This month’s newsletter begins with an article on a topic that I deal with regularly – regulation. While proposed changes won’t impact our relationship with our clients, we believe they would be a negative for the investment public as a whole and the first article below lays out why that is the case. The good news is changes have been sidelined for now due to intense grass-roots pressure, but the issue will very likely be revisited by Congress at some future point.

The second article below continues examining healthcare costs in retirement. This month’s column examines costs associated with Part D (prescription drugs) and discusses how one can estimate cost in this area. In the final column we adress the client question of the month – what criteria we use in deciding when to sell a fund.

Lastly, my very pregnant wife insisted that I let you know – as some of you have asked about this award in the past – that Minerva was named a Five Star Wealth Manager for a third consecutive year. In any event, as always, feel free to forward this newsletter on to friends and family if you feel it would be helpful, and let us know if you’ve got any questions or future article ideas.

Best regards,

Micah Porter, CFA, CFP®


A Possible Step Back for Regulation
Micah Porter, CFA, CFP®

Financial regulation after the 2008 crisis raised awareness of a host of issues. One that is very important to us at Minerva Planning Group is if everyone in the financial advice industry should be held to a uniform standard. Currently, that’s not the case, and brokers are held to a lower standard of suitability, while Registered Investment Advisors (RIAs) like Minerva are held to a higher fiduciary standard.

There are a few key differences between the standards, and two of the most salient are:

  • A fiduciary must always act in the best interest of his or her client, while suitability requires that the broker reasonably believe that the investment is suitable for the client.  Under a fiduciary standard, an investment advisor would be prohibited from selling a mutual fund or other investment if it would pay a higher commission, while under the suitability standard, this isn’t necessarily true. If the higher commission product is still suitable, it can be sold.
  • The loyalty of a fiduciary is always to his or her client, while a broker’s loyalty is to his or her employer and not necessarily to the client.

In the initial aftermath of the financial crisis, there appeared to be a good chance that Congress and the SEC would finally impose a uniform fiduciary standard across the industry. Unfortunately, as time passed and the banks and large brokerage firms brought their influence to bear, the likelihood of a uniform standard began to wane. After the 2010 election brought a Congress more amenable to Wall Street, the banks and brokerages pushed even further and pressed to change the structure of regulation throughout the entire industry.

Currently, regulation of those providing financial advice falls into two categories. Registered Investment Advisors like ourselves are covered by a combination of the SEC and state regulators. Brokers, on the other hand are subject to the lesser suitability standard and governed by FINRA. One of FINRA’s primary arguments was that the SEC’s budget wasn’t sufficient to adequately regulate RIAs, and many of the same legislators that were involved in setting the SEC’s budget agreed.

The concern among RIAs was palpable, as not only was a uniform fiduciary standard apparently off the table, but they believed there was a good chance that they’d be regulated by a body that was a captive of Wall Street. A press release from NAPFA clearly outlined the concerns:

  • FINRA’s member firms are some of the Wall Street broker-dealers who so recently created and sold to unsuspecting consumers the credit default swaps and toxic-mortgage-backed securities, which in large part led to the recent financial crisis.
  • FINRA collects fees from member firms and is managed by Wall Street insiders.
  • According to the Project on Government Oversight (POGO), FINRA executives are highly compensated with $13 million paid out to their top ten executives in 2010. POGO correctly asserts that FINRA should be “benchmarking its compensation packages against those provided by federal agencies such as the SEC.” For example, an OnWall Street Salary Survey for 2008 revealed that FINRA’s top executives were compensated approximately ten times more than appointed leaders at the SEC. There is no indication that the disparity in compensation has been reduced between the two organizations.

Fortunately, a grass-roots effort led by NAPFA, the Financial Planning Association and the CFP Board was successful in having the bill tabled in the House, but there is a strong likelihood that Wall Street will continue to press to extend FINRA’s reach. While who ultimately regulates us won’t change our pledge to always put our clients’ interests first, we believe it would be bad for the public as a whole. That is why we think it’s important to make you aware of the issue, and we’ll continue to keep you apprised if and when the bill is reintroduced.


Financial Planning Tip – A Closer Look at Medicare Part D
Micah Porter, CFA, CFP®

In last month’s newsletter, I took a look at Medicare Part A & B, which cover many types of inpatient care along with what are generally defined as medically necessary services. For this month’s newsletter, I’ll examine Part D, which is the portion of Medicare that covers prescription drugs. Note that Part D is used with traditional Medicare as opposed to Medicare Advantage plans, which often offers prescription drug coverage as part of the plan.

Part D is a recent addition to Medicare, having been put in place during the early part of the last decade. Applying for Part D is done separately from applying for Part A & B, and the first step in doing so is using the Medicare Plan Finder to determine what plans are available in your area. This is necessary, because unlike traditional Medicare, Medicare Part D is administered by insurance companies, and as is the case with private health insurance, there are differences among plans offered.

Once you’ve input your ZIP code along with information on any prescriptions you currently take and pharmacies you use, the plan finder provides the following information:

  • Prescription Drug Plans available to you (i.e. Part D)
  • Medicare Health Plans available to you (i.e. Medicare Advantage Plans) with drug coverage
  • Medicare Health Plans available to you without drug coverage

If you’d like to further refine your search, you can do so using a number of criteria, including plan rating, coverage options and monthly premium among others., The site provides a good deal of information on each plan, including information that should allow you to accurately estimate your total cost, including premiums and out of pocket spending. You can also compare spending among different plans, and if you’re taking name brand medications where generics are available, the site offers to calculate the potential savings in switching to generics.

As a test case, I ran a hypothetical applicant through the system using the 30309 ZIP code, prescriptions for Lipitor and Nexium and a pharmacy in the area. The site provided a wealth of information, and one of the first things I noticed was that without a drug plan – and just original Medicare – I could expect to spend $4,978 on prescriptions for the year. In contrast, were I to choose the most economical Part D coverage, my total cost for prescriptions including premiums and all out of pocket spending would drop to $1,574. I also saw that I could save $150 by using Medicare, and if I opted for the generic versions of Lipitor and Nexium, I could save over $1300 were I to use generic on both.

Overall, the site is extremely useful if you’re working to draw up a budget for healthcare spending in retirement. For the hypothetical applicant above, if I chose the cheapest Part D plan, opted for traditional Medicare and stuck with name brands at my local pharmacy, my total cost would be $4596 for the year. It is possible to change the Part D plan provider at specific times of the year, which might be advisable, particularly if your prescriptions change. Another variable in terms of healthcare costs are medical expenses that are partially covered, or not covered at all. That’s where Medigap insurance comes in, and I’ll take a look at that in the next column.


Client Question of the Month – When to Sell a Fund
Micah Porter, CFA, CFP®

How do you know when a fund should be sold?
One of the challenges in portfolio construction is choosing the right funds to implement the overall target allocation. We’ve got a clear set of criteria we use in identifying funds, and they include:

  • Expense
  • Management tenure
  • Clearly explained investment strategy
  • Focus fund (as opposed to index followers)
  • Value orientation
  • Clear shareholder focus

When we can’t find a fund that meets the above criteria, we’ll opt for an index fund in the asset class in question. In spite of the care with which we choose actively managed funds, some still underperform and from time-to-time the question will arise as to when we would sell an actively managed fund.

To understand our answer, it’s useful to have a bit of background regarding how often funds that have been historically successful underperform. Warren Buffett addresses this question in a well-known speech to Columbia Business School entitled “Superinvestors of Graham-and-Doddsville”. The speech covered a study Buffett conducted of a group of nine professional investors who  had outperformed their relevant benchmarks over the long-term. The study found that each investor often underperformed the market from time-to-time annually, and a third of the investors had a stretch of at least 3 years in which they underperformed.

The results of the study are backed up by a subsequent study  by Litman Gregory in 2006 of successful mutual fund managers. As was the case in Buffett’s study, Litman Gregory found that periodic yearly performance was the norm, and nearly two-thirds of the funds that beat their benchmark over 30 years still had 3 year underperformance of at least 5% per year. If one steps back and considers the traits of highly successful investors, the results aren’t surprising.

Those traits include:

  • A willingness to go against conventional wisdom
  • The fortitude to stick with one’s investment thesis
  • A long term focus

The aggregate impact of these characteristics is that successful investment managers stand their ground, ignoring the noise generated by the financial media and markets. From time-to-time, they’ll underperform, but if their initial thesis was correct, shareholders will ultimately be rewarded as the markets correctly assess the value of the underlying investments.

So, the short answer is that we won’t sell a fund that meets the above criteria solely because it underperforms for a year or even a few years. Instead, we look to changes in our recommended allocation, or changes in the funds focus, process or management before we consider selling the fund.