In this edition Ted, Daniel and Cammy give us an inside look at their priorities and what they see ahead for you and for IEM in 2019.
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Wow! What a year!
With the most challenging stock and bond markets since 2008 and our move to Commonwealth Financial, there has been a lot of attention on client investment accounts. I am pleased to say we have navigated those waves of change successfully and while we continue to monitor accounts for benefits we can bring to you, we are focused on the big picture - your overall needs and expectations.
It is difficult to convey the level of efficiency this move provided: tax loss harvesting, account rebalancing, electronic communications, quality on-line experience for clients, development of comprehensive financial plans and general account maintenance have all seen improvements. Less time on the administration of our work means more time on you -- understanding your situation and goals and delivering our best solutions and service. Simply put, we are well positioned to help you achieve your financial goals, in any market conditions.
Despite a robust economy, market returns were affected by events both domestic and global as referenced in the Market Commentary (below) by Daniel Schoenecker, CFA, our Director of Investments.
Strong markets are like a rising tide that lifts all boats. In contrast, a choppy market can bring a deeper significance in the work we do for our clients, including making sure clients are in the right boats, and that those boats are cared for in the right way. Below I’d like to highlight a few ways we have been proactive with you.
Annual Meeting / Risk Tolerance
Living through a down market can help a client better understand their risk tolerance! Our annual meetings with you are a time to discuss whether you are in the right “boat”. If during the last market correction, you either couldn’t sleep with worry of loss or perhaps with excitement about possible bargain shopping, we should make sure your objectives and situation are still aligned with your portfolio. The intersection of a person’s need, willingness, and ability to take risk dictates asset allocation. This will be one of the topics, among others, that we can talk about when we next meet.
Maintain Asset Allocation / Rebalancing
IEM’s investment advisory portfolios are constructed using asset allocation and modern portfolio theory principles and so are designed to experience a given level of volatility relative to the market indices. Periodically, when certain asset classes fluctuate, the portfolio needs to be brought to its target allocation by selling the appreciated asset class and buying the depreciated asset class. This re-balancing is a risk mitigation strategy that returns the portfolio to its target allocation, consistent with the long-term strategic goals of that portfolio.
We review our Investment Advisory portfolios quarterly and rebalance according to need, which is why you may see trade confirmations. As a reminder, buys and sells of mutual funds in our Investment Advisory IEM Portfolios are done without cost to you.
Tax Loss Harvesting (Or, lemons into lemonade)
Clients who have realized gains in their portfolios can use realized losses to offset the taxes from the gains. Additionally, losses can be carried forward and used in $3,000 increments annually to offset ordinary income. Each December we comb through client accounts to identify loss positions to “harvest” for clients who wish to do so. We did quite a bit of this in December, which will likely lower the tax bill for clients with gains.
Financial Planning
IEM delivered over 150 comprehensive financial plans in 2018. Planning clients enjoy the highest level of individualized analysis including their retirement assets at work, legacy and estate planning wishes, insurance needs, retirement income plans, investment taxation, order of liquidation, and more. Most importantly, our financial plan clients share a confidence about achieving their goals – and stay focused on “working the plan”.
I believe so strongly that comprehensive financial planning is the best way to fully understand and respond to clients’ needs and goals that I have invested heavily in the people and the tools that deliver these capabilities. We will offer financial planning to all clients who we believe have the complexity of needs necessary to benefit from this service and welcome your inquiries.
Quarterly Investment Committee
Each quarter this group, headed by Daniel Schoenecker, assesses economic and market news, the changing risk/reward landscape of various asset classes, as well as firm-wide investment management options. Recent discussion related to asset classes is captured in the following market commentary. We also agreed to open additional investment options in the year ahead, including the IEM Tax Efficient Portfolios for non-qualified money, as well as ESG (Environmental, Social, Governance) portfolios we now have access to at Commonwealth. We will continue to evaluate new offerings to bring to you that align with our philosophy and due diligence standards.
Manage Your Expenses
As stewards of your assets we seek investments that meet our due diligence standards, including in their internal expenses. With an expanded array of mutual funds now available for our Investment Advisory portfolios, and after thorough review, we have shifted to use Fidelity’s Index funds for our passive investments because of their very low internal expenses. For the active managers, we remain fee conscious, choosing funds that we believe have merit and are complementary to the total portfolio’s goals. Together, we believe the IEM Portfolios to be very competitive in terms of all-in cost.
2019
Once again Thank You for seeing past the re-papering to the expanded capabilities and services we are bringing to you. For 2019 we will spend our time dividend from the realized efficiencies wisely… with you. You are the reason we made the move, why we do what we do, and why we will always seek improvement – the IEM way.
Best wishes for the year ahead.
Ted Smith, RHU, CLU, ChFC
President & CEO
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Market Commentary
Daniel Schoenecker, CFA, Director of Investment Management
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The fourth quarter of 2018 did not provide the year-end rally many investors were hoping to experience. The markets were rattled by a trio of events – higher federal funds interest rates, continued trade war and tariff escalation between US and China, as well as a government shutdown.
Looking at the major indices’ quarterly returns, the S&P 500 was down 13.52%, the Nasdaq was down 17.29%, the MSCI EAFE (international developed market stocks) was down 12.54%, and the MSCI Emerging Markets Index was down 7.40%. On the fixed income side, the Barclay’s US Aggregate Bond Index gained 1.64% for the fourth quarter, while high-yield fixed income was down 4.53%.
In contrast to the equity and bond markets, the economy still appears relatively robust, with very low unemployment, increasing labor participation, and increasing wage growth. Moreover, the GDP growth in 2018 was the largest since 2005, and estimated earnings growth rate for the S&P 500 in the fourth quarter is approximately 12.4%. The juxtaposition between a volatile stock market and a strong economy may continue, and emphasizes the value of a well-diversified portfolio in order to stay the course.
In the beginning of the first quarter of 2019, we will be rebalancing the IEM Investment Advisory Portfolios. A systematic rebalancing strategy is an important part of an investment plan, as a portfolio may ‘drift’ away from its target allocations over time. The idea of strategic rebalancing as a value-add is that you are buying assets that are down and selling assets that are up, maintaining target allocation.
Additionally, we take the rebalancing periods as an opportunity to identify changes in the risk/reward landscape of assets and position the portfolios accordingly. In the past year, we made prudent tactically-defensive adjustments (increased Treasuries, reduced junk bonds, increased Value stocks). After the decline in Q4 2018, the risk/reward has improved moderately, allowing small tactically-offensive adjustments (increasing small cap stocks, emerging market stocks, and REITS). Finally, we replaced intermediate treasury bonds with short-term treasury bonds due to the flatter yield curve.
As always, we encourage you to call us or to use our on-line client portal (
www.investor360.net
) to confirm that your portfolio’s allocations match your need, ability, and willingness to take risk. We remain committed to our investment philosophy of well-diversified portfolios, being tax efficient and fee sensitive, as well as providing comprehensive financial planning.
Best,
Daniel Schoenecker, CFA
Disclosure:
Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.
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Inside the IEM Strategic Plan
Cammy Smith, Chief Strategy Officer
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You are the heart and soul of IEM and we are so pleased to be on your financial journey with you. Thank you for your support as we transitioned our back office to Commonwealth. We are humbled – and gratified – that 98% of our clients made the move with us; we even gained some wonderful clients! I’ll be honest, though: losing any client is difficult. Our job is to take it as an opportunity to learn and to improve so we can bring the best experience possible to you.
Sharing IEM’s evolution with you is exciting. As Chief Strategy Officer, my work involves evaluating all of our capabilities and then laying out a plan to take us to the next level – all for your benefit. Like comprehensive financial planning, I look at where we have been, current state and long-term goals. Then I build the steps to move IEM upward toward those goals. Like a financial plan, our strategic plan is not static; rather, it is dynamic and is able to capture opportunities (e.g. a great candidate we can’t pass up, a client referral to a new market, etc.) and respond to curve balls.
IEM’s current evolution of modernizing our day-to-day while celebrating our traditional values started in 2016. We have been ever-focused on the efforts that improve what we offer to YOU. Following are some of the big rocks we have tackled.
2016 - TEAM. In 2016 we made a concerted effort to hire smart, high-integrity team members who are dedicated to providing excellent client service. We increased staff and brought on highly-credentialed Private Wealth Managers to expand our financial planning capabilities.
2017 – PHILOSOPHY. The IEM Way was codified in 2017, which means putting our clients first – always. This included development of an investment philosophy and recognition that we must create investment asset allocation portfolios that are sustainable and conflict-free.
2018- EFFICIENCY + EFFECTIVENESS. After streamlining, training and working with the systems we had and still not being able to deliver to clients the desired quality of service, the necessary decision was made to change back office support. Since our transition, the turn-around time for client service requests has reduced significantly while we have gained a 50-person research team. We are using the advantages in efficiency to deploy our talented team to be more effective for you: hosting more and better client meetings, obtaining designations and securities registrations, and being proactive in communication with you. We hope you are already experiencing the difference!
2019:
CLIENT EXPERIENCE. This includes every connection we have – our meetings, advice, service requests, timeliness, communication, and follow-through. Our goal is for you to be confident knowing that you are receiving excellent, informed, un-conflicted care. As referenced above, 2019 begins our “client immersion”, where we seek to deepen our relationship with each client. In 2018, we had over 700 client meetings. Our goal is to double the number of client meetings in 2019 and bring value to all of our relationships.
MULTI-GENERATIONAL PLANNING. A trend we picked up on in 2018 was clients asking us to meet with their children or grandchildren to get them started with financial literacy, planning, and investing. This is one of those great opportunities I mentioned above, where IEM’s plan was adjusted to recognize the opportunity to bring value to an established relationship by bringing value to your families.
SOCIALLY RESPONSIBLE INVESTING. GenX and Millennials have requested more socially responsible investment options. As our CFA, Daniel, mentioned in his Market Commentary, working with Commonwealth’s research teams, we will introduce at least two ESG (Environmental, Social, Governance) platforms in 2019. Watch for information on this!
CONTINUING EDUCATION. Finally, our team will advance with continuing education. Every interaction you have with IEM should have you feeling confident. In 2019, 75% of our operations team will complete a FINRA registration and/or a professional designation. 100% of our Private Wealth Managers will participate in a professional coaching program and obtain an additional advanced designation.
I would love to hear your thoughts on our plan or how we are doing and ideas for our mutual future. THANK YOU for sharing your journey with us, and for the confidence you have in us.
Sincerely,
Cammy Smith
Chief Strategy Officer
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