In the most recent blog post, we covered our definition of wealth management, which entails the following three components:

WM (Wealth Management) = IC (Investment Consulting) + AP (Advanced Planning) + RM (Relationship Management)

In this post, we’d like to cover the first component in the formula, which is investment consulting. For most people, and in fact for most financial advisors, investment consulting is the centerpiece of the relationship. It involves managing client assets, ideally with the goal of meeting or exceeding a planned return without taking on excess risks. Most client meetings and communications are centered around performance for the last quarter or perhaps for the last year.

We clearly recognize that investment consulting is a key part of the client relationship. After all, for nearly all clients, portfolio performance over the long term is key to meeting their financial goals.  Because of the importance of investment consulting, we’ve focused on gaining the necessary knowledge and experience and tying it all together with top notch research and a well defined investment process.

Nevertheless, unlike many advisors, we believe that investment consulting is just one piece of the overall relationship. Advanced planning and relationship management can be of equal or greater importance for many clients, and we’ll detail what that involves in future posts.

Recently, I was asked to begin writing for Forbes.com. I thought an interesting topic for my first article would be a focus on how a financial plan can help at different stages in one’s life. That first column is below, and as I add additional columns, I’ll likely include them on the Minerva website as well.

For the tip of the month, we take another look at health insurance and specifically experiences I’ve had recently in negotiating medical bills. Finally, the question of the month explains why you might see a temporary drop in the value of your account when securities are purchased.

As always, feel free to forward our newsletter on to friends or family if you think it would be useful to them and don’t hesitate to send questions or feedback about the content.

Best regards,
Micah Porter, CFA, CFP®

Early Career, Starting A Family Or Retirement: A Financial Plan For Every Stage In Life
Micah Porter, CFA, CFP®

One of the first questions to answer when  considering a financial plan is whether or not you need one. While most people would be better prepared with at least a rudimentary financial plan, there are certain times when having a solid, comprehensive financial plan can change your life’s trajectory. Here are a few examples from my own life and practice:

Early Career
Years ago, when I was single and worked in Corporate America, I didn’t consider working with  a financial planner. I was young, earned a good income, maxed out my 401k and received stock and options.  I assumed that financial advice would be of little value to me since  I thought I was doing everything right – but I was wrong.

With benefit of hindsight and experience, I can identify several tactics that would have left me more financially well off.  Of even more value, though, would have been the exercise of putting a plan in place and given real thought to long-term financial goals and what it would take to achieve them. I could have, if necessary, adjusted my savings rates and understood how aggressively I would be invested. And with that framework in place, I could have made adjustments should life have thrown me  a curveball.

What’s Needed Here: Financial plan with a savings/investment focus. Can be self-implemented as opposed to entering into a retainer with the advisor.

Mid-life
As I’ve moved into mid-life, I’ve found that life has become more complicated. From marriage to a child on the way, my life has become more intertwined with others and financial responsibilities have grown. I find the same is true for many couples with whom I’ve worked. In general, their combined incomes are extremely good and savings isn’t an issue, but they have neither the time nor the inclination to ensure they’re making the optimal financial decisions.

Given that these couples have high incomes, they tend to have already saved a good amount, meaning investment management and risk management via insurance are key. Furthermore, if kids are involved estate planning is also a critical issue.

What’s Needed Here: A comprehensive plan covering investments, insurance and estate planning. Tax mitigation may also be an issue. Can be self-directed, but depending upon time and inclination, an ongoing wealth management arrangement might be in order.

Retirement
When pensions were the norm, retirement was a much simpler proposition from a financial perspective. Between social security and pension income, most retirees could expect a regular stream of income that would in many cases approach what they earned when they worked. Unfortunately, pensions by and large have gone by the boards, shifting the risk of generating a steady stream of income to retirees. Maximizing the likelihood that this stream of income remains steady and safe throughout retirement is the number one issue for retirees and near retirees with whom I work. Many also seek assistance in understanding the ins and outs of Medicare and social security, as well as the possible need for long term care insurance.

What’s Needed Here: A comprehensive plan focusing on an income generating portfolio, making the optimal choices with regards to Medicare and Social Security and ensuring risks are covered and estate documents are in order. As is the case with mid-life, those at or near retirement can opt to implement the plan themselves, but many clients at this stage elect to enter into an ongoing relationship with an advisor.

Clearly, the above list isn’t meant to be all encompassing – certain events, regardless of when they occur in life can make having a plan in place that much more critical. Nevertheless, making the decision to speak with a financial advisor can certainly be beneficial for many people at various stages in life.

Financial Planning Tip – Negotiating Medical Bills
Micah Porter, CFA, CFP®

One of the recurring themes in newsletters over the past several years has been healthcare. Part of the reason is that the Affordable Care Act drove a good deal of discussion. The other reason is that healthcare comprises a sizable percentage of most clients’ budgets.

Although I’m a business owner, the rules surrounding group policies in Georgia  are such that group insurance doesn’t make sense for us. So, we insure via an individual policy which means that I deal directly with the insurance company fairly regularly to discuss how claims were treated. Knowing when to question our insurer on treatment of a claim has saved us several hundred dollars over the last few months, and will potentially save us nearly a thousand dollars more in the next month or two. Based on that, I thought it might be helpful to share what I’ve done.

Treatment denied as unneeded – about 6 months ago, our insurer denied a routine treatment our doctor had prescribed. The entire amount was passed on to us at standard provider rates (more on that below). I called the insurer and politely explained the treatment and why the doctor had prescribed it. The representative said she’d re-submit to see if the insurer would cover it, and in the end they did saving us well over $500.

Testing not covered by policy – about 2 months ago, Jennifer had some routine testing done for pregnancy. Her obstetrician recommended the testing, but our  policy didn’t cover it. Furthermore, because the policy wouldn’t cover it, we were charged the standard rate for the tests as opposed to the insurer’s negotiated rate — and our rate was 60% higher. Once again, I called the insurer to see if they would reconsider and they refused. I then tried calling the vendor to see if they would charge us the rate they had negotiated with the insurer, and they refused as well. There are services that will negotiate medical bills on your behalf, and at this point, I’m going to give that a try. If that route is successful, I’ll write about it in a future column.

The lessons I’ve taken away from my experience in dealing with insurance companies are straightforward:

• Read the statements your insurer sends you to see what they’re covering and, more importantly, what they’re passing on to you.
• Don’t hesitate to contact the insurer to see if they’ll reconsider failure to cover an expense if you think it should be covered.
• If the insurer refuses to reconsider, try calling the medical service provider to negotiate a lower bill.

If you’re covered by a group policy or by Medicare and Medigap, you’ll probably run into fewer issues with your insurer than those of us who have individual policies. Still, given our current system, chances are all of us will have a billing issue at some point and following the above pointers could well result in real savings for you.

If you’re seeking financial advice and fall into what the industry considers “high net worth” – typically over $1 million in investable assets – you’ll often be steered towards wealth management. However, in many instances when you ask what wealth management entails, you’ll be given vague definitions along the lines of “acting as a personal CFO” or “combining financial planning and investment management.” And while that may actually be what you get, unless you work in the industry it’s difficult to make the leap from those definitions to what is actually delivered.

To help our clients understand exactly what we deliver in wealth management, we use the following formula:

WM (Wealth Management) = IC (Investment Consulting) + AP (Advanced Planning ) + RM (Relationship Management)

Each of the component parts of the formula can be broken down into subcomponents, and we’ll walk through what is entailed with each in future posts. Once you’ve read through them, what our version of wealth management encompasses should be crystal clear.

Although it doesn’t feel like it, the calendar shows that it’s late February, and that means that most of us will be filing our tax returns in the next several weeks. We’ve mailed out all the documentation our clients need from us for taxes, and if clients haven’t received 1099s from TD Ameritrade yet, they should in very short order. If you’ve got any questions about what documents you need for taxes, the article in last February’s newsletter (here) should be helpful.

For this newsletter, I thought it would be useful to check in with what’s going on in the economy and the markets. The short answer is that things are looking better, but there are still real risks – primarily international – to the recovery. On the plus side, additional mortgage refinancings should begin to provide a tailwind in the coming months. As outlined in the financial planning tip below, changes to the government HARP program and the mortgage settlement will allow a wider group of homeowners to refinance. Finally, in the client question of the month, I provide a framework to allow you to determine if refinancing makes sense.

Feel free to forward this newsletter on to friends and family, particularly if you think they might be in the group now eligible to refinance. As always, if you have any questions or suggestions for topics, don’t hesitate to contact us.

Best regards,
Micah Porter, CFA, CFP®

A Look at the Economy and Markets
Micah Porter, CFA, CFP®

Over the last few weeks, there has been a steady stream of news indicating  continued modest improvement in the U.S. economy. A drop in unemployment has been the most promising indicator, but manufacturing data has been positive as well. And even in housing, a laggard since the downturn began, there are signs that the decline in the housing market is slowing with prices bottoming in some markets. Overall, the picture is one of cautious optimism tempered by ongoing developments overseas.

Foremost among these is the ongoing European debt crisis. The big news from the continent over the weekend was the approval of a second tranche of Greek aid. The approval was given in exchange for Greece’s passage of additional austerity measures. These cuts will be made in an economy which has been in recession for over 5 years and where 1 in 6 is unemployed. The overwhelming preponderance of the evidence is that these cuts will just exacerbate this situation, so it’s difficult to see how the second bailout does more than buy time. That may be sufficient to allow the global economy to continue to muddle along, but it’s far from an optimum solution that would drive growth in the near term while addressing structural deficits over the longer term.

Another area of global concern is the Middle East, where Iran is engaging in brinksmanship with the West and its neighbors, most notably Israel. Increased tensions are driving oil prices higher, and this acts as an inevitable drag on economic growth. The political question is whether war can be avoided, and the economic question is how high the price of oil will go and to what extent that will impact the U.S. economy. The good news is that there is some evidence that changing driving patterns will lead to less of an impact, but regardless, higher oil prices will lead to some economic drag.

Against this economic backdrop, equity markets have generally moved higher, with international and mid/small cap posting particularly strong performances. Fixed income benchmarks indices have been flat, but our funds have handily outperformed benchmarks given their exposure to corporate and international bonds. Overall the story is much the same – continued slow growth, with defensiveness warranted given the risks to the recovery that still exist.

Financial Planning Tip – Eligibility to Refinance
Micah Porter, CFA, CFP®

Although silver linings have been tough to find in the most recent downturn, an easily identifiable one has been lower interest rates. As rates have headed downward, I’ve discussed the idea of refinancing with clients who hold mortgages and I’ve written columns when rates hit new lows. As a result, I know several clients with higher interest mortgages have refinanced and lowered their payment or moved to a shorter-term loan to build equity more quickly. Still, not everyone is in as favorable a financial position as our clients and thus they may not have had the equity needed to refinance. Two recent changes, however, have made refinancing possible for those with solid payment records but too little equity in their home.

The first of these changes was a reconfiguration of the government’s HARP program. HARP, or the Home Affordable Refinance Program, was rolled out several years ago. It was designed to allow those homeowners with solid credit and good payment records to take advantage of lower rates through refinancing. However, one of the provisions that kept many from refinancing was that the loan to value ratio could not be greater than 125%. Thus, a homeowner that owed $150,000 on a house worth $100,000 would not be eligible, even if that homeowner’s credit rating was sterling and their payment record unblemished. The new version of HARP does away with the loan to value provision, allowing a much wider group of homeowners to benefit from the program. Another key change is that the program now includes rental property and isn’t limited solely to owner-occupied property. As a result of the two changes, the new program is available to a much wider group of homeowners. For more details on HARP, check here.

Another recent development that will be beneficial to some homeowners is the settlement between the Department of Justice, states attorneys-general and the five largest mortgage servicers. The settlement includes a number of provisions, one of which is the agreement to allow certain borrowers to refinance. While details on this settlement are less clear than those for the new HARP program, more information is available at this website, or on the website of the individual’s state-attorney general.

While these programs likely won’t have a direct impact on our clients, there are likely to be several indirect benefits. Aside from the fact that there are undoubtedly friends and family who can take advantage of these revamped programs, the programs themselves serve as an indirect stimulus as millions will see their mortgage rates decrease. Additionally, the mortgage settlement in particular will reduce the number of distressed sales, thereby reducing the downward pressure on housing prices.

Client Question of the Month – When Should I Refinance?
Micah Porter, CFA, CFP®

The simplest rule of thumb when it comes to refinancing is to do so when you can save a percent or more on the new interest rate. As with most rules of thumb this oversimplifies things a bit and might not apply to your specific situation. For example, what if you are moving from a 30 year to a 15 year loan, or are planning to move in the next 3 years? Does refinancing still make sense? If you really want to determine whether or not refinancing is for you, focus on three things: the cost of refinancing, how much you’ll save on interest and how long you plan on living in your home.

When determining how much you’ll save on interest, bear in mind that most loans – aside from interest only loans – include both principal and interest payments. As time goes on and the loan balance is paid down, an increasing amount of the payment is applied to principal. Thus, the best way to determine how much interest you’re saving over a specific time frame is to use an amortization table for the loans being compared. As an example, if you can refinance a 4.85% loan on a $300,000 balance to 3.5%, you’ll save over $8100 in interest over 2 years.

Once you understand the potential savings, the next step is to determine (a) how much the loan will cost, and (b) how long you plan on living in the home. In determining how much the loan will cost, it’s key to omit pre-paid expenses like interest and escrow, as they are expenses you would have incurred even if you hadn’t refinanced. However, all costs being incurred solely because you refinanced – like stamp fees, lender fees, mortgage broker fees, appraisal costs and the like – should be factored into the analysis. Additionally, if you’re paying points, factor that in as well to the total cost of the loan. Ultimately, if you’re able to recoup these costs well before you plan on moving via the savings on interest – what’s typically referred to as payback – then refinancing probably makes sense. If payback won’t occur until after you plan on moving or if it looks to be a close call, then think twice about refinancing.

One advantage to the approach outlined is that you can use it to compare loans of varying terms. Whether a loan has a 15 year term, a 30 year term or something else, what’s critical is the amount of interest saved and when you’ll ultimately achieve payback on savings. In fact, one of the best ways to save for many people is to move to a shorter term loan. As long as the borrower can easily make the payments, the end result is a lower interest rate and a much quicker accumulation of equity in the home.

I hope you had a Happy Thanksgiving. I had intended on sending this out prior to the holiday, but as events in Europe unfolded I thought it would be more helpful to wait until things reached a turning point and provide our views on the situation. The lead article below in this month’s newsletter does just that, and in it I summarize where things stand, where they are likely to go from here and the likely impact on the global economy.

The tip of the month deals with something many clients enjoy – travel – and how one can find real value in credit card rewards programs that can be redeemed for travel. Finally, in the question of the month we examine the pitfalls of trying to squeeze higher returns out of what should be safe portions of your portfolio like the emergency fund and short term cash.

As always, we welcome your thoughts and feedback, and if you feel that this newsletter would be helpful to friends or family, please forward it on.

Best regards,
Micah Porter, CFA, CFP®

An Update on Europe
Micah Porter, CFA, CFP®

Thanksgiving – at least the Thanksgiving that falls on the 4th Thursday in November – is a uniquely American holiday. So, while most of us here are preparing for a meal with family and friends, the rest of the world is at work. The European markets were no exception, and the news there left little room for thankfulness, although as I mentioned in last month’s newsletter, politicians do seem to be slouching their way towards a solution.

One of the truest indicators of market concern is the relative rate a country must pay to entice investors to purchase its bonds. On that score, at an auction of 6 month bonds on Friday, Italy was forced to offer investors just under 7%, or nearly twice the rate required a month ago. Even more surprising, Germany – ostensibly the most fiscally sound of European economies – was forced to purchase over a third of the bonds it tried to auction earlier in the week. While Italy is not the first country in the periphery to see rates demanded rise sharply, Germany’s auction is sign that the core European countries aren’t immune to investor skepticism.

The German auction may however turn out to be a blessing in disguise, as it has been the Germans that have been the most intransigent in allowing either European Central Bank intervention of the issuance of Eurobonds. Their stance is somewhat understandable – after all, they have managed their finances well – why should they be on the hook for bailing out the more profligate countries? Still, German’s bond auction makes clear that in the event of the failure of the Euro, the Germans will be heavily impacted as well.

The path that, at this point, looks most likely is that European member countries will agree to accept legally binding oversight of their budgets, and in exchange Germany will soften its opposition to collective backing of member nation debts. The time for doing this is short, however, as each previous half measure politicians have proposed has frittered away investor confidence. The next European summit is on December 9th, so much of the framework will need to be in place by that point.

Such a rescue probably won’t prevent a European recession as it’s likely that one has already begun, but it will stem the drag on non-European economies that are currently being impacted. Central banks outside Europe are beginning to ease rates, and U.S. economic data, although still sub-par, is generally continuing to come in at or slightly above expectations. Lastly, there are signs that Congress will find a way to extend the payroll tax cut and unemployment benefits. Given the foregoing, if Europe can address its problems, we may skirt a recession and continue to see slow growth.

Financial Planning Tip – Credit Card Rewards Programs and Traveling in Style
Micah Porter, CFA, CFP®

I am a bit of a nervous flyer, but for some reason being at the front of the plane in the larger business class seats seems to help. Until the last year or so though we didn’t typically fly business given the cost. However, over that timeframe, I’ve discovered the value of frequent flier points, and more specifically, the value of credit cards that allow you to accrue frequent flier points.

I’ll readily admit it’s unusual for a financial advisor to tout the value of credit cards, so let me begin with this dictum:

If you don’t pay off your credit card at the end of every month, any points you accrue likely aren’t worth the interest that you pay.

So, the bottom line is that if you must carry a balance from time-to-time, there are likely cards out there that offer better terms. However, for those of you that do pay off your cards every month and like to travel, such cards and the associated airline rewards programs can provide real value.

I first began paying attention to these cards when Jennifer and I traveled to the Olympics last year. We were able to fly business class – and my nerves were the better for it – on points that I had earned on my American Express card. As I began to look into the various cards and rewards systems, I realized that I could readily accrue frequent flier miles and hotel points even though we travel infrequently. Further, I found that some cards and programs were much more lucrative than others. Here’s a bit of what I learned:

• Credit card companies regularly offer new incentives for those applying for a card for the first time, or for those upgrading from one card to another. Typically, those incentives are based on spending a certain amount on the card in a set amount of time. For example, American Express recently had a card offer that awarded 50,000 points if you charged $1,000 to the card in the first five months.
• Different cards offer different reward amounts depending on what you’re purchasing. Chase Sapphire Preferred card, for example, offers double points when you use the card for dining purchases.
• The various card programs have their strengths and weaknesses. Some may be better for hotel rewards, others for airlines and so on.
• Airlines will provide transfer bonuses from different card rewards programs. For example, Delta recently offered a 50% bonus for points transferred from American Express. Thus, transferring 50,000 points would accrue 75,000 miles.
• Different airline frequent flier programs will often charge widely different amounts for flights on the same route.

Working your way through the various card, hotel and airline programs can become very complex. However, for those of you who  enjoy  travel, understanding the programs and using them to your benefit can be very lucrative. Recently, Jennifer and I were considering a flight to Europe and I found that for a combination of points and $2,000, we could have gotten two business class tickets from Atlanta to Madrid. The total cost had we paid without points was nearly $9,000, so the points provided a substantial savings.

As I said above, however, working your way through the rules can be challenging and obviously, anyone applying for new credit cards should be cognizant of the impact on their credit rating and also be prepared to deal with managing additional credit cards. However, for those of you who like to travel and pay off your credit cards monthly, it can be well worth your time. Two sites that I’ve used a good deal are thepointsguy.com and flyertalk.com. Both provide a wealth of information regarding how they various systems work and what the best offers are at any given time. I’ve found both to be very helpful in traveling well without paying top dollar to do so.

Question of the Month – Can I Earn a Better Return on the “Safe” Portion of my Portfolio?
Micah Porter, CFA, CFP®

One consequence of the Fed’s monetary stimulus is that the lower interest rates they are targeting have broadly impacted the fixed income universe. As a result, investors are turning to riskier investments or longer term investments to increase return. Taking on additional risk or investment term is fine as long as your investment needs match the type of investment you are choosing. If, on the other hand, you choose to invest your emergency fund in high yield bonds just to increase returns, things might not end up so well.

The most recent issue of Kiplinger ran an article under a headline promising a 7% yield tax free. The investment they were touting was actually closed end bond funds that invested in municipal debt. Some of you might remember that several years back, we used a fund in our portfolios that invested a large portion of its stake in precisely these types of funds. Unfortunately, when the market dislocation became most acute in 2008, the value of many of these funds dropped precipitously, primarily driven by the fact that institutional investors sold these funds to raise liquidity. The fact that there were no counterparties of similar size to buy the funds led to the sharp price drop.

While it’s unlikely that we’ll revisit the worst of the 2008 crisis, the point is that these investments are risky – and that’s one of the big reasons returns are what they are. Higher return rarely comes without greater risk or a greater term for which the investors funds must be committed. Certainly, great investors can find investments that offer greater return than one would expect for a given amount of risk or time commitment, but those investments aren’t typically going to be found under 24 point bold headlines.

On the surface, annuities seem like a simple investment. The investment generally entails paying an insurance company a lump sum with the expectation that, at some point, the insurance company will begin making a string of payments to you from that lump sum plus any investment growth. While the fundamental idea of an annuity is fairly straightforward – you invest your lump sum and we’ll give you a stream of income – as with most financial products designed by Wall Street, annuities can become extremely complex.

The simplest type of annuity is a fixed annuity, which earns a fixed rate of interest and can be converted to a stream of payments at the investor’s request. Slightly more complex are variable annuities, which allow the purchaser to invest in “sub-accounts”, which are mutual fund-like investments into which funds can be directed. Finally, many annuities offer various add-on options, or riders, including  guaranteed lifetime withdrawal amounts, minimum guaranteed growth and so on.

As you might expect, the more complex an annuity, the greater its cost and it’s helpful to understand the various layers of cost involved. The main expenses that every annuity includes are the M&E charges.  The M&E, or mortality and expense charge is a fee which pays for the insurance guarantee, commissions, selling and administrative costs of the annuity. If you opt for a variable annuity, you’ll also pay a fee to the managers of any sub-accounts you use. Finally, those add-on options, or riders, that many annuities now tout come with yet another additional fee.

When you add it all up, it’s not unusual for the total cost of an annuity to exceed 2%, and 3% isn’t unheard of for a variable annuity in which a rider or riders were added. Further, if you try to cash out of many annuities before a specified amount of time has lapsed, and the annuity company will often levy a surrender penalty. Compare all those costs to a cost of less than 1% for a carefully chosen portfolio of mutual funds, and it’s clear that before investing in annuity, an investor should clearly understand the total cost and confirm that for the investor’s particular situation, the annuity makes more sense than a traditional portfolio.

The weather has turned pleasant here in Atlanta in the last week or so, and that has coincided with the beginning of what may be a systematic approach to European debt problems. Still, as with most political issues, the ultimate outcome is uncertain. While that uncertainty continues to exist, expect to see further market volatility.

With that as preamble, I thought it would be useful to revisit the question in the first article below of what would trigger the unwinding of defensive positions in portfolios. One key to understanding our thought process is that we try to quantify likely market returns as opposed to relying on vague ideas of what the market might do.

In the financial planning tip of the month, we delve into two pending legislative issues that will likely impact most investors. For both issues, industry associations we believe represent consumers well are on one side of the issue, while deep pocketed institutional interests are on the other. Finally, in the question of the month we cover market futures, and how they are used to predict where the markets might open on a day-to-day basis.

As always, please feel free to send any thoughts or questions our way.

Best regards,
Micah Porter, CFA, CFP®

One of the key points I’ve reiterated over the last several investment commentaries is that we remain defensively positioned due to the ongoing risks in the market and the broader economy. Given that one of these risks – the European debt crisis – has recently flared again, I think it’s worthwhile to revisit how risk and defensive positioning are related.

Typically, the reason investors take on more risk is the expectation of greater return. Thus, another way of stating the idea in the paragraph above is that the additional return we expect to receive in the near term isn’t great enough to entice us to take on more risk. While this might sound like a subjective judgement, we try to make it less so through relying on an objective, repeatable process. More specifically, we use research that involves scenario analysis to estimate returns on various asset classes. The most recent scenario analysis produced by Advisor Intelligence, one of our research sources generated the following:

As you can see (click image to enlarge), the estimated returns under most scenarios for equities over the next 5 years are fairly lackluster. Absent a sharp market drop or economic data that indicate a shift towards the most favorable scenario, there’s not a good incentive to move from the underweighting we currently have in equities. To put it another way, were investor unease to lead to a market drop of 20% or so in the U.S., we would expect the market to return an additional 4% per year over the next 5 years assuming the economic fundamentals hadn’t changed. Thus, even in a subpar recovery, we would expect returns of over 9%, which would provide us sufficient incentive to take on a bit more risk.

While the returns estimated above aren’t great, they are in line with what we’d expect given a halting recovery. As we’ve maintained for some time, given that this is a debt-driven downturn, recovery simply takes longer. On the bright side, though, there is some evidence that market valuations are now fairly reasonable (see articles here, and here). If that proves to be the case, over the longer term, we should expect healthy returns as we work through ongoing economic issues and enter into a growth phase again.

Financial Planning Tip – Legislation that Impacts Investors

Micah Porter, CFA, CFP®

I don’t often discuss political topics when it comes to financial planning tips, but in rare instances, Congress considers legislation that can have a direct impact on your long-term financial health. In this particular case, there are two issues before Congress that fall into this category.

The first regards whether or not all who offer investment advice should be held to the same legal standard. Currently, registered investment advisors (RIAs) like Minerva are regulated by the SEC or the states and held to a fiduciary standard. This is a strict standard, and requires that we act in our clients’ best interests at all times. The other, more common standard within the planning industry is the suitability standard, and most brokers and non-RIAs adhere to this standard.

To understand the difference in the two standards, consider a hypothetical investment recommendation. The RIA, subject to a fiduciary standard, would have to recommend what he or she felt was the best investment for the client, while the broker would simply be required to recommend a suitable investment. In the latter instance, a bond fund paying a high commission but having a poor performance might well be suitable, but it clearly would not be the best recommendation. If, on the other hand, the RIA subject to the fiduciary standard made such a recommendation, he or she could be found liable for violating that standard.

As part of the Financial Reform bill, there was consideration as to whether a fiduciary standard should be extended to all advisors. The jury is still out on whether that will happen, but there is strong conservative opposition to a uniform fiduciary standard. Further, the second issue is that FINRA, which currently oversees brokers subject to the suitability standard, is making a strong push to regulate RIAs as well. A number of industry associations, including NAPFA, the Financial Planning Association and the Certified Financial Planning Board of Standards are against this move. Given that FINRA is funded by the brokerage industry and has no history of regulating based on a clear standard – and instead regulated via very specific, costly and cumbersome rules – it’s easy to understand why FINRA would not be the optimal choice.

The bottom line is that we feel it is clearly in the best interest of investors to implement a uniform fiduciary standard across the industry. Further, we feel that the states and the SEC are the appropriate, neutral regulators of registered investment advisors. While there are deep-pocketed interests who have the ears of many in Congress, constituent feedback can help shape the ultimate decisions that are made, so feel free to let your Congressman know how you feel.

More in-depth information on both of these topics is available at the Certified Financial Planner Board of Standards website here.

Question of the Month – Why Don’t More Advisors Recommend Gold?

Micah Porter, CFA, CFP®

One of the daily rituals in the financial press is to look to the futures market in the early hours before the stock market opens. The reason they do this is that futures offer a good indication of how the market will likely perform once it opens. But what are futures, and how accurate are they?

A future is an agreement to trade a specified amount of an asset at a specific future time and date. In this particular instance, the asset being traded is the index itself. These trades take place throughout the night and into the early morning, and the movement of the futures price during these hours is considered indicative of the likely movement of the market when it opens. Thus, if futures prices move upward, the market is expected to move upward when it opens and vice versa.

The predictive accuracy of futures often only extends to the first few minutes after the market opens, but even so, for traders who watch the market on a minute-to-minute basis, the information is still useful.

As an example, the chart below on the left hand side depicts the S&P 500 on September 6th and 7th. You’ll note that the market “gapped up” from the 6th to the 7th, and if you had been following the futures chart on the right, you would have anticipated this movement. Futures trended up throughout the period from the close of the market on the 6th to the opening on the 7th, and the market opened up as anticipated.

An Update on Recent Economic Challenges and Market Volatility
Micah Porter, CFA, CFP®

If you didn’t catch much news last week and saw the chart just below, you would probably assume the market was fairly quiet. The actual story, of course, was quite different.

Volatility spiked last week to an extent we haven’t seen since 2009, with market moves in excess of 4% the norm for the week. While the good news is that the markets ended the week slightly higher than they began, it’s still worth exploring the causes behind the volatility and what they might presage for the coming months.

It can be difficult to pin down the cause of market drivers, but last week’s primary movers were likely concerns about the European debt crisis coupled with weak economic data, particularly in the U.S. The issue in Europe has been ongoing, but when that was coupled with revisions to U.S. GDP data that showed the downturn was far worse than originally thought, and the recent recovery has been weaker, the markets moved decidedly lower.

The European Central Bank has moved to support Italy and Spain by buying their bonds, and that has bought some respite in those markets. However, at some point political leaders will have to weigh in if the continent is to ultimately contain the crisis. As for the U.S., although the recovery may well give way to recession, there has been some positive economic data including retail sales that continue to hold up quite well and decreasing initial jobless claims. Further, the Fed’s recent announcement regarding maintaining low interest rates through 2013 should provide a tail wind to both the economy and the markets.

So, last week’s volatility was likely both driven by real underlying economic concerns and an overreaction on the part of many market participants. Yes, the chance of a recession is higher than it was, but no, the data wasn’t indicative of a sea change in expectations. As I outlined in my most recent note, if future volatility drives the markets sharply down again, we’ll likely use the opportunity to add selectively to equity stakes as such sharp drops often lead to bargains.

Financial Planning Tip – Refinancing Your Mortgage

Micah Porter, CFA, CFP®

Although it can be difficult to remember in the face of constant media coverage about the difficulties facing the economy, such a tepid recovery does offer a few upsides. Given the recent softness in economic data, the Fed recently stated interest rates would remain low through 2013. As a result, mortgage rates across the board dropped as well. 30 year rates hit their lows for the year, and 15 year mortgages neared all-time lows.

• If you are carrying a fixed mortgage, now might be a good time to consider refinancing. If you decide to do so, keep the following points in mind:
• If you’re moving from one mortgage of the same type to another – 30 year fixed to 30 year fixed, for example – typically, it will only pay to do so if the interest rate of the new loan is at least one percent lower than the existing loan.
• Try to stay below the jumbo rate if possible, as it is higher than the interest rate on conventional loans. One obvious way to do this is to put more cash down, but another method for remaining below the jumbo limit is to split your mortgage into a first and second mortgage.
• The shorter the mortgage term, the lower the interest rate, so it might be possible for you to move to a shorter term mortgage without a substantial increase in your payments. Moving from a 30 year mortgage to a 15 year mortgage, for example, means that you not only pay a lower interest rate, but you pay less interest because the loan is paid off sooner as well.
• Even if you don’t think you would qualify to refinance because your property has dropped in value, it’s worth your time to check into the possibility. There are still government programs in effect that will backstop your loan, which means lenders will make loans with less equity than would normally be the case.

Although the Fed indicated interest rates would remain low through 2013, there’s no guarantee that mortgage rates will remain at their current lows. Thus, if you think refinancing might make sense for you, we’d advise checking into it in the near future.

Question of the Month – Why Don’t More Advisors Recommend Gold?

Micah Porter, CFA, CFP®

Whenever we hit tough sledding economically, gold rises in popularity as an investment. The most recent downturn was – and is – no exception, as ads for buying gold are everywhere and stores that buy gold have sprung up overnight. Gold is the ultimate bunker investment, and it’s where some investors turn when concerns rise about the global economy. So why don’t more advisors recommend gold?

The primary reason is that over the long run, returns of gold have not been great. Even though gold prices can rise sharply during economic turmoil, they can decline just as sharply. We took a look at the returns of gold for rolling 30 year periods beginning in 1929 and compared those returns to that of a portfolio invested equally in both stocks and bonds. The end results were eye opening, as the balanced portfolio bested gold’s return 84% of the time. Furthermore, the average return of the balanced portfolio over the 30 years was 1230% versus 461% for gold.

For those who are apt to choose a timing approach to investing in gold, it’s useful to take a look at how quickly gold prices fell in 1980, which was the last time we saw a large run-up in prices. As the chart to the left shows, gold can fall in price just as quickly as it rises and timing has the challenges associated with market timing of other investments. Further, unlike most other investments, gold pays neither interest nor dividends while you hold it, which can be problematic if you’re invested during an extended stretch when the price moves little.

For a substitute to gold, understand why you were considering gold in the first place. If it was a question of safety, U.S. Treasuries and very high grade corporate bonds can provide that safety. For inflation protection, Treasury Inflation Protected Securities are one option, as are stocks and real estate. Finally, if you’re seeking diversification, a broader basket of commodities – including gold – can offer a counterweight to the market although in times of extreme economic stress, such an investment is likely to decline in value as well.

All of the foregoing isn’t to say that gold has no place in any portfolio, as it can be a useful investment. However, it’s worth remembering that there are both downsides and challenges to investing that the goldbugs generally fail to mention.

In the most recent quarterly commentary, I noted that the vote on raising the debt ceiling could begin as soon as this past weekend. Unfortunately, that didn’t happen. Instead, talks between the House of Representatives and the White House broke off on Thursday evening. That’s unfortunate, as the deal they were discussing purportedly targeted deficit reduction of nearly $4 trillion over the next decade and included a number of positives, including new revenues and expense reduction in entitlement spending. Each side had to give a bit, but by targeting revenues and expenses, neither would have to be drastically changed.

Ultimately, Speaker Boehner explained that he walked away from the deal because he couldn’t abide a White House request to raise targeted revenues from $800 billion to $1.2 trillion. Subsequent talks between congressional leaders yielded little progress and as a result, both the House and the Senate are pursuing their own bills. Boehner has indicated that he will pursue an increase that requires two steps and two votes – one now and one in 6 months. This strikes us as a bad idea for the economy. To understand why at the most basic level, imagine lending money to someone who tells you that he’ll honor his debt to you now and may continue to do so in 6 months, but he’ll get back to you on that one.

Odds remain high that Congress will ultimately present a bill to President Obama to raise the debt ceiling. However, even absent default, we can’t help but wonder if some damage has already been done. While the debt ceiling increase has been subject to protest votes before, we can’t recall a time in which the increase itself was subject to such legislative wrangling. Further, the idea that over 80 members of the House Tea Party caucus would sign a letter stating flatly they would not vote to increase the limit – in effect stating that they would not honor the government’s financial obligations – is something that to our knowledge has never been done before. Finally, the ratings agencies have indicated that absent a long -term agreement encompassing deficit reduction of a minimum of $3 trillion, a downgrade is a real possibility. With the so-called grand bargain now off the table, it’s unlikely a deal will be forthcoming offering that level of cuts.

The upshot of the foregoing is that we still think it very likely the debt ceiling will be raised, but without a bill that offers greater reduction than now being discussed it seems a downgrade is quite possible. Given that the economy is already facing a faltering recovery, higher interest costs could very well force us back into recession and any immediate austerity as a result of the deal would worsen the situation. Based on these downside risks, we continue to position portfolios defensively, and as we outlined in the commentary, most bond funds have greatly reduced exposure to treasuries.

As to the debt ceiling talks, given the legislative calendar, the House will have to approve legislation this week in order for a bill to ultimately reach the President’s desk by the August 2nd deadline. Thus, we should know in the next few days if the debt ceiling will be raised and what form the ultimate solution will likely take. We will send out more of our thoughts on the topic in the coming week.

David and Susan are in a strong financial position, but the recent decision to adopt has led them to the decision to have a comprehensive plan done. Both David and Susan earn high incomes, and David works as a consultant while Susan splits time between research at a medical university and practicing at the university clinic.

David’s position requires a good deal of travel, and although he has no desire to retire early, he would like to find a less stressful job in his early 50s. Both David and Susan plan to continue working full time once the adoption is complete, and they may hire a nanny or consider daycare for the children. They have fundamental goals in planning: to  adequately fund retirement and to fund education for the children. They want to ensure they are making optimal financial decisions and they would like to have the framework of a plan within which to make those decisions.

Plan Outcome

Given their high savings rate and low spending rate compared to their income, David and Susan are in a strong position. Nevertheless, their position can be strengthened by increasing their stock allocation slightly and by purchasing additional term life insurance to provide income to the surviving spouse in the event of premature death. We also recommend funding 529 plans to cover the educational goals, and we look closely at their various insurance coverages and methods they might use to minimize their tax liabilities.

Note that David recently became eligible for a deferred compensation plan that’s reserved for firm partners. However, the details of the plan are being finalized, and thus we have not included it here. Given its likely materiality, we would update the plan to include the deferred compensation once details are finalized.

Plan Cost

David and Susan’s plan cost $1900, based on 10 hours of work at $190 per hour. In addition, they have requested portfolio design and the fee for that is 0.25% of the portfolio value, or $1125 for a $450,000 portfolio. Should they decide they want to work with Minerva on a retainer basis, the portfolio design fee will be applied to the first quarter’s retainer fee.

Sample Plan #2 Narrative Sample Plan #2