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Doug Meeks
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Doug Meeks is a Registered Investment Advisor in Plano, Texas. He is the Principal Advisor for Pier LLC, an investment management company. The focus at Pier is to build and manage income-producing portfolios for our clients. We provide individual service to those who are inclined to see their... More
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  • Avoid High Fees From Your Financial Advisor

    In this simple article I am going to cover one way you can help your investments perform better. Avoiding high fees.

    Your Financial Advisor is a good place to start looking for high fees.

    If you have hired a Registered Investment Advisor, often called "Financial Advisor" or RIA, then this individual should have your best interest in mind. This means being as transparent as possible with ALL fees and using good judgment when fees are needed.

    Unfortunately I want to go over a few fees that I have seen far too often that have little or no merit. If you see any of these fees, please ask your Advisor about them and be sure to ask.... "Why?"

    Four types of fees.

    1. Up Front Fees.

    2. High Fee Investments, 12b-1 and deferred charges.

    3. Advisor Fees.

    4. Activity Fees or Churn.

    1. Never pay "Up Front"

    Money removed up front is never invested. Money lost to this type of fee can not participate in failure or success. This can be a diverse group of fees but all are 100% losses to you.

    Never pay up front to open an account. Brokerages, like Scottrade and others, do not charge to open accounts and neither should your Advisor. In fact, if you ask, most brokerages will give you incentives to move your account into their care. They will even reimburse transfer fees in many cases and award free trades.

    Some Advisory firms, even 'fee only' firms, charge their base fee up-front. RIA's do have rules about this and it can not exceed a certain amount or time frame, unless it has detailed disclosure. These fees create a feeling of commitment in the client. Leaving an Advisor with this fee often requires a confrontation to recover the fees. RIA's are required to return these fees to clients on a pro rata basis at the end of services provided.

    Advisor's fees should be charged a reasonable time after services are provided.

    More Up-Front Fees

    Advisors often use mutual funds with more up-front fees. Here is an example from Franklin Templeton.

    (click to enlarge)

    Yes, these can be as high as 5.75% as shown above. This has the same effect as the base fee from an Advisor but is often much higher and is IN ADDITION to the other fees. Remember this means if you make a $100 per month contribution to your advisor and something like this is in your account then you get $94.25 invested in the fund (and still get to pay the other fund fees and advisor fees).

    A simple review of your account will tell you right away if these funds are being used. A part of these fees are often returned to the Advisory firm as compensation for choosing the fund, these funds are very tempting to the Advisor in terms of the Advisor getting paid.

    I find these fees the most offensive because better decisions can easily be made for the client.

    2. High Fee funds, with 12b-1 fees and sales charges

    There is a case heading to the Supreme Court right now that addresses this issue..... "Did your Advisor choose the best priced fund for you?" Link to case here. Lower cost funds should be chosen for you if they are available, funds should at least be competitive.

    If you could chose between three S&P500 funds then there is little doubt you would choose the lowest cost fund. Yes, I'm assuming equal reputation and safety of the assets.

    It's very simple to look into this, note the expense ratio's below:

    0.05% - Vanguard S&P500 Admiral (MUTF:VFIAX)

    0.25% - USAA S&P500 Fund (MUTF:USSPX)

    0.56% - Blackrock S&P500 (MDSRX)

    I would question the use of funds with an expense ratio above the Vanguard Funds. These three companies are doing a good job with fees. Nothing wrong with Blackrock or USAA, but if your Advisor is using them, he needs to justify the additional expense and you should ask him for that answer.

    Even worse is that some funds are disguised S&P 500 Funds, like the Franklin Templeton Growth Fund which states clearly in the prospectus that it is benchmarked to the SP500. Link here. This means that you could have an S&P500 Fund with a sales charge of 5.75%. Do you? Please check on that. Ask your Advisor why he didn't pick the Vanguard S&P500 fund for your account.

    Many mutual funds allow for Advisor compensation to come from 'Wrap-fee' programs where the firm selecting the fund is compensated from the fund and thus from the client. These fees can be deferred sales charges and the annually charged 12b-1 fee.

    In the example fund page above I circled the 12b-1 fee. This is a reoccurring charge and is often, but not always, shared by the brokerage and the Advisor. Investments are available with the same goals, risk and most of the same holdings as these high fee funds.

    3. Advisors Fees, these should always be "fee only".

    The shift to "fee only" advisory services is a good thing. But how much should this fee be?

    Definition of Fee Only: The only revenue stream for the Advisor is from client Assets Under Management (or AUM for short) and is from a set percentage on an annual basis. No other fees go to the Advisor. Investopedia describes Fee Only Advisors here.

    So an Advisor with a Fee-Only structure would charge like the example below, and NO OTHER FEES are available to the advisor from the client.

    $100,000 in AUM at 0.75% = $750 per year in fees.

    In fairness this AUM model needs to have some scale. The larger the account the lower the percentage should go. Advisor's should have a maximum of 1.0% for the smallest accounts, decisions should be carefully made as to the size of each account allowed to be under management. Accounts in the $500,000 dollar range should be 0.75% (or lower). Balances above that level should move down orderly to a fee around 0.35% for large accounts (or lower!).

    If Mutual Funds are being used then the firm should charge on the low side of these rates. Mutual Funds and even Exchange Traded Funds represent some degree of external management of the account and should be evaluated in selection of an Advisor and in the evaluation of his fees.

    4. Account Activity or Churn

    The reasons and timing of account activity can vary widely and I would never question that. However, when mutual funds are sold it can trigger fees to the account via new sales charges and deferred charges. In these cases strong justification is needed for the changes. You should make note of activity in your account and make sure that substantive changes are made via the activity. This type of activity is called "churn", here is a link to the definition from Investopedia.


    When I was starting my Advisory Firm I spoke with some advisors that have been doing it a long time. I found that these guys were sales people and do little, if any, management of assets. I found them to be honest and good people, but representing them as Investment Advisors was a big stretch in my mind. It is very important to be encouraged to save and to have goals. Many Advisors are skilled at this and it's needed work. However, too often the fees against client assets are hard to justify even with the addition of great coaching.

    Like any investment you make, invest some time into the practices of your Advisor if you have one. It could boost your performance. I will be happy to do my best to answer specific questions, I will not be able to comment on strategies, investment types, risk level or timing from other Advisors. I will certainly look into the fees, all are welcome to look into mine.

    Your 'all in' fees should be less than 1.25%. The days of higher fees are simply a thing of the past, this is a good thing. Information is free and abundant to those who know how to look. However, the very individuals that need this information most are the ones not able to find or understand it. These individuals are in need of the highest Fiduciary standards, and shame on any who take advantage of them.

    Best regards,

    Doug Meeks, RIA

    Tags: retirement
    Feb 26 3:11 PM | Link | 2 Comments
  • The Markets Are Down Big, Are You Getting Your Returns?

    I know what you are thinking.....

    "Should I sell now?"

    If you are in the market for just price then I'm hurting for you right now. I honestly don't have an answer. You did just watch a big part of those 2013 gains disappear. In fact you are now back to October 18, 2013, like these last 4.5 months never happened.

    If I was an MPT guy I would tell you not to worry that the long term average of the markets is something great like 10% CAGR and just hang in there we are efficient as hell, and you'll be fine.

    I'm happy to tell all of you who are investing for dividend growth (in quality stocks, and not just one or two of them) that things are great. Nothing has changed but the price. I want to further encourage you by taking a look at a return.

    I like to keep things simple. From Investopedia:

    (click to enlarge)

    I would add to this that the capital gains portion of a return is only meaningful when the investment is sold or closed out. A capital gain return does gain some mathematical relevance with large moves and can be further solidified, without selling, by adding some smart option contracts or stop loss orders. However, until the dust settles and you have cash in your hand you do not have a return.

    If you want more return..... well you have to buy another investment and another set of risks. All understand this.

    These kinds of returns are the returns that cause sell-side anxiety.

    Do you sell?

    When capital gains are the major goal or major component of your return then at some point you have to sell to get any return.

    Days like today and the resulting emotions are what cause sell side anxiety and often under performance. Risk against the price component of return is often forgotten about when the markets are moving up and up. Then we have a hard sell off, and we are all reminded that the sweet song of MPT and capital gains are best regarded over long time frames.

    When approaching the market I plan on dividends to be the most measurable and useful return. Dividends are new capital. You own a company that proceeded to get some business done and return you some of the profits. Your return is very real in this case, depending on what you do with it can have other results but because it is a cash payment it's a realized return.

    My returns are doing just fine right now. If you are savvy Dividend Growth Investor then your returns are doing just fine right now as well.

    I'm not a fan of falling prices, but if you are in the market then falling prices should be a part of the plan that you can withstand. The other part should be a growing return of new capital via a dividend.

    Feb 03 9:07 PM | Link | 4 Comments
  • Seasonality: Is The Run Up In Utilities Over?

    Seasonal weakness has effected the markets this year like most years. The pain typically starts in May and lasts most of the summer. Every year there are lots of doom and gloom headlines and many people crying about debt, corruption and government policy. Beginning on May 3rd this year you can see the US Investor Sentiment % Bearish indicator move up sharply from 28% to 42%

    US Investor Sentiment Index of % Bearish.

    (click to enlarge)

    An investor should try to ignore the noise and dig into information that matters to his or her investments. This kind of seasonality is a regular event and can become part of a larger investment strategy but patience is required. Cyclical weak sectors like energy and precious metals can be a good place to go shopping for great prices. In a hot defensive sector do not let a short term desire for something like a high yield effect your plan to get a great price for a stock. A portfolio well designed for income and growth should love the summer weakness season. Dividends are rarely effected and prices are better for buying and re-investing in many sectors.

    Measuring seasonal weakness for an Investment Strategy

    Measuring seasonal weakness with the indexes is a relative exercise that works best using a traditional defensive sector. With that in mind I want to look at the utility sector related to the S&P 500 as a whole. We could also use food, mid-stream MLP's or even the mREITs. All have held up well this year but the utilities hold up well every year.

    A strong group of utilities can add some comfort and stability to a portfolio this time of year. I use Consolidated Edison (NYSE:ED), American Water States (NYSE:AWR) and a smaller regional electric company named CMS Energy (NYSE:CMS). ED and AWR have unblemished dividend history and CMS is doing a great job getting their business in order and growing. Since these three companies are near 52 week highs they have my attention. A shift or rotation in investor sentiment away from a defensive stance could signal substantial price declines from these elevated levels.

    Let's look at this years defensive performance of these three companies (and XLU) during the seasonal weakness in the broad market. Chart from

    (click to enlarge)

    From May 1st till now the S&P 500 has been weak showing a season loss of about 5% (bottom purple line). My small sample of utilities have performed very well, and so has the XLU. Sometimes issues, such as worker strikes, make the news but in the time frames I'm working with I pay little attention to that type of news. I do watch for the pace of regulation adjustment and the ability of a utility to structure it's product in real time with cost change. AWR has a recent approval for new cost of capital (read here) that locks in a return on equity of about 10% for a large subsidiary.

    Let's step back and take a longer more broad look to try to understand the magnitude of seasonal performance related to utilities. This is a four year chart of the S&P 500 against the State Street Utility ETF (NYSEARCA:XLU). It's no surprise to me that the S&P index has outperformed Utilities (as represented by XLU) across the longer time frame.

    (click to enlarge)

    Look at the S&P 500 dips just before each July marker those dips are very consistent at the beginning of May each of the last four years.. July represents a nice point to start watching for money rotation back in to the broad market. The XLU has out performed the S&P during the summer dips since 2009:

    Weakness Starting May 1S&P PerformanceXLU Performance

    These performance ranges are from May 1st each year to the summer low point put in by the S&P 500. The average seasonal outperformance gap of XLU (vs. S&P500) since 2009 has been 12.25%. This year the seasonality or market rotation drove the performance gap to 15% at the S&P low point on June 1st. It may grow more but for the purpose of this simple exercise I'm saying the seasonal advantage has ended. Since June 1 this year, the XLU and S&P 500 have had much more correlation than during May. A quick look at the top chart showing Investor Sentiment will show a peak in bearish feelings at the widest divergence between XLU and the S&P 500 near June 1. As the bearish sentiment drops the S&P should start to outperform the more defensive utilities. I would think that increasing bearish sentiment from this point on will effect utilities as well.

    I hold my utilities with very little interest in selling them. I do re-invest the dividends unless they are needed for current income. July is a good time to move up stops in utilities or to sell them outright in favor of better value in another sector if an investor has an interest in trading.

    ED, CMS and AWR have moved up strongly this summer and have recently shown weaker volumes at these higher prices. New capital that I have allocated to these utilities will wait for a better price for entry.

    Disclosure: I am long ED, AWR, CMS.

    Additional disclosure: Caution is advised in these markets. Investors participating should be prepared to bear loss. This article is for educational purposes only, it is not individual investment advice. Please consult a qualified professional who has specific knowledge of your investment needs and risk tolerance if you need advice.

    Jul 25 5:02 PM | Link | Comment!
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