We are proud and excited to announce that we have expanded into the Minneapolis/St. Paul market, serving the great state of Minnesota. We look forward to serving the area with our unique, 1-on-1 401k participant advice solutions. The expansion was made final by the Vikings securing a stadium for the next 2+ decades. (joking)
If you have any questions, please contact us at (612) 265-9862.
I was fortunate enough to be interviewed by Don Davidson of Manarin Investment Counsel for his Talk 401(k) podcast. While Don does an excellent job with this, I cannot say the same for myself. Therefore, if you are willing to overlook my stammerings (I was surprisingly nervous), the information might be helpful to you. Some of the topics included in the conversation include:
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.
Advice as an industry is a very young one. The ‘SunAmerica Opinion‘ was issued in December of ’01. The PPA Fiduciary Adviser provisions were written in August of ’06, and the DoL is still working to iron out the final architecture. That being said, since the 401(k) is only a little over 30 years old, advice is its first son, and it is just now starting to mature. Wow, that’s quite an analogy, but I am going to run with it for now…
When marketing our services to companies sponsoring 401(k) plans, we will often face confusion as to what is truly being offered to participants — guidance or advice. The reason being that the word advice has been used liberally by brokers, advisors, and service providers. Unfortunately, that will sometimes lead to companies assuming their participants are receiving the advice they need, rather than knowing what is actually taking place in those education meetings and any 1on1 interactions that follow. Since guidance versus advice has been easily confused, the following is a mock conversation designed to clarify what is and isn’t, should and shouldn’t, be taking place with participants so to protect the plan sponsor from fiduciary liability:
Plan Sponsor (PS): “Our participants are already getting advice.”
BeManaged: “Have you ever sat through one of those sessions?”
PS: “Well, no, but that is what our broker/advisor tells us he/she/they are doing when they are on-site during our committee reviews.”
BeManaged: “I noticed on your company’s 5500 that your plan was with XYZ company, so that likely means your plan advisor is being paid by the investments in the plan. Is that still the case?”
PS: “Yes, I believe so.”
BeManaged: “Please forgive me if I am overstepping my bounds, but if your plan’s advisor is being paid by the investments, there are only a few ways in which they can provide advice without holding the company liable for the advice they deliver. One is through the Pension Protection Act’s Fiduciary Adviser provision. The other is through a highly complicated fee offset arrangement that is extremely rare in our experience. If they are operating as a PPA Fiduciary Adviser, they would have a specific fiduciary agreement in place with the committee. Are you aware of one?
PS: “Um, no. What do you mean we could be held liable for the advice he/she/they are delivering?”
BeManaged: “I do not want to alarm you. I would guess that the term ‘advice’ has been used far too loosely. In 1996, the DoL issued an opinion which clarified that general investment education and guidance protected brokers/advisors from acting as a fiduciary, yet we have found many to overstate this guidance as being advice, when in fact it is not. Guidance simply provides a general overview without speaking to specific funds and the percentage that participant should allocate to each one.”
PS: “Isn’t that good enough?”
BeManaged: “That depends on the investment savvy of the individual. Unfortunately, numerous studies have shown that selecting funds, measuring risk, and managing behavior during volatile markets is not the forte of the vast majority of investors. There are entire websites dedicated to sharing these issues such as behaviorgap.com. Even target date funds, looked at as a simple solution to this problem, are not being used correctly based on studies by Vanguard, one of the largest players in that market. Having ongoing advice specific to the participant’s individual situation has become a welcome reprieve to frustrated participants in plans with demographics similar to yours.”
PS: “From what our advisor/broker tells us, there is poor attendance in the advice sessions…or guidance sessions…whatever it is, that they provide.”
BeManaged: “I could guess that if the guidance is provided under the DoL 96-1 opinion I mentioned, it is understandable. Imagine if you walked into a mechanic and explained what the issue was with your vehicle, and regardless of how simple or complicated, they provided you with a number of different approaches on how you can fix it. It was then up to you to decide how to do it yourself. You would never go back to that mechanic again, right? Fortunately, you and I can choose to go to a different mechanic. Unfortunately, unless that individual has enough assets to qualify working with a fiduciary wealth manager, which typically means having assets of $250k at minimum, then they have no one that will provide them with specific, fiduciary advice that has ‘skin in the game’ as does a fiduciary.”
PS: “Ok, so if I sat down with our advisor/broker, and he/she/they provided me specific advice, they are putting the committee members in harms way, and if they are providing general guidance, our participants are not getting what they really need. Am I understanding this correctly?”
BeManaged: “Yes, you are correct. You as a fiduciary are not required to provide advice, but it is simply an understanding of what your participants need. However, if you are not able to abide by Section 404(c) of ERISA, you can be held responsible for the investment decisions of your participants. Therefore, providing yourself and the other committee members protection from ‘advice that goes bad’ is important, and can be done in a simple manner through the PPA Fiduciary Adviser fiduciary safe harbor. And to be clear, if your plan advisor/broker is working under 96-1, you are under no additional liability either. It is simply a ‘line in the sand’ by which the broker can provide guidance without being held out as a fiduciary (see the following reference from the DoL).
The Department notes that the information and materials described in subparagraphs (1)-(4) above merely represent examples of the type of information and materials which may be furnished to participants and beneficiaries without such information and materials constituting ``investment advice.'' In this regard, the Department recognizes that there may be many other examples of information, materials, and educational services which, if furnished to participants and beneficiaries, would not constitute ``investment advice.'' Accordingly, no inferences should be drawn from subparagraphs (1)-(4), above, with respect to whether the furnishing of any information, materials or educational services not described therein may constitute ``investment advice.'' Determinations as to whether the provision of any information, materials or educational services not described herein constitutes the rendering of ``investment advice'' must be made by reference to the criteria set forth in 29 CFR 2510. 3-21(c)(1). READ MORE
PS: "Ok, so if I go through the interaction, how will I know if I am receiving guidance or advice?
BeManaged: “The simplest thing to understand is if the advisor tells you specifically which funds to use and what percentage to put into each, then you are receiving advice. There should be some sort of process used to quantify what kind of investor you are, such as an investor questionnaire which looks at your age, time horizon for retirement and tolerance for risk. If you instead receive general plan and investment information, a general asset allocation model or are given an investment worksheet/website to provide you such a model, your broker is operating under the DoL 96-1 opinion. It would be wise for them to do so as it is quite complicated for them to perform a fee offset to avoid the inherent potential conflicts of interest of providing advice while being paid by the underlying investments in the plan. The DoL’s 96-1 Opinion clarified what was guidance and what is advice, as at that time, fee-only advisors were extremely rare, and investment advice automatically makes an individual a fiduciary, which most broker dealers do not allow. For plan advisors/brokers that are paid by the investments in the plan, 96-1 allowed them to clearly understand where the fiduciary line in the sand is. For the time being, 96-1 does not put you in harm, it just might not be what your participants need.”
PS: “Or our committee members for that matter, if we can be held responsible for participant investment decisions. I am pretty sure we have identified ourself as a 404(c) plan, but remember the requirements being quite onerous.”
BeManaged: “The next step is simple: go through a consultation with your plan advisor on your individual account. What you receive during the interaction will tell you what is happening in your plan, advice or guidance.”
PS: “Easy enough, and they will be here early next week, so this is timely.”
BeManaged: “I would like to schedule a brief call with you following the consultation with your permission.”
PS: “Sure, call me next Wednesday at 10am.”
The following are some highlights discussed in the August ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
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
Since the beginning of May, let alone since the final quarter of 2007, the market has been volatile, to say the least. One of the biggest issues we see during this time is people will stop their contributions when the market takes a down turn, and then contribute again once the market is doing “better.” Unfortunately, as with the other achilles heels we have discussed, this is the exact opposite thing 401(k) investors should do.
It’s perfectly understandable why people do this, asking themselves, “why invest in something that is ‘losing’ money?” When the market is going down, you might have heard people say it’s on sale. However, it can feel hopeless as your contributions may look like they are evaporating as soon as you toss them into your 401(k). The most important thing to remember is you are buying an asset when you contribute to your account. They are called shares of the investment funds you have access to in your plan.
Shares are owned by you. If the market goes down, your contributions should be purchasing more shares for the same amount of money you always contribute. The more shares you own, the better, so investing during a down cycle in the market is a very good thing.
If the market decreases by 20% like the real estate market has in the past few years, you do NOT lose your shares. Instead, they simply decrease in value. For example, just because the value of your home has decreased by potentially 20% in the past few years, that doesn’t mean your garage will be gone when you get home. The physical asset is still there, it is simply devalued.
The following slides are from our Myths and Tips for Investing in Volatile Markets presentation. Make sure you take a look at the final slide illustrating the exponential growth in your account from investing through the down market. The shares you purchased at the ‘bottom’ are the ones that appreciate the most. In this case, the pain of the downturn can pay off in a big way for you once the market rebounds.
Myth i shouldn’t invest in this market, i keep losing money.
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 of the highlights discussed in the June ‘10 Research Newsletter from John Whaley, CFA, AIF, Director of the BeManaged Research Department.
