Celebrating 30 Years, Has Anything Changed?

30-years-look-back-ahead

I recently celebrated my 30th Anniversary in this business. It’s actually been a lot longer, but I don’t count my years as a commodity broker.

After leaving the brokerage world in 1987, I started my own consulting business, having been disillusioned by my experiences in the brokerage world. I figured that I would never be able to find a pace in financial services where I could help people as my primary focus, while still making a living.

While establishing my consulting practice, I was introduced to a company down by the airport that was called “College Planners” that was helping students and their families to improve their opportunity to get financial aid through strategic financial planning.

They would analyze the client’s overall financial situation and then make recommendations that usually reduced their risk exposure and increased their financial aid offers. I was intrigued by this concept where you were vastly improving someone’s situation by reducing their out of pocket college costs, while improving the performance of their assets through planning.

After some negotiations, I joined their company and with the owner created a very interesting business plan. Unfortunately, after nearly a year working with them, we had a parting of the ways, but I had gotten a taste of comprehensive financial planning and I was determined to make that work. I spent as much time as I could learning about everything from taxes to estate planning and from portfolio construction to risk management in order to master the skill set I would need to provide quality advice to my clients while establishing my business.

I have dedicated much of my career to learning, studying and contemplating how different products and strategies perform in different situations along with the math to define and analyze those products and strategies.

continue-education

That has led me to earning my ChFC® (Chartered Financial Consultant) and RICP® (Retirement Income Certified Professional) designations. Developing these kinds of analytical skills have opened my eyes to many generally accepted strategies that inadvertently are not in many client’s best interests. IRA’s and employer sponsored retirement plans are a great example of those strategies. While they aren’t bad for everyone, most people don’t understand how they can create a tax nightmare in retirement and other possible negative outcomes when trying to spend the money in one of those plans.

Another is paying off your mortgage as quickly as possible. While having your house paid off sounds good, for most middle-class folks, doing it the wrong way can have severe negative outcomes for your future financial security. There are many other examples, which is why we spend so much time educating our clients.

One of the biggest changes I have experienced is in the demands on everyone’s time. Even though people know that they have financial goals like retirement or paying for college, they are so busy they ignore pressing financial issues until the last minute.

It is very difficult to plan your retirement the day after you have retired.

While it is still better than just randomly spending and not having a plan, people will generally have better outcomes if they took time earlier and understood their options. Unfortunately, this is becoming the case more and more, no time to deal with the big stuff as the day to day has become so overwhelming for many.

I am sure many things have changed for you over the last 30 years, here is a breakdown, by topic, of some of the changes I have seen during that time.

paperwork

Paperwork

When I started you could open an account with a 2-page application. Same for purchasing a life insurance policy, just 2 pages of questions and you were done. Today, account applications can be as long as 70 pages! Even longer if there are business entities or trusts involved.

On one hand, the expanded information and disclosures have made transactions more transparent, on the other hand, the sheer volume of data and disclosures make some folks roll their eyes and just ignore them. Kind of like those disclosures that you have to agree with when signing up for a website or other services online.

The other thing that happens, is the forms are constantly changing, so sometimes during the course of a transaction, we need to get all new paperwork as a result of those changes and updates.

investmentsInvestments

Back in the early 80’s and 90’s, investment options were primarily stocks, bonds and mutual funds. There was whole life insurance and term and there were fixed annuities. There were about 7,000 different mutual funds in the late 80’s. Today there are more than 25,000, according to Morningstar. Add to this the explosion in ETF’s, which didn’t exist then and investors have more choices than ever.

However, the way that both mutual funds and ETF’s have evolved, it has also become much harder to know what’s inside of these instruments. In fact, I challenge any reader to explain to me how an inverse 3x S&P500 ETF is invested!

People are buying these things, without really understanding them. Part of this explosion has been driven by a demand for liquidity. Adding liquidity to illiquid investments can dramatically increase risk. I will explain further in a future post, but if you use these tools, “Buyer Beware”!

There are more ways to trade the same stuff, just repackaged into these different wrappers. After all there are less than 8,000 stocks to trade, but tens of thousands of options for investing in them.

We have seen an explosion in other derivative products as well. Things like “credit default swaps” and “collateralized mortgage obligations” have also seen huge growth in participation, without many participants understanding what is really happening in these instruments.

There have also been innovations that take advantage of some of these technologies. We have new tools for hedging volatility (the VIX index), Fixed Indexed Annuities, where you have guarantees of principal, but earn interest based on the movement of a market index. There are investable volatility-controlled market indexing strategies, which diversify portfolios and evaluate and rebalance as frequently as daily.

The short version is that there are many more, and more complicated options than ever before. The job of figuring out what works for a particular situation is more daunting than ever.

stock-market-tracking

Stock Markets

The other big change, especially in the stock market, is the speed at which money moves and trades are done and the reasons behind the explosion of trading volume.

When I began, we were taught that investing in stock was investing in the profitability of a company. You looked at how the company’s business was growing, new markets that might be coming on line (future prospects) and at traditional measures of value like the price earnings ratio. Orders were placed by people and executed by people.

Today, the majority of trades are initiated by computer programs, received and executed by computer programs. This has given rise to a phenomenon called “High Frequency Trading” (HFT), which makes a lot of money for the stock exchanges due to increased volume (which is how they make their money), but distorts pricing and costs many market participants a little here and a little there, which adds up to hundreds of millions in profit to the HFT players.

Today, it is more about money movement and technical trading based on computer programs than investors evaluating businesses.

This has led to much more volatility in markets (just look at February and October of this year), than in the past. It makes it harder for individual investors to compete and continue to create more extremes in pricing and market volatility. It is more like a casino these days than a place to make solid long term investments.

It is more important than ever to have a strategy and a discipline if you are going to participate directly in the stock market. You are definitely “swimming with sharks” in that pool.

baby-boomers

Baby Boomers Retiring

For the first 20 years of my career, the focus for most clients was on reducing their taxes and investing for wealth creation. Back in the late 1990’s, I started to realize that Baby Boomers had most of their money invested in their home equity or their 401k’s and IRA’s which were invested in stocks, bonds and mutual funds.

I started to wonder what would happen to the value of those assets as this generation (mine) started to retire. The realization was that there would be a need to convert those assets to cash in order to spend it and pay for their retirements. I believe we are in the early stages of seeing that play out. It is likely a contributor to the increased volatility in stocks and bonds and eventually may lead to a reduction in home values as sellers become more prevalent than buyers.

In addition, the biggest change is people not understanding how to make the transition from wealth building to consuming their assets. Many clients tell me that they would like to spend all of their money in retirement, but they don’t know how to set that up and are afraid of running out of money.

Given the historically low interest rates we have had for more than 10 years, that task has become much more difficult. As a result, I see more and more people increasing risk in their investments because “safer stuff doesn’t pay enough interest”.

Back in the late 80’s we could get 7-10% on pretty conservative stuff, not anymore! That is one of the main reasons I added the RICP designation to my credentials. Planning for a secure retirement is much more daunting these days.

technology

Technology

When I started in the brokerage business, there weren’t computers in everyone’s offices. Letters got typed, you transmitted things by a fax machine that you placed the original on a drum and it turned around and around to send the page. It took about 5 minutes to send one page!

We had a teletype machine that printed out news and market information. There was one for the entire brokerage floor. Orders were placed on forms that were “NCR” paper or had carbon paper to make copies, so you had a record.

When I bought my first laptop, it had a 4-inch black and white screen, a 4 GB hard drive, very little ram and weighed 20 pounds! I printed things out on a dot matrix printer that used tractor feed paper! My iphone would run circles around that thing. Oh yeah, it cost me $7,000 including the software! We have come a long way since then.

We used to type letters and send them by mail. E-mail was expensive (free wasn’t even a consideration) and many people didn’t have access anyway. The internet was not the world wide web of today and to access it we used a dial up modem that was slow as can be. Now we have high speed internet and can watch movies and other content without worry!

Data security and identity theft are now a huge issue. Spam emails and Robocalls are technological “innovations” that have put us all at risk and require our attention and monitoring. Failure to protect oneself can be disastrous. Cybercrime wasn’t even a word 30 years ago.

Looking forward, I see many more technical innovations. We are starting to use applications that are not paper based, secured and encrypted networks to protect data and new tools to keep clients up to date on their assets and current information that would be of benefit to their situations.

We are currently investigating applications for our clients that would do just that. Would you like to have a tool that monitored your accounts and sent you a notice when something needed attention? We are currently testing such a tool. If it really works, you will be hearing more about it as we make it available to our clients.

retirement-confusion

More Complications Lead to More Confusion

All of this “Progress” has led people to a place where they have less confidence in the future and are more confused about what they need to do and what is best for them.

The other result I mentioned earlier, folks are just busier than ever before. So many demands on our time and greater complexity are making many of us feel much more insecure about our futures.

Over the next few months, I will examine these different areas in greater depth. My hope is that, with expanded understanding of these developments and trends, you will be better prepared to make the hard decisions regarding your finances and securing your future retirement.

If there is an issue or concern that this article has brought to your attention, and you want more information before those updates are published, contact our office, we are always ready to help.

roger-gainer

Roger holds the coveted and well-earned designations of Chartered Financial Consultant (ChFC®) and Retirement Income Certified Professional (RIPC®) from the American College. He is also a licensed insurance agent for life and health insurance, a Certified Paralegal for Estate Planning, and a current board member of SASM.