Craig Israelsen Reveals a 3-Pronged Approach To Encourage Clients To Adopt Good Investment Behaviors
Monday, August 25, 2014 10:15

Tags: 7Twelve | benchmarking | client education | investment strategies | investor behavior

Investors naturally focus on the latest gains or losses in their portfolio, and on benchmarks that show up in the media every day like the S&P 500 and the Dow Jones Industrial Average. As their financial advisor, consider guiding your clients to a more effective outlook for long-term investment success.

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In a new Advisors4Advisors webinar, Prof. Craig L. Israelsen, an expert in the field of indexes and passive investing, offers a structured method of encouraging good investor behavior among your clients. Israelsen teaches financial planning at Utah Valley University and offers the 7Twelve Portfolio system to advisors. He divides the client education task into three area: responsibilities, mechanics, and expectations.
Teaching Investors Their Responsibilities
Investment portfolios have two basic features, contribution rate and portfolio return. Investors focus on returns, which are the source of happiness in some years and angst in other years, Israelsen says.
Investors try to control returns by investing in assets that have produced higher returns in the recent past, or by adjusting the percentages invested in different asset classes.
But the factor they have the most control over is their contribution rate. Advisors may illustrate this fact with the following graphic:
Younger clients may contribute less and still build up retirement funds because they have more time to benefit from compounding. As clients age they have less time before reaching the age 65 target, so their savings rate becomes more important.
Showing Investors The Power Of Buying Low
Israelsen recommends a simple and systematic way to ensure investors “buy low” by setting a benchmark based on the assumption of a desired annual return rate.
He provides the example of an investor who invests $5,000 annually and compares each year’s returns with an 8% annual return benchmark. Years in which the investor’s actual returns fall below the benchmark trigger “buy low” moments – the investor adds a dollar amount to the annual $5,000 investment base equal to the dollar amount the portfolio fell short of the return expected by the benchmark.
In this example, actual returns fell below the “8% growth” level six times. In each of those years the investor made an additional investment equal to the discrepancy (limited to $5,000 maximum). The result was $12,501 in added value above the total additional investment amount.
“The main message is to get away from the S&P 500 as your comparison,” Israelsen says. “Set up a benchmark, an ideal growth rate, and check your actual balance against that. When it’s below, add some money. That is the easiest source of alpha I can imagine, supplementing the portfolio at opportune moments.”
Setting Realistic Expectations
For clients who insist on setting an index-level benchmark, Israelsen recommends using an equally weighted, seven-asset portfolio based on his 7Twelve Portfolio system.
Comparing the seven-asset portfolio against popular benchmarks such as the Russell 2000 reveals a solid rate of return paired with lower volatility.
Israelsen notes, however, that clients will still tend to “do an end-around” and compare the seven-asset benchmark against the S&P 500, which is featured on news shows around the clock.
“Many years the S&P 500 beats the seven-asset portfolio, but after a 44-year period they end up at basically the same place. The difference is that the multi-asset portfolio did it with a lot less drama.”
Between 1970 and 2013, large-cap U.S. equities returned an average 10.41% a year with standard deviation of 17.6. By contrast, the seven-asset portfolio returned 10.29% with a 10.2 standard deviation, making for fewer sleepless nights.
“A portfolio’s job is to produce a modest return without a lot of drama,” Israelsen sums up. “Associate that with a client who is saving 10% to 15% of their income and they’re going to win. That is the ideal approach, not to be swinging for the fences, enduring lots of volatility, hoping to make up for an inadequate contribution rate.”
To view the entire webinar, click here.
Rating and Comments
Webinar viewers gave Israelsen a high average rating of 4.6. Comments were:
“Good to see multiple time periods, 44 years, 15 years, 10 years, to support the conclusions.”
“Excellent. Provocative and logically presented.”
“I think his program, 7Twelve, is good. I use it for some clients. However, I do not think the question on how to handle client’s behavior was well addressed.”
“I agree with Andy that this was a new twist on Craig’s prior presentations, and it was a good one. If the viewer listens to Craig carefully on a regular basis, the concept of 7Twelve sinks in pretty clearly. And it makes consummate sense. This is great stuff, and is good for the investment junkies who like to crunch numbers, but also appeals to the fundamentalists who just plain enjoy hearing great new ideas.”
“The webinar was very good, however it was a very long commercial for the 7Twelve Portfolio.”
“Excellent presentation. Interesting concept.”
“Very clear explanation of his concepts. He takes his time to help you fully understand his slides and thoughts.”
“Great. Thanks.”
“This was good. However, I expected it to be more about motivating behavior. Forewarning that it would be another presentation of the 7Twelve model would have better set my expectations.”
“Very much enjoyed the content...good pacing good explanation.”
“I enjoyed the webinar and learned a lot, but feel the title was misleading.”
“One of the best ever. Thanks Andrew!”
“Great stuff! Challenges me to think about how to communicate with clients in simpler, more motivating terms that resonate with them.”
“Definitely provided some food for thought and further investigation.”
“Some of the best research in retirement planning.”


Obstacles To Location Optimization
Monday, August 11, 2014 01:31

Tags: behavioral finance | client communication | client education | investment management | investment strategies | Tax Management | Tax-efficient investing

Location optimization can be a great tool in portfolio management. Location optimization, in basic terms, is locating specific types of investments in specific types of accounts to minimize taxes. The tax reduction "prize" is huge. IRAs can be used to postpone ordinary tax on current income. Taxable accounts can achieve tax deferral (until a sale) at capital gain rates or tax avoidance (basis step-up at death). Roth IRAs can maximize tax-free compounding on high return investments. 

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To apply location optimization, you and the client must want to reduce taxes. This is a no-brainer, right? It should be, but it's not. There are three obstacles:
  • Client perception
  • Advisor-client communication 
  • Advisor workload
Clients can have difficulty with location optimization. This is because the client's individual accounts will not each hold the same investments. Therefore, each account will perform differently than the others. Will your client be ok with her IRA showing a lower performance number than her taxable account? This can be a very real concern for many clients. 
Because of the performance disparity between accounts, the advisor must report returns at the portfolio level and train clients to only look at portfolio returns and not individual account level returns. This takes time and patience to change client perspectives and can only be achieved by communicating the significant benefits from location optimization.  
Finally, advisors must be willing to do the work (and invest in the software necessary) to implement location optimization.  
Is the reward knowing that the clients will be better served? Can providing this service actually increase your business? The answer is both. Location optimization can save your clients taxes and differentiate you from the competition. You just need to overcome the obstacles. 
UHNWIs' Growing Need For Help With Self-Directed IRAs Spawns A Niche; Our Expert Gets A 4.7-Star Rating On A Webinar About This Esoteric, Fun, And Lucrative Niche
Tuesday, July 22, 2014 10:46

Tags: alternative investments | high net worth | IRA | retirement income

The popularity of alternative investments has sparked an increase in the use of self-directed IRAs by high-net-worth individuals who want to diversify beyond securities and invest in private deals. And, since most HNWIs and UHWNWIs have a big chunk of their wealth tied up in IRAs, it makes sense that sophisticated investors are disciovering the possibility trapping higher tax-deferred returns in self-directed IRAs invested in private offerings and need help from an advisor with expertise in this arcane field.

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Private deals are and will always be a great haven to sleazy operators, and RIAs must consciously steer clients clear of any notion that a self-directed IRA is a way to get rich quick. However, self-directed IRAs can be invested in real estate, start-ups, and precious metals, as well as oddball deals like livestock and third-world currencies. So HNWIs and UHWNIs are seeking help in increasing numbers with investing their IRAs in a friend's string of car washes, laundromat, or a venture manufacturing drill bits designed for use in The Rockies. 
I invested some of my IRA money in a private investment at the suggestion of an advisor and I'm very glad I did. So I have some personal experience in this somewhat estoric area and attiorney Mat Sorensen's presentation made me realize this is a fun and, possibly, lucrative niche for advisors.


Mathew Sorensen, a partner with the law firm of Kyler Kohler Ostermiller & Sorensen, LLP in Phoenix, spells out the legal ins-and-outs of self-directed IRAs that advisors must know about at an A4A webinar.
“There is a lot of pent-up demand for self-directed IRAs, and there is a lot of bad information out there. Custodians that handle these accounts are dying for advisors who understand the rules (governing self-directed IRAs),” Sorensen says.
Working With Trustees
Under Internal Revenue Service rules, investors must place the assets of a self-directed IRA with a qualified trustee, or custodian. Among firms that take custody of alternative IRA assets, the big names are Millennium Trust Co. and Pensco Trust. Trust Company of American does some of this as well and there are many others. The role of the custodian is to keep records, file IRS reports, issue client statements. Organzing as a trust company is a simpler, less expensive form of business in the U.S. So all of the IRA custodians do business as trust companies and not broiker dealers. I am sure Mat will chime in with details as to why. 
The custodian may offer a range of investment choices to the account owner, but does not provide financial guidance. As a result, Sorensen says some custodians maintain lists of financial advisors to recommend to their retail clients, many of whom are high-net-worth investors. If you already custody assets at one of these firms, make sure you're on the company's advisor listing.
Understanding the IRS Restrictions
Some advisors may shy away from alternatives because of a perception that IRS rules are complex and difficult to comply with.  Sorensen says the rules get complex but not hard to follow.
The basic principal is that retirement funds are granted tax-free status to encourage people to save for their retirement years, and they should not be used for personal benefit otherwise. So the IRS spells out four restrictions:
·      Collectibles (except for certain coins that meet precious metals criteria)
·      Life Insurance
·      S Corp Stock
·      Prohibited Transactions (restricts who your IRA account can transact with)
In its simplest form, the Prohibited Transactions rule prevents account owners from engaging in transactions such as purchases, sales, leases, or exchanges with their own companies, employees, spouse, children, or parents, or with any company in which these persons have an ownership stake of 50% or more. Account owners may, however, engage in transactions with siblings, aunts, uncles, and cousins.
Account owners may leverage transactions with loans, but only if the owner does not guarantee the loan.
The bottom line is that any investment or transaction must be strictly intended as an investment. For instance, if you buy raw land, you cannot then go hunt on that land. Or allow your father to do so. If you invest in a vacation rental property, you cannot stay there, and neither can your children.
These areas can get pretty tricky. For instance, if you use funds in a self-directed IRA to buy stock in a company and you are a member of the board, you may need to prove that the purchase did not grant you more power to dictate your own compensation. What if your spouse is an employee of a start-up company that you want to invest in?
You can’t sidestep these rules by simply having an asset transferred from your spouse, parent, or other prohibited person to a friend, then purchase it from them. That’s called a “step transaction” and the IRS will disregard the middleman.
Penalties Can Be Steep
If a prohibited transaction occurs, the IRS will “distribute” the entire IRA account as of the date of the violation. That means the entire account becomes subject to taxes and distribution rules, which include a 10% penalty for those under 59½ years of age.
Your other retirement accounts will not be affected.
Other Tax Considerations
Transactions conducted through a self-directed IRA are subject to additional taxes under certain circumstances, primarily UBIT (Unrelated Business Income Tax) and UDFIT (Unrelated Debt Financing Income Tax).
UBIT is triggered by investments in private companies such as LLCs or Limited Partnerships that don’t pay corporate taxes, such as restaurants, tech start-ups, and businesses that sell goods and services. This can also apply to real estate development, construction, or active investment (i.e. “flipping” property). Exceptions to the UBIT include interest income, dividend income, royalty income, rental income, and most capital gains.
UDFIT is triggered by leveraging IRA transactions with debt, because borrowed funds did not originate as retirement account money. For a simplified example, if you buy property with 50% retirement funds and 50% loaned funds and sell it later at a profit, half of the gain will be taxable.
For more details and strategies, view the entire webinar at Advisors4Advisors.

Mat Sorensen’s average rating by webinar participants was 4.7.


These were the comments left by attendees at this sparse summer session:

“Great presenter. He could have used more time for specifics.”
“This was an excellent webinar. Thank you.”
“This is such a great topic and important in our five-tier tax system.”
“Very interesting subject.”
“Very well done. He was knowledgeable and he tailored his presentation to what we needed to learn (benefits and pitfalls) about self-directed IRAs.”
“Great job!”

“Very interesting and timely as this is a popular topic today. Many pitfalls were discussed that can render the idea of real estate and other investments in an IRA useless if not set up properly.”


Every Asset Class Was Up In The First Half Of 2014 -- First Time In 20 Years
Thursday, July 10, 2014 12:02

What’s next? In my mid-year commentary, I deconstruct a market climate that, despite my dire predictions, has thrived in the first half of 2014.


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Which asset classes will continue to deliver strong returns (momentum) and which will not (reversals, also known as regressions to the mean). We’ve already seen reversals in U.S. economic sectors. I’d like to hear your thoughts – your forecasts.  As Yogi Berra said “The future ain’t what it used to be.”


Please see my Market Commentary.


Why Economist Ed Yardeni Is A Mensch; Plus, Good News For Fritz Fans, As Our Intrepid Guru Gets A 4.8 Rating Again From A4A Members
Wednesday, July 09, 2014 15:09

Tags: Fritz Meyer

Good news, Fritz fans. Monthly Fritz Meyer webinars once a quarter will now run 100-minutes in length and be eligible for two professional education credits for CFPs, ChFCs, CLUs, PACE-registered, CPAs (live sessions only), EAs, and state-licensed insurance professionals.

Fritz, who again received a 4.8-star rating out of five, continues to confound skeptics by once again this month receiving superlative ratings and reviews, despite the impossible challenge of speaking before hundreds of independent advisors every month for as much as 100-minutes about investing — the very subject upon which this audience of independent professionals sustains their livelihood.
Fritz began doing webinars on A4A about 45 months ago, and as we approach a four-year anniversary I want to credit economist Ed Yardeni with recommending that Fritz and I get together. Yardeni is a wonderful guy as well as a world-class economic analyst.
I had interviewed Ed often when I was a reporter at The Daily News in the 1980s. Our paths crossed again in recent years a couple of times because we're both on Long Island, and we have come close to working together a couple of times. Yardeni is scary-smart.
But my real point is that Ed Yardeni is a mensch. It's one thing to be smart and another to be a good person. 
Fritz has made presentatyions monthly webinars on A4A over for about four years and his work stands up well to the test of time. His following on A4A is growing. His monthly research has become a regular staple at hundreds of RIAs and it all began with an introduction from Ed Yardeni.
Here are attendee comments after Fritz's live session July 8, 2014:
  • Fritz was again full of facts + charts - to back up his realistic/optimistic long-term outlook for stocks + the US economy. He seems to be almost a lone positive voice in the investment wilderness - where most professional soothsayers have become more + more pessimistic - as the markets continue to climb the proverbial "wall of worry" to more and more market highs.
  • Very helpful segment, but 100 minutes may be too long for the audience to focus.
  • Great

  • Fritz is the best

  • Highlights the same material a little to often in his presentations but in general the information is helpful.

  • Excellent as always!

  • I like these two hour sessions but think they should be quarterly not monthly

  • A little too long

  • Even though Fritz' wife might disagree,

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    he is a national treasure, as Andy said. We appreciate the incisive nature of Fritz' presentations and his willingness to fight the status quo of Wall Street predictions and promises. Thank you. P.S. Comment on the 2-hour sessions. Since this is a major commitment of time, perhaps a "hard close" after 100 minutes would be more palatable to attendees, particularly those of us on the East Coast as it is now 6:14 p.m. as I write this review. Thanks.


  • I had to shut it down one hour and 34 minutes into the presentation.  Glad I am not on the east coast. Participating in the monthly webinar becomes repetitive. As I was listening to Fritz today I was thinking he could present ongoing updates to items Fritz fields are important and separate that from new ideas that would be relevant to advisors. he may have a little more structure in the presentation. If the audience is mainly investment advisors I would recommend more information pertaining to investments

  • Always love Fritz's presentation

  • Time Time Time.

  • Drinking from a firehose

  • Excellent presentation!

  • Great idea to have 2 hour session each quarter.  Fritz wonderful as usual.

  • The last segment on active style advice and performance is old news.  Need to change subject and instead focus on new investment themes or rebalancing adjustments made for the quarter.

  • Good, but started late and went over time.

  • Very helpful to have the longer time period to cover the extra material.

  • In the future, the 2 hours is great.  Maybe 75 minutes of content and 25 minutes for Q&A.  Lots of great material as always.

  • Great!!! 

  • Really like to feel positive again, and Fritz is providing the info for me to change my sentiment.  Thank you Fritz and Andy.

  • Excellent. 

  • I really liked the 2 hour session. 

  • I don't always have 2 hours but I was able to do it and it was great!

  • Another effective presentation with the data points to counter the conventional wisdom or the main media opinions that many clients are influenced by to the point of evaluating the value of the counsel and direction that are provided.

  • Always Good!

  • Great!!!

  • Excellent because he keeps moving and covers a lot of ground rather than pushing one or two thoughts.

  • Super!

  • Too long but great info.  Don't do this on a Fri

  • This was one of his best...he is a real value to A4A!


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