Unless you manage to purchase an index fund that produces zero tracking error, at some point the investments you own will deviate from their associated benchmark. Whether it’s the tracking error of an index fund, or the relative under- or out-performance of an active fund manager, returns can vary over time. And while most of us don’t fret over small deviations from a benchmark – nor do we mind when the deviation is due to outperformance! – but at some point, a fund may underperform its relevant benchmark by enough, and for a long enough period of time, that you have to question whether it’s time for a change. But the caveat is… what IS a big enough underperformance deviation, and how long must it persist, before you actually do decide to make a change? What is the best practice for deciding when a fund has lost its Mojo?
It’s a general principle of economics that price is related to demand. The more you charge, the fewer will buy (or are interested in, or can afford) your services; the less you charge, the more buyers you can attract. The key, of course, is to price low enough to attract buyers, but high enough that your business is still viable and profitable.
Yet in the case of professional services, comparisons on price alone are often difficult, and other factors weigh into the decision; as a result, it’s difficult to easily judge who really has the lowest cost relative to the value they provide. From the business’ perspective, it is similarly difficult to judge where you should really set your price in order to keep your business viable and profitable, while not dissuading clients due to cost.
Accordingly, a recent study on fee-based advisors suggests that many may not have the equation quite right, and may in fact be leaving significant money on the table.Read More…
As the financial world grows ever more complex – and so too does the financial planning advice delivered to navigate it – it is sometimes difficult to keep a handle on the fundamental guiding principles that are the essence of good financial planning. Yet ultimately, some would make the case that if you can’t boil down the value you deliver and the basic tenets of your advice to a very concise statement, you haven’t really identified the essence of financial planning. So what would be YOUR basic financial planning advice, if you had to boil it down to only a sentence or two?Read More…
Although we may focus on various steps we can take to get a better return on our investments or a lower cost for our debt, in reality the most foundational base for financial success is having good financial habits.
Yet in practice – as we’ve all witnessed with clients – not everyone has already learned and embraced good financial habits, and even worse, it can be extremely difficult to change bad financial habits. On the other hand, the weight loss field is in a very similar position; just as the key to financial success is to save more and spend less (than you make), the key to weight loss is to exercise more and eat less.
So if it’s once again all about habits, maybe there’s something that planners can learn about helping clients with financial habits from weight loss experts who assist with other types of behavior and habit change.
With the Federal Funds rate as close to "zero" as it can feasibly get, it would seem that interest rates have only one directly to go: up. And given the mathematics of bond investing – as interest rates rise, bond prices fall – many advisors and their clients have decided that the only prudent course is to wait for rates to rise before investing into the bond markets. Yet the truth – as a recent white paper points out – is that there is a cost to waiting, in the form of earning lower returns while waiting for interest rates to rise. Which means to say the least, if you’re engaging in a strategy of waiting on bonds for interest rates to rise… you better be right about when and how much they actually do increase!
With the explosion of the internet over the past decade, raw access to data and information has exploded for the average individual, made even easier by the effectiveness of search engines like Google to filter through the volume to find the most relevant content. While most of us enjoy having the opportunity to dig into all of this newfound information, it does paint some potentially troubling implications for many professions, including financial planning, that have historically relied on the delivery of expert information as a core value proposition. If access to information explodes further in the next 10 years the way that it has over the past 10, will this force a change in the core value proposition of financial planners? What does it mean to be a financial planning expert if/when the internet makes all the "expert" information accessible to the average person?Read More…