The following are some topics covered in this month’s Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
The BeManaged Ingredients and Recipe Investment Analogy
Over the past number of years I have come to really enjoy cooking. It unknowingly led me to an analogy for investing that is simple to understand and better yet, visual. The analogy, consisting of ingredients and the underlying recipe, has helped hundreds of investors better understand what they can ‘control’ within their 401(k). Furthermore it helps investors understand confusing terms such as “diversification” and “asset allocation” and how they impact the ‘behavior’ of their portfolio.
The image to the right represents the entire US stock market compartmentalized into nine boxes. The idea is you do not want to compare funds in one box to funds in the other box, as they are each investing in distinctively different types of stocks. The market says diversify, diversify, diversify — but people get confused with what that really means. The visual aspect makes it easier to identify any gaps in your portfolio, would be issues with your portfolio’s diversification. (NOTE: This is ONLY illustrating the US Stock market, so also included is international stocks, bonds and cash. For simplicity sake, we are going to stay focused on the US stock portion of an investor’s portfolio.)
If you look at each of these boxes and the funds inside them as ingredients, diversification is simply making sure you have enough ingredients to complete a recipe. As you can see, funds rarely fit neatly inside their respective ‘box.’ In fact, the vast majority do not. Additionally, even though these are listed as US stock funds, a significant portions of these ingredients can include international stocks, bonds and cash. And finally, just as the Papa John’s commercial says — better ingredients, better portfolio.
Actual Portfolio Diversified Portfolio
Now let’s say we have all of the ingredients we need to cook a pizza crust. Depending on the recipe we use and process used to cook it, the ingredients could result in a pizza crust or — a saltine cracker. We could use the same ingredients, but have two entirely different outcomes.
Investing is no different. In fact, studies have shown over 91% (Brinson, Singer, Beebower, 1991) of the reason for your portfolio’s performance is specific to the recipe used.
Therefore, there are reasons your portfolio has behaved the way it has over the past few years. It has to do with the specific ingredients (investment funds) used and the percentage put in each fund. Based on the investor profile you completed, we simply need to create a recipe that fits that specific level of risk. Does that make sense? (I know it doesn’t add up to 100%, the remaining portion is in bonds and international stocks)
Actual Recipe Proper Recipe
Just because I walk into a fully stocked kitchen with every tool and ingredient I could want, it does NOT make me Bobby Flay. Therefore, having a professional either provide you the recipe (401(k) advice) or simply cook it up for you (401(k) account management) can be better options than trying to do it yourself.
Copyright © 2010 BeManaged. All rights reserved.
We wanted to provide a quick ‘shout out’ to our esteemed Portfolio Analyst, Mark Hoppe, for learning on late Monday that he was among the 39% of world-wide candidates that passed Level II of the Chartered Financial Analyst exam. We empathetically watched him study diligently for an obnoxious amount of hours during the first half of the year, and were excited to learn that he passed the second of three exams with flying colors. The Chartered Financial Analyst designation is, in own my words, “the gold standard of the investment world.” Here is an simple overview from the CFA Institute site:
The CFA Program is a graduate-level self-study program that combines a broad-based curriculum of investment principles with professional conduct requirements. It is designed to prepare you for a wide range of investment specialties that apply in every market all over the world.
- Nearly 90,000 CFA charterholders work in over 130 countries
- Over 100 universities use parts of the curriculum in their courses
- Numerous regulators accept the CFA charter as a proxy for many licensing requirements
- Global media recognition of the CFA charter and CFA Institute events
If you are looking for an investment credential that will earn you instant credibility and respect anywhere in the world, look no further than the CFA charter.
Awareness of the CFA charter has grown considerably since it was first offered in 1963 as a means for investment professionals to prove their expertise and demonstrate their commitment to integrity.
Today, with nearly 90,000 CFA charterholders working in over 130 countries around the world, the CFA charter is widely recognized by investors, investment practitioners, employers, regulators, and the media as the highest educational standard in the investment community.
Congratulations, Mark, you definitely deserve and earned it!
- The BeManaged Team
Last year, we began the transition of moving from the name Actium to that of our flagship service, BeManaged. For many of you, you may have never noticed that our email was from @myactium.com, while we communicate ourselves as BeManaged. It just didn’t make a lot of sense why our participant clients knew us as BeManaged while companies and advisors knew us as Actium.
We are finally nearing the finish line due to our recent acquisition of the BeManaged.com URL. The following are some of the changes that will be taking place over the next 30 days:
We appreciate your patience in this process and apologize for any confusion it has caused over the years. If you have any questions, do not hesitate to reach out to us. Thank you!
The BeManaged Team
Our friend Matthew Hutcheson, Independent Fiduciary, recently conducted testimony with the Congressional Ways and Means Committee. The goal of the testimony was to discuss fiduciary best practices as well as avoiding the potential conflicts of interest inherent to the broker dealer model in the 401(k) world. When the topic of 401(k) advice was discussed, information we provided him was cited. Our information spoke to the potential conflicts of interest that could have existed under the original January ’09 proposal, which has since been replaced by a conflict-free proposal by the DoL in February of ’10. The following is the testimony and the reference to us:
Independent Fiduciary Adviser, Chad Griffeth, AIF®, makes the following observation:
If the provider of the advice is being paid by the mutual funds in any way, trust is damaged dramatically. The reality of the situation is that the advice provider must earn participants’ and management’s respect, and the story of true independence, fiduciary prudence, and thus acting in the sole interest of the participant’s best interest is critical to the success of the advice provider, and thus the participants. If participants do not trust the source of the advice and account management, they will not use it, even though they need it. Thus, participants will likely not experience the success they need for a dignified retirement.[6]
The following are some highlights discussed in the July ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
The following are some of the highlights discussed in the June ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
Financial Advisor Magazine, May '10
In this month’s F-A Magazine, BeManaged was featured in the article titled “Better Laid Plans,” which is focused on how companies around the nation are answering the call for 401(k) advice. It was a privilege to be included in the article, but there is a key point we would like to correct about how we operate.
We do NOT control the investor’s contributions. The participant is ALWAYS in complete control, we simply provide encouragement and strategies for how to increase those contributions.
One advisor working in this space, Chad Griffeth, markets 401(k) advice through his company BeManaged in Grand Rapids, Mich. (Bemanagednow.com). The company was four years old on Valentine’s Day.
“I used to be a broker,” says Griffeth, who does the marketing while his partner, John Whaley, a CFA, does the research on investment options and determines asset allocations. “The first thing people would ask is if I could manage their 401(k) plans for them.” He and Whaley set up their company hoping to give investors with just $30,000 in their accounts an institutional level of service.
Companies that seek 401(k) advice for employees tend to be paternalistic, to want the best for their workers and to offer a good plan with well-thought-out options, Griffeth says. In its pursuit of such business, BeManaged has won the contract to work with the 4,600 401(k) plan participants at health and beauty products marketer Amway, whose headquarters are located near where BeManaged is based.
Amway performed a five-year due diligence search to find advisors for their employees before settling on BeManaged. “Other vendors wanted to sell products or move the 401(k) somewhere else,” Griffeth says. The way the firm works is to set up its consulting site at Amway’s offices, sometimes for three weeks at a time. The firm is happy to use the funds in the company’s plan, which Griffeth says are good ones.
“We don’t have clients come to us,” he says. “We have a very humble office and that allows us to be efficient.” Employees have a choice to either simply be advised on their plan or to be managed. Most choose the latter.
When BeManaged sets up at the company’s headquarters, Amway employees can go to the 401(k) Web site and schedule a Web consultation and then come to one of the spots where BeManaged advisors are waiting. “Consultations are free,” Griffeth says. “We can control risk, control the contribution and control their behavior.”
BeManaged charges a standard fee of 15 basis points, which is capped at $125 per quarter. The company is growing slowly and the Amway account was a big break. “Amway is very well known for its culture and a lot of other employers took notice,” Griffeth says.
Read the Article “Better Laid Plans“
The following are some of the highlights discussed in the May ’10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
The following are some of the topics discussed in this month’s newsletter from John Whaley, CFA, AIF, the Director of our Research Department.
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