The Virtue Of The Weekly Advisory Team Staff Meeting

The Virtue Of The Weekly Advisory Team Staff Meeting

Anyone in a growing business has had the displeasure of being stuck in an unproductive meeting. At best, they happen from time to time. At worst, the day is so filled with unproductive meetings that it seems like there’s no time left to actually get anything done… leading many to want to just eschew internal team meetings altogether.

Yet the reality is that done well, meetings can be a mechanism to keep your team on the same page, working towards the right priorities, accountable on a weekly basis to getting things done, and provide a crucial opportunity for everyone to work together on solving the business’s biggest challenges from week to week.

Accordingly, the real problem is not that “(team) meetings are bad”, but that “bad (team) meetings are bad”, and that the remedy is to formulate a better structure to the weekly team staff meeting in the first place, with time to review key business data, evaluate the tasks that need to be done, prioritize for the coming week, and then take more than half the meeting time to actually solve problems that are occurring in the business!

Bad Team Staff Meetings Are Bad

In a growing business, meetings are an inevitable reality. Whether it’s the coming together of an entire leadership team, the gathering of the key players in a particular department, or simply a two-person meeting with an advisor and his/her planning associate, meetings happen. And the larger the business, the more plentiful the meetings tend to be, as there are more people to coordinate amongst and maintain communication with. Throw in some meetings for outside activities and volunteer efforts, and you may reach the point where it feels like you spend more time in meetings aboutwhat to do, than actually getting anything done!

Yet while many financial advisors ultimately push back on this “Death By Meeting” feeling by trying to eschew meetings altogether, arguably the real problem is not that there are so many meetings, but the fact that they’re sounproductive. In other words, the problem isn’t necessarily having meetings. It’s having bad meetings.

After all, meetings at their most basic level are simply about facilitating communication and problem-solving, which are clearly relevant for any business that has more than one person in the first place. And the added virtue of regular meetings is that they can actually become a concrete deadline for ongoing projects, and a point of accountability to ensure that things really are getting done. In addition to being a means of keeping everyone on the same page about the key metrics of the business, and whether it’s growing and moving forward.

In fact, leading entrepreneur expert Gino Wickman makes the case in his book “Traction” that one of the most common problems for businesses is their lack of effective weekly team/staff meetings. The end result is at best wasted time, and at worst a business that literally can’t get the “traction” to move forward on its goals. Because it’s actually the pulse of the weekly meeting, and the shared vision, problem-solving, and accountability that it creates, which helps ensure a team is moving forward on its goals!

Setting A Weekly Staff Meeting Agenda

As a starting template, Wickman suggests a structured 90-minute weekly staff meeting agenda to provide the key aspects of both problem-solving, and accountability. The 7-item standing agenda is shown to the right.

In this process, the segue is simply the quick kick-off to the meeting, to get everyone mentally focused. It might include a quick check-in – “how’s everyone doing today?” – and ideally includes giving all participants a moment to share something positive to get the meeting started on a good note.

Sample Weekly Staff Meeting Agenda - Wickman's Traction

From there, the next step is to review the scorecard, a summary of the key data or metrics for the business. It’s literally meant to be the “scorecard” of how the business is performing. In an advisory firm context, this might include key metrics like the number of new and lost clients (or assets, or revenue) for the month or quarter, the number of client meetings you’ve had, the number of client financial plans you’re working on, the number of prospects in your sales pipeline, or the number of transfers your staff are processing. Whatever the Key Performance Indicator (KPI) metrics are that help you know as a financial advisor where the business stands. (And if you aren’t tracking this data, now’s the time to start building out your KPI dashboard!) You might even come up with a basic color coding system – green, yellow, and red – to highlight metrics that are good and healthy, in the warning zone, or that are concerning and need attention.

The third step in Wickman’s weekly meeting is the rocks review. In this context, “rocks” is a reference to the famous Stephen Covey analogy that in order to effectively fill your time, you need to place the big “rocks” (major priorities) first, then fill in the pebbles (small tasks), and finally the sand (daily drumbeat of minutia). Because if you place the rocks in your bucket first, there’s room to fill in the pebbles and sand around them. If you fill the bucket with pebbles and sand first – and let the business get buried in the minutia – the bucket is already full and there’s no way to get the rocks in. Accordingly, for an effective team meeting, everyone should know what their “rocks” are for the week/month/quarter, and be able to quickly report out whether they’re on track to complete (or not).

Next is the time to review any client/employee headlines – notable news that anyone on the team wishes to share, either about interactions with the firm’s clients, or other staff members. This could be pointing out something good (a client had a good service experience), a problem to be aware of (a staff member is unhappy with the new vacation policy), or simply something noteworthy (a key employee is having a 10-year anniversary!).

The To-Do list section of the meeting is the chance to review the status of the prior week’s action items. Because these are intended to be reviewed (and usually completed) weekly, they should be small and bite-sized. (A large project that could take a month or quarter to complete should be treated as a Rock, not a to-do.) The primary purpose of this section of the meeting is not to re-hash the details of each To-Do list item, but simply to affirm whether they’re done or not. If not, they should get done the following week. If it can’t be done because there’s a bigger issue, that can be discussed later (in the next section of the meeting). This is the essence of holding everyone on the team accountable to the team for completing what they committed to complete in the prior week’s meeting! (Think about how much more effective your organization would be if everyone simply got done every week the stuff they said they would do every week!)

Once all of these “minor” sections of the meeting have been completed, Wickman suggests that the focus should be on IDS, an acronym for Identify, Discuss, and Solve problems. In other words, this is the part of the meeting where everyone on the team comes together to actually resolve any issues that have arisen in the prior stages of the meeting. Notably, the first step to the IDS phase is simply identifying, not just what the issues are, but which are the most important, given that a growing business may easily have more issues to resolve than there is time in the meeting to solve. By prioritizing which are the most crucial to tackle first, by definition the team will be solving the most important problems first (and often solving big problems makes other problems go away altogether, as small issues often turn out to have been byproducts of the big issue). This may lead to more To-Do list items to be tackled for the following week, and some Issues that get carried forward to the following week’s IDS phase (but only those that weren’t deemed important enough to be resolved in the current week!). In the advisory context, this could be figuring out a problem in some new software, onboarding a new employee, handling a complex client problem, or brainstorming how to fix a process that isn’t working.

The conclusion of the weekly meeting should recap the To-Do list items that were assigned for the following week, any unresolved Issues that may carry over to the following week’s IDS phase, and a brief discussion about whether anything needs to be communicated coming out of the meeting (e.g., a message to a particular client, a new initiative to all clients, a new policy to be communicated to staff members).

Notably, the total breakdown of Wickman’s weekly meeting template includes a mere 30 minutes on 6 of the 7 phases of the meeting, and 60 minutes for the IDS phase, where the team problem-solving actually occurs. In other words, the meeting is 1/3rd communication and accountability, and 2/3rds problem-solving. And this balance is deliberate, as the number one failing for most meetings is the feeling that nothing is actually getting done, while this approach is designed to allocate the bulk of the time to getting things done!

My Journey Of Starting A Weekly Team Meeting Process

Personally, I will admit that I long resisted adopting a formal weekly meeting process myself. Having sat in on an incalculable number of unproductive meetings, to say the least I was not eager to voluntarily institute yet another regular meeting upon myself (and my team)!

Yet ultimately, having finally made the transition myself, I will have to confess I see the power of having a standing weekly team meeting. Although I personally haven’t adopted quite the weekly meeting template that Wickman advocates, my own standing team meeting agenda is:

– Review Weekly (and Monthly) Business Data

– Review Task List

– Weekly To-Dos (clients, internal business projects, etc.)

– Monthly Projects (my “Rocks”)

– Reprioritize for the upcoming week

– Other Business/Staff Issues

The meetings are scheduled for an hour, and although I don’t specifically articulate it in my staff meeting agenda, the bulk of the time is really spent not just reviewing the task list per se but actually digging into ‘problematic’ To-Do items (or Monthly Projects) and figuring out how to solve them. Thus, it seems I unwittingly evolved my own weekly meeting agenda to have the heavy component of problem solving that Wickman advocates (and is perhaps why I’ve felt like the meetings have been very productive!). In fact, the whole experience – and Wickman’s book – has made me realize in retrospect that the primary problem with most meetings is that they leave no time for actual problem-solving, usually because the whole meeting is spent on just communication and reporting… or simply because no one actually brought a substantive issue to the meeting with the intention of getting it solved! (Ever gotten to the end of a meeting and felt like the meeting was a waste because there was nothing substantive to actually talk about at the meeting? Exactly!)

Notably, the data tracking comes directly from our business software (and some light massaging of the data in an Excel spreadsheet), and the weekly To-Dos and prioritizing comes from our team’s task management software (e.g., CRM or project management tools). As the weekly meeting process has become habit, some meetings we’ll actually take a few minutes just to focus on how to make it easier to prepare the standard reporting for the meeting. We’ve also been working on automating the reporting of some of our key business metrics.

In addition, I would point out that personally, I’ve found the process of “re-prioritizing” for the upcoming week to be one of the most essential and valuable parts of the weekly team meeting, to stay on target. For a rapidly growing and iterating business – and a bit of a strategic thinker always seeing new ideas and business opportunities – the reality is that sometimes, new opportunities supplant ‘old’ action items and initiatives lingering on our weekly or monthly to-do list. By taking a few minutes every week (usually no more than 5 minutes total) to redirect the team on what they should be prioritizing this week, I can ensure that we’re always working on whatever I truly believe is the highest and best use of the team’s time every week.

Tips For Adopting Your Own Weekly Meeting Process

Ultimately, you may decide to precisely adopt Wickman’s Weekly Meeting Agenda, or instead may decide to craft your own. Whatever your path, I would make the case that the four core areas that have to be covered are:

Data Reporting. What are the Key Performance Indicators for your advisory business? And if you’re not sure, start tracking a few (e.g., new clients, new AUM/revenue, lost clients, prospect meetings, etc.) and adjust based on whether you’re finding them meaningful to regularly report for a period of time. Having a regular weekly meeting process to look at this data will help quickly accentuate whether it’s relevant, or if not what may actuallybe relevant, and will drive you to refine a process to get the data easily.

To-Dos. This is crucial for accountability and ensuring things are actually getting done. What were the tasks from last week, which ones are getting checked off (most of them hopefully!), which are getting carried over, and what are the new ones to add. Ideally this comes directly from the assigned tasks in the task management/workflows from your CRM, but at a minimum, keep track of key To-Dos separately, just so you can report on them at the weekly team meeting!

Prioritize. For me, this is about ensuring that the team is working on whatever is truly most important for the week (which varies from week to week as some projects are paused and revisited later). From Wickman’s perspective, this is where you renew your focus on the Rocks that have to get done in the current month or quarter, to ensure the business is moving forward on its big objectives.

Problem-Solve. Leave time – a lot of time – in each weekly meeting to actually solve whatever issues have cropped up in trying to execute last week’s To-Dos, and preparing for the upcoming week’s priorities items, as well as responding to any data tracking that was concerning. If you follow Wickman’s rule, this should be 2/3rds of your total meeting time!

In addition, one of the biggest keys to the success of the weekly team meeting is scheduling it at a fixed time, and making it a commitment for everyone on the team to honor that team meeting time every week. Our weekly meetings are at 10:30AM on Monday mornings – enough time for everyone to get oriented at the beginning of the day (including preparing the meeting agenda and the weekly data reporting), before diving in to discuss the upcoming week’s activity and obligations. In my case, this was part of my broader personal initiative to regain better control of my time and schedule by crafting a more rigorously structured “standard” weekly meeting schedule.

Beyond just helping for scheduling and time management purposes, though, the real value of having a standing weekly meeting is that it forms the basis for your team’s accountability in the first place. When “everyone knows” that the weekly meeting is coming, and required, and that everyone will be held accountable to their To-Do items in the meeting, it becomes a crucial mechanism for accountability. In other words, the weekly meeting becomes the weekly deadline for weekly tasks… and there’s nothing like a deadline to ensure that things get done!

In the meantime, if you’re looking for more ideas about how to gain momentum in your business, especially if you’ve reached the point of multiple team members (and especially multiple partners) and feel like the business is spinning its wheels with effort but not making much traction, I highly recommend Wickman’s entire “Traction” book, which provides a whole “Entrepreneurial Operating System” (EOS) blueprint to give your business more structure and help it gain some traction.


Why Many Financial Advisers Aren’t Worried About Posting Anti-Trump Opinions

Why Many Financial Advisers Aren’t Worried About Posting Anti-Trump Opinions

It’s common for parents to teach their children not to discuss politics in polite company, and the practice is especially rare amongst financial advisors who don’t want to accidentally offend a client who might hold differing political views. At the most, “politics” only came up in the context of discussing potential policy changes in Washington, and the impact it might have on either investors/markets in general, or a client’s financial plan in particular.  Powell notes that with the rise of President Trump, it’s become increasingly common for many financial advisors to share their political views, especially via social media platforms.

On the one hand, some believe the shift is simply due to the fact that social media, including sharing political views via social media, just simply become more socially acceptable. On the other hand, some advisors note that their political beliefs are so strong, they don’t care if they upset and lose a client from the other side of the political aisle, and prefer to work with clients with whom they have shared beliefs anyway. In fact, while advocating for or against any highly political figure is likely to offend at least some prospects and clients (and there are pro-Trump advisors speaking out more as well), what impairs a relationship with some may also resonate especially well with others, and could attract as many clients as it repels anyway (or even more, if being publicly political actually becomes a viable differentiator for the advisor!).

Notably, the nature of political posts also varies by social media platform – as advisors seem to be more likely to post politically on Facebook (which is more often used personally) than other platforms like Twitter (which is more often a professional platform for learning and sharing expertise). At a minimum, though, marketing experts urge that if advisors are going to speak up on political issues, they should have a plan for whether/how they’ll deal with any pushback that may arise, as making civil political posts is one thing, but an emotional outburst on social media is another.

TD Ameritrade Shocks RIAs [By Changing Its Advisor Referral Program With] A Tight Deadline To Sign

TD Ameritrade Shocks RIAs [By Changing Its Advisor Referral Program With] A Tight Deadline To Sign

Last month on March 20th, TD Ameritrade “informed” the roughly-150 RIAs in its advisor referral program that they must acquiesce to new terms, which for many will involve substantially higher costs, with a contract and an April 5th deadline to sign or be dropped from the program. The primary changes were a shift in the revenue-sharing agreement for advisor referrals from 25% of the advisor’s fee, to 25 basis points (regardless of the advisor fee) which drops to 10bps above $2M and 5bps over $10M; for those who charge more than 1% in AUM fees for million dollar accounts, the change would actually be a discount, but for most advisors who charge 1% or less – sometimes much less on large accounts thanks to graduated fee schedules – the change amounts to a substantial increase in the cost of the referral arrangement.

In addition, the 25bps fee will apply on referred assets, not just closed assets, which means if TD Ameritrade refers a $2M account but the client only agrees to have $1M managed initially, the advisor still has to pay 25bps on the entire $2M that was referred. Also notable was a big change to the exit rules – in the past, advisors who left TD Ameritrade would have to pay a one-time 75bps fee if they left the platform and took TD-Ameritrade-referred assets, but now the cost will be a 75bps one-time fee plus a 25bps trail for five years.

The shift comes at a time when TD Ameritrade is finalizing its Scottrade acquisition, which is expected to boost its branch network from about 100 locations up to a whopping 450 branches, and as a result, could turbocharge what is already a referral flow of about $25B to $30B per year to RIAs… but now with much higher revenue-sharing and retention terms for TD Ameritrade. Of course, the reality is that most advisors would and do gladly share revenue in exchange for high-quality referrals provided to them on a silver platter, and the buzz is that most firms have simply accepted the new terms and moved on – especially since firms already charging right around 1% AUM fees and closing most new business referred to them won’t see much change, and if they plan to stick with TD Ameritrade anyway the new departure provisions are a moot point.

Nonetheless, there were substantial rumblings about the way TD Ameritrade handled the rollout, providing many firms less than 2 weeks to read the notice and make a decision (once the letters physically arrived in the mail), and using the DoL fiduciary rule and its April 10th applicability date as the justification for the push (even though the rule has since been delayed 60 days) on the basis that TD Ameritrade had a conflict of interest by getting paid 25% of an advisor’s revenues (which meant advisors who charged more would result in a conflict of interest by paying more in revenue-sharing to TD Ameritrade).

Although ironically, in practice the new pricing structure will squeeze investment-only firms (that tend to have lower AUM fees for investment-only services, and might not be able to pay 25bps if they only charge 40bps to 50bps in the first place), in favor of more comprehensive financial planning and wealth management firms that charge a higher price point (for which 25bps is expensive but not fatal).

Why The Latest DoL Fiduciary Delay Is Likely The Last

Why The Latest DoL Fiduciary Delay Is Likely The Last

Yesterday, on April 10th, the Department of Labor’s new fiduciary role and the requirement that advisors engage in a best-interest contract with their clients didn’t happen.

Last week, the DoL finalized a new regulation that enacted a 60-day delay to the applicability date for the original fiduciary rules. So, as a result, that final DoL fiduciary rule that was supposed to hit on April 10th is now pushed out to June 9th instead.

Many commentators have been suggesting that the DoL fiduciary rule delay, this 60-day delay, is just the first of what will probably be multiple delays, and that opponents of the fiduciary rule would just keep delaying it, delaying it, delaying it, until eventually, they find a way to kill it. In essence, suggesting that the DoL fiduciary rule is never actually going to happen.

But I wouldn’t be so sure about that, particularly when you delve into the details of what this delay actually said.

What The DoL Fiduciary Rule 60-Day Delay Actually Said

Because the headline announcement was just that, “The DoL fiduciary rule has been delayed 60 days, from April 10th until June 9th.” But the final regulation that was approved, the actual document that substantiated this delay, wasn’t just some brief regulation with a page that said, “We delay it by 60 days.” It was a 63-page regulation, with a number of other key changes and even a few things that have been viewed by the industry as surprises.

The first surprise in the ruling was that not only is the new definition of fiduciary delayed until June 9th, but the requirement to actually implement the best-interest contract exemption, which is the whole crux of the new fiduciary rule, was actually further delayed until the end of the year. Once we now get to June 9th, the only thing that will actually apply are the so-called impartial conduct standards, which says that advisors must give best-interest advice for reasonable compensation and make no misleading statements.

But the remainder of the disclosure rules for best-interest contract won’t apply on June 9th. The full depth of the policies and procedures requirements for financial institutions won’t apply on June 9th. Advisors won’t be required to acknowledge in writing that they’re fiduciaries to clients on June 9th, which means they won’t be bound in IRA accounts to a contractual fiduciary duty and won’t be at risk for financial institutions being sued for fiduciary breach in a class-action lawsuit, for any fiduciary failures that might happen after June 9th and before the end of the year.

In addition, because the full best-interest contract exemptions are delayed to the end of the year, that also means that variable and fixed-index annuities will not be subject to the best-interest contract exemption at all this year, not even after June 9th. They’ll stay under the old PTE-84-24 rules instead, which is a really big deal because annuity marketing organizations that help annuity companies distribute their annuity products through independent annuity agents have been really struggling with the best-interest contract requirements, because annuity marketing organizations don’t actually count as financial institutions.

As a result, they couldn’t sign off on the best-interest contract. The annuity companies didn’t want to do it because they didn’t really have oversight of the agents, and the agents couldn’t do it because the rules require a financial institution. So, we were stuck in this limbo with annuities in particular, and the annuity marketing organizations have been applying the DoL to become financial institutions and be recognized as such, so that they can sign off on a best-interest contract, but that process (or any other potential regulatory relief) has still been pending.

But with the best-interest contract exemption delay until the end of the year, annuity agents and annuity marketing organizations don’t have this problem now looming, not today and not June 9th. They don’t have to deal with it until 2018.

In other words, this wasn’t really just a 60-day delay. Much of it was actually an eight-month delay, from April 10th, all the way until the end of the year, for most of the key provisions, the “teeth” part, the enforcement part of the fiduciary rule. At a high-level, a fiduciary obligation is still going to be applicable on June 9th. But in practice, from June 9th until the end of the year, it’s basically a rule with lots of wiggle room and very little actual enforceability, particularly in IRAs, until we get to 2018.

Why The Fiduciary Delay Reduces The Likelihood Of More Fiduciary Delays

Here’s why all this matters. The industry has been fighting hard, basically ever since the final version of the DoL fiduciary rule was re-proposed, back in 2015, to stop the rule from happening. They lobbied the DoL to prevent it, change it, or at least water it down. They sued the DoL after the rule was issued, claiming that the DoL overreached and that they’d acted too hastily. They lobbied congressional republicans to pass a law to block it. They lobbied the current administration to delay it.

That last piece was ultimately what led to President Trump’s decision to issue a memorandum back in February that suggested the rule needs to be revisited. But it’s important to recognize that the rule is still a done deal on the books. It was finalized last year. It was formally adopted and effective. That’s why even when President Trump won the election, we noted on this blog, in “Office Hours,” the day after the election, that his victory was notgoing to lead to an immediate repeal of the rule, even though that’s what all the publications were writing at the time.

Because when you delve into how this actually happens, the president can’t just undo an existing regulation. It’s a violation of the Administrative Procedures Act. That’s also why even when President Trump finally took action, he still didn’t unwind the rule. In fact, originally, there was discussion he was going to delay it by 180 days. He didn’t delay it by 180 days. In fact, he didn’t even delay it by 60 days. He directed the Department of Labor to issue a proposal to consider whether to delay it by 60 days.

Now, that’s ultimately what the DoL has done, but it did so under substantial pressure and threat from consumer advocacy groups, that they would sue the DoL for making hasty changes. The industry fighting the rule is in a very awkward position now. They claim that the DoL rule, which ultimately took five-and-a-half-years (from first proposal in 2010 until it was finalized in early 2016), was too hasty. They sued the DoL on the basis that the rule was done too hastily.

It’s very hard now to say the rule should be killed or substantially changed in the next 60 days or 180 days, while simultaneously claiming that the prior change, which took 10 times as long, was too hasty. Simply put, if the DoL changes too much, too quickly now, to try to unwind the rule, they really are going to get sued, and there actually is a material risk. They would lose.

In addition, the challenge now is the media has caught wind of this, and the public has caught wind of this. Rolling back the fiduciary rule is wildly unpopular with the public. Ultimately when the DoL did their 60-day delay, they noted that they ended up getting 190,000 comment letters about the delay, and over 90% of them opposed any delay. That was for a two-week comment period, just about delaying, 190,000 comment letters, and almost 180,000 of them said, “Don’t delay.”

It’s really hard to substantiate much real change to the rule when the public is overwhelmingly in support, making quick changes are at risk from a lawsuit from fiduciary advocates for violating the Administrative Procedures Act, and the DoL’s hands are just largely tied because it really was a done rule, last year.

A New Regulatory Impact Analysis Of The Fiduciary Rule? [Time – 7:50]

That’s why the only way that the rule can realistically be changed at this point is they have to do a new cost-benefit analysis, a new regulatory-impact analysis, something that provides some kind of new light about why, perhaps, the fiduciary rule would somehow be harmful after all.

Frankly, I’m still not sure how the industry is really going to make that case. They’re already being buried in studies out there about the problems with the industry’s conflicts of interest and how consumers are being harmed by those conflicts of interest. It’s not just about the fact that advisors are paid or even paid commissions. Advisors have a right to get paid. That’s part of why the fiduciary rule didn’t actually ban commissions.

It is about the fact, though, that substantial investor inflows keep going to funds with known-to-be inferior performance, where those funds coincidentally pay commissions or pay higher commissions. That was actually the driving force of that widely cited stat that the lack of a fiduciary rule will cost investors $17 billion. It wasn’t just about advisors getting paid. It was about a subset of salespeople posing as advisors, selling clearly inferior investment products when superior alternatives are available.

That’s part of why President Trump’s memorandum directed the DoL not only to propose a 60-day delay, but also to solicit comments about a new regulatory impact analysis, basically a new cost-benefit analysis of the trade-offs of a fiduciary rule, one that would look at three primary areas: whether the fiduciary rule is reducing access to retirement advice, causing dislocations or disruptions in the retirement industry that might harm investors, or whether the DoL fiduciary rule will likely cause an increase in litigation that leads to an increase in prices that investors would pay for retirement.

That comment period is actually open now. It was a 45-day comment period, opened alongside the 15-day comment period for the 60-day delay, to conduct this regulatory impact analysis of the rule. That comment period actually closes next week, on April 17th.

But with that 45 day impact analysis comment period closing, it’s still not clear that the DoL could possibly have enough time to substantively evaluate the comments, take them in, write a new rule, propose the new rule, have that proposal with actual changes subject to another comment period, take that feedback, draft a final rule, submit that to OMB, get that back for review, get it approved, and then publish it in the Federal Register, all by June 9th. In fact, one of the primary criticisms from the industry about the 60-day delay is that they fear it’s not long enough to actually stop the rule, and I think they’re right. It’s not.

I’m not even sure that there are any grounds at this point to delay it further, because the best-interest contract exemption provisions, the big onerous part for the industry, already got delayed until the end of the year. Only the somewhat unenforceable on its own, impartial conduct standards, are…and that’s the only part that even kicks in on June 9th.

Now if the industry still tries to fight for another delay, fiduciary supporters can point out, “Hey. You’ve already got until the end of the year to finish your compliance systems, your policies and procedures, your new disclosures. You got transition relief. Why should we grant more?”

Modifications Maybe, But Delays Are Probably Dead

The key point here is that the industry may have gotten more time to adjust out of this 60-day delay. It’s actually, I think, a little bit of a misnomer to call it a 60-day delay, because a lot of it was really an 8-month delay, but that still means all-the-more that when the rule becomes applicable on June 9th, even with the partial initial provisions and the rest that kick in later this year, it’s getting harder and harder to stop or delay or kill the rule, because you can’t even claim you don’t have time to adapt to changes by June 9th, because you don’t have to actually do most of them by June 9th. You only have to do them by the end of the year.

Ultimately, I think what you’re going to find is this conversation is about to shift from killing the fiduciary rule, which just isn’t going to happen, to modifying it. Ultimately, as I suggested to all of you back in November, the day after the election, I think modification is still actually a likely outcome. The DoL fiduciary rule may be here to stay, because the president doesn’t really have the authority to rescind it, and the DoL doesn’t really have the authority to kill it, and there’s too much support now with 193,000 comment letters, with 90% support, but we could modify it.

Because I’ve talked to a number of broker-dealers that are actually acknowledging now that, while the rule is a tough transition, if you’re a leading broker-dealer, and you’re actually well-positioned to handle compliance, this is a business opportunity for you to gain market share from all the other broker-dealers that might be lagging, which means even the broker-dealer community now is kind of split on the rule. If you’re ahead on compliance and adoption, you actually want this thing to go through, to grow your market share, but you might want it to be modified a little. Maybe dial back the threat of that class-action lawsuit provision.

In the meantime, we’re seeing services like Vanguard Personal Advisor Services and Schwab Intelligent Advisory ramping up with very low account minimums and cost of 28 to 30 basis points, for a human CFP financial advisor, which is really taking away any industry credibility for that whole argument that small investors won’t be served or lose access to advice, because the reality is major firms are already offering even cheaper services for those advisors, under an advisory environment. That’s actually the irony of this. The broker-dealers are claiming that consumers will lose access to advice, but, legally, they’re not even in the business of giving advice. Legally, they’re salespeople in the business of selling products, and their advice has to be solely incidental. It’s Vanguard and Schwab that have launched actually investment advisory services as RIAs, there to give advice, with low minimums, at lower cost than most of today’s brokers.

The bottom line is simply this. For all the talk about DoL fiduciary rule dying or going away, it’s really not. I think it’s been wishful thinking of a subset of very vocal industry firms that are fighting the rule, but the tide has shifted. More and more industry firms have come into compliance. They’ve built the compliance systems that they had to do, and they’re ready for it. Some of them even want it now, because their fiduciary preparedness is a competitive advantage.

In the meantime, hasty actions to kill the rule from DoL face the risk of a lawsuit that might well win. Congress could kill it, but congress is gridlocked, and the senate can filibuster to keep the DoL rule from changing, and Senator Warren’s office has already been rallying the democrats around the rule to prepare for that.

It’s getting harder and harder even to make the case for a delay of the rule from here, when so many of the compliance deadlines were already pushed out not just to June 9th, but all the way to the end of the year.

For any of you listening, if you haven’t finished your own preparations for DoL fiduciary yet, I really encourage you to be doing it now, because I think the rule is really coming. It may get modified. It can even get modified after the fact. Maybe we’ll dial down the class-action provision. Maybe we’ll adjust some of the disclosures, but we’re now in the phase of incremental changes to the rule. Repeal just does not realistically seem to be on the table anymore, which, frankly, I think ultimately is a good thing, not only for consumers but for those of us who are real financial advisors who want to regain consumer trust and are tired of having our whole industry’s trust dragged down by a small subset of salespeople posing as advisors, that are causing consumer harm.

But in any event, I hope that’s some food for thought about the current state of the DoL fiduciary rule and why modification is still a maybe, but further delay is probably dead at this point.

Stock Market Valuations and Hamburgers

Stock Market Valuations and Hamburgers

To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying — – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.

– Warren Buffett, Fortune magazine: “The Wit and Wisdom of Warren Buffett”

A few weeks ago I spent two days giving multiple speeches alongside my friend Steve Blumenthal of CMG in a very cold New Jersey on the heels of a rather strong blizzard that had left the countryside white and beautiful. I listened to Steve do deep dives on stock market valuations. He started each of his presentations with Warren Buffett’s hamburger story, quoted above, before jumping into multiple charts. After a while, we began to go back and forth during his presentations, as I had my own insights on market valuations, generally in sync with his.

I asked him if he would be willing to do a joint letter on valuations from time to time (as he puts a great deal of research into the topic), and he agreed. This will be the first of our occasional joint letters (assuming we get a good response), with Steve doing the first draft and then me jumping in with comments and charts from my own sources. I want to thank the Ned Davis Research team for allowing us to use a few of their charts and data. (I should note that Steve will be at my conference, for those attendees who would like to talk with him further on this topic.) So let’s jump right in.

Stock Market Valuations and Hamburgers

Warren Buffett is famous for talking about his pleasure when both stock prices and hamburgers are cheap. He appears joyous when prices are down and cries when prices are up.

So should we sing or weep? Warren Buffett has a brilliant way of making the complicated simple. Let’s think about valuations like we think about the price of hamburgers and see if we are going to get more or less for our money. We’ll share with you our favorite valuation charts and story them in a way that we hope will help you better understand the markets and your portfolios.

When we speak to advisors and investors, we use Warren’s hamburger analogy. Heads nod. Eyes lock in. People get it. If, on the other hand, we talk about price-to-earnings ratios (P/E), price-to-sales ratios, price-to-book ratios, eyes glaze over. People generally don’t get it unless they are financial professionals or sophisticated investors. I’m sure you understand finance language, but a lot of people don’t. So for now, let’s talk hamburgers.

We didn’t have all of this big data or computing power in Steve’s early days with Merrill Lynch in 1984 or when I started in the investment publishing industry in 1982. But we do today. What you’ll see in the data that follows is that hamburgers are richly priced. We’ll define what that means in terms of probable returns over the coming 7, 10, and 12 years and what it means in terms of relative risks.

Valuations and Forward Equity Market Returns

Following are a number of our favorite valuation metrics. Let’s take a look at them and see what the research data tell us about probable forward returns (high-priced or low-priced hamburgers):

Median P/E (Price-to-Earnings Ratio)

Think of the P/E like this. Your business has 10,000 shares outstanding, and your current share price is $10. That means your company is worth $100,000 (10,000 x $10). Now, let’s say your company earned $20,000 over the last 12 months. That works out to $2 in earnings for every share of outstanding stock ($20,000 in earnings divided by 10,000 shares). So if your stock price is $10 and your current earnings per share is $2, then your stock price is trading at a P/E of 5 (or simply $10 divided by $2 equals 5). It is simply a metric to see if your “hamburger” is pricey or cheap.

Note, this P/E calculation is based on your previous year’s earnings, not your estimated next year’s, or forward, earnings. If you expect to make $25,000 next year, then your forward P/E ratio is 4. As we will see later, optimistic earning projections can make valuations appear much better than they are. It’s like the old warning: “Objects in the mirror may be closer or larger than they appear.”

With the P/E calculation as a basic starting point, we can see if your hamburgers are expensive or inexpensive. We can look at the S&P 500 Index (a benchmark of “the market”) and we can measure what the average P/E has been over the last 52 years – call that “fair value” or a fair price for a hamburger.

What we see is that a P/E of 5 is a really cheap hamburger. Now, I believe in you, and I believe you can grow your company’s earnings over the coming years; but, wow, if I can buy your great company at a low price, odds are I’m going to make a lot of money on my investment in you. And if I really think you’re going to grow your earnings by 25%, that could make you a bargain.

We can look at the market as if it were a single company and gauge how expensive stocks are now. Over the last 52.8 years, the median fair value for the S&P 500 is a P/E of 17 (we define what we mean by median below). That means a fair price for your company would be the $2 in earnings we already calculated, times 17, or $34 per share. If I can buy your stock for $10 per share instead of its fair value of $34, good for me.

Investors who use this approach are called value investors. I should note that, relative to the actual performance of the market, value investors have been severely underperforming for the past four or five years. They have been punished by seeing assets leave their funds and go to passively managed funds that have shown much better performance at much lower fees. (Note from John: In a few weeks I’m going to talk about the source of this underperformance and what you can do about it. This is a very serious investment conundrum.)

But what if you earn $2 per share and your stock is trading today at $48 per share, or 24 times your earnings? Well then, I’m buying a very expensive burger. So price relative to what your company earns is a good way for us to see if we should sing or weep.

Here is how you read the following chart (from Ned Davis Research):

• Median P/E is the P/E in the middle, meaning there are 250 companies out of 500 that have a higher P/E and 250 that have a lower P/E. Using the median number eliminates the effect that a few very richly valued companies have on the average P/E, which is what you normally see reported in the media and presentations.

• The red line in the lower section shows you how P/Es have moved over time.

• The green dotted line is the 52.8 year median P/E. So a P/E of 17 is the historical “fair value.” Simply a point of reference.

• You can see that over time the red line moves above and below the dotted green line.

• If you remove the 2000–2002 period (the “great bull market”), we currently sit at the second most overvalued point since 1964. (Note: 1966 marked a secular bull market high, to be followed by a bear market that lasted from 1966 to 1982.)

• In the lower section of the chart you also see the labels “Very Overvalued,” “Overvalued,” and “Bargains.”

One last comment on the chart. At the very bottom of the chart, Ned Davis states that the market is now 7.9% above the level at which it is considered to be overvalued.

• That means the market would need to decline from the March 31 S&P 500 Index level of 2362.72 to 2176.07 to get back down to the “overvalued” threshold.

• It would need to decline to 1665.72 to be get to “fair value” (the median). That’s a drop of 29.5%.

• Also note “undervalued,” which we could see in a recession (now -51.1% away).

So fair value for your company is $34 per share (that’s your $2 per share in earnings times the “fair” P/E of 17). I’m thrilled if your stock is selling for $10, because my forward returns will likely be outstanding. Let’s see what that looks like next.

Median P/E and Forward 10-Year Returns

Median P/E can help us predict what future 10-year annualized returns are likely to be for the S&P 500 Index. Will your future burgers be pricey or cheap? The price at which you initially buy matters.

Here is how you read the following chart. (Data is from 1926 through 2014.):

• Median P/E is broken down into quintiles. Ned Davis Research looked at every month-end median P/E and ranked the numbers, with the lowest 20% going into quintile 1, the next 20% into quintile 2, and so on, with the most expensive or highest P/Es going into quintile 5.

• They then looked at forward 10-year returns by taking each month-end P/E and calculating the subsequent 10-year annualized S&P return.

• They sorted those returns into quintiles and determined that returns were greatest when initial P/Es where low and worse when P/Es were high.


With a current median P/E for the S&P of 24, we find ourselves firmly in quintile 5.That tells us to expect low returns over the coming 10 years. Though it appears that most investors are expecting 10% from equities, history tells us that the market as a whole will have a hard time growing much faster than our country’s GDP does.

Note that 4.3% returns are the average of what happens when stocks are purchased in the top 20% of valuations. That forward return number goes down considerably if we are in the top 10% or top 5%, which is where we are today. The following chart, from Ed Easterling, shows what 20-year returns look like based on starting P/E ratios. Using average P/E ratios rather than the median, we are looking at an average annual return over 20 years of less than 3% from where we are today. Again, not what investors are expecting.

I should point out that, in research done with Ed Easterling and shared in previous letters, we turned up 20-year periods when investors actually lost money (inflation-adjusted). So, the next time you go in for a tune-up of your financial-planning program, have them adjust your forward returns based on some of the data presented above and below. And then be prepared to exercise restraint when they show you the results. And then be determined to work longer and save more, because that’s what you may have to do.

The reality today is that hamburgers are expensive. You’ll need to be mentally prepared to play offense when P/Es eventually shift back down into quintiles 3, 2, and 1; but for now it’s time to play defense and think differently about your portfolio.

Use this next chart as a guide to help you determine which P/E quintile we’re in, going forward. We are clearly in the most expensive valuation quintile now:

Next, let’s next look at some other valuation measurements used by people who know what they’re talking about.

Shiller’s CAPE (cyclically adjusted P/E) – a measurement process that smoothes P/E over the last 10 years

The current Shiller’s CAPE P/E is 28.94, higher than at the market high in 2007, and higher than the bull market peak in 1966. Only 1929 and 2000 were higher.


Jeremy Grantham: GMO’s 7-Year Asset Class Real Return Forecast


Here’s how to read the chart:

• Each month for many years, GMO has published its forward return forecasts. There has been a high correlation over time between what GMO predicted and what turned out to be. An approximate 0.97 correlation, actually. That’s as close to the middle of the fairway as any forecaster has hit the ball, as far as I know, which is why you really need to take this forecast seriously.

• In 1999, GMO predicted a -1.9% annual real return over the following seven years for large-cap stocks. “Real” means after inflation. Everyone was racing into tech stocks back then – I’m sure you remember. The actual returns turned out even worse than GMO had forecast. I should note that in 1999 GMO, led by the venerable and brilliant Jeremy Grantham, was seeing a lot of money take flight from its management programs because investors had concluded that Jeremy just didn’t get it. Those investors, many of whom went into conventional momentum-based strategies, then had their heads handed to them, messily, in the next two years. GMO’s assets rose spectacularly during and after the subsequent bear market. We are seeing the pattern repeat today. GMO is once again bleeding assets because investors still don’t think that Grantham gets it. They’ve decided his management style is simply antiquated and his forecasts just can’t be right. Sometimes they really do ring a bell.

• As of February 2017, GMO is forecasting a -3.8% annual return for US large-cap equities and a -0.8% for US bonds over the coming seven years.

• With a richly priced market (expensive hamburgers) and GMO’s strong return forecast history, we find it illogical and unwise to chase into passive buy-and-hold ETFs and index funds at this time. Yet that is what is happening.

Hussman’s 12-year Return Forecast

John Hussman shared this next chart, and it shows that his 12-year forecast is for 0% to 2% returns before inflation. This is a portfolio based on 60% equities, 30% Treasury bonds, and 10% Treasury bills. Basically, a typical 60/40 portfolio. Question: Do you really think there will be 0% inflation over the next 12 years?


What about Drawdowns?

The following chart is a look at the downside risk by valuation quintile.

When valuations are highest, not only are returns lowest but risk is highest. This chart shows that from where we are today we should expect an 18% drawdown in an average case and a worst-case -51% if there is a recession (more recession probabilities in a moment).

Household Equity Ownership Percentage vs. Subsequent Rolling 10-Year S&P 500 Index Total Returns

This next chart shows that household equity ownership percentage has a high correlation with future annualized returns.

Here’s how you read the chart:

• Think in terms of buying power. If individuals are fully invested in stocks, how much more money do they have available to buy more stocks? More buyers than sellers pushes prices higher. More sellers than buyers pushes prices lower.

• Of course there are other buyers and sellers: institutions, corporations, and foreign investors (and now even government central banks). Just stick with us at this point.

• The blue line tracks the percentage of total household financial assets that are equity investments, including mutual funds and pensions.

• Take a look at the top red arrow. At the market top in March 2000, the high level of equity ownership was forecasting a return of -3% annualized over the coming 10 years.

• The black dotted line plots total return over the subsequent 10 years, on a rolling basis.

• Again, focus in on 2000. The dotted black line shows that total return over the following 10 years turned out to be approximately -1%.

• Look how closely the dotted black line tracks the blue line over time.

We can use this chart as a guide. We will share it with you from time to time. The point is that we want you to be prepared to overweight stocks when the getting gets good. The hard part is that you’ll need to be a buyer when everyone around you is panicking. That’s when opportunity is always best. But for now, if you are betting that we’re at the beginning of a new bull market, you are really expecting this time to be different.

Average of Four Valuation Indicators – Way Above Trend

Here’s how you read this next chart:

• The chart is a simplified summary of valuations obtained by plotting the average of four arithmetic series. It also shows standard deviations above and below the mean.

• Standard deviation measures extreme moves away from normal trend

• The four valuation metrics are the Crestmont PE, the cyclical PE10 (similar to the Shiller PE), the Q ratio, and the S&P composite from its regression.

• Note the far-right number on the chart: 84%. That’s our current valuation, and it’s two standard deviations above trend – the second-most overvalued reading in the data series history.


Valuations – Everything Else: Price-to-Sales, Price-to-Operating Earnings, Etc.

The chart below looks at 20 different ways you can value the stock market. Note that it is possible to come up with valuation metrics that show the market to be moderately undervalued. Most of those methodologies have something to do with yield.

That being said, look to the far right – most valuation metrics are “Extremely Overvalued.”

Median P/E – Selected Dates

(This next section is basically from Steve, triggered by a discussion he had with a reporter from a mainstream media business journal. The journalist was struggling to understand the concept of projecting future returns based on current P/E ratios. Steve gave her the following chart.)

To make this discussion a little more real, I selected several dates to give you an idea as to what the median P/E was then and what the subsequent annualized 10-year return turned out to be.

• Green is low P/E, high subsequent returns

• Red is high P/E, low subsequent returns

Take a look at the December 2002 median P/E of 18.8. A month prior, on November 11, 2002, Warren Buffett said, “The bubble has popped, but stocks are still not cheap….” He was right. The return over the subsequent 10 years was just 4.94%. Gentle readers, we sit at a median PE of 24.2 today – higher than at any other point in the above chart. Caution!

Earnings Estimates

We use median P/E because analysts have historically been too optimistic in their earnings forecasts. This is why we don’t – and don’t believe you should – trust Wall Street estimates.

Here’s how you read the chart:

• The upper end of each squiggly line is the first Wall Street consensus estimate; the bottom of each line is the last.

• Note that for 2016 (the orange line), the first estimate was for $137 earnings per share on the S&P 500 Index, and the last was for $106. That’s a big miss.

• Also note that 2016 may end lower than the actual earnings for 2013 (the black line).

Now, here is another way to look at that same data, from Crestmont Research. What the next chart shows is that the earnings per share for 2016 dropped to $94.55, which is indeed lower than for 2013 and 2014! The initial forecast for 2016, 24 months ago, was for earnings to be $124.20. And as Ed Easterling has noted, the analysts haven’t learned anything: They are starting their predictions for 2018 at well over $130 (upper-right small squiggle). Already, 2017 forecasts are down $10 from the original predictions and are on target to be close to the earnings for 2016!

Earnings have been basically flat for the last three years and haven’t really improved all that much in the last six years, and yet we are in a serious cyclical market. The last three years have seen the market rise by over 50% with no earnings increase. As my friend Jared Dillian says, “Dude, it’s a bull market.” Sometimes that simply the only explanation for why the market goes up.

And on top of all that exuberance, volatility has now plunged to 4%, the lowest level in all rolling 12-month periods since 1950. Traders who have been shorting the VIX simply because it’s low and a reversal seems so obvious have been carried out on stretchers for the last three years.

Bull Markets Go Out with a Bang

This next chart is almost self-explanatory. Look at the numbers in the boxes outlined in black, which show the final-year performance in every cyclical bull market since 1947. They typically end with a great final blowoff year. Which is precisely what leads investors to pile ever more frenetically into the market, convinced once again that this time is truly different.

What Will Trigger the Next Bear Market?

Every bear market correction since 1947 that didn’t come during a recession was relatively quickly reversed. Think about what happened in 1987 and 1998. There were serious corrections and then a bull market. The bull market that found its footing in 1987 lasted for another 13 years. In 1998, we were only a few years away from a major correction accompanied by a recession. It was in late 1998 and early 1999 that I began writing about a coming secular bear market. Watching the market go even higher throughout 1999 was frustrating, but my book was out, and my words had been immortalized.

Obviously, it’s important to have a sense of when the next recession will happen. But, though the economy is at stall speed and this past week’s employment report proved weaker than expected (though the U-3 unemployment number dropped to 4.5%), there are very few signs that we could actually enter a recessionthis year.

We also have to remember that, as of last month, we are officially in the third-longest period of time since the previous recession. The charts below are again from Ed Easterling’s Crestmont Research, one of the most useful websites I know of.

If there is no recession by 2020, we will have lived through the first decade in 120 years without one. But for that to happen, everything has to go right. We have to have major tax reform – reform that does not include some form of tariffs and/or a border adjustment tax. No tinkering around the edges, no small-ball. We must also have extensive healthcare reform. We have to figure out how to increase the labor force participation rate. And we have to hope that Europe doesn’t blow up, that Italy somehow figures out how to deal with its banking crisis, and that China evades a major credit crisis, etc. – all sorts of things that are out of our control.

We need to put this post-2009 bull market into some historical perspective. These last two charts from Crestmont Research show the beginnings and ends of every bull and bear market since 1920. Every bull market other than the current one began at a point when the market was at a low P/E ratio, and every bear market began when the P/E ratio was high. Since 2000, though, the market has never returned to low valuations. Valuations certainly went down in 2009, but then they turned right around and started back up. This is the strangest “bull market” cycle so far in the last 100 years. Is it possible that it could be different this time? Certainly; anything’s possible. It’s a bull market, dude!

The market never got to “cheap hamburgers” in 2009. Maybe it doesn’t need to, but we need to be aware that valuations are at such a high level that a fall to a P/E level that would get us back into the green zone where most bull markets start would be a bear market of biblical proportions. Think down over 60%.

Some Final Thoughts from John

I’m not saying that we have to get back to the green area now – at some point in the future that will actually happen – but you need to understand that we are at a very interesting, very challenging juncture, and I don’t think traditional buy-and-hold investing styles will be rewarded very well going forward.

In a somewhat cautionary example, I had an associate over at Tectonic Advisors do a search on his Bloomberg for me, analyzing the stocks in the Russell 2000 Index. Just over 30% of those stocks have less than zero earnings – as in, they are losing money. So when somebody passively buys a small-cap index – almost any small-cap index – they are buying a high percentage of companies that have no earnings.

I understand that Amazon and Tesla have no earnings and yet there may be good reasons to buy them. There may be similarly good reasons to buy hundreds of small-cap stocks that have no earnings today, because of expectations of future powerhouse earnings. I am an investor in biotech stocks that have no earnings.

But those are targeted and specific investments, not passive index investments where you get the good and the bad indiscriminately. Yes, active management has had its collective head beaten bloody for the past few years; and the proclivity for passive investing may persist a lot longer than any of us imagine, driving markets higher than many of us believe possible; but I think the stampede into passive investment is going to end up painfully, at the bottom of a cliff, for many investors.

 I want to make it clear that I am not suggesting you get out of the stock market. In my own money management program, which is based on diversifying among trading strategies rather than asset classes, the managers I am using all have systems that are telling them to be quite bullish on equities right now.I am sure that Steve and I could have written a similar letter in early 1999 (if the data had existed) that would have been as cautionary as today’s letter is. And yet, the correct short-term and medium-term position to be in throughout 1999 was long equities. So yes, my call for the beginning of a secular bear market in 1999 was early. It was the correct long-term position, but it was painful to sit on the sidelines. Ditto the experience I had in 2007, when I said we would be having a recession and the markets would go down, which they did – but only after they went up 20% from the date of that call.

I didn’t have to be spanked more than a few times before I learned that trying to talk logic regarding the market – or at least logic as I understand it – is not a useful investment or trading style. Having a rigorous, systematic approach is far better. I’m putting the final touches on a series of white papers on how to invest that we will be releasing to you quite shortly, after the Easter weekend. They are the culmination of years of research and a lot of work on the part of our team of serious investment professionals, and I’m sure you will find them interesting.


Changing Your Mindset to Grow Wealth

Changing Your Mindset to Grow Wealth

Clear Your Money Hang Ups

You will have to dig a little deeper to work on this one, but it can take you far in terms of adjusting your mindset. What are your money fears and beliefs? Pay attention to your earliest memories about money and your family’s wealth beliefs. Did you or your family deal with any financial traumas, like a failed business, divorce or unemployment? Are you aware of how that has affected your current relationship with money? Maybe it has made you too risk averse, or you squander your finances because you don’t believe you can hang on to them. Working through some of your deepest money hang ups can make hitting your goals much more possible.

Check Your Emotional Money Connection

How closely are your spending habits aligned with your emotions? Do you spend excessively when you’re dealing with emotional turmoil, or are you so afraid of losing your money that you hoard it? Dealing with your finances is supposed to be rational, but for most people, they have a hard time separating money from emotions.

Looking closely at the motivations behind your money decisions can help you realize whether or not you’re making the right choices. Make sure you work with your spouse on this, as well.

Assess Past Mistakes

For a lot of people, certain resolutions show up on their list year after year but never get resolved. If you have a goal that you can’t seem to clear from your resolutions list, look closely at your past approaches. Have you implemented a similar plan every year without making any headway? Look for the ruts you get stuck in and do something new to shake up your approach.

5 High Yield ETFs of CEFs For Tactical Income Investors

5 High Yield ETFs of CEFs For Tactical Income Investors

Many investors are making the right choice to build their core portfolios around low-cost, liquid, and diversified ETFs geared towards dividend paying stocks and bonds.  These funds provide transparent exposure to a broad range of asset classes without the drag of high expenses.

While this core exposure is important, there may also be a desire to further diversify your holdings towards alternative investment styles with a penchant for higher yields.  This is the foremost objective behind ETFs that invest in a basket of closed-end funds (CEFs). 

Closed-end funds offer varying risk dynamics than a traditional ETF.  They are pooled investment vehicles with set share amounts that can trade at a premium or discount to their underlying net asset value.  Furthermore, they often employ leverage, options, and other sophisticated portfolio management techniques to boost their yields for shareholders.

The following are five dedicated ETFs that invest in a broad range of CEFs for those investors that want to enhance the yield of their portfolio or seek out varying asset classes.

PowerShares CEF Income Composite Portfolio (PCEF)

PCEF is the largest and perhaps most well-known fund in this category.  This ETF has $667 million dedicated to an index of 140 closed-end funds.  The benefit of a fund like PCEF is that you get highly diversified exposure to virtually every corner of the closed-end fund market.  It’s like owning the benchmark for this investment group.

The portfolio is allocated approximately 33% towards stock or option income strategies and 67% towards high yield fixed-income.  The current 30-day SEC yield is a generous 7.31% and income is paid monthly to shareholders.

PCEF charges a management fee of 0.50% for the construction and maintenance of the fund.  However, it’s total expense ratio is reported at 2.02% because of the additional 1.52% blended expenses of the underlying CEFs.  These must be transparently reported according to securities guidelines.

An important aspect of analyzing closed-end funds is where they are trading in relation to their net asset value.  PCEF currently sports a weighted average discount of -6.44%, which is on the high side in relation to its historical average.  The 52-week low discount was -10.39%.

One of the best opportunities to buy closed-end funds and their ETF overlays is when discounts are expanding or premiums are contracting.  This means that investors are selling regardless of the underlying price action of the portfolio.  That’s where the value play is most attractive.

YieldShares High Income ETF (YYY)

YYY is another fund that has grown in popularity over its nearly four-year history.  This ETF has $150 million dedicated to a more concentrated mix of just 30 holdings.  The YYY portfolio is constructed by screening for CEFs based on fund yield, discount to net asset value, and overall liquidity.

The end result is a unique mix of securities with the flexibility to change as the attributes of these underlying funds evolve.  Think of it as a “smart beta” alternative to a more diversified and passive index.  The current asset allocation is 25% stocks and 75% bonds.

YYY offers a 30-day SEC yield of 7.03% and its average discount is -8.01%.  Dividends are paid monthly to shareholders as well.  The fund charges a similar management fee of 0.50% and carries underlying fund expense fees of an additional 1.36%.

This type of ETF may be appropriate for those that want to own a unique portfolio ofCEFs with deeper discounts and higher yields than traditional benchmarks.

VanEck Vectors CEF Municipal Income ETF (XMPT)

Investors that are looking for high yields in their taxable accounts may be drawn to a fixed-income fund like XMPT.  This ETF has $78 million invested in a group of 70 diversified municipal bond CEFs.  Most the holdings focus on national municipal fixed-income portfolios that produce federally tax-free income.

The purpose of this fund is to generate higher yields than a traditional muni ETF or even index mutual funds because of the use of leverage within the CEFs.  The CEF portfolios may also own riskier credit securities in order to boost their yields as well.

The current 30-day SEC yield is listed at 5.09%, which produces a taxable equivalent yield of 7.07% at a 28% Federal tax rate.  XMPT charges a management fee of 0.40% and its net expense ratio is listed at 1.56%.

Muni bonds have traveled a volatile path over the last twelve months as the hit of rising interest rates took their toll on this coveted sector.  Nevertheless, those with a higher risk tolerance may find that a small tactical allocation to XMPT provides an attractive income stream.

First Trust CEF Income Opportunity ETF (FCEF)

With FCEF we begin to explore the world of active security selection in closed-end funds.  First Trust released this ETF in late-2016 and it has accumulated $17 million in assets to-date.  The portfolio currently owns 40 CEFs selected by the fund managers according to their objectives of current income and capital appreciation.

The prospectus for FCEF gives the managers wide leeway in selecting their portfolio based on fundamental and technical analysis.  The fund can hold both U.S. and foreign stocks, alongside virtually every corner of the CEF bond universe.

FCEF comes with a management fee of 0.85% and total net expense ratio of 2.50%.  The latest fact sheet identifies the portfolio in 25% stocks and 75% high yield bond and fixed-income producing assets.  The weighted average discount is -7.10% and the 30-day SEC yield is 6.38%.

The benefit of an actively managed fund is that they have the flexibility to move to cash or other less volatile funds to control risk.  However, that benefit is a double-edged sword, in that they may miss out on the upside of an index if they aren’t in the right place at the right times as the market is rising.

Saba Closed-End Funds ETF (CEFS)

Lastly, the newly released fund from Saba Capital Management is listed under the ticker CEFS.  This is another actively managed variant run by a company that is familiar with CEF portfolio management.  Saba ranks CEFs based on their in-house models using factors such as yield, discount/premium characteristics and underlying portfolio quality.

The fund charges a management fee of 1.10%, which is on the high side for this group.  The total fund expense ratio is listed at 2.42% based on the initial holdings.

Because this fund is literally in its infancy, it’s too early to evaluate the efficacy of their strategy as it relates to the peer group.  CEFS hasn’t even declared its first dividend yet.

Nevertheless, I will be closely evaluating how the manager constructs and modifies this portfolio over time.  It will be interesting to determine if their management style will be worth the higher fee in generating consistent returns and dependable income.

The Bottom Line

The menu of available funds to choose from in the income investing world is significant.  So much so that selecting the most appropriate funds for your portfolio can be an overwhelming task.  Particularly when you are trying to balance the right mix of quality and credit-sensitive investments to form a sensible strategy without taking too much risk.  It’s always worth remembering that higher yields also encumber a higher risk of invested capital.

The ETFs mentioned above are not for everyone and will be most appropriate as small, tactical positions within a more diversified income portfolio.  Their benefits will be felt most strongly in a credit friendly environment with rising stock and high yield bond prices.