- Who Is FIM Group and Why Should I Care?
- Headwinds, Hurricanes and Unexpected Hazards
- The Planning Reality for Gen-Yers
- Investment Spotlight
By: Paul Sutherland, CFP®
Over the years, FIM Group’s team has updated our clients on “why” we do what we do, including topics like “Safety First,” “Values Matter,” etc. Today, the “industry” of investing is fraught with misguidance disguised as advice, salesmen acting as consultants or advisers, and giant firms creating products for sheer profit – not products that are right for consumers. I would like to speak frankly in this article about why FIM Group is a fee-only, SEC-registered investment adviser and a National Association of Personal Financial Advisors (NAPFA) member. The catalyst for this was this headline that recently came across my Bloomberg news feed:
“Brokers Lure Soldiers Out of Low-Fee Federal Retirement Plan,” Aug. 12 (Bloomberg), By John Hechinger
The article was about a former Labor Department economist who contacted various financial firms posing as a potential client grappling with what to do with his nest egg. What he encountered was gross misrepresentation and obscuring of facts to get him to switch out of his super-low-cost government thrift savings plan (which has investment flexibility at extremely low costs) into products that, from what I can infer from the article, were merely higher-cost versions of his existing plan. Incentives like no fees, better diversification, more options and even a $200 cash bonus were used to entice the economist to the other offerings. Financial Industry Regulatory Authority (FINRA), the industry’s self-policing group, said the term “no-fee IRA” could be misleading when there are management fees and other expenses associated with the account.
Reading the article got me thinking about how FIM Group adds value to our clients as we work in an ethical, honest and commonsensical way. So below, I’ve listed a few things that are core to FIM Group and what I feel collectively sets us apart from others providing “investment services”:
1) FIM Group is, and always will be, FEE-ONLY. We are not “fee-based” or “fee and commission,” which means the “broker/commissioned agent can receive both commissions and fees.” The problem with commissions is they do not incentivize performance. FIM Group’s compensation rises or falls with our clients’ account balances.In other words, our interests are aligned with client interests to manage risk well and have positive performance.
2) FIM Group is held to a fiduciary standard. To quote the above-mentioned Bloomberg article, “The Labor Depart-ment has said it will propose rules in January that brokers and other advisers act in clients’ best interests during rollovers, a so-called fiduciary standard. Brokers are generally held to the lower standard of selling products that are suitable for their customers, meaning they don’t have to put their clients’ interests first as long as they select appropriate investments.”
FIM Group is a corporate member of NAPFA, and we are required by our fee-only standard to be held to the highest standard of fiduciary duty. No exceptions. A fellow fee-only adviser, Tom Alf, uses this analogy to describe the “Fiduciary vs. Suitability” equation:
“Let’s try an everyday example: buying a car. Assume you are looking for a car that costs less than $25,000 and gets over 25 mpg. Those two requirements alone would leave you with a rather long list of cars that would be ‘suitable’ to you. However, most of us would do further investigation and consider additional criteria. For example: Which models have the best safety record? Which ones have the best maintenance/repair history? Which ones have the best resale value? And so on. You work to find a car that does not just meet your basic needs or is ‘suitable,’ but one that is ‘best’ for you.
Going one step further, would you feel comfortable making your car-buying decision by simply relying on the salesperson repre-senting the car manufacturer? Or would you feel more comfortable using an independent research organization such as Consumer Reports to help find the best car for you? I think you know the answer. Why not then demand an independent, fiduciary level of care for something of much greater importance, your financial future?”
3) FIM Group is family- and employee-owned. FIM Group is not beholden to or owned by a bank, brokerage firm, trust company, insurance agency, venture capital fund or private equity firm. We work for our clients. This allows us to think and act in the long-term interest of our clients. We manage investment portfolios and offer financial coaching to achieve real client financial goals rather than to match or beat an arbitrary benchmark like the S&P 500 stock index. In other words, we manage real risks, those that impact client financial outcomes, rather than our own career risk. We have no quibbles about straying from the herd when it is prudent to do so.
4) FIM Group is optimally sized and structured. We are large enough to invest in deeply experienced team members, research and operational systems, yet small enough to provide direct client access to the portfolio team making decisions on your behalf.
5) At FIM Group, we eat our own cooking. FIM Group partners and staff invest a vast majority of their long-term investments in the same strategies managed for our clients..
6) FIM Group is audited annually by an independent CPA firm held to high standards and duty. Many smaller firms are not audited and, in some cases, are flying under the radar of good corporate/business practices like being audited.
7) FIM Group does not hold clients’ assets. All client assets are held in SIPC-insured custodial accounts or trust accounts that are in the clients’ names. It is always amazing to me to read the stories of people who have deposited money into accounts that they thought were insured and in their name but were not. “Safety First” is a good motto, and an insured account in your name (not ours or anyone else’s) is the best practice for security.
8) FIM Group doesn’t use speculative options, leverage, futures or margin shenanigans in the management of client accounts. Slow and steady wins the race, and while I have friends in the industry who manage futures, we don’t use
9) FIM Group diversifies and concentrates portfolios. I am always amazed by the radio ads that say, “For diversification [or to add diversification] put gold coins, futures, commodities, farm land, oil, energy partnerships or stocks [whatever the advertising is touting] in your portfolio.” Why own a crummy, highly marked up, overvalued investment in your portfolio because it adds “diversification?” Diversification is about having a variety of investments in your portfolio that are strengthened by adding each new position – not by dumbing down the portfolio for the sake of adding a position. Every asset in a portfolio should be there for a reason, and underlying that reason is the value proposition and investment merits of the investment that is bought at the right price. Speculation has more to do with the price you pay for an investment (risk-adjusted) than the investment itself. So diversification is for risk management and to enhance consistent performance, not as a way to invest.
10) FIM Group believes that complete transparency is important, including the disclosure of our clients’ actual performance. We send out monthly statements, and all clients have access to their portfolio statistics, appraisals and progress reports by e-mail, Internet or phone on a daily basis. The statistics that we show each month are real. In other words, they are always reported net of all transaction costs, fees and other investing expenses. I am always amazed how some managers show gross performance and deliberately exclude net performance. This is often the case with annuities, insurance products and back-end loaded mutual funds. In some cases, the lost performance from commissions, fees and back-out expenses results in a negative return.
FIM Group also fully discloses our performance to prospective clients. We don’t show someone else’s perfor-mance or tout the hot investment of the day – we disclose what our clients’ actual performance experience was – which surprisingly is a rarity in this industry.
11) FIM Group believes that ethics and values matter. We have discussed this in past letters, newsletter articles and other communications, so it should suffice to say that we believe ethics, honesty, transparency and virtues are important.
12) FIM Group provides ongoing, unbiased financial coaching/planning and advice that enables clients to make smarter financial decisions, avoid financial pitfalls and sleep better. We are well-staffed with CFPs, CPAs, MBAs and CFA-credentialed advisers who work closely with clients to achieve solid, long-term results. Among the many benefits this ongoing financial advice can bring, one of the most important is that it allows us to structure and manage investment accounts proactively, taking into account each client’s unique and evolving tax considerations, portfolio cash flow needs, and tolerance for short-term portfolio volatility.
Hopefully, the above list of differentiators gives our readers a little better understanding of why we choose to operate the way we do. FIM Group is designed from the ground up to be aligned with our clients’ interests. Throughout our 30-year history,
we believe success comes from a corporate DNA that is client-centered and built around ethics, performance, virtues and people.
By: Barry Hyman, MBA
Those of you who read our monthly musings should recognize the pattern: first the story, then the analogy relating it to investment strategies and manage-ment. The story: recently I had quite an eventful few days, initially thanks to two hurricanes bearing down on Hawaii and then a completely unrelated and unpredictable emergency. My actions/inactions and those of the people around me present an interesting study in behaviors in response to risks and threats.
Despite living here in Hawaii, in the middle of the Pacific Ocean where tropical storms are the norm and hurricanes are not that rare, during the 48 hours prior to the expected storm, thousands of residents flocked to Costco and other retailers to stock up staples like bottled water, gasoline, toilet paper, batteries and the like, completely depleting shelves. Why people don’t already have a month’s supply of these items amazes me.
(Side bar: Tom, the husband of Judy McCorkle, who retired from FIM Group several years ago, owns one of Maui’s largest recycling businesses. On the day prior to the hurricane, the number of nickels given to people at his recycling centers was double the normal daily average. Why people felt compelled to recycle the day before a hurricane is beyond me and is another interesting factoid about crowd behavior. But I digress.)
Despite many people waiting until the last minute, it appeared most Hawaii residents were finally prepared by 12 hours prior to the expected onset of hurricane winds, as the parking lot at Costco had finally become more or less vacant. For the most part, with the exception of a couple places, the state of Hawaii was spared from much damage from Hurricane Iselle. The second hurricane, Julio, veered north of the state and steered completely away from land. Its only discernable effects were some good waves for us surfers.
I felt relieved that we averted any damage … then I took the dog for a walk the morning following Iselle. As we passed our cottage I heard what sounded like the shower running. Our tenants were off-island on vacation so I ran back to our house, got the keys and upon opening the cottage door was greeted by three inches of water flooding the entire house. The water supply line to the toilet had broken some time in the 48 hours between my closing the windows a day prior to the hurricane and the morning after it. It seemed like a random, unpredictable and seemingly non-preventable event … until I analyzed it later.
I shut off the water, called the insurance company and had a flood mitigation company extract water and run industrial fans and dehumidifiers in the house within 90 minutes.
Now for the analogies …
Thoughtfully preparing for a hurricane should not include hurriedly purchasing basic necessities in the 48 hours prior to the event. That sets one up for forgetting important items, getting there after everyone else has taken action first, overpaying and contributing to general chaos. Nor should it include panicking during the event itself.
The same applies to personal financial responsibility and investment management. In terms of personal responsibility, as Paul pointed out in last month’s newsletter, most people are woefully unprepared financially. To be so, one either needs to have chosen their parents wisely or implemented discipline and foresight. Have a few months’ worth of toilet paper and several years’ worth of retirement-income-generating assets stored away for rough conditions, financially related bad weather. Fortunately most FIM Group clients have fulfilled those responsibilities. They have also hired us to responsibly steward the assets they have amassed.
To prepare your portfolio for storms, we do serious analysis of every investment, both in isolation and in conjunction with each other. We consider the effects of a weak dollar as well as a strong one; the ravages of inflation, as well as the potential of deflation and benign “no-flation”; the effects of trends and tailwinds on investments and consumers as well as current, expected and unexpected headwinds of demographics, economics, global conditions, and geopolitical risks and opportunities.
We build portfolios with “informal hedges” in which we own some investments that are expected to offset the short-term negative effects of various future scenarios on other investments in the portfolio. For example, we own some investments that we expect will benefit during periods of a falling dollar and others that will benefit when the dollar rises; investments that benefit from deflation or benign inflation such as high income-producing assets as well as investments that benefit from inflation such as equities that hold “hard assets” or discretionary consumables.
But regardless of how each performs during various cycles, the one common thread among all the investments in your portfolio is the single fact that prepares and defends your wealth from permanent loss: each investment we make is bought and held only when its price is significantly below the present value of our estimate of its future cash flow.
In the aftermath of events like hurricanes, imagine the glut of bottled water, toilet paper and gasoline people have stocked up on. Once they do an assessment, many discover they overbought. Not a big deal for consumables. But I assure you when I go on Craigslist in the next few months, I will be able to buy the brand-new generator I need at prices well below those the panic crowd paid the day before the hurricane. This same phenomenon is the value investor’s friend. As highlighted in our Investment Team Spotlight on Adidas this month, Morrison’s last month, and as Paul mentioned in his article last month about panic selling of interest-sensitive investments and anything with a trace of Russia exposure, panic selling by the crowd creates significant opportunities for patient investors with a long-term strategy.
In the case of the unpredictable calamity in my cottage, I learned a lot of valuable lessons. I learned to make periodic in-spections of all the plumbing lines, I will shut off the water to the house every time my tenants are out of town, and I will also now replace my smoke detectors (not just their batteries) every few years.
In the portfolios we manage, we do continuous inspections on every investment we own. We read any and all pertaining news, every filing, listen in on company calls, periodically discuss questions that come up with management, and review competitive forces and any other threats to our hypotheses. In addition to detailed analysis and position management of each investment in isolation, we also review portfolios in their aggregate. We analyze the effects that various potential conditions, including unlikely and extreme scenarios, might have on each security and estimate the range of combined impact on portfolios. If the estimated outcome pushes any portfolio outside the target range for any client, we make adjustments to that portfolio accordingly.
In FIM Group’s 30 years of portfolio management we have a respectable long-term track record. By proactively managing portfolio risks with careful analysis, strict price discipline, and thoughtful client counseling, we have been able to minimize permanent losses when storms roil the markets we invest in. Our investment performance has also been aided by our opportunistic approach of buying when others got greedy and ultimately found themselves selling at distressed prices. Admittedly, we have had periods of disappointing performance. But like the disappoint-ment I experienced with my recent flood, we go back and examine every part of our thought processes and our actions (or inactions). We learn from mistakes, incorporate these lessons into our go-forward process and strive to help our clients build increased financial resilience against the storms and other surprises that will inevitably come our way.
By: Hayley Wood, CFP®
Having completed my undergraduate in the spring of 2009 and currently pursuing my Executive Master’s in Business, I would like to share my thoughts and observations as to the reality of planning for my generation. I recall sitting in my International Finance class, my favorite class in college, on October 9, 2008. The S&P 500 had fallen approximately 22.92% since October 1. Having no real-life understanding, only academic, we as a class would analyze articles and charts as though the crisis were an intriguing economic event and were fascinated to be studying the crisis as it unfolded – or at least I did. I was lucky. In October of 2008, I was offered a financial planning position at Capitol Financial Solutions (a John Hancock branch) in Raleigh, North Carolina. I say I was lucky because something in the analysis was eerie and chose to listen to my concerned professor and mentors about my generation’s future opportunities and vigilantly pursued finding a position in a field I am passionate about with a reputable company. Many of my colleagues upon graduation weren’t as lucky and settled for positions “below” their capabilities, pursued graduate degrees at a time they may have otherwise not, had job offers rescinded because the companies could no longer support their growth strategies and, of course, moved in with their parents. Fortunately, many of my peers are in careers they are passionate about or at least have jobs that afford them the opportunity to be an adult (i.e., live on their own without parental assistance). However, there’s still looming repercussions from the Great Recession, rational and irrational.
The Urban Institute published in March of 2013 that those in Gen-Y have accumulated approximately 7% less wealth than those in their 20s and 30s in 1983. It is noted that stagnant wages, diminished job opportunities, lost home values during the Great Recession or the rising home values in city markets today, coupled with a procrastination savings mindset, could equate to a less apt generation to accumulate sufficient wealth for retirement. This reality is not an excuse. My generation has a flare for the finer things in life – or participating in a nasty game of entitlement and believing their future selves will be able to handle their excessive spending/leverage and neglect of saving. I truly believe there’s a way to enjoy your accomplishments today while being diligent about accomplishing your future objectives, and it takes a disciplined plan.
Begin your savings plan by setting aside a cash reserve with six months of living expenses if you’re single or three months if you’re married with dual incomes. If your employer provides a qualified retirement plan, begin by deferring as much as possible per paycheck, building up over your career to the maximum. Most plans offer a match and ensure to defer at least the matching minimum, that’s a “free” return on your investment before your investment return. Each qualified plan requires an investment briefing, and I encourage you to review the plans invest-ment offerings and determine which properly diversified portfolio resonates with you Review your portfolio annually with an adviser – we at FIM Group can also serve as a resource. It may also make sense for you to begin a Roth IRA or Traditional IRA in conjunction with your qualified retirement plan (I would advise you to speak with a fee-only adviser or tax preparer).
Takeaway: Save three to six months’ worth of living expenses in a high-interest-bearing savings account or other highly liquid account, and participate in your company’s qualified plan in conjunction with your own IRA or individual account. The goal is to defer the maximum into your company’s qualified plan and to reach an asset level in your IRAs and individual accounts where you hire a money manager.
Earn Your Lifestyle
If you’re in my generation and privy to this article, you have heard throughout your life to “live within your means.” Let me make this statement relevant for you: you will not live like your parents out of college or graduate school and you will not live like some of your peers – so, avoid making permanent increases in your lifestyle that will place a permanent burden on your future. Comparing your current situation to others will not bring you happiness, nor will extending your budget to buy the “right” anything – car, house, watch, etc. Have confidence in your abilities to achieve current and future successes that will allow you the opportunity to buy the “right” anything when it makes both financial and situational sense.
I will further this argument by stating that being social is a key component to our human nature, but you may have to say “no” to certain activities. On Fridays, peers of mine on Facebook will post Loverboy’s “Everybody’s Working for the Weekend” lyrics to remind the world they are ready to see friends and spend money. While I encourage social outings, I caution my generation when accepting a simple dinner and drinks invitation that can result in excessive spending that can damage an already unaffordable budget. If you’re one who finds bliss in your credit card, it may work best for you to carry the cash budgeted for the evening and remind yourself why you’re working so hard – I guarantee it wasn’t for that restaurants plate price.
We’ve also all heard to strive for “work/life” balance – if you have any idea what that means, please share. I believe in focusing on what is most important at that moment and choosing to be present. Meaning, if I am on the phone with my Mom, I still speak daily, I give her my full attention. I do not believe in multi-tasking to the “nth” degree to get things “done.” I believe in being strategic about my time and deliberate with my actions to do things exceptionally. This trans-lates to my budgeting process as well. I create a budget and abide by it because that gives me the confidence to live freely with my budgeted money knowing that I have set my current and future selfup to pursue the objectives I have laid for myself.
Takeaway: Debt management ratios, without knowing your current situation, can be helpful when evaluating certain decisions such as a home or car purchase and other spending. Regarding housing, your goal should be to have the cost be less than or equal to 28% of your gross income and consumer debt be approx-imately 10% to 12%. Create a solid budget and live by it – this may take a few months to truly understand your spend-ing behaviors, but be honest with yourself and don’t neglect to budget semi and/or annual expenses (car insurance, life insurance, etc).
Be a Giver
Social and behavioral scientists have studied the links between happiness and money with the conclusion that money can only buy you some to no happiness. We recognize that money makes life “easier” and affords us the many blessings that we cherish (a home, clean water, food, etc.), but there is significant evidence to being altruistic and being happy. The vast majority of my generation, 86% to be exact (Sylvia Ann Hewlett, 2009), recognizes this and actively seeks to work with companies that support local giving or incorporate corporate social responsibility standards. The irony is many do not feel as though they have anything to give after support-ing their lifestyle. You do – you just chose not to give.
I recently traveled to Vietnam and took a boat down the Mekong River. There was a woman by the dock selling hand-made Vietnamese hats with various colored ribbons. I perused her selection and chose one with a beautiful orange ribbon and asked her “how much?” She replied in broken English, “$2” (or approximately 42,000 dong) I had a 100,000 dong bill and gave it to her. She scrambled to give me change and I told her to keep the remaining 58,000 dong – she smiled and bowed while I proceeded to catch my boat. As I approached the boat, a classmate of mine asked why I had given the 100,000 – I responded, “That woman sells $2 hats to feed her family, and I hope tonight she feels she can have something special.”
Takeaway: With many organizations providing monthly giving programs with as little as $10 or finding time during your weekend activities to clean up a local trail, you can give. Support your personal savings plan as well as organizations that you are passionate about. I give approximately 7.5% of my net monthly income to various organizations of choice. I certainly could find other places to divert those funds, but as with my hat story, it’s more important to me to give to others than
to support any material thing I could ever “give” myself.
Forever in Debt
Ballooning student loan debt is another contributor to the low savings rate for Gen-Yers. We all know the earnings potential statistics after completing your undergraduate/graduate degree, and it is evident that investing in education is, on average, a good investment. But according to FINRA Investor Education Foundation’s 2012 National Financial Capability Study (NFCS), 57% of people with student loans are concerned about being unable to repay the debt. Furthermore, I have read and heard that due to student debt, many are delaying saving money, getting married and having kids because of their current debt burden. It’s important that early in a child’s life we begin to teach financial education, and help make aware
borrow-ers potential debt burden as they contem-plate their paths and future income opportunities after graduation. Education planning can be a significant challenge for parents who have inclinations to send their children to receive their degrees debt-free due to the rising costs of education, coupled with trying to save for their own futures. But parents can play critical roles in guiding their children to schools that offer programs in alignment with their passion. I am certainly a proponent
for permitting a child to choose the school he/she feels will serve his/her best interests, but I am also an advocate of having sincere conversations about the potential debt load they may carry after graduation and what that means.
Takeaway: For those of you who currently carry student loan debt, I strongly encourage you to speak with one of our financial planners or a loan officer to learn more about how to tackle your debt load and to enhance your savings plan. For those of you potential borrowers, take the time to evaluate your options and be true to your passion and the reality of what that means for your future.
All Financial Planners Are the Same
Gen-Yers are well aware that financial planners can help assist them in understanding how to reach and maximize their financial goals; however, many have been dissuaded to working with a planner because of financial embarrassment, mistrust of the financial industry or not knowing where to begin. Here are a few key interview tips:
At FIM Group, many of our planners carry the certification awarded by the CFP® Board. Certifications mean that the individual has successfully completed tests focusing on personal finance, tax, retirement and estate planning, investment planning, as well as other financial topics.
2. Fiduciary obligation
A fiduciary must legally place the clients’ interests first. This is an important differentiator, especially when working with a commission-based planner.
3. Investment philosophy
Different investment advisers and financial planners will have varying investment philosophies, so it is important that the investment philosophy resonates with your objectives to reduce future conflict. Here at FIM Group we believe in global, value investing with a flexible, comprehensive approach. Our clients choose to hire us because of this philosophy, among other reasons, and this is a key interview question.
4. Scope of services
Certain planning firms are specialists in certain areas and lack expertise in others. Before beginning a relationship with a planner, understand their scope of services and what you’re looking for to ensure alignment and reduce the risk of not focusing on what’s important to you.
5. How the planner is paid
Planners are paid by fees, commissions or a combination of the aforementioned. At FIM Group, we choose to utilize the transparent fee-only schedule in order to reduce conflicts of interest and align our incentives with our clients. Commission-based planners are paid whenever the client buys a specific product or fund – when working with a commission-based planner, be sure to understand how they are being paid for one product over another. If they are unsure, you can be sure to not work with them.
Takeaway: Do your due diligence prior to working with any financial planner. This is your plan, your money, your future.
I have faith in my generation’s resiliency to take on our current macro and micro environmental challenges – from a social, financial and global perspective. For some of you outside Gen-Y, I hear your annoyance about our entitlement issues and attachment to technology, but don’t lose faith … serve as a mentor to those of us who actively seek guidance from the wise. I do wish many of my peers will recognize the importance of saving today rather than deferring to later in life simply because it will only exacerbate the stress and anxiety to accumulate enough wealth to support our lifestyles. I’m reminded of David Bowie’s “Golden Years,” and I want my fellow Gen-Yrs to have a fabulous set of them – whop whop whop.
Steuerle, Eugene, Signe-Mary McKernan, Caroline Ratcliff and Sisi Zhang. “Lost Generations? Wealth Building among Young Americans.” Urban Institute. March 2013. http://www.urban.org/UploadedPDF/
Sylvia Ann Hewlett, L. S. (2009, July). How Gen-y & Boomers Will Reshape Your Agenda. Harvard Business Review.
There is no Spotlight for this issue.