Wealth Clarity Blog

Every so often the media uncorks some financial scandal that shakes the business world.  Lately, it seems like we’ve had plenty of them.  It started with the Enron scandal in the early 2000s, then the Madoff scandal, and most recently it’s Rhonda Breard, a wealth manager in Seattle’s own backyard, making dubious headlines.  As you may have heard, Breard pleaded guilty in federal court to stealing over $9 million from her clients over the course of several years.

News of such misconduct both angers and saddens us as wealth managers.  Our priority is to help our clients live life without the anxiety and complexity that accompanies wealth.  Unfortunately, scandals like Breard’s can plant seeds of doubt and undermine peace of mind. 

After talking with my team, we think this is an opportune time to remind our readers of a few key safety measures that should be in place to preserve and protect your assets:

Make sure your statements are sent directly to you from the custodian.  Advisor generated reports showing performance, balances, and positions must reconcile to the custodian’s, not replace them.

Separation of duties is a key detriment to fraud occurring.  At least two sets of eyes across departments see all of the activity that occurs in our accounts.  Different people in our office are responsible for executing account activity and for reconciling it. 

Understand the insurance coverage carried by your custodian and advisor.  Your brokerage assets are protected from loss by SIPC, and from both fraud and error by insurance carried by your custodians.  We have also chosen to carry insurance coverage that would help protect our client’s in the unlikely event of a loss.

For more information about consumer protection, please visit our blog video gallery at:  http://www.wealthclarityblog.com/about/video-gallery.

One of the joys of my chosen career is that I get the privilege of learning about the passions of my clients’.  In some cases I get to witness those passions first hand and even share in the experiences.  From my perspective, there is something about spending time at a client’s home, or in doing an activity together that helps build long-term and enduring relationships.  It magically transforms the typical business-type relationship to something much more special.  This was definitely the case with Phil.

Three years ago I was invited to join Phil, a client of mine, at his second home in a small fishing village on the western shore of Vancouver Island.  My son, who was 16 years old at the time, and I headed out on the adventure by seaplane and touched down about two hours later in the bay outside Bamfield.  Phil met us at the dock in his fishing boat “Sea Bear”, and we cruised the short distance to his home, which was only accessible by boat.

It only took a few moments to understand that fishing, boating, and enjoying nature were the passions that Phil lived for.  I was visiting for three days with the express purpose of fishing, but discovering the rugged beauty of the area and the abundant wildlife including bears, eagles, and whales, while also having the opportunity to hook and catch more salmon than ever before in my lifetime, was a complete thrill.

Phil was up when I arrived in the kitchen each morning for my first cup of coffee.  He would vigilantly listen to the radio for the wind and swell reports and watch as the lights of the fishing boats headed out in the dark for a day of fishing.  On your first impression, you might say he was a bit tough on the outside, but as you got to know him better, you would find he had a warmth and gentleness that made you want to be around him.

He lived life fully and loved to share stories about his adventures.  He was inquisitive and a voracious reader, which only added more depth to the wisdom that he dispensed at every meal we shared together.

Phil knew what he loved to do and where he loved to be, and that is why he spent five months of the year in Bamfield.

For the last three years, I too have found solace in this small fishing village on the coast of British Columbia.  Phil, thanks for inviting me into your story.  Your bright smile will be missed.  (Phil T. 1936 – 2010)

This reflection inspired me to evaluate my own life and it reminds me to live life fully while continuing down the path of significance.

Author’s note: Details shared with permission of the family

Just for fun, let’s recap the stock market this year:  fantastic start, up almost 10% through the end of April; four days of losses last week primarily caused by the turmoil in Greece, growing concerns in the Euro area, and fears of tightening economic markets in China; the now infamous trading glitch and the associated historical price swing; and then yesterday’s surprise European Union rescue package valued at almost $1 Trillion that helped push equities higher to the tune of 3 – 7% in most developed countries.

Summation:  Basically your investments are back to even for the year.  Isn’t it easy to get complacent in your investment approach and then suddenly get reminded how quickly things can change.  You definitely don’t want to be figuring out investment process and strategy during times of high volatility and market stress. 

While some experts have suggested that diversification is “dead”, we believe diversification is back and represents one of the key themes we are focused on in 2010.  It was proven in 2008 when we were facing economic collapse, it was proven in 2009 when the financial markets rose from the ashes, and, we believe it will again be the case this year.  It is simply what preserves wealth and provides the best opportunity for increasing portfolio values during extremely uncertain times…like now.

Several of Highland’s other investment themes that are also relevant at this stage are: 

1. Quality is King: Although not as apparent during the first quarter, rising volatility has pushed investors toward quality investments.  For example, the purchase of U.S. Treasury securities that has in part been prompted by concerns about the stability of the Euro. 
2. Where’s the Yield: Yields are low due to this flight to safety, requiring greater diligence to locate reasonable quality income streams, especially with money market rates hovering near zero.  High dividend paying stocks, corporate bonds, and emerging market debt securities are reasonable considerations in this environment. 
3. Limited Visibility: Market movement is based on only the very latest data releases—think last Thursday—and highlights the need to be nimble.  Volatility is peaking and suggests a focus on proven process in investment selection and timing.
4. Developed Markets Owe: The potential for contagion in Europe and spill-over effects on the rest of the world is the reason we have reduced our exposure to Euro denominated debt and equity exposure during the past quarter as this crisis was brewing.  Most of our portfolios have less than 10% total weighting in Euro-denominated investments. 

What worries you about your investments during the second half of the year?

First, there is a huge sell-off in stocks starting in 2008; then, the big rally back higher this past year.  It really didn’t matter what stock you owned in either case as most moved in tandem. 

Now what?  In general, I would argue that stocks aren’t overly cheap; and, stocks aren’t extremely overpriced.  So, what do you do in this confusing time?

In a recent article in The New York Times titled When Stocks Stop Moving Like a Herd, Paul Lim gets it right in several respects:

It is easier to invest when all you have to do is jump in when everything is moving up, like the past year, and critical thinking about specific investments is less relevant.  Just get the direction right and you win…but that dynamic is changing fast.

The equity markets appear to be moving towards an environment that will reward those who can find value.  You can still purchase growth stocks, but it would behoove you not to overpay for them.

Active management can be a key contributor to performance during this type of uncertainty because of the opportunity to tilt your portfolio towards undervalued investments and adjust to new information.

The quality of your advisor will play a big part in the results you see over the next few years.  A well-defined investment process and experienced team is as important as ever.

Keeping Paul’s ideas in mind, I wanted to give you a few tips that could really help your portfolio results during the next few years.

1. Review how much of your portfolio is indexed versus actively managed — I would argue that a higher allocation to actively managed assets is appropriate in this uncertain economic environment.  Increasing volatility expands the chances of finding interesting opportunities.
2. Make sure your investment selection process includes a valuation screen and doesn’t just focus on growth.  If history repeats itself, we could see value stocks outperform growth stocks in the years ahead. (Note:  We believe our internal stock strategy of growth at a reasonable price is particularly timely in this type of economic environment.)
3. Evaluate your advisor’s investment philosophy and strategy — can they communicate it to you so you understand it?  Does it make sense to you?  Did they stick to it or did they abandon it during the recent financial meltdown?  What did they learn during the past few years and what adjustments are they making?  A high quality advisor is more important now, than ever.

Do you have any investment tips to add that you’ve been successful with?

Honestly, this is a tough one for me to discuss and for most financial advisors worth their salt.  Why?  Because no one likes to get fired, especially if you are doing your best work and honestly care about your clients and want to do so in a truly professional manner.

However, there are times when…it’s time!  What do I mean by that? 

Well, the best way to describe it is by focusing on the best advisor-client relationships I have had over the past twenty years, and the common characteristics of those relationships.  Hopefully, this will provide you with a way to evaluate your current advisory relationship and make the determination yourself.

Best Relationship Themes:

Authenticity—Openness and transparency about who you are as a person and what you care about.  Living in your own integrity and not trying to be more or less than you really are.

Compassion—True care and concern for the other person and their life that transcends any type of financial arrangement or service expectations. 

Gratitude—Appreciation for the contribution the other person makes to the shared life journey.

Grace—A willingness to allow the other person to grow and change as they live their life.  Forgiveness when the outcome isn’t as expected.  Patience to allow adjustments to occur.

There are others that could have easily been selected and arguably are also important like effective communication, shared expectations, and commitment; however, these four themes separate the excellent relationship experiences from just the average. And, since we have a choice, don’t we all want the best relationships possible?

If you don’t have these themes in your advisory relationship, is it time for you to make a change?