Philip J. Kiernan Jr. discusses the seven questions you should be able to answer when you review your year-end brokerage statement…



Phil: Hello. This is Philip J. Kiernan Jr. and I’d like to welcome you to another Highlander Capital Management, LLC podcast. I’d like to remind you that this interview featured in the episode has been recorded in the past. Any investment theses, data and other important information discussed has likely changed since the recording date and should not be relied upon. The content of this podcast is not an offer to sell or the solicitation of any offer to buy any security in any jurisdiction. Of course, past performance is no guarantee of future results.

As 2016 is upon us, here are seven questions you should be able to answer when you review your year-end brokerage statement.

Number one: What type of advisor are you working with? Are they acting in a fiduciary capacity, fee-based and required to act in your best interests? Or are they a salesperson selling you a commission product often with layers of fees? Is your advisor part of an asset management firm that actually does the selection of stocks and bonds in your portfolio or is that portfolio management outsourced to someone in a remote location who doesn’t really know you or your objectives on a personal level?

Number two: Do you have access to the portfolio manager who is selecting the stocks or bonds in your portfolio? Can you speak directly with the person managing your account? Can the salesperson who sold you the products speak directly to them beyond a quarterly fact sheet from the fund’s marketing department or wholesaler? If not, what are you compensating them for?

Number three: What are you paying in total costs for your asset management? This is one area where many investors are paying layers of fees they’re unaware of. Does the portfolio have high or low turnover? What are the impact to trading costs in relation to taxation and frictional costs of high turnover? What is the advisory fee? What are the internal fund costs? The fee to your advisor is in many cases not the only expense that you’re incurring. Keep in mind that direct ownership of stocks and individual bonds has no operating expenses so they don’t increase your annual portfolio costs. ETFs, mutual funds, separate accounts and especially variable annuities all have costs associated with them in addition to what you’re paying your advisor. These layers of fees can potentially add up to 3% a year in total costs.

Number four: Do you know what securities you own? What stocks are you invested in? What bonds make up the fixed income portion of your account? What are their durations and credit quality? Did your advisor, or the fund manager they outsourced the actual asset management to, reach for yield and purchase long data bonds? If so, they may have exposed you to losses if rates were to rise. Certain municipal bond funds, in an effort to amplify the yield, invested in Puerto Rican bonds which offered high triple for yield. Many of these bonds are trading at pennies on the dollar. Here at Highlander, our portfolios are transparent, meaning you can always see what you’re invested in. Are you a victim of window dressing? An often utilized strategy of buying what’s performed well during the last few days of the quarter so that when the investor gets the quarterly holdings report they assume that they owned the winners the entire time.

Number five: If you’re currently taking distributions, what rate or percentage of your assets are you taking out? We’ve devoted the winter 2015 issue of our newsletter, The Highlander Report, to the 4% role. This is a good rule of thumb for what rate of distributions you should use especially in today’s low interest rate environment.

Number six: How is the account rebalanced and what is the rationale for doing so? Many tactical programs rebalanced based on certain parameters. Quite often selling assets that have underperformed on a short-term basis and buying assets that have outperformed. In effect, buying high and selling low. This type of rebalancing can also create frictional costs and tax liabilities to investors in taxable accounts.

Number Seven: Is the portfolio 100% invested? Here at Highlander, we have the ability and willingness to hold cash in the absence of attractive prices. Many investment models utilized by advisors today hold little cash and new investors are often immediately invested upon opening the account.

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