Fee-Based Investment Management
We are proud to offer one of the first asset management programs in the securities industry; the Strategic Wealth Management (SWM) account. Through SWM, we can personalize your portfolio by choosing from among more than 10,000 no-load/load-waived mutual funds and Exchange Traded Funds (ETFs). The investment management and advice for this unique advisory account is provided through Dean, Jacobson Financial Services, A Registered Investment Advisor, and separate entity from LPL Financial. LPL Financial, the custodian for our SWM accounts, created this advisory platform to enable us to expand our independence and focus solely on you, our client, and your specific goals.
SWM also gives you access to individual stocks and bonds. SWM provides you with the assurance of knowing your goal and our goal is the same: the long-term growth of your assets. Instead of commissions*, you pay a low annual fee: a percentage of the value of your account. As your account grows and you are rewarded by its increased value, so too are we rewarded by earning your business long-term through our successful investment advice and value added services. As time passes and your needs or objectives change, SWM is designed to allow your assets to be easily rebalanced and properly reflect your appropriate, individually tailored investment portfolio. SWM also offers an easy way to follow your portfolio’s progress. SWM uses an easy-to-understand, consolidated quarterly statement broken down by asset class. This report offers clearly presented, consolidated information about all of your SWM investments. What’s more, it offers an excellent opportunity for you and us to review your investment mix and determine if it still reflects your long-term objectives. This flexibility, offered by the SWM program, is one of its most important features. It can help you meet your investment objectives today and in the future.
* Certain mutual funds available in the SWM program pay 12b-1 fees. Nominal transaction costs may occur.
Strategic Asset Allocation
We believe strongly in the time-tested investment strategy of Strategic Asset
Allocation. Asset allocation is the process of constructing a diversified portfolio from a wide range of different asset classes. An asset class is a broad group of similar securities such as corporate bonds, large company stocks, or foreign company stocks as opposed to a single stock or bond. Examples of other asset classes would include high yield bonds, small company stocks, U.S. Treasury bills, and real estate.
We believe the most important type of asset allocation is strategic asset allocation. This involves setting a long-term investment policy, establishing weightings for various asset classes, and making few changes over the short run unless there is a specific change in the investor’s objectives. We reject the strategy of “market timing,” as it attempts to predict and capitalize on short-term market swings by shifting the portfolio into specific, concentrated asset classes at certain times (particularly stocks) to improve returns. A key reason why market timers have had so little success over the long-term is the nature of stock market results: much of the appreciation comes in brief, unexpected bursts that catch investors off guard.
Although outguessing the overall movement of stock prices is an appealing and enticing concept, it has proven very difficult to do consistently in practice. It may seem simple to wait for a market downturn and then intuitively buy stocks after they start going back up; but distinguishing between a brief rally and a major turning point is often an exercise in frustration. The financial media are fond of highlighting the next supposed hot stock or asset class, but attempts to pick the best stocks or just the right time to invest are surprisingly unproductive.
With few exceptions, strategic asset allocation policy determines how well investors fare over time. Although no investment policy can guarantee success, strategic asset allocation can help enhance portfolio returns by reducing volatility.
Proper strategic asset allocation may also reduce risk. Academic research has demonstrated that the performance of different asset classes is not always closely related; some do quite well at the same time others are declining. Asset allocation strategies take advantage of this lack of correlation to build portfolios that are unlikely to have assets that all do well or poorly at the same time. As a result, a well-diversified investment account is less likely to suffer huge losses in an unfavorable market environment.
* Strategic Asset Allocation does not insure a profit or protect against loss.
Dynamic Asset Allocation
Over the past 20 years, we have witnessed two of the worst bear markets since the Great Depression. From peak to trough, the S&P 500 index lost over 50% of its value from 2000-2002 (often referred to as the “tech bubble”) and again from 2007-2009 (often referred to as the “great recession”). Regardless of the causes and the name tags, the reality is that even the best strategic asset allocations suffered significant losses because historically diversified correlations among so many asset classes moved closer to one during the extended major bear markets.
The resulting conclusion from those two historic market downturns was that diversification failed to work as good in practice as it did in theory… and at the worst possible time. Because of that, Modern Portfolio Theory (MPT) and its core component strategies, asset allocation and rebalancing – indeed, any investment strategy not involving cash in a mattress – came under attack. Long-term investment professionals like ourselves were even found asking: are we missing something? Our conclusion: even the best-designed MPT/asset allocation/rebalancing system is not infallible, which presents significantly enhanced risk to clients near or already in their retirement years.
From these experiences, combined with several years of in depth market study and research, we have determined that a second important type of asset allocation is essential for our portfolios: dynamic asset allocation; and we have added that into our models alongside our fundamental and foundational strategic asset allocation approach. Whereas strategic asset allocation continues its proactive approach by establishing long-term weightings of asset class allocations and staying fully invested through market ups and downs, dynamic asset allocation seeks to be more reactive to significant market movements, specifically attempting first and foremost to provide greater downside protection during protracted market declines.
First, to be very clear, we continue to disavow “market timing” as a reliable investment strategy. Dynamic Asset Allocation is not market timing. Market timing purports to replace a disciplined financial/economic theoretical framework with gut instinct and intuition. Unlike market timing, dynamic asset allocation is not a get-rich-quick scheme. Instead, it is a fundamentally sound, fully realized, not-get-poor-quick, risk management approach. It is an advancement of sound stewardship of client assets, consistent with our fiduciary duty to our clients. In short, our dynamic asset allocation strategies are designed to help when strategic strategies are most vulnerable – during periods of protracted market decline.
With today’s globally integrated economies, complex markets, and experimental policies being used by governments and central banks alike, we believe the unique combination of Dynamic Asset Allocation and Strategic Asset Allocation represents the next generation of investment risk management.
* Dynamic Asset Allocation does not insure a profit or protect against loss.
Everyone talks about risk in connection with investing, but few understand how to actually define it or measure it. An investor may know intuitively that “safe” investments like insured bank CDs* or Treasury bills** have “low” risk, or that stocks have “high” risk, but these are vague terms. Higher or lower than what? And by how much? And how does one calculate the risk for a whole portfolio containing different types of investments? We believe a more precise method of describing risk is a statistical measure known as “standard deviation,” expressed as a single number showing how results in a given period vary from a long-term average.
A low standard deviation number means predictable results (low risk); high standard deviation means unpredictable results (high risk). In the financial world, a low risk asset like U.S. Treasury bills has a long-term average return of 3.7% with a standard deviation of 3.1%***. One cannot precisely predict what Treasury bills will return two years from now, but there is a high probability (about two-thirds of the time) it will be in a range between 0.6% and 6.8% (3.7%-3.1%=0.6%, or 3.7%+3.1%=6.8%). A higher risk asset class like U.S. stocks has a long-term average return of approximately 11.8%, and a standard deviation of over 19%, meaning returns in any one year will most likely be between +31% and -7.5%, a much wider range of possible outcomes.****
Investors inherently don’t like risk; and insist on getting compensated for it. Investments that are the most unpredictable (the highest standard deviation) also have the potential to generate the most attractive returns over a long period of time. These would include aggressive growth stocks and foreign issues*****, for example. Investments with low risk (Treasury bills, bonds, etc.) produce lower returns, but usually with much greater predictability.
The purpose of strategic asset allocation is to quantify the risk associated with various asset classes as precisely as possible and construct a portfolio offering the best possible blend of investments to suit our client’s overall objective and risk tolerance. The role of dynamic asset allocation is to mitigate significant negative returns when markets move past their historical standard deviation measures.
There is no such thing as a single “best” asset allocation policy since investors have a wide range of objectives. The key, therefore, to assembling the appropriate portfolio for you revolves around a thoughtful and thorough discussion with our professional investment advisors of your financial goals, cash needs, investment experience, and tolerance for fluctuations in portfolio value.
* CDs are FDIC insured and offer a fixed rate of return, whereas the principal value of an investment in stocks fluctuates with market conditions.
** Treasuries are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and fixed principal.
*** Source: bogleheads.org – US Treasury Bills (30-year history)
**** Source: moneychimp.com – S&P500 (20-year history).
***** International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Taking in more risk does not ensure a higher potential return. Past performance is no guarantee of future results.
We believe that mutual funds represent the best method of active investing for most investors. We do not proclaim to be “stock pickers,” but instead realize our true role as financial advisors and wealth managers. The institutional money manager has a resource and knowledge edge that is significantly beyond what anyone in the [financial planning] business can bring to the table. Put a different way, it is inconceivable that someone who does something other than focusing on stock selection (which includes planners, most brokers, and certainly clients) and has far less resources than the professionals they are competing with, can look at a stock and presumably determine an inherent value. And, determine that, if that stock is bought, the market value is less than the inherent value and constantly re-evaluate that. In short, the “amateur” is not going to beat the professionals over the long run. This has been proven time and again through multiple studies.
Therefore, we spend our time and energy identifying mutual fund managers that have provided consistently strong performance year after year relative to a meaningful peer group and benchmark. Because of the media’s focus on each year’s hot funds, many investors never hear about the funds that provide this kind of consistent performance. Our research of mutual funds and managers is conducted using an extremely thorough and analytical analysis of a number of important factors. Mutual fund excellence means more than last year’s return — or even the last ten year’s records. It must take into account a much wider range of factors, including fund management experience, performance consistency, expense costs, and portfolio management discipline. Managers who have a clear philosophy and consistently implement it through a disciplined process are more likely to be able to replicate the results. If we change our opinion on a mutual fund, it is usually because of a fundamental change in the fund or its management, not simply due to a shift in short-term performance.
A short period of under-performance doesn’t always indicate the fund manager has lost his or her touch. It may, in fact, simply demonstrate that the fund manager remains true to the fund’s objective and style regardless of short-term changes to market emphasis. However, we do watch for several types of events — in conjunction with poor performance — that will merit an in-depth review of a fund. These primarily include:
- Change in fund management company ownership,
- New portfolio manager,
- Significant change in asset allocation,
- Substantial drift in investment style, and/or
- Sustained under-performance.
This comprehensive process illustrates our hands-on, active approach to mutual fund selection, which empirical data suggests, has had a positive impact on the long-term consistency of our clients’ investment portfolio performance. Keep in mind, however, past performance is no guarantee of future results.
In addition to active mutual fund managers, we also use exchange traded funds (ETFs). ETFs are passive “index” investments that allow intraday trading just like individual stocks and bonds. The ETFs we use are passive investments in that they do not have investment managers, but instead simply track a specified market index. Our goal with ETFs is to gain broad market exposure to indices. We use ETFs and the “passive” index investment strategy exclusively in our dynamic asset allocations.
As we do with almost every aspect of our business, we have from time to time cast critical eye upon our investment strategies. While we are happy with our current investment approach and its seamless fit into our wealth management practice, we are always looking for ways to improve and refine the investment services, products and strategies we provide to our clients.
We arrived at our current investment approach through an evolutionary process that continues today. We have created and modeled broad asset allocations that are used as a starting point for investing client portfolios. Currently, we use seven model portfolios, each composed with a combination of actively managed mutual funds (as described above) and index-linked exchange traded funds (ETFs)*. These portfolios range from balanced/conservative to aggressive growth with varying levels of tax efficiencies. Although ETFs and mutual funds may lose value, we believe that their breadth of diversification enhances the long-term success of our clients’ portfolios in both up and down markets.
While these models serve as base portfolios, each client account is unique because of inception date, cash flow, fund selections and specific client preferences. Lower-expense portfolios are also one of our strategic goals. Keeping an overall cost to the client (our fee plus the fees of the underlying investments) below that of the average investment advisory platform is paramount for long-term success and ultimate client satisfaction.
Through the use of ETFs for “core” positions inside the portfolios, the overall expense ratios of our portfolios can be lowered while providing exposure to a wide set of asset classes that are needed in order to achieve good risk-adjusted returns. As alluded to above, we also use actively managed mutual funds run by managers who have been identified as being capable of adding value in their respective asset classes and/or sectors. These “enhanced” portions of the portfolios provide the potential for positive performance during unfavorable market trends and more reasonably managed risk during market “bubbles”.
The specific allocation levels at which we incorporate ETFs versus actively managed mutual funds varies depending on existing market and economic conditions as well as the overall weightings between Strategic Asset Allocation and Dynamic Allocation. Core positions may be set using either, or a combination of both.
* Exchange Traded Funds (ETFs) are investment companies registered under the Investment Company Act of 1940 that offer shares that trade in the secondary market, including national securities exchanges. Currently, most ETFs invest in a portfolio of securities that closely tracks a specific index. Some ETFs are structured as open-end management investment companies and some are structured as unit investment trusts (UITs). Because ETFs are listed on exchanges, individual ETF shares can be bought and sold throughout the trading day at the current market price. Furthermore, ETF shares can be sold short and bought on margin.
A final method of investing used in and alongside our model portfolios is alternative investments*. These investments and strategies available through LPL Financial vary a great deal across a broad spectrum of alternatives including: hedge strategies, global real estate, commodities, master limited partnerships (MLPs), and business development companies (BDCs). Various mixtures of these investments are strategically used in our model portfolios with the intent of capturing positive returns while reducing overall portfolio volatility and losses due to their low correlation to other traditional portfolio allocations. In this area, we actively utilize our unique access to some of the most prominent alternative investment companies and institutional managers available in the world.
* Alternative investments include: commodities, financial derivatives, hedge strategies (or absolute return strategies), and real estate. These investments are supposed to have very low correlation with traditional investment products like stocks, bonds and cash. Certain investment interests may require investors to meet higher qualification standards to participate and may have less liquidity than traditional investment products. Some alternative investments can contain significant risks and conflicts of interest. Investors should have the financial ability and willingness to accept such risks associated with these investments. Investing in alternative investments may not be suitable for all investors and involves special risks such as risk associated with leveraging the investment, potential adverse market forces, and regulatory changes,. There is no assurance that the investment objective will be attained.
Client Portfolio Reviews
Our model client portfolios have behaved in a consistent fashion. All performance-based communication with our clients is educational and fact-based rather than promised-based. We explain to clients and prospective clients that our goal is to achieve risk-adjusted market returns in our client portfolios consistent with the clients’ goals and resources. The specific risk/return characteristics of each client’s portfolio are tied to the all-important selection of their strategic asset allocations.
That decision, made jointly between the client and advisor, is based upon risk preferences and financial planning outcomes. At each client review meeting, we provide reports that include net-of-fee returns and then compare those returns to wide variety of appropriate and relative market indexes and benchmarks. Setting reasonable investment expectations is paramount. The quality of these discussions can then be greatly improved as we spend more time on elements of our clients’ financial lives that they can control, or at least affect, and less time discussing performance from a perspective of hindsight biases and arbitrary measurements.