Financial challenges

transcript

FINANCIALCHALLENGES

Presents

17/1/2012

CLIENTS

IntroIntro

More Goals

MORE GOALS THAN MONEY

MOST PEOPLE HAVE …

Multiple GoalsLimited Amount of Money

MORE GOALS THAN MONEY

If Tax Deferred or TaxDeductible (IRA/403b, etc.)Taxes are Delayed, But StillImpact Your Investments!

TAXESTaxes Make A Difference

TAXESTaxes Impact Rate of Return

The process of using security analysis in an attempt to obtain

returns higher than those offered by the market

ACTIVE MONEY MANAGEMENT

ACTIVE MONEY MANAGEMENTMore Risk To Break Even With The Market

An active manager must outperform an index by the total of the additional

costs of 90 – 250 BP (1) just to match its

performance!

ACTIVE MONEY MANAGEMENTActive Management Facts

• S&P 500 outperformed active large-cap funds by 2/3rds.• S&P MidCap 400 outperformed active mid-cap funds by 75%.• S&P SmallCap 600 outperformed active small-cap funds by 63%.

“Most Active Funds Continue to Trail Index Performance”. US News, 2011.

(CAPTURE THE MARKET)

Exchange Traded Funds are a form of indexing and represent PASSIVE MANAGEMENT

● Don’t attempt to beat the market with selective stock picks● Don’t attempt to time the market

PASSIVEINDEX

EQUITYFUNDS

PASSIVEADVANTAGE

Large Cap Growth 5.17% 4.00% 1.17%

Mid Cap Growth 8.52% 5.91% 2.61%

Small Cap Growth 6.26% 4.81% 1.45%

Fixed Income OUTPERFORMED 1-5% PER ANNUMFOR INVESTMENT GRADE BOND FUNDS

Source: Standard & Poor’s, CRSP. Periods ending June 30, 2011

ACTIVE MONEY MANAGEMENTActive Money Management vs. Passive

Inflation

Inflation is the increase in the cost of living

INFLATION

1913 -- $1,0001950 -- $1,000

INFLATIONHow Much Has The Cost of Living Increased?

Source: Consumer Price Index Data 1913 - 2011

2011 -- $22,870.812011 -- $9,395.06

COST IN COST IN

From 1945 -- 2010

From 1950 – 2010

Future

INFLATIONInflation and Investments

Source: Historical Inflation Rates: 1914 - 2011

3.93%3.64%

TIME INFLATION RATE

YOUR INVESTMENTS SHRINKBY THE RATE OF INFLATION

• Don’t coordinate with your situation• Amount of investment not right for goal• Incorrect product type• Aren’t based on an objective and detailed financial analysis of your personal values• “Pre-asset allocation” decisions balancing your assets and savings with your goals haven’t been made

INAPPROPRIATE SOLUTIONSInappropriate

• Have high expenses and fees• ALL possible strategies aren’t evaluated and implemented• Limited or NO flexibility• Have surrender penalties that limit your ability to improve your financial options• Provide limited or NO service• Aren’t compatible to your risk tolerance

INAPPROPRIATE SOLUTIONSInappropriate Solutions

• Investment Risk• Insurance Related Risk

•Life•Health•Disability•Long Term Care•Property and Casualty

RISKTypes of Risk

RISKLittle Knowledge of Direct Relationship

Between Risk and Return

RISKVolatility and Price Fluctuation Not Understood

RESULTING IN PANIC!

RISKLack of Diversification and

Inappropriate Asset Allocation

• How much capital is needed• How long capital is needed• How will the capital need change over time?

RISKInsurance Related Risk

CONFLICTING RECOMMENDATIONS

• Mutual Funds• Variable Annuities• Stocks• Bonds• General Inv Products

Sales Person Bias

SECURITIES REGISTEREDREPS SELL…

• Retirement• College Planning• IRA, 401k, 403b (TSA)• Annuities• Mutual Funds• Long Term Care

SPECIALISTSSELL…

• Life Insurance - Fixed/Variable• Annuities - Fixed/Variable/Equity Indexed• Long Term Care• Disability• Health• Property & Casualty

INSURANCE AGENTSSELL…

Conflicts

CONFLICTING RECOMMENDATIONSTelevision – Radio “Personalities”

• Broad General Information• May Be Misleading• Not Specific To Your Personal Situation and Values• No Effective Way to Challenge Statements They Make

CHANGE

• A Goal (Change or Eliminate)• Amount of Investments & Savings• Specific Investment & Savings Solutions• Time Horizon• Employment / Career• Life Style• Risk Management Decisions (Investment & Insurance)

Changes That YOU CHOOSE To Make

Change

CHANGE

• Tax Laws• Income (Loss or Gain)• Job Loss• Economic• Health

Changes Where You May HaveLITTLE OR NO CHOICE

EXPENSES & FEESAll Investments Have Expenses & Fees

NON DISCLOSED

PARTIALLY DISCLOSED

FULL DISCLOSURE

Expenses

EXPENSES & FEESNon Disclosed

• CDs• Fixed Annuities

EXPENSES & FEESPartially Disclosed

• Mutual Funds• Variable Annuities

DISCLOSED

Expense RatioSales Related Commission

NON-DISCLOSED

Trading CostBid-Asked SpreadMarket ImpactPotential Embedded Capital Gains

EXPENSES & FEESFull Disclosure

• Exchange Traded Funds

Source:1. MorningStar 2009. Average Expense Equity Funds. Higher cost for Small Cap International, etc..2. “Scale Effects in Mutual Fund Performance: The Role of Trading Costs” 2007.3. “How Much Does That Annuity Really Cost” Charles Stanley.4. This is an average of the Industry average range of 1.25% - 1.45%.5. Bid-asked spread N/A utilizing window trades6. Market Impact not applicable based on size of an individual’s buy or sell order7. Based on size account

EXPENSES & FEESMutual Funds and Variable Annuities

Expenses & Fees Comparison

ANNUAL EXPENSES MUTUAL FUNDS VARIABLE ANNUITIES ETFs

EXPENSE RATIO 1.45% (1) .88% (1) Avg .20%

COMMISSIONS (TRANSACTIONS) 1.44% (2) .45% (2) .10% - .30%

BID-ASKED SPREAD .40% (3) .40% (3) N/A (5)

MARKET IMPACT .40% (3) .40% (3) N/A (6)

DISTRIBUTION EXPENSE (LOAD) 1.50% (3) 1.35% (4) .50% - .95% (7)

TOTAL 4.99% 3.48 .80% - 1.45%

TOTAL (NO LOAD) 2.70% PLUS .80% - 1.45%

POTENTIAL SURRENDER FEESAVG. 7% (reduced over time)

The Client

THE CLIENTFACTS

Annual Personal Savings Rate

• December 1, 1981 – 11.4% ----- December 1, 2011 – 4.0%• 43% of American workers have less than $10,000 in savings• 70% of someone’s retirement funds need to come from Personal Savings!Source:(1) Department of Commerce: Bureau of Economic Analysis(2) Sutton, Chavon. “Most Americans are Still Unprepared for Retirement” http://money.cnn.com/2010/03/09/PF/RETIREMENT_CONFIDENCE/index.htm , March 2010

THE CLIENTFACTS

20 Years – 1991 - 2010

Source: Dalbar, Inc. Quantitative Analysis of Investor Behavior Study, 2011 Update.

THE CLIENTFACTS

What Does it Mean in Actual Dollars?

20 Years – 1991-2010Gain on $100,000 After Inflation (3.00%/yr)

THE CLIENTFACTS

Average Investor Mutual Fund Holding Period

3.27 YEARS

THE CLIENTOther Obstacles

or Why It’s Hard To Do It Yourself

• Try to Beat the Market• Don’t Begin Investing Soon Enough• Procrastination• Risk/Reward Principle Isn’t Understood and They Panic• Confusing Information and Overload

THE CLIENTOther Obstacles

or Why It’s Hard To Do It Yourself

• Don’t Diversify Correctly• Don’t Seek Appropriate Help• Don’t Have or Take the Necessary Time• Finances Unorganized• No Written Plan with Specific Goals• Limited Understanding and Knowledge of Financial Matter

Disclosures

For Investment Professional Use Only

Although the statements of fact and data in this presentation have been obtained from, and are based upon, sources believed to be reliable, SW CARES does not guarantee their accuracy, and any such information may be incomplete or condensed. Information contained in this presentation does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information on products and services. A professional advisor should be consulted before implementing any of the options presented. Information presented in this presentation should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. All opinions included in this presentation constitute the judgment of SW CARES as of the date of this report and are subject to change without notice. Copyright © Someone Who CARES 2012. All rights reserved. 7/1/2012.

Financial challenges

Economy & Finance