went on to explain, “diversification is a kind of free lunch at which you can combine a group of risky securities with high expected returns into a relatively low-risk portfolio, so long as you minimize the covariances, or correlations, among the returns of the individual securities.”

YaleThe most prominent institutional investor in developing the multi-asset class investment model was, and remains, David Swensen, chief investment officer of the Yale University Investment Office. The power of diversification to act as a free lunch is described in his book Pioneering Portfolio Management. Swensen, the long-term Chief Investment Officer at Yale University and father of the Yale Endowment Model, believed in avoiding liquidity rather than seeking it, since it comes at a cost of lower returns. The Yale Endowment Model emphasizes broad diversification and makes the case for allocating only a small amount to traditional U.S. equities and bonds and more to alternative investments.

Today, multi-class investing means different things to different people. Initially the Yale Model was based on an asset class composition that included six asset classes. It currently uses seven asset classes: domestic equity, foreign equity, fixed income, absolute return, natural resources, real estate, and private equity.

When it comes to achieving purity of asset class composition, Swensen had to say this:

Purity of asset class composition represents a rarely achieved ideal. Carried to an extreme, the search for purity results in dozens of asset classes, creating an unmanageable multiplicity of alternatives. While market participants disagree on the appropriate number of asset classes, the number should be large enough so that portfolio commitments make a difference, yet small enough so that portfolio commitments do not make too much of a difference. Committing less than 5 percent or 10 percent of a fund to a particular type of investment makes little sense; the small allocation holds no potential to influence overall portfolio results. Committing more than 25 percent or 30 percent to an asset class poses danger of overconcentration. Most portfolios work well with around a half a dozen of asset classes [1].

Swensen’s views on diversification and asset allocation continue to pay off. According to the preliminary 2014 results of the NACUBO-Commonfund Study of Endowments, larger, better-diversified endowments have outperformed their smaller, equity heavy peers.

On average, the 426 university and college endowments in the study returned 15.8%, while endowments with more than $1 billion returned on average 16.8%, and endowments with between $500 million and $1 billion, saw investment returns of 16.2%.

Free LunchYale University led the group, posting 20.2% gains. Further proof that the free lunch concept is alive in well in 2014.

The principles and benefits of diversification are well supported by academic thought. When selecting an investment manager, advisors and investors should consider a firm that believes in the value of the free lunch by taking a multi-asset class investment approach.

[1] Swensen, D. (2009). Asset Allocation. In Pioneering Portfolio Management (p. 101). New York: Simon and Schuster.

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Two Ways Advisors Can Help Clients Reduce Financial Stress

Sue BerginSue Bergin, President, S Bergin Communications

While all of your clients are unique when it comes to financial outcomes, they are likely to share one unifying factor—money being the top cause of their stress.

The American Psychological Association, which releases figures on stress, documented in their final report for 2011 (published in 2012) that, “More adults report that their stress is increasing than decreasing. 39% said their stress had increased over the past year and even more said that their stress had increased over the past five years (44%). Only 27% of adults report that their stress has decreased in the past five years and fewer than a quarter of adults report that their stress has decreased in the past year (17%).”

The same report shows that the top source of stress is money (75%), with work coming in a close second (70%) and the economy getting the bronze (67%). These results were validated by another study in which 63% of survey respondents indicated that they had some financial stress and another 18% rated their stress level at high or overwhelming[1].

It has been well established that stress triggers a move away from a rational and cognitive decision-making style in favor of a style driven by emotions. As the book Personal Benchmark: Integrating Behavioral Finance and Investment Management states, “Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee.” Experts suggest that emotionally-charged decisions are myopic (nearsighted), reactive, and associative.[2] All three of these predictable responses to stress are powerful ingredients for disastrous investment results.

Advisors can help clients manage emotion and associate stress in two ways:

  1. Manage the volatility in their portfolio. As the highs and lows of investments are brought under tighter control, so too will the emotions of the investors that hold them.
  2. Refocus clients’ attention on the appropriate things, such as matters with personal significance and those that are within their own control. Far too often, clients worry about externalities that have no direct impact on them or their wealth but which create a sort of vague anxiety that can never be truly calmed.

“By managing volatility as a means for controlling emotional extremes and by focusing on germane financial matters within personal control, investors can reap the benefits of appropriate stress without the paralyzing effects of excessive worry” (Personal Benchmark).

[1] http://www.financialfinesse.com/wp-content/uploads/2014/05/Financial-Stress-Report_2014_FINAL.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only.

Teaching Moments: Help Clients Shake the Emotional Hangovers

Sue BerginSue Bergin, President, S Bergin Communications

While the I-make-a-decision-and-forget-about-it approach might have worked for Harry S. Truman, it does not describe the vast majority of today’s investors.

According to our recent Brinker Barometer advisor survey[1], only 22% of advisors clients embrace Truman’s philosophy. The vast majority of clients suffer from emotional hangovers after periods of poor performance. They let the poor investment performance impact future decisions. Sometimes, it is for the better. In fact, 31% of clients made wiser decisions after learning from poor investment performance. Nearly half of the respondents, however, claimed that emotions cloud the investment decision following poor performance.

Bergin_LiveWithDecisions_7.30.14Another recent study, led by a London Business School, sheds light on how advisors can increase satisfaction by helping clients make peace with their decisions. According to the research, acts of closure can help prevent clients from ruminating over missed opportunities. To illustrate the point, researchers simply asked participants to choose a chocolate from a large selection. After the choice had been made, researchers put a transparent lid over the display for some participants but left the display open for others. Participants with the covered tray were more satisfied with their choices (6.30 vs. 4.78 on a 7 point scale) than people who did not have the selection covered after selecting their treat.

While the study was done with chocolate and not portfolio allocations, behavioral finance expert Dr. Daniel Crosby says that it can still provide useful insights on helping clients avoid what Vegas calls, “throwing good money after bad,” and psychology pundits refer to as the “sunk-cost fallacy.”

“Many clients are so averse to loss that they will follow a bad financial decision that resulted in a loss with one or more risky decisions aimed at recouping the money. If you detect that a client is letting emotional residue taint future decisions you should counsel them to consider the poor performance as a lesson learned. This will allow the client to grow from the experience rather than doubling the damage in a fit of excessive emotionality,” Crosby explains.

[1] Brinker Barometer survey, 1Q14. 275 respondents

The views expressed are those of Brinker Capital and are for informational purposes only.

Reach Out in Good Times and Bad

Sue BerginSue Bergin, President, S Bergin Communications

It’s no secret that clients like to hear from their advisors. In fact, failure to communicate is one of the top five reasons why clients become dissatisfied with their advisor. According to a Spectrum study, 40% of clients said they consider leaving when the advisor makes them do all the work (make all the calls).[1]

A recent study by Pershing, however, shows that advisors do make the calls—when they have bad news. Here are some of the key findings when it came to communication choices.

  • 58% of the advisors contacted clients during market downturns, yet only 39% reached out to discuss market gains.
  • 68% of advisors reached out to clients when personal investments declined, while only 53% initiated contact with the client in instances when personal investments increased in value.[2]

Bergin_Reach Out in Good Times and Bad_6.19.14How News is Delivered
The telephone is the most frequently used communication vehicle for both good and bad investment performance news. A quarter of the advisors surveyed used email and face-to-face meetings to communicate market losses, while 58% of the advisors picked up the phone. The only type of communication that happened more frequently in person than any other message was in the area of education. 52% of advisors said that they scheduled face-to-face meetings to educate clients while 48% did so over the telephone.

“No News is Good News” Applies Better to Weather than Client Relationships
Communication work is fundamentally about two things: trust and relationships. Good communication can strengthen relationships and deepen trust while poor communication can have the opposite effect. The “no news is good news” approach many advisors seem to take is problematic for a few reasons. It robs the advisor of the opportunity to score relationship-building points. It also increases the risk of clients feeling neglected. Finally, it makes it more difficult for the advisor to identify opportunities proactively because they become somewhat out-of-touch with what is happening in their clients’ lives.

[1] http://www.onwallstreet.com/gallery/ows/client-switching-advisor-top-five-reasons-2681390-1.html

[2] The Second Annual Study of Advisory Success: A New Age of Client Communications and Client Expectations, Pershing.

The views expressed are those of Brinker Capital and are for informational purposes only.

Bridging the Alternative Investment Information Gap

Sue BerginSue Bergin, President, S Bergin Communications

The groundswell of interest in alternative investments continues to build, creating a thirst for clear, comprehensive and client-facing educational materials.

According to Lipper, alternative mutual funds saw the biggest percentage growth of any fund group, with assets under management increasing 41% to $178.6 billion in 2013. A recent report by Goldman Sachs projects liquid alternatives are in the early stage of a growth trend that could produce $2 trillion in assets under management in the next 10 years. In order for this to happen, however, investors must gain a better understanding of how alternative investments work, how they function within a portfolio, and where potential benefits and risks could occur.[1]

EducateAlternative investment strategies are a separate beast than the traditional methods of investing and traditional asset classes that most investors are familiar with. From divergent performance objectives, to the use of leverage, correlation to markets, liquidity requirements and fees, a fair amount about alternatives is different from traditional investments. Understandably, investors have many questions before they can decide whether to and how much of their portfolio to dedicate to alternative investments.

The task of educating investors about alternatives is falling largely on the shoulder of the advisory community. Well over half (60%) of the high-net-worth investors recently surveyed by MainStay Investments, indicated financial advisors as the top resource for alternative investment ideas. Trailing advisors was internet-based research (41%), research papers and reports (35%), and financial service companies (30%).[2]

Historically, advisors have shied away from recommending alternative investment strategies because they are too difficult to explain. The conundrum they now face is that 70% of those advisors surveyed also acknowledge the need to use new portfolio strategies to manage volatility and still seek positive.[3]

Bridge the Education GapIt’s important that advisors start to value the use of alternatives and find ways to bridge the information gap for investors. The good news is that investors have tipped their hands in terms of what they really want to know. According to the MainStay survey, clients want more information in the following areas:

 

  • Explaining the risks associated with alternative investments (73%)
  • Learning about how alternatives work (71%)
  • Finding out who manages the investments (54%)
  • Charting how alternatives affect returns (46%)

[1] http://www.imca.org/pages/Fundamentals-Alternative-Investments-Certificate

 [2] “HNW Investors Turn to Advisors For Alternative Investment Guidance,” InsuranceNewsNet, April 3, 2014.

[3]Few advisers recommend alternative investments: Respondents to a Natixis survey said that they stick to strategies that can be explained to clients more easily,” InvestmentNews, October 24, 2013

The views expressed are those of Brinker Capital and are for informational purposes only.