Will the Bull March On?

I’ve gotta say—I was a bit surprised by the opening life of Evan Simonoff’s column in the October Financial Advisor magazine. He said “Who among us (referring to the financial advisor community) really takes this 60% rally in equity prices seriously.” He then goes on to say its “remarkable” how many observers are convinced this rebound is for real. Evan’s column, The Long View, which I read most months, usually provides careful analysis to its arguments. However, this month I was a bit disappointed. Simonoff cites Liz Ann Sonders throughout the article who, it turns out, is actually pretty optimistic about the big market bounce. I didn’t find much if any of the solid data I would expect from an article which looks to support an overall bearish sentiment amongst advisors. Based on what I’ve been hearing at recent financial advisor conferences around New York City, the sentiment is anything but bearish. So let’s take a look at why some advisors might actually take this rally in equity prices seriously.

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Money Management Decisions for High Net-Worth Individuals

When I have new potential clients in my office, I’m always interested to see what their current financial advisor is doing for them. Needless to say, I’m frequently disappointed with the level of service standards (many differing markedly from my own) which some advisors display with multi-million dollar accounts. For example, mutual fund ‘wrap’ programs are very popular with the big brokerage firms. These are basically portfolios of mutual funds wrapped up in advisory platforms with annual fees. As popular as this platform is, I’ve shown clients how to reproduce a similar portfolio which strips out many of the fees and the actively-managed mutual funds. In my opinion, these wrap account platforms are often convenient and provide adequate diversification for many clients, but may not be the most cost effective way to invest. Obviously the money management business is competitive and for me, showing clients a potential method for reducing their costs and creating more efficient portfolios has generated considerable interest.

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The Changing Mindset of Variable Annuity (VA) Providers

A year ago it was hard for me to keep variable annuity (VA) wholesalers out of my office. The features offered by various insurance companies would change so rapidly that I’d have to take meetings to stay up-to-date.* There was essentially a competition between insurers to load more and greater guarantees onto their products to attract the most new money. But when the stock market started collapsing, the reaction by insurers was very interesting. You see, a large number of annuity contract holders never use the guarantees they pay for. The rider expenses and other fees paid by contract holders which provide them the peace-of-mind they are looking for also keep the insurance companies running profitable businesses. When many contracts became worth dramatically less than the initial premiums, insurers had to hope that there wasn’t a rush to exercise those income benefits, which could have potentially put some insurer’s VA divisions out of business. Not only was each insurer’s ability to ‘hedge’ well enough to pay their riders in question, but their overall balance sheets, in many cases full of bonds and other investments were also cracking at the same time. The snowball effect can lead to ratings cuts which ultimately leads to broken trust and confidence by investors.

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Interesting Mutual Fund Alternatives

When people refer to mutual funds they are most often referring to ‘open-end’ mutual funds in which investors buy and sell shares on a regular basis. Most mutual funds have active managers who, with their teams, make decisions as to the fund holdings which correspond to the fund’s stated objectives. These objectives are often growth, income, international exposure, etc. What many people don’t realize is that similar products exist which may be able to achieve a similar objective but at a lower cost. For example, closed-end funds are out there along with unit investment trusts.* Let me explain each:

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On Leveraged ETFs: Investors & Advisors

The craze of exchange-traded funds (ETFs) which employ leverage (the use of borrowed capital to increase the potential return of an investment) has been on a tear over the past year.* It makes sense that speculative investors would toy around with such vehicles given the extreme market volatility we’ve been experiencing of late. Combine that with the high level of conviction certain day traders have about which direction the markets will move in and when, and you can fully appreciate why the trading volume on these ETFs is so high. Leveraged ‘inverse’ ETFs are part of this craze as well, allowing investors to take bets against sectors of the market which they expect to decline. Just to be clear, these leveraged ETFs are designed principally for experienced investors who engage in market timing. They wouldn’t generally be suitable for an inexperienced investor or somebody who didn’t fully understand the characteristics, including the risks of the product. The financial advisor channel uses leveraged ETFs as well. In my practice their primary use is as a hedging tool to lock in gains or limit losses on certain positions at certain times. The function which they do not serve, and most advisors will agree on this, is as core portfolio holdings. More on that below:

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Is a Variable Annuity Right for You?

Welcome to one of the most misunderstood financial products out there. It’s no surprise how little most investors know about variable annuities because they’re extremely complicated and their explanations often come from insurance brokers and financial advisors who often don’t adequately explain their potential benefits and drawbacks. Over the past year variable annuity (VA) sales have skyrocketed as investors seek guarantees which may help them keep retirement plans on track.* So, who exactly is this product right for?

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