Does Your Advisor Offer Institutional Pricing?

This post originally appeared in April, 2016.  For more information on institutional pricing, visit our Investment Management page.

A 60-second read by Anthony Benante: Baron Financial Group is an institutional investor.  As an independent RIA (Registered Investment Advisor) with no allegiance to any investment company, we seek the most attractively-priced investments for our clients. We look at every situation, and when we have the opportunity to invest in institutionally-priced mutual funds that make sense for our clients, we take advantage of the opportunity. The result of this is a direct benefit to the clients’ bottom line. And here’s why:

In the world of mutual funds (which are pools of assets such as stocks and/or bonds), there can be different pricing for the same underlying investments.  For simplification, you could think about these different pricing levels as institutional and retail. Whether you buy institutional-class shares or retail-priced shares from a mutual fund, the investment itself will be exactly the same. The major difference between the two is their fees and this can directly impact investor performance. For example, retail-priced shares can have higher expense ratios, while institutional-class shares have ongoing lower expense ratios (an expense ratio is a measurement of what an investment company charges to run a mutual fund). Retail customers may experience the effects of higher expense ratios because they typically have lower purchasing power.  Retail investors may also be subjected to upfront fees (fees when you purchase shares) as well as back-end fees (fees when you decide to sell your shares). There can also be yearly marketing fees called “12b-1” fees that you might have to pay. Finally, there may be a minimum to what you have to buy.

Institutional-class shares, on the other hand, tend to offer 25 to 50 basis points (a basis point is 1/100th of 1%) of pricing advantage because of their lower fees. There are no initial upfront percentage fees (note that there can be a small nominal transactional fee to purchase these funds) and no maximum sales fees are allowed. With lower expense ratios, more of your money is actually being invested. The result of this can be better performance and better returns for longer periods. 

Ask an advisor at Baron Financial Group to find out if institutional-class mutual funds are right for you. 

Recent Market Volatility

A 60-second read by Anthony Benante: The US Stock market is experiencing something that historically happens about once per year, a market correction.

Our Clients’ Perspective is Important to Us
Our client portfolios are constructed in a risk-appropriate strategy, based on ability and willingness.  When clients complete a financial-planning workbook, we are able to present analysis showing their financial position in different market environments, including markets like we are currently experiencing

Market Activity
Starting January 30th, market volatility has significantly increased.  Explaining the exact reasons for the current moves at this point is difficult.  Fundamentally, not much has changed from an economic growth, corporate profit or employment standpoint.  These are all showing stability and improvement.  However, on Friday, as part of the unemployment report, it indicated that wage inflation is starting to surface.  This created some questions and concerns around inflation and interest rates.  Markets responded aggressively to these concerns.  We have seen popular equity benchmarks trade significantly lower than where they were in mid-to-late January.

Though the numericalpoint moves you hear about may sound alarming, keep in mind that the index levels themselves are higher.  In reality, the percentage moves are not that uncharacteristic.  As investors, you should expect to experience periods of market weakness.  Corrections of 5% – 10% are not that uncommon historically.  We just have not seen these types of moves recently. 

What Baron is Doing – Controlling the Controllable 
The development of Baron Strategies for clients considers different market environments.  That is why we have assets that are built for Growth, for Stability and for Diversification.  We are paying attention to the performance of our investment choices.  We continue to review our investment choices versus peers and benchmarks, and seek rebalancing opportunities.

Baron follows the four pillars of disciplined investing:

  1.  Create a globally-diversified portfolio
  2.  Control the quality of investments
  3.  Rebalance when needed
  4.  Keep emotions out of investing

With the recent Stock Market turbulence, there are THREE questions you should be asking yourself:

  1. Do I have a strategy in place for all market conditions?
  2. Am I receiving proactive communication from my advisor?
  3. Have I been given financial guidance to help answer “Am I OK”?

We gladly offer a second-opinion phone call to help review your financial situation or to answer any questions you may be having at this time.  Please feel free to reach out to the Baron Team.

Click here to learn about our comprehensive Financial Planning and Investment Management service

Disclosure: Past performance is no guarantee of future results.  Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research or investment advice.

5 Financial Actions to Consider at Year-End – 2017 version

A 90-second read by Anthony Benante:  What 5 things should you be thinking about at the end of the year when it comes to your finances?

1. Review your personal budget and commit to a savings plan for 2018

a. On January 1, write down the balance in your checking account. Do this on the first of the month for the next three months. After you incorporate your income for the period, as well as take note of any cash withdrawals from other accounts, you can get a general sense of what your monthly spending is.

b. We work directly with our clients at Baron to help understand how their budget and all of their financial assets work together.  If you would like a budget sheet (either electronic or hard-copy), let us know. 

2. Review your long-term investment strategy

a. Is the long-term strategy in place for you still right for your specific circumstance? Are you going to be making any large purchases coming up in the New Year? Are you thinking about revisiting your risk tolerance – becoming more aggressive or conservative?

b. At Baron, we use a customized approach to design client portfolios.  We not only consider potential return, but also risk, as well as how the investments complement each other.  Having a long-term investment strategy is critical for investing success and provides a guide for when markets act unexpectedly or make a major directional move.

3. Rebalance your investment accounts

a. Rebalancing brings the portfolio into alignment with the original target weights of each asset class. It also helps to reduce long-term portfolio volatility.

b. Client portfolios at Baron are rebalanced on a contingent basis.  This means the actual holdings are regularly compared to the recommended strategy.  Triggers are in place to help identify when investments deviate too far from strategy and trades are placed. This keeps client portfolios close to their strategy.  Most individuals do not follow this disciplined approach. 

4. Review your tax situation for the year and take advantage of tax trading in your investment accounts, if possible

a. Understanding how your investments may impact your tax circumstance is important.  The last trading day for 2017 is Friday December 29th.  That is the last day you can make any changes to your portfolio for your 2017 tax return.

b. Throughout the year, we review Baron clients’ tax situations and see if any strategic trades can be made to help reduce tax burdens.  As year-end approaches, we look to minimize tax impacts when possible.  However, our main focus is adhering to portfolio strategy, while minimizing taxes when possible.

c. A new tax  bill has been passed and there will be changes for 2018.  Check in with your accountant or tax preparer to see if they recommend any changes prior to year-end or to your tax plan for 2018.

5. If you are 70 ½ or older, or if you have inherited a tax-deferred account, make sure you understand how required minimum distributions (RMDs) apply to you

a. If either of the above applies to you, you will need to take an RMD.  Contact your advisor or custodian to help understand the amount and how to take your RMD.  It is important to take your required minimum distribution in order to prevent any penalties from the IRS.

b. At Baron, we advise our clients on the timing, the structure (lump sum or regular distributions throughout the year) and the correct dollar amount needed to be withdrawn from retirement accounts requiring RMDs.

If you have any questions, don’t hesitate to contact the Baron Financial Group Team.

 

What are some differences between Exchange-Traded Funds and Index Mutual Funds?

A 45-second read by Anthony Benante: There are many factors to consider when comparing an exchange-traded fund (ETF) and an index mutual fund.  An ETF is a marketable security that tracks an index, like an index fund.  A Mutual Fund is an investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds and money market funds. A main difference between an ETF and an index mutual fund is an ETF trades continuously while the market is open, while the index mutual fund trades one time a day at market close. 

For ETFs, investors should be aware of the spread between the bid and the ask price.  The larger the spread, the higher the implied cost is for investing in the ETF.  Also, investors need to understand the strength and depth of the ETF to make sure there is ample liquidity during volatile markets.  Investors can research the daily volume traded, the overall size of the ETF and other factors to better understand the strength of the ETF.  All these factors can lead to the ETF performing differently than its benchmark.

Index mutual fund performance will not perfectly match its benchmark either.  The costs to run the fund, which are paid by the investor and identified as an expense ratio (ETFs have similar costs) negatively impact performance compared to a benchmark index.  Also, index mutual funds may be required to hold a portion of the fund in cash to meet investor redemptions, which could contribute to lower relative performance when the benchmark’s performance is positive. 

Investors may experience different costs for the same product, meaning you have to do your homework.  Some ETFs can have transaction costs, however, some brokerages allow for free trading for certain ETFs.  For index mutual funds, you may be able to go direct to a mutual fund company and invest with no transaction cost, but you could pay transaction charges in a brokerage account for that same fund, depending on where the account is held.

In general, active investors may prefer the trading flexibility offered from ETFs, while long-term buy and hold investors may prefer using a straight index mutual fund to gain exposure to a specific benchmark.  We encourage investors to do their research and seek help in areas outside of their expertise. 

If you have any further questions on the subject, please reach out to your Baron team.

Disclosure: Past performance is no guarantee of future results.  Every investment strategy has the potential for profit or loss. This material is not intended to be relied upon as a forecast, research or investment advice.