Posts in NAPFA

Teacup Pigs and Your Retirement: John Oliver’s Segment on 401(k) Plans

June 15th, 2016 Posted by 401(k), Investment Strategy, NAPFA, Politics, Retirement Planning 0 thoughts on “Teacup Pigs and Your Retirement: John Oliver’s Segment on 401(k) Plans”

For those of you who enjoy John Oliver’s straight-shooting and hysterically funny slant on the world and are concerned about getting unbiased advice from a fiduciary advisor on your retirement funds, do yourself a favor and watch his June 12th show. As a fiduciary myself who implements passive, low-cost investment approaches for 401(k) plans and clients in general, I can tell you that Oliver’s segment on retirement advice is right on the mark. Work with a fiduciary who is legally obligated to put your interests ahead of their own, get a full accounting of fees (beware 12-b1 fees, broker fees, internal fund fees), and keep aggregate costs low. Also I would add to his list the following: make sure your plan participants are being individually helped and educated based on their situation, protect yourself as plan sponsor by having the fiduciary advisor take responsibility in writing to serve as section 3(21) fiduciary to the plan, and use only index funds or low-cost asset class mutual funds–the ones we use are from Vanguard or Dimensional Fund Advisors. And please spread the word!!!!

[Strong language advisory]


Also read my April 7th blog for even more reasons to want the Department of Labor to succeed in their efforts to bring fair treatment and transparency to retirement fund management.

$17 Billion in retirement funds have been wasted in hidden broker fees

Top Tips for the Well Advised Investor Part IV

November 24th, 2015 Posted by Budgeting, Investment Strategy, Investment Vehicles, Investor Behavior, NAPFA, Stock Options 0 thoughts on “Top Tips for the Well Advised Investor Part IV”

Good advice for investors does not need to be complicated. In that spirit, we offer this four-part series on sound investment principles. Including these guidelines in your investment strategy could help you reach your financial goals.

Part IV. – Thoughts on Life and Investing

  1. It is important to understand the difference between “highly improbable” and “impossible”, as well as the difference between “highly likely” and “certain”.

Over almost all periods of 20 years or longer in the United States, stocks have provided higher returns than bonds. So it’s no surprise that investors assume, if their horizon is long enough, stocks will certainly continue to provide higher returns than bonds. Unfortunately, this assumption can lead them to take more risk than they should. It is essential to remember that stocks, like any risky asset, are risky no matter how long the investment horizon is.

  1. The only thing worse than having to pay taxes is not having to pay them.

Taxes are a fact of life – they are not going away anytime soon. Whether we agree with where our tax dollars are, or are not, being spent, we still have to pay our fair share. For many people, not having to pay taxes is a reflection of not having enough income to live on. So in that respect, having to pay taxes is a good thing. But that does not mean we should pay more than we need to.

All of this leads people to try and avoid paying unnecessary taxes. There are smart and not-so-smart ways of approaching the issue. Investors who hold a large amount of stock with a low cost basis often refuse to sell because of the tax bill on capital gains. Sadly, large fortunes have been lost because of this error.

There is a wiser way to make the decision to sell or not to sell. Investors should weigh the present asset allocation of their current holdings against the desired asset allocation that they have defined within a carefully designed investment policy. Then, factors such as tax implications can be considered.

  1. The four most dangerous words are, “This time is different.”

Believing that “this time is different” has caused the investment plans of many individuals to end up in the proverbial trash heap. It is tempting to succumb to the lure, and potential mania, of the “new thing.” This behavior reinforces a time-worn phrase: “The surest way to create a small fortune is to start with a large one.” When the lure beckons, stick to your plan, as described in Part I of this series.

  1. Good advice does not have to be expensive, but bad advice can cost dearly.

Most of us wouldn’t choose the cheapest doctor, the cheapest attorney or the cheapest accountant. Although we should consider the expense against what we can afford, we also know that the value we receive is what ultimately matters.


The principles outlined in this series can provide investors with resolve to stay the course regardless of market events. For investors, creating and sticking to an investment strategy that addresses their long-term financial goals along with their overall ability, need and willingness to take risk, is an advisable approach that can serve them well through bad times as well as good.

[Photo credit: LendingMemo]

Top Tips for the Well Advised Investor Parts II & III

November 16th, 2015 Posted by Budgeting, Investment Strategy, Investment Vehicles, Investor Behavior, NAPFA, Stock Options 0 thoughts on “Top Tips for the Well Advised Investor Parts II & III”

Good advice for investors does not need to be complicated. In that spirit, we offer this four-part series on sound investment principles. Including these guidelines in your investment strategy could help you reach your financial goals. (You may want to refer back to Part I – Investing – The Benefits of a Disciplined Plan.)

Part II – Individual Stocks – Reasons to Avoid Trying to “Beat the Market”

  1. Owning individual stocks and sector funds can be unnecessarily risky.

Owning one large-cap growth stock has the same expected return as owning an index fund of large-cap growth stocks, but it entails far greater risk. (Large-cap refers to companies with a market capitalization of more than about $10 billion, which is calculated by multiplying the number of a company’s shares outstanding by its stock price per share.)

The market compensates investors for risks that cannot be diversified away – such as the risk of investing in stock versus bonds, or corporate bonds versus Treasury bonds. Investors should not expect the market to compensate them for risk that can easily be diversified away – that is, the unique risks related to owning just one stock or one sector fund. Prudent investors understand that it makes sense to only accept the kind of risk which compensates them in the form of higher expected returns.

  1. Each strategy has an associated cost.

To outperform the market, an investor must first identify a mispriced security and then, after the expenses of the effort, be able to exploit the mispricing. Strategies by themselves have no costs, but implementing them does. Many investors have tried to exploit what they believed were (and perhaps really were) mispricings, but found that that the trading and other costs of implementing their strategies exceeded the potential benefits.

  1. It is prudent to avoid investment products with “elite” appeal.

We feel that hedge funds and private equity, including venture capital, appeal to investors by offering them the possibility of achieving superior returns while appearing to extend invitations to an elite group of investors. Recently, however, the hedge fund and private equity industries have lowered their minimums significantly. Furthermore, many of these vehicles turn out to be more expensive than they are expansive for an investor’s portfolio.

Generally, investors should not invest in a security without fully understanding the nature of all of its risks. And they should avoid investing in an investment product purely for the sake of its inherent complexity or exclusive nature. Such products are designed to be sold, not bought; the complexity is likely to be designed in favor of the issuer/seller, not the buyer.

Part III. – Diversification – An Essential in Portfolio Construction

  1. The safest port in a sea of uncertainty is diversification across many asset classes.

It is not possible to properly diversify using only the S&P 500 Index. While there would be a large number of holdings, there would not be enough diversification by asset class. An investor would receive ownership in 500 companies, but many of them belong to the same asset class. Investors need to look further than a single index to achieve appropriate diversification.

  1. Diversification is always working.

Sometimes investors like the results of diversification in their portfolios and sometimes they don’t. Most investors are familiar with the benefits of diversification. Done properly, diversification reduces risk without reducing expected returns.

However, once investors diversify beyond popular indices such as the S&P 500, they must accept the likelihood of being faced with periods of time (even long ones) when a popular benchmark index, reported by the media on a daily basis, outperforms their portfolio.

The media “noise” may test their ability to stick to their investment strategy. Nothing will have changed (diversification will still be the right strategy), yet many investors will make the mistake of confusing strategy with outcome, and abandon their plan. This is a good time to remember the stick-to-it-iveness that we discussed in Part I.

Stay tuned for the fourth and final part of this series: Thoughts on Life and Investing

[Photo credit: Lendingmemo]

Top Tips for the Well Advised Investor

November 10th, 2015 Posted by Budgeting, Investment Strategy, Investment Vehicles, Investor Behavior, NAPFA, Stock Options 0 thoughts on “Top Tips for the Well Advised Investor”

Good advice for investors does not need to be complicated. In that spirit, we offer this four-part series on sound investment principles. Including these guidelines in your investment strategy could help you reach your financial goals.

Part I – Investing – The Benefits of a Disciplined Plan

  1. Have an investment plan and stick with it.

Your plan should be well-developed and comprehensive. Your plan should be the foundation of all the financial decisions you make, especially when the market is fluctuating. A solid strategy will help you keep your head when your emotions threaten to take over.

  1. Determine the appropriate level of risk tolerance.

Be prepared for the unexpected, so that if it occurs, you will be less likely to panic and abandon your plan altogether. When considering risk factors in specific asset allocations, keep in mind whether your investment time frame is short-term or long-term. Also weigh the stability of your income, your ability to deal emotionally with market fluctuations, and the rate of return you are seeking.

  1. Know how to interpret the value of information.

Consider the source. If you learn something through the media or from a broker, it is likely that the market will have incorporated the same information into the current stock price. In other words, much of the information you may be privy to has a good chance of being obsolete. In any case, there are many intelligent and motivated people researching the same stock, so the information is unlikely to give you a competitive advantage.

  1. Don’t ignore the impact that expenses have on your portfolio.

Investing always has associated costs. On paper, a stock may look like it has outperformed the market, but when considered against fees and other expenses, the net result could equate with underperforming the market. And remember, for one investor to outperform the market, another (this could be you) must underperform. You would be well-advised to seek earnings at the market’s rate of return, while incurring lower costs with an evidence-based investment strategy.

  1. Work with an advisor who meets the fiduciary (rather than a mere suitability) standard.

Brokerage firms and their employees are held to a rule of suitability. The service they provide and the products they sell are only required to be suitable for an investor, not necessarily in the investor’s best interests. And a brokerage firm may sell suitable funds with relatively high fees, earning themselves bigger commissions or satisfying particular sales quotas.

Registered Investment Advisors, on the other hand, have a fiduciary obligation that goes above and beyond the basic suitability standard. They must act with the utmost good faith in their clients’ best interests. In fact, the fiduciary standard is generally considered the highest legal duty that one party can have to another.

Furthermore, an advisor can play an important role in ensuring that investors adhere to their well-developed plans when markets fluctuate. This stick-to-it-iveness helps investors avoid the potential financial consequences of reacting to the “noise” of the market. This approach also averts attempts to profit from “bubbles” in the market, which do occur, but are unfortunately quite likely to burst at unpredictable moments.

Stay tuned for the remaining three parts of this series:

II. Individual Stocks

III. Diversification

IV. Thoughts on Life and Investing

[Photo credit: Lendingmemo]

Why We Don’t Recommend Hedge Funds

November 3rd, 2015 Posted by Investment Strategy, Investment Vehicles, NAPFA 0 thoughts on “Why We Don’t Recommend Hedge Funds”

Hedge fund assets have grown from $39 billion in 1990 to an estimated $2.5 trillion today. But the evidence we see on these funds indicates to us that the vast majority of investors should avoid them. In fact, we at OpenCircle do not recommend them for our clients. Why not?

Larry Swedroe, our Director of Research through the BAM Alliance, recently completed an updated review of academic papers that analyze hedge fund performance. His conclusion? Despite the allure of “miraculous growth,” the hedge fund industry has major pitfalls. I have outlined some of them below.

Biased Data

You should not trust the data. A significant bias in the available data on hedge funds relates to survivorship. Rather than using statistics that are objectively random, the results may be limited to the funds that are actually performing well in the first place. If the funds with the biggest losses are dropped out of the database, the results reflect greater success across the board.

Risk of Dying

 Hedge funds, as an investment category, do not offer peace of mind. If hedge funds had a healthy survival rate, the statistical bias might not matter so much. But about a third of these funds do not make it past three years. And roughly half of all hedge funds hold on for only five years. In the longer-term, even fewer hedge funds survive.


After adjusting for database biases such as survivorship, it appears that hedge funds underperform, rather than outperform their benchmarks. An equivalent, or perhaps better, rate of return may be realized through investment vehicles that have less inherent risk. And don’t be misled by the idea that a highly trained and skilled fund manager will lead to better fund performance. Just because a fund manager has “beaten the market” in the past, does not mean he or she will be a top performer in the future.

Liquidity, exclusivity and other factors 

Hedge funds may suffer from illiquidity, which means they cannot easily be sold for cash. An attempted sale may not attract buyers, and if there is a sale it may be at a substantial loss. Furthermore, the assets in a hedge fund may be “locked up” for long periods, making them untouchable by the investor at potentially key times.

Hedge funds offer the lure of exclusivity. Some individuals may be attracted by the thought of becoming one of the “elite members of a special club” reserved for those who can afford high stakes investing. The actual results can be costly and disappointing. At the very least, the results of hedge fund investing may not outweigh the price of so-called exclusivity.

Hedge fund managers demand comparatively high fees for their services. And many of the fees are buried. In other words, investors may have serious difficulty discerning the true costs associated with these funds.

The bottom line? If something sounds too good to be true, it probably is. Hedge funds are risky business. You’re not missing anything if you’re not investing in them.

[Photo credit: Flickr user Adam Koford]

Fiduciary or Suitability Standard?

September 14th, 2015 Posted by Investment Strategy, NAPFA 0 thoughts on “Fiduciary or Suitability Standard?”

I am proud of my firm’s fiduciary status as a Registered Investment Advisor. By choice and by legal requirement, unlike brokers who only adhere to a suitability standard, OpenCircle always acts in the best interest of our clients, both individuals and retirement plans. We work on a fee-only basis, which means we do not earn or charge commissions on investment transactions.

Not only do my firm and I uphold the fiduciary standard, we also stay away from actively managed investment funds. We are dedicated to keeping our clients’ costs down. We help them create an investment plan and stick to it. We believe in rebalancing a client’s portfolio in order to adhere to their written investment plan. In this way, we keep costs down while harvesting tax benefits.

The suitability standard to which brokers are held allows for conflict of interest. Brokers can recommend the purchase of investment products that help them make money, at your expense. They also can make money every time they make a trade on your behalf. It serves their interests to advise you to buy and sell. Naturally they want to protect their way of doing business.

The U.S. Department of Labor has proposed a rule that would require a fiduciary standard. My Registered Investment Advisor peers and I applaud this effort. It comes as no surprise that lobbyists for non-fiduciary providers are strongly opposing the proposal.

Our Director of Investor Advocacy through the BAM ALLIANCE, Dan Solin, explains the importance of avoiding conflicts of interest in working with your advisor. He explores how providing conflicted advice is big business and harms investors while enriching firms and brokers. Read Solin’s The Fiduciary Rule: The Real Agenda in the Huffington Post.

Learn how OpenCircle’s business model serves your best interest.

[Photo credit: Lending Memo]