Brian Puckett – Brian Puckett's Blog

Tools to Help You Make the Most of Your One Financial Life

The typical financial advisor loves to focus on your investments—after all, most earn sales commissions for selling you stocks, bonds, annuities, or mutual funds.

But the team at Align Wealth Management seeks to take care of every facet of our clients’ financial lives, from cash flow to taxes, from insurance to estate planning and charitable giving. Simply put, we believe in treating you as a human being – not as an investment account. And we’re armed with the best tools and technology to make it happen.

Our cornerstone technology for comprehensive planning is a software suite called MoneyGuidePro. MoneyGuidePro helps us gather and consolidate your whole financial life in one place. With it, we—and you—can clearly see your current financial situation 24/7.

MoneyGuidePro clearly illustrates everything from your cash flow to your assets and liabilities. It tracks not just the accounts we manage, but also assets such as bank accounts and loans, all of which can be updated quickly. As a goals based tool, it also records your specific objectives, such as funding college, paying for weddings, buying a home or securing your retirement.

Our clients have direct access to this dynamic tool to ensure that are always on track through the financial planning portal on our website. That’s a big departure from past industry practices, when clients had to call their advisor every time they needed a piece of information. The financial plans themselves used to be paper-based, and often the size of a small phone directory! Now they are electronic and updated in real time. A living breathing plan. Real wealth management.

MoneyGuidePro is full of nifty features. Among them: the “Play Zone,” where you can use sliders to explore the probability of achieving your goals under different scenarios. You’ll see how entering different hypotheticals—saving more, earning different investment returns, retiring earlier or later—affects your statistical probability of success.

You can also learn the impact of higher or lower inflation, different life expectancies, or health-care expenses. In addition, MoneyGuidePro lets us simplify complex calculations to learn, for example, how and when you should claim Social Security in order to maximize your benefits. The more you know about possible future scenarios, the more you can prepare with confidence.

Our investment in technology like MoneyGuidePro reflects our commitment to not only empowering our clients, but also helping them master the many different areas of their financial life. So whether you need guidance on investing, or when to retire, or whether you can afford that big trip or purchase, you can rely on us. We have no financial incentive to focus only on a narrow part of your financial life. Knowing that we can help our clients succeed throughout their entire financial lives is why we love coming to work every day. We are Client Focused. Period.

Giving Clients a Fair Shake

As we’ve previously written, there’s a big difference between stockbrokers and true financial advisors. Brokers are salespeople: Because they’re paid to sell you investments or insurance, they operate under a continual conflict of interest.

True financial advisors, on the other hand, only sell advice, not products. Unlike brokers, they are what’s known as fiduciaries, meaning they must place clients’ interests ahead of their own. Align Wealth Management is a fiduciary firm.

There’s been a major development on this front. Early this month, the Department of Labor ruled that all advisors giving guidance to clients with 401(k)’s or IRAs must adhere to a more stringent “fiduciary” standard. This new rule, which goes fully into effect in 2018, is aimed squarely at brokers. For the first time, brokers will have to act more like true advisors.

At Align, we believe this is a step in the right direction. Consumers should never have to wonder whose interests their “advisor” is putting first. But the fact is that the new DOL rule is riddled with weaknesses. In fact, brokers will be allowed to continue many of the practices that should concern their clients. For example:

Taxable accounts aren’t covered. The DOL’s rule only applies to particular types of retirement plans. That means that brokers can continue to use the old, conflicted approach when advising clients about their taxable accounts.
Sales commissions will continue. Brokers will still be able to earn a payout for each sale they make. They’ll simply have to provide a contract stating that their advice is in their client’s best interests. This compromise allows the old, conflict-prone compensation model to remain in place.
Brokers will be allowed to recommend questionable products. The brokerage industry has drawn criticism for peddling wildly expensive annuities, mutual funds and other more complex products, even if their performance doesn’t merit their cost. Under the DOL rule, they will still be allowed to do this.

It’s important to note that the brokerage and insurance industries fought hard against the Department of Labor’s effort to impose its fiduciary rule. Complying with it will be expensive, and it will no doubt cut into their profits. Make no mistake, brokerage firms will adopt a higher standard of client care not because they want to, but because they’ve been forced to.

Align Wealth Management has always been a fiduciary firm. We chose this consumer-friendly model because we believe it’s important for clients to trust their advisors. Acting in clients’ best interest isn’t something we’re doing grudgingly, it’s our privilege. Caring for our clients in the most objective, ethical way possible is our core value proposition and our business mission.

Brian Puckett | JD, CPA, PFS, CFP®
13921 Quail Pointe Drive | Oklahoma City, OK 73134
T: 405.607.4820 | F: 405.294.3340
125 5th St. S. Suite 201 | St. Petersburg, FL 33701
T: 727.455.0033
Toll Free: 800.401.6477

SOCIAL SECURITY CLOSING A LUCRATIVE LOOPHOLE Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

Social Security pic — Social Security
Image: ssa.gov

If you’re planning for retirement, you should be aware of Congress’ recently enacted budget deal. Why? Because it eliminates a popular Social Security claiming strategy known as “file and suspend.”

File and suspend is essentially a way for married couples to squeeze the maximum amount of benefit dollars from Social Security over their lifetimes. In some cases, file and suspend is projected to add hundreds of thousands of dollars to a couple’s lifetime retirement income.

Before we go any further, it’s important to clarify that couples who already have the file-and-suspend strategy in place will not be affected by the new legislation. In fact, there is still a six-month window for couples who meet certain age requirements to use file and suspend before the law’s provisions take effect.

In the file-and-suspend strategy, the spouse who is the higher earner claims Social Security at his full retirement age—currently 66 or 67 based on the individual’s date of birth. The filer then directs the Social Security Administration to suspend his benefits immediately. The filing triggers the lower earner’s eligibility for spousal benefits, which are half of the amount of the higher earner’s benefit amount.

Why does the original filer suspend his benefits? Because Social Security rewards those who wait to take their benefits with what are known as delayed retirement credits. For every year after full retirement age that a person delays, their benefits grow by 8%, until age 70. The result is benefit checks that are ultimately much larger than they would have been.

Another advantage of file and suspend is that it boosts the lower-earning spouse’s benefit if the principal earner dies first. Specifically, the surviving spouse’s benefit amount is bumped up to 100% of the deceased spouse’s benefit.

Many in Washington saw the file-and-suspend strategy as a costly and unintended loophole in the system, and with the budget bill that President Obama signed on November 2, they have eliminated it. But couples can still benefit by coordinating their Social Security strategies.

These strategies revolve around the fact that Social Security’s system of delayed retirement credits remains in place. In most cases, couples will continue to benefit by having the higher-earning spouse delays filing to earn those delayed credits.

Particularly in today’s low-interest-rate environment, earning a guaranteed “interest rate” of 8% (the amount your benefit grows for every years of delay between full retirement age and age 70) can be an extremely good deal.

Bear in mind that your Social Security claiming strategy should be coordinated with your income from other sources. For instance, if you delay taking Social Security, you’ll need a reliable source of adequate income to get over the “gap” while you wait to start collecting those benefits.

If you’d like to discuss using your Social Security benefits and other sources of income to create a secure and comfortable retirement, please don’t hesitate to reach out to us. And if you think you may be interested in using the file-and-suspend strategy before the window closes on May 1, you should get in touch as soon as possible to allow enough time for planning and implementation.

http://www.alignmywealth.com/blog/76-social-security-closing-a-lucrative-loophole.html

Behavioral Biases: What Makes Your Brain Trick? By Brian Puckett, CFP®, CPA/PFS, Attorney at Law

In last month’s blog, we discussed the deep-seated “fight or flight” instincts that that trick us into making significant money-management mistakes. Now let’s take a look at a half-dozen of the behavioral biases that arise from our wiring, and how they can sabotage even the best-laid investment plans.

Behavioral Bias #1: Herd Mentality

Herd mentality is what happens to you when you see a market movement afoot and rush to join the stampede. The herd may be hurtling toward what seems like a hot buying opportunity, such as a “next big thing” stock. Or it may be fleeing a perceived risk, such as a country in economic turmoil. Either way, as we covered in “Ignoring the Siren Song of Daily Market Pricing,” following the herd puts you on a dangerous path toward buying high, selling low and incurring unnecessary expenses.

Behavioral Bias #2: Recency

Your long-term plans are also at risk when you succumb to the tendency to give undue weight to recent information. In “What Drives Market Returns?” we learned that stocks have historically delivered premium returns over bonds. Whenever stock markets dip downward, though, we typically see recency bias at play, as droves of investors sell their stocks to seek “safe harbors.” In a roaring bull market, they reverse course and buy.

Behavioral Bias #3: Confirmation Bias

Confirmation bias is the tendency to favor evidence that supports our beliefs over evidence that contradicts them. We watch news shows that support our belief structure; we skip over those that might challenge us to change our views. Of all the behavioral biases on this and other lists, confirmation bias may be the greatest reason why the rigorous decision-making approach we described in “The Essence of Evidence-Based Investing” is so critical. Without it, our minds will rig the game to support our beliefs—even when they lead to bad investment outcomes.

Behavioral Bias #4: Overconfidence

Garrison Keillor made overconfidence famous in his description of Lake Wobegon, “where all the women are strong, all the men are good looking, and all the children are above-average.” Keillor’s gentle jab actually reflects reams of data indicating that most people (especially men) believe that their acumen is above average. On a homespun radio show, overconfidence is quaint. In investing, it’s dangerous. The truth is that investors cannot expect to consistently outsmart the collective wisdom of the market, especially after the costs involved.

Behavioral Bias #5: Loss Aversion

Research has shown that we are significantly more pained by the thought of losing wealth than we are excited by the prospect of gaining it. As Jason Zweig, author of Your Money and Your Brain, states, “Doing anything—or even thinking about doing anything—that could lead to an inescapable loss is extremely painful.”

One way that loss aversion plays out is when investors prefer to sit in cash or bonds during bear markets—or even when a correction “seems” overdue. The evidence clearly demonstrates that you are likely to end up with higher long-term returns by at least staying put, if not bulking up on stocks after they have fallen & while they are “cheap.” And yet, even the potential for future loss can be a more compelling emotional stimulus than the likelihood of long-term returns.

Behavioral Bias #6: Sunken Costs

We investors also have a terrible time admitting defeat. When we buy an investment and it sinks lower, we resist selling until it’s at least back to what we paid. In a data-driven strategy (and life in general), the evidence is strong that this sort of sunken-cost logic leads people to throw good money after bad. By refusing to let go of losers (or even winners) that no longer suit your portfolio’s purposes, an otherwise solid investment strategy can be undermined.

There are many more behavioral biases, as detailed in Zweig’s and others’ books on behavioral finance. We recommend that you take the time to learn more. Understanding our bias can help us become more confident investors—and they’re likely to enhance other aspects of your life as well.

For more, please visit http://www.alignmywealth.com/blog

THE ESSENCE OF EVIDENCE-BASED INVESTING Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

In our most recent blog, “What Drives Market Returns?” we explored how markets deliver wealth to those who invest their financial capital in human enterprise. But, as with any risky venture, there are no guarantees that you’ll earn the returns you’re aiming for, or even recover your investment.
This leads us to why we so strongly favor what is known as evidence-based investing. Grounding your strategy in a rational methodology helps you best determine your financial goals—and it helps you stay on course toward those goals even when your emotions threaten to take over.
The origins of evidence-based investing stretch back to at least the 1950s, when scholars began studying financial markets to answer key questions such as:

• What drives returns? Which return-yielding factors appear to persist over time, around the world and across a range of market conditions?
• How do the return drivers work? Once identified, can we explain why particular return-yielding factors exist, and exactly how they work?

Meanwhile, fund companies and other financial professionals seek to translate this academic inquiry into successful investments. Their job: to capture the theoretical return premium in the real world, and to preserve it even after implementation and trading costs are factored in.

In any discipline—from finance to medicine to quantum physics—it’s academia’s job to discover the possibilities; and it’s the professionals’ job to figure out what to do with the understanding. It’s important to maintain the distinct roles of financial scholar and financial professional in order to ensure that each is doing what we they do best in their field.

In academia, rigorous research typically demands:

A Disinterested Outlook. Rather than beginning with a point to prove and then figuring out how to sell it, academic inquiry is conducted with no agenda other than to explore intriguing phenomena and report the results of the exploration.

Robust Data Analysis. The analysis should be free from weaknesses such as:
• Data that is too short-term, too small of a sampling to be significant, or otherwise tainted.
• “Survivorship bias,” in which the returns from funds that were closed during the study (usually because of poor performance) are omitted from the results.
• Apple-to-orange comparisons, such as using the wrong benchmark to evaluate a strategy’s “success” or “failure.”
• Insufficient use of advanced mathematics like multi-factor regression, which helps identify valuable factors within a confusing, noisy mix of possibilities.

Repeatability and Reproducibility. Academic research requires results to be repeatable and reproducible by the author and others, across multiple, comparable environments. This strengthens the reliability of the results and helps ensure they weren’t based on luck.

Peer Review. Last but not least, scholars must publish their detailed results and methodology, typically within an academic journal, so that their peers can review and their work. As is the case in any healthy scholarly environment, those contributing to the lively inquiry about what drives market returns are rarely of one mind.

So, it’s wise to step away from the popular financial media and take a look at academic research about the way investing really works. Wall Street’s message tends to be “invest with us and we’ll make you rich,” in a very short time horizon. Wall Street’s profit motives also affect which research it shows clients, because the primary purpose of Wall Street research is to sell you products.

Our evidenced-based investment philosophy comes from the academic world and is based on more than 87 years of investment results, not on what happened last year or even over the past few investment cycles. Academic researchers are motivated by truth – not what sells product. Academics strive to win the Nobel Prize – not the “top producer of the year award”.

In short, we firmly believe that an evidence-based approach to investing offers the best opportunity to advance and apply well-supported findings and strengthen your ability to build and preserve your wealth.

What Drives Market Returns?

By Brian Puckett, JD, CPA/PFS, CFP®
Align Wealth Management
www.alignmywealth.com
800-401-6477

In last month’s blog, “Get Along, Little Market,” we discussed the benefits of diversifying your investments to minimize avoidable risks, manage those that are unavoidable when we’re seeking market gains, and better tolerate market volatility along the way.

Our next topic: understanding how to build your diversified portfolio to effectively capture market returns. To do that, we must understand where those returns actually come from.

Market returns represent something deeper than the ups and downs of stocks and bonds. They are our compensation for providing the financial capital that feeds the human enterprise going on all around us.

When you buy a stock or a bond, your capital is ultimately put to work by businesses or agencies that expect to succeed at whatever it is they are doing, whether it’s growing oranges, running a hospital or selling virtual cloud storage. You, in turn, are not giving your money away: You mean to receive your capital back, and then some.

A company hopes to generate profits. A government agency hopes to fund its work with money to spare. Investors hope to earn generous returns. Now,
even if a business is booming, you cannot necessarily expect to reap the rewards simply by buying its stock. By the time good or bad news is apparent, it’s already reflected in share prices.

So what does drive expected returns? One factor is the acceptance of market risk. Stocks, as you may know, are often riskier than bonds. When you buy a bond:

• You are lending money to a business or government agency, with no ownership stake.

• Your returns come from interest paid on your loan.

• If a business or agency defaults on its bond, you are closer to the front of the line of creditors to be repaid with any remaining capital.

On the other hand, when you buy a stock:

• You become a co-owner in the business, with voting rights at shareholder meetings.

• Your returns come from increased share prices and/or dividends.

• If a company goes bankrupt, you are closer to the end of the line of creditors to be repaid.

In short, stock owners generally face higher odds of not receiving an expected return and of losing their money. While stocks are considered riskier than bonds, they have also tended to deliver higher returns over time. This outperformance of stocks is called the equity premium. The precise amount of the equity premium, and how long it takes to be realized, is never certain.

As the chart below shows, stock have handily outperformed bonds over time. However, they also have exhibited a bumpier ride along the way:

Exposure to market risk is among the most important factors contributing to premium returns. But it’s not the only factor. Next month, we’ll continue to explore market factors and expected returns, and discuss why our evidence-based approach is so critical to that exploration.

Get Along, Little Market

By Brian Puckett, CFP®, CPA/PFS, Attorney at Law

As we discussed in our previous blog, “Managing the Market’s Risky Business,” properly diversifying your investment portfolio helps to minimize unnecessary risks and better manage those that remain. But diversification provides us with an additional benefit: It helps to create a smoother ride toward our goals.

Like a bucking bronco, near-term market returns are characterized by periods of wild volatility. Diversification helps you “break” the horse. That’s important because, as any rider knows, if you fall out of the saddle, you’re going to get left in the dust.

When you crunch the numbers, we see that diversification helps to minimize volatility along the way to your expected returns. Imagine several jagged, upward trending lines on a chart; they represent several kinds of holdings. Individually, each holding has a bumpy ride. Bundled together, however, the upward trend remains, but the jaggedness along the way can be dampened (albeit never completely eliminated).

If you’d like to see a data-driven illustration of how this works, check out this post by CBS MoneyWatch columnist Larry Swedroe. http://www.cbsnews.com/news/how-to-diversify-your-investments/

A key reason diversification works is related to how different market components respond to price-changing events. When one type of investment zigs due to a particular news story, another may zag. Instead of trying to move in and out of investments as they zig and zag, wise investors remain broadly diversified. This increases the odds that, when some of your holdings underperform, others will outperform, or at least hold their own.

The results of diversification aren’t perfectly predictable. But it is a coherent, cost-effective strategy for capturing market returns where and when they occur, and it’s far better than guesswork.

The Crazy Quilt Chart is a classic illustration of this concept. It shows that there is no discernible pattern of how different asset classes have performed.

If you can predict how each column of best and worst performers will stack up in years to come, your psychic powers are greater than ours.

Diversification provides not only more manageable exposure to the market’s long-term expected returns, but also a smoother expected ride along the way. Perhaps most important, it eliminates the need to try to forecast future market movements—and that helps to reduce those nagging self doubts that throw so many investors off course.

In our next blog, we will pop open the hood and begin to take a closer look at some of the mechanics of solid portfolio construction.

For more, please visit http://www.alignmywealth.com/blog

Managing the Market’s Risky Business Part I

By Brian Puckett, CFP®, CPA/PFS, Attorney at Law

In last month’s blog post, “The Full-Meal Deal of Diversification,” we described how effective diversification means more than just holding a large number of accounts or securities. It means having efficient, low-cost exposure to a variety of capital markets around the globe. Today, we’ll expand on the benefits of diversification, beginning with its ability to help you better manage investment risks.

Most of us learn about risk even before we have the words to describe it. Our lessons start when we, say, tumble into the coffee table, or reach for that pretty cat’s tail. Investment risks, alas, are a little more complex. They come in two broadly different varieties: avoidable, concentrated risks and unavoidable market risks.

First let’s look at concentrated risks. They are the ones that wreak havoc on particular stocks, bonds or sectors. Even in a bull market, one company can experience an industrial accident (Exxon Valdez), causing its stock to plummet. A municipality can default on a bond (Detroit, LA) even when the wider economy is thriving. A natural disaster (Japan’s Tsunami) can strike an industry or region while the rest of the world thrives.

In the science of investing, concentrated risks are considered avoidable. Bad luck still happens, but you can dramatically minimize its impact on your investments by diversifying your holdings widely and globally, as we described in our last post. In a well-diversified portfolio, some of your holdings may indeed be affected by a concentrated risk. But it’s likely that you’ll have plenty of unaffected holdings.

For more, please visit http://www.alignmywealth.com/blog

Financial Gurus and Other Unicorns Part II

By Brian Puckett

Across the decades and around the world, a multitude of academic studies have scrutinized active manager performance and consistently found it lacking. Among the earliest such studies is Michael Jensen’s 1967 paper, “The Performance of Mutual Funds in the Period 1945–1964.” He concluded that there was “very little evidence that any individual fund was able to do significantly better than that which we expected from mere random chance.”

A more recent landmark study is Eugene Fama’s and Kenneth French’s “Luck Versus Skill in the Cross Section of Mutual Fund Returns,” from 2009. Fama and French demonstrated that “the high costs of active management show up intact as lower returns to investors.”

In the decades between those two studies, as 100 similar studies, published by a who’s-who of academic luminaries, have echoed the findings of Jensen, Fama and French. In 2011, the Netherlands Authority for the Financial Markets (AFM) scrutinized this body of research and concluded: “Selecting active funds in advance that will achieve outperformance after deduction of costs is … exceptionally difficult.”

Can hedge fund managers and similar experts fare better than mutual fund managers? The evidence suggests not. For example, a March 2014 Barron’s column took a look at hedge fund survivorship. The author reported that nearly 10% of hedge funds existing at the beginning of 2013 had closed by year-end, and nearly half of the hedge funds available five years prior were no longer available (presumably due to poor performance).

So far, we’ve been assessing some of the reasons it’s hard to “beat” the market. The good news is that there is a simple way to let the market do what it does best on your behalf. In our next few blogs, we’ll begin to explain how.

For more, please visit http://www.alignmywealth.com/blog

Financial Gurus and Other Unicorns Part I, By Brian Puckett

In our last blog, “Ignoring the Siren Song of Daily Market Pricing,” we examined how price- setting occurs in capital markets, and why investors should avoid reacting to breaking news. Now let’s look at why using a professional “pinch hitter” to try to beat the market is also ill-advised. In the words of Morningstar strategist Samuel Lee, managers who have persistently outperformed their benchmarks are “rarer than rare.”

As we explained in “Jelly Beans and Investing Wisdom,” independently thinking groups (such as capital markets) are better at arriving at accurate answers than even the smartest individuals in the group. Thus, even experts in analyzing business, economic, geopolitical or any other market-related information face the same challenges you do in predicting market behavior. For these experts, beating the collective group intelligence remains a prohibitively tall hurdle, especially when their fees are factored in.

But maybe you know of an extraordinary stockbroker, fund manager or TV personality who strikes you as being among the elite few who can make the leap. Maybe they have a stellar track record, impeccable credentials, a secret sauce or brand-name recognition. Should you turn to them for the latest market tips or should you pursue a strategy of capturing market returns with the least amount of risk, cost and tax?

Unfortunately, there is little credible evidence that hiring a stock picker/market timer is a good idea. In fact, the evidence to the contrary is overwhelming. Star fund managers often fail to survive, let alone persistently beat appropriate benchmarks. A 2013 Vanguard Group analysis found that only about half of some 1,500 actively managed funds available in 1998 still existed by the end of 2012, and only 18% of the survivors outperformed their benchmarks. Dimensional Fund Advisors found similar results in its independent analysis of 10-year mutual fund performance through year-end 2013.

For more, please visit http://www.alignmywealth.com/blog