Wealth Preservation for Anesthesiologists


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This publication reviews the key wealth preservation issues faced by anesthesiologists and it outlines a process to deal with those issues.

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Wealth Preservation for Anesthesiologists

  1. 1. Wealth Preservation for Anesthesiologists Helping You Make Informed Decisions About Your Most Important Financial Concerns Charles P. Boinske, CFA President Independence Advisors, LLC
  2. 2. “Go confidently in the direction of your dreams. Live the life you have imagined.” —Henry David Thoreau   2
  3. 3. M ost people do not invest their money simply because they want to see it grow. Instead, they have very specific goals in mind—to enjoy a particular lifestyle during retirement, for example, or to send their children and grandchildren to top universities. Some dream about traveling the world, while some envision making a significant difference in the lives of others through charitable giving. More often than not, people who invest have many goals—some short-term, some long-term and some that reach beyond their own lifetimes. As you look ahead at your own financial future, you no doubt are asking serious questions about the best way to proceed. Finding the optimal path is not easy. Changes in health care laws, competition and other forces beyond your direct control have made finding your financial path more challenging than ever. In publications for anesthesiologists, we present a range of key concepts that we believe you should consider as you address your financial concerns. With this knowledge, you will be in a position to take a thoughtful, comprehensive approach to your financial life and to achieve all that is most important to you financially. In this, our first publication, we address the top financial concern for most successful medical professionals: preserving their wealth. You have worked hard for your money, and you want to grow and preserve that wealth effectively so that it can serve you well in helping fulfill your goals. We earnestly hope that this guide will prove useful as you move forward in making the intelligent financial decisions that will take you in the direction of your dreams. Sincerely, Charles P. Boinske, CFA President, Independence Advisors, LLC 620 Lee Road Wayne, PA 19087 610-695-8070 800-588-1732 cboinske@independenceadvisors.com 3
  4. 4. Table of Contents Chapter 1: A Comprehensive Approach to Your Financial Life.................................. 5 The Five Major Areas of Financial Concern.................................................................... 6 The Wealth Management Approach������������������������������������������������������������������������������ 6 Chapter 2: Removing the Emotion and Tuning Out the Noise................................... 8 The Emotional Curve of Investing................................................................................... 9 Chapter 3: Four Important Lessons Investors Should Have Learned Since 2008.................... 10 1. f the capital markets are to function, I investors have to be rewarded for taking risks.������������������������������������������������������� 10 2. he market is a discounting mechanism. T Current risks are factored into expected returns.���������������������������������������������������� 10 3. Risk is higher and prices are lower during recessions.�������������������������������������������� 11 4. herefore, the expected return of risky assets T should be higher during recessions.����������������������������������������������������������������������� 12 Chapter 4: Five Success Drivers for Preserving Your Wealth.................................. 13 1. Create a Road Map������������������������������������������������������������������������������������������������ 13 2. Leverage Diversification to Reduce Risk����������������������������������������������������������������� 14 3. Seek Lower Volatility to Enhance Returns��������������������������������������������������������������� 15 4. Diversify Globally to Enhance Returns and Reduce Risk����������������������������������������� 16 5. Track Your Progress����������������������������������������������������������������������������������������������� 17 Chapter 5: Go Confidently Forward ........................................................................... 19 The Importance of Process����������������������������������������������������������������������������������������� 20 The Consultative Process������������������������������������������������������������������������������������������� 20 The Professional Network������������������������������������������������������������������������������������������� 21 Selecting a Financial Advisor�������������������������������������������������������������������������������������� 22 Five Questions to Ask Financial Advisors ������������������������������������������������������������������� 24 Chapter 6: My Path to Comprehensive Wealth Management.................................. 26 Chapter 7: Why We Specialize in Serving Anesthesiologists................................... 27 Chapter 8: About Independence Advisors................................................................. 28 Epilogue: What Most Advisors Won’t Tell You������������������������������������������������������������� 29 4
  5. 5. Chapter 1 A Comprehensive Approach to Your Financial Life As an anesthesiologist, you lead a busy life and must juggle multiple priorities and demands on your time. However, at the end of the day, you are the chief executive officer for your family, responsible for making the decisions that will determine whether or not you will achieve your financial dreams. To do so successfully, you need what every successful CEO has: a sound understanding of the challenges you face and a comprehensive approach for addressing those issues. For example, we recently helped a very successful new client who had spent the past 30 years building and running his practice. We brought his attention to the fact that his estate planning, risk management and investment portfolios needed better coordination. Only a comprehensive planning process could have identified the issues that he and his family faced. The good news was that all the issues were solved relatively easily with the help of the proper experts, and now our client is enjoying a very relaxed retirement. That’s not the case for everyone in health care. According to the health care recruiting firm Jackson Coker, many physicians who had planned to retire and see more of their families and grandchildren are still seeing patients. Of the 522 physicians who completed the online survey, more than half (52%) said their plans for retirement had changed since the onset of the recession. Of this group, which included physicians of all ages, 70 percent said they planned to work longer to make up for shrunken nest eggs. On top of investment losses and stagnant income, many physicians nearing their golden years have been hit hard by a depressed housing market. Keith Borglum, a California-based medical practice consultant, told Medscape Medical News that he’s had physician clients who retired in their late 60s before the recession but were forced to come back to work. “Most of them are mad as hell,” he said. What’s more, the need to postpone retirement can cause internal pressure in group practices that have preset mandatory retirement ages. Partners may not always allow physicians to work past the agreed-upon retirement age, because they’re delaying the progress of younger doctors who joined the group under the assumption that the most senior doctors would leave the group at a predetermined time. For anesthesiologists, the pressure can be even greater. According to Medscape, anesthesiologists are among the highest-earning professionals, yet a recent Gallup poll reported that slightly over 30 percent of anesthesiologists in active practice said they had no or minimal savings for their age and stage. What’s more, only about 15 percent of respondents believed that their savings were more than adequate. 5
  6. 6. Chapter 1 The Five Major Areas of Financial Concern For many anesthesiologists and their families, there are five major areas of financial concern: 1. Preserving your wealth. Your aim with wealth preservation is to produce the best possible investment returns consistent with your time frame and tolerance for risk. 2. Enhancing your wealth. Your goal here is to minimize the tax impact on your financial picture while ensuring the cash flow you need. 3. Transferring your wealth. This means finding and facilitating the most tax-efficient way to pass assets to your spouse and succeeding generations in ways that meet your wishes. 4. Protecting your wealth. This includes all concerns about protecting your wealth against catastrophic loss, potential creditors, litigants and identity thieves. 5. Giving your wealth away effectively. This encompasses all issues related to fulfilling your charitable goals in the most impactful way possible. None of these five areas of concern stands in isolation from the rest. Wealth protection, for example, is often intertwined with wealth transfer needs. And charitable giving can often support goals in each of the other four areas. To be most effective, you need to deal with each area systematically while maintaining an integrated approach to your overall financial picture. We call this “wealth management” in our business. Think of it in terms of how a general practitioner will call in experts and specialists to help a patient with complex medical issues. The Wealth Management Approach As you may have noticed, many financial firms these days say that they offer wealth management. The challenge is that the primary focus for many of these firms is investment management. They may offer a few additional services, such as college education planning and estate planning, but they lack the truly comprehensive tool set of wealth management. Without this complete tool set, there are areas of your financial life that may not receive the attention they need. To define wealth management, we use this formula: WM = IC + AP + RM The first element of wealth management is investment consulting (IC), which is the management of investments over time to help achieve financial goals. It is through investment consulting that we address the first key financial concern—wealth preservation. Astute investment consulting requires financial advisors to deeply understand each client’s most important challenges and to then design investment strategies that take into account the client’s time horizons and tolerance for risk. It also requires financial advisors to review not only clients’ portfolios but also their financial lives on a regular basis so that they can make adjustments to the investment strategies as needed. 6
  7. 7. Chapter 1 The second element of wealth management, advanced planning (AP), examines and manages all the issues beyond investments that are important to clients’ financial lives. We place these issues into four major categories: 1. Wealth enhancement 2. Wealth transfer 3. Wealth protection 4. Charitable giving As you will no doubt notice, these four areas of advanced planning align exactly with the four remaining key financial concerns we described above. In our experience, very few financial advisors address these four concerns in any systematic, comprehensive manner. Relationship management (RM) is the third element of wealth management. To effectively address their clients’ range of overlapping, frequently complex financial concerns, wealth managers build relationships within three groups. The first and most obvious group is their clients. It is only through solid, trusted client relationships that wealth managers can fully understand and help manage their clients’ needs effectively over time. Second, because no single financial advisor has all the knowledge required to manage the entire range of financial challenges, many wealth managers have a network of financial professionals they can call in on a case-by-case basis to help address specific client needs. Finally, wealth managers must be able to work effectively with their clients’ other professional advisors, such as attorneys and accountants. This collaborative approach leverages those advisors’ knowledge of a client’s financial challenges while helping ensure an integrated, holistic approach to the client’s finances. While our focus at this event is on the first element of wealth management—investment consulting to achieve wealth preservation—keep in mind that it is just one component of a comprehensive approach to your financial life. In the last section of this guide, we will describe what you should expect from a wealth manager who can help you make informed decisions about every aspect of your financial life. 7
  8. 8. Chapter 2 Removing the Emotion and Tuning Out the Noise These days, we are inundated with information from every direction. As an investor who wants to make astute decisions about your portfolio, you know about the sheer volume of financial data and commentary bombarding you from the Internet, television, newspapers and magazines. It can be extremely difficult—or even impossible—to sift out what is genuinely useful and leave the rest. It all begins to sound like noise. Unfortunately, it’s easy to get caught up in all that noise. Instead of using the information to make decisions thoughtfully and logically, we can get drawn into the emotion generated by the noise. And when people begin to base their financial decisions on their emotions, they very often begin to make mistakes. They chase hot stocks and market sectors while ignoring investments that are undervalued and poised to rise. They forget about risk and volatility. As a result, they often earn subpar returns that fail to help them achieve their financial goals. To help you understand how emotion can lead you to make investing mistakes, let’s look for a moment at what happens when you hear about a stock. If you are like many investors, you do not buy the stock right away. You have probably had the experience of losing money on an investment—an experience you did not enjoy—so you do not rush out and buy the stock immediately. Instead, you decide to follow it for a while to see where it goes. Sure enough, it starts to trend upward. Over the years, I have seen countless examples of wealth lost by chasing individual stocks. In fact, in the late 1990s and early 2000s, I sat on the NASD Board of Arbitrators. This was the governing body that regulated stockbrokers during the “tech boom” and eventual bust years. My role was to sit as part of a three-member panel and judge the merits of arbitration claims made by clients against their brokers. In many cases, it turned out that there was shared responsibility on the part of the client for the investment disasters. Most of the time, the scenarios were similar to the following. You follow the stock for a while as it rises. What’s your emotion? Confidence. You hope that this might be the one investment that makes you a lot of money. It continues its upward trend, and a new emotion kicks in as you begin to believe that this just might be the one. This new emotion? Greed. You decide to buy the stock that day. 8
  9. 9. Chapter 2 You already know what happens next. As soon as you buy the stock, it starts to drop. You are flooded with new emotions: fear and regret. You are afraid that you have made a terrible mistake. You promise yourself that if the stock just goes back up to the price at which you bought it, you will never make the same mistake again. You don’t want to have to tell your spouse or partner about it. You don’t care about making money on the stock anymore; you just want out. Now let’s say the stock continues to drop. Yet another emotion—panic—takes over. In your panicked state, you sell the stock at a huge loss. And what happens next? New information comes out and the stock races to an all-time high. (See Exhibit 1.) Exhibit 1 The Emotional Curve of Investing Many Investors Follow Their Emotions People may struggle to separate their emotions from their investment decisions. Following a reactive cycle of excessive optimism and fear may lead to poor decisions at the worst times. Source: DFA Emotions are powerful forces that sometimes cause you to do exactly the opposite of what you should do—in this case, buy high and sell low. If you were to do that over a long period of time, you would cause serious damage not just to your portfolio but, more important, to your financial goals. The good news is that there is an alternative to noise-based investing. By applying a handful of sound investing concepts to your portfolio, you can tune out the noise and remove the emotion from your investment decisions. These success drivers will help empower you as you move toward achieving consistent, long-term success in preserving your wealth. We turn to those concepts next. 9
  10. 10. Chapter 3 Four Important Lessons Investors Should Have Learned Since 2008 1. If the capital markets are to function, investors have to be rewarded for taking risks. The temptation is always to say, “It’s too risky now. I’m going to wait until things get better before I invest.” Unfortunately for investors, that strategy often leaves the best returns on the table. Why? Risk and reward are inextricably linked. However, not all risks are recognized as equal by the capital markets. The key to long-term success is to avoid the risks that do not offer an expected payoff and to embrace the risks that do. Academic research over the past 50 or so years has provided significant evidence that there are two basic types of risk—one to be avoided and one to be sought. Avoid risks with no expected return, such as: 1. Market timing 2. Stock picking Pursue risks with positive expected returns, such as: 1. Market risk 2. Value stock risk 3. Small stock risk If you avoid the former risks and embrace the latter, you will be well on your way to a successful long-term investment strategy. The evidence supporting this concept is overwhelming. 2. The market is a discounting mechanism. Current risks are factored into expected returns. Current perceived risks are already reflected in stock prices. If you see a news story about an investment risk, it’s already priced into the market. Therefore, the probability that you will be able to invest profitably based on an idea that you see on the news or read about in a magazine is very low. Instead, you should develop a long-term strategy that’s based on your needs and that is diversified broadly and rebalanced periodically. 10
  11. 11. Chapter 3 3. Risk is higher and prices are lower during recessions. Market Risk Premium Is Countercyclical Business Cycle Peak Trough Risk Premium The risk premium is the additional return an investor requires to compensate for the risk borne. Business cycle is a repetitive cycle of economic expansion and contractions. Peak is the high point at the end of an economic expansion until the start of a contraction. Trough is the transition point between economic recession and recovery. Many investors assume that stock returns follow the business cycle. According to this view, the stock market offers a higher expected return premium in a strong economy and a lower premium in a weak economy. (The market premium refers to the return of stocks over T-bills.) In reality, the market premium tends to run counter to the business cycle, as illustrated in the chart above. The premium is a function of how investors perceive their risk exposure in equities to be relative to “risk free” assets such as cash or T-bills. During recessions, as company earnings fall and investors become more risk averse, stock prices adjust downward, which raises expected returns. The possibility of earning higher returns compensates investors for choosing stocks over cash. Conversely, investors will accept a lower expected return when they regard stocks as less risky relative to cash (i.e., a lower market risk premium). This typically occurs when the economy is expanding and the outlook for company earnings is strong. As more investors choose to hold stocks, market competition drives up stock prices relative to company performance, which reduces expected returns. Investors should not attempt to time the business cycle. Economic performance is known only after the fact, while stock prices reflect the market’s view of future business performance. As new information becomes public, stock prices adjust to provide equity investors an expected return that matches perceived risk. Investors are best served by diversifying across many stocks, maintaining a long-term perspective and applying discipline throughout the business cycle. 11
  12. 12. Chapter 3 This is a critical concept. When everyone is negative—when the news is negative and when things just seem awful economically—risky assets offer the highest expected returns. 4. Therefore, the expected return of risky assets should be higher during recessions. This is the period when disciplined investors harvest the returns that give them the advantage over undisciplined investors. If you’d like to learn more about the relationship of risk to stock returns, there is no better place to start than the three-factor model of risk developed by Eugene Fama and Kenneth French, University of Chicago business school professors at the time and pioneers of Dimensional Fund Advisors. Much of their work is freely available on the Internet, or you can call us for more. In addition, we have a resources page on our website that has plenty of free reading materials on the subject. “A good advisor should provide the guidance that keeps you from making the mistake of acting out of greed or fear. That requires a disciplined and comprehensive process.” 12
  13. 13. Chapter 4 Five Success Drivers for Preserving Your Wealth If you examine your own life, you may find that it is often the simpler things that consistently work to help you achieve your goals. Successful wealth preservation is no different. However, as we have just seen, it is easy to have your attention drawn to the wrong issues. These wrong issues—the noise—can derail your journey. To keep on track, consider the following five success drivers as you make your decisions. Alone, each is a pearl of investing wisdom. Used together, they have the potential to maximize your ability to create and preserve wealth. It is important to note here that while these concepts are designed to maximize return, no investment strategy can eliminate risk—just as no medical procedure can completely eliminate risk. Whenever you invest, you have to accept some risk. It is also important to remember that you are responsible for reviewing your portfolio and risk tolerance and for keeping your financial advisor current on any changes that occur in either your risk tolerance or your life that might affect your investment objectives. Myth: It’s impossible to know what life will throw at you, so why bother? Fact: By clarifying your big milestones and investment goals, you will be ready to close the gap between where you are now and where you want to go. 1. Create a Road Map Only by knowing exactly where you are now and where you want to be in the future can you identify what you need to get you there. Start by assessing your current situation. Determine your net worth, your investable assets and any other financial resources that you may have. Next, clearly define your investment goals. These could include college expenses, retirement, travel plans and so forth. Specify what you will need and when you will need it. With these issues clarified, you will be ready to address the gap that exists between where you are now and where you want to go. This straightforward step is a critical part of any planning process. We recently helped a late-career anesthesiologist and his wife clarify their retirement goals in terms of income and lifestyle. Then we were able to create a checklist of issues that needed to be addressed between now and the anesthesiologist’s retirement in five years. This process brought their thinking into focus and helped them prepare psychologically for the new life stage of retirement. Determine how much of your income you can put toward your goals. Estimate the rate of return you will need to achieve on your investments to reach those goals. Consider how much risk you are willing to take, and align your strategy accordingly. Select the investment vehicles you will employ, and then implement your plan. 13
  14. 14. Chapter 4 This process may sound daunting, and many people, especially those with more complex financial situations, find the assistance of a financial advisor to be invaluable in creating their financial road maps. In fact, closely examining your current situation and creating a detailed investment plan should be the first steps that any financial advisor takes in working with you. Regardless of whether you create your road map yourself or consult with a financial advisor to create one, the road map will serve as a steady reminder of your goals and the clear-eyed decisions you have made to move toward your goals. Especially during times of market tumult, when the emotions of others are running high, this will help you maintain your deliberate approach. If you do choose to work with a financial advisor, consider a wealth manager who can assist you with your financial concerns beyond simply investments. In the next section, we will look at what you should expect from a wealth manager so that you can make an informed decision about choosing which financial professional to work with. Myth: Diversification will dilute the returns of a good investment, and my portfolio will be only average. Fact: The empirical evidence is overwhelming: Diversification is as close to a free lunch as you will find in investing. Eat as much diversification as you can. 2. Leverage Diversification to Reduce Risk Most people understand the basic concept of diversification: Don’t put all your eggs in one basket. That’s a very simplistic view of diversification, however. It can also get you caught in a dangerous trap—one that you may already have fallen into. For example, some investors have a large part of their investment capital in their employers’ stock. Even though they understand that they are probably taking on too much risk, they don’t do anything about it. They justify holding the position out of loyalty or because of the large capital gains tax that they would incur if they sold. Or they imagine that the company’s stock is about ready to take off. Often, investors are so close emotionally to particular stocks that they develop a false sense of comfort. Other investors believe that they have effectively diversified because they hold a number of different stocks. What they don’t realize is that they are in for an emotional roller-coaster ride if these investments share similar risk factors because they belong to the same industry group or asset class. “Diversification” among many companies in the same industry is not diversification at all. But truly diversified investors—those who invest across a number of different asset classes— can lower their risk without necessarily sacrificing return. Because they recognize that it’s impossible to know with certainty which asset classes will perform best in coming years, diversified investors take a balanced approach and stick with it despite volatility in the markets. 14
  15. 15. Chapter 4 As shown in the chart below, being reactionary rather than strategic can hurt performance. Performance of the SP 500 Index Daily: January 1, 1970 to December 31, 2012 $58,769 $52,702 Growth of $1,000 $38,212 $22,191 $13,999 $9,195 Total Period Annualized Compound Return Missed 1 Best Day Missed 5 Best Single Days Missed 15 Best Single Days Missed 25 Best Single Days One-Month US T-Bills 9.94% 9.66% 8.84% 7.47% 6.33% 5.30% Performance data for January 1970 to August 2008 provided by CRSP; performance data for September 2008 to December 2012 provided by Bloomberg. The SP data are provided by Standard Poor’s Index Services Group. US bonds and bills data © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield) Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. Information contained herein is compiled from sources believed to be reliable and current, but accuracy should be placed in the context of underlying assumptions. This publication is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. Past performance is not a guarantee of future results. Unauthorized copying, reproducing, duplicating or transmitting of this material is prohibited. Date of first use: June 1, 2006. Myth: Volatility isn’t necessarily bad for investors. It just means the ups and downs are greater, with some nice buying opportunities on the dips. Fact: Research shows that with everything else being equal between two portfolios, the one with lower volatility will have a higher compound return—and less emotional stress—for the investor. 3. Seek Lower Volatility to Enhance Returns If you have two investment portfolios with the same average or arithmetic return, the portfolio with less volatility will have a greater compound rate of return potential. This means that you want to design your portfolio so that it has as little volatility as necessary in order to help you achieve your financial goals. Why is this the case? Assume that you are considering two mutual funds. Suppose both have had an average arithmetic rate of return of 8 percent over the past five years. How would you determine which fund has performed better? You would probably expect both to have the same ending wealth value. However, this would be true only if the two funds have had the same degree of volatility. If one fund is more volatile than the other, the compound returns and ending values will be different. This illustrates the mathematical fact that the investment with less volatility will have a higher compound return potential. 15
  16. 16. Chapter 4 You can see in Exhibit 2 below how this works. In this example, two equal investments have the same arithmetic rate of return but have very different ending values because of volatility. Exhibit 2 Less Volatility = Greater Wealth The Impact of Volatility Impact on a Hypothetical $100,000 Portfolio Year 1 Return Year 2 Return Average Return Compound Return Value at End of Year 2 Portfolio #1 50% -50% 0% -13.4% $75,000 Portfolio #2 10% -10% 0% -0.5% $99,000 Myth: Investing in overseas markets is too risky for me. Their currencies, political structures and markets aren’t as stable as ours. Fact: While the U.S. stock market is the largest in the world, it accounts for less than half of the total investable capital market worldwide. Overseas markets allow you to invest in high-performing global companies and better diversify your portfolio. U.S. markets and international markets generally do not move in tandem. 4. Diversify Globally to Enhance Returns and Reduce Risk Investors in the United States tend to favor stocks and bonds of U.S.-based companies. For many, it’s much more comfortable emotionally to invest in firms that they know and whose products they use than to invest in companies located overseas. Unfortunately, these emotions are causing investors to miss out on a way to potentially increase their returns. That’s because the U.S. financial market, while the largest in the world, still represents less than half of the total investable capital market worldwide. By looking to overseas investments, you can increase your opportunity to invest in global firms that can help you grow your wealth. Global diversification in your portfolio also helps reduce overall risk. American equity markets and international equity markets generally do not move together. In investing, there is a correlation between risk and return: Individual stocks of companies around the world with similar risk have the same expected rate of return. However, they do not necessarily get there in the same manner or at the same time. The price movements between international and U.S. asset classes are often dissimilar, so investing in both could help increase your portfolio’s diversification. Exhibit 3 illustrates the potential benefits of diversifying your portfolio globally. Investors who focused solely on large-cap U.S. stocks, as represented by the SP 500 index, would have lost money over the ten years from 2000 to 2009—a dismal decade, indeed. The story would have been far different, however, for investors who invested across a broad mix of different parts of the U.S. market as well as developed and emerging markets around the world. 16
  17. 17. Chapter 4 Exhibit 3 Total Returns of Various Asset Classes, 2000 – 2009 Total Return January 2000 – December 2009 Asset Class Index U.S. Large Cap U.S. Large Value U.S. Small Cap U.S. REIT International Developed Large Cap International Developed Value International Developed Small Cap Emerging Markets Large Cap Emerging Markets Value Emerging Markets Small Cap Short-term Government Intermediate Government -9.1% SP 500 Index Russell 1000 Value Index Russell 2000 Index Dow Jones U.S. Select REIT Index MSCI EAFE Index MSCI EAFE Value Index MSCI EAFE Small Cap Index (price-only) MSCI Emerging Markets Index MSCI Emerging Markets Value Index MSCI Emerging Markets Small Cap Index One-Month U.S. Treasury Bills Five-Year U.S. Treasury Notes 27.6% 41.2% 12.4% 41.5% 52.3% 31.4% 175.6% 154.3% 212.7% 176.7% 82.0% The SP data is provided by Standard Poor’s Index Services Group. Russell data © Russell Investment Group 1995-2010, all rights reserved. MSCI data © MSCI 2010, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Indexes are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Diversification neither guarantees a profit nor prevents a loss. Index is not available for direct investment. Past performance is no guarantee of future results. Myth: I don’t need to track my progress. My advisor handles that for me, and I know from the news when things are going well or going poorly for investors. Fact: You need to review your progress at least annually to make sure you are still on track and to determine whether you need to make any adjustments in response to changes in your personal situation or the markets. 5. Track Your Progress As you move forward, assess your progress on a regular basis to determine whether you are still on track and whether you need to make any adjustments in response to changes in your personal situation or the markets. Ideally, you will conduct this assessment on a quarterly basis. At a minimum, it should be done annually. If you work with a financial advisor, he or she should facilitate a progress report each quarter. To check your progress, you (or your financial advisor) should answer these questions: n ave there been any significant changes in your life or family since the last H progress report? Do you expect any significant changes in the near term? Changes such as a divorce, retirement, birth of a child or grandchild, or death of a close family member can have a major impact on your goals and your financial situation. This in turn can require adjustments to your investment plan. n ow has the portfolio performed compared to the market? Performance should H be gauged against the benchmarks that apply to the asset classes represented in your portfolio. The performance of large-company U.S. stocks or stock funds, for example, would typically be measured against the SP 500 index. 17
  18. 18. Chapter 4 n as the portfolio performance met its expected rate of return? Your financial road H map or investment plan should state the rate of return that is expected on your mix of investments. Compare this with the actual rate of return achieved by the portfolio. n hat accounts for the portfolio’s performance? If your portfolio’s performance is not W matching your expectations, or if it is falling below historical performance, then find out why. It could be caused by short-term market fluctuations, or it could mean that your asset allocation should be adjusted. n hat changes, if any, should be made in the portfolio? While we believe that a W patient, long-term outlook is important to investing success, there are also instances in which a change of course is indicated. Most often, this will be in response to changes in your life or family, but it can also be called for by performance-related issues with particular investments. By addressing each of these questions, your regular progress report will become one of your most important tools for making disciplined, unemotional decisions about your investments. As shown in the table below, markets have rewarded discipline. Markets Have Rewarded Discipline Growth of a dollar—MSCI World Index, 1970–2012 Arab oil embargo Business Week: “The Death of Equities” Oil prices quadruple SP 500 down 43% Dow drops 23% on Black Monday U.S. inflation at 13.5% Gold hits record high Income tax rates rise Asian Savings and loan crisis Iraq invades Kuwait Dot-com stock crash 9/11 terrorist currency attacks crisis Y2K scare Russian financial crisis Euro zone debt crisis SP 500 down 46% Hurricanes Katrina and Rita Iraq Subprime war begins mortgage crisis U.S. home prices hit bottom Fiscal cliff worries A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets. In U.S. dollars. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results. MSCI data © MSCI 2013, all rights reserved. 18
  19. 19. Chapter 5 Go Confidently Forward As we discussed at the beginning of this guide, a comprehensive approach to your financial life requires wealth management. This means more than just preserving your wealth by taking care of your investments. It also means addressing your advanced planning needs, including wealth enhancement, wealth transfer, wealth protection and charitable giving. So if you choose to work with a financial advisor, you will want one who uses the wealth management approach (see “Five Questions to Ask Financial Advisors” near the end of this guide). However, many in today’s financial services industry call themselves wealth managers even though they offer little more than investment management. How will you know whether you are dealing with a true wealth manager? Obviously, the financial advisor should offer a full range of financial services in the four areas of advanced planning: n Wealth enhancement n Wealth transfer n Wealth protection n Charitable giving In addition, your financial advisor should do two key things: (1) use a consultative process, and (2) provide access to a network of professionals. We will look at each of these crucial items in some depth. Focus on What You Can Control No one can reliably forecast the market’s direction or predict which stock or investment manager will outperform. A financial advisor can help you create a plan and focus on actions that add value. Diversification neither ensures a profit nor guarantees against loss in a declining market. 19
  20. 20. Chapter 5 The Importance of Process While the structure of your investment portfolio is very important, the process that you use to manage and plan your financial life is even more critical. Without the right process to provide a framework for financial decision-making, even the best investment solutions can be ineffective. Why? Because a lack of process leads to having a portfolio that’s a hodgepodge of investments, cobbled together from cocktail party tips and the “recommendations of the day” gleaned from CNBC and other financial media. Such a portfolio has no underlying rationale. And that makes it all too easy for investors to make big mistakes—such as engaging in market timing—that can derail their financial stability, security and ability to weather unexpected life events. Think back to the financial crisis of 2008 and 2009. I know it’s painful, but try to remember what it was like. If you recall, there was a great deal of panic and no shortage of opinions about what to do with your money. In that highly uncertain environment, many investors who lacked a defined process to guide their decisions ended up changing their investment strategies—for example, by selling stocks and loading up on cash—at exactly the wrong time. As a result, they missed out on the robust stock market gains that followed. In stark contrast, investors who had a defined process for managing their wealth were much more likely to maintain their discipline and to be well-positioned for the impressive future growth that followed. The Consultative Process Research on the best practices of leading wealth managers shows that they use a consultative process with their clients. This allows wealth managers to uncover clients’ true financial needs and goals, to craft long-range wealth management plans that will help meet those needs and goals, and to build ongoing relationships with clients that help ensure that their needs continue to be met as those needs change over time. The consultative process usually unfolds over a series of meetings: n At the Discovery Meeting, the wealth manager determines the individual’s (or couple’s) current financial situation, financial goals and any obstacles that may stand in the way of reaching those goals. In addition, the wealth manager will ask detailed questions about key nonfinancial issues such as values, interests and important relationships. Using the answers, the wealth manager will create an in-depth profile of the most important aspects of the client’s life. n At the Investment Plan Meeting, the wealth manager, using the information he or she gathered at the Discovery Meeting, presents a complete diagnosis of the client’s current financial situation and a plan for working toward the client’s wealth preservation-related goals. n At the Mutual Commitment Meeting, assuming that the wealth manager can truly add value to the client’s finances, both the wealth manager and the client formally decide to work together. 20
  21. 21. Chapter 5 n At the 45-Day Follow-up Meeting, which usually takes place about six weeks after the Mutual Commitment Meeting, the wealth manager helps the client organize the paperwork from the new accounts that have been opened and answers any questions the client may have. n At Regular Progress Meetings, which are typically held quarterly, the wealth manager reports on the progress toward the client’s goals and checks on any important changes in the client’s life that might call for an adjustment to the investment plan. In addition, at the first Regular Progress Meeting, the wealth manager presents a wealth management plan—a comprehensive blueprint for addressing the client’s advanced planning needs that has been developed in coordination with the wealth manager’s network of professionals (which we describe below). At subsequent progress meetings, the client and the wealth manager decide how to proceed on specific elements of the wealth management plan. In this way, over time, every aspect of the client’s complete financial picture is effectively managed. If you decide to work with a financial advisor who uses a consultative process, keep in mind that you are an active participant throughout the process. At every step, you must re-examine your commitment to the process and make sure that you have the information you need to make informed decisions. If you choose to manage your finances on your own without a financial advisor, we still recommend that you undertake a consultative process with yourself to help ensure that you move forward thoughtfully. The Professional Network Just as no doctor can know all the possible ailments and treatments for a patient, no single wealth manager can have all the skills and experience needed to address the entire range of advanced planning needs beyond wealth protection. To provide clients with the required knowledge and experience, high-performing wealth managers work with networks of carefully selected financial professionals. Exhibit 4 provides an overview of the consultative wealth management process and how it is supported by the wealth manager’s network of professionals. Typically, a wealth manager will create a core network composed of three professionals: n A private client lawyer who is skilled in estate planning, wealth protection planning, succession planning and developing charitable giving programs; n An accountant, who deals with matters of income tax planning and cash flow; and n An insurance specialist, who works closely with the private client lawyer to identify and structure solutions that leverage the entire range of insurance options. As needed, the wealth manager can bring in additional professionals to address highly specific challenges. These professionals might include credit specialists, corporate tax lawyers, actuaries, derivatives specialists and securities lawyers, to name but a few. 21
  22. 22. Chapter 5 When appropriate, and as the client chooses, the wealth manager also works closely with the client’s other professional advisors, such as attorneys and accountants. This helps ensure that the perspectives of professionals who may have additional or unique insights into the client are included in the client’s wealth management plan. Exhibit 4: The Consultative Wealth Management Process The Independence Wealth Management Process WEEK 1 Discovery Meeting To discuss your personal financial goals. Investment Plan Development WEEK 2 WEEK 3 Investment Plan Meeting Wealth Management Network Accountant Estate Attorney Risk Manager Charitable Advisor 45-Day Follow-Up Meeting We help you finalize all account paperwork. Wealth Management Planning We develop recommendations based on the investment approach we feel best fits your needs. Independence Advisors Planning 9 Confirmation to move forward. We present you our proposed investment plan. Client Meetings WEEK Mutual Commitment Meeting DAYS Regular Progress Meeting At convenient intervals, we’ll meet to review our progress toward your long-term objectives. We indentify, outline implement our recommendations for achieving your financial and life goals. Independence Advisors Independence Advisors EVERY 90 Wealth Management Network We collaborate with a team of carefully selected outside experts to evaluate all aspects of your financial situation devise comprehensive solutions designed to help you achieve all that is important to you. Selecting a Financial Advisor In addition to working with a financial advisor who is a genuine wealth manager, you also want to choose someone with whom you can build a satisfying relationship over time. Trust and integrity are the cornerstones of a good relationship with an investment advisor, just as they are the cornerstones of a good relationship with a medical practitioner. A trusting, long-term relationship with an investment advisor is critical to your long-term success as an investor. Trust allows for open communication, which in turn creates the necessary conditions for better planning. “I need your help” John Bowen, President of CEG Worldwide, a highly successful coaching firm for elite financial advisors, once told me that the four most powerful words in the English language are “I need your help.” If you really think about it, people want to help other people. It’s human nature. You help people every day in your working life. Why not ask for the best help you can get in your financial life? Research in the financial services industry* shows that there are six major factors that contribute to clients’ satisfaction with their financial advisors. We explore these six attributes below and recommend that you look closely at each one with regard to any financial advisor you are considering working with. If you already work with a financial advisor, think about whether he or she displays these six traits: * Source: Russ Alan Prince and David A. Geracioti, Cultivating the Middle-Class Millionaire, 2005. 22
  23. 23. Chapter 5 1. Character. Without doubt, any financial advisor you work with should have integrity, trustworthiness and dependability. He or she should demonstrate these character traits in every contact with you. 2. Chemistry. This is the financial advisor’s ability to “connect” with you. You should feel a genuine rapport with him or her from your very first meeting. You should agree, even see eye to eye, on important issues. 3. Caring. The financial advisor must be truly concerned about you as a person and should understand what is most critical to you, beginning with your life goals and financial objectives. Your financial advisor should care more about you than he or she does about making money. 4. Competence. Of course, the financial advisor should be smart and able to manage the technical aspects of your finances. Even better, he or she will be exceptionally technically capable. Better yet, the financial advisor will be recognized as a leading professional in your area. 5. Cost-effective. This is not a question of what the financial advisor costs, but one of whether he or she provides you with true value for the cost. 6. Consultative. This is the most important factor because it frames your entire relationship with the financial advisor as an ongoing, long-term partnership. It has three major components: n Cooperative orientation. Some financial advisors feel it is their job to constantly hold their clients’ hands and take care of everything for them. However, most clients actually prefer a more collaborative approach, where they take an active part in the management of their finances. n Contact. n Customized The financial advisor should ask how often you would like to be contacted, how you prefer to be contacted and on what topics you want to be contacted. As appropriate, he or she should also reach out to you on matters beyond your finances. communications. The financial advisor should tailor his or her communications to you and your specific needs and interests. These communications should be sophisticated and highly professional—not off-the-shelf spiels. For example, we publish the Independent Thought blog and various white papers. As you choose a financial advisor—or take a closer look at your current financial advisor—keep in mind that you need someone not just to help you manage your finances, but also to help you reach your most important financial goals. This is one of the most important financial decisions you will make, and you deserve to be extremely satisfied with your choice. If you are currently working with a financial advisor and are unsure whether he or she is using the consultative wealth management approach discussed here, we recommend that you have another financial advisor provide a second opinion by completing a diagnosis of your situation. You owe it to your family and yourself to make sure that your investment plan and your overall 23
  24. 24. Chapter 5 wealth management plan are designed to address your very specific financial needs effectively, in order to maximize the probability that you will achieve all your financial goals and, along with them, your dreams. We wish you nothing but success in achieving all that is important to you. Five Questions to Ask Financial Advisors We understand that many people are intimidated when they first meet with a financial advisor, because they’re embarrassed by their lack of financial knowledge—or by how little progress they’ve made toward their big financial and life goals. This is ironic, because a lack of knowledge is the main reason you’re seeking an advisor. Instead of feeling intimidated, you should adopt the same critical posture that you would when interviewing a contractor or a mechanic, even though you’re not an expert in their fields either. If nothing else, make sure you probe to see whether an advisor is truly interested in and capable of working in your best interests. When shopping around for an advisor, put candidates to the test by asking five key questions: 1. How are you paid, and what are all the costs that would be involved in working with you? You want an advisor who succeeds by making money for his or her clients, not primarily for himself or herself. This is the rationale for the fee-for-service compensation arrangement that most advisors use—typically 1 percent annually of the value of the assets they’re managing for you. Fees Matter Assumed 6.5% Annualized Return over 30 Years Over long time periods, high management fees and related expenses can be a significant drag on wealth creation. $5,000,000 $4,000,000 Dollars Passive investments generally maintain lower fees than the average actively managed investment by minimizing trading costs and eliminating the costs of researching stocks. 1% Fee $4,983,951 2% Fee $3,745,318 $3,000,000 3% Fee $2,806,794 $2,000,000 $1,000,000 1 Year 3 Years 5 Years 10 Years 20 Years 30 Years Time 2. What are your qualifications? Look for credentials that reflect knowledge of the field and, more important, that indicate continuous learning. 3. How many clients do you have like me in terms of asset totals, life situations and goals? Advisors tend to segment clients into groups of people with common traits. 24
  25. 25. Chapter 5 Y ou want to be in the group that comprises the majority of the advisor’s clients. You don’t want to be a one-off, because you don’t want to be paying an advisor to learn on the job how to best serve someone like you. 4. Where do you want to take your firm down the road? Is the firm planning to expand vastly from a boutique operation to a mega-firm with many more clients, thus making you less important? Or is the plan to scale down—to become more of a boutique and jack up minimum investment requirements so high that the firm may not want you any longer? The point is to ensure that your long-term interests are consistent with the advisor’s long-term interests. 5. What is your process for bringing new clients on board? If there is none, this is a problem. If an advisor’s answers fail to show a thorough process for getting to know you and learning about your assets, goals and risk tolerance, then the advisor likely won’t render you good service. A desirable onboarding process might involve an extensive interview, a written questionnaire or both. 25
  26. 26. Chapter 6 My Path to Comprehensive Wealth Management There are a great many uncertainties in life that we all face. Indeed, perhaps the only thing we really know about the future is that it is unknowable. When you consider the many unexpected events— both good and bad—that inevitably will occur throughout our lives, it’s clear how important smart planning and intelligent decision-making become. I learned early in my life about the importance of planning for the unexpected and about taking good care of your wealth so that it, in turn, can help you take good care of the people you care about most. When I was six years old, my father died suddenly and unexpectedly. He was just 36. Although I was very young, I was the oldest of three children. Even at that young age, I felt a responsibility to watch out for my younger brother and sister. The whole experience instilled in me a tremendous sense of responsibility to others—a feeling that I carry with me to this day. Of course, I also saw firsthand how difficult life can be when a surprising or unsettling event occurs. My mother, an English teacher, was able to support us in the wake of my father’s death. But it could have been easier for her. Certainly the situation could have been much less stressful had more complete planning been in place. These and other experiences I had growing up set me on my path to helping others manage their wealth and make smart financial decisions. My mother always stressed the importance of learning and education throughout one’s life. My paternal grandfather was a coal miner in upstate Pennsylvania. He sought better lives for my father and his siblings through the pursuit of higher learning. As a result, I come from a science-driven family that is full of engineers, physicists and the like. My other grandfather, an engineer, loved to show me the investments he had made and to explain his reasoning behind what he bought and sold. From my grandfather, I learned the value of evidence-driven investing and the importance of thorough analysis. As a result of those conversations, I decided to pursue a career in investment after graduating from college. I immediately saw how the great sense of responsibility that I felt toward others could become the driving force behind my chosen career in investing. The people who mentored me when I was getting started taught me a hugely valuable lesson: By working in my clients’ best interests at all times and by “sitting on the same side of the table,” I could build trusted, long-term relationships with clients and help them reach their biggest life goals. I could help them capture the opportunities in front of them while steering them away from the pitfalls. And in the process of putting my clients first, I was able to build a great business and to achieve success for myself. Seeing people achieve what is important to them—and helping them get there—has always been tremendously satisfying for me. Eventually, my sense of responsibility for helping clients reach their goals prompted me to start my own firm, Independence Advisors, which I co-founded in 1993. Our goals are to help our clients articulate and achieve their financial and life goals by bringing clarity to their financial decisions. 26
  27. 27. Chapter 7 Why We Specialize in Serving Anesthesiologists Anesthesiologists are used to focusing on details, and for good reason: Their patients’ lives depend on attention to detail. However, this intense, detailed focus that makes them so successful in a medical setting often hinders their ability to look at their own big-picture wealth management issues. That’s where we come in. Through a comprehensive, consultative wealth management process, we help anesthesiologists take a step back and look at their big-picture wealth management needs. They tend to appreciate our academic and data-driven approach to executing a wealth management plan. Helping anesthesiologists focus on the big picture, while executing tactically in a cost-effective and empirically supported manner, is what enables us to build the decades-long relationships we have with our anesthesiologist clients. 27
  28. 28. Chapter 8 About Independence Advisors Independence Advisors, Inc., was founded in 1993 with a mission to provide sophisticated and highly personalized financial advice to high-net-worth individuals and institutions. Our name was carefully chosen to reflect our steadfast belief that a prerequisite for fulfilling our mission is an independent structure. This mitigates potential conflicts of interest that may detract from providing advice that is strictly in our clients’ best interests. In 2010, we formed a new company, Independence Advisors LLC, for the sole purpose of a taxefficient transition of ownership that had been planned for several years. We continue to operate with the same personnel, processes and investment philosophy that have been in place since our inception. Since 1993, we have successfully followed our mission, having built a solid reputation, an enviable track record, a growing number of long-standing client relationships and an exceptionally high client retention rate. My team and I firmly believe that investors owe it to themselves and their families to take advantage of a comprehensive financial planning process that gives them the best chance of reaching their most important financial goals. It’s our privilege—and our responsibility—to share this process. That’s exactly what this book does, and I’m honored to have been given the opportunity to contribute to it. Charles P. Boinske, President of Independence Advisors LLC, has been a financial advisor serving individual investors for 30 years. A Chartered Financial Analyst, Boinske has been a featured speaker at national industry conferences and is a member of the New York Society of Security Analysts. 28
  29. 29. Epilogue: What Most Advisors Won’t Tell You The genesis for this book came to me as I sat in a restaurant in Frankfurt, Germany. I was reviewing my slides for a presentation I was preparing for wealth managers in Germany. The presentation was based on my nearly three decades of financial advisory experience in the U.S. As I reviewed the slides, I realized that what my audience needed was not slides but actionable ideas. It turns out, the same goes for our clients. The rules of the financial advice game are changing. I constantly challenge advisors I meet to tell me clearly what it is they are doing to create value for their clients. “If you aren’t sure about how you create value,” I tell them, “then it’s time to do some work and figure it out.” As advisors, we all want to help our clients and make a living by doing so. But our world is changing fast. The value added to the client relationship is harder than ever to measure. We must differentiate ourselves and focus on the clients’ needs and goals. We must be problem solvers, not salespeople. Solve someone’s problem, and we become that person’s trusted advisor—and we become more valuable to him or her. As I constantly remind advisors, “Unless you become valuable to clients, you will likely be out of business.” It’s a never-ending process. The best advisors relish the challenge and never get complacent or cut corners. 1. This publication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements. 2. Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. 3. Any information provided by Adviser regarding historical market performance is for illustrative and education purposes only. Clients or prospective clients should not assume that their performance will equal or exceed historical market results and/or averages. 4. The material listed in this publication is current as of the date noted, and is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Any information is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Results will vary, and no suggestion is made about how any specific solution or strategy performed in reality. 5. Adviser does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party and incorporated herein, and takes no responsibility therefor. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. 6. Inclusion of index information or any other market information is not intended to suggest that their performance is equivalent or similar to that of Adviser’s clients. Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance. 29