The Investment Scientist

Archive for August 2013

ImageI am not a fan of permanent life insurance. Over the years, I have helped many people extricate themselves from costly life insurance policies. Invariably, they were sweet talked into buying these products without any real need.

But recently, I’ve actually had to help a client shop for a permanent life insurance policy. They have a child with a potentially permanent medical condition. Of course we hope and pray that he will outgrow his medical problem, as many kids do, but as parents, they must prepare for the worst.

This is one of the few legitimate reasons for using permanent insurance. Other legitimate reasons include to pay for estate taxes, or to facilitate business succession.

Here is the decision process I employed to help my client, bearing in mind that insurance products are not under the purview of the SEC and are usually chock full of hidden costs.

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This is the title of a newsletter by my peer and friend Russ Thornton.  It is fabulously written. I asked his permission to take out a large excerpt:

A recent Onion headline caught my attention. I think I saw it on Google+.

It read . . . Report: Only .00003% Of Things That Happen Actually Matter

The article references a fake Pew Research Center report, and while clearly this is an extreme (and artificial) claim, I think there’s more truth here than fiction.

Especially when it comes to your money and your financial decisions.

Whether it’s the financial media, friends, family, advisors or your psychic, you don’t have to look far for people and organizations eager to tell you what matters with your money. And why.

Interest rates. The price of oil. Trouble in the middle east. Trouble in Washington, DC. Fed tapering. Gold going down. Silver going up.

And the long list goes on.

However, I’d like to suggest a couple of alternatives . . .

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I read with disgust this news about a “financial advisor” stealing $1.3m from his client who also happened to be his father!

I want all of you to know that not all financial advisors are the same. In fact “financial advisor” is a free term. There is no educational requirement nor legal requisite. Justin Bieber and his grandmother could call themselves financial advisors and begin dispensing advice – and they would not get into trouble for it!

In reality though, there are generally four types of people who like to call themselves “financial advisors”:

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I had a fun conversation with a prospective client who I lost a few months ago. He actually got me to create an investment plan for him, then he shopped around and found an advisor who charges less.

He then had the gall to call me back and ask whether I think he is paying too much for his new advisor. Here is what he said.

My advisor puts me in low cost ETFs and meets with me every quarter. But otherwise he does nothing with my portfolio, so what exactly do I pay him $15k for?

I know this gentleman has a sizable portfolio, and $15k means a fee of well below 1%. So I told him what I thought.

  1. The fee is very competitive.

  2. The advisor did the right thing by putting his money in low cost EFTs.

  3. Doing nothing with a portfolio is the only right thing to do!

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ImageIf you are a typical investor, given the choice between investing in a small cap value fund or a large cap growth fund, which one would you choose?

You would probably go with the large cap growth since “large cap” sounds a lot safer than “small cap,” and “growth” sounds a lot more promising than “value.”

To prove how wrong you are, I did a study of the relative performances of these two styles in the eight decades between 1931 and 2010. Here is what I found.

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ImageA few days ago, I interviewed Jim Ludwick using Google+ Hangout On Air (HOA.) This is the first time I’ve interviewed an expert live on air! Feel free to laugh as you watch me stutter and trip over my words left and right.

Jim is the owner of MainStreet Financial, he used to be an agent at NY Life. Now he is a licensed insurance advisor.

I did not waste his appearance and got right down to the nitty gritty. I asked about a client case during the interview. Specifically, this client of mine was talked into 1) buying a universal life insurance inside her defined benefit plan, 2) buying a whole life insurance policy for her young daughter, because “it’s a great investment” according to the agent’s illustration of 8% growth.

I asked Jim three questions:

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ImageI go to great lengths to meet with my clients regularly. For instance, many of my clients live across the country. I fly to them.

Some might ask: what value is there in meeting regularly? There can be about $100k of value in it, let me tell ya!

Meeting regularly allows me to uncover hidden issues and potential opportunities, thereby helping my clients make smart financial decisions.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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