Friday, August 18, 2017

What’s your Money Mind®?

Pathways Advisory Group, Inc.
      Dustin J. Smith, CFP®

Is there a particular money paradigm that drives your financial decision making? If so, what is it and where does it come from? When your thoughts are consumed by this dominant Money Mind®, how does it ultimately shape the decisions that you make?

Take this brief quiz for a little insight.

According to the source of the Money Mind® quiz, while each of us has traits of all three money minds (The Protector, The Giver and The Pleasure Seeker) one of the traits routinely dominates. This makes a lot of sense. We seem to shift back-n-forth (between money minds) depending on the circumstances, but most of us default to a particularly dominant money paradigm. However, as you read at the end of your quiz, it’s not beyond your control. With awareness and lots of clarity (e.g. life goals projections), you can cultivate your less dominant money mind(s) and live a more balanced financial life.

Dustin J. Smith, CFP®

As described in this previous post, understanding the role of money in your life can be very helpful in achieving financial clarity. For another take on the Money Mind® quiz, view this post from Forbes online.

Source: United Capital Financial Advisors, LLC.

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Thursday, August 3, 2017

Brokers and Fiduciaries, Butchers and Dietitians

Pathways Advisory Group, Inc.
Evon Mendrin

America’s brokers and financial representatives giving advice on retirement savings accounts are finally required to act as fiduciaries.

The U.S. Department of Labor’s Fiduciary Rule partially came into effect on June 9th after much delay and not without a fight.  The rule requires financial professionals working with retirement accounts – such as IRAs – to work in their clients’ best interests rather than simply finding “suitable” investments. Now, there’s a higher level of accountability and conflicts of interest are to be disclosed. (See here for more detail on the law).

While this may seem like an obvious thing for someone in that position to do – and I’ve personally known many brokers and reps to work under that principal – they were not required by law to do so!

If you’re not entirely sure what that means or how it affects you, you’re not alone. A recent survey by Financial Engines shows 93% of Americans think financial advisors should be legally required to put their clients’ interest ahead of their own. However, 53% mistakenly believe that all financial advisors are already required to do so.

It’s not entirely the clients’ fault. A great issue in the financial services industry and the planning profession is that confusion abounds. Everyone uses the same terminology – broker, representative, advisor, planner, fee-based, fee-only – it’s easy to think everyone’s the same. However, there are many differences.

Some may say the law is not quite enough, as it only includes retirement accounts (what about every other part of your financial life?). It's not perfect, but it could be a step in the right direction.

As a fee-only financial planning firm, we’re proud to have served as fiduciaries all along. The best thing you can do for yourself is to know the professionals you work with (or want to work with).  See our Searching for an Advisor page for more information on different types of financial professionals and business models – from commission-only to fee-only and everything in between.

Lastly, the video below, courtesy of Hightower Advisors, gives a great overview of the simple differences between a broker and a fiduciary. Do you want to work with the butcher or the dietician? Ultimately it’s up to you and your situation, but an informed decision is the best decision.

(Credit: Hightower Advisors, YouTube)

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Thursday, July 20, 2017

Costs Matter!

Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

People rely on a lot of different information about costs when making any major financial decision. Whether you’re buying a car or selecting an investment strategy, it’s important to be informed about the costs. When you buy a car, as my wife knows all too well, you have to be patient and flexible to maintain purchase price leverage. However, the initial sticker price is only part of the overall cost of ownership. The sales tax, vehicle insurance, fuel efficiency, routine maintenance, and potential for unexpected repairs on the vehicle also need to be considered. Some of these additional costs are easily observed, while others are more difficult to assess. Similarly, when investing in mutual funds, many different variables need to be considered to evaluate how cost‑effective an investment strategy will be over time.

Many types of costs lower the net return of an investment strategy. One important cost to consider is the internal expense ratio of a mutual fund (returns to the investor are net of this internal cost). Similar to the purchase price of a car, this expense ratio tells you a lot about what you can expect to pay for an investment strategy. Exhibit 1 helps illustrate why expense ratios are important and shows how hefty expense ratios can impact performance.

This data shows that funds with higher average expense ratios had lower rates of outperformance. For the 15-year period through 2016, only 9% of the highest-cost equity funds outperformed their benchmarks. This data indicates that a high expense ratio is often a challenging hurdle for funds to overcome, especially over longer horizons. From the investor’s point of view, an expense ratio of 0.25% vs. 0.75% means savings of $5,000 per year on a $1 million account. As Exhibit 2 helps to illustrate, those dollars add up over longer periods.

Exhibit 1

Exhibit 2 

While the expense ratio is important to evaluate, what matters most when gauging the true cost‑effectiveness of an investment strategy is the “total cost of ownership.” Similar to the car example, total cost of ownership is more holistic than any one figure. It looks at things that are readily observable, like expense ratios, but also at things that are more difficult to assess, like trading costs and tax impact.

For example, while an expense ratio includes the fund’s investment management fee and expenses for fund accounting and shareholder reporting (among other items), it doesn’t include the potentially substantial cost of trading securities within the fund. Overall trading costs are a function of turnover (the amount of trading) and the cost of each trade. If a mutual fund trades excessively, costs like commissions and the price impact from trading can eat away at investor returns. Viewed through the lens of the car analogy, these costs are similar to excessively jamming your brakes or accelerating quickly. By regularly demanding immediacy when it may not be necessary, your vehicle experiences reduced fuel efficiency and additional wear and tear. These actions increase the total cost of ownership. Additionally, excessive trading within a strategy can lead to negative tax consequences for investors holding funds in a taxable account, which further increases the cost of ownership. The best way to decrease the impact of these trading costs is to avoid trading excessively and to effectively minimize the cost per trade. Employing a flexible investment approach, as described in this previous post, helps accomplish these goals by enabling more opportunistic execution.

The total cost of an investment strategy can be difficult to assess and requires a thorough understanding of costs beyond what an expense ratio can tell you. As you can see from this discussion, however, it’s worth the effort. These costs absolutely matter. A strategy that minimizes expense ratios, limits turnover and applies a flexible trading approach (only when the potential benefits of a trade outweighs the costs) has a clear advantage with time.

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The cost of advice, relative to the value realized, is an additional factor. There are many variations (both in services and costs). Each compensation model, investment philosophy and service model differs. There is a lot to consider. At the end of the day, it’s relatively simple - the benefits realized must outweigh the costs associated with the service. 

Source: Dimensional Fund Advisors LP

There is no guarantee investment strategies will be successful. Diversification does not eliminate the risk of market loss. Mutual fund investment values will fluctuate and shares, when redeemed, may be worth more or less than original cost. The types of fees and expenses will vary based on investment vehicle. Investments are subject to risk including possible loss of principal.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.

Thursday, May 18, 2017

Tax Form 5498

Have you received a tax form in the mail recently? If not, then disregard this post. If, however, you did receive a 2016 IRS Tax Form 5498 recently, do not panic. Form 5498 is generated by investment custodians every May for Traditional IRAs, Roth IRAs or Educational Savings Accounts with activity during the previous tax year and usually does not lead to an amended tax filing.

Tax Form 5498 is informational. The IRS reconciles this activity with your Tax Return. If you received this form, ask yourself: Did I contribute to a Roth or Traditional IRA last year? Did I roll money into an IRA last year? Did I contribute or initiate activity out of an Educational Savings Account last year? Did I convert IRA money to a Roth IRA last year? If any of this activity applies to you, you received Form 5498.

Contribution information is typically requested on an accountant's questionnaire. IRA rollovers and conversions generate a 1099-R. Either way, your accountant should already be aware of the activity. Then what should I do with my copy? In most cases, simply add it to your freshly started tax folder for 2017. As your accountant reviews next year's tax file, he or she can confirm that the activity was addressed.

The above explanation is summarized and generic. Please consult your tax professional with any specific questions.

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Friday, April 21, 2017


Pathways Advisory Group, Inc.
Dustin J. Smith, CFP®

Parenting is much harder than it looks.  I cannot recall an exact moment, but somewhere along the way, the questions got harder – and we’ve got a LONG way to go.

Kids-n-money, however, should be one topic we can handle.  I am, after all, a CERTIFIED FINANCIAL PLANNER™ professional.  Surely that counts for something.  I’ve got this one Teri….

The kids ask for stuff every time we shop.  Toys, treats, you name it, and the store layouts aren’t coincidental.  “No” doesn’t seem to deter them.

I know, let’s get piggy banks and give them a little money so they can decide for themselves.  That’ll stop them from asking for more stuff.  They will learn about money choices and experience why the answer is “no” when it’s all gone.  This piggy bank will be the perfect tool – they can pick their favorite style/color...

Two weeks later, when the piggy banks arrived, it was time to get started.

“Emilie, you still have fifty dollars from your birthday. I will trade you for five ten dollar bills so you can put some of it in the spend slot, some in the save slot, some in the invest slot and some in donate. The spend slot can be used whenever you want.  The save slot is for a spending goal in the future. The invest slot actually grows for you when you’re older and donate can be used to help other kids.”

Great speech Dad - really nailed it!

“Dad, I am going to put it all in the spend slot.”

Ok - not what I was expecting.

“Ok honey.  It’s your money.  You can put it in whatever slot you like, but, if you spend it all you won’t have any money left.”

That should do it.  It was a teaching moment.

“That’s ok Dad, I will have more birthdays.”

Dammit.  Good point kid.  It is birthday money after all; maybe I don’t have this one.


Humbled but never one to quit trying, we’ve been plugging away with the kids-n-money topic ever since.  We read an interesting book The Opposite of Spoiled and started a weekly allowance.  There have been some generous moments and lots of Legos (money smolders quickly in Bryce’s pocket).  Emilie turned out to be more of a saver (half way to a Penny skateboard purchase).  They have learned to make change and pay for things themselves.  However, they do still ask for stuff at the store.

I have no idea what parental challenge is coming next, but I do know that a kid-less beach vacation will help.  Time to call the Grandparents!!!!

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Friday, April 7, 2017

Warren Buffett’s Bet Shows the Market Wins, Again

Pathways Advisory Group, Inc.
Evon Mendrin, Paraplanner

If there’s one thing that’s been confirmed over and over in my few months at Pathways, it’s the undying belief that markets work. I’ve been baptized in the eternal optimism in businesses and the investment in those businesses as broadly and efficiently as possible.

Warren Buffett agrees – and 9 years ago a great bet was brought forth.

It was 2005 when the first challenge was announced by Buffett – he reminisced in his recent 2016 Letter to Shareholders that he boldly declared the following:

 “I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees.” 

Fast forward to 2008 – a contender emerged, and the heavyweight bout began.

Protégé Partners, LLC came forward – a New York City money management firm that runs funds of hedge funds. In other words, they create funds that invest in other (hedge) funds. Their skill is selecting the best hedge funds available for their investors, rather than running their own. In theory, they select the cream of the crop – able to produce positive returns through any market environment.

In Buffett’s corner is the simple Vanguard S&P 500 index fund. In the opposite corner is Protégé’s selection of 5 funds of hedge funds – the names of the funds not publicized but known by both parties.

The bet was simple – as told on, the host of the bet. “Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” The stakes, totaling $1 million at the end of the bet, goes to the winner’s choice of charity.

The challenge is, indeed, the challenge of passive investing vs. active investment management as a whole.  Buffett, often called the Oracle of Omaha, has long been critical of the active investment management industry and the fees charged in their services. Passive investors, he argues, will instead enjoy the growth of the market as a whole with minimal costs involved. As he states in his argument on Long Bets,

“A lot of very smart people set out to do better than average in securities markets. Call them active investors.

Their opposites, passive investors, will by definition do about average. In aggregate their positions will more or less approximate those of an index fund. Therefore the balance of the universe—the active investors—must do about average as well. However, these investors will incur far greater costs. So, on balance, their aggregate results after these costs will be worse than those of the passive investors.”

He is especially critical of hedge funds – the supposed cream of the crop. The managers of these funds are supposed to operate at a level above traditional active management – enticing institutional and wealthy sophisticated investors to take the bait.

Nine years into the bet – who is pulling ahead?

As of February 25, 2017, the compound annual increase for the index fund was 7.1%. The collection of hedge funds? Only 2.2% compounded annually. To put that in terms of dollars - $1 million invested in the five hedge fund-of-funds would have grown to $1,220,000. The index fund would have grown to $1,854,000.

While there are 7 months left to the bet, we can assume Mr. Buffett’s charity of choice will be eagerly anticipating the mail come January 1st, 2018. As the Oracle concludes in his recent Letter,

“The bottom line: When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds.”

This bet highlights what we wholeheartedly believe – have faith in the markets. Have faith in businesses. Invest broadly and efficiently, without trying to select or time, and let the markets work for you over time. Focus your energy, instead, on other financial decisions important to your success. Your future self will thank you for it.


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