Ironwood Market Update – August 19 2019

Dear clients and friends,

The yield curve for corporate bonds has become almost completely flat. What this means is that a 5 year bond is yielding (paying) almost exactly what a 1 year bond is yielding. Normally, you would earn more interest for longer bonds than for shorter ones. Right now, this is not the case, at least on the bonds that we are using. This has happened because the longer bonds have gone up in price, driving the yield lower which is of course a good thing.

We will be selling these longer bonds and moving to shorter bonds. Ideally the yield curve will regain its normal shape or interest rates will go up, at which point we will buy those longer bonds back at a lower price and a higher yield. Since they are currently all earning the same amount, we won’t be giving up potential interest while we wait for this to happen. If interest rates fall farther, then we could miss out on some potential interest, but in our opinion that risk is low.

In the high yield portion of our portfolios, we will be likewise shortening our bond ladders both for this reason, as well as because of potential price risk if recession fears increase.

Overall this is NOT a big move, but we believe it will be a bit safer, as well as hopefully earn a bit more on the fixed income portion of our portfolio once this weird pricing corrects.

As always, please don’t hesitate to contact us with any specific questions or concerns you may have.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 15 2019

Dear clients and friends,

The stock market was shaken by an indicator called a yield curve inversion. What this means is that 2 year government bonds were paying a higher interest rate than 10 year bonds. This is unusual and fundamentally shouldn’t be. The theory is that there is more demand for long term bonds because of perceived short term weakness in the economy. This makes the price of the long term bonds go up, and therefore the yield go down.

The reason the market is concerned by this is that there is a high correlation between this indicator and a coming recession. This indicator does not have a 100% track record, however, and the coming recession that it has predicted in the past has taken as long as 2 years or more to come to pass. Historically, after one of these signals, the market drops about 5% and on average rallies about 17% after that, before falling due to recession. To me, that reads as if this is a bullish indicator at least in the medium term.

Another point to take into consideration is that the Fed is playing a huge role in artificially controlling interest rates. This makes any indicator based on these rates suspect.

Our plan at the moment is to wait and see how the market reacts until there’s a larger overall move. There have been some big days, but the overall move from the peak isn’t that big in terms of percentage points. If the drop continues, we intend to purchase more stocks, and keep a close eye on profits to see if a recession actually is looming. On the bond side, our bonds have gone up in value, so we will start leaning more towards the short end of our bond ladder and when interest rates climb once again, we will once again go longer.

As always, please don’t hesitate to contact us with any specific concerns or questions.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 2019

Dear clients and friends,

The last week or so in the financial markets have been a bit concerning. The stock market has taken a downward direction once again due to the China trade thing. Recently, the US imposed further tariffs on Chinese imports as a bargaining tool in upcoming talks. These tariffs effectively would make goods from China more expensive. In retaliation, China devalued their currency, thereby making goods from China cheaper to US consumers. From an economic theory perspective, both of these moves are negative. The change in exchange rate is particularly concerning because it raises a great deal of uncertainty as to future moves by China.

From a stock market perspective, we have two concerns. The first one is of course the uncertainty of more politically motivated moves that can affect earnings, and secondly the effect of the already made moves to the profitability of companies.

In my opinion, at least with companies that are US based and derive most of their profits in this country, the first concern is by far the bigger one. After all, as far as the US is concerned, Chinese imports were made both more expensive and cheaper by these two moves. Those moves are opposite and will to some extent lessen or even cancel the overall effect. The uncertainty factor, is as usual the thing that will make the market jump or tumble in the near term. Remember back to the 4th quarter of last year. There was a pretty big drop for no real reason, based on uncertainty over interest rates and the economy. That of course was short lived, as people came to their senses once they had reviewed the real economic data and not just acted based on speculation.

As of right now, we are in “wait and see” mode. It is very likely that all this is just political posturing as it has been the last half dozen times or so over the last couple of years and will just blow over. I do not believe that either the US or China will willingly scuttle its economy over this. It is very likely in the short term that there will be more of a downturn as speculators take advantage of investors’ panic. However, in the long term the market should realize the economy is doing quite well right now.

Finally, and most importantly, “Don’t fight the Fed.” The Fed just lowered interest rates, signaling it has its eye on the economy and is ready to continue its ridiculous level of stimulus if we show signs of economic weakness. Right now, 10 year treasuries are trading below 1.75% per year. Interest rates that low create a huge amount of upward pressure on the economy and the stock market. It is too soon in my opinion to do any large buys, but if this latest political fight pulls the market down significantly, we will be ready to buy.

As always, if you have any questions or concerns, please don’t hesitate to contact us about your particular situation.

What Financial Advisors to Avoid? – Choosing a Financial Advisor in Tucson, AZ – Part 5

Financial Advisors To Avoid In Tucson, AZ

In our final post on the subject it’s time to understand which financial advisors you should avoid, and how to find them.

It seems like everyone these days is calling themselves a financial advisor.

There’s everything from bloggers talking about retiring early or radio pundits, to insurance agents calling themselves full financial planners or “money coaches.”

It’s no wonder it’s confusing.

Probably the most common thing we run into is someone who recommends almost nothing but annuities (AKA an insurance agent), but calls himself a financial planner when in reality they’re anything but.

Which would you rather have?

An insurance agent who only sells insurance or annuities…

…or a financial advisor who’s legal obligation is to put your interests first?

When we tell people the difference, they usually request the latter.

That’s why it’s imperative that you learn to tell them apart, so you can know which ones to seek out and which ones to avoid.

The issue is simple: commission.

Some products pay far more commissions to an “advisor” than others.

Naturally, an advisor who bases their income on how much commission they generate will lean towards those products.

We met a lady whose late husband had been sold over a dozen different annuities.

Here’s why: Each of these annuities has a 10% free withdrawal privilege each year. This allowed her husband to take out 10% per year and do whatever he wanted with it.

What did the advisor recommend?

He recommended taking that 10% from each annuity, every year and using it to buy a new annuity…

It didn’t matter that the new annuity carried a brand-new, decade long surrender charge or that the client would now lose access to their money.

Do you think that was really in the best interest of the client?

To help you out to make sure you can tell different types of advisors apart, here are a few things to look for.

Earlier in our series, we have talked repeatedly about the word, “fiduciary.”

This is a great place to start.

Someone who is acting as a true fiduciary is going to have a really tough time justifying a high built-in commission.

In addition, insurance companies can hide their commissions so it’s hard to know they are there, let alone who actually ends up paying them.

It’s quite simple.

You do.

The insurance company isn’t going to take money out of its pocket to pay the advisor. That would hurt their bottom line.

So, whose bottom line do they want to impact?

Just because a salesperson isn’t a fiduciary, doesn’t by itself mean you can’t trust them.

For example, car salesmen aren’t fiduciaries.

Not all of them are out to harm the consumer. Likewise, there are good, ethical insurance agents.

People need life insurance…in some cases.

The problem is when you the only tool you have is a hammer…everything looks like a nail.

So you need to be able to determine who is actually a broad based financial advisor and who is just a guy with a hammer looking to solve every problem one way.

The first way to determine this is to look at their licenses.

If all a “financial advisor” has is an insurance license, then that’s all he can sell you. I would avoid people who call themselves advisors who can only sell one type of product.

If you look deeper into the licenses a person holds, you get more insight into their structure and what they can sell.

For example, someone who holds a series 6 or 7 license is going to be a commission based broker, whereas someone who holds a series 66 is going to be fee based.

Again, those advisors who are commission based are held to a different standard of what they can sell you as opposed to those who are fee based. They also have different incentives.

The company an advisor works for also tells you something about him.

For example, someone who works for Northwestern Mutual is likely going to recommend Northwestern Mutual products over anyone else’s.

This is also the case in many big names such as Merrill Lynch.

I had an account with them when I was in college. All they recommended were Merrill Lynch branded mutual funds.

Banks are often the same way.

There is no one company that has the best products in all the different sectors of investing. If there were, no other companies would exist!

So why would you lock yourself into one brand of products by choosing an advisor who works for a company that has its own products?

That’s a clear conflict of interest on the part of that advisor.

In the end, remember the tips we went over in the entire series:

  1. Do your research.
  2. Understand the Designations
  3. Ask the right questions.
  4. Decide if you really need an advisor in the first place!
  5. And make sure to avoid anyone with a conflict of interest to your future.

Hopefully these tips will help you feel more confident in choosing the right financial advisor for you.

And if you want to see how we think a financial advisor interview should, then interview us and then go meet a few others.

If they pressure you and don’t allow you to go home and think about it, before making a decision?

Then maybe it’s time to work with someone who will.

Sincerely,

Alex Parrs

Do You Really Need a Financial Advisor? – Choosing a Financial Advisor in Tucson, AZ – Part 4

CHoosing a Tucson Financial Advisor - Do you need one.

Do you really need a Financial Advisor? In this guide we’ll help you find out when and when not to start looking.

You’re about to retire and your 401(k) and other investments have grown over the years to where you think you’ll have enough to retire comfortably.

You’ve talked to a few friends who have retired recently and they’re telling you great things about the financial advisors they hired to help them manage their funds in retirement.

But one question keeps, going through your mind, “Do I really need a financial advisor?”

Watch this to find out.

I will be the first to tell you that not everyone needs a financial advisor and that it really depends on your situation.

Let me start with a few examples.

I recently met a couple who had built a nice bond ladder and were simply living off the interest. There weren’t any moving parts, and nothing needed to be changed. Why bother paying an advisor?

It’s hard to generalize, but I will try to give you some useful examples of people who probably don’t need an advisor.

Reason 1 – When your main asset is a pension.

Probably the most obvious couple who didn’t need an advisor was a pair of retired teachers from the Midwest.

They had very little in their retirement accounts but had great pensions. With their guaranteed monthly incomes, there was no way they were going to run out of money. And as a bonus, they could even handle costs associated with a health issue purely from their pension income alone.

Their accounts weren’t of a significant size for them to need a manager so we give them some free advice and sent them on their way.

Reason 2 – The Passionate Investor

We have run into countless people who really have a passion for managing their own money.

They come in because a friend or a relative tells them they have to, but they truly enjoy doing the research, staying up with current financial markets and trends and spending the time to learn what they need to know and implement every day, week or month. For the most part these people don’t need a financial advisor.

There are two important exceptions here.

The first one is that you need to be very careful where you do your research, and don’t just stick to one source. Clients are constantly concerned and sending us doom and gloom articles from a “prominent financial expert” who was fined by the SEC for defrauding and misleading investors.

In my opinion, he and his firm haven’t changed their ways, so you really have to make sure you’re getting advice from the right source.

The second exception here is a tougher one to recognize and overcome.

That is emotion.

When faced by a crisis, will you make the wrong move with your finances?

The tough part is most people don’t or can’t know the answer to that one in advance. Another financial crisis will hit, and you might have been still working the last time one hit. Your mindset will be different ten years into retirement than when you were working. Before, you could simply delay retirement if you made the wrong call. Once you’re retired for ten years, it may not be possible to go back to work if your investments fall apart.

That’s why it’s critical you can control your emotions and that of your spouse when dealing with these potentially life-altering decisions.

Reason 3 – The Wealthy

I already talked about the people with a big pension and little assets, but oddly enough, you can also argue that people with huge amounts of assets don’t need a financial advisor.

If you have enough saved and a modest enough lifestyle that there’s no possible way you could run out of money, then a financial advisor is not necessary.

Even if you’re so bad at making investment choices that your portfolio loses money every year in retirement, you could be rich enough that it simply doesn’t matter. Of course, your heirs might prefer it if you hire a competent advisor but at that point, it really comes down to what you value most. If you want to make sure you leave money to your children, then it can definitely be a positive to get a second opinion.

If you do all the right research, find yourself to be qualified to manage your income stream in retirement, and feel confident that you can go it alone, make sure to take a step back and ask yourself this question annually.

Am I prepared for things changing?

We actually have a retired Certified Financial Planner as a client because she recognizes that her knowledge is out of date since she retired and she can’t keep up with current markets and investment products.

In addition as some people age, their interest and ability to manage their finances might dwindle. Don’t do your family the disservice of not doing this analysis every year.

So, do you need an advisor?

In the end it really comes down to your skill level, how important your wealth is for your income, and your history controlling your emotions.

If you can manage all the above without a problem then you probably don’t need one.

If you don’t feel confident, have issues making decisions, and the market keeps you up at night and you want a guide. That’s when an Advisor really matters most.

And if you need to talk to someone who will give you an honest opinion? Then give us a call. That’s what being a fiduciary is all about. Putting your interests first no matter the situation.

Until next time,
Alex and Robin.

In the next installment in “Choosing the Right Financial Advisor for You,” we cover the advisors you should avoid and why we are so passionate about this.

See you there.

Tough Questions You Need to Have Answered First – Choosing a Financial Advisor in Tucson, AZ – Part 3

Choosing Fa-3

There are loads of articles out there about “questions to ask your financial advisor,” and those are really helpful. However, sometimes the tough questions are the ones that are the most important to get answered before you hire someone. Unfortunately, not everyone knows the right questions to ask. This can lead to some big mistakes.

Several years ago I ran into someone who had hired a financial advisor at a big bank. They had asked lots of questions about qualifications, the safety of the custodian, types of investments etc.

Unfortunately, the client didn’t ask was what brand of products the bank would invest their money in. The bank put all of their money into proprietary products owned and managed by the bank. A couple years later, the client wondered why his performance was lacking and realized that the bank hadn’t picked what they thought was best or even investments with the best track record, but rather what would make the bank the most profit.

This person’s theory was that you can’t go wrong with a brand name. While this might be true with tires, I would argue that bigger names in the financial advice industry actually have more conflicts of interest than smaller firms which can be bad for the client.

To help you out, here is a list of tough questions you need to ask. I call them tough questions because many financial advisors will squirm when you ask them.

Check out our video as well. In it, we go over some basic and some tough questions you need to ask.

The financial industry is REALLY good at hiding compensation. To me the first question you should ask is,

“How do you get paid?”

Don’t accept a vague answer to this one like, “I’m like a travel agent, If you buy this investment from me or straight from the company, there’s no difference, they just pay me a finder’s fee.”

You need to know whether the advisor gets paid on commission, by fee, or what?

“Do different products pay you differently or more?”

If some of the products pay the advisor more than others, how do you know you’re getting unbiased advice?

“Do you have proprietary products?”

I see this all the time. Someone has a portfolio with “insert big name investment company here” and every one of their holdings is in a company owned fund. There is no one company who is the best at everything in the investment world. That would be like saying Chevy makes the best pickup, sports car, hybrid, electric vehicle, midsize sedan, semi truck, etc. They may be great in one or two areas, but other companies are better in other areas.

“Are there any complaints about you or your firm?”

Just having a complaint against them should not disqualify an advisor. Even the best restaurants have negative reviews. However, you should be aware of the circumstances and the resolution of the complaint.

“What are your qualifications?”

The test I took that allows me legally to charge for financial advice took me less than a day of study to pass.

Just because someone is a financial advisor does not mean they know more than you. How do you know they’re qualified? In another article in our series, we go over some designations in the financial industry that show a commitment to further education in the field.

“How do you pick your investment recommendations”

If the guys back at corporate just make the recommendations and the advisor blindly follows them, what value really is the advisor? Why add a middleman?

“What is your investment strategy?”

This one makes me chuckle. A lot. More than half the people who come into my office with an existing advisor or doing it on their own cannot answer this question. And no, “To make money!” is not a strategy, it’s a goal. It’s like saying, “I’m going to Tahiti.” And not figuring out how to get there.

“Do you have sales goals/competitions/quotas?”

If your advisor will win an all-expense paid trip to an exotic island if they sell enough of product “X,” or if they don’t keep their job unless they make enough commission in a particular product every month, I would be very worried about how unbiased they will be.

“Are you acting as a fiduciary?”

This is a big one and in my opinion, it is the most important. A fiduciary has to put your interests ahead of his own and minimize conflicts of interest. It doesn’t mean they’re educated, or good at picking investments, but at least it means they’re on your team.

Even if you get satisfactory answers to these questions, it’s not unheard of for people to lie. Check out our other articles and videos for ways to double check these answers and make sure you can be confident of your choice of financial advisor.

In the next installment in “Choosing the Right Financial Advisor for You,” we cover some top questions you can ask potential advisors that will help you understand their business model and philosophy in detail.

See you there.

How Long Would it Take a CEO to Earn as Much as Kylie Jenner

I was browsing the internet and saw a great calculator:

“How long would it take me to earn Kylie Jenner’s annual pay?”

For those of you who don’t know, she’s part of the Kardashian clan. They’re famous for some reason or other.

I encourage you not to try one of these calculators. They’re pretty depressing.

It got me thinking though….How long would it take a Dow Jones CEO to earn as much as Kylie Jenner?

So I looked at Forbes and Yahoo Finance and some corporate filings to figure out how long it would take one of the CEO’s of the Dow Jones Industrials to earn as much as Kylie Jenner did in the 12 months ending June of 2018. According to Forbes, she earned $166.5 million over that period!

Not bad for a 20 year old.

The results are pretty amusing. It’s not quite fair since I used calendar year 2017 compensation for the CEO’s, so the timing is a bit off.

I did, however, include salary and stock options, so that gave the CEO’s a bit of a leg up.

The worst one I found was the CEO of Walgreens.

It turns out with a paltry 475k, Mr. James Skinner would take over 350 years to equal Kylie Jenner’s earnings! Assuming she works a standard 2080 hour year (40 hours per week,) then it would take her only 6 hours to earn as much as him!

The CEO’s of the companies that make up the Dow with 2017 averaged $16.43 million in compensation. At that rate, it would take just over 10 years to earn as much as she does!

That’s not good news for them since according to a Harvard Law School article, the average tenure of a CEO at large US companies at the end of 2017 is 5 years.

There is someone with some hope of catching her, and that is the CEO of JP Morgan Chase. Mr. Jamie Dimon, with 2017 earnings of almost $119 million. It would only taking him about a year and a half to make as much as she does. Way to go Jamie!

I have included the full list below and how many years it would take them to make as much as Kylie.

In perspective, it makes me think how we look at our own wealth.

Are we comparing it to the right measure or are we looking at it from an unrealistic lense?

Or are we not realizing our full potential with limiting beliefs?

Money is funny that way, isn’t it?

To your success,
Alex Parrs

Understanding Designations – Choosing a Financial Advisor in Tucson, AZ – Part 2

It’s time to understand what those letters at the end of an advisors name really mean and if they matter…

Would you blindly trust just anyone to operate on you?

I sure wouldn’t.

If I was going under the knife I’d want to check out the team who had my life in their hands.

  • I’d want to know if they were qualified?
  • Did they have a history of success?
  • Is this even their area of expertise?

I might be fearful before going under, but the last thing I would want to worry about is whether or not I trusted their skills…

Can you imagine getting put under with that on your mind? No thanks!

The test I took that allows me to legally give financial advice took me about 3 hours of study to be able to pass. That’s it!

Just like that, a few weeks out of college, with no experience, I was able to call myself a financial advisor.

It takes more to become a barber!

So how do you know that a financial advisor even knows more than you?

This is where what I call “alphabet soup” comes in. There are many non-required courses and tests that professionals can take to earn designations and learn more about financial topics. These designations show that they are serious about their career. Not everyone takes them, but those that do, are at proving and enhancing their skills.

There is a popular Ad that came out recently. You can see it here.

It’s the one where the CFP® board has a DJ present financial plans to people to see if they would let him manage their financial life. And guess what? People do!

Yes, you heard me right, a DJ.

The tagline at the end goes “If they’re not a CFP® pro, you just don’t know…”

That’s why we made this video. To help you understand that it’s your responsibility to do research on the advisor’s you’re interviewing to see their history and qualifications.

We’ve all heard the horror stories from friends and coworkers about terrible financial decisions they or people they know have. What’s worse, many were led to those decisions by financial “professionals” whose advice they trusted and followed.

That’s why you need to do your research and make sure they’re qualified.

Though it isn’t always that easy.

It can be difficult to find good insight into someone’s qualifications without knowing where to go.

For instance, at The American College you can see just a few of the many different designations available.

No wonder it’s confusing.

To make things worse, not all designations are equally respected, and they certainly don’t mean the same thing.

Open Book Testing? Really?

I recall a designation I pursued over ten years ago that was focused on working with people in retirement.

If you read the study materials and prepared for the test like you were supposed to, there was good knowledge to be gained that would help you make better decisions for your clients. Unfortunately, it turned out that the testing procedure wasn’t as stringent as it should have been and many people were not studying at all and in fact were taking the test “open book.” They just looked up the answers as they took the test without actually learning anything.

While I thought that designation was in fact useful for the knowledge I gained, the people who took the test open book had as much right to use the designation as I did, but without having the underlying knowledge. That designation was eventually discredited, and I don’t believe it exists anymore.

Designations to Look For

Of the more common ones are the CFP® or Certified Financial Planner, the CFA® or Chartered Financial Analyst, and the CLU® or Chartered Life Underwriter.

But what does that mean? As I said before, not all designations are created equal!

For instance, the Certified Financial Planner mark requires a bachelor’s degree, college level financial planning specific coursework, and a 6-hour long exam. It also carries an experience requirement of either 4,000 hours of apprenticeship or 6,000 hours of professional experience related to the financial planning process. That’s a pretty hefty requirement no matter how you look at it.

The CFA® or Chartered Financial Analyst is a globally respected designation that requires a bachelor’s degree, 4 years of financial experience, and 3 tests that require over 300 hours of study each. In addition, the first test is only offered in June or December, and the second and third ones are only offered in June. It takes a commitment of several years after college to earn this designation.

But let’s also look at the course explanations.

The CLU® is all about:

“Protect clients, their families, and their business with the premier designation for insurance professionals”

Versus what it says on the CFP® Board’s site:

“The CFP® Board Center for Financial Planning seeks to create a more diverse and sustainable financial planning profession so that every American has access to competent and ethical financial planning advice.”

One’s about insurance, the other about financial planning.

Yet both will often call themselves financial advisors…

That’s why we create blog posts and videos like the following: “Should you hate annuities or love them.” We want people to understand the difference between insurance focused “advisors” and professionals focused on financial planning.

Does that mean they aren’t qualified? Not necessarily. But to us it’s synonymous with the “Law of the Instrument” by Abraham Maslow.

If all you have is a hammer, everything looks like a nail…

Insurance commissions are often much larger than those on other investments… what do you think they will push?

But I digress, in my opinion, I would argue that in most cases, any designation is better than none.

But it’s time to do your research, know your advisor’s history, and not just hire the first one you meet.

Look around, meet many, and choose the right one for you.

In the next installment in “Choosing the Right Financial Advisor for You,” we cover some top questions you can ask potential advisors that will help you understand their business model and philosophy in detail.