Business Friday Forum

What is Financial PlanningAccumulation, Distribution and Transfer of Wealth

St. Bonaventure Business Student Friday Forum

September 26, 2014

Agenda

Discuss the Business of Personal Finance What is Financial Planning What are Some of the Products and Services What is the Role of a Financial Planner What opportunity is there for a college

graduate in this industry The Money You Can Make The Impact You Can Have on the Life of Others

Who is Kevin Wenke

Kevin Wenke From Olean NY BS From SUNY Fredonia (1993) MBA From University of Tennessee

(1999) Started with MetLife in 2003

IAR in 2004 CFP in 2008 CLU in 2008

Decision Tree Financial in 2009 “Comfort Investing” Book 2014

What is the Average 25 Year Old College Graduates Biggest Asset?

The #1 Answer Is Usually “My Car”

Explanation

Current Age 25 Earning average of $50,000 per year Work until age 65 Never Get a Raise = $2,000,000 Get an average raise of 3.5% throughout

career

The Accumulation, Distribution and Transfer of Wealth

Cash Flow Quadrant

Developed By Robert Kiyosaki “Rich Dad, Poor Dad” Author

Where Do “Do It Yourself” Investors Get Investment Advice?

Media Experts

Newspapers

Television

Radio

Tips from Family and Friends

Quantitative Analysis of Investor Behavior

Produced by Dalbar since 1994 In the Period of 1984-2013, The Average

DIY Investor: Earned an Average CAGR in the Stock Market

of 3.69% The S&P 500 had a CAGR of 11.11%

Earned an Average CAGR in Fixed Income of 0.7%

The Barclay’s Bond Index had a CAGR of 7.67%

investment Cycle of emotions

Depression

Euphoria

Optimism

Excitement Anxiety

Fear Relief

Optimism

Individual DIY InvestorsHave A Great System of:

Where There is a Problem

Common Way Financial Planners Get Paid

Gain Clients and Manage Their Portfolio’s Average Fee Charged is ~ 2.5% of the

portfolio 1% is paid to the Financial Planner meeting with

Clients 1% is paid to the Portfolio Manager 0.5% is paid in various expenses and trading

costs

Building a Clients Portfolio

Stocks Large Cap Mid-Cap Small-Cap International Emerging Market

Bonds Long-Term Short-Term TIPS Corporate Government Municipal High-Yield Convertible

Level of Risk

ExpectedReturn Reposition assets for better

investment return with same risk.

Reduce risk and maintain investment return.

Grandma Gambler

Efficient Frontier

100%

Regression to the Mean

50% 50%

Professional InvestmentAdvisor Performance

Average, or Benchmark

(Index)

Different managers beating their benchmark in different years maintains the average… Before Fees!

Asset Managers that beat their Benchmark

Asset Managers that lagged their Benchmark

Average, or Benchmark

(Index)

Professional InvestmentAdvisor Performance

Different managers beating their benchmark in different years maintains the average… Before Fees!

Benchmark

Fund Manager Performance

Different managers beating their benchmark in different years maintains the average… Before Fees!

AccountPerformance

Hypothetical Account Performance(the Index Minus 2.5% Fee)

Hypothetical Stock Market Movement

The Fees Effect

"It is difficult to systematically beat the market. But it is not difficult to systematically throw money down a rat hole by generating commissions (and other costs)." -- Michael Jensen, professor, Harvard University

PerformanceCosts toInvestors

Some Real Numbers

The S&P 500 had a CAGR of 11.11% from 1984-2013 $100,000 $2,374,000

If a 2.5% Fee was Levied Against that Return $100,000 $1,186,000

“Robo-Advisors”

Investors don’t want to “Watch Their Own Money”

Investors Understand that Asset Managers Typically Don’t “Beat the Market”

Investors Don’t Want to Pay High Fee’s on Average Performance

Software Based Advisors (Wealth Front and Future Advisor) are Charging 0.5% for their Service Using Low Cost ETF’s and Mutual Funds (Cumulative Fee <0.7%)

Some Real Numbers

The S&P 500 had a CAGR of 11.11% from 1984-2013 $100,000 $2,374,000

If a 0.7% Fee was Levied Against that Return $100,000 $1,958,000

However

According to the Dalbar Report, the average DIY investor who earned a CAGR of 3.69% in stocks would have only turned $100,000 into $304,000.

Other Considerations

“Past Performance Doesn’t Guarantee Future Results”

Nothing Contractual ensuring a return basically says “invest at your own risk because we aren’t standing behind our service.”

Aggressive portfolio’s fell by around 50% from their highs at points in 1987, 2000-2002 and 2008.

Investors changed advisors and advisors got PTSD Bonds are Used to Reduce Volatility

30 Years of Falling Interest Rates has made professionally managed and rebalanced portfolio’s look like they are “beating” their averages.

Other Considerations

Other than Growth and Income, Stocks and Bonds typically provide no additional economic benefits to the investor holding them. Ford – 100 shares for 6 months x-plan pricing Wriggly sends shareholders a pack of gum

each year…….

Point - Investors buy Stocks and Bonds for Growth and Income

Is this possible

Help an investor limit the amount of investment losses they can experience to an absolute amount. Helping to manage emotions and allow investor to

comfortably “buy low and sell high” Reduce the risk to a portfolio when interest rates

increase and or Allow an investor to have a large portion of their

wealth positioned more stable asset Allowing them to be in a position of power and control

Without sacrificing long-term investment returns While providing additional benefits to their

comprehensive financial plan?

Reduce Risk and Reduce Volatility

With Out Sacrificing Long-Term Performance

Investing In Stocks vs. Options

Benefits of Using Call Options

Purchasing the right to purchase an asset in the future at a predetermined price.

Positive Leverage – Unlimited Upside Potential Call Options don’t force investor to risk 100% of

their capital Transfer the downside risk to the seller of

the call option Cost effective for investors to obtain -

$0.65 per contract and $5 per trade Contract is equal to 100 shares of stock

The Use of Call Options Can Help Prevent This Behavior

Depression

Euphoria

Optimism

Excitement Anxiety

Fear Relief

Optimism

Potential Negative of Using Call Options

Must Compensate Seller For Their Risk Premium is based on future “strike price”,

contract term, current risk free interest rate and volatility of underlying asset.

This Premium Can Come From The Earnings of Remaining Money Not At Risk In Option

Ideally remaining money should be safe, have a stable value, be liquid while providing a decent rate of return

Constructing a Portfolio

Fixed Income Securities Low Variance and Standard Deviation

Cash Bonds TIPS MLPs BDCs MBSs

These Securities Are StillInterest Rate Sensitive

The Contract That Guaranteesa Minimum Rate or Return

What is Cash Value Life Insurance

Life Insurance Companies Invest Premiums Into a Diversified Portfolio of Fixed Income Securities.

The Manage and Retain Interest Rate Risk for Policy Owners.

Assets Life Insurance Companies Hold

They own 17% of US Corporate Debt Control $6.5 Trillion Dollars of Assets This Amount Would Increase the More

Premium Collect Compete with Investment Banks for Corporate

Debt Underwriting.

What is Whole Life InsuranceFrom A Mutual Insurance Company

Mutual Life Insurance Companies Are Owned By Its Policy Owners

Allows Policy Owner to Receive Dividends When Surplus (Earnings) Are Above Guaranteed Minimum Rates.

Contracted Minimal ReturnPlus Equity Ownership

Owners of Whole Life Receive Dividends Which Are Derived From: The Earnings of the Life Insurance Companies Insurance

Business The Earnings of the Fixed Income Portfolio The Earnings from their other insurance business

Annuities Disability Long-Term Care Term and Universal Life Insurance

The Earnings From Other Interests the Insurance Company Controls Brokerage, Mutual Fund and Asset Management

Businesses

Criticism of Cash Value Life Insurance

Expenses are Front-Loaded – Takes Years to “Break-Even” Requires a long term commitment.

They “Never Perform” As Illustrated!

30 Year Dividend Interest Rate History 1983 - 2012

4.00

6.00

8.00

10.00

12.00

14.00

Guardian Northwestern MassMutual* New York Life

30 Year Average Return: Guardian 8.98% Northwestern 8.69% MassMutual* 9.10% New York Life 8.67%

CAGR of the S&P 500 1983-201210.87% (Growth and Dividend Reinvestment)

Life Insurance Dividend Rate Does Not Reflect Cost of Insurance

Return Comparison Risk vs. Return

SP 500 (1984-2013) CAGR of 11.1% (when

dividends are reinvested)

Assumes No Fee’s Best Year

38.0% (1995) Worst Year

-37.2% (2008) Standard Deviation

17.1%

Call Options and Whole Life Insurance CAGR of 11.68%

Considers Average 2.5% deducted for COI

Best Year Worst Year Standard Deviation*

18.6 Beta = 1.0

Call Options and Cash Value Life Insurance

In financial planning the goal is to integrate and coordinate all areas of your finances to achieve efficiency and have a greater probability of reaching your target. Integrating the pieces of your finances also means working with your other advisors to ensure the best possible plan for you!

Lawyer Accountant

Mortgage Broker Certified Financial Planner Banker

Insurance Agent Investment Advisor

What Is Earning Potential Of Commission Based Insurance? Life Insurance

30-100% of FY Premiums 2-10% on premiums paid after 1st year.

Fixed Annuities 3-5% of Contribution

Disability Insurance 50-100% FY Premium 10-20% On Premium After 1st Year

Long-Term Care 50-100% FY Premium 10-20% On Premium After 1st Year

Potential Earnings?

Show 2 New People a Week how to Reallocate $500 per month into life insurance with this strategy Could come from their Earnings or Assets

Already Invested $600,000 Annual Premium at 50%

Commission

Question and Answers

More Information at my Website: Http://www.DecisionTreeFinancial.com Http://www.KevinWenke.HubPages.com Please Share and Follow Me On:

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