The Fiduciary Rule and You

If you keep up with current events and what is happening in Washington, it is likely that you have heard about the Department of Labor’s Fiduciary Rule. Some of you may be curious about what exactly it is and how it could possibly affect you. Before we talk about that, let’s take a quick look at the spectrum of financial advice, and where Parsec lands on that spectrum.

RIAs and B/Ds

These two acronyms stand for Registered Investment Advisors and Broker Dealers. These are two different types of providers of financial advice. In 1940, Registered Investment Advisors were separated from Broker Dealers under the Investment Advisors Act of 1940. Consider that the United States had just emerged from one of the biggest stock market crashes on record a year or two prior. The goal of this new legislation was to eliminate potential conflicts of interest, when a financial professional might consciously or unconsciously provide advice not in the best interest of the client. However, these new rules did not apply to everyone! They only applied to a group of advisors that were Registered Investment Advisors or RIAs. To make things even more complicated, someone could be a Registered Investment Advisor at the same time they were associated with a B/D! Now, if an advisor is associated with a B/D, they are essentially an agent for that company. Very simply, think about your local home or auto insurance agent. They work for the insurance company, and you know their job is to sell you an insurance product. This is the relationship that all advisors who work for large banks and brokerage firms maintain. Their first priority is to sell the products of their employer.

Cue the Independent Broker Dealer

As mentioned previously, there are some advisors who are associated with both an RIA and a B/D. These advisory firms typically associate with an Independent Broker Dealer, which means that they are still able to sell products and receive a commission, or they can provide advice through the RIA and receive a fee. At the end of the day, these advisors are stuck with a decision, whether to sell the client a product, or to provide objective advice. Doesn’t it seem like it would be very difficult for an advisor to provide advice, then sell them a product based on that advice? It is like asking your barber whether or not you need a haircut. This is why it is extremely difficult, if not impossible, for an advisor to be a fiduciary if they maintain an association with a B/D.

So what is Parsec?

Since our founding in 1980, Parsec has only been a Registered Investment Advisor. We have never been associated with a B/D, nor have we ever received any commissions or revenue sharing from our recommendations to our clients. One of our core beliefs is that our clients should have complete transparency on our fees, and that there is never any question of what the total cost to work with us is. This means that we are a fee-only fiduciary that always seeks to serve our clients’ best interests as well as eliminate any conflicts of interest that could arise.

How does the DOL’s Fiduciary Rule affect RIAs and B/Ds?

The current fiduciary rule proposal affects retirement accounts, including 401(k)s and IRAs. If the rule is adopted, it will require anyone working with these types of accounts to show that their advice is in the best interest of the client, not just a “suitable” recommendation, which is the current requirement for B/Ds. We believe this is a step in the right direction for consumers, but must point out that if an advisor is a representative of a B/D they still are still considered an “agent” of their firm, and this rule only requires they act in the clients’ best interest with IRAs and 401(k)s. We believe the best outcomes occur when an advisor is able to guide a client in a fee-only advisory relationship. The proposed regulation (if it eventually goes through) will require very small changes to some of our processes for documentation purposes, but no changes to how we work with our clients. We hope this post leaves you more informed about why being a fiduciary is so important to us.

Thank you,

The Parsec Team

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Financial Times Top 300

Parsec is excited to have been named one of the nation’s Top 300 Registered Investment Advisers by Financial Times Magazine.  The candidate pool started with more than 2,000 qualifying RIA firms.  This list was then narrowed down to the top 300 in the nation after a lengthy decision making-process. Each firm was required to fill out a survey where the FT scored RIAs based on 6 broad factors. These areas included adviser assets under management, asset growth, the firm’s years in existence, industry certifications of key employees at the firms, SEC compliance record and online accessibility.  We are excited to have been included in this inaugural list. Check out their site to read more about FTs Top 300! http://www.ft.com/intl/reports/registered-investment-advisers

 

Ashley Woodring, CFP®

Financial Advisor

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Where is My Money?

It seems there are always stories in the news about the latest scheme that has defrauded many people. Seeking a big return, people give their hard-earned dollars to criminals. The big return is never realized. All the money is lost.

With all the bad guys in our industry, I can understand how someone would look at Parsec with a skeptical eye. I am not going to discuss our performance returns or market strategies in this post. I want to discuss something a little more basic that everyone should consider when interviewing a potential investment advisor: “Where is my money?”

In some cases, the victim gives the criminal money to buy investments. In turn, the fraudsters provide the victim with a statement showing assets purchased with that money. It may contain the names of easily recognizable companies. Without an actual stock certificate behind that piece of paper, the statement is worthless.

At Parsec, we do not take custody of your assets. The assets are held at an independent broker, in your name. We recommend Charles Schwab, Fidelity, and T.D. Ameritrade, all brokers whose names you probably recognize. You will receive a quarterly statement from us that contains performance statistics and other information. You also receive a monthly statement from the independent broker so you know exactly what you own in each investment account.

Furthermore, we do not have the authority to move those assets to an unlike-registered account without your consent. You must sign a letter or form to authorize the movement of securities to unlike-registered accounts, which adds another layer of security.

When assets are held at a broker and registered to you, an independent source tells you what you own. There are no “phantom” assets. Also, giving someone the ability to move assets to accounts not registered in your name can be dangerous if in the wrong hands.

When you select an investment advisor, I hope you will ask this very basic question. You worked hard to accumulate what you have. Don’t let an unscrupulous person take it away from you.

Cristy Freeman, AAMS
Senior Operations Associate

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And Now For Something Completely Different

Are you as fatigued as I am with the constant barrage of bad news?  Every time you turn on the TV, someone is yelling about the stock market.  You see images of devastation, famine, and war on every channel.  We need some positive news! 

Well, I have something positive to share.  Parsec is sponsoring its first Parsec Prize 5K race on October 15, 2011.  We believe in promoting wellness.  What better way to do that than to have a race?  

We also believe in supporting local charities.  As you have probably read many times, we are committed to donating up to 2 percent of gross revenues each year.  We have a Parsec Prize through which we make large donations to four select charities.  This year’s recipients are: 

  • Appalachian Sustainable Agriculture Project (ASAP),
  • Asheville Symphony,
  • the Salvation Army Boys and Girls Club of Buncombe County, and
  • Industries for the Blind

Each recipient has an opportunity to raise even more money through the Parsec Prize 5K.  All of the $25 race entry fee will be given to one of the four charities; the runner selects the charity.  Runners and their sponsors can also donate more money if they choose.

It is not too late to register for the race.  For more information, please visit our special Parsec Prize 5K page at http://www.parsecfinancial.com/parsecprize5k.html

Sure, the race is not going to cause the markets to soar (upward).  It just gives us all an opportunity to enjoy a nice fall day and forget about our problems for a few minutes.  Believe me, when you see the last hill of the race, you will not be thinking about the stock market!  We hope to see you on Saturday, October 15.

Cristy Freeman, AAMS
Senior Operations Associate

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Looks Like We Made It

As I read over our recent blog posts, I thought it was high time for an entry that’s full of positive, upbeat, exciting news. So I’m obviously not going to talk about the stock market, politics, or the weather. I’m going to talk about myself…again (and Harli Palme, and Travis Boyer, so it’s not ALL about me).

You’ve heard me bellyache about studying for CFA exams for as long as this blog has existed, and I am ever so pleased to tell you that it’s all over – we passed the third and final exam! You’ll never have to hear my complaints again, and I’ll finally be able to live life to its fullest. Yes, that’s right – I can watch American Idol! Take naps! File my nails!

In all seriousness, though, Parsec has added two more CFA charterholders to its highly credentialed staff, which further underscores our commitment to high ethical and professional standards. I just hope that all the TV I plan to watch doesn’t leach that valuable information from my brain. Most importantly, I will never have to dread the first Saturday in June ever again, and I can finally enjoy Memorial Day weekend guilt-free.

Cheers!

Sarah DerGarabedian, Director of Research

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No More Excuses

At my recent annual check-up (which I never actually get annually – in fact, this was my first real “physical” in about, oh, 10 years) my doctor asked me all the usual questions: do I smoke (no), drink (a little), eat well (mostly), exercise (umm, yeah…but not lately). He really gave me a hard time about that last response. I tried to tell him that I fully planned to get back into the groove as soon as I stopped studying in early June. I think he thought I was just making up excuses, but I swear it’s the truth. Well, then there was vacation…the only exercise I got there was adjusting my beach chair and lifting fried shrimp with a fork.

OK, so now it’s time. As it happens, Parsec is sponsoring our first ever 5k this fall. There it is – the perfect motivator! It’s been at least 5 years since I ran a 5k, and I’ve been exercising only sporadically since then (I have lots of good reasons for that, thank you very much). I volunteered to be on the 5k planning committee, and before I could stop the words coming out of my mouth, I mentioned that I’d be happy to post a beginner’s training schedule, follow it, and blog my progress. So I guess there’s no getting out of it now!

I plan to start my 9-week training regimen in mid-August, which should get me ready by race day. In the spirit of full disclosure, I’m not exactly starting from zero – I’ve been walking on the treadmill while watching Lost (I’m starting Season 2 now – do NOT tell me what happens), which is also a great motivator. I practically throw my son into bed after dinner so I can jump on the treadmill and find out what happens. But walking on a treadmill isn’t the same as running outside, so it will still be an uphill battle (especially since the race course ends with us going up Flint Street – thanks a lot for that!).

I thought I’d give everyone ample notice, so that 1) I’m locked in and I can’t back out, and 2) you can join in and share my pain! Doesn’t that sound fun? Stay tuned for more details on the race, which we’ll be releasing in early August. Happy trails!

Sarah DerGarabedian, Director of Research

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Pardon the Dust

If you visit our Asheville office this summer, please pardon the dust.  It is with GREAT pleasure that I announce we are refurbishing our building. 

It was built in 1892.  Like most old structures, it requires a little extra TLC from time to time.  We began with the exterior. 

Here is the “before” picture:

And here is the “after:”

Rather than replace it, we refinished our conference room table.  We will replace the chairs soon, opting for something a little more comfortable and modern.  We also plan to remove the wallpaper and replace the carpeting on the main floor.  We will replace a few pieces of furniture too. 

When the dust settles, we hope you like our “new-to-us” space.  In the meantime, thank you for your patience!

Cristy Freeman, AAMS
Senior Operations Associate

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Trading Strategies

Well, the CFA Level 3 exam is 2 weeks away, it’s my turn to write a blog article, and I am at a loss. I’m functioning at a fairly low level these days, with my main priorities being 1) attempt to maintain a semblance of normalcy, while 2) keeping a virtual encyclopedia of facts and formulas from seeping out of my brain. I’m not so sure I’m doing a good job of #1; as for #2, I could swear I lost at least 5 formulas when I sneezed this morning. Looks like I picked the wrong year to develop allergies.

Now that I’ve established the fact that my bandwidth is low, and lowered any expectations you may have regarding this article, I thought I would talk a bit about trading. The execution of a trade is a fairly simple matter – we have software that enables advisors to enter the desired trades in a client’s account, which are then transmitted to a trade blotter. Throughout the day, Mark Lewis and I (the designated traders) group all the trades together and send them out to get filled. For a typical trade, which might be a market order of a few hundred shares of a very liquid security, the trade is filled within seconds. Sometimes, though, we have block trades, when we sell the same security for many accounts. These trades can consist of several hundred thousand shares; depending on the average daily trading volume for a particular security, a trade that size could have considerable market impact which could negatively affect the fill price.

So what do we do? We work with the trade desks at the custodian (Schwab, Fidelity, etc.) to break the trade down into smaller pieces so that it is more easily absorbed into the market, to decrease price impact. There are several ways they can do this, but most of the time they use trading algorithms, which are automated based on quantitative rules. The ones we use most frequently are called simple logical participation strategies, such as VWAP and percentage-of-volume. VWAP (which stands for volume-weighted average price) strategies attempt to complete the order in a specified time period (anywhere from a few hours to the entire day), either at or better than the day’s VWAP for that security. Percentage-of-volume strategies break the block into smaller pieces equal to a certain percent of the trading volume (usually 5 to 20%) and feed those to the market until the trade is completed. Both strategies attempt to go along with market order flow, breaking a large order into smaller pieces to avoid detrimental price impact.

Sarah DerGarabedian, Research and Trading Associate

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What Does “Fee Only” Mean?

Recently, I experienced the joy of shopping for a car.  I visited a dealership from whom I purchased my last vehicle.  It was an “enlightening” experience. 

By the time the third sales associate walked into the office, I was more than ready to leave.  He attempted to counsel this ignorant girl about the virtues of a lease.  Surely, I could see how fabulous a lease was, how practical it was?  Then, he made a big mistake.  He admitted that the dealership received better incentives for leasing vehicles than selling them outright.  So, whose best interests did he really have at heart? 

When looking at financial advisors, people sometimes ask the same question.  Parsec is a “fee-only” advisor.  That term can be a bit confusing.  Any phrase with the word “fee” in it has negative connotations. 

Our firm’s income is derived from the investment counsel fees we charge.  We do not receive commissions from the trades we place.  We derive no income from recommending a particular fund or other investment.  We do not receive bonuses for referring clients to a particular custodian. 

As a result, a fee-only advisor has the ability to provide impartial advice.  This is reassuring as we learn more every day about unscrupulous brokers pushing bad investments, solely for the big commissions received.

If you are not currently a Parsec client, we encourage you to take a closer look at fee-only investment advisors.  And, if you are a client, thank you for your continued faith in us!

Cristy Freeman, AAMS
Senior Operations Associate

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What would you say ya do here?

I was recently asked to write a summary of Parsec’s investment process, in a relatively jargon-free, easy-to-understand manner. As it happens, it is also my turn to post the blog, so surprise! I’ll be killing two birds with one stone. In much the same manner Andie Walsh created her prom dress in Pretty in Pink, I have fashioned this summary from bits and pieces of preexisting brochures and other client materials, so it may look a little familiar:

We follow a long-term investment strategy based on diversification and reduced risk. Although we create a customized portfolio for every client, our overall investment approach includes:

  • Balanced investment between growth and value, including small-, mid- and large-cap companies, with some weight in international markets;
  • Individual stocks for the large-cap portion of a portfolio (when appropriate to account size), carefully researched and chosen by our Investment Policy Committee;
  • Equity mutual funds for the mid-cap, small-cap, and international portions of a portfolio;
  • High-quality short- and intermediate-term bond funds or individual bonds for clients who require a fixed-income allocation.

We follow a bottom-up stock selection process focusing on several fundamentals including:

  • Current valuation relative to projected earnings growth;
  • Price/earnings ratio relative to the overall market and to the company’s own historical range;
  • Degree of financial leverage, avoiding heavily indebted companies;
  • Level and consistency of profit margins.

Based on our research and analysis, we have compiled a recommended list of securities. We continually monitor the prices of the securities on this list, as well as any news regarding these holdings. In addition, every security in our coverage universe is formally reviewed at least 3 to 4 times a year, and more often if circumstances dictate.

Our Investment Policy Committee meets weekly to discuss each company and vote on a recommendation. If the committee votes to sell a holding, a block trade is initiated across all discretionary client accounts so that the committee’s convictions are effected on a firm-wide basis in an orderly and timely fashion. When the trade is executed, all accounts participating in the trade receive the same price.

Investing in securities involves risk of loss that clients should be prepared to bear.  Investment risk consists of both systematic risk and unsystematic risk.  Unsystematic risk is not related to the market as a whole, but rather is associated with a specific firm or investment.  Systematic risk is the risk associated with the overall market that is not unique to any one investment vehicle. It is possible to reduce unsystematic risk by creating a portfolio diversified across many different companies and sectors.

It is not possible to eliminate systematic risk.  Macroeconomic factors such as inflation, unemployment, corporate earnings, commodity prices, and interest rates all contribute to systematic risk since they influence the prices of all risky assets. However, it is possible to lower systematic risk somewhat by diversifying internationally, since economic variables in the U.S. are not necessarily correlated with those in other countries. Of course, investing internationally exposes investors to risks related to social, political, and economic factors, as well as fluctuating exchange rates.

Sarah DerGarabedian, Research and Trading Associate

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