Friday, March 15, 2013

A Letter To The Editor, March 2013...

The February 2013 issue of Financial Advisor magazine included an article entitled: “Avoiding the Next Train Wreck.” which discussed trend following techniques in a poor light (click the above link if you wish to read the original article).  I wrote a letter to the editor which was published in the March 2013 issue.
Financial Advisor, March 2013

I felt a reply was needed as there is much confusion on trend following and how it can be used to reduce risk in an investing strategy.  The full text is written below, OR just click the URL to be redirected to Financial Advisor's home page to read the article there.

The February 2012 issue of FA included an article entitled: “Avoiding the Next Train Wreck.”.  While I found portions of the article quite insightful, I walked away feeling that Financial Advisor did a disservice to its readers by publishing the article.

For full disclosure, our firm, Resnn Investments LLC, uses trend following techniques in our client’s portfolios and have been quite successful (for our clients) as a result. In fact, I am personally so convinced of our strategies’ long-term performance that I have invested literally all of my 401(k), IRAs and taxable accounts in the exact strategies our client’ portfolios are invested in. I am a firm believer in trend following and am not afraid to put my money where my mouth is as a result.

I have greatly enjoyed the author’s articles in the past and hope he keeps writing them, as I have always found them to be informative and educational, but this article had many portions that were misguided. In the beginning of the article, he admits his lack of knowledge on the topic. and his inexperience in technical analysis and trend following were apparent.

Trend following is not “market timing,” and comparing the two is like comparing value investing to distressed asset investing. They have similarities in that both strategies focus on undervalued securities/assets, but that is really where the similarity ends. The entire style, valuation techniques, liquidity concerns and purchase implementation are completely different, and in fact, taking the same approach from one style to the other would potentially have disastrous results.

I can only assume that as a result of this lack of knowledge, the article came across with a very skeptical tone on the use of trend following techniques in a portfolio, and borderline implying misleading activity on the part of trend following money managers. As a fiduciary, we all are expected to put our clients’ interests first and hold ourselves to a higher standard. There are, unfortunately, bad apples in every bushel, but to imply that trend following techniques are hocus-pocus or that advisors that employ TF techniques do not take their fiduciary responsibility seriously is simply inappropriate.

Many of the “buyer beware” comments expressed in the article are quite good to consider when performing due diligence on an investment, although they have nothing to do with trend following strategies specifically. They would apply to any investment, regardless of the style. I would hope that an advisor who is shopping for a new investment style for his or her client would “read the fine print” on performance results, know the assets under management, investigate the firm and key personnel, and have a strong understanding of how the strategy works. I also would hope that these standard due-diligence practices are all quite obvious to a discerning advisor.

Trend following is a risk-management strategy that, when used correctly, can be quite effective in producing alpha. Most important though, its focus is (as the author identified) on protecting a portfolio from strong declines, reducing the correlation with a traditional buy-and-hold style. In fact, our flagship fund, “The One,” only lost 1.89 percent in 2008 vs. the S&P 500 losing over 38 percent, a sizable difference for sure!

Making light of this “one-time fluke” as he implies is just improper, considering it has taken over five years for the S&P 500 to just get back to break even after the tremendous decline of 2008 (which it still hasn’t done). So while a buy-and-hold strategy has been steadily chugging along to get a client back to $0.00, a trend following strategy missed the large drop and since then has been taking part in the gains. In our case, we have returned 153 percent from January 2008 vs. almost breaking even. So, by controlling risk, you outperform over time. It is an odd concept to wrestle with, that taking a defensive role actually creates more alpha, but clearly at our firm it works.

In my opinion, of utmost importance to a fiduciary should be capital preservation, over and above market-beating performance in up years. Risk control is why all of our clients hire us; they expect that we will be there in volatile times to protect their investment from decline. 2008 wasn’t a fluke. Sharp declines happen every few years, whether they be 20 percent or over 90 percent (such as after the dotcom bubble), and our role is very clear in these cases.

There is so much distrust and dissatisfaction out there in the investing world and most of it has been created by our industry’s greed and laziness. Our focus needs to be on repairing that distrust with the public, and we do that by not only providing a quality service at a reasonable price, but also by not bad mouthing hard-working people that are helping our industry by protecting their clients and growing their net worth over time. We can look at each other as competition, or we can look at each other as having a common goal toward helping the mainstream public achieve their financial goals and protecting their assets during times of turmoil. We all have the same goal here, and as a result, we should work together to further our industry and repair the damage that has taken so long to create. There is so much retail money sitting out of the market as a result of this greed, and all of us working together to create value for our customers will over time result in these clients to trust the industry again.

Our industry is constantly evolving, and being on top of emerging technologies and available options (not that trend following is emerging, it has been around since the early 1900s) that can help our clients is an important part of this magazine’s purpose. As a result, I hope it will present ideas factually and with no bias so that the audience can make an informed decision as to how a particular strategy or technology can fit into their current infrastructure. This article fell short of that, in my opinion.

Oh and by the way, October 1987, two weeks before the big crash our strategy was in cash. We moved fully to cash on October 8, eight trading days before the dramatic decline. The signs WERE there and a well-developed system would have identified it and prevented the dramatic losses that most retail investors experienced. You say balderdash; I saw happy customers.

Randall Mauro, RIA
Resnn Investments, LLC
Denver, Colo.

Wednesday, March 13, 2013

Tax deferred investing ...

We just signed a deal with a new broker specifically to be able to use their product that combines the growth and protection of Resnn’s strategy with tax free growth (tax deferral on all gains).

It’s a fantastic solution to keeping the IRS from taking your gains each year … particularly if you do not qualify for a traditional retirement account OR are already of retirement age and want to continue with tax deferred investing.

A short summary of the benefits (and drawbacks) are listed below … if you are interested in hearing more, let’s setup a time to talk further as to how this will benefit (or not benefit) your particular situation. 

Since most of our clients’ annual income is too high to be able to qualify for traditional retirement accounts like an IRA) we have been actively looking for a tax deferred investing method to help grow their portfolio without incurring a tax hit every year on their investment.

And I am happy to report that we have found an amazing, very low cost solution that acts similar to the way a Traditional IRA works … but has literally NO maximum contribution amount.  So unlike an IRA where you can only contribute 5.5k a year, you could put literally millions of dollars into this account and it will grow completely tax deferred until you withdraw it.

What’s more, there is no surrender charge or fees to close the account, hold it for 6 months it grows tax free until you withdraw the money, hold it for 10 years … ditto, no restriction on how long you maintain the account.

One big caveat … Like a traditional IRA, if you withdraw the funds before you are 59 ½, the IRS will charge you a 10% penalty, but with the annual tax savings an early withdrawal could potentially still be less expensive depending on your situation.  Oh and … if you are over 59 ½ there is absolutely no penalty to withdraw the funds when you want. 

The beneficiary treatment at time of death is exceptional where it can keep growing for the beneficiary without tax consequences for many years.  This allows you to pass your estate down with very positive results for your heirs.

Also, this applies to Joint accounts and Trust accounts as well as individual accounts.

The fees are a little higher than our existing custodian, so we need to look at your individual situation to see if a change makes sense, but if you are looking for ways to grow your portfolio while deferring taxes this might be a great opportunity.

By the way, we are paid NO differently whether you decide this product is right for you or not, there is literally NO incentive for us.   And of course, this changes nothing on your existing accounts … we will only move accounts over to this new custodian if you find it makes sense for your particular situation.

This solution really provides the best of both worlds, Resnn’s market protection and growth, without the annual tax hits we previously dealt with.  The product is top notch and will help you put more in your pockets over time.

Let me know if you are interested in finding out more and we will set up a time to discuss the nuances.

Resnn Investments, LLC

Saturday, March 9, 2013

Can you really trust financial advisers? ... the conversation continues ...

Back in February I mentioned a worthwhile post at LinkedIn from the Society of Physician Entrepreneurs entitled, "Can you really trust any financial adviser or expert to put your interests first above their own?"  The conversation is still continuing and worth a renewed look if you have any interest ...

my first post can be found here

The LinkedIn post can be found here

I invite you to click here to comment on your own experience with a financial advisor along with your thoughts on how the industry can be improved.

== My latest comment on the SOPE discussion starts here ==
The truth is that all of us can agree that 98% of all Financial Advisors' out there are really doing the minimum "portfolio re-balancing" and generic mutual fund diversification.  I'm sure you will agree that the amount of potential clients we meet with that show us their current advisor's portfolio allocation is abysmal at best.  Most advisors' put their clients in 20 to 30 equity/bond correlated mutual funds and they give the client the assumption that they are protected from declines.  As we saw in 2008 when ALL world's equity markets declined 30 - 80% ... showing the masses that no matter where you were invested ... there was no protection.

A properly diversified approach involves investing in non-correlated assets / strategies ... which is something that is foreign to most advisors.

With all this said, I was on a conference call yesterday with a client of my who happens to be a 20 year veteran of the industry (a Financial Planner who manages over 1 Billion in assets) and he mentioned something insightful and related to our discussion.  He said ... he can't imagine starting a financial planning business in today’s market because there really is no chance for profitability until you get a sizable amount under management.  He mentioned in the olden days how they would sell loaded funds to get some initial profit and that got them over the initial hump until they built up their client base.  He said these days ... the chance of achieving profitability since fees are much lower is very difficult without a large number of clients under management.  And if you think about it ... he is partially correct.

1% of 1 million is only 10k, which certainly is A LOT of money, but to the advisor ... certainly not enough to pay his bills ... so unfortunately for most, it becomes a numbers game.  It becomes more important for him to get 50-100 clients than to service his existing ones.  The average financial planner has no more than 20 clients with less than 15 million in total assets, that’s 150k a year BEFORE expenses, taxes, etc …

I am by NO means trying to justify the lack of service or worse … giving clients a false perception of safety, and I am by NO means saying the industry should charge more, but I certainly can appreciate the dilemma. 

One could argue this is just simply supply and demand and the industry needs to shrink a bit to get the riff raff out ultimately creating a better product for the masses, but this solution also ultimately keeps the larger firms that are interested in keeping the status quo alive and well, and the smaller independent shops that might actually be in it for the love of helping people … out.

Lowering fees might not be the specific answer.  Having a higher end product that focuses on the client is certainly a good step … but one wonders based on what I mention above if this just isn’t possible based on the compensation structure and time it takes to truly deliver a quality product to their customers.

This is why I always encourage people to not focus on the fee specifically, but look at the end result … how much can this person make me AFTER fees.  If I pay more in fees, but he delivers more in performance AFTER fees … who cares what he charges in a sense …  We have become so fixated on low cost that I think we as a masses have forgotten to focus on quality.  This is the ole’ Wal Mart vs. the mom and pop store dilemma …

Bottom line … we all agree that the system is broken, but I’m just not sure if there is a solution which solves the long term problem??

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?

Wednesday, March 6, 2013

slow and steady wins the race ...

I received a question yesterday through email and thought I would answer it here since I'm sure others are wondering the same thing ...

the question was simple ... after going to cash two weeks ago and then the market stabilizing and having a nice up move from there, the person asked ... "Did you get back in to the market?"

The quick answer is ... "Yes … we went back in last week", but I felt a longer answer was appropriate here to help you understand our investing philosophy and strategy.

As you know when we take a very defensive approach to the investing in the market.  For us, the most important rule is to protect our clients’ original investment.  As a result there will be times where we exit the market out of caution and it keeps chugging higher and ultimately we miss some upside.  Over time these small fake outs (as I so fondly call them) ultimately are insignificant and our defensive postures works to our favor where we protect assets during volatile times and grow the account when the market is strong.

For our strategy … it is more important to miss a decline and as a result underperform occasionally during strong up markets, than take undue risk and enjoy the upside but also take part in the declines.

REMEMBER ... I am investing my own assets right next to our client's, investing the exact same way ... so protecting OUR capital is the utmost priority.  We we have declines, I feel the pain right next to you.

Whether our strategy makes sense to a prospective client really boils down to what is important to them.  We have found that most investors appreciate our cautious approach since protecting their original investment is the most important factor and outperforming the market in good times is secondary.  

Bottom line, I expect to see times like what we just experienced where we slightly underperform for a short period of time, but I have no issue with it since we are achieving our stated goal of reducing risk and protecting our clients assets.
If you have any questions or comments, as always I encourage you to reach out to me.  My door is always open.

Randall Mauro
Resnn Investments, LLC