Albion CIO on KPCW with Partner Doug Wells

“…With the invasion of Ukraine, the disruption of the distribution of natural resources and food supply caused by that, and other supply chain factors. How should we look at the stock market, investing, and saving during this time?

Find out by listening to Albion Partner, Doug Wells‘s interview with Albion Partner and CIO Jason Ware.

Each week Doug co-hosts the one-hour show – Mountain Money – on Park City’s NPR affiliate, KPCW Public Media.


Highlights from the American Families Tax Proposal


Patrick Lundergan achieves CFP® Designation

Albion Financial Group is proud to announce and celebrate the firm’s newest Certified Financial Planner®. Financial Planners are engaged in the detailed aspects of the financial advising relationship. Their efforts make it possible for our clients to seamlessly envision and plan for a variety of prospective scenarios. Their contribution to the team is essential as we work to guide clients toward making a lifetime of good financial decisions.

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Weekly Market Recap

Equities were mixed last week as the world watched the Suez Canal drama unfolding. Most sectors generated positive returns allowing the S&P 500 and the Dow to finish the week higher, while price declines in some large-cap communications names pulled the Nasdaq lower. Small caps were also lower on the week, as were many international stocks.

Bond markets mostly rallied last week. Treasury yields were lower as the curve flattened modestly, while credit spreads were stable.

Oil prices gyrated day by day as investors grappled with the impact of the Suez blockage on short term global supply.

Economic news was mixed last week. On a positive note, jobless claims hit new pandemic lows, and the University of Michigan consumer sentiment index registered a large sequential index. At the same time, personal incomes & spending, capital goods orders, and home sales all fell.

Finally, in two days of testimony before the US Congress, Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen both pledged to continue supporting the economic recovery and downplayed concerns about runaway inflation caused by excessive monetary and fiscal stimulus. As the Chart of the Week shows, the Core PCE Deflator (the Fed’s preferred inflation metric) remains below its 2% target.

Download the entire Weekly Market Recap PDF by clicking download below.

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ESG with WOA on Zoom

We welcome you and a guest to join the Women of Albion THIS THURSDAY, February 25th, for a virtual event on ESG investing. ESG stands for Environmental, Social, Governance, and the term ESG investing includes these three central factors along with the usual financial factors in determining the investment merit of a company.

Albion has provided ESG investing opportunities to our clients since 2017 and as this type of investing gains more popularity and recognition, we are getting many questions about what ESG investing is and how it works. Thus came the inspiration for our spring #WOA event!

Albion’s Chief Investment Officer, Jason Ware, will join the Women of Albion to talk about ESG investing. This will be an opportunity to learn more about the type of companies that make the cut, why ESG investing is important to Albion, and how it can be a way to align your investments with your values.

Looking forward to seeing you on Zoom! Contact us to RSVP.

#esg #esginvesting #womenofalbion #albionfinancialgroup #womeninfinance #femalefinancialliteracy #environmentalinvesting


Conference Call Recording – November 5, 2020

Listen back to Albion’s November conference call.

  • 00:00  John Bird, President & CEO – Introduction
  • 03:27 Jason Ware, CIO – Markets & Economy
  • 11:54 Doug Wells, Partner – Planning Strategies
  • 26:09 Q & A
  • 27:28 How is potential regulation of “Big Tech” affecting our investments?
  • 33:23 What should I be doing to protect my portfolio in the context of so much ambiguity?
  • 41:21 Who can I talk to if I am anxious about my portfolio for any reason?
  • 43:18 With the ongoing pandemic and a potential change of president, are there investment changes I should make?
  • 48:48 Conclusion

Understanding Employee Stock Options

You’ve worked hard for your employer for several years and been rewarded with options on the company stock. Now stock options make up a large share of your wealth and you’re thinking it’s time to pay more attention. But what are these options worth and how should they be handled? As employers have grown more creative with compensation, questions like these no longer apply only to the executive suite. In many companies options are now available to employees of all levels and for some represent a substantial portion of their total compensation package. Understanding how stock options work, and determining how to maximize their value can be complicated. While employee stock options can be great wealth creation vehicles, understanding what they are and how they work will greatly increase the odds of a positive outcome.

Stock options grant the holder the right to purchase shares in a company at a specified price (exercise price) for a specified period of time (expiration). The aim of granting options is to incentivize employees; aligning their interest with that of the company. By doing so the company hopes to increase operational performance and thus profitability. There are two types of options awarded; incentive stock options (ISOs) and nonqualified stock options (NQSOs). The key difference between the two is how they are treated for tax purposes.

Incentive Stock Options (ISOs)
ISOs offer more favorable tax treatment than NQSO’s, taxing the gain on the sale of the underlying shares at long-term capital gains rates if the holding rules are correctly followed. There are two important holding periods to meet the holding rule requirement. The first holding period begins with the grant date of the option. The option holder must wait at least two years from the grant date prior to selling the underlying shares in order to have the gain taxed at long-term capital gains rates. The second period begins when the stock is transferred to the employee. In order to receive long-term capital gains treatment the shares must be held for at least one year following the date the stock was transferred. If the two holding periods are met then the gain will be considered long-term. Be aware that ISO’s are an alternative minimum tax (AMT) preference item and in certain circumstances can trigger AMT.

Nonqualified Stock Options (NQSOs)
NQSOs are less tax favorable, but are more commonly used as they are not subject to the same restrictions on issuance as ISO’s. When a NQSO is exercised tax is due at ordinary income rates on the difference between the exercise price and the value of the stock at the time of exercise. The exercise price becomes the cost basis for the position going forward. When the shares are eventually sold they will be subject to short-term or long-term capital gains based on the length of the holding period from the time of exercise.

Option Risks
Stock options are a great way to build wealth and over time may come to represent a large share of one’s net worth. However there are risks. First and foremost is concentration. Not only does the employee rely on the company for income but he also depends on the ongoing success of the company if his net worth is to be maintained. A failure of the company is a double whammy; the income is gone and the stock option assets on his personal balance sheet have greatly diminished in value. It is important to sensibly diversify the balance sheet from time to time to avoid having all eggs in one basket.

Exercising Options
The method used to exercise options can also have unintended consequences. In the late 1990’s many technology and internet based companies experienced substantial stock price appreciation. Employees of these companies were suddenly wealthy and exercised their stock options. Given the strength of the companies in the market many employees chose to hold the shares for further appreciation. When the bottom fell out and the share prices dropped these same employees discovered that their tax bill, based on market price at exercise, was greater than the now depressed value of the shares. There were many variations on this theme but the net result was the same; when the share prices plummeted the option value disappeared and the option owner found himself with liabilities but no assets left to cover them.

An idea often considered is to hedge the exercised shares by purchasing a corresponding put option while waiting for twelve months to pass in order to receive long-term gains treatment. Unfortunately this does not work. Such a strategy suspends the holding period in the eyes of the IRS and the holding period for capital gains purposes remains suspended as long as the put is in place. Fortunately all is not lost. With proper planning and a clear vision of what employee stock options can and cannot do an investor can design a strategy to protect against catastrophic downside loss while allowing participation in the ongoing success of the company. With a clear-eyed hard headed analysis the option owner can greatly increase the probability of meeting their long-term financial objectives.

Devin Pope, MBA, CFP / Senior Wealth Advisor
Albion Financial Group
(801) 487-3700


White Paper: Dollar-Weighted Versus Time-Weighted Returns – Should You Care?

Imagine; you invest $100,000 in a stock. Six months later you put another $100,000 into the same stock. Six months after that you sell all your shares for $300,000. After a few rounds of self- congratulation on your stock picking prowess you decide to calculate your return. You know you invested $200,000 and had gains of $100,000. Since your gain of $100,000 is 50% of the $200,000 invested your gain is 50%. While this is a straightforward calculation something doesn’t feel quite right. Should the fact that only half the money was invested initially with the other half invested midway through the time period cause you to adjust your calculation? In search of answers you go online and find two rate of return calculators. You enter your data and click to the answer. One says you earned 66%, even better than your own calculation had indicated. But the other says your rate of return was… Zero. Yes, zero. Something must be wrong. You recheck your data and determine that both answers are correct. Welcome to the exciting world of dollar-weighted versus time-weighted returns!

Ever since assets have appreciated people have worked hard to come up with methods to quantify their profit. At its simplest, the appreciation calculation is straightforward. Just divide the amount the investment appreciated by the initial value of the investment as in the example above where the $100,000 gain was divided by the $200,000 investment showing a rate of return of 50%.

However it starts getting a bit more complicated if during the period the performance is being measured money is added to or taken from the investment account. Dollar-weighted and time weighted return calculations are the two methods that account for cash inflows and outflows during the performance measurement period.

Let’s look at dollar-weighted returns first. While the calculation is straightforward the details are challenging. All you have to do is divide the gain by the average capital base. Gain is the amount left over after subtracting all the money put into the investment. Average capital base is a bit trickier; it is the sum of the initial investment plus or minus any funds added to or removed from the investment after the start date, adjusted for the time period the funds were in the account.

That’s a tough sentence; here is an example:

Suppose we start our investment account with $100. Six months later we add another $100. Six months after that we want to measure the performance for the previous 12 months. What is the average capital base? It is the initial $100 plus half of the second $100 added to the account, for a total of $150. Only half of the second $100 is included because it was only invested for half the period. If instead of adding funds, $50 had been removed from the account halfway through the performance period, the average capital base would have been $75; the initial $100 minus half of the $50 that was removed.

The advantage to the dollar weighted calculation compared to the basic calculation where gain is divided by the amount invested with no adjustment for cash inflows and outflows is that the dollar weighted calculation modifies the performance to reflect the gain relative to the funds actually available for investment.

Time weighted return takes dollar weighted returns one step further. In calculating time weighted returns, first you divide the performance period into smaller time periods; quarters, months, weeks and days are typical. Then for each of these smaller time periods a dollar weighted return is calculated. Finally, these smaller period returns are compounded to generate the time weighted return for the whole performance period.

Using time weighted returns further diminishes the impact of cash inflows and outflows on the actual return of the assets in the portfolio. A bit of math clarification is in order. When compounding multiple periods of return you must add 1 to each percentage number and then subtract 1 from your final result. Here is why. Suppose you are compounding quarterly and for three quarters in a row you earn 5% per quarter. Mathematically 5% is 0.05 so if we multiply 0.05 * 0.05 * 0.05 we get .0001, or one tenth of one percent. Whenever you multiply any number by a number less than 1 the product will be less than the initial number.

So here is what to do; add 1 to each percentage to be multiplied then subtract 1 from your answer:

1.05 * 1.05 * 1.05 = 1.16
1.16 – 1 = .16 = 16%.
5% per quarter compounds to a 16% total return after three quarters.

So which return calculation makes the most sense? It depends. The basic “gain divided by amount invested” calculation which does not take into account cash inflows and outflows provides the most clarity when you are trying to figure out how many more (or less) dollars you have than you did before investing. But it does not capture the impact of cash moving in and out of the investment account.

Dollar weighted returns capture more than just the return of the assets in the portfolio. They also give you a better idea of the returns earned on the money you had at risk. If your advisor helps you determine when to add funds to the account, or when it makes sense to pull money out, the dollar weighted return is more likely to highlight the impact of that advice. More typically, cash flows into or out of an account are driven by the client and are based on cash flow needs, savings strategy and other life events.

If you want to hone in exclusively on the impact of the investment decisions made within the portfolio then time weighted returns are likely the better measure. However most investors will find that investment portfolios experiencing large inflows and outflows will have time weighted performance that differs from managed portfolios that do not have such contributions and withdraws.

Of course if there are no cash inflows and outflows after the initial investment then all three performance calculation methods; gain divided by amount invested, dollar weighted, and time weighted, will show the same investment return. (great point …. Correct but not intuitively obvious).

Back to that opening problem; why did one performance method show a 66% return while the other showed a 0% return? Here are more details on the twelve months of investing. During the 12 month period the $100,000 investment lost half its value, to $50,000, in the first six months at which point an additional $100,000 was added. In the second six months the investment doubled in value so the $150,000 grew to $300,000.

First we’ll calculate the dollar weighted return which is the gain divided by the average capital base. The gain is $300,000 less the $200,000 that was invested, or $100,000. Next comes the average capital base. We had $100,000 for the full period and $100,000 for half the period for an average capital base of $150,000. $100,000 gain divided by the $150,000 average capital base is .666, or a 66.6% return. Not bad.

Next we’ll calculate the time weighted return and we’ll do it by calculating the dollar weighted return for two time periods and then compounding them. For the first six months the stock declined by $50,000 and the average capital base was $100,000 for a return of -50%. For the second six months the stock appreciated by $150,000 on an average capital base of $150,000 for a return of 100%. To compound these two periods we add 1 to each return and multiply them together:

First, add 1 to each period return;
1 – 50% = .5
1 + 100% = 2

Then multiply the adjusted return numbers together;
2 * 0.5 = 1

Finally, subtract the 1 from your result;
1 – 1 = 0 which equals 0.0%

Performance measurement should be a detailed and accurate exercise following prescribed performance calculation standards. Yet even when the calculations adhere to a standard the results can vary significantly depending on which performance calculation method is used. Next time you’re quoted an investment return you’ll know to ask a few follow-up questions to ascertain what the investment in question might have actually done for you.

John Bird, MBA, CFA, CFP / President
Albion Financial Group
(801) 487-3700