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Fund Families sued by their own employees over their retirement plans??

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By Mack Bekeza

Over the past two years, a number of investment firms have been sued by their employees over their 401(k) plans. That’s right! Investment firms have been sued over their own in-house retirement plans! Why? In most cases, these firms would only provide proprietary funds to their employees at a full or slightly reduced cost. In fact, here are just a few of the recent cases from the past two years:

1. Transamerica
2. Fidelity Investments
3. Ameriprise
4. New York Life
5. Great West (Empower)
6. MFS Investment Management
7. Waddell and Reed
8. Allianz Global Investors
9. MassMutual
10. Neuberger Berman
11. Putnam Investments
12. BB&T
13. Edward Jones
14. Morgan Stanley
15. American Century

Why do these investment firms offer their own funds to their employees without significantly lower fees? First, they do not want to convey to their employees that there are potentially superior investment opportunities outside of the company. For instance, Fidelity might not want to offer an outside fund that could be cheaper and possibly better performing than a comparable Fidelity fund. Additionally, since these plans tend to be very significant in size, reducing investment fees for their own employees could be problematic, since it could potentially increase fees for their retail investors to absorb the cost.

Is there a solution to this dilemma? Yes, there actually is! For the investment firms that are currently offering their proprietary funds to their employees without reduced expenses, these firms should consider offering outside funds to their employees. This could potentially result in lower expenses for the employees. Furthermore, this could remove the target off their backs from ERISA once the DOL regulation becomes effective in April of 2017. Of course, this is a lot easier said than done because it requires investment firms to expose their weak spots in their investment line ups, which could also potentially leak out to their retail investors. Also, a retirement plan was never meant to make the employer money, it is supposed to be a generous benefit for its employees.

With the new DOL regulation coming in April 2017, 2016 has proven that broker dealers and investment advisors are not the only target, but the fund families have also been dealing with quite the roller coaster themselves. And, as retirement investors, we should be glad that the investment business is starting to clean up its act for good and will in return make the industry more beneficial for everyone.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

Active Versus Passive Investment Strategy…Which is Best?

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By Mack Bekeza

Investors have been debating if it is better to have an active investment strategy or a passive one. On one side, investors claim that being active will allow them to capture the best investment opportunities and optimally manage risk. On the other side, investors claim that going passive will help them secure long-term returns while being able to diversify unnecessary risk. Is one side more accurate than the other? We can’t really say. However, we can say that there is one thing that plays a very significant role in this argument…fees!

How do fees affect investment returns? First, let’s review the three common places fees show up in our investments, particularly mutual funds: Sales-loads, management fees, and 12b-1 fees.

How do these fees affect overall investment performance? Recently, Standard and Poor’s conducted research on how fees affect active managers’ performance against their benchmarks and came out with some noteworthy results. For U.S equity funds,       70% – 92% of active funds in their respective categories underperformed their benchmarks[1] over five years, net of fees. In other words, the vast majority of actively managed U.S equity funds underperformed U.S equity index funds over the course of five years[2] after fees. However, only 30-65% of actively managed fixed-income funds in their categories (excluding long term government, high-yield, and emerging markets) have underperformed their benchmarks after fees. International equity funds have also experienced a smaller percentage of their funds underperforming after fees, ranging from 47%-79% in their categories.

So, what does this mean for those who invest in mutual funds? Although there could be a case made that going active in fixed-income has benefited investors, being passive (investing in market index funds) has been more rewarding to investors over the course of five years. Will this trend continue? We don’t know. However, we do know this: index funds have posted better long-term performance than active funds due to having fewer fees and by mimicking the market, rather than trying to beat it.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

[1] Note that the benchmarks in this study are indexes made by Standard and Poor’s, this writing only mentions returns after fees with retail mutual funds, not institutional mutual funds. Here is the study that we are referencing: http://us.spindices.com/documents/research/research-spiva-institutional-scorecard-how-much-do-fees-affect-the-active-versus-passive-debate.pdf?utm_medium=Email&utm_source=Eloqua

[2] Index funds are not the benchmarks themselves, rather they attempt to mimic them.

Rouge Broker Steals $1.3 Million From an 89-Year old!

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By Mack Bekeza

On July 2016, FINRA discovered that Travis Wetzel, a former broker who was originally barred from the industry in 2013, had been making fraudulent annuity withdrawal requests for an 89-year old’s Variable Annuity with Prudential. Once Prudential got wind of this, it immediately investigated the situation and discovered that the withdrawals were being made from an account in the broker’s wife’s maiden name! Overall, there were a total of 114 withdrawals made to this account between July 2010 through September 2012. Unfortunately for Prudential, even though it responded promptly and reimbursed the 89-year old, it was fined $950,000 by FINRA for failing to spot this while the withdrawals were being made.

Even though this story seems to be very unfortunate for both the 89-year old and Prudential, things like this happen more frequently than most people would think. For instance, MetLife was fined $25 million dollars for similar reasons. And, on top of that, LPL has paid over $12 million in fines and restitution for failing to supervise fraud in variable annuities, non-traded REITS, and even certain ETFs.

Since variable annuities are complex products that are mostly sold to the elderly, FINRA places a very high level of scrutiny on possible fraudulent activity. And, it can be quite a task for brokers to spot these transactions since they process millions of transactions on a daily basis. So, being able to spot fraudulent activity the minute it happens can be nearly impossible. In fact, it can take up to a couple of years to find out what exactly happened!

Is there anything the client can do to avoid these mishaps? Fortunately, yes, there is! Individuals can hire a financial advisor, such as Castle Rock Investment Company, that operates as a fiduciary to help them make the right choices and not get sucked in by a dishonest broker. Another thing that a client can do is look up their broker or investment advisor through FINRA’s Broker-Check website to see if they have had previous client complaints. Although most financial professionals are honest people, it is important that individuals seeking financial advice do their homework to see if they are walking into a trap.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

How to Get the Most Out of Index Funds

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By Mack Bekeza

Although index funds can be an excellent choice for retirement investing, many people do not have a complete understanding of how they work. Before we get into the main topic, let’s get some facts straight about what these funds have done historically.

  1. Over the long term, have index funds outperformed the large majority of their active cohorts? Yes!
  2. Are index funds a much cheaper way to invest than actively managed funds? Yes!
  3. So, just because someone is only invested in index funds, have they significantly reduced their portfolio risk? Well… not exactly.

Being able to understand the risk of an index fund has been difficult for some investors, simply because they do not have a complete understanding of what they are invested in. For instance, a study conducted by Natixis, found that 64% of investors believe that index funds will help minimize investment losses. Natixis also found that nearly 7 out of 10 investors believe that index funds “provide the same access to the best investment opportunities in the market.”[1] Is this true? Again…not exactly. So, how can investors reduce investment losses with index funds? The simple answer is through diversification.

Diversification, or what is known to academics as the only free lunch in investing, is simply investing across different asset classes (stocks, bonds, cash, etc.) and across numerous regions around the world (i.e. domestic funds and international funds). As a result, investors reduce risk by having funds that do not all go up and down together. For example, let’s take a $1,000 portfolio that has 50% invested in a stock index fund and 50% invested in a bond index fund. If the stock index fund loses 2% in one year and the bond index fund gains 4%, the portfolio has increased by 1%.

So why doesn’t the portfolio go up 2% if it has a 50/50 split between stocks and bonds? Well… let’s find out. At the end of the year, the $500 that was in the stock fund turned into $490 and the $500 in the bond fund turned into $520. If we add them together, the portfolio is now worth $1,010, a 1% gain. Diversification is meant to be used to reduce risk and stabilize the portfolio. And, if you diversify with index funds, you have found a way reduce risk while saving money!

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

[1] Here is the article about the study: http://www.planadviser.com/Investors-Miss-Much-of-the-Subtlety-in–Active-vs-Passive-/

The People’s Best Interest…The Battle Continues

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By Mack Bekeza

The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.

How to use Credit Cards the right way!

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By Mack Bekeza

Credit Cards, just a piece of plastic that spirals people into debt right? Well… not always. In fact, many people who use credit cards tend to actually save money on certain items. That’s right! People can actually save money by utilizing a credit card! But how? Although there are plenty of ways one can utilize credit cards, here are the two most common ways people can save money with them:

  1. Utilizing a Cash-Back Card for everyday purchases and racking up rewards in a form of a statement credit or even a check.
  2. Frequent travelers using a Travel Rewards Card to lower their travel expenses substantially via points when staying at a hotel, renting a car, or even everyday purchases.

Although these perks are great for people trying to save money, it is crucial that you pay off these credit cards on-time and on a regular basis. It is also important to note that cards with very generous rewards are known for charging higher interests rates (even to those with excellent credit).

So what is the best way to manage your credit cards without paying interest?

  1. One rule of thumb is to check and pay your balance once a week or every other week depending on how frequently you use it. Not only will doing this increase your credit score, you also will not have to worry about paying your bank any extra money!
  2. Another tip is to only use a credit card if you can pay the balance instantly, meaning that if you couldn’t pay for an item with a debit card without going into overdraft, don’t use a credit card!
  3. Last but certainly not least, do not pressure yourself to spend more money just to get a sign-up bonus, in fact, do not change your budget what so ever! Only attempt to go for the sign-up bonus if your regular spending habits will allow you to do so.

Now that you have an idea on how to manage credit cards, how do you know which one is right for you? There are a few things to consider:

  1. If you haven’t done so already, check your credit score or even your full credit report(credit reports are only free to view once a year). Many Banks and Credit Card Companies only issue certain cards to people who meet specific criteria such as credit score and income thresholds.
  2. Think of how can you best utilize a credit card. For instance, do you travel a lot? Do you frequently go grocery shopping? Or do you just spend a lot of money in general? Either way, there is a high chance that there is a credit card that can help you save money on certain or even all frequent expenditures.
  3. Like previously mentioned, make sure that you find a credit card that you can get the sign-up bonus without having to alter your spending habits.

If you have any questions about certain credit cards or how to interpret your credit score, don’t hesitate to contact us at mack@castlerockinvesting.com

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

 

The Importance of Saving

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By Mack Bekeza

Saving, sounds hard, right? Well actually not as much as you think, but it does require will power and a positive attitude. In most cases, people begin to start saving but end up quitting because of a few things:

  1. They save too much and end up having to spend most of it to pay for life’s necessities.
  2. They save too little and think there is no point to continue saving at all.
  3. They save a fair amount of money but end seeing a big sale at their favorite stores and decide to blow it on clothes or other things.

So how can someone avoid those three things? It can be achieved by following a few steps:

  1. Develop a monthly budget for your bills and discretionary spending (budgeting tips can be found in our previous personal finance blog attached here).
  2. Think of a couple things that you can set a savings goal for. For instance, you could plan to start an emergency fund that can cover 3-6 months of expenses (Please take note that this should be done over a course of a couple years so don’t rush yourself on this).
  3. If you have not done so already, another goal you can start is creating a retirement savings goal. You know that 401(k) that your employer offers…take advantage of it! Not only will it possibly allow to exclude a portion of your income for tax purposes, it can be a big help to get you prepared for retirement.
  4. To fund these great savings goals, think of a suitable savings rate that can cover these goals. For instance, a rule of thumb is to be able to save 10%-15% of your income for an emergency fund and eventually contribute another 10% to your retirement goals. This might sound like a lot, but you do not have to automatically save this amount right away. These things take time to start building, so start with at least 5% for both and gradually increase the amount over time.
  5. Now that you have these in mind, how do you resist the temptation of using these savings for things you do not need? For starters, you can open your new savings account with an another bank so you really feel like you are putting money away and do not have instant access to it. However, for an emergency fund, it is important to have at least a check book to pay for emergencies (Money Market Savings Accounts allow you to have a check book and might even allow you to have a debit card). Check out banks that offer High Yield Money Market Accounts here.

Hopefully you will take this to heart and begin a plan to save! Although we will continue to write personal finance blogs over time, do not hesitate to contact us at mack@castlerockinvesting.com if you would like us to help with your goals!

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

Water Cooler Wisdom: Second Quarter 2016

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By Mack Bekeza

Is the U.S the only place for long term returns?

Although the United States has experienced one of the best bull markets in terms of duration and returns, investors have been wondering what is next. This past year has not been as invigorating as the prior few years and, on top of that, economists are predicting U.S GDP growth to be at around 1.5% for the next few years. You may have also been hearing from either presidential debates or that “one guy” at the bar that everything is going down the tubes and that we have seen our best days. Are they right? The answer is, we do not know.

What we do know is this, even though the U.S is still considered the safest place for investors, that doesn’t necessarily mean we should only be invested in American securities. Did you know that the rest of world accounts for 95.5% of the human population, nearly 75% of the global GDP, and nearly 60% of the total stock market? On top of that, international securities are not perfectly correlated with the U.S markets so they can be used as a very effective diversification tool for people of all age groups and time horizons. So why don’t people invest outside of the U.S?

There a couple of reasons:

  1. Many people have a bias towards their home country
  2. Many people fear that investing internationally is unbearably risky

To respond to those two reasons, there is nothing necessarily bad about being biased toward your home team but there is also nothing wrong with tapping into other developed countries and even emerging markets such as China and India to name a couple. And for people fearing that going international is overly risky, that is not necessarily true. Although volatility is more prevalent, that does not mean that international securities are a sure way to lose money. In fact, it is the volatility that will allow more buying opportunities which in turn can boost returns for people like you and I.

So despite what happened this past quarter (Brexit, continued negative interest rates in Europe, along with current slow global growth), we should still expand our horizons into the international markets and tap into the opportunities they present.

Attached are a few slides about global markets for the past quarter.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@CastleRockInvesting.com.