Prudent Investors Network » Compliance

Becoming Fiscally Fit

Jamie Pearson — Mon, 15 Aug 2011 09:00:19 +0000

Just as it is important to see a doctor for an annual physical to check our cholesterol levels, it’s important to conduct an annual fiscal review to keep our financial obligations in check. There has been much said this summer about the United States’ inability to pay its debts. It may be easy to criticize state and federal governments for allowing their expenses to exceed their incomes, but imagine if your personal finances were to become front-page news. As the President and Congress have scrambled to reach an agreement on how to resolve the situation, perhaps now would also be a good time to reflect on our personal finances. In the case of fiduciaries, it would be prudent to review the financial obligations of their clients too.

At Prudent Investors Network, we hope that our clients view us as an extension of their household or business. Many of our fiduciary clients must report budgetary and portfolio performance to the courts as part of their accountings. We assist them in preparing for these reviews by providing a Compliance Report. These reports demonstrate whether or not the performance of an account has been in line with the initial investment objectives established for the account. We also use this opportunity to provide our clients with a copy of the most recent questionnaire. This is a way for them to review information previously provided to us and make any necessary updates or changes.

In life, there is always the challenge of changing circumstances or things not going as planned. When you find yourself in such a predicament, it is crucial to communicate with us so we can offer advice and help you prepare for what lies ahead. On several occasions we have recommended that a client change their investment objectives or go to cash because of significant life changes. In some cases, expenses have increased, and it is speculative to keep assets invested. In other cases, clients find that they need to be more or less aggressive with part or all of their assets. The bottom line is that we are here to help and that proper, timely communication is the road to the best possible outcome. If you, at any time, would like us to provide you with a Compliance Report, please don’t hesitate to contact us.

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Need Cash? Know Your Options!

Jamie Pearson — Mon, 01 Feb 2010 09:00:33 +0000

Clients often request that we send out funds to cover upcoming tax, personal, medical or housing bills. Please be aware that while we are able to send funds out of your account’s money market quickly, most of our accounts are invested in funds that have a 1- to 3-day settlement period. That means that if you don’t have sufficient funds in your money market and we are required to generate trades to meet the request, a trade made on Monday very likely won’t generate cash until Friday! Please don’t run the risk of coming up short! Give us at least a week’s notice if you’re going to need cash from your account.

Also bear in mind that your brokerage or investment account is not intended to be used as a checking account. The assets you place with us should have a long-term investment time horizon. Any funds that you anticipate needing within a year or so should certainly be kept in a bank checking or savings account.

When you do request funds from your account, you have several different options.

The funds can be sent out via check by either regular mail or by overnight mail. When funds are sent by regular mail, there is no charge. When funds are sent via overnight mail, there is a $15 charge to the account.
You may write a check off of the funds in the money market. When you do this, please contact us first to make sure that there are funds available in your account. We do rebalance accounts from time to time and we want to make sure you avoid unnecessary fees associated with bouncing checks.
We can wire funds directly to your bank account. There is a $15 fee associated with one-time wires from an account.
We can set up an Electronic Funds Transfer if you know you will require a certain amount to be deposited into your bank on a regular, monthly or otherwise periodic basis. There is no charge for these transfers, but they do require a 10-day setup period before the first wire goes out.

We hope that these reminders will help you avoid unnecessary fees and will help in terms of meeting your financial goals. If you have any questions, please don’t hesitate to give us a call!

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How To Calculate Returns on Investment Accounts

Lee Anke — Wed, 01 Jul 2009 09:00:29 +0000

When we attended the 2009 North Carolina Guardianship Association Conference and the NGA Colloquium, we stayed with dear friends on Lake Norman. With 500 miles of shoreline, it was fun boating on the lake. When I asked our friend what the large signs sticking out of the tops of telephone poles in the middle of the lake were, he said they marked the shoals. Without these signs, boaters unfamiliar with the location of shoals could beach their crafts. There are shoals that we need to watch out for in our fiduciary practices that may not be well posted; it is up to us to protect our clients. Sometimes fiduciaries are unsure whether or not their accounts are doing well or doing poorly. The reason for the uncertainty is twofold:

Performance is difficult to calculate
Performance is relative and they do not know what to compare their accounts’ performance to.

Here is a quick and easy way to calculate approximate performance. Let’s presume this is a fiduciary account that has a separate working capital account that normally covers the expenses, so the investment account has had no deposits and no withdrawals. The “return” formula is: Divide the ending value by the beginning value and subtract one (1) as shown under “Example #1” below.

Example #1
120,000 / 100,000 = 1.2. Subtract 1 and you get 0.2, or 20%. If that happened over, say 16 months, multiply the 20% by 12/16 (the number of months in a year divided by the number of months in the actual period). In this example, 20% x 12 /16 = 15% per year.
The account grew from $100,000 to $120,000

Now let’s suppose that there were withdrawals (distributions from the account). The formula is: Ending value + withdrawal, divided by beginning value, minus one. So supposing you use the above example and add withdrawals of $4,000 you will see the results in Example #2 (below).

Example #2
(120,000 + 4,000) / 100,000 = 1.24. Subtract 1, and you get 0.24 or 24%.
The account grew from $100,000 to $120,000 and there were withdrawals of $4,000.

Example #3 below shows how to calculate a return with both withdrawals and deposits.

Example #3
(120,000 + 4,000 – 10,000) / 100,000 = 1.14. Subtract 1 and you get 0.14, or 14%.
The account grew from $100,000 to $120,000, there were withdrawals of $4,000 and a deposit of $10,000.

Example #4 shows how to calculate a return if you started with $100,000, but ended up with less, say $90,000, after also receiving $4,000 in distributions.

Example #4
(90,000 + 4,000)/ 100,000 = 0.94. Subtract 1, and you get -0.06 or -6% return (a 6% loss).
The account dropped from $100,000 to $90,000 and there were withdrawals of $4,000.

Now that you have the performance, you want to know if it is good or bad for a fiduciary account. Since the Morningstar Moderate Allocation Category of funds represents a set of diversified mutual funds, it would probably comply with the Prudent Investor Rule and, therefore, provides a good comparison. To find the Moderate Allocation Fund average, go to Morningstar.com. Click the tab that says Funds.

Then scroll down and under Mutual Fund Performance and Ratings click Category Returns

Scroll down and you will see the Balanced Funds heading and underneath it Moderate Allocation. Look at the 1-year performance to compare with the performance you have calculated above (the periods must be the same, however, to make a proper comparison – just a month or two difference can invalidate the comparison).

If you will regularly review your accounts using the rough methodology above, you will begin to fulfill your fiduciary obligation to monitor. This will also give you a rough idea about risk and help you avoid the shoals in your fiduciary practice. If the performance is significantly below the benchmark over the most recent year, then you have probably taken much higher risk.

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