We are now uniquely able to help our clients plan to qualify for this benefit. Those who qualify receive between $12,000 to $19,000 tax free every year.

Created by an act of Congress in 1951, the benefit was originally designed for disabled veterans or those who had reached the age of 65. With the progress that medicine was making, it soon became apparent that many veterans and most retirees were just getting started at that age, and so the requirements have changed over the years. The most recent modifications, one in 2001 and one in 2006, have made assisted living expenses and even independent living expenses eligible for consideration as medical care. When a certain threshold is reached in the ratio of medical to non-medical expenses, the benefit can kick in and really add a great deal of security to life of someone in their golden years.

A typical recipient is a widow of a veteran who served during a war, but not necessarily in the war theatre. Any enlisted person or officer who served at all, even one day during the standardized time periods, is eligible.

While not a strict rule for Porter Kickham clients, we would like to see the veteran family member in one of the "Veteran First Communities" established in the local area. These communities specifically cooperate with our efforts to educate residents and families about the benefit and they are committed to moving the volumes of paperwork required in a fast and efficient manner.

For more information on this benefit and how to get it, feel free to drop into one of the many briefings that we do around the St. Louis, St. Charles and Jefferson County areas.

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According to a survey conducted from April 12 -16, 2007, the average pre-retiree could not distinguish between a stockbroker and a registered investment advisor in order to determine who they should be listening to for retirement planning. The Consumer Federation of America (CFA), a consumer advocacy organization, and Zero Alpha Group (ZAG), a group of fee-only investment advisers, canvassed 1,073 individuals who “described themselves as investors,” according to Graham Hueber, senior research associate, Opinion Research Corporation, the firm that conducted the “Investor Knowledge of Stockbrokers and Financial Planners” study for ZAG/CFA.

More than half the investors polled—54%—looked “to stockbrokers for more than transactional assistance,” and 29% said that “financial advice is the ‘primary’ service” that stockbrokers offer. Both misapprehensions could spell disappointment for retirees.

Majority Want Protective Laws

Significantly, 92% thought that, for the same type of services, financial planners and stockbrokers should be covered by the “same investor protection rules.” This is where the public is overwhelmingly mistaken. Apparently, if they knew better, more than half would be less likely to use a “stockbroker providing investment advice” if operating under “weaker investor protection rules than a financial planner,” according to the report.

Prudent standards demand that all of your advisers owe their first loyalty to your interests, not their own. The fiduciary standard is what people typically rely on for important issues in medicine, law and finances.

How do you find someone who is dedicated to your goals and objectives?

If they don’t offer advice, what do brokers do? According to the act, a broker is, “Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank.” The key word is effecting, which means that brokers make the trades happen. They encourage and facilitate the transaction. Today’s brokers sell financial products to customers for a fee.

By Law, Brokers are not Investment Advisors

While advisors must act in their client’s best interest at all times, brokers do not face this requirement. Brokers must understand their client’s financial picture and direct them towards appropriate products. Advisers are sworn to put their clients’ interests ahead of their own, in accordance with the Investment Advisors Act of 1940. The Act defines an advisor as, “Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The Act specifically precludes brokers from being considered investment advisers.

The heart of conservative investing lies in the low tolerance for risk. Conservative investors generally express that thinking through action when they weight their portfolios heavily in bonds and large cap domestic stocks.

A weighting like this will lower the apparent volatility of the portfolio. In fact, the volatility can get lower and lower as the proportion of bonds increases. This is the basis of the old saw about allocating your age in percentages to bonds during retirement. The common adage goes that since you can handle less risk as you get older, you should have less money invested in stocks.

Bonds are not "Safe Investments" for Retirement

In truth, allocating more money towards bonds is kind of like cheating. You don’t reduce the stock volatility so much as hide it. With 50% of your wealth invested in stocks, you should enjoy a total portfolio volatility of around 9% per year, versus the SP’s 18%. With an allocation like that, volatility has not truly been reduced however. The stock volatility has been hidden by putting bond allocations on the same statement. It makes for a rosy picture, but it’s not a prudent way to lower volatility and certainly it fails as a prudent method to preserve wealth over several decades.

Focus on Spending Power more than Account Balance

A truly conservative strategy would focus on conserving spending power rather than capital. The most important thing about your nest egg is that it provides you with the power to maintain your lifestyle over the course of your retirement. Most plans need to provide for the lifetimes of two retirees, with one surviving a bit longer than the other. In that sort of planning, the conservative investor’s worst fear should be inflation and taxes, even though volatility gets all the headline coverage.

Inflation is the Pensioner's Enemy

Average rates of inflation just about halve the value of a dollar over the course of 15 years. Volatility may do that to a portfolio once or twice in a decade, but at least it has an upside. Over the last thirty years (the length of time you probably will want your retirement to last) the market has had various ups and downs, most of which you can remember. Even so, its value doubled almost four times in spite of the bear markets that have interrupted its progress. Inflation has unrelentingly worn away the value of the dollar since 1978. The inflation threat is far more serious and constant than market volatility.

Prudent Investment Planning Fights Inflation Risk

In order to truly safeguard your wealth, you need to switch to a prudent paradigm when considering what to do with a nest egg that needs to produce income for several decades.

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Like any street, Wall Street has two sides. If retail investors are on the sell side (sold at the offer) then large institutions are on the buy side (bought at the bid.) For them, stock is an investment that must achieve certain returns in the face of various macroeconomic factors.
Generally, buy-side refers to professional money managers, each of which is contractually bound to act as a fiduciary for the people who pay him.

The issue is sometimes confused because investment banks also have buy-side parts to them, which manage money for others. In an effort to stop any leaks and clear up any confusion, investment bank managers create a legal device called a Chinese Wall.  The "Wall"  is a series of policies which aim to prevent information exchange between those selling to the public and those buying for institutions.

Buy-side institutions include:

• Mutual funds
• Pension funds
• Hedge funds
• Institutional firms
• Sovereign wealth funds

The Buy-Side Silence

Who speaks does not know, who knows does not speak - Lao Tzu

Any buy-side analyst can get as much information as any retail investor on a given company. Using only that information would violate prudent standards, however. Institutions know the potential for abuse with sell-side literature and duty to investigate with due diligence any such claims. For some managers, that means reviewing publicly available accounting reports and then analyzing them in a specific, proprietary way.

Other managers will actually visit the companies and talk to employees on a plant tour. These tire kickers think they can get a better idea of whether or not to invest by actually looking over the place. In either case, the buy-side analyst gathers information in order to create his own vision of the future. In effect, the management team of an actively managed fund tries to predict the future. There is no advantage to investing if you don’t know “just a little more.”  The vision they create remains private; no one shares it with the world.

When Advertising Masquerades as Information

Whenever you hear of an upgrade, downgrade or price target, you’re listening to an advertisement. The buy-side keeps its opinions to itself, because it has a duty to do so. Its members have paid for the research they produce. The public has no right to it.

Buy-Side Meets Sell-Side

It used to be that large institutions and small investors were consigned to meet in one place: The New York Stock Exchange. Trading also took place on “the curb” (the AMEX) as well as in Philadelphia. However, New York offered a central location for those with the greatest liquidity needs. Buy-side managers used to place large orders with specialists on the New York Stock Exchange (NYSE) and these firms would gradually execute the orders throughout the course of one or several days. In cases where large blocks of stock needed to change hands, a sudden market order would upset the price to the disadvantage of the institution.

Greater information exchange over the internet and even television made large trades too visible to speculators. Today, your simple online trading platform (which you can get for free from a discount broker) will show you where the liquidity in many issues lies. You can see large blocks of stock offered for sale or you can see prices at which buyers will take thousands of shares. This information makes buy-side managers very uncomfortable, as it should. A smart speculator who sees where liquidity lies or detects changes can insert his own order and make a buy more expensive or a sell less profitable for an institutional manager.

Now, buy-side institutions make their trades away from the prying eyes of speculators in “Dark Liquidity Pools.” This mysterious sounding phrase refers to a series of electronic trades that can take place in small bits on many exchanges across the world without giving anyone a clue that a particular fund is divesting or investing in a company. Contrast this with the orders that retail investors use, and you’ll see that any edge you might have as an individual will be particularly hard won and entirely non-existent if you do not take into account the way that these sophisticated managers work. The moral of the story is simply this: If you engage in retail trading, and you buy a stock from someone, you should ask yourself what that person knew that made him want to sell it to you.

Index investing allows investors to put their money to work with some of the lowest costs in the industry. If low fees for financial services concern you the most, this may be the starting point for your future planning.
New investment products in the last decade allow individuals with relatively smaller portfolios to use ETF’s in order to gain out-sized diversification in a variety of indices. The financial press has widely publicized that typical management fees for index funds are under 20 bips (0.2 percent) which makes them some of the lowest fee choices available. The popular thinking equates greater returns on investment with lowered fees for services.

Other advantages include the fact that shares of the ETF’s trade all day long. This contrasts with many mutual funds whose shares are marked to market once daily, at the close. Sophisticated accredited investors may even short the ETF’s or buy and sell options contracts on them. This flexibility and wide range of choices makes them preferable to mutual fund shares for some purposes.

The wide range of indices represented by ETF’s allow investors or trustees to overweight certain areas which may be more relevant to beneficiaries in a customized manner. A charity involved in food distribution my overweight food related commodities while a company involved in delivery of heavy equipment might overweight energy and transportation issues.

ETF Transaction costs may be significant

The downside to ETF’s is that trading costs may be significant. If you wish to receive monthly income and to re-balance, you’ll need to liquidate shares on the open market regularly. This increases costs to a much greater degree than alternatives which have zero trading costs and zero fees for cash redemption. Individuals may need larger portfolios with less frequent distributions and re-balancing in order to fully realize the cost savings of the lower management fees. In order to take advantage of the great diversification available with ETF’s, a retirement account of at least $2,500,000 starts to make this method economically feasible.

ETF returns under-perform their benchmark

Investors who chase ETF returns make the same mistake that any market timer makes. The design of these instruments allows for out-sized diversification, not out-sized profits. In fact, to the degree that the managers successfully execute the purpose of the fund, they are guaranteed to under-perform their benchmark over each period, simply because of the fee structure and the fact that the underlying assets must conform to the benchmark yields and returns.

The simplistic investment policy statement of ETF’s allows for these low fees. For a given benchmark, the selection of underlying stocks makes the manager’s job easier. One of the largest and most popular index ETF’s is the Dow Jones Industrial Fund (Symbol: DIA) or Diamonds. In order to create shares in this fund, the managers at State Street Bank and Trust Company purchase shares in each of the stocks in the Dow Jones 30 Industrial Index on a capitalization weighted basis. As of this writing, there is somewhat more than 9 billion dollars in the trust and more shares may be created or liquidated in units of 50,000 shares. The procedural details can be found here.

The purpose of the trust is to provide investment results, before expenses that correspond to the price and yield performance of the Dow Jones Index. The managers don’t make any judgments about the individual stock components or any economic, financial or market considerations. They simply make sure that at the end of the day the trust holds enough shares of each individual stock so that one share of the DIA represents an interest in the thirty stocks.

While the Dow Jones Industrial Average may be the most reported index, hundreds of other indices support the diversification needs of individual and institutional investors. The long history of these benchmarks makes for simpler calculations of risk and covariance for professional asset allocators.

Using index funds like ETF's allows for a stringent design of diversification. The investment policy statement of the funds demands that all of the equities in the particular index must be held without regard to valuation or any performance prediction. Thus, the fund follows the performance and yield of the given index very carefully. When an expert designs a diversification plan, she first looks to which investments form a group in some natural way. The first major cut is to distinguish stocks from bonds. Every investor can say why those two are different; it comes down to whether or not the investor owns some of the company or lends some of his money to the company.

This difference makes the two asset classes behave differently when things change in the macro economy. As interest rates rise, some stock prices may go down as the value of bonds comparatively increases. The opposite may happen if interest rates go lower. If you own a combination of stocks and bonds, the individual components will fluctuate, but the total value of your holdings will change less. While it's great to have a bifurcated plan of diversification, an expert can do much better than that.

Logical Groupings Help Create Sub Asset Classes

She looks for logical groupings among stocks that would make them behave in similar manners. Consider that transport, delivery and perhaps car manufacturers behave similarly, although the last may not always move in a pattern similar to the first two.

Contrast those groupings with energy stocks and consumer staples. When energy is expensive, transports and delivery services pay more for gas and report lower profits. Energy companies do well as they achieve pricing power.

Given that this type of thinking underlies good diversification, then the next step is to find out how many distinct groupings one can find that fulfill the criterion that the components move together for some logical reason and that the groups may move in directions opposite to each other given the same conditions. The companies that put together ETF's generally take that into account in order to design and market an ETF.

Good Sub-Asset Groups Have Long Histories

The long history of a properly constructed sub-asset group makes for quite an attractive feature to our expert advisor. With years of daily data, the numbers for performance, yield and covariance in relation to other groups allow her to construct apparently stable behavior profiles. From these profiles, she can decide what percentage of your funds to allocate to each group in order to both capture equity risk premium and to increase safety through diversification.

This same quality of asset classes may also create a false sense of security among amateur purchasers of ETF's. Normally, when a mutual fund opens its doors, it can only report its performance since inception. That should make perfect sense. An index fund, however, can report the performance of the underlying index since its composition is entirely composed of that index. The performance figures for ETF's do not reflect the same kind of performance that a history of an active fund shows.

When a particular sector of the economy outperforms the others, the creation of an ETF around that grouping makes for easier sales to those who want to enjoy the gains without the labor of picking stocks in the outperforming area. Marketing efforts for these funds become easier as the trend continues and everyone wants to jump on board. Thus, a new index ETF may report stellar performance just as the sector or group it's composed of heads for a fall.

Prudent Practice Avoids Trendy ETF's

Sometimes though, the temptation to produce a product that people will buy may lead to products which don't suit the Prudent model particularly well. A fund which holds physical silver and gold may accurately represent the precious metals as an asset class, but a fund which uses rolling futures contracts and buys or sells based on robust technical indicators doesn't represent the type of diversifier one seeks in a prudent investing plan.

Avoid ETF Equity Overlap

Overlap represents a significant danger to a good diversification plan. Most index ETF's hold equities on a cap-weighted basis. That means there will be more shares of expensive companies in the fund than shares of lower prices, less capitalized companies.

Consider the American behemoth General Electric (GE.) It's one of the largest companies in the world. How would you classify it? Large cap, domestic, durable goods provider? Do you know that a large share of its business comes from its financing arm, so part of GE behaves like a bank?

GE could be a large portion of several different ETF's. That means that a number of the parts in your portfolio you had counted on to act differently may end up acting the same way because of the elephant in the room. In order to be sure that your diversification is effective, an expert should perform a thorough drill down to check for this kind of overlap.

These times demand that you manage your money with sound fundamentals in mind. Most people think that investing is about buying stocks and watching the price of their assets go up from the moment they buy. That’s for amateurs and gamblers. Marked to market pricing is not what you are after, and if you chase it, you’ll see your wealth dissipate. Sound fundamentals make for sound investments.

If you plan to retire and live from the income your savings can generate, your primary concern in the capital markets involves purchasing earnings streams. By selecting portfolio managers who can choose good companies with solid expectations of growth, you're more likely to own investment opportunities which may turn out to be tomorrow's industrial powerhouses. But that all takes place in the background.

Financial Independence is Your Primary Concern

That’s what retirement is all about. The concerns of making a living day after day don’t concern you anymore. When you declare your financial independence (“retirement is so last century") your days revolve around the things you want them to, and not around questions of money and finance. The end result of good retirement planning delivers a stream of income for you and your family that allows you to move on with the really important parts of your life: travel, visiting family and friends, good books and good endeavors.

Five key principles have guided Porter Kickham over the last 30 years of financial practice. We’re sure you’ll agree that they should be good for the next millennium.

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“Begin with the Goal in Mind”

Let’s begin to make crystal clear what you want out of your life’s work. If you are near retirement or retired, the best truly is yet to come. Tell us about your family and what you want for them. Let’s make a plan to take care of your spouse, your children and your grandchildren. Life is one successful encounter with risk after another. We need to plan together for the best way to confront them in an affordable, rational manner.

“Before acting, seek understanding”

You need to be heard. You need to talk out your hopes and dreams, as well as your concerns about the future. We need to hear it. Financial planning is not about winning some football game where points accrue year after year. Sound planning makes clients feel relaxed and in control of their future, and the future of their family.

“Leave no assumption unchallenged. Let nothing pass unsaid”

Our guiding principle is to understand your unique position in the world. Each person comes to the table with their own ideas, prejudices and myths about what the capital markets can do for them and how they should behave as investors. We’ll examine your thoughts about the market so that we can interact on a level playing field of understanding and knowledge.

“Plan a Legacy”

You don’t need to make your kids rich when you die, but you can plan now so that those you care about will not be saddled with an awful mess when you are gone. Frankly, we’ve found that the best gifts you can give to your children and grandchildren aren’t monetary. They are composed of diaries, gifts, moments and time together. Let’s plan your time and your use of your wealth so that you leave a lasting legacy and truly help the next generations become all they can.

“Plan for Goals, not Balances”

Money in an investment account is useless. A balance steadily rising in a bank account is meaningless. Goals, dreams and people give meaning and importance to money, because it is what wealth can do for you, and for your loved ones, that is vitally important. That’s what makes money come alive.

In both bull and bear markets, popular media advise strongly that lower fees guarantee a larger return. After all, if you avoid a 1% fee, then you have 1% more money for yourself. John Bogle, founder of Vanguard funds, advocates that individual investors pare away most all fees and “take what the market gives them.”

Prudent experts know that fees can impede return. On the other hand, the expert has a positive duty to make sure that each part of the trust operates smoothly and that often requires delegation. In order to delegate, the advisor must be sure that the service you get adds value to your overall portfolio, either in terms of safety or return. Additionally, he needs to be sure that the fees each expert delegate charges reasonable and customary fees for the services he delivers.

Most importantly, a Prudent Fiduciary may not have a set opinion about fees or commissions, but instead must investigate which of these are necessary and reasonable.

Actual Benefits, not Manner of Compensation Guide Decisions

As an example, it may not be worthwhile for a CFP advisor to spend an hour or two on life insurance planning for a 40 year old with a spouse and two children when the same work can be done at no additional cost by a competent insurance agent. Incurring a fee over and above a commission on that issue simply does not make sense. The client requires competent planning, and if there was a prejudice about fee only issues, then the cost of the service would be greater than it needed to be.

Perhaps the hottest button for investors is the question of mutual fund and advisor fees. With the availability of very inexpensive ETF’s (Exchange Traded Funds,) some would think that mutual funds are a thing of the past. If no one can choose stocks consistently in such a way as to outperform the market, then paying for these services makes no sense. And the popular press is filled with quotes about managers who can’t beat the market net of fees. In light of the fact that individuals and institutions pay billions of dollars per year to portfolio managers, a Prudent expert must examine this statement carefully. On closer examination, the common thinking about stock pickers may be a bit of journalistic sophistry.

Skilled Managers May Reduce Risk

Those who subscribe to the strong form of the Efficient Market Hypothesis must believe that no manger can gain an advantage in choosing stocks at any time. Each price at every time is perfectly correct because of the accumulated wisdom of “the market.” Those who believe the weak form of the EMH may allow that some managers have skill, but that a given investor could not tell whether a particular manger was lucky or skilled.

In fact, it may be that paying a portfolio expert to choose certain stocks over others is money well spent. A Fiduciary Expert knows and uses various means to determine if indeed the managers are worth their fees.

So while the press may lead you to believe that the only way to invest is through the use of very low cost measures, it’s worth remembering that some valuable services are worth paying for.

You answer your telephone only to hear your brother-in-law telling you that you have to drop everything and listen to this. He has a line on The Next New Thing. Gasoline from seawater!

Sure, it was spoken of in whispers during World War II, but now scientists have perfected the process and you can get in at the bottom. This is your chance. Oil prices are higher than ever, aren't they? In fact, the stock is selling for just $0.37 on the OTC:BB market. Should you buy 10,000 shares, just to be sure you don’t miss out? You can see your mind racing to figure out how you could raise that extra cash quickly.

You think about what happened with Microsoft, that company that was started in someone’s garage. Didn't that idea sound just as ridiculous back then? The same company whose stock options made multimillionaires out of secretaries. Now your palms are sweating and you wonder if tomorrow isn’t too late to buy some of this stock. What’s a Prudent Investor to do? On the one hand, the idea is patently ridiculous. On the other hand…. What if?

Missed Opportunities May be Costly

On the performance side, one of the risks to a prudently managed portfolio is that it will fail to capture the Equity Risk Premium of the world capital markets. (See: The Wealth Factor: What Every Portfolio Needs to Succeed.) In short, the purpose of prudent investing is to make sure that you are able to benefit from the earnings of as many good companies around the world as possible. It’s true that many of the strongest and most sustainable ones are here in the US, but there are some great candidates in other countries. You don’t want to ignore any good opportunities.

Imagine how poorly an investor would do if he was so “conservative” that he refused to have own shares in any company which was not established enough to pay dividends. His reasoning: If it isn’t safe enough and established enough to be making good money, I don’t want any of it.

With that kind of an attitude, he’ll miss a great deal of growth over any given decade. Indeed most of the universe of small cap and micro cap stocks do not pay dividends. Companies grow like oak trees if they are successful and they almost all start small. There is a risk in bringing any new idea to market and investors take that risk everyday. The price they pay to participate in that opportunity is relatively small since the shares have lower prices. That makes up for the fact that plenty of companies go bankrupt. Most go honestly and quietly, unlike Enron. But failure is still a fact of life in business and a risk that must be taken in a prudent portfolio.

So how do you handle the opportunity of a lifetime at less than the cost of a cup of coffee in the old days, when it didn’t cost $3?

First, you need to take a breath. This isn’t the first world shattering idea that has come about and it won’t be the last. Back in the 1600’s in England, shares in a company whose purpose was “To make a profit, the secret means by which are not to be disclosed,” were sold and even became expensive before the company simply folded in the crash of the South Sea Bubble.

Good Companies Prove Themselves

Let’s say, for the sake of argument, that you have been presented with an idea for a stock whose meteoric price rise will surpass Google or Taser. You’ll have to agree that somewhere between being sold for $0.37 and $1,200 per share it’s going to cross the $5.00 mark. For most institutional investors, that’s what puts it on the radar screen. Many mutual funds have investment policy statements that prohibit them from investing in companies with share values under $5.00. On the other hand, once that barrier is breached, you may see lots of accumulation in the stock if the idea looks good and if the company appears viable.

You might even be lucky enough to have an active manager who sees this opportunity early and grabs it for the fund that you own. But even if you miss that early stage, you’ll have ample opportunity to catch the value as the company’s revolutionary product becomes more and more mainstream and hence profitable.

So what about all that profit you missed form $0.37 to $5.00? That’s more than a ten bagger! How could you let that go?

It’s simple and here’s the reasoning: If this new idea is viable, the company will be in demand. Its shares will get listed on a major exchange. That’s a major goal for the investors and for the CEO of any company. Listing on a major exchange means millions for them. Of the thousands of stocks on the OTC:BB about 6 get listed each year. So while that stock for under fifty cents sounds great, in order to reduce your risk of rolling craps, you’d have to spread your investments around hundreds if not thousands of other “great ideas.”

Your best chance at capturing the equity risk premium across the world markets is not to speculate in low cost bargains. If you limit your choices initially through the use of a professionally designed investment policy statement, then you’ll significantly reduce your risk and conserve your capital.