Money Matters Newsletter:
The Investment View from Prescott, Arizona
December 9, 2014
Tony Robbins and the Fiduciary Standard
Robbins felt nobody was watching out for the little guy during the 2007-09 financial debacle called the Great Recession and he feels he can be part of the solution.
As part of his campaign, Robbins is putting his considerable star power behind the fiduciary standard and the advisers who follow its tenet of always operating in the best interest of their clients.
The Dodd-Frank Wall Street Reform Act, passed in 2010, ordered the brokerage industry to adopt the fiduciary standard, but most of the big, national brokerage firms whose names are easily recognized, are fighting this issue tooth and nail.
The majority of financial advisors are licensed by FINRA, the Financial Services Regulatory Authority, which holds its licensees to a standard of “suitability” which allows huge conflicts of interest to persist. Under this standard, an investment is deemed suitable if it is aligned with your investment objective, even if the adviser knows of a much better, much less expensive alternative. If you want income and the high-commissioned product you are offered provides some, that investment is deemed “suitable” for you even though a lower commissioned product producing more income was available but never mentioned to you.
The old adage of “follow the money” would suggest that the allegiance of the adviser is to whoever is paying them. Whether you have a broker, planner or financial adviser, they are most often paid by the investment firms, not by you.
If you see FINRA on your adviser’s business card or website, you can assume you are getting the suitability standard from your adviser, not the higher, fiduciary standard of care.
Fiduciaries have a duty to always put your interest above their own. Therefore, I believe you will get fairer treatment from a fiduciary, such as Hepburn Capital Management.
Tony Robbins agrees with me and is convinced that the industry is selling overpriced products and that clients usually don’t understand what they are paying for. One way to protect yourself is to deal only with a fiduciary who puts your interests above their own. Hepburn Capital provides a fiduciary standard of care to our clients.
What standard does your advisor operate under?
“The only investors who shouldn’t diversify are those who are right 100% of the time.”
~ John Templeton ~
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Beginning in 2015, HCM management fees will be adjusted automatically to our tiered fee schedule, adjusting them for any increase or decrease in account values. If your account has grown and crosses one of our pricing tiers, you will see a reduction in the fee percentage. If you have a specially calculated rate such as our Family and Friends discount, your fees will remain unchanged.
Our fee schedule has not changed. The only difference is our new custodian’s ability to automatically calculate them when account values change.
This fee schedule is listed in your management agreement with HCM, and may be seen in our SEC Form ADV, Part 2 Brochure that is on our website at https://www.hepburncapital.com
If you are interested, it is easy to qualify for our Family and Friends discount. Simply refer family and friends to Hepburn Capital. We give a “volume discount” based on the total amount of money we work with for a family or other grouping of clients, including friends. The higher the amount of assets being managed for the group, the lower the fee percentage becomes for everyone in that group.
Besides being one of the nicest things you can do for us (and them), mentioning Hepburn Capital to your friends can save you real money. The easiest way to introduce someone to our work is to forward our newsletter to them and suggest they look into one of our strategies, such as our red-hot Future Technologies. Here is a link that will allow you to forward the newsletter with a just click.
Thank you for your help and support.
Get Tax Credits Before Year-End
For those of us paying Arizona income taxes, there are a couple of school tax credits that are literally too good to pass up. What I mean is that you get back more in tax savings than you give. These tax credits are a great way to do well by doing good.
Tax credits are more valuable than tax deductions because a deduction is only the amount multiplied by your tax bracket. If you are in a 25% tax bracket, a dollar of deduction saves you 25 cents. A dollar of credit, however, saves you a full dollar of taxes.
Public Schools: An individual may claim a dollar-for-dollar credit for making contributions or paying fees to a public school for support of extracurricular activities or character education programs. The credit cannot exceed $200 per taxpayer ($400 joint). I still donate to the high school band program that was so instrumental (pardon the pun) in my son’s upbringing.
Private Schools: An individual may claim a credit against Arizona taxes for making a donation to a School Tuition Organization for scholarships to private schools. The maximum credit amount that may be taken for tax year 2014 is $528 per taxpayer ($1,056 joint). I donate to the local Orme-Primavera Schools Foundation since my son went to Primavera.
You may get as much as 100% of your donation back in credits on your Arizona income tax, but you also get to deduct these donations on your federal tax returns, meaning you can save more in taxes than the amount of your donations. Is this a great country or what?
The AZDOR.gov website has a tax credit tab that gives details and lists of eligible organizations.
Although this sounds like a no-brainer, please check with your tax preparer to ensure your donations will qualify for these credits.
How Are The Markets Doing?
The most frequent worry I hear from clients is that the current bull market just has to be about to end because it has gone on now for several years. According to the chart, below, the current bull market is still shorter in duration and has less in gains than the historic average. This chart looks at rallies all the way back to 1900.
The usual killers of bull markets are recession, war, hysterical bullishness as we saw in the technology sector in the late 1990s, or an economic shock such as rising oil prices.
None of those factors appears likely at the moment. The only recent shock has been positive — the plunge in the price of oil, which should boost more sectors than it will hurt.
The specter of the Federal Reserve cutting off the supply of new money to our economy seems to be offset by similar stimulus measures picking up in Europe and Japan just as ours tapers off. Since money is fungible, it does not matter where it comes into the worldwide economic system. A rising tide floats all boats, and we still have a rising tide of money.
Furthermore, the colder months of the year are generally more favorable for stock investing, as is the third year of a presidential cycle which we have just entered. With this double dose of positive seasonality, I expect the market’s uptrend to continue for a while with only minor corrections along the way.
What’s Going On In Your Portfolio?
Our Shock Absorber Growth accounts had a great month in November. Smaller growth accounts grew in line with the S&P 500 Index**, which gained 2.6% in November, while larger accounts outperformed the S&P, gaining about 3.2% for the month. This difference is a result of the mix of investments used in larger vs. smaller accounts, including our new Future Technologies strategy available only in larger accounts.
As of December 5th we were close to being fully invested, holding future technology (nano-tech, robotics, stem cell research and “Internet of Everything”) stocks, health, biotech and diversified index funds, some core stock holdings and about 7% in cash from a fund sold a few days ago and not yet reinvested.
I am beginning to consolidate our Future Technology portfolio, selling off one laggard and adding that money to two of our double-digit gainers. Systematically cutting weaker holdings and adding to the stronger ones is an example of one tactic that allows active management to be superior to passive or index investing.
Flexible Income accounts were doing OK until oil prices plunged in late November. Although energy-income was a small part of the portfolio, the large drop in price in just a few days wiped out gains we had built up in those 5 stocks and created some red ink for November for this part of the strategy. With the price back at what appears to be a bottom level for prices, I have decided to be patient and let these stocks do what I brought them for, produce dividends that average over 5%.
The high dividend real estate and other stocks and diversified bond funds in Flexible Income portfolios continue to perform nicely.
If you have Adaptive Balance or Adaptive Growth objectives for your accounts, you have a mix of both Shock Absorber Growth and Flexible Income portfolios mentioned above.
Municipal income accounts are fully invested at the moment.
Prefer Electronic Statements?
Paper statements are produced quarterly by Trust Company of America, but proxies and interim mailings often come in tree-killing flurries.
If you would rather have your proxies, statements and interim mailings delivered electronically on your Trust Company of America accounts, rather than receiving paper copies by snail mail, it is easy to request electronic delivery.
1. From the main page in your Liberty account access portal, click on the “About your account” tab.
2. Click on “Document Deliver Options” and select the “Edit” button on the right side of the screen.
3. Choose “Email” for the Delivery Method and enter your email address. Enter a 4-digit PIN in the box on the right side of the screen. Agree to the terms and click the “Save” button.
If you don’t normally use Liberty or just want someone to walk you through this process, please call the office and my staff will be happy to help you get this set up.
If it is more convenient to meet with Will in Scottsdale, please call the office to schedule your appointment.
College Classes Coming
Mark your calendar for these Yavapai College classes that begin in February:
“Managing an Inheritance: Planning it, Getting it, and Keeping it.” Feb 5th, 3:30-5:30 pm.
“Fundamentals of Investing for Retirees”: This is the most popular finance course YC’s community education department has ever offered, so tell your friends. The class runs for two classroom hours on three Thursdays beginning Feb 19th, 3:30- 5:30 pm.
Mark your calendars and I’ll have more details in next month’s newsletter.
Our Spotlight Strategy
With our Adaptive Growth Strategy we strive to provide high total return from a combination of investments from both the equity and income markets with the emphasis on equities.
Our proprietary Stock Market Exposure Indicator is used to determine a stock market exposure that adapts to the strength or weakness of the market, directing exposure in the HCM Shock Absorber Growth strategy to range from 20% to a maximum of 80% of account value. The balance, 20% to 80% is invested using the HCM Flexible Income strategy. The HCM Safety Net indicator is designed to warn of sudden potential declines in which case stock market exposure is quickly reduced.
“The richest country is Ireland. It’s capital is always Dublin.”
Richard Lederer, Get Thee to A Punnery
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.
In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Hepburn Capital Management, LLC adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Hepburn Capital Management, LLC, an Arizona Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.
Copyright (C) 2014 William T. Hepburn. All rights reserved.