Howdy all! It looks as though spring has finally arrived in the Rocky Mountains of Northwestern Wyoming! This is always a wonderful time of re-birth and renewal. Before heading out into the great outdoors, you might consider giving your investment portfolio(s) some attention.
After a long period of minimal volatility in the markets, we have once again entered a period of higher volatility, which by the way represents more of the historical norm. This higher volatility is being driven by everything from the fear of a trade war to higher interest rates. Markets hate uncertainty, but uncertainty can create some attractive short term opportunities for longer term investors as assets are re-priced and multiples are compressed.
Before I move on into our topic of discussion this month, let me share a couple of terms and titles with you and their corresponding definitions. This should help to give you a better understanding of the information I’m about to share with you.
The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance.
The professional asset management of various securities and other assets in order to meet specified investment goals for the benefit of the investors.
A professional who is responsible for making investment decisions and carrying out investment activities on behalf of individuals or institutions.
Many portfolio managers started out as financial advisors, or research analysts, and then worked their way up. Portfolio management requires acute analytical skills and initiative. One must also be highly organized, detail-oriented, and be comfortable making big decisions for others. Making decisions with regard to other people's money is a demanding responsibility.
In the April issue, I spoke a little bit about mutual funds, the various share classes of funds and the costs associated with each. As I previously stated, mutual funds can be a good investment vehicle for a beginning investor, particularly if he/she does not have a large amount of capital to invest.
If however, one has significant investable assets, let’s say $250,000 or more, a mutual fund may not be the best option. It might be time for one to consider private portfolio management. This type of investment management is typically offered by a registered investment advisor rather than a broker. These types of portfolios are typically referred to, in the investment industry, as “managed accounts”. Rather than pay a transactional fee such as a commission or a “load”, a client with a “managed account” pays a percentage fee based on the amount of assets under management.
For example: A client with $1,000,000 in assets under management might pay 1% per year to have those assets professionally managed by an advisor or portfolio manager. This annual fee is typically broken up and assessed to the account on a quarterly basis. Under this arrangement, the client would pay no commissions, transaction fees, or any other fees for any investments bought or sold in the portfolio.
Because the fee is asset based rather than transaction based, there is no incentive for the advisor to purchase any investments for the client which are not in the clients’ best interest. When the client does well, the advisor does well. It’s that simple. This concept is further reinforced by the legal standard governing fee based “managed accounts”. The standard is known as The Fiduciary Standard which requires that advisors always act in the best interests of the client. Each and every investment decision, or recommendation, must be thoroughly analyzed to insure that it is solely in the best interest of the client.
A “managed portfolio” may offer other benefits beyond cost effectiveness. One of those benefits can be tax management. In a mutual fund, the shareholder has no input as to capital gains distributions, whereas with a privately managed portfolio, a client can work directly with the portfolio manager or advisor in order to maximize tax efficiency.
For example: The portfolio manager can sell, or hold off on selling, specific individual holdings in the portfolio in order to create a gain, or a loss, if it is in the client’s best interest.
Since “managed” portfolios are typically constructed with individual securities, and or exchange traded funds, they maintain a high level of liquidity. This means that assets can be sold quickly and accessed by the client in a short period of time if needed, without a penalty. Assets can also be added easily, at any time, without incurring a commission, load, or transactional fee. This particular benefit might be attractive to an investor who also invests in other asset classes, such as real estate. Over the years, he/she would have the ability to add assets to the “managed account” when real estate is sold, and have access to capital from the “managed account” to purchase real estate.
Some advisors act as a middleman and hire third party managers to manage their client’s portfolios. Other advisors serve as the portfolio manager, managing the assets themselves. If you are seeking the higher level of service that should come with a “managed account”, be sure to ask if your assets will be managed by the advisor you are hiring, or will he/she farm out your account to a third party money manager. In most cases, third party money management will increase, not decrease the management fee, since your advisor will want to be compensated on top of the portfolio manager’s fee.
One last thing to consider when choosing an advisor or portfolio manager. Does he / she work for a big investment firm, or are they an independent. Advisors who work for large firms are sometimes pressured to sell proprietary products and rely on the research produced by the company they work for. An independent advisor will not typically be in a position to be pressured by anyone to sell any particular investment or financial product. They are also free to conduct independent, unbiased research.
In the next issue, I will discuss actual portfolio construction, different asset classes, and different ways to mitigate risk.
The mutual fund business is a massive business. At the end of the year 2016, there were 16.3 trillion dollars in US mutual funds. Retail investors (i.e., households) held the vast majority (89 percent) of the $16.3 trillion in US mutual fund assets.
Although mutual funds are, generally speaking, are a relatively unsophisticated investment, they can still be very difficult to understand for the average person or investor. The different share classes offered by various funds alone can be confusing to an inexperienced investor.
For the most part, the only difference between each share class is the cost to the investor and the compensation to the broker. This, however, creates a confusing and sometimes misleading landscape for the investor.
Let’s go through the more common share classes of funds and outline what differentiates them from one another.
Typically carry an up-front fee (load) to buy into the fund. These loads can be as high as 5.75%. In addition, Class A shares may impose an asset-based sales charge (often 0.25 percent per year), but it generally is lower than the charge imposed by the other classes (often 1 percent per year for B and C shares).
Class B shares typically do not charge a front-end sales charge, but they do impose asset-based sales charges that may be higher than those that you would pay if you purchased Class A shares. Class B shares also normally impose a penalty, known as a contingent deferred sales charge (CDSC), which you would pay if you sell your shares within a certain period, often six years. For this reason, these shares should not be referred to as "no-load" shares. The CDSC normally declines the longer your hold your shares and, eventually, is eliminated. Within two years after the CDSC is eliminated, Class B shares often "convert" into lower-cost Class A shares. When they convert, they begin to charge the same fees as Class A shares.
Class C shares do not impose a front-end sales charge on the purchase, so the full dollar amount that you pay is invested. Often Class C shares impose a small charge (often 1 percent) if you sell your shares within a short time, usually one year. They typically impose a higher management fee than Class A shares and, since they generally do not convert into Class A shares, those fees will not be reduced over time. Additionally, in most cases, your total cost would be higher than with Class A shares, and even Class B shares, if you hold for a long time.
Class D and Class F Shares are usually no-load mutual funds. While no-load mutual funds do not charge “commissions” upon their purchase, there are ongoing expenses that are assessed to investors. These ongoing expenses vary for each fund. Class D and Class F share funds can be purchased at most discount brokerage firms through their “mutual fund supermarket” platforms. Many D and F share class funds pay an annual 12b-1 fee to the brokerage firm (not the advisor that may recommend the fund. No-load funds are often referred to as "investor shares" and do not always have a formal share class title. Therefore you won't often find a letter, such as A, B, C or I, at the end of the mutual fund name.
Institutional shares, often labeled as "Inst" funds, Class I, Class X, Class Y or Class Z, are generally only available to large (institutional) investors with minimum investment amounts of $25,000 or more. In general, institutional class mutual funds are better than other share classes because the lower expense ratios translate into higher returns for the investors because the fund is not withholding as much money for the purpose of paying the operating costs of the mutual fund.
Well, by now, you probably have a headache. My apologies if that’s that case. However, knowledge is power and education is important. Mutual funds can be a good investment vehicle for a beginning investor, particularly if he/she does not have a large amount of capital to invest.
If however, you have significant assets, a mutual fund may not be your best option. It’s possible to achieve adequate diversification and reduce fees with a portfolio of individual securities and or exchange traded funds. I will discuss these other options in greater detail in the next issue.
Risk is a scary word to most people. However, just as taking too much risk can cause you great heartache, so can taking too little risk. Let us begin by first defining “risk”, and then identifying some different types of risk.
Broadly defined, and in very general terms, risk is: “A situation involving exposure to danger. Exposing (someone or something valued) to danger, harm, or loss.” With this having been established, let’s look at some potential risks associated with investing.
We have systematic risk, and then we have unsystematic risk. Systematic risk, sometimes referred to as market risk, or volatility, is the risk associated with an entire market. Systematic risk can be “managed”, or mitigated in part, by adding different asset classes into a portfolio: Asset classes that have a negative or minimal correlation to one another. Unsystematic risk is company or industry pecific risk. Unsystematic risk can be reduced by simply adding to the number of holdings in a portfolio.
Breaking down risk a bit further, we can identify specific types of risk that fall either on the Systematic risk side, or the Unsystematic risk side. Here are just a few!
Another risk that I would like to discuss with you, is the risk of not taking enough risk. I know it may sound counter-intuitive, but it is a real concern. With folks living longer into retirement, many into their 90’s, the possibility exists, of a retiree outliving his / her assets.
When approaching retirement, it is a good idea to consider meeting with an experienced Financial Advisor, in order to help you determine exactly how much income you will need in retirement.A good advisor will ask you detailed questions about your entire financial picture. A good advisor will listen more than he / she talks. Based on your responses to those questions, a good advisor will determine a suitable investment mix that is appropriate for your personal risk tolerance and time horizon; and that will serve to meet your long term investment and income needs.
Although past performance is no guarantee of future results, history has shown us that there is, indeed, a connection between risk and returns. In simple terms, the lower the risk, the lower the potential returns. The higher the risk, the higher the potential return / reward. It is this principle that drives the movement of the markets.
So the long and short of it, (pardon the pun) is; don’t take too much risk, but don’t get caught in the trap of taking too little risk either.
Another busy summer has come to an end in Cody Country and things are finally beginning to quiet down once again. Now is a good time to devote some extra attention to things that perhaps you have been ignoring, like your investment portfolio(s).
What does it mean to be proactive, when it comes to investing?
Being proactive requires diligence. At O’Donnell Wealth Management, we are constantly assessing economic trends, individual security and broad market technical indicators and fundamentals, geo-politics, interest rates and more. The markets are forward looking. The markets react now, to what they perceive to be the future, to a potential future. Therefore, Staying abreast of this information allows us to make informed decisions when managing our client’s portfolios. Portfolio management is both interesting and challenging because the markets are changing constantly, thereby always creating both risk and opportunity.
It is very important to understand what you own. I spend the extra time to provide my clients with education. One investment can act very differently from another to changing market conditions.
For example: The Federal Reserve and Federal Open Market Committee continue to signal their bias towards higher interest rates. This will undoubtedly have an effect on bonds and bond funds. Bond values have an inverse relationship with interest rates. As interest rates rise, the value of existing bonds in the market fall. This effect is most pronounced with bonds having long maturity dates. One way to be proactive might be to reduce your exposure to bonds with long maturities or bond funds that hold a significant amount of long bonds.
As a portfolio manager, I make regular asset allocation changes in my client’s portfolios as market conditions begin to signal a change. Asset allocation refers to the distribution of investments into different assets classes such as stocks, bonds, commodities, real estate etc. These can been broken down even more into sub-classes such as small cap, mid-cap and large cap stocks.
Managing the downside is very important. Having a disciplined approach to dealing with losses is very important. In the money management business we call this a “sell discipline”. Having a sell discipline is proactive investing. Take this simple example: If you own 100 shares of XYZ company at $100 a share, nd it goes down 50%, to $50 per share, how much does XYZ company need to go up before you are at break even again? The answer is 100%. So, although your investment went down 50%, it now needs to go up 100% before you begin to make a profit.
There is nothing wrong with being a do it yourself investor, so long as you know what you are doing, you have the time to do it, you want to do it and you have the emotional discipline to do it successfully.
As a professional portfolio manager, I have accepted many clients over the years that had enough knowledge to manage their own money, but simply preferred not to. Perhaps they had a medical practice, or owned a business and simply couldn’t dedicate the time to do it right. Maybe they realized that they had a tendency to succumb, all too often, to the emotions of greed and fear which can cause catastrophic financial decisions. Individual investors often get caught selling at the bottom of a market downturn, or buying at the top of an overvalued market. A professional money manager must be able to remove emotion from the decision making process when buying or selling investments.
Regular communication is another form of being proactive. We communicate with our clients regularly, not just to review their portfolios, but to stay informed about changes in their lives that may impact the way we manage their portfolio. It is important to plan for anticipated future events such as retirement, or a large expense such as a wedding or the purchase of car. It is also important to respond to life’s unexpected events and make the proper changes or adjustments to your investment portfolio(s), accordingly.
I had the sincere pleasure of spending some quality time with O'Donnell Wealth Management President Stephen O’Donnell Sr. and Office Manager Sue Jean O’Donnell at their Sheridan Avenue offices. I was very impressed with their rich careers and backgrounds and would like to share with you what I learned.
Some of us in Cody know Steve as a law man due to his service to our community and his contributions to law enforcement that go back nearly a quarter of a century.
I have learned however, and would like to emphasize, that his service of guarding and protecting our community just barely scratches the surface of who he is. I would like to share a few details of his diverse experience, personal strength and extensive knowledge in other areas – specifically the field of investment management.
Almost two decades ago Steve graduated from a two year training and licensing program at Merrill Lynch in just 11 months. He raised $22,000,000 in client assets while providing investment advice to high net worth private clients. Talk about an auspicious beginning to a career! In 2000 Steve was recruited by Smith Barney as a Second Vice President. During his 7 years at Smith Barney he worked as a Branch Manager and was named the number one performing portfolio manager in a complex of 5 offices, raising over $50,000,000 in client assets. In 2007 Steve was recruited by Morgan Stanley as a Vice President and Portfolio Manager. In the middle of the financial crisis of 2009 Steve made the bold move of going out on his own and founded O’Donnell and Associates, an independent asset management and financial advisory practice. He and his team provided full service asset management, retirement planning and estate planning services to a broad range of private and institutional clients.
After 17 years of living and working in New York, Steve Sr. and his wife of 30 years, Sue Jean, decided to return home to Wyoming in 2014. In 2015 they founded the investment firm of O’Donnell Wealth Management right here in Cody, Wyoming. Their elegant investment office sits at the heart of beautiful downtown Cody at 1306 Sheridan Avenue.
Not even four months after founding O’Donnell Wealth Management, Steve’s sister and nephew were murdered in a heinous act of domestic violence on February 9, 2016. Devastated by the murders and unable to continue on, Steve’s father took his own life on May 31, 2017.
"We forge on, we keep moving forward. Family is everything. It is important for families to stick together, in good times and bad and to work through any differences that may arise throughout the years. Life is short. My whole family lives here in Cody, in Wyoming, in God’s Country, the greatest State in the nation. I have too many people depending on me to withdrawal, to shut down, to give up. I am accountable to God, to my family, to my clients and to the community.” - Stephan P. O'Donnell Sr.
I can honestly say that I feel fortunate to have them back as neighbors.Please stop in and feel free to let them know that you do too. For investment management, financial planning, and estate planning services, please call: 307-586-4279 to et an appointment or simply drop by the office on Sheridan Avenue.
One of the more difficult responsibilities of being a business owner is managing a retirement plan for yourself and your employees. In fact, many business owners neglect or forego it all together. The daunting task of choosing the plan that best fits your needs, managing contributions and understanding IRS tax codes can be overwhelming. Some things you should know about the world of employer sponsored retirement plans include:
While one of the more commonly used plan types, a 401(k) may not be the best fit for you and your employees. There are many other options, such as, SEP and Simple IRAs, Solo and Roth 401(k)s, etc. Each with their own income barriers, contribution limits, tax benefits and flexibility for employee participation requirements.
Contributing to an employer sponsored retirement plan allows you to both provide your employees with added benefit, while removing a portion of your taxable income, lowering your tax liabilities.
Although many business owners act as their own Plan Administrators for their retirement plan, there are Third Party Administrators out there who are well versed with the intricacies of running various plans. They can navigate the, sometimes, confusing paperwork required to create your plan, as well as, serve the growing needs of your participants.
There are many dates, such as, contribution deadlines and Plan Restatement* that must be followed.
*The Pension Protection Act is public legislation that was enacted to protect retirement accounts and to hold companies that have underfunded existing pension accounts accountable. In 2006, the President signed an amendment to the original PPA in an effort to reform the pension system. The Pension Protection Act requires that all Qualified Retirement Plans restate the plan once every 6 years, starting in 2009/2010, among other legislation. After the most recent plan restatement, many plans are left out of compliance and in danger of losing their tax-sheltered status.
“Retirement Planning for Businesses” cont… (2)
Retirement plans offer a way for you to grow your money on a tax deferred basis. This means that while you are putting away money, your investment can grow without being taxed immediately. Ideally, taxes will be levied as you withdraw from the plan in retirement, when your tax bracket is lower.
This is where a Registered Financial Advisor can come in. As a business owner, you are already wearing many hats. Portfolio management does not have to be one of them.
O’Donnell Wealth Management is a financial planning and asset management firm located at 1306 Sheridan Avenue in beautiful Cody, Wyoming. For a no cost, no obligation, initial consultation, call 307-586-4279 or simply stop by the office Monday through Friday.