Should I refinance?
Mortgage rates are at historic lows. According to Bankrate, the national benchmark rate for a 30-year fixed refinance mortgage is 3.16% and a 15-year fixed refinance mortgage is 2.62% (8/27/2020). It is worth noting that rates for refinancing tend be a bit higher than for purchases. Many clients are wondering if they should refinance and it seems like the answer would be, “yes,” however, not unlike many financial planning questions we address, the real answer is, “it depends.”
Yes, refinancing at a lower rate will reduce your monthly payment. But, it may not reduce the total payment you make over the life of your loan. One of the most determinate variables in the refinancing equation is how long you’ve had your current mortgage.
For example, we have a client who was looking to refinance a few months ago. They were 10 years into a 30-year fixed mortgage at 4.375% and were looking to refinance into a new 30-year fixed loan at 3.5%. Sounds like a good move, right? Their monthly payment would drop by $400 which is a savings they would feel right away. But, over the life of the loan, they would actually end up paying an additional $15,000 of interest. Why? Because more of the monthly payment goes towards interest in the early years of a mortgage. When you refinance, you restart the interest clock. In our client’s example, they already paid 10 years of interest. If they continued paying on their current loan at 4.375%, they would pay a total of $128,000 in interest over the life of the loan. If they refinanced at 3.5%, they would end up paying a total of $143,000 in interest.
If the client chose to invest their monthly savings ($400) they could potentially earn more than the additional interest of $15,000 thus making the refinance a more attractive option.
For simplicity sake we are not accounting for closing costs, but they do have an impact on the refinancing decision. Additionally, a new refinance fee – called the “adverse market” fee – is set to go into effect on December 1st of this year. It will add a 0.50% charge to the vast majority of refinances. The fee is applied to the total loan amount. For example, if you take out a $300,000 mortgage, you will pay an additional $1,500 in closing costs.
So, should you refinance? Again, the answer is, “it depends.” How long have you been paying on your current mortgage? If you haven’t had your current mortgage for very long, a refinance is likely more compelling, especially if you can do it before the new fee goes into effect later this year.
Other important questions. How much lower will the rate be with a refinance? What will you do with the monthly savings? Are you trying to shorten the term of your loan?
We have helped many clients work through refinancing decisions. Please reach out if you have questions about your current mortgage or other loans. We are happy to help you determine the best decision for your individual circumstance.
by Liz Bernhard & Danielle Gregory, August 2020
Senior Wealth Advisors at Albion Financial Group
www.albionfinancial.com | 801-487-3700
Often, the Planners’ Corner is used to provide straight forward, actionable guidance from our planners and advisors. In these extraordinary times, it’s a piece of behavioral psychology that will beset the following text. We are working hard to provide insights into the changing world around us using a plethora of mediums – conference calls, blog posts, emails, phone calls, video chats, TV appearances, social media posts, etc. Yet we can’t discount that the world has seemingly tempered to a halt. As a community, we do our best to make do, but sometimes fear and anxiety permeate our best efforts at normalcy.
It was once thought that ostriches buried their heads in the sand to avoid danger. Although a reasonable assumption, it’s wrong. This hasn’t stopped the term “ostrich effect” from bleeding into the study of behavioral finance. The misconception about why ostriches bury their heads in the sand, led to a broad definition describing this effect as “avoiding exposing oneself to [financial] information that one fears may cause psychological discomfort.” As with every story, there are two sides – some tend to find themselves falling victim to the over monitoring of finances in periods of high uncertainty and volatility. Coined the “meerkat effect” due to a change in behavior that resembles more of a hyper-vigilant meerkat than a head in the sand ostrich. Regardless of whether we act more like ostriches, meerkats, or just humans – our built-in psychology can reinforce negative emotions in times of uncertainty.
Whether we like it or not, some aspect of the ostrich effect influences us within or outside of our financial lives – avoiding listening to a voicemail because we know its contents are undesirable, not checking financial statements for fear of unpleasant details, putting off an uncomfortable phone call, or unnecessarily rescheduling a filling at the dentist. We, as humans, experience this effect even with the most minor unpleasantries. Financial health is no minor detail. It’s easy for financial advisors and investment gurus to repeat the same truisms over and over in times like this to aid clients who are wading in murky waters. However, we should never discount the unprecedented nature of this pandemic as it relates to all of our ever-changing situations.
So why do ostriches bury their head in the sand? They dig holes to keep their eggs, and occasionally insert their heads into the ground to turn the eggs. They are nurturing, not hiding. This is time we can spend nurturing our financial eggs, controlling what we can control. Below are 5 steps we can take, together, to manage our financial and mental health during and after the novel coronavirus:
Talk to us, talk to others – We do our best to reach out to all clients personally, both prior to and during this time. Discussing finance, family, friends, canceled trips, or plans for the future are all suitable topics. We are here to listen to you, regardless of the topic. Communicating with our clients does as much for us as it does for you – we all need the personal connection right now. Remember to connect with those you love via phone or video chat or catch up with someone you haven’t spoken to in years.
Automate – Finances can fall by the wayside when our health is at risk. Manually making transfers, withdrawals, paying bills, and contributing to retirement accounts can feel tedious and stressful right now. Let us help you automate your financial life so that you can focus on what’s important.
Plan with real data – Financial planning is probably not near the top of many lists right now. However, I would be hard-pressed to find a better time to properly plan. Working together to understand and finetune your entire financial picture can be a great way to confront both sides of this psychological coin. Planning with estimates is good, planning with data is better. When we understand what is coming in versus what goes out while factoring in all assets you have, we can act faster with real data in times of need (good or bad). Please reach out to discuss formal planning and we will work together to realize its benefits.
Get informed – We work with some of the most intelligent clients out there, but no one knows everything about everything. Albion employees are working as a cohesive unit from home to deliver the most relevant insights and information for our clients. Following us on social media, attending our conference calls, keeping up with the blog, and dissecting our emails are great ways to understand where we stand on the most important topics facing the world today. We can’t cover everything, but we are willing and able to research or answer any tough questions that you have – don’t hesitate to make us your first call.
Take it slow, make a list – Whether we are busy or finding ourselves with too much free time, trying to tackle everything at once can be draining. We are here every day working to ensure your success but might not wholly understand what concerns you have for one reason or another – everyone has different worries and wants. Making a list of things we have been actively avoiding or overanalyzing is a logical first step. Acting on and completing this list over time yields the desired outcome. Small steps turn into big leaps with time.
The Yellow Ribbon Network is an online platform for veterans, active military and their families in need of counseling and resources to help with finances, housing, employment or education. The Yellow Ribbon Network has partnered with AFCPE® (Association for Financial Counseling & Planning Education®), whose mission is to ensure the highest level of knowledge, skill and integrity of the personal finance profession. AFCPE® aims to empower people to achieve lasting financial well-being through financial counseling, coaching, and education.
Together, The Yellow Ribbon Network with AFCPE® are currently offering free financial counseling to anyone who has experienced a negative change in income and/or budget due to COVID-19. This partnership has come about due to the widespread economic impact that COVID-19 has had on individuals and families. While the government has worked to expand public benefits and has distributed stimulus checks, there is still a great deal of financial stress and uncertainty for many people. The goal of this partnership is to help individuals navigate their financial situation in the short and long term.
The certified financial counselors and coaches will help you to make a plan and will provide you with unbiased, trustworthy advice. These sessions are available virtually – and are free.
An AFCPE® certified professional will never sell you products. They can help you to address your spending and savings plans, overcome debt, work through ineffective money management behaviors, and/or create a specific plan during this time of uncertainty. Your financial counselor will work closely with you to help you through today’s challenges and to develop a strong financial foundation for the future.
A member of the Albion Team donates her time as a volunteer CFP with the AFCPE.If you have additional questions about this service, please click the following link:
It is now four weeks since the March market lows. We have more information on how the pandemic will impact our lives and the economy and we have seen both bad and good come out during this unprecedented time.
Sadly, we have seen the virus spread quickly to every state in our nation. Nationwide there have been over 750,000 cases and over 40,000 deaths. Many of our favorite local businesses have temporarily closed or dramatically scaled back their services, all of us know at least a few people who have lost their jobs and most of us have been sheltering in place for over four weeks.
There has also been uplifting news. Many of our neighbors have become local heroes by opening their hearts to help others – whether that be through grocery runs for others, celebrating a child’s birthday with a drive-by parade or health care workers continuing to risk their own well-being every day to help those infected. In addition, we have seen positive news on vaccines (J&J, Moderna, and others) and potential drug therapeutics (Gilead).
While the current situation remains scary, many of us have settled into our new temporary reality. And, the stock market has done the same. Since the March 23 lows, the market has made up roughly half of its losses and rebounded approximately 30%. As we adjust and get a bit more comfortable with our new daily routine, some people are asking “If I have additional capital, should I invest more in stocks?” As with most questions, the answer is – it depends. Below are a few of the factors to consider if you are contemplating investing new money into the stock market:
Most people have several accounts, each with different goals, and you want to make sure your investments match your goals. For example, you may have several college savings accounts for your children or grandchildren, an emergency fund with 6 months to 2 years of living expenses and your retirement accounts. The right answer for one account likely will not be the right answer for all of your accounts. For instance, your emergency account should be held in cash or high-quality liquid investments (like US treasuries). Adding equity exposure to this type of account likely does not make sense. For college savings accounts, it depends on how soon the beneficiary will need the money and your ability to add additional funds should the need arise. If the college funding is needed in the next 1-3 years, adding equity exposure likely does not make sense. However, if the child does not need the funds for 7-10 years, adding some equity exposure might make sense. For retirement accounts, if you have 5-7+ years of living expenses in bonds and/or cash, it might make sense to consider investing any new money in stocks.
Each market correction is different. In some cases, new highs are reached after just a few months. In other cases, it can take a few years. And, occasionally, it can take longer. Only invest new money in the stock market that you don’t need for several years, preferably 5 years or more.
Trying to call “the bottom” is an expensive exercise in futility. Yes, you might get lucky but, more likely, you will miss your opportunity. Most investors are far better off splitting their money into 4-6 tranches and investing regularly over a period of time. For example, invest 1/6 th of the new money on the first trading day of each month for the next 6 months. This allows you to dollar cost average into new investments. A quick side note. If you believe the market will be higher in several years than it is today, you actually want the market to continue to fall as you invest as it will give you a lower average cost basis for your new investment.
For investing, it helps if you are an optimist who believes in a better tomorrow. Yes, the next few months, and possibly years, will be challenging. Some companies will miss their earnings estimates, unemployment will almost certainly continue to rise to previously unthinkable levels, new coronavirus infections and deaths will continue, some cities and states will have setbacks after reopening their economies and there will be other expected and unexpected challenges. However, there will also be unforeseen positive developments such as promising news about vaccines and drug therapies, success stories from hospitals, cities, and states, additional fiscal policy support from the state and federal government and more. The point is, can you weather the bad news and a declining stock market if it continues over many months? Remember, your timeline for any new money invested in the stock market should be 5 or more years. That can be a very long time in a negative or flat market.
I would argue that your goal should be to make a series of good financial decisions over several years. You will not get every decision “right”. But, if the vast majority of your decisions are sound and your mistakes are modest, you will likely do very well over time.
As I write this note (Sunday evening 4/19/2020), the S&P500 is at 2,875 – down just 11% year-to-date and very close to levels last seen in October of 2019. Think about that. If six months ago you had perfect clairvoyance and knew a global pandemic was coming and it would halt the world’s economies (and many of the small businesses in your neighborhood) what would you have predicted the stock market would do? “Flat” would not have been my prediction. Yet here we are.
At these levels, it feels as though there is a fair amount of optimism regarding the re-opening of the economies around the world, the power of unprecedented fiscal and monetary policies from various governments and the progress on drug therapies and vaccine candidates. Yes, I am optimistic on what the world looks like in 2 years. However, I am also a realist on what the path to get through this likely entails. The reality is that we will have some tough weeks and months in front of us as well as some heartbreaking setbacks in our fight against this virus. It is impossible to know when the market bottom will happen.
Given the fear and uncertainty, a course of action could be to wait and start your first tranche of investing should the market fall another 5-10% from these levels. But be clear this carries two big risks; first, the market may not correct the amount you’ve defined as your entry point causing you to leave you funds on the sideline. Second, you can be certain the headlines will look dreadful if/when the downdraft occurs. Will you be willing to buy in the face of really bad news?
In summary, is now a good time to invest new money? Maybe. But it is definitely a good time to plan how you intend to add to your equity exposure regardless of what the market does over the next several months.
On a similar note, if you found your portfolios a bit too aggressive in your current asset allocation, it makes sense to reevaluate and possibly de-risk some of your investment accounts. Your aim is for your asset allocation to match the specific account’s goals. With the market down just 11% year-to-date and at levels close to those seen in as recently as October of 2019, it may be a good time to evaluate a change like this.
Our goal is to help you make good financial decisions; often this includes helping you avoid short-term thinking with long-term assets (or, conversely, long-term thinking with short-term assets). Please reach out to your Senior Wealth Adviser if you would like to discuss any of the ideas shared in this note and how they might relate to your specific situation. Also, if any of your colleagues, friends or family are struggling to make good financial decisions during this stressful time, please feel free to let them know about Albion. We would be honored to have a conversation with them to see if Albion can be of service.
Doug Wells
Partner
Albion Financial Group
Thursday, March 12, 2020
In this rapidly evolving market environment we’d like to share how we perceive our role in serving families who depend on us.
Our training, experience, and commitment to the craft of being the best financial advisors we can be is about to be put to the test. The recent double whammy of COVID-19 and the apparently unrelated breakdown of OPEC has created tremendous uncertainty and fear. Eight of the last twelve trading days have seen the S&P 500 close up or down more than three percent with a nearly eight percent decline on March 9th. This is what volatility looks like.
This is our World Series and we are in game one. We’ve been here before; sliding into the abyss, staring down a sheer cliff into the fog of uncertainty. That same fog obscures the view across the chasm; while our rational selves know the other side of the canyon exists our emotional selves feel a rising doubt.
The other side exists. There is a solution to this crisis and we’ll be well on our way out of this hole before we have clarity on the path. The way will only become clear in hindsight, when we are standing in sunshine on the opposite rim. As financial advisors our challenge is to help our clients remain clear about why they are investing, clear about understanding what is possible and what is not possible, and keep them on course so they are onboard for the eventual climb out of this morass – which no one will believe is sustainable even as it is happening.
Following are some thoughts that may be helpful as we work to help our clients through the coming months.
While we work to address and plan for potential downsides to our clients financial position in calm times it is ok to revisit such conversations in the midst of risk events. Most of the time we’ll find that the allocation is correct, the adjustments that have been made are sufficient, and we can move ahead. However there are circumstances when this is not the case. And there are actions you can be taking right now.
We hope you can make one of our conference calls and look forward to visiting with you then. And as mentioned above please reach out to your Albion team if you have any questions or concerns about your specific situation.
Please stay healthy,
John Bird
CEO
A quick reference for tax rates, savings and retirement contributions, college savings strategies, as well as Social Security and Medicare information.
Everyone’s financial situation is unique – the information found in the 2020 Planning Guide should only be used as a foundation for discussing your individual circumstances with a CERTIFIED FINANCIAL PLANNER™ practitioner, legal or tax professional.
The wealth advising team at Albion Financial Group understands the complexities of the current wealth management environment and would be honored to discuss your financial situation and strategies that may help you reach your personal financial goals.
Please give us a call at (801) 487-3700 or email dpope@albionfinancial.com.
We wish you a prosperous 2020.
Devin Pope, CFP®, MBA
Senior Wealth Advisor
Albion Financial Group
At Albion Financial Group, we believe in the importance of quality advising where financial success is a result of a series of good decisions over time. Multi-year financial advice on investments, tax planning, retirement savings, college education, Social Security and estate planning strategies can help protect income and grow wealth.
The start of a New Year is a good time to review your financial strategies to ensure they are aligned with your goals – an expertise we bring to bear for our many client families. We aspire to be a financial resource to you and in that spirit this blog post contains our 2019 Planning Guide to assist you in making informed choices. This guide is designed to be a quick reference for tax rates, savings and retirement contributions, college savings strategies, as well as Social Security and Medicare information. We hope this infographic is a helpful resource as you navigate many of life’s financial decisions.
Everyone’s financial situation is unique – the information found in the 2019 Planning Guide should only be used as a foundation for discussing your individual circumstances with a CERTIFIED FINANCIAL PLANNER™ practitioner, legal or tax professional.
The wealth advising team at Albion Financial Group understands the complexities of the current wealth management environment and would be honored to discuss your financial situation and strategies that may help you reach your personal financial goals. Please give us a call at (801) 487-3700 or email dpope@albionfinancial.com.
We wish you a prosperous 2019.
Devin Pope, CFP®, MBA
Senior Wealth Advisor
Albion Financial Group
Financial decisions were once much simpler. Let’s rewind the clock to a time when, after graduating from high school or college, individuals would begin a job at a company where they would remain for the entirety of their career. Cash inflows were simply a pay check while working, followed by a pension in the golden retirement years. Employers would fully cover the cost of health insurance, and, upon retirement, Medicare would substitute. Banking would occur at a local bank where tellers were identified by their first name, and interest was paid on cash savings. If there was excess cash in a checking account, conservative investing would take advantage of the power of compounding.
Let’s now fast forward to today where it is the responsibility of each individual to decide how much to save for retirement, where to save, how to invest, when to pay off various debts, as well as what to do about health insurance and healthcare costs. In a time where endless information can be found on the internet at the click of a button and where the choices available to consumers are infinite, individuals must have a solid financial literacy base in order to make good financial decisions.
Now, more than ever, it is essential to teach financial literacy skills to our children. Here are some financial literacy building blocks:
As a family, craft a clear set of values regarding spending, investing, and philanthropy in your home. What does it cost to run a household? What percentage of monthly pay checks are saved each month? Are donations made to charities in volunteer hours or dollar gifts? Which particular charities are supported?
Make time for family discussions about money. It’s very important to talk with children about why you do things the way that you do them in your household. As parents, practice what you preach. If you teach your children about the importance of saving, and then children see you spending all of the money entering your household, you are sending a mixed message. Children will pay attention to the action rather than the verbal message.
Young children can begin to learn about money and adopt early skills needed for a lifetime of currency use. Teach young children about different currencies. Practice counting and exchanging coins and bills with them: four quarters for a dollar bill, a five dollar bill for five one dollar bills. Simple games such as “store” or setting up a lemonade stand are fun ways for children to gain comfort with money. Help kids understand prices, purchases, and how to make change. Have your child open their own library card and explain the library trusts the child to return borrowed books or they will owe a fine. This is a way for kids to begin their first credit relationship.
Giving children a chance to practice money skills while the stakes are relatively low is critical. Using an allowance as a financial teaching tool is a great place to start a financial education. A good rule of thumb for allowance is a dollar a week for each year of age. For example, an eight-year-old would receive eight dollars paid in cash on the same day each week, and then going up to nine dollars after her next birthday, and so on.
It’s a good idea to separate allowance from household duties like making the bed, keeping the bedroom clean, and emptying the dishwasher—in other words, expected household contributions that do not warrant compensation. Create opportunities for children to earn money by doing jobs around the house that are above and beyond expected household duties. Make a chart that shows the monetary value of each of those other household jobs: mowing the lawn earns five dollars or organizing the pantry earns four. When you pair allowance with work, you show children the relationship between performing a job and earning a wage.
Be consistent and clear with when allowance will be paid and how their money can be used according to parameters decided upon as a family. Families may determine that allowance should be split into thirds: a third saved, a third given to charity, and a third to spend. Give children the freedom to spend the money that is set aside for spending. Encourage comparison shopping and thinking twice before making purchases. It is also helpful to talk about needs versus wants. Clothing is a need, while the fancy new t-shirt designed by a skateboard professional is a want.
As your children mature, begin to pay allowance in advance. By paying allowance monthly or quarterly, you allow older children to practice long term budgeting. Work with kids to create an itemized budget and track expenses. Overtime, talk about what is working in their budget as well as where they have over-spent or under-estimated. The goal is to help children shift from relying on their parents to relying on themselves.
With age, financial literacy activities can become more complex. Have your ten-year-old track a utility bill for six months. A good example is the cell phone bill. Look at how many minutes each person uses and how much data is used in a given month. How does the expense change month-over-month? What can be done to decrease the bill when the expense is high? How much of your household monthly budget is this cell phone bill?
Encourage children to think about what they would like to be when they grow up and facilitate research on the average salary for the desired profession. Let’s say they chose a circus performer. How much does one earn each year? If the circus performer had to save one third of earnings, how much is left to spend on new circus props? Have them look at different career paths and study the level of education or training needed for a particular career. Then, look for schools that specialize in this training and find the cost associated with the training. Children also love stories of entrepreneurs. Share entrepreneurial stories about professionals working in areas that your children are passionate about.
It is never too late to begin discussions about financial literacy. To be successful, we need to educate both ourselves and our children. Financial literacy skills are critical and they can also be a lot of fun.
Sarah Bird, CFP® / Senior Wealth Advisor
Albion Financial Group
sbird@albionfinancial.com
(801) 487-3700
Measuring investment performance is an art, not a science. For many this notion can prompt an uncomfortable response as it repudiates what should be entirely impartial statistical information. The reality however is that there are many subjective conditions that dictate the numerical output of such analyses. Therefore, it is important to have a thorough conversation around various performance data in an effort to understand both its meaning and significance.
The first subjective gate that presented investment performance must pass through is time frame, or the specific period being measured. Take for example the following simple exercise in examining a hypothetical portfolio return versus a stated benchmark (more on benchmarks in a moment). Let’s say an investor owns a portfolio of stocks that exactly mirrors the Russell 2000 basket (“Russell”). At the time this paper was written on a year-to-date (YTD) basis this portfolio had a negative price return of approximately -2.02% through 11/23/2015. As a point of orientation the Dow Jones Industrial Average (“Dow”) is down -0.17% over this same period, resulting in this portfolio underperforming the Dow by roughly -1.85% YTD. What actionable implications can one draw from this data? Should our investor make any changes to our portfolio as a result of this information?
Now let us expand that time horizon by only one short month. Our hypothetical Russell-like portfolio return is now +0.17%, while the Dow is off -0.02%. The relative performance of this portfolio has quickly become +0.19% when studied over this second period of time! Through this lens, is this portfolio doing what is should be doing? Would it have been wise to trade out of this Russell replica portfolio and into the Dow based on our early impressions of period 1?
We are all human beings with instinctive impulses; it’s just the way we’re wired. And in this situation it wouldn’t be unusual for an investor to desire a switch based on information gleaned from the first time period. However, when adding a supplementary data point to the mix – i.e., time period 2 – this instant reaction in labeling the portfolio as an “underperformer” may have been a rush to judgement and warrants further examination.
In an effort to counter this urge an analysis of these two strategies over a longer observable period is a good place to start. Put differently, which portfolio has delivered ample and steady returns over time? In our hypothetical scenario we see the Russell basket returning +73.5%, +163.5%, and +280.8% over 10-, 15-, and 20-year periods, respectively. An investment in the Dow, meanwhile, would have delivered +64.6%, +71.1%, and +251.2%, respectively, over these same periods. How would we imagine our hypothetical investor to behave had we began our analysis with this perspective? Or perhaps even more frightening, what would have been the financial impact to one’s portfolio if they had made the decision back in, say, the year 2001 to switch from the Russell strategy to the Dow after a couple of bad months, or even bad years?
To be sure, overactive short-termism and myopic performance chasing can be damaging to an investor’s financial goals. On the other hand, long-term ownership of good businesses (stocks) and a focus on performance over extended horizons is a solid beacon in an environment fixed to 24-hour news cycles and a nearsighted measuring of returns. This rhythm affords the astute manager the latitude to administer the indispensable elements of patience and discipline.
Indeed, long-term investors are the financial market equivalent to marathon runners. Yet in today’s fast moving connected world of always-on digital information, social media, intense scrutiny on quarterly earnings results, and enormous pressure to deliver short-term results, we are often clocked every 100-meters as though we are running sprints. This does not make sense and fuels a fundamental mismatch that can lead to flawed measurements, or worse yet strategic mistakes towards an investor meeting their long-term financial goals. Quite simply, it’s the wrong tool for the wrong job – like asking for a hammer to screw in a bolt.
A more suitable and effective analysis is to observe the two portfolios over a much longer period of time in order to smooth out shorter-run dispersions and more clearly assess the consistent pace and performance of an investment portfolio. Patience and discipline are paramount to long-run investment success, much like the way we would evaluate a marathon runner.
The second subjective gate that performance must pass through is relative bench-marking. In our previous example, why did we select the Dow as our relative measure? Why not the S&P 500? Wilshire 5000? German DAX, or the Shenzhen in China? MSCI World index, anybody? How about stocks in the U.S. health care sector, or in energy? Did these perform better or worse than our portfolio? How would the presentation of this material have affected our evaluation? And more important, what can we do with all of this information? Does it make us better or worse decision makers? We belabor the point, but what’s key to appreciate is that there are almost an infinite number of options one can choose when buying stocks (or index funds), and thus scenarios for comparing actual returns against theoretical opportunities are equally as vast.
We certainly recognize that it is easy to get caught up in the media hype obsessing over the one or two most widely-cited indices. Nevertheless, we believe that this focus is an arbitrary exercise and tells us nothing about the merits of an individual investor’s portfolio needs, strategy, and financial goals.
Albion Equity Performance
With this understanding we encourage our clients to apply the same analytical framework when assessing Albion’s investment management acumen. And we are pleased to report that our marks here are emphatically positive. Our ultimate goal as holistic wealth managers is to help our client’s reach theirs. At present we currently manage assets for over 400 families, across 2,000+ accounts, each with unique situations and needs. This custom and client-centered approach does not lend itself to a one-size-fits-all performance figure. Rather, we firmly believe that the purest gauge in measuring our value and determining our performance can be seen by whether or not our clients are happy and retain our services. Indeed, it is this behavior that embodies the most conclusive vote of confidence and judgement of our ability we can think of.
Albion has been in business for 39 years, and over this time our annual client turnover rate is approximately 2%. This is a very low level for this industry; a fact that we are extremely proud of. In addition to the custom nature of our services, industry rules as they apply to fiduciary managers – the highest standard in the investment industry – makes it quite difficult for us to formally engage in traditional returns reporting conventions.
To help you understand why, a brief description of the difference between fiduciary and suitability standards is necessary. It sounds complicated, but essentially the difference between the two standards refers to the guidelines that spell out the obligations financial services professionals have to their clients.
The suitability standard gives advisers the most wiggle room: It simply requires that investment vehicles fit clients’ investing intents, time horizon, and experience. As a result the suitability standard invites conflicts of interest pertaining to compensation, which can greatly influence what financial products are pushed onto clients. Conversely, the fiduciary standard requires advisers to put their clients’ best interest ahead of their own. For instance, faced with two identical products but with different fees, an adviser under the fiduciary standard would be bound to recommend the one with the least cost to the client, even if it meant fewer dollars in the company’s coffers – and thus his or her own pocket.
We think it is clear which standard is superior, and we take very serious our adherence to these principles. Yet, this also handcuffs us when it comes to presenting official performance data to prospective clients. Meanwhile, those firms that follow the less rigorous and conflict-riddled suitability standard are permitted wide latitude in providing this data. While we argue that this is frustratingly irrational, we also recognize that we do not make the rules and therefore must follow industry regulations as they are, not as we wish them to be.
With that said, here’s what we can share with you.
While we are active managers tirelessly monitoring markets in real-time keenly attune to present information, at our core we are long-term oriented (i.e., the “marathon runner”). Consequently we are proud of the excellent results we have generated for our clients. However there are times when even the best managers will have soft spots in their returns. An example of this for us would be the year 2012 where we left some upside on the table in our equity portfolios and underperformed the broad averages in a conscious decision to protect our clients’ hard-earned nest eggs.
In 2012 the world got very scary, very quickly. The U.S. economy had turned sour in the late-spring (particularly employment data) and Europe was at the height of a potential Greek debt default and ensuing contagion. Not only was Greece looking into the abyss, but the entire European periphery (e.g., Italy, Spain, and Portugal) was fragile enough that any policy misstep would have likely held grave consequences. There were riots in the streets, sweeping anti-euro sentiment, and against this backdrop we made an active decision as active managers to raise cash to protect our client’s assets. Our calculus at the time was while a decent chance did exist that this strategy would dent short-run performance if the market moved higher; the sheer magnitude of the market downside if things collapsed necessitated a defensive posture. Indeed, if the euro had fractured during this time the ripple of global banking contagion, general fear, and economic retrenchment would have been disastrous to equity markets. The probability of such a scenario in our view was high enough to warrant more than a healthy dose of caution. As holistic wealth managers with a fiduciary responsibility we had to act in the best interest of our clients.
Despite these large macro risks the S&P 500 finished the year up +16%, while the Dow returned +10.2%. For us, our abnormally high cash level created a drag on equity returns causing us to end the year only slightly positive. And while this does skew the various short-run performance data sets, we own this decision and would do it again if the environment called for it.
We feel very strongly and take very serious our duty to protect client assets. In our view this form of cognitive, yet assertive risk management cannot be captured by traditional attribution and returns reporting methods. Please do not mistake our explanation as an excuse. Quite the contrary, we believe that it is precisely these types of active decisions and attention to downside protection that helps drive investment returns over the long-run. As such we felt it both appropriate and necessary to provide this context.
As the world chewed through some of the more terrifying moments of that year – e.g., German Supreme Court ruling declaring the euro bailout mechanisms legal; a restructuring of Greek debt from the private sector to the IMF / ECB / EC who could better absorb potential losses; euro members assembling the sound regulatory framework necessary to backstop the financial system; etc. – we scaled back into quality stocks utilizing our time tested rigorous fundamental approach.
Hindsight is always 20/20. Was this a sound decision to go to cash given the severe risks we were seeing, or should we have put our blinders on and gritted our teeth through it? In discussing this with our clients at the time, an analogy we found helpful in imparting our thinking as we made this decision is as follows.
Suppose you were offered a free flight to anywhere in the world. Rome; the pyramids of Egypt; Japan; the South Pacific; any place you’ve most wanted to visit is now at your finger-tips at no cost to you. Sounds great, right? The catch is there’s a 20% chance that the plane you’re riding on will be involved in a horrific crash. Would you accept the offer? Put differently, there’s an 80% chance you make it there just fine. And yet does that make you feel any better about accepting this deal? Probably not. Why? Because the risk – albeit far less likely relative to the odds of a gain – holds such grave consequences that it is simply not wise to chance it. This is precisely how we viewed the stock market and the potential negative impact on our clients’ portfolios during the global chaos in 2012.
Summary
Wealth management has an almost unlimited number of variables and unique situations. Unfortunately, the desire by the media and Wall Street marketing to distill down this complexity into imperfect short-term investment returns data, particularly in cohabitation with a randomly selected arbitrary benchmark, has created a distraction that few can afford to have.
Chasing short-run manager performance can be every bit as damaging to long-run portfolio returns as hopping in and out of hot and cold stocks without any attention paid to the fundamentals of the underlying companies. While we surely understand the virtue of considering market returns as a component of the overall wealth management picture there is far too great a focus placed on it, both versus stated benchmark(s) and over increasingly shorter time horizons.
This works in both directions. When a manager is crushing it with great returns above their specified benchmark over short periods of time, publicizing this as sustainable and reason to invest is every bit as imprudent as eschewing a smart, high quality manager with a laudable and principled investment philosophy demonstrating sound long-run risk-adjusted returns. Sometimes we fall into the former category, but we will always fall into the latter.
Without question, what matters most is creating the right investment portfolio to achieve your financial goals. This is challenging, and candidly it always has been and likely always will be. But, it is a worthy and important goal – one that all of us on the Albion Team are proud to devote our professional careers to helping clients attain.
Jason L. Ware, MBA / Chief Investment Officer
Albion Financial Group
jware@albionfinancial.com
(801) 487-3700