The First Quarter Results
US stocks ended the first quarter of 2016 with slightly positive results. The quarter was very volatile due to worries about Federal Reserve Policy, slowing growth, China, a crash in oil prices and talk of a pending recession. About half way through the quarter, stocks were oversold and pessimism gave way to a strong rally that moved major US indices up about 10% from their lows. The Barclays Intermediate Term Bond Index was up about 3% for the quarter. International equities were negative for the quarter.
Uncertainty about central bank interventions and the rate of economic growth from countries outside of the US will likely continue for some time. We agree with those who believe that 2016 will remain volatile and that improving fundamentals for the US economy should allow equities to appreciate.
The data suggests that the US economy is growing, albeit slowly. We see support for this view in job reports and new orders for manufacturers. The decline in the value of the dollar relative to other currencies and more stability in the price of oil is helping. We also hear from clients with businesses that activity is picking up.
One of the things that roiled the markets in January was the prospect of Federal Reserve rate increases. The Fed’s more recent comments indicate that they are showing restraint in view of the slow growth around the world, and they will take a measured approach to interest rate increases. Low mortgage rates and low energy prices are helping consumers. What the stock market needs is for corporate profits to strengthen as 2016 continues to unfold. In the end, balanced portfolios that are invested 60% in equities and 40% fixed income were essentially flat for the quarter. The second quarter is off to a positive start.
Regulatory News Update
Northeast Advisers is an investment adviser registered with the United States Securities and Exchange Commission (SEC). We strive to represent our clients’ best interests and steadfastly embrace our status as a fiduciary. This means that we recognize our duties of loyalty and care to you. Also, we avoid conflicts of interest. Our recommendations are based on a due diligence process that considers management, performance and expenses. NAI does not receive any compensation except for our investment advisory fee. We organized the company with these principles, to avoid the conflicts compensation and divided loyalties can create. A copy of the Annual Disclosure we file with the SEC is available upon request.
The Department of Labor (DOL) recently announced some long anticipated changes to the fiduciary rules that govern advisers who are not necessarily SEC registered. The stated goal was to streamline and elevate the standards that various investment companies and persons follow. The hope was that commission-driven brokers and brokerage firms, loaded mutual fund companies, and annuity companies and their sales people would be held to a higher standard. In the end, we believe that the DOL’s changes were modest victories for consumers. There are still loopholes. Indirect compensation and commissions still exist and a representative of one company has no obligation to present other alternatives.
Don Trone, widely recognized as the lead figure in the cause for fiduciary best practices, referred to the new DOL rules as a “bronze standard, not gold.”
We want you to know that as your adviser, NAI adheres to the highest possible standard.
Money Market Funds
There has been some communications about changes to money market funds. SEI, for example, is closing their existing funds and re-establishing new funds to comply with new regulations from the SEC. In summary, the new regulations limit the types of investments that money market funds can invest in to US government bonds in order to maintain their $1.00/share stable net asset value. Very short-term bond funds (90 days) are also available but will have a floating price instead of a stable value.
No action is required on your part, and we would be happy to answer any questions.
We hope you will call us anytime you have questions about annuities. Annuities are financial tools that can have a place in a portfolio. There are many advertisements for annuity products that purport to have no fees and be fully guaranteed. Advertisements and free meal promotions are expensive but the high compensation paid to sales people and annuity companies’ profits make it a lucrative business. Disclosure is often inadequate and fear is sometimes used to motivate buyers.
We are routinely asked to evaluate products that have 4% or more in expenses and surrender charges from 7 to 10 years. Vanguard advises that “you should consider all costs—such as annual maintenance fees, surrender charges, and fees for optional riders and death benefits—and the financial strength of the insurance carrier.”
The 2008 stock market upset and fear resulted in record annuity sales. Many of these are coming out of their surrender periods. Please do not be sold a new annuity with new commissions and a long surrender period without considering the alternatives. Where an annuity is called for as part of a sound financial plan, NAI may consider no-load offerings that cost more like 0.4% to 0.5% per year instead of 4% or 5%. One reason to use an annuity contract is to postpone taxes on an existing annuity by exchanging the existing one into a no-load choice. Individuals who are making decisions about retirement income may choose to include annuities, but should consult an unbiased credentialed professional and make a fully informed decision
In addition to our investment advisory services, we can help you with financial planning. Planning coordinates all of the aspects of your financial life so you can make informed choices about important decisions. These inter-related planning areas include retirement, investments, tax, insurance and estate issues. We are happy to work with your other advisers as part of the process. A properly constructed financial plan assumes conservative estimates for inflation, investment returns and spending. We also like to provide general “what if” scenarios and prospectively monitor and adjust as your circumstances evolve. We have several credentialed experts on NAI’s staff and would be happy to talk with you about preparing for the years ahead.
Michael Devine, MSFS, AIF / Becca Cummings, CPA, AIF / Eric Bleiler, CPA/PFS CFP®