A solid week has passed since British voters shocked the world with their decision to exit the European Union. This has given us some time to analyze the possible economic impacts of Brexit, as it is now known.

From an economic viewpoint, its ramifications on global growth are negative. When borders become more closed, impairing the flow of capital, decreasing access to workers and lowering trading opportunities, the impact on the economy is obvious. Just imagine if California or Texas or New York decided to secede from our union. It would affect not only the citizens of those states, but also people in Michigan and the rest of the world.

A growing and healthy economy lifts most people, to varying degrees. On the flipside, a stagnant and shrinking economy – a result much more likely after Brexit – disproportionately hurts people living on the lowest rungs of society’s economic ladder. Early voter analysis shows that poorer, less educated voters chose to leave Europe. Voting against one’s own economic interest is not a new phenomenon.

The vote to leave Europe was clearly based on non-economic reasons.

With the Brexit vote, the deciding factor hinged on issues of cultural sovereignty, rather than economic theory. Specifically, concerns of immigration policy played a serious role that tipped the balance.

Regardless of the motivations of the “leave” voters, the implications for the economy were indicated by the upheaval in financial markets. In part, the unprecedented decline of the pound sterling and stocks throughout Europe was a result of surprise. Unexpected events aren’t normally positive for financial markets. Nonetheless, the recovery in stock prices this past week could have been expected. Nothing moves in a straight line in capital markets.

However, the likely longer term effects can be visualized by watching an inchworm. The stuttering, stop-go nature of the economy’s forward progress can result in miscalculations along the way by businesses and investors. Those newly-launched expansion plans or that just-signed contract now face a different set of assumptions than originally planned. The global economy just became a bit more like an inchworm.

Looking forward, business confidence has also been impaired. Whether this hit to confidence is longer lasting will depend on how politicians throughout Europe and the UK handle the aftermath. Since the vote, uncertainty is heightened. In addition, the realities of the massive complexity of actually exiting the European Union hasn’t helped. It’s been aptly described as a messy divorce.

In my view, the Brexit vote has injected tangible uncertainty for businesses and markets, on a global scale. What affects the UK, affects the rest of Europe. And, what affects Europe, affects the US and Asia. With central bankers running out of policy bullets – with interest rates already at rock-bottom levels – and with global politics running on a potent mixture of anti-establishment and anti-globalization fuel, the situation will likely be uncomfortably volatile for investors.

In investing, discomfort can be a red flag or an opportunity. It is never easy to spot the difference.

In this politically heated environment, yet another partisan battle ensues in Washington. It highlights a sad reality of how difficult it is to do what is so obviously right for consumers. In particular, the battle is over the concept that all investment advisors should adhere to a legal fiduciary duty to their clients when providing financial advice. Until very recently, this duty was largely followed by only a subset of financial professionals, registered investment advisors.

Viewed at a high-level, a fiduciary duty is simply the professional obligation to place the interests of the client first at all times and under all circumstances.

In many ways, the public’s ability to recognize a financial advisor acting as a fiduciary reminds me of that old legal definition of pornography – you know it when you see it. However, that doesn’t cut it when some in the financial services industry seem intent to blindfold the public. Amid a flurry of paperwork and small-print disclosures, most consumers are wholly ill-equipped and outgunned. That is precisely what industry regulation is designed to counter.

The quest to implore all financial advisors to operate under an obligation to act as fiduciaries has been the Holy Grail for as long as I can remember. Due to a massively powerful lobbying effort from those with a vested interest to avoid a legal obligation to first serve the interest of their customers, the foot-dragging among our regulators and politicians over the years was striking to watch. Finally, in April, the Obama administration took matters into its own hands.

Using the existing framework that imposes a fiduciary duty standard on financial advisors in their dealings with pension and employer-sponsored retirement plans, the Department of Labor simply expanded that same obligation to any professional who also provides advice to consumers who own an individual retirement account (IRA). In one fell swoop, that regulatory expansion brought almost every financial advisor into the fiduciary world. With a stroke of the executive branch’s pen, the last foot was dragged across the finish line.

Predictably and disappointingly, the House and the Senate – mostly along party lines -recently voted to strike down the new fiduciary duty rule. Obama’s veto last Wednesday successfully kept the rule in place.

In my view, despite the loss of a clear-cut competitive differentiator for me and my fellow registered investment advisors, the new fiduciary rule is a resounding victory for consumers. Let’s hope it survives our dysfunctional politics.

At the Front Street Foundation’s recent Money Series workshop, an attendee asked a deceptively difficult question. She wanted to understand how to figure out the cost of her investment program. That’s a simple enough request, right?

It should be easy for consumers to safely navigate the investment industry. Never is this more the case than it is today. Just last month, essentially every professional who provides financial advice must now operate under the same fiduciary duty rules independent registered investment advisors have always lived under. It is a long overdue and good change for investors.

Given this, my initial suggestion was for her to ask her current advisor what she’s paying. After all, it is a quick calculation for a professional to make and, now, it is her advisor’s obligation to provide her this information. Sadly, she didn’t trust her advisor to give her the straight scoop. She clearly has a larger issue to address, other than knowing the cost of her investment program.

I’ve been asked about fees often in my career and have helped calculate the fees paid by investors on countless occasions. Here’s a basic primer on how you can do it from the comfort of your own home.

For the typical investor who invest in mutual funds, grab your most recent brokerage account statement and go visit morningstar.com.

Each mutual fund you own has a unique ticker symbol. Find the ticker symbol on your statement and just enter it in the search box at the top of the website. Click on the resulting mutual fund’s tab labeled, Expense, and scan down the page for the words, “Net Expense Ratio.”

The net expense ratio is the all-in cost of your mutual fund, presented on a percentage basis. Simply take this percentage and multiply it by the current value of your mutual fund holding. Repeat this process for each mutual fund you own and, finally, add up all the fees. Yes, some math is required.

However, there’s more. If you have also hired an adviser to manage your investments, you are probably paying advisory fees too. Further, if you’ve chosen to work with someone who sells financial products for a commission, some deeper digging is required.

No consumer would dream of buying groceries, clothes or a plane ticket without knowing the price. It begs the question, why do so many do just that when it comes to their investments?

Jason P. Tank, CFA will present, “Understanding Your Investment Fees” at the Front Street Foundation’s Money Series on June 15th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6459 or visit FrontStreetFoundation.org, if you plan to attend. Front Street Foundation is a local nonprofit providing financial education for all people.

After yet another violent market swoon and snapback, it is entirely possible investors are resting their hopes on a flawed belief.

The first quarter of 2016 displayed a range of emotion that could shake even the most rational of investors.

The first six weeks of 2016 saw stocks rapidly decline, at one point down around 10% to 15%. While the depth of the decline could reasonably be described as normal, the speed was certainly sudden. On the flipside, the market’s recovery over the second half of the quarter has been equally quick.

Today, in fact, most stock market indexes now hover around the zero line year-to-date. No gain and only the fading memory of pain.

It was quite a ride that no doubt favored investors who were either blind or deaf or internet-free, as it has since the recovery began in 2009. Contemplation and preparation has not been rewarded.

To begin the year, investors began anticipating the negative effects of the Fed’s move off of zero interest rates. That concern, coupled with the fact that the economy is still showing only subdued growth and corporate profits have been in decline, investors were quick to cry wolf.

As soon as their cries rang out, central bankers in Europe, Japan and China all responded with more easy money. In fact, describing it as easy money may be an understatement with a large portion of all government debt across the globe now trading at negative yields. Yes, unbelievably, negative interest rates require the investor to pay the borrower for the privilege to lend!

Following suit, our own central bank has consistently backed down the expectations for rate hikes this year and next.

It’s almost ironic that the Fed started to raise rates in December, citing a healthy enough economy to start “normalizing policy”, as they say. Now, growth has stalled out once again, as it’s done repeatedly.

Regardless, my observation is investors don’t care as much about economic growth or even profit growth as they do about the underlying support of central bankers.

The quick market bounce in mid-February almost perfectly coincided with a doubling down of promises of lower rates for longer and more asset purchases around the globe.

Investors reaction to promises of easy money reminds me of the long held belief that objects of different weight – a bowling ball and a feather – fall at different rates.

For thousands of years, this flawed belief was seen as an universal truth by the academic elite. That is, until Isaac Newton showed what other non-academics knew long before, all objects are affected by gravity just the same.

Are investors simply buying into a similarly flawed and long-held belief that central bankers and low rates will always be there to rescue them? We shall see, but I’m placing my bet on gravity.

The recent best-selling book, The Life-Changing Magic of Tidying Up, argues that life’s better when you eliminate your clutter. I believe the exact same principle applies to your financial life.

As you look at your pile of shoes, tools or warily peer into your messy closets, it’s no surprise your things get lost so easily. Too often, partially due to a distaste for all things related to money, people similarly neglect their finances.

If this describes you, your benign neglect may lead to costly and avoidable mistakes.

Over the years, I’ve noted two common habits that lead to financial disorder.

First, many people have too many investment accounts. It results in a cornucopia of accounts and the situation is overwhelming.

This type of shotgun approach – to just open accounts all over town and never look back – creates a situation that is often unmanageable for a normal person. And, as a general rule, what is unmanageable most often remains unmanaged. In the world of investments, I can assure you, that’s not a good thing.

People living in this disorganized state also have little idea about their overall investment allocation and the level of risk they are taking with their money. With their piles of unopened envelopes and email notices growing, they often don’t know their mix of stocks, bonds or cash. There are simply too many accounts and it literally stops them from moving forward with a strategic investment plan.

Second, failing to periodically clean out your financial closet can result in costly estate and tax planning mistakes.

For example, neglect can lead people to fail to update their beneficiary designations as their life situation changes, such as a divorce, death or having a new child. The benefits of good tax planning concerning your heirs can be large and to inadvertently throw them away is unfortunate, to say the least.

Another example is for those who have successfully completed basic estate planning moves – through the creation of trusts or other methods. Having to keep track of too many moving parts naturally lead to a failure to execute on the plan. When you don’t actually fund your trusts or properly designate your payable-on-death directives for your various accounts, all the planning in the world is wasted effort and can lead to avoidable expenses for your loved ones.

A good financial adviser will work to better organize your financial life. Helping you tidy up your affairs is one of their core functions to help you gain confidence with your overall financial strategy and plans. An uncluttered home – and an uncluttered financial life – invariably leads to an uncluttered mind. It might even feel, dare I say, life-changing.

Occasionally, I experience disappointments as an investment adviser. It comes with the territory as I get to see behind the curtain of the financial services industry. It saddens me to report, when it happens, it’s often not a pretty sight.

An individual recently came to me for advice about his IRA account. After years working with an adviser, his gut told him he needed another set of eyes to take a look. His hunch was right. In a nutshell, the investment expenses he was paying were outrageously high.

The primary lesson is, you should periodically conduct your own review. It’s not difficult to do. The savings you might find can add up to a substantial sum over time.

Casting the curtain aside, here’s what I saw.

First, this individual’s adviser charged him 1% of his account value per year for services that largely focused on investment management. He described to me a relationship that was very light on personalized financial planning. For that 1% fee, which isn’t uncommon, the delivered services shouldn’t be light on this front.

But, as they say, there’s more.

Next, his adviser chose to outsource his duties to another investment advisory firm. Outsourcing is also not uncommon in my industry, especially for advisers who either don’t have the professional skill or the inclination to actually manage their clients’ assets themselves.

However, as a prudent consumer, you should be very aware of the possible double-layer of expense an outsourcing decision creates. In this individual’s case, his adviser’s outsourcing added yet another cost of 1.25% per year.

Unfortunately, as bad as this might be, you guessed it, there’s more.

 Third, the outsourced investment adviser outsourced his work too. As part of their service, they chose to invest the money in various mutual funds that, together, added at least 0.75% per year in additional costs.

With the curtain fully drawn back, this individual incurred total expenses of roughly 3% per year. Expenses like these create a hurdle so high, few investors can ever get ahead. And, these expense layered cakes are not rare enough, especially for smaller investors who can afford them the least.

 Think about the math for a moment. With interest rates so low today and with the economy now entering its eighth year of recovery, future investment returns – after expenses like these – may indeed have a hard time staying in positive territory.

Learning how to analyze your investment costs is a skill worth developing.  

Just finished reading the letter portion of Warren Buffett’s annual report to shareholders. It’s always a good read.

My general impression is that Buffett is increasingly describing the wide-ranging operations of Berkshire in terms and structure that highlight the conglomerate his empire has truly become. The specifics of the many underlying, smaller businesses that Berkshire controls and the investments Berkshire makes in marketable securities, are largely gone from his commentary. This was once the bread and butter for professional investor readers. This is natural and reflects the sprawling nature of the business today. Still, his letter does lose a little bit of its “nerdiness” as a result.

It was noticeable to me that he used only one page – just a short list – to describe Berkshire’s investment activities and he made no detailed mention of bonds (a big part of Berkshires’s portfolio as a large insurer), the state of the economy or the current state of central bank policies that have produced unprecedented effects in financial markets today. His comments about the market and their transactions along the way were very sparse and no real mention was made of his investment lieutenants’ (Combs and Weschler) decision making or returns in 2015. Given the focus that many shareholders place on Buffett’s investment acumen, I found this somewhat odd. Especially so, given that he is 85 years old.

Overall, the businesses that Berkshire controls have certainly produced a very diversified set of income streams. The overall value of the company, from a book value relative to its current market value perspective shows that Berkshire’s common stock is reasonably priced at around 1.2x book value. In fact, this is the valuation level that Buffett has stated will prompt him to use Berkshire’s resources to buy back its own shares. This has not occurred often in his 60 year history.

My opinion on Berkshires’s lower book value multiple is that it better reflects the reality that a management transition will occur sooner rather than later. Given its complex conglomerate structure – again, one highlighted by this year’s letter – Buffett’s successors will have a challenge during a transition.

In the high heat of this election cycle, Social Security reform will likely slide closer to the front burner. If not, it should.

As an investment adviser who disproportionately works with near- or currently- retired people, I see firsthand the important role Social Security plays in their overall financial picture.

For a large proportion of retirees, Social Security represents the majority of their retirement income. For this reason alone, digging into our presidential candidates’ Social Security reform proposals is a high priority.

Bernie Sanders appears to provide the most detailed Social Security reform proposals on record. Naturally, he focuses on increasing the program’s funding to help shore up its long-run financial sustainability.

Sanders primarily proposes raising the cap on wages subject to payroll taxes earmarked for Social Security. Under his plan, today’s maximum threshold of around $120,000 per year in earnings subject to this tax would remain. His new proposal is to restart collecting the payroll tax once a worker’s earnings exceed a new threshold of $250,000.

Importantly, in exchange for these additional contributions, affected taxpayers would receive no additional benefits and the money raised would be used to support the benefits of those with a lower history of earnings.

Hillary Clinton’s proposals center on her opposition to retirement age hikes, privatization plans or payroll tax increases for the middle class. Clinton has expressed openness to Sanders’ idea of raising the cap on earnings subject to Social Security payroll taxes, but provides no specific plans.

Donald Trump’s main idea for Social Security is to produce faster economic growth. However, I am not aware of an analysis of how economic growth affects the long-run financial position of Social Security. Beyond the economic growth argument, Trump has also suggested that wealthy people voluntarily return their benefit checks and that he’d reduce “waste, fraud and abuse.”

Marco Rubio and Ted Cruz both support increasing the retirement age and lowering the inflation rate for benefit payments. Both also support the idea of younger workers developing private accounts within the system.

While Cruz’ plan for privatization appears similar to Bush’s previously failed attempt, Rubio’s private account proposal appears to be designed as a supplementary source of retirement savings, rather than a replacement for Social Security.

Social Security is the ultimate political hot potato, no doubt. Understanding the candidates’ reform proposals – with details that allow for deeper analysis and thoughtful debate – is a basic right of voters. The goal of any reform, as I see it, is to reach a collective view on how we’ll maintain Social Security as a pillar of financial support to the millions of retirees who need it. Benign neglect won’t get the job done.

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Navigating Social Security’s New Rules” on March 9th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6459 with questions, visit frontstreet.com/workshop to learn more.

 

Stock markets are down this year between 10% and 15% across the globe. From their recent highs set in 2015, the drop has been an even larger 15% to 30%. Now is a good time to talk battle plans for handling this type of investment volatility.

While investment battle plans are best established prior to declines, it’s never too late and today’s lessons will no doubt help you tomorrow.

Your first line of defense is to do an investment risk assessment.

A proper risk assessment is a function of your age, income, assets, debts and your lifestyle desires. Together, these factors define your financial capacity for taking risk. It’s the brains, but not the heart of the matter.

A clinical exercise in financial accounting just isn’t sufficient to capture the power of your emotions. While investment advisers tend to denigrate investors’ emotional decisions, let me provide you with a more-nuanced view.

Like it or not, your emotional tolerance for risk will always be a part of you. Discounting who you are is generally a futile fight. Given this reality, your focus should be on properly aligning your portfolio’s high-level structure with your tolerance for taking risk. If you don’t know your portfolio’s asset allocation, review it now.

Your next line of defense is to actually know what you’re invested in.

If you own mutual funds, like most people, you should work to understand the investments sitting inside those funds. Remember, a mutual fund is just a box with wrapping paper on it. What’s inside is what matters most. If you don’t know the type of funds you own, find out.

Your third line of defense is to be diversified.

Diversification is often cited by investment advisers. Sure, it’s good, classic advice; don’t put all your eggs in one basket. But, calling it good after simply noting a long list of holdings on your account statements may open you up to some hidden risks.

Ask yourself if your portfolio is hanging on a common thread. For example, in your search for income in a yield-starved world, do you own too many real estate funds, lower-quality bonds or even safe-looking bond funds that rely on leverage?

Upon deeper analysis, you may have exposed your portfolio unknowingly and are actually undiversified. After all, diversification is not about how many investments you own. Rather, it’s about the commonalities and differences between them. If you are unaware of the factors that affect your portfolio, I’d suggest you start doing your homework

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Battle Plan for Investment Volatility” on Feb 24th at 3:30 pm in the Blue Room at the Traverse Area Chamber of Commerce. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.

One question has rung through loud and clear following my two recent columns on the big rule changes with Social Security and the development of a safe spending rate in retirement.

Soon-to-be and current retirees want help developing a holistic plan for the “living off my savings” phase of their retirement journey.

Specifically, their burning question can be broken down into three smaller questions. First, from which accounts should we withdraw our money and in what order? Second, how exactly will my Social Security benefits affect our tax bill? Third, what steps could we take now to help minimize our tax bill in retirement?

Our financial system is a ridiculously complex maze for retirees to navigate. At the center of the complexity sits our tax code.

Regarding the question of which accounts should be drawn from first and in what order, most retirees have two forms of savings. They have savings that have already been taxed and savings that have yet to be taxed.

To begin, it’s important to understand that the mere act of drawing from your already-taxed savings does not trigger a tax bill. Only your dividends, interest and realized gains result in tax payments. In contrast, the act of drawing from your tax-deferred savings creates immediate taxable income.

Given this, choosing the best source of retirement income clearly depends on your own tax picture. For this reason, sound advice about the best source of retirement income wholly depends on your personal financial setup. This requires some basic tax modeling of your present and future tax picture.

Next, you may not realize that Social Security benefits are often taxed. The proportion of this benefit that is taxed can range from none to a maximum of 85% of the benefit. The tax owed depends entirely on your other income, some of which is voluntarily created by drawing from your tax-deferred accounts, such as your IRAs.

With this understanding, the decision of which pot of savings to draw from – your already-taxed savings or your tax-deferred savings – can impact the amount of tax owed on your Social Security.

Finally, there are planning techniques that might allow you to minimize your future tax bills in retirement. Among these techniques are strategic, partial Roth IRA conversions and the possible utilization of the 0% capital gains tax rate on your federal tax return.

Intelligent planning for the “living off my savings” phase is increasingly on the minds of current and soon-to-be retirees alike. The educational steps you take now will no doubt pay dividends later. Best of all, those dividends are completely tax-free!

Jason P. Tank, CFA of Front Street Wealth Management will hold a free educational workshop on “Retirement Income: From Where & When?” on Feb 10th at 6:30pm in the McGuire Room at the Traverse Area District Library. Call (231) 714-6407 with questions, visit frontstreet.com/workshop to learn more.