Objective information about retirement, financial planning and investments

Reverse Churning Are You a Victim?

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One of the best things about being a freelance financial writer and blogger is that I often learn new things in the course of my writing. A reader left a comment on a post here on the blog and mentioned reverse churning. Until that time, I had never heard this term, but after a bit of research I found that its’s one more thing that clients of stock brokers and registered reps need to be aware of.

The issue of reverse churning is one that will come to the forefront as the initial implementation of the DOL fiduciary rules commences next week. Here’s what you need to know about reverse churning to protect yourself and to make a good decision if your broker proposes a fee-based account.

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What is churning?

Investopedia defines churning as “Excessive trading by a broker in a client’s account largely to generate commissions. Churning is an illegal and unethical practice that violates SEC rules and securities laws.”

Churning conjures images such as the boiler room in the movie Glengarry Glen Ross (actually they sold real estate) or the iconic 2002 ad by Charles Schwab (SCHW) in which a brokerage house manager is depicted as telling the brokers, “Let’s put some lipstick on this pig” in reference to a sub-par stock he wants them to pitch to clients.

What is reverse churning?

A 2014 piece by Daisy Maxey in The Wall Street Journal describes reverse churning as follows:

“The Securities and Exchange Commission says the practice of so-called “reverse churning”–putting investors in accounts that pay a fixed fee but generate little or no activity to justify that fee–is on its radar. Regulators will be watching for signs of double-dipping by advisers who generate significant commissions within a client’s brokerage account, then move that client into an advisory account and collect additional fees.”

This occurs in brokerage accounts that at one point generated significant commissions for the broker from the purchase and sale of individual stocks or other commission generating transactions. If the activity in the account tails off the broker makes little or nothing from this client.

As a way to generate ongoing fees from this type of client, the broker may suggest moving to a fee-based advisory account, often called a wrap account.

Under this arrangement there is an ongoing fee based upon the assets in the account plus often trailing commissions in the form of 12b-1 fees from the mutual funds usually offered in this type of account. These generally include proprietary mutual funds offered by the brokerage firm, or at the very least costly actively managed funds from other fund families in share classes geared to offering broker compensation.

Fee-based is not fee-only

Fee-based is often confused with fee-only. I suspect the brokerage industry likes it this way.

Fee-only compensation means that the financial advisor earns no compensation from the sale of financial products including trailing fees and commissions. Their fees come from their clients. These can be hourly, a flat-fee or as a percentage of the assets under management.

Fee-based compensation, also called fee and commission, is a mix of the two forms of advisor compensation. A common form of the fee-based model entails the client paying the advisor to do a financial plan and then if the client chooses to have the financial advisor implement their recommendations this will often be via the sale of commission-based products.

The version with fee-based advisory accounts associated with reverse churning by brokers and registered reps arose out of a 2007 rule that prohibits the charging of fees in brokerage accounts. Many broker-dealers have a registered investment advisor (RIA) arm which runs these accounts.

The fiduciary rule

The new fiduciary rules make fee-based accounts more desirable for brokers and other fee-based advisors. These types of accounts will become even more prevalent with the disclosures required for retirement accounts under the new rules.

There has been a movement towards fee-based accounts in the brokerage world for several years now, likely in anticipation of the eventual issuance of these rules. This movement should accelerate in IRAs. In some cases, this will be a good thing as clients will fully know what they are paying in terms of fees.

In other cases, clients will find themselves paying 100 basis points or more in wrap fees for accounts where they were formerly trading infrequently on a commissioned basis. Whether the fee-based account will be a better deal will vary.

If all they are getting is an expensive managed account filled with bad to mediocre mutual funds that charge high fees on top of the wrap fee, this is not a good deal. If the advisor does little more than collect a fee, this sounds like the definition of reverse churning based on my understanding of the term. Much will depend upon the level and types of advice clients receive for the fees they will now be paying.

Buyer beware 

If you are working with a stock broker or registered rep and they propose moving to a fee-based or wrap account, you should take a hard look at what you are being offered. What is the wrap fee? What types of investments are used in the account? Are they expensive actively managed mutual funds that throw off 12b-1 fees in addition to wrap fees? What is the track record of the manager of the account that the advisor is proposing? What types of advice and service will you receive for the fees you will paying?

The Bottom Line 

I can’t recall hearing about a case of churning in recent years. Reverse churning is a new term to me, but from the perspective of a broker or registered rep, fee-based advisory accounts make a ton of sense. They provide ongoing fee income and frankly require little attention from them. If your broker proposes a wrap account, make sure you understand how this arrangement benefits you the client.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

 

5 Tips to Manage Taxable Mutual Fund Distributions

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With the end of the year in sight it’s time for year-end mutual fund distributions. If you hold mutual funds in taxable accounts, these distributions will be taxable to you.

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Even with the weakness in the stock market to start the year, the Bexit vote in United Kingdom and recent pre-election weakness many mutual funds have gains embedded from a seven-year plus bull market.

Short of selling the funds, which may or may not a good idea, here are 5 tips to manage taxable mutual fund distributions.

Don’t buy the distribution 

During November and December mutual fund companies will publish information about fund distributions on their websites. If you are looking to add to a position or start a new mutual fund position in a taxable account it is important that you know the dates of these distributions and take the anticipated distribution into account. You don’t want to buy a fund shortly before a significant distribution and then owe taxes on the distribution only having owned the fund for a short time.

Even if you reinvest distributions on mutual funds held in a taxable account the distributions are still taxable in the year received. These distributions can be added to your cost basis in fund which can take a bit of the sting out of this.

Consider tax-loss harvesting to offset capital gains distributions 

As you go through your taxable accounts near the end of the year consider selling holdings with a loss to offset some of the capital gains distributions from your funds.

Just as with gains and losses generated from the sale of investments, long-term capital gains are matched against long-term capital losses and likewise with short-term capital gains and losses.

Tax-loss harvesting or any tax strategy should only be used if it makes sense from an investment point of view.

Index funds are not a cure-all for taxable mutual fund distributions

Index funds tracking standard broad-market indexes are generally pretty tax-efficient. That doesn’t mean that this will be the case each and every year. Further index funds and ETFs tracking small and mid-cap indexes may need to make more transactions in order to track their respective indexes.

As smart beta products become more popular they will likely be less tax-efficient than more common market-cap weighted index products. Smart beta funds will likely need to buy and sell more frequently in order to rebalance to the their underlying benchmark than more standard index products, potentially resulting in larger capital gains distributions.

Don’t let the tax tail wag the investment dog 

While it is aggravating to receive large taxable mutual fund distributions, it is rarely a good idea to sell an investment holding solely for tax reasons.

Mutual fund distributions are one of three types:

  • Dividends
  • Short-term capital gains
  • Long-term capital gains

All three have different tax implications.

Ordinary dividends and short-term capital gains are taxed at your highest marginal ordinary income tax rate. Long-term capital gains are taxed at preferential rates ranging from 15% to 20% with higher income tax payers subject to the 3.8% Medicare tax. Qualified dividends are taxed at these same rates as well.

That said it is important to pay attention to the tax efficiency of the mutual funds that you are using in your taxable accounts. 

Consider distributions when looking to rebalance 

Year-end is a good time to look at rebalancing your entire portfolio, both taxable and tax-deferred accounts.  As you look to rebalance your portfolio consider reducing positions in taxable mutual fund holdings that continually throw off large distributions. If the fund is a good holding look for ways to own it in a tax-deferred account if possible.

The decision with regard to the taxable portion of your portfolio always involves taxes to one extent or another. If you were looking to reduce your position in the fund anyway it can make sense to sell it prior to the record date for this year’s capital gains distribution. If selling the fund would result in a capital gain, offsetting the gain against a realized loss on another holding could be a good strategy.

The Bottom Line

With the gains in the stock market over the past few years many investors may find themselves the recipient of large distributions this year in spite of weakness in the markets over the course of the past year. When possible consider tax-efficiency when buying mutual funds in a taxable account.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

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3 Financial Products to Consider Avoiding

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Before buying ANY financial product make sure that this product is right for you in terms of your unique, personal financial situation.  Financial products are tools and just like your projects around the house you should use the right tool for the job, not the tool that the financial rep wants to sell to you.

Here are three financial products that you should consider avoiding.

Equity-Indexed Annuities 

Equity-Indexed Annuities are an insurance-based product where the returns are tied to some portion of the performance of an underlying market index such as the S&P 500.  They are also called fixed-index insurance products and indexed annuities. Your gains are limited to a portion of what the index gains and there is generally some sort of minimum return to limit (or eliminate) your risk of loss.  As you can imagine these were pitched heavily to Baby Boomers and retirees after the last market downturn and are still being sold based upon fear today.

Two problems here are generally high internal expenses and surrender charges that keep you locked in the product for years. Worse yet, these internal expenses can be hard to isolate. If you decide to go ahead with the purchase of an Equity-Indexed Annuity be sure that you understand all of the details including the level of index participation, expenses, surrender charges, and the health of the underlying insurance company. Check out FINRA’s Investor Alert regarding Equity-Indexed Annuities for more cautionary information.

Proprietary Mutual Funds

It is not uncommon for registered reps and brokers to suggest mutual funds from the family run by their employer. In many cases they are incentivized or even required to do so. While some of these funds are perfectly fine, all too often in my experience they are not.  Whether via high fees and/or low performance these are often investments to be avoided.

A lawsuit against Ameriprise Financial brought by a group of participants in the company’s retirement plan alleged the company breached its Fiduciary duty by offering a number of the firm’s own funds in the plan and that these funds then paid fees back to Ameriprise and some of its subsidiaries as revenue sharing. The suit was ultimately settled.

JP Morgan also settled a suit by some retail investors over the bank steering clients into their more expensive proprietary funds over those of other families.

Load Mutual Funds

It is important that you understand the ABCs of mutual fund share classes.  In the commissioned/fee-based world reps often sell mutual funds that offer compensation to them and to their broker-dealers.  A shares charge an up-front commission plus a trailing fee (often a 12b-1) of somewhere in the neighborhood of 0.25% or more.

B shares charge no up-front commissions, but carry an additional back-end load as part of the ongoing expense ratio.  This can amount to an addition 0.75% or more added to the fund’s annual expenses.  In addition these shares also contain a surrender charge that typically starts at 5% if your sell the fund before the end of the surrender period.  B shares have been largely phased out by most fund providers.

C shares typically have a permanent 1% level load added to the fund’s expense ratio and carry a one year surrender period.

These sales loads ultimately reduce the amount of your investment and are an expensive form of advice. Nobody expects financial advisors or any other professional to provide financial advice for free. Unless the person to whom you are paying these pricey loads is providing extraordinary advice, this is a very expensive way to go.

The DOL fiduciary rules

The fiduciary rules introduced by the DOL (Department of Labor) in April of 2016 impose a far greater level  of disclosure on financial advisors. The rules require financial advisors to act as fiduciaries when providing advice to clients on their retirement accounts such as IRAs.

The fiduciary rules require advisors to have their client sign a disclosure document for many financial products with sales charges and trailing commissions if used in a retirement account. Load mutual funds and proprietary mutual funds will most likely require a BICE (Best Interest Contract Exemption) disclosure. Additionally Equity-Indexed Annuities were not exempted from these disclosures in the final draft of the rules as they had been in earlier drafts.

It will remain to be seen how the fiduciary rules will impact these three products, both within retirement accounts and overall. As an example, broker Edward Jones recently announced that mutual funds and ETFs will no longer be offered to clients in retirement accounts where commissions are charged.

Before making any financial or investment decision review your specific situation. Consult a fee-only financial advisor if you feel that you need financial advice.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

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Avoid these 9 Investing Mistakes

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Investing is at best a risky proposition and sometimes even the best investment ideas don’t work out. However avoiding these 9 mistakes can help improve your investing outcomes.

Avoid these 9 Investing Mistakes

Inability to take a loss and move on 

It’s difficult for many investors to sell an investment at a loss. Often they prefer to wait until the investment at least gets back to a break-even level. I think its part of our competitive nature. Investing is not a competitive sport, leave that for our Olympians.  When reviewing your investments ask yourself “Would I buy this holding today?” If the answer is no, it’s time to sell and invest the proceeds elsewhere.

Not selling winners

I’ve seen many investors over the years refuse to sell highly appreciated holdings, all or in part. There is always the risk that you’ll sell and the price will keep going up. But sometimes it’s best to protect your gains and sell while you’re ahead or at least consider selling a portion of the holding and reinvesting the proceeds elsewhere. The latter can be part of your portfolio rebalancing process.

Investing without a plan

When you take a road trip in your car you generally have a map to help you to get to your destination. Investing is a means to an end, a road map to achieve your goals such as providing a college education for your children or funding your retirement.

Without a financial plan how will you know how much you need to accumulate to achieve your goals?  How much risk should you take?  What types of returns do you need to shoot for? Are on track toward your goals?  Essentially investing without a plan is much like hopping in the car without any idea where you are headed. 

Trying to time the market

It’s difficult to predict when the market will rise and fall. Even if the stock market is following a general trend, there will be up and down trading days. Trying to buy and sell based on those daily fluctuations is difficult. While there are professional traders who do this for a living, for most of us this is a losing proposition.

Worrying too much about taxes

Taxes can consume a significant portion of your investment gains for holdings in a taxable account. While nobody wants to pay more tax than needed, in my opinion paying taxes on a gain is almost always better than dealing with an investment loss.

Not paying attention to your investments

Your portfolio needs to be evaluated and monitored on a periodic basis.  You should reevaluate a stock when the company changes management, when the company is acquired by or merges with another company, when a strong competitor enters the market, or when several top executives sell large blocks of stock.

This applies to mutual funds as well. Manager changes, a dramatic increase or decrease in assets under management or a deviation from its stated style should all be red flags that cause you to evaluate whether it may be time to sell the fund.

Failure to rebalance your holdings  

This goes hand in hand with having a financial plan. Ideally you have an investment policy for your portfolio that defines the percentage allocations of your investments by type and style (stocks, bonds, cash, large stocks, international stocks, etc.).  A typical investment policy will set a target percentage with upper and lower percentage ranges for each style. It is important that you look at your overall portfolio in terms of these percentages at least annually.

Different investment styles will perform differently at various times.  This can cause your portfolio to be out of balance. The idea behind rebalancing is to control risk. If stocks rally and your equity allocation has grown to 75% vs. your target of 60% your portfolio is now taking more risk than you had planned. Should stocks reverse course, you could be exposed to over-sized losses.

Assuming recent events will continue into the future 

The first 15 plus years of this century have been tough on investors. The market tumbled during the 2000-2002 time frame and then again in 2008-2009. More recently the stock market dropped steeply and suddenly in the wake of the Bexit vote in the U.K. These events have instilled fear into many investors. It’s hard to blame them.

However this fear and the assumption that recent events will continue into the future might also be keeping you from investing in the fashion needed to achieve your financial goals. Taking the events of recent years into account is healthy, however letting these events paralyze you can be destructive to your financial future. This holds true for stock market drops as well as protracted bull markets.

Building a collection of investments instead of a well-crafted portfolio

Are you investing with a plan or do you simply own a collection of investments?  Great football teams like my beloved Green Bay Packers have a better chance of winning when everyone embraces and executes their role in the game plan for that week.  In my experience you will increase your chances for investment success when all of the holdings in your portfolio fulfill their role as well.

Nothing guarantees investment success.  Avoiding these 9 investing mistakes as well as others can help you increase your odds of being a successful investor.

Concerned about stock market volatility? Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if its right for you. Financial coaching focuses on providing education and mentoring in two areas: the financial transition to retirement or small business financial coaching.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Brexit and Your Portfolio

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As you are most likely aware, the U.K. voted to leave the European Union. The so-called Brexit vote was a surprise to many and caused a swift, severe and negative reaction in the world financial markets.

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On Friday June 24, the S&P 500 lost about 3.6% and the Dow Jones Industrial Average lost about 3.4% of its value. There may be more pain in the days ahead, only time will tell.

As an individual investor what should you do when the stock market drops?

This isn’t new 

While the Brexit is a new issue, we’ve seen plenty of market disruptions before. The stock market crash of October 19, 1987 saw the market drop 22.61%. The correction following the Dot Com bust and 9/11 was severe as was the market decline in the wake of the 2008 financial crises. The markets recovered nicely in all cases and even with Friday’s declines the S&P 500 is about three times higher than it was at the depths of the market in March of 2009.

A good time to do nothing 

While everyone’s situation is different, the vast majority of investors would be wise to do nothing in the wake of these market declines. Panicking and withdrawing money from your accounts may feel good now, but you’ll likely regret it down the road.

Investors nearing retirement who sold their equity holdings near the depths of the financial crises in late 2008 or early 2009 realized large losses, then sat on the sidelines during some or all of the ensuing market recovery. Their retirement dreams are in shambles because they panicked.

Some strategies to consider 

Once the dust settles a bit, here are a few things you might consider:

Rebalancing your portfolio. Especially if the markets continue their downward trend for a few more days or weeks it is likely that your portfolio will become underweight in equities. This is a good time to rebalance back to your target asset allocation. Rebalancing forces a level of discipline on investors, in this case buying when equities have fallen.

Tax-loss selling. In the course of rebalancing and reviewing your portfolio, you may have some holdings in your taxable account that have dropped below their cost basis. Look to sell some of them to realize the loss. Be sure to understand the wash-sale rules if you intend to buy these holdings back. Above all ensure that any asset sales make good investment sense, as the saying goes “…don’t let the tax tail wag the investment dog…”

Recharacterize a Roth conversion. If you have converted traditional IRA dollars to a Roth IRA and the value of these converted dollars has fallen you are entitled to a do-over or recharacterization. You generally have until October 15 of the year following the year in which the conversion took place. The assets that are recharacterized cannot immediately be converted back to a Roth, there is generally at least a 30 day waiting period. In other words if you did a conversion in 2015 you would have until October 15, 2016 (or the latest tax filing date including extensions).

If the value of the assets that you converted has fallen appreciably, there can be significant tax savings to be realized here. These rules are complex so be sure that you know what you are doing or that you seek the advice of a knowledgeable tax or financial advisor.

The Bottom Line 

Event-driven market declines such as we’ve seen (and may continue to see) via the Brexit vote are often swift and severe in nature. For most investors the best course of action is no action. Once the dust has settled a bit review your portfolio and make adjustments and tweaks that make sense in a thoughtful, controlled fashion.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.  

 

The Bull Market Turns Seven Now What?

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On March 9, 2009 the market downturn fueled by the financial crisis bottomed out as measured by the S&P 500 Index. On that day the index closed at 677. Yesterday, on the bull market’s seventh birthday, the index closed at 1,989 or an increase of about 194 percent. According to CNBC the Dow Jones Industrial Average has increased 160 percent and the NASDAQ 267 percent over this seven-year time frame.

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With the bull market turning seven, now what? Here are some thoughts and ideas for investors.

How does this bull market stack up?

According to data from the most recent quarterly Guide to the Markets report from JP Morgan Asset Management, the average bull market following a bear market lasts for 53 months and results in a gain of 153%. By both measures this bull market is a long one.

Does this mean that investors should brace for an imminent market correction? Not necessarily but bull markets don’t last forever either.

There have been some speed bumps along the way, including 2011, a sharp decline in the third quarter of 2015 and of course the sharp declines we saw to start off 2016. Again this is not an indicator of anything about the future.

Winners and losers

A commentator on CNBC cited a couple of big winners in this bull market:

  • Netflix (NFLX) +1,667%
  • General Growth Properties (GGP) +9,964%

Additionally, Apple (APPL) closed at a split-adjusted $11.87 per share on March 9, 2009. It closed at $101.12 on March 9, 2016.

The CNBC commentator cited giant retailer Walmart (WMT) as a stock that has missed much of the bounce in this market, as their stock is up only 42% over this time period.

What should investors do now? 

None of us knows what the future will hold. The bull market may be getting long of tooth. There are factors such as potential actions by the Fed, China’s impact on our markets, the threat of terrorism and countless others that could impact the direction of the stock market. It seems there is always something to worry about in that regard.

That all said, my suggestions for investors are pretty much the same “boring” ones that I’ve been giving since I started this blog in 2009.

  • Control the factors that you can control. Your investment costs and your asset allocation are two of the biggest factors within your control.
  • Review and rebalance your portfolio This is a great way to ensure that your allocation and your level of risk stay on track.
  • When in doubt fall back on your financial plan. Review your progress against your plan periodically and, if warranted, adjust your portfolio accordingly.
  • Contribute to your 401(k) plan and make sure that your investment choices are appropriate for your time horizon and risk tolerance. Avoid 401(k) loans if possible and don’t ignore old 401(k) accounts when leaving a company.
  • Don’t overdo it when investing in company stock.
  • If you need professional financial help, get it. Be sure to hire a fee-only financial advisor who will put your interests first.

The Bottom Line 

The now seven-year bull market since the bottom in 2009 has been a very robust period for investors. Many have more than recovered from their losses during the market decline of 2008-09.

Nobody knows what will happen next. In my opinion, investors are wise to control the factors that they can, have a plan in place and follow that plan.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

20 Best Investing Blogs of 2016 – The College Investor

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I am very flattered to be included in this list of the 20 Best Investing Blogs of 2016  compiled by Robert Farrington on his outstanding blog The College Investor, with it’s tagline “Investing and Personal Finance for Millennials.”

20 Best Investing Blogs of 2016

I know and follow many of these people and read their blogs on a regular basis. There were a few that were new to me and I plan to add their blogs to my regular reading list as well. If you like to read about investing and financial topics this list is a great place to start.

Jim Blankenship, Financial Ducks In A Row

Josh Brown, The Reformed Broker

Ben Carlson, A Wealth of Common Sense

Kathryn Cicoletti, Ms. Cheat Sheet

Jim Dahle, The White Coat Investor

Sam Dogen, Financial Samurai

Eddy Elfenbein, Crossing Wall Street

Michael Kitces, Nerd’s Eye View

Larry Ludwig, Investor Junkie

Michael Piper, Oblivious Investor

Ben Reynolds, Sure Dividend

Barry Ritholtz, The Big Picture

Jeff Rose, Good Financial Cents

Todd Tresidder, Financial Mentor

Joe Udo, Retire By 40

Tadas Viskanta, Abnormal Returns

Roger Wohlner, The Chicago Financial Planner

The Dividend Guy Blog

Don’t Quit Your Day Job

The Mad FIentist

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

Denver Wins! Time to Go to Cash?

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The Denver Broncos just won Super Bowl 50 and its looking like Peyton Manning will go out a winner. Good news and a feel good story? Not for investors. The Super Bowl Indicator says a win by an AFC team is a bad omen for the stock market for the year. 

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Super Bowl Indicator

The Super Bowl Indicator says that if a team from the old American Football League (AFL) wins the Super Bowl that the stock market will finish down for the year.

This indicator has held true for 40 of the previous 49 Super Bowls played prior to this one, including the past seven years.

The New York Giants, one of the earliest teams from the NFL, won the Super Bowl in 2008 but as we all recall the stock market had its worst year since the Great Depression with the S&P 500 being down 37% for the year. I guess a little thing like the mortgage fueled financial crises trumps a “sure fire” stock market predictor like the outcome of the Super Bowl.

The January Effect 

The Stock Trader’s Almanac says that if the month of January is down then 75% of the time the stock market will be down for the year.

The January Effect says that stocks that were sold off in December for tax-loss harvesting purposes will rally in January when investors buy them at reduced prices.

With the S&P 500 and the Dow Jones Industrial Average both down over 5% for the month this clearly didn’t happen.

Time to go to cash? 

Clearly investors should not peg their actions to any type of indicator like the Super Bowl Indicator or any of the others of a similar nature that have cropped up over the years.

The best course for investors has always been to have a financial plan, have an investing strategy and stick to their plan.

The Bottom Line 

The Super Bowl Indicator is fun and part of the Super Bowl hype. At the end of the day there is really no correlation between the performance of the stock market and who wins the Super Bowl. Investors should invest based upon their goals, their time horizon and their risk tolerance. I will say this, however. The market will be way up in 2017 after my Green Bay Packers bring the Lombardi Trophy back to its rightful home, Lambeau Field. OK no predictions, I have no idea what the market will do after the Packers win (which is a sure thing, I hope).

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out our resources page as well.

3 Financial Planning Lessons from the Cincinnati Bengals

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Long-time readers of The Chicago Financial Planner know that I am a die-hard football fan and avid supporter of the Green Bay Packers. Come playoff time, I try catch all of the games as they are often memorable. The game this past Saturday between the Pittsburgh Steelers and the Cincinnati Bengals was memorable for the wrong reasons if you are a Bengals fan.

Rarely, if ever, in my 50 years of watching NFL games have I ever seen a team give away a game (especially a playoff game) in such a bonehead fashion as did the Bengals. Besides some just plain dumb moves, the level of dirty play and bad sportsmanship was disgusting.

What can we learn from the Bengals about financial planning? Here are 3 financial planning lessons from the Cincinnati Bengals.

Protect your downside 

The Bengals had gained the lead in the final quarter after being held scoreless for the first three quarters of the game. On what should have been a routine running play, (in the Steelers end no less) to try to run the clock out, the Bengals’ running back fumbled. In this situation ball security should have been his first priority, not gaining any yardage.

Unless you are very young, most investors are wise to diversify their portfolios in order to dampen the impact of market declines like the financial crisis or even the market volatility that we’ve seen since the start of the new year.

Keep your emotions in check 

Cincinnati linebacker Vontaz Burfict made a key interception that looked like it might seal an improbable comeback win for the Bengals. After the fumble mentioned above, he proceeded to make one of the absolute dumbest and dirtiest hits to the head of a Steelers receiver resulting in a key 15-yard penalty.

His teammate (and I’m sure fellow Mensa member) Adam Pacman Jones then garnered another 15-yard penalty for shoving a Pittsburgh assistant coach during an on-field altercation that set-up a chip-shot game winning field goal for the Steelers.

Burfict is known as a loose cannon and has been fined in the past and Jones is not a choir boy either. Both personal fouls can be attributed to a combination of bad judgment and a failure to keep their emotions in check in a key situation.

Investors need to stay calm during periods of upheaval in the economy and the financial markets. So far 2016 has started off with roughly a 5% loss in some the major market averages.

Back in 2008 and early 2009 the financial press was filled with stories of investors who panicked and sold out of their stock holdings, including mutual funds and ETFs, at or near the bottom of the market. Many of these investors stayed out missing all or most of the six plus year rally we’ve seen since the lows of March 9, 2009. Sadly, for those who were near retirement they booked substantial losses and never gave their portfolios a chance to recover.

Investors need to stay calm. One way to help in this area is to have a plan. Have an asset allocation that that reflects your situation including your time horizon for the money and your risk tolerance. Review your portfolio at regular intervals and rebalance as needed. A plan does not eliminate market volatility or the stress that it can bring, but it can help to prevent you from acting on your emotions, usually to your detriment. 

Build a team that you can depend on 

While both Burfict and Jones are talented players, both have a history of issues. Jones has been in trouble with the NFL for off-field activities and has been suspended by the league in the past. Burfict was suspended for this hit and has been fined for prior transgressions. He was undrafted, many say as a result of a reputation for being hard to deal with.

As a viewer of the game I would say these two players let their teammates and fans down at the most critical point in the most important game of the season. The Bengals have not won a playoff game since 1991 and their comeback to take the lead and put themselves into a position to win was heroic, only to be destroyed by the lack of self-control of these two.

In the course of accumulating money for goals such as retirement and college for your kids, many of you will seek advice along the way. In doing so it is important to build a team of advisors and partners that you can trust.

If a financial advisor is needed be sure to choose a fee-only advisor. This isn’t to say that one who derives some or all of their compensation from the sale of financial products isn’t competent, but someone who doesn’t have the conflict of interest inherent in the sale of financial products starts out as more objective.

Find an investment custodian who has reasonable fees and offers the types of investments and accounts that meet your needs. Free ETF platforms are nice, but who cares if the ETFs on the platform are not the ones that are right for you.

Other advisors might include a CPA or an attorney to handle estate planning matters.

In all cases don’t be afraid to ask questions. In the case of a financial advisor it is important to understand if they have worked with clients in similar situations as you and to understand what you will receive for the fees paid.

The Bottom Line 

As I’ve written here in the past, football and the world of financial planning and investing have some similarities. Learn from the Cincinnati Bengals and be sure to protect your financial downside, keep your emotions in check and build a team that you can trust. These steps will put you on track towards achieving your financial goals.

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5 Reasons 401(k) Lawsuits Matter to You

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Several 401(k) lawsuits against major employers have been in the news this year. These suits are about high fees, conflicts of interest and plan sponsors failing to live up to their fiduciary obligations.

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Ameriprise Financial settled a suit that alleged that the firm offered a number of its own proprietary mutual funds in the company’s 401(k) plan and collected revenue sharing payments on these funds from an Ameriprise subsidiary.

The U.S. Supreme Court ruled in Tibble vs. Edison International that the large utility company had a duty to monitor the investments offered in the plan no matter how long along they were initially added to the plan. One of the issues here surrounds the fact that lower cost share classes of these funds became available but the plan stayed with the higher cost retail share class.

Most recently Boeing settled a lawsuit that was first filed in 2006 for $57 million. The suit alleged that the company had breached its fiduciary duty to its employees by using high cost and risky investment options in the plan and by allowing the plan’s record keeper to charge employees and retirees excessive fees.

While all of this may be interesting, you may be asking what does any of this have to do with me? Here are 5 reasons 401(k) lawsuits matter to you.

Plan Sponsors have a fiduciary obligation 

These and a growing number of 401(k) related lawsuits have reaffirmed that retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan participants. This includes:

  • The selection and monitoring of the mutual funds (or other investment vehicles) offered in the plan.
  • The selection and monitoring of the service providers selected for the plan.
  • All costs and fees associated with the plan.

Moreover plan sponsors should have a process in place to manage all aspects of the plan.

Mutual Fund share classes 

Several of the lawsuits centered on plan sponsors offering expensive retail share classes of funds when lower cost share classes were available. These higher cost share classes might throw off more revenue sharing and other fees to the plan but they are more expensive for the plan participants. It behooves plan sponsors more now than ever to offer the lowest cost share classes of a given fund available to them.

Numerous studies have shown the connection between lower investment costs and investment return. Well-run 401(k) plans strive to keep investment costs down and one way to do this is to ensure that the plan offers the lowest mutual fund share classes available.

Duty to monitor 

As shown in the Tibble versus Edison ruling the Supreme Court said plan sponsors have a duty to continue to monitor the investments offered in the plan long after they may have been initially offered. This dovetails into an ongoing duty of plan sponsors to monitor the investments offered to you to ensure the costs are reasonable and that they meet a set of criteria.

Typically a 401(k) that is well-monitored and managed via a consistent investment process will tend to offer a better investment line-up to their participants.

Manage plan expenses 

Boeing recently settled the second largest 401(k) suit in history at $57 million. In part the allegations included that Boeing allowed its outside record keeper to charge employees and retirees excessive fees.

This and other suits underscore the responsibility of plan sponsors to manage 401(k) plan costs and the activities of plan providers such as an outside record keeper. To the extent that administrative expenses are paid out of plan assets plan sponsors who strive to keep these expenses low are doing the right thing for their employees.

Plan Sponsors are getting it 

While this is not a blanket statement as there are still plenty of lousy 401(k) plans out there, there is evidence that plan sponsors are getting the message that they have a responsibility to the plan’s participants.

As an example mutual fund expenses in 401(k) plans have been declining for the past 15 years. Fewer companies are mandating the use of company stock in their 401(k) plans and a 2014 Supreme Court ruling will certainly help keep this trend going.

The Bottom Line 

Retirement plan sponsors have a fiduciary obligation to act in the best interests of the plan’s participants. A number of 401(k) lawsuits in recent years have served to reinforce this duty and this is a good thing for those participating in 401(k) plans. As a plan participant become knowledgeable about the investments offered in your plan and how much the plan is costing you. If you have concerns raise them in a constructive fashion to your employer.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

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Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.