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I am a firm believer in the passive approach to investing. Decades of research have shown that trying to beat the market through active investing – like stock picking – simply doesn’t work. This is especially true when you factor in mutual fund fees, sales loads and trading commissions. Instead, the safest, most reliable way to grow a portfolio over time is by simply matching market returns through the use of low-cost index funds (ETFs).

I listen closely to each client’s investment goals and risk tolerance to build well-diversified global portfolios of low-cost index funds (ETFs). Fund fees in my portfolios range from 0.10% to 0.20%.

I work with clients who have $500,000 or more to invest. I charge 0.50% to manage portfolios up to $1 million in size, with a reduced fee on amounts over $1 million.

I don’t take physical custody of client funds at any time. I’ve partnered with TD Ameritade to custody client funds. Clients have 24/7 visibility into their portfolios via the TD Ameritrade portal.

MY APPROACH

Lower fees mean more stays in your portfolio to grow.

The typical financial advisor now charges 1.0% to manage a portfolio. That doesn’t sound like a lot, but if you assume that the average annual portfolio return is about 6%, that means that investors give back 17% of their annual returns to the advisor in fees. That’s expensive. Add to that 1.0% advisory fee the average fund management fee of 0.65% and investors pay 1.65% all-in. Again, given the average portfolio return of 6%, investors give back 28% of their annual returns to fees. Ouch.

At McPeake & Company, my clients pay 0.50% in advisory fees and between 0.10% and 0.20% in fund fees, for a total of 0.60% – 0.70%. Given the average portfolio return of 6%, my clients are giving up only 10% – 12% of their returns to fees. Over 25 years, given the above assumptions, my clients’ portfolios will be 25% larger than those invested with a higher-priced advisory firm.

PASSIVE INVESTING

A smarter way to invest.

Many traditional and higher-priced advisors will assert that they can “beat the market” through “active investing.” By making bets on certain stocks or industry sectors at different times, they will claim to be able to deliver outsized returns. Decades of research have proven that such active investing very seldom yields better returns than simply investing in the market more broadly – as through index funds.

Here’s proof. Over the last 15 years, 92% of actively managed US large company stock funds failed to match the performance of their benchmark S&P 500 index. This is even true for those managing funds that invest in small companies or in the emerging markets, where some argue that there is less transparency and more opportunity for a smart, well-resourced manager to outperform.

Percentage of Funds Outperformed by their Benchmark Index Over the Last 15 Years
US Large Company Funds 92%
U.S. Small Company Funds 93%
Emerging Market Funds 90%
Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2016.

But wait – what about the 8-10% of active managers who were able to beat their benchmarks? Unfortunately, there is simply no way to identify the “winners” in advance.

The research findings are even more striking – in favor of passive investing – when fund management fees, sales loads and trading commissions are factored into the analysis.

FOREIGN STOCKS

Enhance growth and reduce risk.

Adding foreign stocks to a portfolio has several benefits.

First, it helps to reduce risk in the portfolio. Many times, foreign stocks will react differently from U.S. stocks to some external event. For example, when oil prices rise, consumer spending in the U.S. may fall and many U.S. companies’ profits could be adversely affected. Meanwhile, the shares of foreign oil producers in Brazil, Russia and China will likely rise.

Second, developing economies in the so-called “Emerging Markets” have enjoyed higher economic growth rates that those countries in the advanced economies of the U.S., Japan and Europe. This trend is expected to continue. Adding emerging market stocks to a portfolio can enhance its growth.

Average Annual GDP Growth 1980-2018 Actual 2019-2023 Forecast
Advanced Economies 2.2% 1.7%
Emerging Markets 4.6% 5.0%
Source: International Monetary Fund

Third, think about all of the products we have around our homes that are made by foreign companies. That Toyota minivan or BMW sedan in the garage? That Panasonic TV in the living room or Samsung smartphone in our briefcases? Dove soap or Axe body wash in the shower? These are all products made by foreign companies. Examine an iPad from Apple. It’s constructed from components manufactured largely by Chinese, Korean and Japanese companies. If we do not include foreign company stocks in our portfolios, we will fail to capture the fullness of global economic growth.

DISCIPLINED REBALANCING

Improve returns and reduce risk.

I listen closely to each client’s investment goals and risk tolerance to build a well-diversified global portfolio of low-cost index funds (ETFs). This may mean that a client with a more aggressive approach to investing has an 80% stock, 20% bond portfolio. In a year where the stock market is performing well and the bond market isn’t, by mid-year that portfolio may actually be 82% in stocks and 18% in bonds. At that point, it is important to rebalance the portfolio, by selling the excess stock position to return it to 80% and using the cash raised to restore the bond position to 20%.

Research by Burton Malkiel, Professor Emeritus of Economics at Princeton, has shown that over time disciplined rebalancing has improved returns slightly and, more importantly, significantly reduced risk in a portfolio.

Positive Effect of Annual Portfolio Rebalancing

January 1996 – December 2013

Improvement in Portfolio Returns + 0.27%
Reduction in Portfolio Risk (Volatility) (12.9%)
Source: Rebalance-IRA.com

At McPeake & Company, I rebalance my client portfolios twice annually.

FIDICIUARY & FEE ONLY

What does that mean to me?

Many “financial advisors” actually work for insurance companies and are in the business of providing the kind of financial advice that promotes the sale of insurance products like whole life policies or annuities that pay handsome commissions to the advisor.

Many more are, from a regulatory perspective, “registered representatives” of a broker-dealer like Morgan-Stanley, Merrill Lynch, Ameriprise or Wells-Fargo. Their employers incentivize them to place their clients in mutual funds that carry hefty sales loads.

It’s vital that investors seek out unbiased investment advice from an advisor who is a “fiduciary” and who must, by law, act in the investor’s best interests.

I am a fiduciary and put my clients’ interests first. I don’t receive commissions on any product I put my clients’ money into. I am paid only by my clients, in fees for financial planning or wealth management services provided.

HOW I WORK

My fees and types of accounts I manage.

I work with clients who have $500,000 or more to invest cumulatively across accounts. I charge 0.50% per year to manage portfolios up to $1 million in size, with a reduced fee on amounts over $1 million, according to this fee schedule.

Assets Under Management Advisory Fees
$500,000 – $1,000,0000 0.50%
Next $1,000,000 0.25%
Amounts over $2,000,000 —-

I charge my advisory fees in quarterly installments, in advance, during the first week of a calendar quarter. Fees are taken directly out of the investment portfolios via my custodian TD Ameritrade.

TYPES OF ACCOUNTS I CAN MANAGE

I can manage many different types of client accounts, including:

Standard / Taxable Retirement Education
Brokerage IRAs Coverdell ESAs
UGMA / UTMA Roth IRAs
Rollover IRAs
SEP IRAs
SIMPLE IRAs
Solo 401(k)s