Traits of great financial advisors

Crosby_2015-150x150Dr. Daniel Crosby, Chief Behavioral Officer

You probably know by now that you’re supposed to have a financial advisor, you may just not know how to differentiate the good ones from the bad ones. We’d like to suggest the following as a checklist for helping you to find an advisor who can help you meet your financial goals and have a good time doing it.

They will keep you from being your own enemy - The research consistently shows that behavioral coaching is an advisor’s biggest value added, although most clients assume it is the skillful selection of investments. Look for someone you like enough to listen to and trust enough to follow their advice. If they can keep you from making a handful of big errors over a lifetime, they will have earned their fee and more.

They charge an equitable fee - Fees are more negotiable than you might imagine, especially for larger accounts. Good advisors know what they are worth and charge appropriately, but advisors charging exorbitant fees are doing their clients a disservice.

They have a niche – Some advisors specialize in working with small business owners, “women in transition” or those with values-based investment preferences. Whether you are soon to retire, have inherited some “sudden wealth” or are an entrepreneur with a great deal of value in her business, you can and should find an advisor who specializes in your particular needs.

They offer comprehensive services - Some financial professionals offer only planning or investment advice, while others offer a broad range of services. Ensure that what is offered is consistent with your needs.

They have the right credentials – Look for some combination of years of experience, appropriate certifications, and post-graduate education. The CFP is more and more becoming the industry gold standard, but many competent advisors (especially those with many years of experience) may have foregone a credential they don’t see as adding much new value to their business. Rather than looking for specific letters behind a name, ensure that they have a commitment to lifelong learning and self-improvement.

They can articulate their investment philosophy - A clear and concise investment philosophy is a sign of having given this deep thought. A corny sales pitch is a sign that you should run. People with a deep fluency in their discipline can explain what they do to a layperson. People with something to sell will try to convince you that it’s over your head.

They communicate regularly - This should be driven by your needs and preferences. Expect roughly four times per year but be sure to communicate your own expectations about how best to connect and how often to engage.

They offer a unique client experience - You are paying good money for this service and should be treated accordingly. This should include everything from courteous support staff to regular meetings to an ability to ask appropriate questions about the process. Do not be afraid to ask for what you need to be happy and well informed.

They have a succession plan - Someone asking you to think about the long term should have done so as well. It is difficult for some business owners to confront the inevitability of their own departure, but it is a sign of maturity to have done so.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

 

The recession has been dodged (or ducked, or dipped, or dived, or dodged)

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Recently, more than a few market prognosticators saw the US economy headed for a recession, a not unreasonable thought given weakened corporate and consumer sentiment, a very disappointing 20,000 jobs created in February, and increasingly flat US 2 Year / 10 Year Yield Curve and inverted US 3 Month / 10 Year Yield Curve, a harbinger of an economic downturn.

While cognizant of weakening economic data as we moved into 2019, Brinker Capital believed if we solved for monetary policy risk and trade policy risk both the economy and risk assets would be biased higher. Well, the Federal Reserve put its rate hiking and balance sheet unwinding plans on hold and the US/China trade discourse improved, with signs pointing toward an imminent agreement. And, as those meaningful economic and market headwinds abated, economic data improved and risk assets rallied. More specifically, the US added a better than expected 196,000 jobs in March, the US 2 Year – 10 Year Yield Curve steepened, the US 3 Month – 10 Year Yield Curve turned positive, albeit by only about 10 basis points, per the chart below, and the S&P 500 rallied 2%+ to start the second quarter, tacking on additional gains to a very strong Q1 2019. Outside the US, efforts by the Chinese government to stimulate its economy are bearing fruit, while the European Central Bank has assumed a more accommodative monetary policy stance.

Us Treasury

Today, we see little near-term risk of a US recession and our base case for the US economy remains growth of 2% to 2.5% in 2019.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

 

Vlog: Quarter-end Q&A 1Q2019

Brinker Capital Global Investment Strategist, Tim Holland, CFA, asks and answers those questions we think will be top of mind for clients as they open their quarterly statements and think back on the quarter that was:

  1. Have we seen the high in the stock market for the year?
  2. Is the yield curve indicating a recession is imminent?
  3. What is the market and economic impact of the Mueller Report?

Q&A_1Q19-thumbnail_Blog_v2

 

 

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.

Use 19th century technology to defeat 21st century fraud

O'Hara 150x150Jim O’Hara, CISM, CISSP, CEHInformation Security Officer

March 10, 1876. Alexander Graham Bell’s Boston laboratory.

“Mr. Watson come here – I want to see you. I think someone just looted my brokerage account.”

Okay. Those may not have been the exact words spoken over the first useful telephonic device. But similar words are spoken on any given day in the modern world.

In the early 2000s, hackers and fraudsters preyed upon a burgeoning digital world. As financial institutions rushed to establish an online presence, cyber security controls were often overlooked, inadequate, and sometimes nonexistent. Regulatory bodies were slow to adjust to the new playing field as well, and firms could quite literally put their clients at risk without violating written regulations.

After a few hard lessons, smart financials became extremely focused on security, and the regulators followed suit, updating compliance requirements to counter the threats inherent in the brave new digital world. The SEC was no longer telling firms to “exercise responsibility in protecting client data.” They were now saying “deploy and maintain a stateful inspection firewall.” Seeking compliance, firms tossed out the security appliance purchased at the local office superstore and installed second generation firewalls and network intrusion prevention systems. They hired information security professionals who established security departments and put in place comprehensive technical controls and written policies. Game on.

Hackers and fraudsters soon discovered that their old tools and methods were no longer effective. It had suddenly become much more difficult to compromise the now security-savvy financial firms. What to do?

If you can’t pick the lock, steal the key. Criminal focus shifted from defeating the security systems protecting valuable data, to compromising individuals who had direct access to it. Credential theft became the hack-du-jour, and remains so to this day, in the fraudsters’ all-time favorite flavor: Email phishing.

The most effective use of phishing as a fraud tool follows this simple 3-step process:

  1. Phish the investor. Typically, in the form of an email masquerading as the victim’s email provider. The investor is asked to follow a link and validate their credentials. The linked site is usually very convincing, complete with the email provider’s current branding. The victim dutifully enters their username and password and is told “Thank you. Your account is secure.”
  2. Using the stolen credentials, the fraudster logs into the investor’s email account and reviews its contents. They watch and wait. They learn who is managing the investor’s money, how they communicate, and in some cases, they may even see prior communications related to a distribution.
  3. When the timing is right, usually around the holidays or a weekend, the fraudster jumps into an existing email message thread. They talk about how long it’s been since they’ve spoken, ask how Jenny is doing at Cornell, and then….instruct the financial advisor to perform a distribution to a newly established bank account. Usually it’s for a down payment on that dream vacation home, sometimes it’s to buy their spouse the classic convertible they’ve always wanted. A theme common to all the messages is that time is of the essence. The advisor needs to move the money quickly or the opportunity for the house or car will be missed.

Alexander Graham Bell’s invention then comes into play in one of two ways. Either the advisor calls their client and learns of the attempted fraud, or the client calls the advisor a week or two later and asks why their account is short. It’s the advisor who determines which call takes place.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Vlog – To Tell The Truth

Given the news flow and data points of late, Brinker Capital Global Investment Strategist, Tim Holland, CFA, poses the question to our $20 trillion economy, “Will the real US economy please stand up?” (recorded March 28, 2019).

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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.

It seems the jobs market has been drinking a bit of JOLT

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

With an attention-grabbing tagline, “All the sugar and twice the caffeine,” JOLT Cola burst onto the consumer product scene in the mid-1980s. Fortunately, or unfortunately depending on how one feels about highly caffeinated, sugary, carbonated beverages, JOLT Cola is no more. But, for we capital market types, there remains, another more important JOLT, and recently that JOLT has been packing more of a punch than JOLT Cola ever did.

Every month, the Bureau of Labor Statistics compiles the Jobs Openings and Labor Turnover Survey (i.e. JOLTS). The JOLTS program queries 16,000 private nonfarm businesses and government entities in the 50 states and the District of Columbia on timely employment topics, including job openings, hires, and layoffs. The data is compiled and analyzed to help us better understand the state of the labor market. And the survey result that commands the most media and investor attention is the jobs opening data that helps determine the spread between the number of Americans out of work and actively seeking a job and the number of available jobs. January of this year marked the 11th consecutive month where job openings outnumbered job seekers. More specifically, openings exceeded the number of Americans looking for work by more than 1 million. Today’s job market stands in sharp contrast to what the country experienced in 2009 when nearly 16 million Americans were seeking a job and companies and government entities had only two million positions to fill, see the chart below. Said plainly, there are more help wanted signs hanging in windows across this country than there are Americans looking for work. We are all likely living through the strongest jobs market in our respective lifetime.

US employment and job openings

All of this is very good news for the American worker. But, as we highlighted last week, a real risk for the markets and the economy is that a too tight jobs market sparks wage inflation and pulls the Federal Reserve, so recently moved to the sidelines, back into the game of raising rates.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: FactSet

6 behaviors that predict future wealth

Crosby_2015-150x150Dr. Daniel Crosby, Chief Behavioral Officer

For many years, the prevailing advisory remuneration model has led financial advisors to look at just one variable – investable assets – when deciding whether or not to work with a client. One widespread truism about human behavior is that what gets rewarded gets done and inasmuch as advisors have been rewarded with a percentage of assets under management, AUM has been the North Star for determining whether or not to work with a client. 

But the simplicity of this calculus has historically caused advisors to overlook those who might soon become rich or those who would be a good cultural fit for the ideals of a practice. After all, a wealthy client that’s a pain to work with may not be so enticing after a few hotheaded visits to the office. The “AUM as sole determinant” model has also excluded groups not stereotypically thought of as having wealth, despite clear evidence to the contrary. Consider the following stats from The Center for Outcomes about two such groups – women and young people. 

  • Women control 2/3 of the total wealth in the US[1]
  • Women are the primary breadwinners in 40% of households[2]

…and yet…

  • More than half (58%) of women defer to their spouse to manage critical, long-term decisions[3]
  • As a result, 70% of women fire their advisor within a year of their husband’s passing[4]

The numbers don’t look much better for young people, either. Consider: 

  • Young people are open to working with their parents’ financial advisors (55 percent), but only 20 percent have met them[5]
  • Just 10% of RIA clients are under 40[6]
  • 86% of children will fire their parents’ advisor[7]
  • 2/3 of those making over $150,000 have no advisor[8]

Clearly, the investable assets model is incomplete, leading us to ignore cultural considerations as well as opportunities for future wealth accumulation. But if AUM isn’t the answer, what is? Dr. Sarah Stanley Fallaw has a suggestion: behavior. Dr. Fallaw, CEO of Data Points, sets forth six behaviors that predict future wealth creation in her fantastic new book, The Next Millionaire Next Door (2018):  

Confidence - “Demonstration of confidence and collaboration in financial management, investing and household leadership.”  

Frugality – “Financial behaviors associated with consistent saving, dedicated commitment to lower spending and rigorous adherence to a budget.” 

Responsibility - “Acceptance of the role of actions, abilities, and experiences in financial outcomes. Belief that luck plays a small part in achievement.”  

Social Indifference – “Spending and saving behaviors that reflect immunity to social pressure to purchase the latest in consumer and/or luxury goods, clothing and cars.”  

Focus - “Demonstration of the ability to focus on detailed tasks through completion without becoming distracted.”  

Planning - “Behaviors related to goal-setting, planning, and anticipating future needs.” 

An exclusive focus on dollars and cents has led the advisor of yesteryear to size up a client simply on how much (or how little) money they have today. The advisor of the future will cast aside this outdated approach, relying instead on an understanding that today’s behavioral realities are likely to lead to tomorrow’s financial success. This behavioral approach reflects a more holistic understanding of what true wealth means, allows the advisor to serve historically underserved populations and ensures a tighter fit between client personality and firm culture. It’s time to stop asking, “What are you worth?” And start asking, “What are you like?”

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Sources:
[1] BMO Wealth Institute, “Financial concerns of women” (2015).
[2] BMO Wealth Institute, “Financial concerns of women” (2015).
[3] UBS: https://www.ubs.com/global/en/ubs-news/r-news-display-ndp/en-20190306-study-reveals-multi-generational-problem.html
[4] Smart Women Finish Rich: 9 Steps to achieving financial security and funding your dreams. Bach (2002).
[5] Broadridge: https://www.broadridge.com/press-release/2018/millennials-most-confident-in-savings-accounts
[6] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html
[7] https://www.investmentnews.com/article/20121028/REG/310289970
[8] https://www.cnbc.com/2015/01/29/millennial-millionaires-to-be-neglected-by-advisors-study.html

 

 

Welcome back, welcome back, welcome back!

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

A hallmark of the Great Recession was a decline in the prime age labor force participation rate from 83% to 80%, see the chart below. While a three-point drop might not seem significant, it reflects millions of Americans walking away from the economy, giving up on ever finding gainful employment. The economic and societal consequences of that dynamic were staggering.

fredgraph (1)

Fortunately, over the past few years our long-lived economic expansion managed to produce both a level of demand for labor and gains in wages – north of 3% – significant enough to pull millions of Americans back into the workforce. Said differently, millions of Americans have been welcomed back to the economy, which is reflected in a rebound in the labor force participation rate to north of 82%. And while that is great and welcomed news for those Americans and their families, a tightening labor market and rising wages also pose risks to the markets and economy. To better appreciate this seemingly counterintuitive point, we have to remember that significant slack in the labor market post the Great Recession helped keep a lid on both interest rates and inflation, which was bullish for risk assets and supportive of economic growth. The risk now is that as the job market continues to tighten and wages continue to rise, the Federal Reserve will be forced to raise interest rates further, and in doing so will make the cost of capital too expensive, choking off corporate and consumer spending, ultimately putting the economy into a recession and stocks into a bear market.

While we do think inflationary and interest rate risk is underappreciated by many market participants, we also continue to see enough capacity in the labor market that wage inflation and broader inflation shouldn’t become a real risk to the economy and markets until sometime in 2020, at the earliest.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart source: US Bureau of Labor Statistics

It’s a big birthday for the bull market, and we see a successful quest for greater gains

Holland_F_150x150Tim Holland, CFA, Senior Vice President, Global Investment Strategist

Happy birthday bull market! The longest running bull market in United States history hit a major milestone last week, turning 10 on March 9. It sure has been an interesting and exciting 10 years.

US equities, as measured by the S&P 500 Index, found their footing on March 9, 2009 while the US and the world were in the throes of the Great Recession. Since then, the S&P 500 has produced a total return of approximately 396% and an average annualized return of approximately 17.3%. But, the ride higher hasn’t always been smooth. Consider, since March 2009 we’ve contended with four corrections of 13%+, US government shutdowns, a US debt downgrade, the European debt crisis, Brexit, the Arab Spring, the risk of an armed conflict on the Korean Peninsula, and a budding trade war with China. Yet even with all of that, the S&P 500 sits at 2743 – up from its open price of 675 on March 9, 2009 – and the US economy is growing 2.5%. Proof positive the economy tends to expand, and risk assets tend to increase in value. And, to that point, we think the market will remain on a successful quest for greater gains. After all, US equities are reasonably valued, earnings are growing, inflation is contained, monetary policy isn’t restrictive, and investment sentiment isn’t ebullient. We remain optimistic on US stocks into 2019, though we do expect a volatile trading environment.

WW March 11 2019 The Bull's Birthday (002)

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Chart Source: FactSet

Equity and fixed income return volatility

Williams 150x150Dan Williams, CFA, CFPInvestment Analyst

People need no help picturing equity return volatility. Anyone invested in the equity market in the middle 2000s still likely feels the scars from the subprime mortgage crisis. Prior to that, there was the dot com burst of the early 2000s. The dark side of equity return volatility is double-digit loses in a short period of time that can take years to recover. It is for that reason equity investing is best for time horizons that are also double-digit in years. However fixed income volatility is more subtle in nature and although people know to try to avoid it, it is not as widely understood.

Volatility for investments is often represented by the standard deviation which most understand has to do with the range of returns that are experienced around the average return. However, knowing the term and understanding what the term represents are two separate matters. Volatility in traditional fixed income securities is driven by the two factors: changes in the rates that securities of similar risk should pay and how long you are locked into receiving the coupon rate of a given security. The magnitude these market rates changes impact the principal value of the fixed income instrument is driven by how long an investor is locked into a given rate as the duration of a bond. Accordingly, the fear of rising raters has driven investors to try to lower the duration of the bonds they own to lower the price hit or even to avoid fixed income securities.

One thing that differs between equity and fixed income volatility is what happens with returns after there is a downward movement in price. When an equity goes down in value it is likely due to the consensus judged future prospects of the equity having gone down. For a fixed income, as long as the future ability of the instrument has not come into serious question, the short-term hit comes due to the market view of rates required for payments having increased. In other words, equities go down because things have gotten worse while for fixed income prices go down because the market feels you should be paid a higher rate going forward.

As way of example, consider a diversified portfolio of bonds like that represented by a Bloomberg Barclays US Aggregate Bond replicating investment like the iShares US Aggregate Bond ETF (AGG) or the Vanguard Total Bond ETF (BND). Currently, the duration is about 6 and the 30-Day SEC Yield is about 3%. If rates rise by 0.5%, these securities will take about a 3% price hit (not precisely due to convexity but close enough). Going forward the SEC Yield should rise as bonds now are lower priced but pay the same coupon amount and new bonds are bought with higher coupons. The income return on a new dollar invested is now expected to be over 3% but a 3% hit was taken on the principal amount invested. Despite the feared rate hike occurring, the net return is still projected flat or maybe even slightly positive for the 12-month period.

Another way to picture this return volatility, we can look at the actual annualized 36-month, 84-month, and 120-month rolling periods for the Bloomberg Barclays US Aggregate and Russell 3000 Index since the start of 1994, 25 years ago. During this period there existed no 36 month period where Bloomberg Barclays US Aggregate failed to deliver a positive absolute return and as increasingly longer periods are looked at the range of actual outcomes settles into a 3% to 8% range. Alternatively, equity still possesses a few very unlucky 120-month (10-year) periods with a negative return as well as periods of annualized returns in excess of 14%.

Equity fand fixed income return volatilityIt is for this reason that longer time horizons are prescribed for equity investing and time horizons of 3+ years are regarded as reasonable for holding a diversified fixed income exposure. Finally, it would not be an investment blog if it was not pointed out that these extreme return periods often occur at different times for different asset classes and intelligent diversification gives better return range confidence. Better investment return confidence leads to increased ability to plan and better planning usually leads to better outcomes.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.