Parsec Financial is a fiduciary, as such we are required to place the interests of our clients in front of all else. It is a special role that we play, blending together trust, confidence and responsibility in our obligations to our clients. Many of our competitors are not fiduciaries because of conflicts of interest, either transactional based compensation or revenue sharing agreements from the products they recommend.
While we are a fiduciary for all our clients, it is very pertinent to our trust clients and retirement plan trustees. Trustees come to us for help with the procedural prudence that is necessary for them to control their fiduciary liability and obligations.
The strength of our service resides in our objectivity. The Fee-only model allows us to embrace the fiduciary standards. Our credentialed professionals are here to assist you with all aspects of trust and retirement planning.
Rick Manske, CFP
As the compliance officer for Parsec, it is apparent to me that the compliance officers for Madoff were not doing their job. In 2006 the SEC required every securities firm to name a specific person as Chief Compliance Officer. The CCO is required to monitor the firm’s activities and ensure that the business is complying with the various securities regulations.
We have a software system that monitors all e-mails sent and received by employees which are then archived for record-keeping purposes. We are not allowed to electronically send personal client information which would include social security numbers, date-of-birth, account numbers, etc. The software alerts us to suspect e-mails.
Employee trades are carefully monitored and must be pre-approved before any trades are made. Employees must wait until block trades are finished for clients before executing any trades in their own accounts. Parsec receives statements on all employee accounts, including household members, and trades are double-checked each quarter to ensure compliance.
Portfolios are given specific composites (growth, growth and income or balanced, for example) based on the client’s investment objective, and then must be diversified according to guidelines established by our Investment Policy Committee. Sample portfolios from each advisor are reviewed periodically for compliance. If the portfolio is out-of-balance, the advisor is given a certain timeframe to get the portfolio back in compliance. We screen for stocks that are over a 5% weighting and if there is a reason for the overweight position it must be documented in the client’s electronic data file.
All advertisements and correspondence sent to more than one client must be reviewed and approved and a file is kept on all of those items. If we give statistics or certain facts we must have documentation on file to prove those facts. We also must retain records such as trade confirmations and account statements in order to be able to substantiate the performance figures sent to our clients.
Many other areas are routinely checked and a year-end compliance report is a requirement with documentation and “work papers” on the various testing procedures during the year included. I have attended compliance conferences every year and Parsec also retains a compliance consulting firm. We take this matter seriously and we maintain a culture of compliance. If a Ponzi scheme was going on at Madoff Securities and the compliance officer was unaware, he was a compliance officer in name only.
Barbara Gray, CFP
This week’s post will focus on some sample questions regarding how we buy and sell stocks.
Q: What factors do you look at when selecting individual stocks?
A: We review many different pieces of fundamental data as well as published research from a variety of sources. We then combine and analyze this data in order to draw our own conclusions. Once we add a company to our coverage universe, we monitor it daily and also review company news, earnings reports and SEC filings as needed.
Q: You bought XYZ Company and it went down. Why don’t you sell it?
A: Stock selection is not an exact science. Sometimes we review a company and the fundamentals look great, then it goes down anyway due to some piece of company-specific news or general market conditions. In a diversified portfolio, something will virtually always be down. We do not believe that a short-term adverse price movement by itself is a reason to sell if our investment conviction about a company has not changed. Although it runs contrary to human nature, many times the right thing to do in the stock market is to not do anything. We favor low turnover, since academic studies have repeatedly demonstrated that the more investors trade the worse they do. Frequent trading also drives up your transaction costs and creates short–term gains, which are taxed at higher rates.
Q: What would cause Parsec to sell a particular stock?
A: Sometimes it’s one reason, and sometimes it’s a combination of factors. Deteriorating fundamentals, loss of confidence in management, increasing debt, declining margins are several potential reasons. We also look at relative P/E, or the price earnings ratio of a particular stock relative to both the overall market and the company’s own historical range. We prefer to buy stocks near the low end of the relative P/E range and sell them near the high end. Our favorite reason to sell part or all of a position is to take profits.
Bill Hansen, CFA
January 30, 2009
We have a correction to our most recent newsletter. I had indicated the size of the upcoming fiscal stimulus program in the millions. While I wish this was true, the package being debated is $825 billion, many apologies for this over-sight.
Rick Manske, CFP
With mortgages rates reaching all time lows many people are choosing to refinance. The 30 year fixed mortgage rate is below 5% which is a deal too good to ignore! Your credit score is an integral part of getting lower rates. Consequently, it is also important to continually stay on top of your credit report and your credit score. You are allowed a free credit report every 12 months and I would encourage everyone to check their report and ensure there are no mistakes. You can order the report online at http://www.annualcreditreport.com or call 877-322-8228. This is the only organization that will give you a report for free.
If you have been a victim of identity theft you can place a fraud alert on your file by calling one of the three consumer credit reporting companies:
Barbara Gray, CFP®
The title alone should peak your interest! In the past, taxpayers who had adjusted gross income over $100,000 could not convert their IRA to a Roth IRA. That income limitation has been lifted for 2010. Of course, you will have to pay taxes on the amount you convert but you will be allowed to spread that tax burden over a two year period. Roth IRAs grow tax free as regular IRAs do, but the proceeds are tax free upon any withdrawals – AND there is no required minimum distribution on a Roth. One tactic for retirement spending is to have several pots of money to draw from (other than social security): investment assets taxed at the capital gains tax rate, IRA assets fully taxed at your income tax rate, Roth IRA assets not taxed. If you don’t need the Roth assets in retirement they can be left to your beneficiaries for them to take out over their lifetime, tax free. If you have earned income you can do a non-deductible regular IRA for 2008 and 2009 and then covert those assets over tax free.
Congress has rescinded the IRA required minimum distribution for 2009 for those ages 70 ½ or older in order to allow the accounts time to recover from the stock market decline. Consequently, nothing has to be sold while it is temporarily at a low.
Barbara Gray, CFP®
As this year comes to a close everyone is hoping that 2009 will be better, and we think it will be better. Having said that, there are good lessons to be learned from past events and in the long run corporations and individuals will benefit from these difficult times. Spending less, saving more and living within our means should be the mantra going forward for individuals. Corporations and large institutions will need to be more transparent to regain trust from individuals, especially in light of the Madoff scandal. One can only hope there will be more honesty and less greed in the future.
The media is saturated with gloomy, depressing predictions and it is difficult to find any positive news out there at all. It could be worse – gas prices could still be at $4.50 a gallon so we’re thankful those prices have come down. Household net worth in the U.S. is at $45 trillion dollars – not bad. One-third of American households have no mortgage. Interest rates are extremely low and mortgage refinancing will be good for the economy. As quickly as things went sour in the economy they can also stabilize and begin to improve.
We have grown over the years in large part from client referrals and we are thankful for the vote of confidence from our clients. We wish for everyone a better 2009.
Barbara Gray, CFP
Investors around the world have been affected by the recent alleged fraud committed by Bernie Madoff, a well-known New York investment manger. Madoff is accused of running a giant Ponzi scheme, where money from new investors is used to pay returns to existing clients. Some wealthy families had all or most of their net worth invested with Madoff, and it is likely that these people will lose everything. The losses are tragic for the families and charities involved.
This scandal highlights one of the major disadvantages of hedge funds, or any other type of pooled investment vehicle, where monies from more than one client are combined into a single account. Called “lack of transparency,” it means that you never really know what you own or how much it is worth. Our business is set up differently in order to eliminate this risk, and there are two primary reasons why this type of scandal could not happen at Parsec. First, we do not take custody of any client assets. Client accounts are all held at a reputable third-party custodian such as Charles Schwab & Co., Fidelity or TD Ameritrade. Your assets are always in your name in your account, where you can see them online or call the custodian and get a current balance and list of holdings. Second, we do not have the authority to get money out of your account without your signature. These protections are key distinctions between our approach and a pooled account.
As of this morning, the 10-year Treasury Note yield is 2.12%. This implies deflation over the next 10 years, as historical inflation has been significantly higher than this level. The government has pumped a huge amount of liquidity into the financial system in the form of interest rate cuts and various bailout packages, and we believe this will eventually be inflationary. Keep in mind that inflation is one of the major risks to fixed income investments over time. The dividend yield on the S & P 500 is currently about 3.1%. The implication is that stocks at this level would outperform Treasury Notes even with no capital gains over the next 10 years. For this reason, we are not particularly interested in buying Treasury Notes at current prices. For our clients that have an allocation to fixed income, we are currently focusing on inflation-protected Treasury securities, and high-quality corporate and agency bonds that are currently trading at wider than normal yield spreads.
One benefit of the current interest rate environment is the decline in 15 and 30-year fixed rate mortgages, both of which are currently just under 5%. While it is possible that mortgage rates could move slightly lower, we do not believe that they will stay at these levels for long. We encourage all of our clients with fixed rate loans at higher interest rates, or those of you on adjustable rate mortgages, to consider refinancing in order to lock in your borrowing costs at currently low levels.
We thank all of our clients for their perseverance over the past year, and wish you and your families a happy and healthy holiday season.
Bill Hansen, CFA
December 19, 2008
Parsec Financial, Asheville’s largest independent wealth management firm, announces zero job cuts as it navigates through the 2008-2009 recession. We started the year with 24 employees and we still have 24. Each one of those 24 is an individual whose job is very important to him or her and their family. Never in our 28 year history have we laid off a person for economic reasons.
This is the 14th recession since World War II. It is temporary and we’ll get through it. We are a financially solid, stable firm that is profitable and has very little debt. Clients of our firm, unlike those of many of our competitors, will not experience the discomfort of disruption of service that bankruptcies and mergers entail. Many major financial institutions have had massive layoffs and tremendous write-downs this year, but Parsec is retaining employees and remaining profitable.
Our motto is to always tell the truth; we offer smart, strategic, low cost advice from a locally-owned shareholder firm.
Bart Boyer, CFP®
CEO and Chairman
As the year comes to a close we can all breathe a sigh of relief that it is over; 2008 will go down in history as one of the worst investing environments ever seen. Obviously, the stock market was terrible; both domestic and international, but so was real estate and most all bonds outside of the treasury market. Even the commodity prices crashed with prices on oil, gas, soybeans, wheat and corn. dropping precipitously during the second half of 2008. As we enter 2009, we can be hopeful that we have seen an end to the bubble theme of the last nine years. As you recall we first had a stock market bubble in the late 90s, followed by a real estate bubble in the mid decade, then finally the commodity bubble in 2007-2008. Unfortunately for some it appears to us that another bubble is inflating in the treasury market as the flight to quality has brought the yield on the ten year treasury down to levels not seen since the end of World War II. When credit markets stabilize and the panic subsides we could see a spike in inflation with the big increase in monetary supply; this would be a bad situation for someone locking in 2.8% for ten years. It would be nice to get back to some normal markets.
The year saw a number of stock market records broken. The largest monthly decline, the biggest ever point gain and point advance, the worst year in modern history. The amount of bad economic news feels almost unprecedented. All the tell tale attributes of a bad recession abound: rising unemployment, multi-decade lows in industrial production, sagging real estate prices, and record home foreclosures. The equity markets have sold off for all of these reasons and more. Seemingly stocks are beginning to take bad news in stride. Expectations are so reduced and markets are so sold out that any sign of a lessening of of the crisis will be met with a strong stock market rally.
You have to look carefully but there are some positives for us all to consider:
- The declining price of oil, natural gas, home heating oil is saving consumers billions of dollars every month.
- The governments of the world are making sound and coordinated policy decisions, injecting trillions of dollars into the credit markets.
- Mortgage rates have been in a falling pattern, stoking the refinance opportunity and allowing people to begin buying excess inventory in housing.
- Dividend rates on stocks are higher than bonds for the first time in decades.
The reality is that the economic and financial conditions have changed markedly in the last three months of 2008. However, the long-term objectives of investors have not. We all still want to retire and spend in retirement according to our lifestyle. The need to grow wealth is as important today as ever before. There is only one way to grow wealth and that is through ownership. Ownership of real estate and businesses (public and private) represents equity and over the long-term the owners of equity will see their wealth grow. Bonds, CDs and cash do not grow wealth. They do play an important role in protecting and preserving wealth, but they do nothing to grow wealth. We feel strongly that investors that have left the real estate and stock market will return when prices begin to rise. Many people will fail to get back in or will at much higher prices than when they got out. We and our clients will have seen the bottom and by definition will be in place to get the full recovery when it comes.
Rick Manske, CFP
We will be busy between now and the end of the year doing tax loss harvesting in our client’s taxable accounts. With such a broad market decline this past year it isn’t hard to find some losses – in some cases, many losses. There are a few tactics that can be used in tax loss selling. A security can be sold for the loss and then bought back in 30 days. If you want to take the loss, but think the market might have a rally in the next 30 days, you can double up on the stock and then sell the original lot in 30 days. That way you get the loss and you don’t miss out on the gain. However, there are many securities trading below what we believe to be their fair value, so reinvesting the proceeds immediately in something else is also prudent.
Mutual funds typically pass on capital gains to their shareholders in December. You may have a large loss in a mutual fund and also be burdened with capital gains. Since so many mutual funds have also had losses (almost all of them) we will be reviewing them for tax loss selling as well.
Capital gains can be offset by capital losses. If you do not have any capital gains a couple can deduct $3,000 of losses on Schedule D of their tax return, a single person can deduct $1,500. You can carry forward an unlimited amount of losses for use in later years. If there is an upside to a down market it’s that most of us should not be paying capital gains for 2008.
Barbara Gray, CFP