AFA believes in the efficient market theory of investing. This means that the developed world stock markets efficiently process information and immediately reflect the prices of new information immediately in each individual stock. The implication is that the market prices of companies are immediately priced into the stock price so it is futile to stock pick or to try to beat the market. As matter of fact, Nobel winning academic research and studies has shown that over 10 to 20 years, 67% of managed mutual funds do not perform as well as their performance market index benchmarks. These same studies have shown that the cost of investing is the major determinate of fund performance. The conclusion to this vast amount of research is that low cost, diversified, passive, market index investing has the highest probability of achieving individual financial goal targets.
Investment Management Criteria
AFA crafts individual portfolios for each of our clients based on the following criteria:
- Time – Time is the most important factor in determining the make-up of the asset selection in the construction of a portfolio.
- Occupation – Are you employed by a business that is highly cyclical such as real estate or one that is more resilient against market cycles like the heath care business?
- Risk Tolerance – “Are you a Stock or a Bond” What is your personal tolerance for risk or short term investment losses. When markets are rising, people tend to not concern themselves with risk, it is when markets contract, like in 2001 & 2008, when we are confronted with our true aversion to risk. Stocks are approximately 4 times more volatile or risky than Bonds.
- Expected Returns – What are the returns that you require to meet you financial goals in the future. The 6 month U.S. Treasury Bill rate, which is currently yielding .14% annually, is the baseline for a risk free asset. If you need a higher expected return, you must invest in riskier assets to get to your goal number. Over the last 75 years, Bonds have yielded 5.6% and stocks, a volatile/risky asset class, has returned on average about 9%. Your expected return and other factors will determine your appropriate asset mix.
- Asset Class Preference – Based on all of the other criteria, we determine the asset class preference for your portfolio. It is prudent to only take risk for which you need to take and will be compensated for taking. If a client already has all of the money they need to fund a comfortable retirement over their expected life span, it would be imprudent to have a portfolio that is equity/stock heavy (riskier). This is taking risk that the client doesn’t need to take.
- Tax Status – AFA uses Electronic Traded Funds (ETF) and low cost mutual funds to construct portfolios for our clients. We look for funds that have low portfolio turnover and operate tax efficiently. Additionally, we optimize asset location to optimize the tax treatment of your different account types. Tax deferred accounts such as IRA and 401K accounts should hold assets that generate ordinary income distributions and taxable accounts should hold more tax efficient equity funds that have low asset turnover and generate foreign and domestic qualified dividend income.
Investment Management Services
To construct a proper investment portfolio, it is imperative for us to know the financial details of our clients extremely well. AFA portfolios are low cost, risk appropriate, tax efficient and appropriately diversified based on your individual criteria. We recommend you have us construct your portfolio monitor it regularly and rebalance it over time systematically. As a holder of the Accredited Investment Fiduciary® (AIF®) we use the FI360 methodology suggested for prudent investment fiduciaries for constructing and monitoring portfolios. We provide three services options to manage and advise our clients on their investment portfolios:
- Investment Mentoring Service – This is an on-going service where we construct and maintain your portfolio over time. We monitor your portfolio weekly and meet with you either quarterly or every six months to discuss the portfolio, any life changes, and rebalance the portfolio back to your targeted asset percentages. AFA does not have any control over your account and does not have trading authority or the right to debit your account for planning fees. We sit with you and mentor you though any trading changes. The idea is to make our clients self-sufficient over time so much of this service is educational while working toward your financial goals.
- Portfolio Review – This is a very cost effective service which provides the client with a professionally constructed portfolio with specific fund suggestions and custodian (Schwab, Fidelity, Scottrade) recommendations. We do not execute the trades for you, but can quote you the time required to mentor you through the trades in our office or your home or office. This is a one-time project service priced by the hour. Once we deliver the portfolio suggestions the project is concluded. AFA does not monitor your portfolio on an on-going basis. You are responsible for setting a follow up appointment with us to rebalance and review the portfolio either annually or semi-annually.
- Retirement Plan Investment Advisor – As holders of the AIF® designation we use the methodologies developed by fi360/University of Pittsburgh, the gold standard for developing practices and processes for fiduciaries of pension plans governed by the federal and state laws (ERISA, UPIA, MPERS, UPMIFA). The rulings and regulations from the DOL and other state regulators changes constantly, so it is important to hire an Investment Advisor that invest in Continuing Education to stay up to date on the new rulings and the best practices for managing your plan. Our fee-only status requires complete transparency, and disclosure which fits well with the requirement of the laws and regulations required by pension plans.