Going the ETF Route? What You Should Know

CNBC recently published a story on the growing popularity of exchange-traded funds, or ETFs. According to the article, 81% of advisors surveyed said they used or recommended ETFs to their clients in 2015. We have been advocating ETFs as a secure, flexible investment for our clients since the days when they weren’t as popular.

Here’s a look at some ETF basics. (For related reading, see: Why Investors Can Be Their Own Worst Enemy.)

What Are ETFs?

An ETF combines features of stocks and mutual funds. Like a mutual fund, it is composed of a group of stocks, giving investors access to a diverse array of securities with only one transaction, an investment in the fund. And like stocks, an ETF can be bought or sold on the open market at market-determined prices. ETFs are usually used to track specific indexes of the securities market as a whole or of specific sectors. The first ETF in 1993 was created to track and match the performance of the S&P 500 index.

Why Do We Use Them?

ETFs have a number of advantages for investors who are saving for retirement. These include:

  • Transparency: While the holdings of a regular mutual fund are only reported every quarter or year, ETFs report their holdings every day since they are traded and the holdings are a reflection of an index. Knowing exactly which positions you are invested in can help with fine-tuning your portfolio according to your risk tolerance.
  • Lower costs: The passive nature of ETFs allows them to have significantly lower costs than a mutual fund. In short, actively managed funds, as the name implies, execute a far greater number of trades than passive funds like ETFs, which are generally not overseen by a fund manager on a daily basis. As a result, ETFs usually incur much lower costs than actively managed funds. (For more, see: Don’t Expect to Win With Actively Managed Funds.)
  • Flexibility: Mutual funds, whether active or passive, can only be sold at the end of the trading day. On the other hand, ETFs are traded throughout the day and their price continually updated.
  • Tax efficiency: There are several factors underlying the structure and operations of ETFs that make them more efficient than a lot of mutual funds. To buy shares of a mutual fund, you must exchange cash for shares directly with the fund. There is no middleman; therefore, when the fund realizes capital gains on an investment, those gains are passed through to the individual investors and you must pay tax on it. When purchasing shares of an ETF, the shares in the ETF are purchased through a middleman called an Authorized Participant, not the fund itself. (The AP purchases shares from the fund when they are originally issued.) This degree of removal from the fund and the capital gains it realizes can help you avoid significant taxes on long-term capital gains. Additionally, since ETFs don’t make as many trades as actively-managed funds, there are fewer chances for an event that could generate capital gains, which will be taxed.

So how do they fit with our investment strategy? We think that your best chance at building wealth through the markets for retirement is to work with a fiduciary advisor to utilize a long-term approach that emphasizes diversification, tax efficiency, risk management and cost effectiveness. We believe in the efficient market hypothesis, which dictates that in the long run, it is nearly impossible to beat the returns of the market by picking individual stocks and market timing. Therefore, an ETF is generally a stable—but flexible—tool for long-term growth if used properly. (For related reading, see: 8 Common Biases That Impact Investment Decisions.)

 

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Instituting Investing Rules: Lessons from the Brexit

The world had its eyes on the United Kingdom on June 23, as returns from their national referendum on whether to withdraw from the European Union began to roll in. The ultimate victory of the “leave” camp sent shock waves through political and financial sectors, as investors saw the British pound crash to a 30-year low and markets experienced a significant drop.

Rules-Based Investing

The Brexit tale is only just beginning, and its ultimate effects are anyone’s best guess. That said, there is a lot to be learned from what’s already happened. We think that in the aftermath of Brexit, you need investing rules that you stick to hard and fast.

The market crash post-Brexit panicked a lot of investors. Of course, investors and advisors should have basic philosophies that they stick to, even in times of market crashes, such as not following the herd and selling off when a stock is lowest. (You can read more about the detriments of panic selling here.) But it may be beneficial to establish some firmer rules for exactly what qualities the investments you make will have.

For example, consider the following from Kevin O’Leary, Shark Tank judge and O’Shares chairman: “Imagine if you could create the perfect portfolio manager that had no style drift, that never, ever got emotionally involved in a stock, that only used the most hardcore rules on balance sheet testing, and never, ever strayed from that. That’s what rule-based investing is. It takes out one of the challenges I’ve found as an investor over the decades.”

In other words, you have to eliminate emotion from your investing. As a retirement saver, this can be incredibly difficult after big market swings, whether up or down. We’ve previously explained why active management doesn’t win and one of the benefits of passive investment management is that since it takes a long-term view, it reduces the role of emotion in investment decisions. Creating investing rules can be a good extension of this strategy.

 

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Do You Need to Change Your Financial Advisor?

Financial Advisor

In his song “Real Friends” musician Kanye West raps, “Real friends. It’s not many of us. We smile at each other. But how many honest? Trust issues.” West wonders whether those around him are there because they really have his best interests at heart, or if they only care about him for his money.

Given recent developments in the financial advisory industry, many Millennials might be wondering the same thing about their financial advisor. The Department of Labor (DOL) will soon be enacting a new rule that requires all financial advisors handling a retirement account to abide by a fiduciary standard, which means always acting in the best interests of the client and not the advisor’s or corporation’s profits. It might be surprising, but that is currently not always the case. If your advisor is not a fiduciary, he or she may not be obligated to act only in your best interest. You can read more about the new rule and our take on the fiduciary obligation here.

Opponents of the rule, unsurprisingly the financial services industry’s lobbyists, who largely oppose the rule, point to a study saying that it will decrease access to financial advice for small investors since advisors “cannot figure out how to make money when working with them.” Without the fiduciary obligation, how do advisors currently profit from younger investors? Forbes recently published an article by the Morgan Stanley team where advisor T. Gregory Naples says that with Millennial clients he,

“starts them out in managed mutual funds until they reach $50,000. After that, he often switches them to more transparent and lower-cost stock and bond funds managed by institutional money managers.”

Breaking it Down

This is a huge admission. Let’s break down exactly what Naples is saying. Crucially, Naples admits that, until you hit $50,000 assets under management (AUM), he invests your money in more expensive, less efficient funds. Many of these “actively managed” funds, which try to beat the market’s returns, have higher costs because of labor and number of trades they execute. After this period, once your AUM gets to a point where Naples can more easily make money off of you through fees, he puts your money into more efficient places it should have been all along.

Later on, he mentions examples illustrating the power of compound interest, but neglects to mention that the unnecessary fees you are incurring from the inefficient funds he has invested your money into will eat away at the returns you get from the compound interest. This illustrates the folly of the argument that the fiduciary rule will drive young investors away. Young investors who are just starting out are, in fact, much better off being driven away from advisors with non-fiduciary practices like Naples. Entrusting your money to a non-fiduciary, traditional financial advisor as a young, new investor is like intentionally hitchhiking on a road known for having murderous truck drivers when there’s a much safer road nearby. (Read more about 6 Questions to Ask A Financial Advisor)

People naturally gravitate towards big firms with name recognition. But as the Naples quote demonstrates, these large, non-fiduciary firms may not always be the best option, particularly for young investors. What the back-and-forth over the DOL rule reveals is that non-fiduciary advisors often don’t even really want your money. Most seek accounts with higher balances. So why go where your money is not wanted?

 

This article was originally published on Investopedia.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

4 Healthy Financial Habits to Develop Now

4 Healthy Financial Habits

Our habits play a crucial role in our ability to meet our goals and become who we want to be. Bad habits — whether it’s biting our nails, overeating, smoking or something else — create roadblocks on the path to becoming our best selves.

And it’s no different when it comes to our finances. Bad money habits can have damaging, long-term consequences for our financial security. But developing healthy financial habits can do wonders for helping us achieve our long-term goals like saving enough for retirement or paying for a child’s college education.

The earlier you develop healthy financial habits, the better your chances of successfully meeting your goals. Here are four financial habits you should start working on today:

1. Separate spending on ‘needs’ and ‘wants’

This is the first step in developing healthy habits. You need to understand where your money is going and then figure out where you need to allocate it to make the best use of it.

Sticking to a spending plan and avoiding impulse buying is crucial for building a healthy savings plan. Create a simple budget that shows you how much money you are bringing in and helps you understand your monthly spending. Add up all of your expenses that you would consider a need — this includes your monthly savings amount, rent, car payment, cable and internet bill, food, etc. (By including your savings amount in your need category, you create an automatic savings plan for yourself — more on that below.) Subtract that total from your income, and what is left over is your free cash flow.

The remaining money is the amount you have at your disposal for your “want” expenses. At the very least, make sure you are not spending more than that. At the end of the month, if you still have money left over, stick it in your savings or investment account. This removes the temptation to spend it and lets you start the next month fresh again. If you consistently have money left over, increase your savings amount.

2. Set up automatic savings

Creating a consistent savings mechanism will ensure you are saving a minimum amount each month or paycheck, making progress toward your longer-term goals. Whether you are saving into an investment account or your bank savings account, set up an automatic contribution from each of your paychecks so that the money is “out of sight, out of mind” and you won’t be tempted to spend it.

Why is this so important? Without having an automatic savings plan, you could be saving $500 one month and then $0 the next. Although this is better than not saving at all, it is not a good practice to adopt. And remember, you can start small. Even if it’s $100 a month, saving consistently will pay off immensely down the road. 

3. Participate in your employer-sponsored retirement plan

Saving for retirement is one of the most important financial habits you can build for yourself. The power of tax-deferred investment growth over your entire career can really add up. Another benefit with 401(k)s and other retirement plans is that the money you contribute is pretax, which effectively lowers your taxable income, reducing your tax liability today.

If your employer offers a matching contribution to your 401(k) based on your contribution level, it’s especially important to contribute enough to take advantage of this benefit. The employer is basically offering you free money that you would be turning down. For instance, an employer may offer a retirement savings plan to which you can contribute up to 5% of your salary and it will match up to 3% of that. If you don’t contribute at least 3%, you are in effect saying no to a 3% raise.

If your employer does not offer a retirement savings plan, look into opening a self-directed retirement account such as an IRA so you can benefit from tax-advantaged retirement saving.

4. Start investing now

Time is the greatest advantage investors have when it comes to saving and investing early and consistently. With the power of compound interest, even small amounts can really add up over the years. With compound interest, your interest amount is added to the principal, increasing the amount of interest you earn, even if the rate of return does not change. To take advantage of compound interest, the earlier you start saving, the better.

If you can boost your savings rate, you’ll be even better off in the event of a long period of low investment returns, according to Michael Batnick, director of research for investment firm Ritholtz Wealth Management. “Saving more money can offset lower returns because you’re compounding on top of compounding,” Batnick writes. He points to a comparison of two portfolios over a 20-year period, both starting with contributions of $5,000 a year. The portfolio earning an average of 4% annually, with contributions increased by 10% each year, will have $100,000 more in it compared with a portfolio earning 6% a year, with contributions raised by only 5% ($393,153 vs. $293,534).

Prioritize your goals

If you already have these good financial habits, that’s great. If not, the best time to start developing them is now. Everyone will have their own goals and needs, and, unfortunately, not all of those can be satisfied at the same time. You’ll have to prioritize your goals, but once you do, you can start building healthy habits that will allow you to reach them. Separating your needs from your wants, saving early and often, taking advantage of tax-favored retirement savings plans, and investing now can help you build a solid financial foundation and get you where you want to go.

This article was originally published on NerdWallet.com

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

4 Things You Can Learn From John Oliver About Retirement Planning

On his HBO show Last Week Tonight, comedian John Oliver recently turned the national spotlight on the wealth management and retirement planning industry. In light of a new Department of Labor rule requiring all financial advisors to act as fiduciaries for retirement accounts, in which we strongly believe, Oliver skewered the opaque tendencies of brokers and traditional financial advisors. He urges viewers to bring their business to a transparent fiduciary who has your best interest at heart.

Oliver’s segment serves an important purpose — many regular people who trust a traditional financial advisor with their money, or millennials who are just now beginning to think about retirement planning, simply don’t know the many ways the advisor could be robbing them of their hard-earned money. While not everyone is as clueless as the woman whom Oliver ridicules for asking CNBC host Suze Orman whether she should spend $4,000 to get an elf-spotting certification in Iceland, the many ways traditional financial advisors hurt their clients are often hidden unless the client does the digging themselves. With that in mind, here are four major takeaways from Oliver’s monologue.

1. Many financial advisors may not have your best interest at heart — but you can find one who does.

As Oliver notes, “financial advisor” is a vague term. Even so, many traditional financial advisors  are not fiduciaries, and instead operate on commission. (An advisor who is a fiduciary must always act in the best interests of you, the client.) This means they can execute trades and strategies that line their own pockets with little regard for your financial well-being. We believe that this is unacceptable; as a result, we operate as a fee-only fiduciary that does not receive any sort of commission. While some advisors make money by endorsing a particular investment or product to their clients, we are paid only by our clients.

2. The “active management” of many funds and advisors can destroy your capital.

As we’ve previously detailed in this blog, you shouldn’t expect to win with actively managed funds. Not only do these funds fail to outperform the market, but in doing so they also accrue massive fees due to the large amount of trades they are making. While compound interest grows your investment over time, interest isn’t the only thing that compounds — fees do as well. Oliver cites a study in which an index of stocks, selected by a cat throwing a ball at them, outperformed an actively managed fund overseen by experts. The cat earned returns of 7%, while the pros garnered only 3.5%. Oliver summarizes the situation succinctly: “If you stick around doing nothing while everyone else around you [messes] up, you’re going to win big.” At Sherman Wealth Management, we believe sticking with investments that focus on low cost and tax efficiency is the best way to save for the long term. ETFs are an investment vehicle that we utilize to accomplish this goal.

3. It doesn’t have to be this complicated, and it might be getting simpler.

There are easy steps you can take. Start saving now — it’s never too early. When screening financial advisors, ask if they are fiduciaries. With your money in the hands of a fiduciary who puts your best interest first, you can be confident in your advisor’s motivations. 

Feel like the little guy/girl who can’t get the time of day from your “financial advisor”? Read our post – Why Go Where Your Money’s Not Wanted?

4. These principles aren’t abstract — they have real consequences for real people, like you.

To demonstrate all of this, Oliver examined the 401k his own employees at HBO were using through their provider. The retirement fund charged 1.69% fees, and their broker refused to offer low-cost, low-fee plans. The advisor even messed up the calculations on the compounding interest, making his original math off by over $10,000,000. These are not the actions of someone who values his/her clients more than a paycheck; on the other hand, we value our partnership in our clients’ future success.

Where Oliver went wrong is when he questioned why anyone would invite their financial advisor to their wedding. We are proof that a relationship like that is possible between client and advisor. As a fiduciary, when we consistently act in the best interests of our clients, we end up building strong friendships with them.

At Sherman Wealth Management, we have long been at the forefront of the fiduciary movement for transparency and conflict-free advice. At a traditional insurance company or wire house, advisors will often recommend expensive funds produced by their institution; on the other hand, we can take a more holistic view of investments to determine which are best for you. We believe in growing with you, not at your expense.

We encourage you to trust your retirement to an advisor who will act only in your best interest. Curious what that looks like? Schedule a free portfolio analysis and strategy session with us.

Check out the full John Oliver video here.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Where Millennials Can Turn for Financial Advice

Sherman Wealth Management | Fee Only Fiduciary

We live in a fascinating time. The biggest wealth transfer in history is beginning, as Millennials will soon become the wealth bearing demographic in this county.  Not surprisingly, as we pointed out in a recent blog post, personal finance is a huge issue for many Millennials. But where can a Millennial turn for advice?

Goals, dreams, jobs, family plans, etc. are going to vary widely, but there a few common themes that seem relevant across the spectrum. We constantly write on many of these issues, so decided to summarize the topics for you and answer some of those nagging questions.

 

  • Getting started is often the hardest part. Beginning a savings plan early is key, which makes planning all the more important. We constantly preach the importance of determining your short, intermediate and long term goals and then focusing on creating a plan on how to achieve them. Having the “money conversation” is a great way to get started. Remember, it’s not how much you make, but how much you save. Read more here on getting started with the money conversation.

 

  • Student Loans/Debt – A common financial hurdle for many millennials is navigating student loans. So how do you determine if your focus should be on accelerating the payoff of that debt or maximizing saving instead? We wrote about that here.

 

 

  • Knowing Who to Trust – Even if you understand the advantages of investing in the stock market, it’s not always easy to find a professional you can trust. A recent facebook study shows that over 50% of millennials have no one to trust for financial guidance.

 

FB Study

Source: insights.fb.com

 

A few months back we wrote a piece titled “Why Go Where Your Money’s Not Wanted” that touches on the point of many financial institutions turning down Millennials as clients. Most of the corporate institutions prefer high-net worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades. As frustrating as the requirement for a high minimum balance is for first time investors, it’s actually one of the main reasons I created Sherman Wealth Management. It was important to me to make sure top notch financial advice was available to anyone and everyone,  particularly to those who are starting out on the path to wealth accumulation. We created this guide to make sure you are asking your potential financial advisors the right questions to determine if they are right for you. – 6 Questions to Ask Your Financial Advisor

 

  • Marriage – Getting married is more than just substituting the word “ours” for “yours” and “mine”. It’s combining your finances, histories, dreams, aspirations, possessions – even your music – and making all of that “ours” too. If you have started to think about marriage, or are married already, there are a few financial discussions you should be sure you have.  Since a significant part of those pre-marital dreams and aspirations involve money, having multiple financial conversations before marriage (or right after, if you’re newlyweds!) can help you start married life on a firmer footing, with regard to financial goals. Here are two blogs we wrote for those getting married or already married.

 

  • Buying a house – There are studies out there saying that Millennials are not buying houses. A prudent home purchase often can be one of the most stable and solid investments a young person can make. So why the hesitation? Some Millennials wonder if given the rate increase and current market turmoil – if this is really the right time to purchase a first home, or if renting makes more sense for you right now? We wrote about this exact topic here.

 

  • Kids – Babies change your life in many ways, including requiring large amounts of time and money. While you may already be thinking about childcare costs and options, or about paying the medical bills that accompanied your new child, there are several other – important – financial considerations you should be thinking about even before the new baby arrives – 5 Planning Tips for New Parents

 

If this all seems overwhelming, don’t be discouraged. Personal finance is a journey and everyone is going to take a slightly different path. Taking the initiative to educate yourself on these topics is a great 1st step.

We are passionate about improving financial literacy in our society which is why we try to write blogs like these that will be useful to those trying to navigate the rocky waters on personal finance. If there are additional topics you would like us to write about, we would love to hear your thoughts! Email us at info@shermanwealth.com.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Which Investor Personality Best Describes You?

psycology-investment

This article was originally published on investopedia.com

According to many studies, our different personality traits and preferences, along with a range of emotional and mental behavioral biases, have a strong impact on the way we invest. This is commonly referred to as behavioral finance. As part of a two-part series on Behavioral Finance, we will start by exploring the different personality types of most investors. When it comes to money and investing, there are many factors that contribute to the “how” and “why” of important financial decisions.

Investor Personality Types

There are four different types of investors, according to the CFA Institute, each with their own distinct behavioral biases. Understanding your own investor personality type can go a long way toward helping you determine and meet your long term investment goals, as well as producing better returns. (For more from Brad Sherman, see: 6 Questions to Ask a Financial Advisor.)

Which of these profiles best describes you?

Preservers

Preservers are investors who place a great deal of emphasis on financial security and on preserving wealth rather than taking risks to grow wealth. Preservers watch closely over their assets and are anxious about losses and short-term performance. Preservers also have trouble taking action for fear of making the wrong investments decisions.

Common Issues with Preservers: An investment strategy should take into account short-, mid- and long-term goals. By overemphasizing short-term returns, an investor risks making an emotional decision based on the short-term performance, which may end up being more detrimental to them in the long run.

Accumulators

Accumulators are investors who are interested in accumulating wealth and are confident they can do so. Accumulators tend to want to steer the ship when it comes to making investment decisions. They are risk takers and typically believe that whatever path they choose is the correct one. Accumulators have frequently been successful in prior business endeavors and are confident that they will make successful investors as well.

Common issue with Accumulators: Overconfidence. We recently wrote a blog on the issue with stock picking and active management. Overconfidence is a natural human tendency. As investors, accumulators consistently overestimate their ability to predict future returns. History has shown that it is impossible to predict markets at large scale, yet accumulators continue to try and do so and expose themselves to extreme risk.

Followers

Followers are investors who tend to follow the lead of their friends and colleagues, a general investing fad, or the status quo, rather than having their own ideas or making their own decisions about investing. Followers may lack interest and/or knowledge of the financial markets and their decision-making process may lack a long-term plan.

Common Issues with Followers: The herd mentality is a concept of investors piling into the same investments as others. This is often the basis of investment bubbles and subsequent crashes in the stock market. When you are a follower, you are typically following fund managers who have tools and recourses to act on new information in a fraction of a second. By the time the average investor “follows” them into a position, it is often too late. It is always important to understand your investment decisions and how they fit into your overall plan.

Independents

Independents are investors who have original ideas about investing and like to be involved in the investment process. Unlike followers, they are very interested in the process of investing, and are engaged in the financial markets. Many Independents are analytical and critical thinkers and trust themselves to make confident and informed decisions, but risk the pitfalls of only following their own research.

Common Issues with Independents: Similar to overconfidence bias associated with accumulators, independents face similar issues with relying too heavily on their own train of thought. We as humans have ability to convince ourselves that we are correct or that we don’t need guidance, even when that is not the case.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Personal Finance – Why Didn’t I Learn That?

I recently returned from a reunion weekend with some of my college buddies. We caught up on wives, kids, work and all the other important parts of our lives. One thing struck me about the conversations, no matter whether I was speaking with liberal arts majors or those who studied corporate finance: While we all know that E=MC2 and maybe even know a fair amount about Einstein’s theory, most of them graduated without having a real clue about personal finance.

In other words, the financial skills we learn in school are not necessarily the ones we need in the real world — at least when it comes to our personal lives.

Personal finance is not typically part of a college curriculum. And while some of us have parents or family members who can guide us along the way, those individuals may not be financial experts, and there is a limit to the help they can provide.

From my experience, most people are interested in financial literacy but don’t know where to go to get started. We all face similar issues, and the less familiar we are with the mechanics of approaching them, the more anxiety-provoking they become.

The younger you learn, the better off you are. When I was in the first grade, I wanted to be Alex P. Keaton, the money-savvy teenager played by Michael J. Fox on the television sitcom “Family Ties.” It was clear early on that I had an affinity for sound saving, investing and growing money. When I was 7, my grandmother gave me a dollar; I turned it into $5, then $50. I am thrilled by the challenge of helping people reach their financial goals at all stages of their lives.

For example, take buying that first home. Your career is on track, and becoming a homeowner seems like an appropriate goal. So with some excitement and anticipation, you decide to start looking.

Then the questions begin flooding in. How much home can I afford? How much should I be saving? When is the ideal time to buy? How does a mortgage work? Will I qualify? What’s my credit score? Do I need insurance? How do property taxes work?

Imagine if there were a course in college (let’s not get crazy and imagine they would teach this in high school) called Personal Finance 101. In addition to the homebuying lessons above, the curriculum could look something like this:

Cash flow and budgeting

Topics covered: What is a budget? How do I create one? How do I know what I can afford?

Building credit and understanding credit cards

Topics covered: What are the advantages and disadvantages of owning a credit card? How should I decide which one to get?

Intro to the stock market and investing

Topics covered: What are the differences in the various investment vehicles — exchange-traded funds, mutual funds, stocks, bonds, certificates of deposit?

Taxes

Topics covered: How do I pay taxes? What do I need to pay attention to in my tax planning?

Future workplace retirement plan options

Topics covered: What is a 401(k), IRA, Roth IRA? When should I start saving? How much should I save?

My guess is that a course like this would be incredibly valuable to many. It’s complicated stuff. It’s important stuff. It’s the kind of stuff that you actually need to know.

This is the main reason I chose to get in this line of work. Younger people have no idea where or how to start, and they have no idea where to find help. Traditional financial management institutions have investment minimums that most of us won’t be able to meet for over a decade, if ever. These minimums can range from $250,000 to $500,000, and sometimes are higher. Even if you were fortunate enough to be accepted by a big institutional investment manager, you’re kidding yourself if you think a large institution is going to take the time to explain to you the difference between a traditional IRA and a Roth IRA.

That’s why I chose to create a wealth management model where we would provide the same customized service to all of our clients, without consideration of a minimum initial investment and irrespective of the size of their accounts. We hope that by investing in you early, you’ll see our value for the long term.

If you are reading this and can relate to some of these thoughts, know that it’s not just you. It doesn’t matter whether you majored in art or corporate finance, you almost certainly did not take a class in Personal Finance 101. The good news is, you don’t have to go at it alone. Seek the help that is out there, and learn what you may have missed in college.

This article was originally published on NerdWallet.com

This article also appears on Nasdaq.

 

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

6 Questions to Ask A Financial Advisor

6 Questions for Financial Advisor

Finding a financial advisor who is right for you is an important process. A good financial advisor is there to prevent you from making decisions that would have a negative, unintended impact on you. Who wouldn’t love to have a financial coach to keep you on track to achieve your financial goals?

Just like with any working relationship, it’s a good idea to interview advisors until you find the one who is the best fit for you, your life, and your financial goals. Since you are entrusting your financial well-being to someone, you should get to know them and their financial planning and investing philosophy before committing to a long-term relationship.

As you may have heard the Department of Labor (DOL) has just released its new fiduciary rule in its final form. We previously wrote about the reasons why someone would oppose this rule considering it was created to improve financial transparency and eliminate conflicted advice from advisors. While this rule would still allow advisors to keep their “conflicted” commissions in some instances, it would require advisors to act as fiduciaries (a.k.a. “best interests contract”) when handling client’s retirement accounts.

We have long been proponents of more transparency and conflict-free advice and feel this is a step in the right direction.

So how does this affect your search for the right financial advisor? Here are 6 questions to ask to help with finding a financial advisor.

1. Are You a Fiduciary? (Are You ALWAYS a Fiduciary?)

As we mentioned earlier, this new rule will only require financial advisors to act as a fiduciary for client’s retirement accounts. A fiduciary is regulated by federal law and must adhere to strict standards. They must act in the client’s best interest, in good faith, and they must provide full disclosure regarding fees, compensation, and any current or potential conflicts of interest.

Until now, broker-dealers, insurance salesman, bank and financial company representatives, and others were only required to follow a Suitability Standard. That means they only had to provide recommendations that are “suitable” for a client – based on age or aversion to risk for example – but this may or may not be in that client’s best interest.

The brokerage industry, as you can probably imagine, and all those who earn their compensation from commissions are strongly against these new rules.

Even with this new law passed, we feel it is important to make sure your advisor is acting as a fiduciary when dealing with ANY of your finances, not just retirement accounts.

 

2. What is Your Fee Structure? (Difference Between Fee-Only, Fee-Based and Commission)

Advisors throw out terms like “fee-based” and consumers assume that is the same as
“fee-only.” That is not the case. At Sherman Wealth Management, we are fee-only which means that we are paid exclusively by our clients, so we are completely conflict-free. We do not get commissions from the investments or products we recommend. We do not get bonuses based on how many clients we get to invest in company products. We are paid an hourly or quarterly fee by our clients who retain us because we are making their money work for them with only their best interest in mind.

Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you.

Do not assume that an advisor is following a fiduciary standard with their compensation now. The new rules will not be enforced until 2018. Ask your financial advisor to clearly specify their fees. With many layers of diversification that can be applied to your portfolio, you want to be aware of whether you are exposed to up-front charges, back-end fees, expense ratios, and/or whether a percentage of your returns will be deducted.

 

3. Why Are They Right for YOU?

A financial advisor should be able to tell you their strengths and what sets them apart. Some advisors will advise on investments while others specialize in comprehensive financial planning. While you may think all advisors are the same, and it certainly may seem like that on the surface, by now you should be seeing that is not the case.

Ask how involved they are with their client’s portfolios. Are they hands-on in their approach? How available are they for their clients’ needs?

For us, we enjoy serving a wide-range of clients, from young first-timers who are just getting started with investing and financial planning, to experienced savers, to high-net-worth investors who are well on their way to financial independence.

We strive to understand our clients wants and needs. We help our clients plan for the long term while simultaneously working to avoid short-term roadblocks. We do so by making it a point to SHOW you that you are not alone. We’re just like you, we’ve been there, and we know that financial planning can be an anxiety provoking activity for many. We use a fluid process to help set clear, realistic goals with an easy to understand roadmap of what you need to do to get there. We are right there with you every step of the way.

In today’s world you don’t just want a trusted advisor, you want instant access to your accounts and the progress you are making. That is why we offer some of the best in new financial services technology tools.

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The relationship with your financial advisor is an important one. You need to feel comfortable with whom you are working with.

 

4. What is Your Investment Philosophy?

Every financial advisor has a specific approach to planning and investing. Some advisors prefer trying to time the market and actively manage funds versus passive investments. Others may seek to gain high returns and make riskier investments. Your goals and risk tolerance need to align with the advisor’s philosophy.

When anyone invests money, they are doing so with the hopes of growing it faster than inflation. While some traditional investment managers not only want to generate a profitable return, they aim to beat the market by taking advantage of pricing discrepancies and attempting to time the market and predict the future. Some investment companies offer “one-size-fits-all” investment management solutions that only take into account your age and income.

We have a different approach. We believe an individuals best chance at building wealth through the capital markets is to avoid common behavioral biases in the beginning and utilize a well thought out, disciplined, and long-term approach to investing. We create a well diversified, customized portfolio that focuses on tax efficiency, cost effectiveness, and risk management. Read more about how we do this.

Make it a top priority to understand the strategy your advisor uses and that you are comfortable with it.

 

5. How Personalized Are Your Recommendations for Your Clients?

It is important that your financial advisor tailors your financial plan to your specific goals. Your retirement plan and investment strategy should be customized to take into account your risk tolerance, age, income, net-worth, and other factors specific to your situation. There should not be a one-size-fits-all approach to managing your money.

Some traditional brokers and insurance companies are so big that it becomes impossible for them to give you a truly individualized experience. They have a corporate agenda that they must follow and it can restrict the service they provide to you.

As frustrating as the requirement for a high minimum balance is for first-time investors, it has also inspired a new breed of smaller independent Registered Investment Advisors (RIAs), like Sherman Wealth Management. What our clients all have in common is that they appreciate the focus on their own individual goals and best interests that we guarantee as a boutique, independent, fee-only fiduciary.

We know that each client is unique.  We don’t look for “market efficiencies” or work for sales commissions on the products we recommend. Our focus is different. We strive to help investors build a strong foundation and grow with them, not by profiting off good or bad trades. This gives us the opportunity to create individual strategies and plans that are uniquely suited to each client, not just a cookie-cutter plan based on age, income, or broadly assessed risk tolerance.

 

6. Do You Have Any Asset or Revenue Minimums?

Some have argued that the proposed DOL rule will end up hurting the small investor because larger institutions will not be willing to serve small accounts. This logic is fundamentally backward and flawed, as those clients were never on their radar to begin with. In fact, the ability for these large institutions to generate commissions and thus charge more to these small investor clients have driven that business, without regard to the best interests of the individual investor.

For example, In a company statement quoted by Janet Levaux in Think Advisor, Wells Fargo, the most valuable financial institution in the world according to the Wall Street Journal, said that in 2016, “bonuses will be awarded to FAs with 75% of their client households at $250,000.”

Wells Fargo isn’t the only large institution effectively ignoring Millennials and other smaller and entry-level clients. Most of the corporate institutions prefer high-net-worth clients because it creates “efficiencies of scale” and a higher profit margin on larger trades.

The complaints against the new DOL rule have nothing to do with protecting the little guy. Rather, the complaints are driven by the desire of commission-based large institutions, insurance companies, and broker-dealers who are trying to protect their ability to generate commissions and charge clients unnecessary fees.

Make sure you understand your advisor’s motivations. If they don’t want you, why should you want them?

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Is Your Retirement Advisor a Fiduciary?

Is your Retirement Advisor a Fiduciary?

Do you want a financial professional who is opposed to financial transparency managing your money?

The upcoming and long anticipated proposed rules by the Department of Labor (“DOL”) exposes that very debate, as it seeks to eliminate the ability of financial advisors to profit by selling retirement account products to investors without being held to a “fiduciary standard.”

For those wondering what that means, with a fiduciary standard an advisor must always act in your (their client’s) best interests. A fiduciary standard ensures that the advisor’s duty is to the client only, not the corporation they represent. To the surprise of many, that currently is not always the case. Financial advisors have had the ability to profit (through commissions and high fees) to the potential detriment of their clients. That is exactly what many large financial institutions and insurance companies have done. In fact, the federal government estimates that there are roughly $17 billion dollars of fees generated each year from conflicted advice.

The DOL has made clear –and we agree– that a commission based investment model creates a conflict of interest. Companies with a commission based model operate with an inherent conflict: the pressure to sell products that are more profitable for them and/or their firm can be important factors in how they direct you to invest. For example, an advisor may receive a 5% commission by selling you a fund through their company when you could get a similar product elsewhere without commission. Think of it this way: would you want to work with an accountant who also gets commissions from the IRS? Of course not. You want your accountant to represent your best interests. Would you go to a doctor who makes money each time he prescribes penicillin? No, you want your doctor to prescribe what is right for you. That is the primary reason we stay completely independent and operate as conflict-free, fee-only advisors.

The proposed DOL rule will hopefully begin to fix this issue as it is expected to require a strict fiduciary standard for financial advisors in the context of sales for retirement account products.  This standard will require advisors to certify that they are acting independently and in their client’s best interest, and are not motivated by the prospect of a commission. This has created a firestorm among big insurance companies, broker dealers and other institutional investors who, as we pointed out, don’t typically operate as fiduciaries.

In a letter sent last week to the SEC, Senator Elizabeth Warren, a strong proponent of the proposed DOL rule, pointed out that presidents of Transamerica, Lincoln National, Jackson National and Prudential all have called this proposal “unworkable.”  She commented on the self interest in their position, and the danger in permitting unwitting investors to be guided by non-fiduciaries in the context of their retirement investments.

Why would a rule that requires a financial advisor to act in their client’s best interest create such an uproar? One reason is that unlike Sherman Wealth Management, they are in a commission driven model, and therefore fear that the way they currently serve clients would not meet the standards of this new rule. We hope that because of the conflict a commission driven model creates, that eventually enough pressure from policy-makers like Senator Warren and Labor Secretary Perez will propel this proposed new rule beyond just retirement accounts. In the meantime, think to yourself why anyone would oppose this rule if not for purely selfish reasons?

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.