What Is Your Fee Schedule?

Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy tell me about your assets under management model.

Andy:

Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value like they did in 2018?

Andy:

The fee will go down if the accounts drop in value. My income will be lower as well.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, your fee will run $4,000 to $5,000?

Hank:

Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.

Nate:

Thanks Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.

Nate:

Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?

Rebecca:

That’s correct. It’s based on income.

Nate:

How long do your client’s pay a retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients stay with us for about three to five years before they move on.

Nate:

What if a client wants to invest based on your recommendations?

Rebecca:

We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.

Nate:

Give us an example please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but we encourage our clients to be long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.

Nate:

Thanks Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

That is true. However, we have an account minimum of $500,000.

Nate:

If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.

Frank:

Well, the fee is more than asset management fee. I also get paid for advice and financial planning.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.

Nate:

Thanks Frank.

Nate:

Let’s her from Patty. Patty tell us about your fee structure.

Patty:

Thank you, Nate. I only charge client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it look like?

Patty:

The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity.  Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year, or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year, or $500 per month.

Hank:

For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.

Patty:

This planning fee for this client, based on her assets, would be $5,000.

Nate:

Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you’re all getting paid?

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

April 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

What Is Financial Planning?

Peggy called me one afternoon to ask me if she could afford to buy a new car. I told her she could buy two. I knew this because we had just completed a financial plan for her and her husband.  Buying a new car, let alone two, wouldn’t make a dent in their financial situation. Twenty-five plus years later her plan is still bearing fruit. It has allowed her to live a life free of financial worry and turmoil, which is my definition of financial planning.

The text book definition of financial planning is “the process of determining whether and how an individual can meet life goals through the proper management of financial resources.”[1]

The planning process comprises of six steps:

  • Establishing and defining the client relationship.
  • Gathering the client data and identifying client goals.
  • Analyzing and evaluating the client’s financial status.
  • Developing and presenting recommendations.
  • Implementing the recommendations.
  • Monitoring the recommendations.

The key section, to me, is gathering the data and identifying the client’s goals. These items are vital to the success of your plan. Wrangling up statements from Social Security, your bank, investment firm, employer, insurance agent, credit card company, and accountant should be easy, if you’re organized. Items listed on a statement are easy to quantify. It’s much harder to value personal property, collectibles or a business interest. Furthermore, trying to put a dollar figure on your life goals may be impossible. What is it worth to you to spend time hiking with your daughter in Yellowstone? Priceless?

After your information is captured, the financial planner will go to work analyzing your data using powerful software from Money Guide Pro, eMoney, or Right Capitol. If a planner has been creating plans for years, they will also rely on Excel, Word and their trusted HP-12c calculator.

Your plan will consist of several pages quantifying your financial goals, dreams and concerns. It will highlight your risk level, investment management fees, cash flow projections, insurance needs, estate options, investment suggestions, college cost data, and much more. At the heart of the analysis is the Monte Carlo simulation. Most financial planning software providers include this in their analysis. The plan will run hundreds, or thousands, of scenarios to give you a probability of success ranging from 0% to 99%. Of course, a higher number is preferred.

Are all financial professionals created equally? No, definitely not. It’s imperative to hire a Certified Financial Planner® practitioner. An individual who has obtained the CFP® designation has spent years studying to become certified. Once certified, the planner must adhere to strict guidelines which includes obtaining 30 hours of continuing education every two years. Beware of brokers or insurance agents who offer financial planning, because, often, their end game is to sell you a product.  And, to be clear, financial planning is not a product.

I’ve done thousands of financial plans over the years and there is no good plan and there is no bad plan, there’s only your plan. Your plan is customized to you and your current situation. It’s a moment in time, like a photograph. But, once completed, it gives you a road map, a guide to help you obtain your financial goals. It will affirm your financial situation allowing you to maintain the status quo or make some serious financial decisions.

Does financial planning work? According to one study, individuals who completed the financial planning process had three times the assets of those individuals who did little or no planning.[2]

Several years ago, a client wanted to retire early. He approached me with a scenario that he thought might work for him and his family. After I completed his plan, I told him he could retire early. He was elated, but he wasn’t so sure – yet. He sent me another scenario and the plan confirmed his adjustments; he could still retire early. Still not sold, he sent me another request. It produced the same result. In short, we ran ten different scenarios and they all confirmed he could retire early. After the tenth and final plan he gave his notice to his employer and retired. He’s still retired.

Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? ~ Luke 14:28

April 2, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

[1] https://www.cfp.net/for-cfp-professionals/professional-standards-enforcement/current-standards-of-professional-conduct/compliance-resources/frequently-asked-questions/financial-planning

[2] http://www.nber.org/papers/w17078

Are You Too Frugal?

The person who dies with the most toys – loses!

John Bogle, the founder of Vanguard, recently passed away with a net worth of $80 million. By Wall Street standards $80 million is pocket change, especially for someone who founded one of the largest investment and asset management firms in the world.  Vanguard has about $5.3 Trillion in assets under management.[1]  By comparison, Stephen A. Schwarzman, the CEO of The Blackstone Group, has a net worth of $12.4 billion. Blackstone’s assets under management are $427 billion, or 8.5% of Vanguard’s total.

Mr. Bogle is known for being frugal, probably to a fault. He once said, “I don’t like going into stores, I don’t like the whole process of buying things.” He didn’t like spending money on himself, but he did donate to charities and schools including The John C. Bogle Center for Financial Literacy, Blair Academy and Princeton.

Mr. Bogle could have sprinkled his assets to individuals or groups he supported, including himself, without risk of running out of money.

It’s good to be frugal and watch your budget, but is it possible to be too frugal? I think it is. For example, if you drop your daily Starbucks habit, you could save $152,000 over the next 30 years, but would you be happy? I’ve seen individuals who look to save a dollar or two on small ticket items but hold 100% of their assets in cash, CDs or T-Bills. Rather than trying to save a few nickels by kicking your coffee habit, move your assets to stocks so you have an opportunity to make more money. Since 1945 stocks have averaged 11.3% per year while T-Bills have returned 3.9%, a difference of 7.4% per year! With the money you make from stocks you can now afford multiple lattes!

Mr. Bogle followed an asset allocation of 60% stocks, 40% bonds in his retirement accounts. His taxable allocation was more aggressive with 80% stocks, 20% bonds.[2]

Here are a few suggestions for you to spend more money and be less frugal.

Spend. The goal is not to die with the most assets but to use your net worth to live and enjoy life. Cash is a use asset, so use it accordingly. If you’re concerned about spending money on things, spend it on experiences. A family trip to a national park is not only a great experience, it’s also economical.

Give. If your assets are burning a hole in your pocket, give them away. Donate your resources to charities or organizations you support. Your gift will bless the organization and you’ll benefit from a tax write off.

Retire. Retiring early will give you an opportunity to travel to distant lands, spend more time with your loved ones, or volunteer your time. If you retire early, you’ll spend your money sooner rather than later. In addition, you can use your resources while you’re young and mobile. A former client saved his money to travel with his wife, but she died one month after his retirement. Don’t wait to enjoy your resources because you don’t know when you’ll leave God’s green earth.

What if you’re not blessed with a net worth of $80 million? How do you know how much money you can spend before you run out of money? A financial plan will help you create a spending plan based on your current assets. It will also recommend an appropriate asset allocation and risk tolerance level in hopes of maximizing your return.

So, go ahead, buy the latte and enjoy your life!

A nickel ain’t worth a dime anymore. –Yogi Berra

February 14, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Happy Valentine’s Day!

 

 

 

[1] http://fortune.com/2019/01/16/john-bogle-vanguard-founder-created-index-funds-dies-89/, by Kevin Kelleher, 1/17/2019

[2] https://www.investopedia.com/articles/financial-advisors/012716/where-does-john-c-bogle-keep-his-money.asp, Richard Best, 4/26/2018

Happy Anniversary to Me!

This year marks my 30th year in the investment business and what a long strange trip it’s been.

My last semester at the University of San Diego I took an investment course with a young, energetic, and entertaining investment professor. His knowledge about investing was second to none and he taught our class how to apply our learning to the real world of investing. His course changed my career trajectory.

I was living the good life as a college student. I lived in Mission Beach with the beach on one side and the bay on the other. My roommate at the time was in the same investment class.

After graduation I was working for Bank of America in downtown San Diego processing loans for residents of Orange County. My roommate took a job as a stockbroker with a penny stock firm. The stock market closed at 1:00 and on most days he’d call my office to let me know he was going to the beach.  He was going to the beach at 1:30 and I wasn’t getting home until 7:30. I asked, “Jim, did you make any money today?” His response, “Bill, I’m always making money!”

The thought of making money and going to the beach at 1:30 was too much to pass up so I called a former roommate whose dad was managing a small office for Spelman & Company in Rancho Bernardo. His dad told me if I passed the series 7, he’d hire me as a stockbroker. I borrowed some old series 7 training manuals and studied for a couple of months. I passed the exam with a score of 70.3! I was later told that the lower your score on the series 7, the better your odds of succeeding in the business.

Once I received my results, I resigned from Bank of America. My first official day on the job was May 8, 1989. My friend’s dad was an incredible mentor and it was an honor to work at his side. To get clients I spent most of my day cold calling with municipal bonds.

A few months later I moved back to Los Angeles to start working with Dean Witter in Pasadena. I went through their training program in April 1990. Like my job in San Diego I spent most of my day cold calling for new business. In addition to municipal bonds I added preferred stocks to the mix, and I’d dial the phone morning, noon and night – about 300 to 400 times a day, including Saturdays. My source of leads was the Criss Cross Directory. The early 90s was a great time to cold call because there was no caller ID, cell phones, or internet to interfere with my mission. To increase my odds of success I’d find a local bond paying 7% or more – tax free! My standard script went something like this: “Hello Mrs. Jones, My name is Bill Parrott and I’m calling from Dean Witter in Pasadena. The reason for my call today is that the City of Arcadia has just issued a new tax-free bond paying 7%. Would you like to hear more about it?” I repeated this process throughout the day. For a moment in time, I was the number one trainee in my class.

At Dean Witter I was blessed to work with another incredible mentor, a gentleman who’s been on the Barron’s 100 list of top advisors each year it’s been published. After hours we were often the only two left in the office and we’d go to lunch on several occasions.  I’d pick his brain about the business at every opportunity.

My mentors taught me more than investments, however. They taught me how to treat clients with respect and to put their interests above mine. I learned much by watching and listening to how they conducted themselves daily. Their wisdom, teachings and examples are still with me today.

On May 8, 1989 the Dow Jones Industrial Average closed at 2,376. It has since risen 933% to 24,553, averaging 8.17% per year – before dividends for the past 30 years! Despite the long-term success of stocks, each year, including this one, forecasters have called for the market to drop because it’s overvalued. In fact, the first year I started in the business one large producer told me to sell stocks and buy silver. I didn’t take his advice, thankfully.

During my career I worked in California, Connecticut and Texas. After Morgan Stanley and Dean Witter merged, I joined the management pool; managing offices in New Haven, CT and Austin, TX.  A few years after leaving Morgan Stanley I joined a large discount brokerage firm to work with executives, attorneys, pilots and doctors across the country. I spent a good deal of time in hotels and airports.

When I turned 50, I started my own company. My daughter was leaving for college and I thought if I don’t start my company now, I never will. It was a leap of faith. We live by faith, not by sight ~ 2 Corinthians 5:7.    

My firm is doing well and growing. I’ve had the benefit of working as an independent advisor, a wire-house broker, and an order taker. The independent channel is, by far, the best of them all. The relationships I have with clients are much deeper and more authentic than the other channels.

It’s been a great run and I’ve been blessed beyond measure.  Here are a few tips I’ve learned over the past three decades.

  1. Family and friends come first. I’ve been blessed with an amazing wife, a beautiful daughter, loving parents, and incredible sisters.
  2. Time in the market trumps timing the market. The long-term trend in the market will give you an opportunity to create wealth for you and those you love. Don’t try to trade the market daily because you’ll lose more often than you’ll win.
  3. Turn out the noise. As I mentioned, every year, for the past 30 years, “experts” have been telling me the stock market is overvalued. If I listened to any of these individuals, I’d have missed the historic rise in stocks.
  4. Diversify your portfolio. Diversification is the only free lunch on Wall Street. Stocks, bonds and cash will help you grow and protect your assets over time. All three will play a part in your wealth journey at some point.
  5. Invest internationally. About half of the global stock market capitalization is found in companies outside of our borders.
  6. Have a plan. Financial planning will help you create wealth. Your plan will quantify and prioritize your financial goals.
  7. Rebalance your accounts. At the beginning of each calendar year, review your asset allocation. If it’s out of whack with your risk level, adjust your portfolio.
  8. Eliminate your debt. Debt is a four-letter word and it’s a killer. Too much debt will keep you from reaching your financial dreams.
  9. Giving money away to help others has multiple benefits. It will make you happier, reduce your taxes, and assist those who receive your gift. It’s a win-win-win.
  10. We live on a beautiful planet with amazing things to see and do. Get outside and enjoy your life.

Thirty years have gone by in a blink of an eye. Between classes and jobs, my friends and I would sit on the beach and ponder our future. I’m happy to report we’ve all done well, and, more importantly we’re still friends. Life is good.

May He give you the desires of your heart and make all your plans succeed. ~ Psalm 20:4

January 22, 2019

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

Ditch Your Estate Plan?

Estate planning is vital for people with significant wealth. A properly structured plan can aid in the successful distribution of your assets to those you love. Transferring assets to your beneficiaries, while avoiding estate taxes, is paramount for most individuals.

Estate planning is primarily a one-time event. You meet with your attorney, create a will or trust, and then you put it in your safe. The documents probably contain standard language to transfer money to your children, relatives, or charities once you’re deceased.

Of course, you’ll have no control over how your estate plan will turn out because you’ll be dead. The successful distribution of your estate will rely on others, hopefully people you trust, to honor your wishes. Yes, your instructions are written and recorded, but your executor still must execute. The beneficiary can pursue legal action if they’re aware of a breach of fiduciary duty by the trustee.

An addition to your estate plan is a wealth transfer plan. A wealth transfer plan is a process allowing you to give money away while you’re living. You will be able to control the assets, distribution, and timing of your gifts.

For example, if you give money to your children and they’re excellent stewards of your gift, then you can entrust them with more money. If they aren’t, you can limit how much money they’ll receive in the future. It’s a test run.

The same is true for gifts to churches, charities, and organizations. You’ll be able to witness how they handle your donation. If they do it well, you can be confident they’ll treat your future gifts in the same manner. If they’re poor stewards, you can remove them from your estate plan.

A wealth transfer plan will allow you to actively manage your distributions, a luxury you won’t have with your estate plan once you’re gone.

His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. ~ Matthew 25:21

A few years ago, I was having a conversation with a client about her estate plan. We discussed giving her money away sooner rather than later. She wanted to support her family financially while experiencing the joy of giving. She decided to help the younger generation with their education. As a result, her gifts will bear fruit for decades. Her giving has not hindered her financial plan, if anything, it has been enhanced.

A wealth transfer plan will also help your beneficiaries because they’ll be part of the process. No one likes surprises, even if it’s millions of dollars. A large, unexpected gift may do more harm than good, especially if your kids don’t have the experience to manage substantial wealth. Including children in the conversation about how you plan to distribute your estate will set expectations for all. Your family will remain united and, hopefully, sibling rivalries will be avoided.

Estate planning involves trust, love and respect. If you put significant restrictions on your children before they can receive their money, you probably don’t trust them much. It’s a lack of trust if you make your children adhere to several rules or jump through hoops to be compliant with your wishes.  What is the message you’re sending? I love you, but… If you don’t trust your kids with how they’ll spend the money, don’t give them any. Setting up a trust with trap doors won’t change their behavior or your faith in their ability to meet your demands. Of course, if your kids are minors or have special needs, then a trust is recommended.

Giving through a wealth transfer program will educate your kids on how best to handle money. Your experience and wisdom can help them become better stewards of resources. Working together as a family will pay dividends for years to come.

Wisdom, like an inheritance, is a good thing and benefits those who see the sun. Wisdom is a shelter as money is a shelter, but the advantage of knowledge is this: Wisdom preserves those who have it. ~ Ecclesiastes 7:11-12

Randy Alcorn said, “You can’t take it with you, but you can send it ahead.” Wise words. There are no banks in Heaven. What’s the point of dying with millions, or billions, of dollars? Why not distribute your estate while you can?

Here are a few questions to ask if you want to create a wealth transfer program.

Why are you saving money? What’s the goal for your resources? A financial plan can answer these questions. Your plan can create multiple giving scenarios and strategies. The plan will quantify and clarify your goals.

Who will receive your money? When will they receive it? How will they receive it? The timing and titling of your assets is important.

Do you own a business? Who will run it when your gone? Do your kids want to be business owners? Do they have the capacity to operate a company? If you have multiple children, who will call the shots?

What if your wrong? If your giving plan isn’t working, you can make changes while you’re alive and in control. After your gone, your estate plan is irrevocable.

So, should you ditch your estate plan? No. A thoughtful wealth transfer plan, coupled with your estate plan, will benefit many – especially you and your family. You’ll be able to witness the joy of giving and they’ll be able to create a solid foundation. Win-win.

Naked I came from my mother’s womb, and naked I will depart. The Lord gave, and the Lord has taken away; may the name of the Lord be praised. ~ Job 21:1-2

December 13, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

What is Average?

At lunch a few weeks ago, a friend of mine said he didn’t want his son to be average. I was struck by his comment because all his kids do well in school and they’re exceptional athletes. I then spent some time pondering the word – average. What is average? According to Merriam-Webster it means a single value that summarizes or represents the general significance of a set of unequal values. It also states a level, typical of a group, class, or series.

Do you know Akani Simbine? He is an Olympic sprinter from South Africa who finished 5th in the men’s 100-meter dash at the 2016 Olympics. His time was 9.94 seconds – the average winning time of the eight runners in the race.  By Olympic standards, he’s an average sprinter. However, if he raced anybody else in the world, he’d win – by a lot. Is Mr. Simbine average?

The average score for the top 20 finishers at the 2018 Masters was 281. Tony Finau finished 10th with a score of 281. Is Mr. Finau an average golfer? If he was in your foursome at your local muni course, do you think he’d win? I do.

The average height of an NBA player is 6 foot 7. Russell Westbrook is only 6 foot 3. He has below average height, but if he showed up at your local YMCA to play basketball, he’d dominate the court. Would you be able to guard Mr. Westbrook one on one? Doubtful.

Average is relative. Metrics and benchmarks matter.

Some investors shun index funds because they’re designed to generate market returns, or average returns. Who wants average returns? If you were able to capture these returns, your account balance would grow substantially. Yet, most investors fail to do so and, as a result, produce below average returns.

According to a 2017 Dalbar study, investors underperformed the S&P 500 by a wide margin. The S&P 500 is an unmanaged index of stocks. At the time of their report the index returned 11.96%, the individual investor made 7.26%, a difference of 4.7%. The 20-year annualized return for the index was 7.68%, the individual made 4.79%.[1]

The dollar differential is staggering. A $100,000 investment for twenty years earning 7.68% will grow to $439,239. If the rate drops to 4.79%, the balance falls to $254,915, a difference of 42%.

Why do individual investors constantly underperform the market? Here are a few reasons.

Emotions. Investors fall prey to greed and fear. They buy high and sell low. When stocks rise, investors feel good and they buy more stocks. When stocks fall, investors panic and they sell their holdings. The best time to buy is when everybody else is selling.

No Plan. Investors without a financial plan are likely to react to negative news. They don’t have a game plan. Without a plan, it will be a challenge for investors to have much financial success. An archer needs a target.

Short-term thinking. Markets fluctuate, and no trend lasts forever. Focusing on recent, short-term market moves may cause investors to lose sight of their long-term goals. Marathon runners don’t panic at the five-mile mark.

Noise. TV shows, newspaper headlines, Facebook posts, and tweets will try to knock you off your target.  Distracted investors make mistakes. Focus on your goals and tune out the noise.

Lack of accountability. A trusted advisor can help you navigate troubled waters. A Certified Financial Planner™ can design a plan and portfolio fit for you and your family.

Buy and hold investors can capture average market returns if they have the courage to stay the course. Focusing on your goals and following your plan will pay substantial dividends. Average returns may deliver above average wealth.

I feel like a fugitive from the law of averages. ~ William H. Mauldin

December 10, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

 

 

 

 

[1] https://www.marketwatch.com/story/americans-are-still-terrible-at-investing-annual-study-once-again-shows-2017-10-19, Lance Roberts, 10/21/2017

Raking Leaves

The fall foliage in New England is amazing – full of splendor and beauty. I lived in Connecticut for a few years and the color of the fall leaves were always spectacular. However, they eventually fell off the trees and someone had to pick them up.

Raking leaves is not an activity I enjoy, a daunting task. This weekend, my yard was covered with thousands of leaves that needed to be picked up.

To attack this problem, I needed a plan for transferring the leaves from my yard to the (environmentally friendly) trash bags. As I surveyed the yard, I decided on three options.

Option 1: Do nothing. Leave the leaves alone and let mother nature take care of it.

Option 2: Rake them into one giant pile.

Option 3: Start at the front of my yard, work my way to the back and rake the leaves into several small piles that are easy to pick up.

I chose option 3. Breaking my task into small, manageable pieces allowed me to move across my yard with efficiency and skill.

Creating a budget, financial or investment plan may be a daunting task for you and your family. Like a yard covered in leaves, your paperwork may be scattered around your house – unorganized and in disarray.

Here is a guide to help you get on track and organized.

Monday: Gather your bank, credit card, loan, investment, and other financial statements and put them into individual piles. Use manila folders and title each one accordingly to help you organize your documents.

Tuesday: Review your bank and credit card statements to identify where your money has gone. Looking back over the past 5 or 6 months is recommended. Create individual categories such as mortgage, auto, food, entertainment, etc. and enter the data in Excel or write it on a yellow pad. This will be the start of your budgeting process. Do you notice any trends or themes?

Wednesday. Identify your income streams by reviewing your paystubs, 1099s and other income generating documents.

Thursday. Evaluate your investment statements. Write down your account values, asset allocation, dividends, interest, and total fees paid.

Friday. Assess your health, insurance, and retirement benefits. Are your beneficiaries up to date? Do you have enough insurance coverage? Are you contributing enough money to your retirement accounts?

Saturday: Review your estate planning documents: wills and trust. Do they need updating? Do you need to create one? Are your loved ones protected?

Sunday: Rake leaves.

If you approach these tasks day by day, they will be easier to accomplish. After a week, your financial affairs will be organized, and you’ll have started a financial plan. Of course, if you don’t want to do these items yourself, contact a Certified Financial Planner™ to help you create a financial plan and get organized.

How do you eat an elephant? One bite at a time ~ Anonymous

December 4, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process to help our clients pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

 

Do You Have the Right Map?

Having the right map is paramount if you want to arrive at your destination. Navigating the high seas and distant lands requires a detailed map, so does driving across town to pick up a gallon of milk. A map of Los Angeles is of little use in New York. A ski map of Crested Butte provides no guidance on Mt. Bachelor. Whether you rely on a printed map or satellite GPS, make sure it’s in sync with your travel plans.

Growing up in Los Angeles I relied on Thomas Brothers Maps to help me get around town. The maps, bound by a spiral spine, were necessities for driving around Los Angeles and the surrounding counties. The maps were detailed, simple to use, and extremely efficient.

When I hike in the mountains, I mostly rely on trail maps from National Geographic. Never would I consider hiking in a national forest without one. Would you?

Nowadays, satellite navigation through phones, watches, and other electronic devices have replaced the need to carry a printed map unless travelling in remote areas with poor reception.

Have you ever been lost? Driven on the wrong road? Hiked on the wrong trail? It’s a scary feeling once you realize you may be lost. Anxiety runs high until you recognize a familiar landmark.

Having the right financial map can help you navigate your investments. Like a GPS, your financial map can guide you to your desired destination. Your map is a financial plan. It will help you identify your goals and direct you to the best path to achieve them. However, most investors don’t follow a plan, or if they do it’s the wrong one.

Here are a few suggestions to help you follow the right financial map.

The right way:

Your map should be a collection of your goals – no one else’s. Committing your financial goals and dreams to paper gives you an excellent chance of making them come true. Your goals, once documented, become a gravitational pull, navigating you to your destination. In addition, after you write down your goals, you can quantify the time and cost it will take to achieve them.

Your map will help you avoid the wrong roads and trails, keeping you focused on your route. A financial plan will help you answer several questions like, “Can I afford to retire?” or “Do I need to be worried about the market volatility?” It may also help you avoid financial landmines like Bitcoin.

Your map should be checked periodically. After you have departed on your financial journey, check in often to make sure you’re still on the right path. I refer to my hiking map often to make sure I’m still on the right trail. If I have deviated from my goal, I must find the fastest, and safest, route to get back on track. Your financial plan will occasionally be knocked off track through markets rising and falling. Adjusting your plan and portfolio is necessary for you to achieve your goals.

The wrong way:

Following someone else’s map will never get you to your financial destination. Trying to keep up with your next-door neighbor is no way to plan for the future. Who cares if they have a bigger boat or a faster car? Are you jealous of their social media posts? Planning through envy is a sure way to end up in the poor house.

Listening to the media. The media’s job is to report on the news and entertain their audience.  They’re not talking directly to you, nor are they giving you specific investment advice. When a reporter says the market is going to rise or fall, they’re making a generalization about its direction.  They don’t know you or your situation. If you listen to the news, do so with a skeptical ear.

Leaving your financial future to hope and chance. Hoping you have enough money to retire someday is no plan. A vague promise of a bright future will insure you won’t have one.

A financial plan will require some time and effort on your part, but the results will be time well spent. Once it’s complete, you’ll be able to refer to it often and adjust it as needed. It will keep you focused on your final financial destination.

Happy trails!

“Suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it?” ~ Luke 14:28

November 28, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

A Few Things I Know

Most markets have struggled during the months of October and November causing angst and worry among investors. Media commentators, reporters, and online personalities are bellowing from their pulpits about the pending doom in the markets and economy. If these experts were asked to help contain a fire, they’d bring kerosene. It’s easy to focus on negative items especially when investments are losing ground. Misery loves company.

Rather than focusing on the unknown and worrying about tomorrow, spend time identifying things you know and can control. With that said, here a few things I know and one I don’t.

The things I know:

  • Individuals who complete a financial plan have three times the assets of those individuals who do little or no planning.[1]
  • Stocks outperform bonds. The 91-year average annual return for common stocks has been 10.2% while long-term government bonds returned 5.5%. A $1 investment in large company stocks is now worth $7,347 while $1 invested in bonds is worth $143.[2]
  • Small company stocks outperform large company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.4% from 1928 to 2017. A $1 investment is now worth $83,387. The Dimensional Large Cap Value Index averaged 11.3%. A $1 investment in this large cap index is now worth $15,699.[3]
  • Asset allocation accounts for 93.6% of your investment return. The remaining 6.4% is attributed to market timing and investment selection.[4]
  • Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over a 15-year period 95% of active fund managers fail to outperform their benchmark. This is also the case for 1, 3, 5 and 10 years.[5]
  • Lower fees are better than higher fees. Less is more.
  • Working with an investment advisor can help you increase returns. A study by Vanguard quantified an advisor relationship can add 3% in net returns.[6] An advisor can help with financial planning, estate planning, investment planning, charitable planning, and much more.
  • Stocks fluctuate. But the S&P 500 has made money 73% of the time dating back to 1926.
  • Risk and reward are linked.
  • A buy and hold model of low-cost mutual funds is difficult to beat over time regardless of market conditions.
  • Spending less money than you earn will help you create generational wealth.
  • A high debt level will suffocate your ability to save money and enjoy life.
  • Giving money to those in need makes economic and spiritual sense. It will also make you happier.
  • Health is wealth. Take care of yourself.

One thing I don’t know:

  • The future.

In a few weeks we’ll roll into a new year. As we approach 2019, focus on those things you can control like saving, spending and expenses. Think long-term. Create a financial plan. Set some goals. Dream big. Smile always. Enjoy life.

“No! Marty! We’ve already agreed that having information about the future can be extremely dangerous. Even if your intentions are good, it can backfire drastically!” ~ Dr. Emmett Brown (Back to the Future)

November 21, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

[1] http://www.nber.org/papers/w17078

[2] Dimensional Funds 2016 Matrix Book.

[3] Ibid.

[4] Determinants of Portfolio Performance, Financial Analyst Journal, July/August 1986, Vol 42, No. 4, 6 pages; Gary P. Brinson, L. Randolph Hood, Gilbert L. Beebower.

[5] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

[6] https://www.vanguard.com/pdf/ISGQVAA.pdf

Too Good to Be True

The Wall Street Journal reported on a firm that went belly-up due to “bad bets on energy prices.” The firm, OptionSellers.com, sold options on future contracts and they suffered a “catastrophic loss” on their trading strategy.[1]

As a result of the firm’s trading losses, some of their clients lost 100% of their capital and they were still required to add money to their account because their accounts went negative. One individual in the article had $470,000 invested but is now $150,000 in debt.[2]

Investors were attracted to the firm’s “double-digit gains” and income from selling options. It appears the firm sold naked calls, or short calls, against energy positions. When you sell a naked call, you don’t own the underlying asset – the most aggressive option strategy you can employ. For example, if you sell a call option against Apple at $150 per share and it rises to $200, you’re required to sell your shares at $150 and buy them at $200. In this example, you lost $50 per share minus the tiny income you received from selling a call option.

Unfortunately, greed and envy are two magnets some investors can’t ignore. The lure of double-digit returns is too much for individuals to overlook. Envy of what others are doing is a catalyst for investors to do dumb things with their hard-earned dollars.

High risk, highly leveraged strategies work in a raging bull market but when stocks fall risk in these portfolios is exposed. As investors in this firm found out it was too late for them to recover their assets. Everything works until it doesn’t. Too much risk can vaporize your wealth – quickly.

During the Tech Wreck from 2000 – 2002, I managed a branch office for a major Wall Street firm. One of our brokers worked with a client who aggressively traded options. When the stock market corrected, his client lost 100% of the account balance. Due to his margin balance, he still owed $20,000 after his account was liquidated. I called his client to let him know his account went negative and that he still owed the firm a balance. He was cooperative because he knew the level of risk he was taking. Thankfully, he sent us the money.

A globally diversified portfolio of mutual funds is boring, very boring, when compared to an exotic trading strategy using options and futures. A portfolio of mutual funds is like a slow moving, meandering river snaking its way across the country. The river is in no hurry to get to where it’s going but it will eventually arrive at its destination.

When I present a diversified mutual fund portfolio to potential clients some of them are less than thrilled. I get comments like: “That’s it?” or “I’m doing better on my own!” or “I want to be more aggressive trading individual stocks.” Some people want the sizzle more than the steak.

A diversified portfolio of mutual funds is based on your financial goals, identified and quantified through your financial plan. Your portfolio is built for the long-term with a main goal of asset preservation through rising and falling markets.

If you’re attracted to shiny objects and feel the need to speculate, limit your trading dollars to 3% to 5% of your investable assets. Do not speculate or trade in your retirement accounts.

Markets fluctuate, and losses are inevitable, especially in the short term. One of the best ways to protect your portfolio against permanent loss is to own a globally diversified portfolio of low-cost mutual funds and review your financial plan often. Over time, markets recover and appreciate.

“The stingy are eager to get rich and are unaware that poverty awaits them.” ~ Proverbs 28:22

November 20, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

[1] https://www.wsj.com/articles/energy-losses-prompt-emotional-video-to-options-firms-clients-1542709800, Gunjan Banerji, 11/20/2018

[2] Ibid