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May. 26, 2017 – 3:17 – IHT Wealth Management President Steve Dudash on where to invest.

By Steven Dudash

November 22, 2016

As a wealth manager, more than a few things keep me up at night, including what the election of Donald Trump means for the markets, the country’s economy and how Brexit will ultimately unfold. Perhaps my biggest worry continues to be that investors – both on the retail and institutional side – have not adjusted their expectations in today’s interest-rate and equity market environment.

To illustrate, consider a meeting I had recently with a $250 million university endowment fund. Each year, it uses 5.25% of its assets to award scholarships and at the same time expects to keep pace with a long-term inflation projection of 2.5%. To meet these assumptions and keep the principal intact, basic math says the fund needs to generate returns of just under 8%.

Given that the next 30 years will not be anything like the last 30 years, when investors could rely on a 50/50 portfolio of stocks and bonds to produce that kind of return, that’s pretty implausible. This is not a fun message to deliver to a roomful of stern-face endowment board members. It’s equally unpleasant to have to look a retiree or pre-retiree in the eye and tell them that may be facing a future income shortfall. Nevertheless, it’s the truth. A big reason why can be found in two significant events that occurred over the course of the last three decades – the scale of which are not likely to repeat themselves anytime soon.

The first was the rise of the PC and the Internet during the 1980s and 1990s, which caused productivity to spike, breeding higher corporate profits and boosting stocks. But as technology has permeated more and more areas of the labor market, productivity growth has slowed in recent years, crimping earnings. While equities have hardly suffered, that’s a bit of mirage, having been propped up by an aggressive Federal Reserve.

The second has been the steady decline in bond rates. The U.S. ten-year bond yield hit an all-time high of nearly 16% in September 1981. Earlier this summer, it was 1.36%, and despite a rise in recent since the presidential election, yields are not expected to ramp up meaningfully in the coming years, thanks to interest rates that are all but guaranteed to remain below historical norms for an extended stretch.

Therefore, we now have a stock market that is fully valued and unlikely to repeat past performance (even if corporate tax rates decline under Mr. Trump), combined with a bond market that is depressed, and unlikely repeat past performance. So what should investors do?

Assuming that, unlike an endowment, you can’t adjust your income needs, think about upsizing your level of risk. A 50/50 portfolio simply won’t be enough anymore, period. So my advice, at least in the near term, would be to lower U.S. government bond exposure and look to European equities.

Granted, it will likely be a bumpy ride, riddled with stomach-churning ups and downs. But as the United States seems likely to begin gradually raising interest rates in the coming months, much of Europe is essentially in the middle of QE infinity, still injecting massive amounts of capital into their economies in an attempt to jumpstart lagging growth. Take advantage of this phenomenon.

Cynically, whether those efforts are successful isn’t the concern over the long haul. The more important point is that mainland Europe, for all its issues, is in many ways valued much more favorably than the U.S. market, and there as some opportunities to go bargain hunting. PE ratios aside, Euro markets are likely to appreciate, if for no other reason than the governments are willing to mortgage their futures to make that happen.

Skeptics will point to looming concerns over Brexit. But England was never fully integrated with the rest of Europe in the first place, and as we have seen in the wake of that vote earlier this year, the divorce may not be the nightmare many predicted. What’s almost certain, though, is that the rest of the European Union will remain intact.

The bottom line is that investors need to be realistic about what the next 30 years may hold. This is a case where the past is unlikely to repeat itself, which means you may need to change your outlook and be willing to venture into areas that may not be so popular in the present but offer the opportunity to achieve larger upside potential.

New Labor Department rule is pushing brokers to decide whether to continue use of commissions

By: MICHAEL WURSTHORN

Oct. 28, 2016 12:45 p.m. ET

Commissions are at the center of a new brokerage battle.

Stockbrokers for years have been moving away from commissions—payments per trade—as a way to charge their customers. Instead, they have been pushing fee-based accounts, where they charge a percentage of assets regardless of the amounts of trading.

For investors who rarely traded, though, commissions remained the more cost-effective approach.

Now a new rule from the Labor Department concerning retirement accounts is pushing brokers to decide whether to continue, or nix, the use of commissions.

Known as the fiduciary rule, the policy is aimed at eliminating incentives that might cause brokers to give conflicted advice—an inherent problem with commission-based retirement accounts that can have varying sales costs depending on the types of investment products. But a move away from commission accounts could mean investors may now end up paying more in fee-based accounts.

So far, brokerages are breaking into two broad camps: those that plan to offer some level of commission-based options and those that would rather avoid the thorny issues of trying to make commission accounts comply with the new rule, which begins to take effect in April.

“There’s definitely going to be a percentage of people hurt by these conversions,” said Steven Dudash, head of Chicago-based IHT Wealth Management. “Old-school, traditional investors who have nothing but bonds because they want ultrasafe security [and] your buy-and-hold investors are going to get hurt if they go to more costly fee-based accounts.”

The new order is being illustrated by two Wall Street bellwethers that have taken opposing views on the best approach under the new rule, with Bank of America Corp.’s Merrill Lynch effectively eliminating commission-based individual retirement accounts and Morgan Stanley attempting to retain such accounts.

Moving an IRA to a fee-based structure from commissions could mean higher costs for some investors, especially those who trade stocks occasionally or have portfolios consisting mostly of bonds, experts say.

Fee-based IRA accounts are typically charged a fee of around 1% annually. So a theoretical $1 million fee-based account would cost about $10,000 a year, brokers say. That doesn’t include other fees, such as embedded costs in exchange-traded funds and mutual funds, although those expenses are typically small, says Matthew Papazian, a financial adviser with Denver-based Cardan Capital Partner.

The costs associated with a commission-based IRA can vary more broadly depending on the frequency of trading, the investment products purchased and the fees that come with them.

If that theoretical $1 million was in a commission-based IRA at a brokerage, and the client did about 10 stock trades over a year, the cost could be around $3,000 or less, according to brokers. Those fees would be pushed higher if the client bought other products, such as structured notes, which can carry upfront charges of 2%

But an investor who trades more frequently or buys higher-cost products would incur higher costs. If that same investor executed 30 significant trades of a specific stock in a year, their costs could be as much as $13,000.

For bondholders, the cost difference between a commission-based IRA and one that charges fees is even greater, says Mr. Dudash.

Moving clients to a fee-based structure is a simpler step toward complying with the rule, as well as part of a broader industry shift over the last decade, observers say. Brokers say those costs are justified because they have to provide a higher level of service by spending more time understanding a client’s full financial situation.

“Some brokerages are seeing [commissions] not being offered at all as a competitive advantage,” says Bharat Sawhney, a managing director focused on wealth and investment management at consulting firm Gartland & Mellina Group in New York. “There could be an asset play here where firms like Morgan Stanley choose to offer commissions as others pull away.”

However, brokerages will have to justify such conversions to avoid violating the rule. A broker who recommends a fee-based account to a commission-paying retirement saver who trades little or doesn’t need close monitoring would be an “abusive practice,” according to guidance released by the Labor Department on Thursday.

Retirement savers also have the option of moving their account away from full-service brokerages like Merrill and Morgan Stanley to self-directed IRAs or an automated robo adviser that relies on an algorithm to provide advice, both of which aren’t significantly affected by the Labor Department’s rule.

Those options, especially a self-directed account, would mean investors no longer have access to advice.

“Unfortunately some of the fallout on some investors will be choosing between no longer receiving advice or paying higher fees for it,” Mr. Dudash said.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

Bonds investing involves risks. Bonds are subject to market and interest rate risk if sold prior to maturity.