W. Swartz & Co. Insights

Here you will find the firm's thoughts and perspectives on a range of topics including current market conditions, investment philosophy, and financial planning principles.

Posted by Wyatt on July 27, 2017

What is an annuity? (Investopedia Question)

 The Advisor Insights question and answers can be found on Investopedia here.
Question Headline:
What is an annuity?
An annuity is a sum of cash invested to produce a flow of money for a fixed period. To simplify, an annuity is money invested with an agent or broker, that grows over time. The owner of the annuity will receive payments from the annuity company for a period of time, typically for life. There are two types of annuities, immediate or deferred annuities. An immediate annuity is when someone makes an initial  principle payment and begins receiving a fixed payment for life, immediately. With a deferred annuity, the investor doesn’t start receiving payments until a later, specified date, determined by the investor.  Annuities are tax deferred, making this investing vehicle important for people looking to save for retirement. There is often a conflict of interest between investors and agents concerning annuities. Agents/brokers selling annuities are paid commission at the point of sale, which tends to encourage the agent to sell annuities even if they are not appropriate for the investor. The lack of liquidity is also a downfall. If people are in a bind for money and their money is in an annuity, they could face penalties for having to withdraw their money early. Annuities are taxed at the ordinary income tax rate, and not the lower long-term capital gains rate like most investments. In summary, there are unique situations where annuities can be useful, however in most circumstances there are better investment options which provide better returns and more liquidity to investors.
– Wyatt Swartz
– Contributions by Caitlin Lammers
– 7/19/2017
Posted by Wyatt on July 25, 2017

What’s the difference between a 401(k) and a pension plan? (Investopedia Question)

The Advisor Insights question and answers can be found on Investopedia here.
Question Headline:
What’s the difference between a 401(k) and a pension plan?
A 401(k) and a pension plan are both retirement plans set up between an employee and employer. The main difference is that a 401(k) is a defined-contribution plan, while a pension plan is a defined-benefit plan. What does this mean? A defined-contribution plan means that the amount of money in the 401(k) is dependent on how much the employee contributions to the plan, and the performance of the investment vehicles. These plans are tax deferred, and employees have an $18,000 contribution limit, unless they are 50 years or older. The employer is not required to contribute to a 401(k) plan, however they often do match a percentage of what the employee invests into the plan. With a defined-benefit plan, the employer is required to provide a specific amount of money to the employee once they begin retirement. This amount is fixed, and independent of how the investment vehicle performs. There are number of factors that determine what the fixed dollar amount owed to the employee upon retirement is. Employees can contribute to these plans as well. Pension plans are also tax deferred, and provide a tax break for employers when contributing.
– Wyatt Swartz
– Contributions by Caitlin Lammers
– 7/3/2017
Posted by Wyatt on July 3, 2017

What do people mean by “beat the market?” (Investopedia Question)

The Advisor Insights question and answers can be found on Investopedia here.
Question Headline:
What does it mean when people say they “beat the market”? How do they know they have done so?
When someone says they “beat the market” it generally means they have received greater returns than some benchmark. This phrase can be misleading because people use different indexes to compare their returns with.
Often times investors compare their returns to the Dow Jones Industrial Average, or the S&P 500. Neither of these are great representations of the entire market. The Dow Jones is one of the oldest indexes, which is one of the primary reasons people like using it. However, it is only comprised of 30 of the largest US companies, which doesn’t give someone an accurate “big picture” of the market.
The S&P 500, takes into account 500 of the largest US companies. This makes it a pretty good representation of US markets, and is what I typically cite when referring to US stock performance.  Depending on how it is calculated the US only comprises ~40-55% of the world market capitalization, so it doesn’t really make much sense referring to an index of only US stocks as “the market.”
I recommend that investors always be invested globally. Holding a combination of US and international stocks is one of the best forms of diversification and it should be taking an advantage of.
Indices like the MSCI World Index or the MSCI All Country World Index which take into account US and international stocks are a better representation of “the market” and are better benchmarks for investors. I personal use the Vanguard Total World Stock ETF (VT) as my investing benchmark. It covers approximately 98% of the world’s investable market capitalization with about 50% in US stocks, 40% in international developed stocks, and 10% in international emerging-market stocks.
It is also important to take into consideration what your portfolio looks like when comparing it to the market or a benchmark. If you only own small U.S. companies, it would not make sense to compare it to the Dow being 30 of the largest US companies. This phrase can mean a variety of things, so the next time you hear someone use it, it’s probably best to ask them to clarify their statement.


– Wyatt Swartz
– Contributions by Caitlin Lammers
– 7/3/2017


Posted by Wyatt on June 29, 2017

How to talk to clients about investing in real estate

Financial Planning

When it comes to discussing real estate with clients, adviser Michael Martin is able to draw on his own hard-earned experience.
In 2001, Martin, principal and founder of Marius Wealth Management in New York, left a career at Smith Barney to spend what became a decade as a real estate investor, buying, rehabbing and selling properties in New York and Florida.
“I learned some valuable lessons, I can tell you that,” Martin says. Fortunately for his clients, they are lessons he is now able to impart to them.
The native New Yorker had some home runs renting, buying and selling properties in the Hamptons, the fashionable beach towns on Long Island.
“I knew what renters and buyers wanted in a Hamptons house, and where they wanted to be,” he says. “I knew how far a house could be from the train track, for example. And after seeing a house for the first time during the day and being initially sold on it, I would always go back at night or weekends to uncover any negative surprises, such as crazy neighbors, loud noises or unpleasant odors from, say, a nearby duck farm.”
But Martin didn’t fare as well in Florida.
In 2005, he overpaid for what appeared to be desirable vacant lots fronting a canal in Coral Gables, Florida. What Martin now owes on his mortgages is more than the fair market value of the lots. His waterfront properties are, in real estate lingo, now underwater.
Martin learned the hard way that “vacant lots do not produce rental income if the numbers turn against you at market highs, especially if you need to derive income while you wait for the market to improve.”
“Don’t mortgage vacant lots,” Martin says, “which I did. Don’t have your wife on the mortgage, too, which I did.”
Martin also warns against replicating two other mistakes he says he made: succumbing to FOMO — a fear of missing out — and being “persuaded and influenced by a commission-hungry salesman.”
Martin returned to the advisory business in 2012.
“I realized I liked being an adviser better,” he says. “Real estate was ultracompetitive, and it’s easier to differentiate yourself as an adviser.”
After two year at Wells Fargo Advisors, he started his own firm in 2014. When high-net-worth clients say they want to invest in real estate, excluding their primary residence, Martin doesn’t mince words.
“Real estate is not for the faint of heart,” he advises them. “It’s a very fickle market. You can’t be emotionally attached. And the lack of liquidity is a huge issue. You’re married to a property until you’re able to sell it, and the options for liquidity are far less than any other investment.”
Martin and other wealth managers stress the need for a detailed and candid conversation covering asset allocation, risk, tax liability, income needs and the consequences of owning an illiquid asset.
Advisers generally recommend that high- and ultrahigh-net-worth clients allocate anywhere from 5% to 30% of a portfolio to real estate as an asset class, with many caveats, of course.
Age and income needs are primary considerations. For older clients who will need income, Ross Fox, founding partner at Cardan Capital Partners in Denver, puts “a higher emphasis on cash flow versus total return. We want to have serial liquidity events in investments that mature over time.”
For HNW clients, Fox recommends allocating approximately 5% to 15% of assets into real estate investments outside their primary residence. For anything exceeding 15%, clients should “have an affinity with the space” — that is, be real estate professionals themselves.
Being caught at the wrong end of an economic cycle is a major risk, cautions Derek Newcomer, director of investment research at Beacon Pointe Advisors in Newport Beach, California.
Property location is another critical variable. “If you have a real estate asset in Houston, and the energy business takes a dive, you’re left very exposed,” Newcomer explains. One way to mitigate the risk, he advises clients, is to diversify their holdings with multiple assets in different geographic areas.
Clients should closely scrutinize maintenance costs, Fox notes. They must analyze tax obligations. And while real estate investments can provide tax relief in some cases, Fox and other advisers say this should not be a primary reason to buy property.
“You can certainly receive favorable tax treatment for some investments, but clients can get too cute by half by trying to [minimize] their taxes,” Fox says.
Lois Basil, principal of the Basil Financial Group in Chicago, says her real estate advice doesn’t vary much, no matter what her client’s tax bracket. “I think there’s a place for real estate in every portfolio, whether mass affluent or high-net-worth,” Basil says. “Leveraged real estate is an excellent hedge against inflation, and tax efficient. Our goal is to have our clients’ net worth divided one-third interest-earning, one-third equities and one-third real estate.”
Only after risks have been discussed and understood can the potential benefits of real estate investments be presented to clients, advisers say. Indeed, it’s imperative.
For wealthy clients, real estate is simply “too big to ignore,” says Alex Stimpson, founding partner and co-CIO of Corient Capital Partners in Newport Beach, California. “Real estate plays an important role as part of overall asset allocation in their portfolios,” he says. “It provides risk diversification because it has a low correlation to the stock market.”
Real estate is also a good source of income diversification, he adds. While corporate bonds are yielding around 3%, real estate investors should be rewarded with a higher yield — an additional 2% to 5%, Stimpson says — in exchange for taking on lower liquidity.
This “illiquidity premium” is a key concept when discussing real estate with clients, says Marty Bicknell, chief executive of Leawood, Kansas-based Mariner Wealth Advisors.
Just as clients need to know the risks associated with an investment that isn’t publicly traded, clients “with the patience to ride out economic cycles” can also benefit from illiquidity, Bicknell says, although the premium he seeks is less generous than Stimpson’s.
“The illiquidity premium should be around a 2% to 3% increase over more liquid alternatives,” he says. “If not, it wouldn’t make sense to tie up the capital.”
A leading way clients can invest in real estate is through publicly traded REITs. But with yields at historic lows (the Vanguard REIT Index Fund yields a little over 4%), advisers interviewed did not recommend REITs as an optimal real estate strategy.
Direct investments or investments in a private fund were preferred real estate vehicles, and investors can benefit greatly from the capitalization rate, say Stimpson and other wealth managers.
“The cap rate is a powerful predictor of future return and future risks,” Stimpson says. “What you see is usually what you get.”
Posted by Wyatt on June 22, 2017

The best way to beat robos: Be more human

There’s industry agreement that human advisers’ jobs are relatively safe from robots. However, there’s also agreement that advisers need to adopt new technologies to stay competitive.
“I truly believe [technology] is going to be the very thing that ensures longevity in our profession,” says Danielle Fava, product strategy and development director of TD Ameritrade Institutional.
“I think as investors are learning so early about financial advice they are much more likely to interface with a financial adviser in the future when their wealth grows and their needs become more complex.”
Automating processes will save advisers work and give them more time to focus on their clients, says Alan Moore, co-founder of XY Planning Network. Bloomberg News
During a webinar hosted by Financial Planning about the latest digital wealth management tools for advisers, Fava and other industry experts discussed how advisers can stay on top of emerging digital wealth management trends and tools and make their practices more efficient.
Anything in an adviser’s daily routine that can be automated should be outsourced to technological tools, says Alan Moore, co-founder of XY Planning Network. According to Bloomberg, 58% of an adviser’s role can be automated with artificial intelligence.
Not only will that save advisers from mundane, repetitive tasks, Moore says, it frees them to focus on their clients, the actual service that sets them apart from digital-only robo advice.
“Clients are not coming to [advisers] because they are the best at opening an account or the best at rebalancing,” Moore says.
Fava agrees, suggesting that rather than trying to best robo advisers, advisers should shift their focus to aspects of their organization that requires a human touch.
“[Some companies] are saying, ‘What I am selling is not investment management. What I am selling is a relationship,’” she says. “[Those advisers] are figuring out how to repurpose their value and that is really imperative.”
There are tools already that can simplify relationship building with clients too, says Sean McDermott, project manager at research firm Corporate Insight.
Virtual meetings can take place anytime via video chat and chat bots can help answer routine questions. In his research McDermott says he’s found a growing number of advisers using video chat for initial consultations and their clients are satisfied with telephone consultations afterwards.
Another easy automation is password management software, McDermott says. Using that tool is simpler than trying to remember 70 passwords or having to input and look them up individually on a spreadsheet, he says.
Moore suggests advisers to download the browser extension, RescueTime. He says while using the app, advisers will see how much time they spend on tasks that can otherwise be automated.
Using the app, Moore says he learned he wasted time playing email and phone tag with clients, so he installed a client portal for his practice. The portal allows advisers and customers to track financial goals and schedule appointments. When advisers are on the same page with their clients about goals, he says, meetings are more effective.
“Data monitoring is key to communication,” McDermott says.
Large advice firms are aggressively investing in digital advice operations and introducing new technologies to make the advice process more efficient, such as Cetera’s new facial recognition software feature.
Corporate Insight’s McDermott notes that client demographics are changing too — not only is the future client going to be younger, they will also be savvier about their financial behavior, he says, and about the services they elect to manage their wealth.
RIAs need to take heed of such trends, says XY Planning Network’s Moore, especially older firms that have been resistant to change.
Moore acknowledges that there are many firms doing financially well and their current customers are happy without having to evolve their practices. But that isn’t sustainable, he adds.
“Advisers have to understand that the future of financial planning and our profession in general is very much what we like to call the cyborg adviser,” Moore says. “We are just going to get better at what we do. We are going to become more efficient and provide greater value to more clients. But technology can’t be rejected. It’s here to stay.”