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Mentor RIA Consulting

Allowing you to focus on what you do best

My Blog


Should Your Portfolio Include ESG Investments?

Posted on September 21, 2018 at 3:02 PM Comments comments (99)
A hot topic in the financial industry commentary for some time has been the interest in investing in firms that seem to meet environmental, social and governance criteria. This type of investment will appeal to some clients as a way to support businesses that are taking steps that may make a difference on various issues. However, at this point in time, such investments have not really caught on in terms of participation by investors.
One major roadblock seems to be the absence of any transparency and clarity in terms of what the investments – funds and ETFs comprised of shares in the chosen firms – actually do. One ESG investment may be very different from another and even with digging into the largest holdings, it is not always clear how effective the investment (and the underlying businesses) are at what the investor might choose to support. A company might be at the cutting edge on one aspect of ESG and a lollygagger on another. Which aspect should the investor see as decisive? How much ESG activity is enough to make a business “right” for an investor?
Alternatively, if an investor has a desire to focus on a particular part of the ESG concept, how easy will it be to find a fund or ETF that does the same? Many of the offerings are a hodge-podge of businesses that may or may not be doing what we would call ESG conscious activity. An investor might logically prefer an investment that is very specific and substantial in its commitment to a desired goal(s).
The other major roadblock appears to be the costs of these investments. Investors typically invest to make money on their investment and, if they can feel that they are doing good at the same time, it is a win. Expense ratios and costs for many investments described as ESG are rather higher than many other offerings. New ESG products are coming that will have lower costs and that may be an incentive for investors currently on the fence to put their money into ESG. 
The takeaway is for investors to know just exactly what the investment is providing that is related to ESG in any meaningful way and to understand the cost/expense or other drag on performance that will apply. Once you know, you can decide whether that investment is for you.

Some Benefits of Financial Education

Posted on September 7, 2018 at 6:03 PM Comments comments (2)
All too often, it seems that human nature leads one to believe that some are better than others at making financial decisions and that they are among that select group. This leads to what we might call overconfidence and often to ill-advised investing decisions. Worse, it usually leads these persons to ignore advice from any credible or unbiased source.
We all know these folks. Take, for example, the client who believes that real estate is the best possible investment and that one should always be looking to add to their property holdings and not to look at selling or diversifying their overall investment portfolio. Or maybe the client who puts all available funds into annuities because the salesman is a member of the same country club and appears to be very successful. Scarier examples, like the professionals who are sold a variety of tax avoidance schemes, also abound.
What is missing here is both a basic financial education and any sense of understanding that one doesn’t know everything. That makes it difficult to try to help these clients but providing strong examples of mistakes by other investors or thoughtful discussions of basic theories by people who understand finance can help. Even if it is an uphill battle it is worth it to try to provide some financial education to such clients.
The alternative usually is to fire those clients since they will not choose to follow your advice and you will always run the risk of their complaining of your services when they don’t do as well as they expected while ignoring your suggestions. Of course, you can always try a little guidance and perhaps get these clients to see that others can add value. One adviser uses brief presentations long on graphics and short on verbiage to illustrate basic concepts. This adviser finds that clients can grasp the ideas if they are at all open to learning. At bottom, the financial gains obtained or losses prevented will make it positive for both client and adviser.

Commodities, Volatility and Your Portfolio

Posted on August 18, 2018 at 2:22 PM Comments comments (0)
Chances are you know someone who is a strong advocate for owing commodities in the investment portfolio. Whether the choice is precious metal such as gold or silver, industrial commodities like copper or diamonds, or perhaps agricultural products like soybeans or coffee, there are some who believe that it is not only useful for diversification but actually necessary for an investment portfolio.
What would be helpful to those of us listening to this advocate on his or her commodity(ies) of choice would be to know just how much they have invested over time and just what the returns on that investment may have been. How else might we know if a particular commodity might be a good choice? Of course, if we take a step back and consider this as we would other investments, we might have a better grasp of what the upside and downside may be. First, think about volatility and what we see in the news with respect not just to stocks but to commodities. Just this year, copper has soared and then plummeted while gold and silver have experienced a substantial drop in recent weeks. Like individual stocks, then, timing is everything if you are dabbling in a commodity investment. Buy at the wrong time and you lose your shirt when the price tumbles. Buy and hold and your gains over time may be minimal and will be affected by when you finally sell – and you cannot always choose when that will be.
Another factor is liquidity of the investment. Owning the actual commodity as opposed to, say, an ETF that owns companies that own the commodity, presents a different set of concerns. Thus you will see folks owning physical gold while others own shares in companies that mine or refine gold. Those investments pose different issues with regard to ownership and, not surprisingly, different results with respect to performance. In different situations, it will be easier to liquidate a portion of an investment represented by stock, fund or an ETF than it will be with regard to physical metal (or whatever commodity we are addressing). Or vice versa.
If your overall goal is to get the best performance possible, then the risk and volatility associated with a specific commodity may be the way to go. After all, that is where the greatest potential for growth (or loss) is present. If instead you are looking primarily for protection for your principal and to avoid any unnecessary risk, then a more diversified and broader investment – say in a mutual fund or ETF representing a particular commodities sector – will likely serve you better.

Markets, Tariffs and Your Investments

Posted on July 13, 2018 at 12:08 PM Comments comments (0)
Recently, there has been a great deal of talk about tariffs and their impact on trade and, of course, their impact on the markets and your investments. We’ve learned (if we were not already aware) that a lot of countries employ tariffs for various imports and exports. The United States has taken an approach that places tariffs on a variety of items and countries exporting those items.
What is interesting is that while there will be US businesses which may benefit from tariffs there are also businesses which will definitely not benefit from those same tariffs. Your investment in the latter businesses may not do so well for the present while there may be a pop for other businesses that derive some benefit. Furthermore, it is possible that other countries will engage in new or additional tariffs of their own which will have a similar impact on businesses domestic and foreign.
What might this mean for the markets? It seems likely that on balance, there won’t be that great an overall impact from the US tariffs as you will have both gainers and losers. However, the fact that the government, through its intervention by way of tariffs, is in effect picking winners and losers will be a negative impact. The higher prices faced by consumers of items affected by increasing tariffs will also carry a negative impact on the markets. And we can’t overlook the likelihood of higher tariffs from other countries as well which, again, will negatively impact consumers for sure.
One might be forgiven for thinking that perhaps the better approach for all concerned is no tariffs for anyone. A more level playing field keeps governments from choosing the winners and losers and the consumer, wherever they may be, will gain to some extent. Businesses that are operated effectively will survive while others may fail without the extra bump from a specific tariff.
In the meantime, consider reducing investments in businesses/sectors you (and your adviser) feel will be negatively impacted by the announced tariffs and increasing your interest in those which will benefit. 

Did We Really Need the DOL Fiduciary Rule?

Posted on June 21, 2018 at 2:45 PM Comments comments (97)
It appears that with the DOL declining to appeal rulings against the proposed rule, it will pass away and leave the financial industry waiting to learn about the next rule(s) from various sources. Of course, a rule which created its own different definition of fiduciary, unlike the existing rule for registered investment advisers, and exceeded the authority of the DOL by purporting to apply the rule to IRAs (which are outside its purview) was probably going to run into trouble sooner or later. Perhaps the current situation means no further taxpayer money will be wasted on the previous DOL approach.
However, it seems pretty obvious that protections for investors, which protections specifically require the myriad different sellers of financial products to place the interest of their clients ahead of those of the industry is not only a good idea but one whose time has definitely come. Some value can be taken from the efforts of the DOL, particularly in terms of how the proposed rule heightened consciousness about some of the abuses in the industry and the need to address them. Some firms have made progress towards better serving clients and their interests and much of that progress should remain in place.
The current effort of the SEC with its so-called best interest rule is also a small step in the right direction but not enough for the protection investors deserve. More importantly, DOL or no, the insurance industry needs to get on board with the concept of serving clients instead of what we so often see today and it appears a strict best interest rule – whether we call it fiduciary or not – is the right way to go.  Consistency across the various industry players is critical to ensuring that investor’s interests are served and the lack of a single controlling rule is a problem that needs to be addressed. Just because one type of advisor – the registered investment adviser – is held to a fiduciary standard doesn’t mean that investors are protected since other groups (insurance sellers, brokers, etc.) do not employ that level of protection and want to keep that “advantage” over their customers.
So, if it got the ball rolling, then we probably needed the impetus the DOL rule provided, even if that was not the ultimate resolution of the issue. 

Fees, Bond Markups and Other Advisor Charges

Posted on May 17, 2018 at 12:15 PM Comments comments (0)
Advisor charges for the various services they provide investors have always been important to investors, regulators and the advisors themselves. The recent headlines about best interests, fiduciary duty, lawsuits over 401(k) fees, required disclosures to investors and more have had their central focus on how advisors make their money. The most recent development in this area is the new rule requiring brokerage firms to start disclosing some of the fees they charge their clients to purchase or sell municipal bonds. Note particularly the term “some” here – it means that investors won’t get full disclosure and will continue to be taken advantage of by their brokers.
What fees are we discussing? In this case it is the markup (or down) on the price charged (or paid to) clients transacting in municipal bonds. According to one source (Investment Advisor), these charges amounted to about 1.1 percent on investment grade bonds during 2016. Note that these charges were not subject to disclosure to the investors who are often unaware they occur. Investors would likely pay less if, instead, the investor purchased mutual funds holding the same municipal bonds.
How does the markup work in practice? In one case, an advisor for a major firm told his client that although he charged an asset management fee for some of the client’s assets, he would not charge a fee on the large portfolio of individual municipal bonds he had acquired for the client’s account. The client thought this was a bargain. However, the advisor conveniently forgot to inform the client that he was paid tens of thousands of dollars on markups on those bonds he selected. Wouldn’t you think that such an approach should have been disclosed? Clearly this approach would not be consistent with the fiduciary duty standard investment advisers are held to meet and would not be appropriate under the SEC’s new proposed best interest rule. Knowing that this type of activity occurs makes clear that the new rule on bond markup disclosures is not before time and that hopefully it will be strengthened as we move forward. 

Much Ado about Bitcoin (and Blockchain)

Posted on January 11, 2018 at 3:33 PM Comments comments (2)
As the new year ages, last year’s high interest in Bitcoin and related items continues with skyrocketing prices. There have been some advancements in the use of blockchain technology beyond Bitcoin and its competitors and it seems likely this will continue. Amid the excitement, however, there are some concerns about hackers and the security of holdings in Bitcoin and related cryptocurrencies. Regulators and governments are getting involved as well to protect both investors and various governmental interests.
Some of the major broker dealers (wirehouses), worried about the unknowns this new currency and fearful of the lack of any significant regulation, have barred their employees from offering as investments any products related to Bitcoin. As one adviser put it, “I know we are at the top of a bubble when unsophisticated investors with no money to spare start talking about buying bitcoin.”
As with many new developments, there is a great deal of speculation and volatility surrounding Bitcoin and other similar products. This in turn attracts investors by appealing to greed and the desire not to miss out on the next new thing. There is money to be made and the natural question is – when the dust clears – who will be the winners and losers in the product.
The underlying technology – blockchain – will likely have many uses other than cryptocurrency and, like many other technology investments, firms developing other uses for blockchain will be appealing to some investors. For example, Vanguard has announced that it plans to share index data using blockchain technology and expects this use will drive down the costs for investors as well as for Vanguard.  Kodak has announced a new type of bitcoin/blockchain platform intended to allow photographers to protect their work and copyright.  will These types of projects will be unlikely to raise the same regulatory and security concerns we are seeing with the cryptocurrencies such as Bitcoin. It will be interesting to follow this story to see just where Bitcoin and blockchain will go.

Growth as an Indicator of What?

Posted on August 24, 2017 at 4:54 PM Comments comments (0)

Certainly, one might be excused for thinking that the measure of business success is growth. After all, individual stocks and other securities are analyzed and praised for showing year over year growth and panned when they fail to obtain those results. The same thing happens to businesses, sectors and practically anything we can measure in the world of business. If you are not showing growth, then you are a disappointment and the value of your business in the view of investors, analysts and the public will drop, sometimes precipitously.

Of course, this approach begs the question of how, despite all the variables in the world, the only thing one is expected to do is grow. That single minded approach makes no sense when tested by history, logic, common sense, or any other useful measure. There are cycles, changing tastes, periods of consolidation followed by growth spurts and other factors that make a year over year growth an unlikely and poor measure of long-term success. But that is what we face in many cases, even if it is not a good measure of value of a particular firm or sector.

This is not to say that there is a perfect measure other than growth to get a grip on the value of a particular business model. What is probably closest to the truth is that there is no single ideal benchmark and focusing simply on that growth year over year statistic is not a certain path to our goals of properly assessing the future success of a business.

In fact, an undue focus on growth and the pursuit of growth for growth’s sake can damage a business even to the point of bankruptcy.  We have seen that many times where firms expand their business too rapidly or on the basis of a mistaken view of what the economy and customers can or will actually support.

As an investor you should pay attention to growth in a business or sector you are interested in for investment purposes. However, remember that this is just one factor to consider and may not be the best measure of how your investment might do over time. Growth should definitely NOT be the sole factor you consider and be wary of those touting an investment because of growth or growth potential.



Bitcoin as Tool or Investment

Posted on August 17, 2017 at 2:23 PM Comments comments (1)

Are you one of the millions of folks who own bitcoins or other forms of digital currency? As this relatively recent development (bitcoins were invented in 2008) continues to gain in use and acceptance, it is likely that you know someone who does use bitcoins even if you do not.

As an interested observer – not a bitcoin user, yet – I wonder what the experience has been for those using this medium of exchange as well as the reasons for others who have considered using bitcoin opting not to participate. The fact that bitcoin does not rely on an intermediary and is decentralized is quite appealing, not least for the appearance of anonymity of one’s transactions.

Since bitcoin operates digitally, the reliance on computers of various types is substantial, which opens one to the likely negative impact of any type of computer failure, ranging from loss of a digital key to the interference of an EMP event. In those cases where bitcoin is used in offline transactions, the need to protect the credentials (whether paper or metal or other method) is similarly important. The nature of bitcoin suggests that there is a need to be diligent in protecting against the potential for negative impact from such events.  

Another interesting aspect of the bitcoin phenomenon has been those touting it as an investment alternative. As a medium of exchange, the bitcoin seems to be effective. Where the investment aspect arises is the value of bitcoin stock, a stock that has seen enormous increases of late, increases that attract not only attention but investment with investors hoping to climb on that shooting star. A word of caution, this may be a good time not to jump aboard given the likelihood that prices will flatten or even drop for a time while the market absorbs the recent surge. You won’t want to be the one buying in at the top and be left holding the stock when the music stops. Of course, if you are patient, after a time it may well surge again.  

Investing in an Environment of Fear and Greed

Posted on July 18, 2017 at 11:55 AM Comments comments (0)
You’ve heard it before – many times – and you are still seeing it today: the two traits that dominate the financial markets and investors are fear and greed. As the bull market continues, the financial industry news is cluttered with stories, blog posts and articles warning about how the markets are overvalued and we are “overdue” for a correction. (“Correction” is one of those financial industry terms which, like “haircut”, means something a great deal more painful to investors than the word itself describes.)

What is perhaps interesting is that while everyone is warning investors, the various writers and authors all have different suggestions or solutions for the expected market trouble. Not surprisingly, the advice typically involves either the products the writers are promoting or whatever approach fits their personal experience and bias. Any connection to investors generally, let alone their best interests, is not apparent.

At the same time, these writers also may point to other factors which, they believe, will potentially cost investors money directly or indirectly contribute to that anticipated market correction. These run the gamut from government limiting access to accounts or actually seizing assets to riots and insurrection to bringing down the grid and more. If readers were to believe even a small percentage of these warnings – and their accompanying investment “advice” they would have every right to be afraid and, at the same time, greedily hoping to protect themselves in a variety of ways.

What is an adviser to do when investors raise these fears and desires, fueled by the plethora of writing directed at investors and full of contradictory suggestions? What is sad is how many investors are calling advisers now – summer 2017 – and only now are looking to get out of the cash positions they took a year ago prior to the election or even longer ago in some cases. This makes recommendations more difficult as investors have missed out on substantial growth and, of course, are not guaranteed the same kinds of profits, or any profits, going forward. So, there is your question – what would you tell an investor in this situation?