More than 1,000 financial advisers work in Orange County, spread across more than 100 financial firms. Some trade stock for broker dealers. Some provide advice, along with insurance. Some are registered investment advisers, also known as RIAs, providing only investment advice. And others offer a combination of all services.
Trying to determine whether an adviser is worth his or her fee is difficult because it’s often hidden among surcharges and not clearly spelled out. So we asked big and small advisers to shed some light on their industry.
Besides the much-debated new fiduciary rule, we also asked them about the latest trends in Orange County and the biggest concerns of their clients.
What are advisers and clients doing differently because of the new tax law? What are the best ways for a customer to make sure he or she is receiving the best money management possible? How can you tell a good adviser from a bad one? Is there a red flag?
And what costs should customers expect? Is it still 1% of assets under management?
Here are edited excerpts of their answers:
Morgan Christen
Chief Executive
Spinnaker Investment Group
Newport Beach
One of the biggest conversations we are having in Orange County is the value of real estate. Housing prices seem to continue moving higher, and in many areas, more than the last peak. For our younger clients, the question is affordability. They want to know if they should chase the dream of home ownership or stay on the sideline and rent.
There are some good and bad aspects to the new tax bill. We have found that many OC small-business owners have lost a good deal of tax deductions. Many of our small-business owner clients are exploring their tax deductible options, and a great choice is a retirement plan. With the proper planning, small-business owners can give a benefit to employees and save a large amount toward retirement in a tax-efficient manner. We anticipate this trend to continue as many clients feel their personal taxes increasing.
The biggest trend in Orange County is not only the aging baby boomer, but also the aging adviser. College grads are choosing not to enter the financial planning profession, and finding young talent is extremely difficult.
The Department of Labor’s planned fiduciary rules really put this debate to the forefront. Brokers working under the Financial Industry Regulatory Authority use a suitability standard—which offers more service options to clients—meaning if the trade is suitable, then execute. There is no provision for it being in the client’s best interest. If you are an SEC registered investment adviser, you are working under a fiduciary standard, meaning you will work in the client’s best interest.
It is an odd debate. Shouldn’t we all be doing the best for our clients? The law was poorly designed, as the fiduciary standard only applied to retirement accounts. So an adviser would not be a fiduciary on a nonretirement account, but switch to a fiduciary on the retirement account.
Annuities are the bread and butter of insurance companies, and these feed right into the crosshairs of the rule. In the end, even though the rule was not fully instituted, it effectively is in force. Clients are asking questions, and firms do not want to run afoul of potential litigation.
There are many resources for a customer to find
an adviser, such as FINRA BrokerCheck or
letsmakeaplan.org for a certified financial planner. You can look up a firm on the SEC’s website. The internet has allowed clients to do extensive research on an adviser before they meet with them.
At Spinnaker Investment Group, a 1% fee is about average. However, a 1% management fee is just the surface; a customer needs to understand the all-in costs of the adviser and their company, as there can be onerous fees buried in a portfolio.
Our investment philosophy is as simple as ABC. Asset allocation, Behavior and Costs. We believe these are three areas that you can control, and if controlled, you should have a successful financial outcome.
Scott Gajda
Wealth Management Adviser
Northwestern Mutual
Irvine
The 2018 U.S. tax reform law has been a hot topic for Orange County clients in pursuit of purchases, sales and investments in real estate markets.
The tax changes will bring new personal income tax rates, new tax brackets and eliminations of some personal deductions and credits. The effect of the changes varies from taxpayer to taxpayer, so we will identify planning needs on a case-by-case basis. There may be clients who will require more involved planning to maintain or reach predetermined real estate goals.
No two people have the same financial situation—we’re all unique. Before anyone invests in real estate in Orange County or a vacation home elsewhere, I recommend that person take a comprehensive look at short, medium and long-term goals, which will be affected by new rules on mortgages, taxes, insurance and other fees. That way, they have a more realistic vision of both tomorrow and today, and they can live life more confidently.
People in the market for a home may be less inclined to quickly jump into a purchase agreement if they feel like they’d have to sacrifice too many of today’s goals for tomorrow.
Mark Hebner
President
Index Fund Advisors
Irvine
I think education is the big trend, both in Orange County and nationwide. At our Irvine headquarters, we’re working on a new app so that all of the content on IFA.com—including calculators, charts, videos and articles—is condensed and easily accessible through mobile devices. It’s a reason we’re also expanding our video library, which now exceeds 400 videos covering a wide range of investing topics.
Fiduciary has become an especially important concept with corporate retirement plan sponsors in recent years. So our investment advice is highly aligned with the Department of Labor’s goal of requiring fiduciary advice in 401(k) and related retirement plans.
As a result, today we work with more than 60 retirement plans. Those include both for-profit and nonprofit organizations. Corporate plan sponsors, as well as retirement plan participants, are increasingly coming to us looking for objective portfolio-related advice. In fact, the retirement plan marketplace has become one of IFA’s biggest growth drivers, both in Orange County and across the country.
IFA’s roots as a fiduciary go back to when I started this indie RIA more than two decades ago. My decision came after I had sold my healthcare company and deposited the proceeds into a big-name brokerage. More than a decade later, I reached an epiphany. Simply put, my fascination with studying financial history and investing led me to conclude that all of those years I’d spent trying to beat the market had been wasted. And it was a very expensive lesson.
Over that 12-year period, I learned that passively investing through a diversified group of index funds would’ve generated millions of dollars in higher gains and lower brokerage fees. But it wasn’t until a widowed friend asked for help in getting a handle on her finances that I came to realize my true calling. Irvine-based Index Fund Advisors, which I opened in 1999, now manages nearly $3.9 billion and employs more than 40 people.
Our website, IFA.com, is approaching 1,600 articles and more than 400 videos. It’s all free for everyone to use. In the name of transparency and education, our site includes almost 300,000 monthly returns of IFA indexes and index portfolios, along with better than 3,100 data-driven charts. You can also read the works of Nobel laureates like Harry Markowitz, William Sharpe and Eugene Fama at IFA.com.
In keeping with the trend of education, I wrote a book, “Index Funds: The 12-Step Program for Active Investors” and shot a full feature-length documentary film version.
This collective knowledge gives us a proper frame of reference in creating portfolios with a high probability of a successful investment experience. We remain disciplined in our understanding that passive investing gives investors the best chance to generate the highest expected return over time, net of fees. And the primary reason for this is that by collecting and reviewing so much index data, you actually have a big enough data set from which to draw those conclusions.
David Hutchison
Partner, Portfolio Manager
Triad Investment Management
Newport Beach
My partner, John Heldman, and I notice in meetings with people throughout Orange County a confusion over the difference between a purely fiduciary adviser and other structures. In short, there are purely fiduciary advisers, including Triad and other firms that must serve the best interests of the client in everything they do for them.
There are other structures where the financial adviser is a registered representative of a broker-dealer firm. Those individuals typically offer both investment and insurance solutions. It is important to know what structure you are working with and to understand the positives and negatives associated with it.
There are many financial advisers in Orange County, and it can be a challenge to find one that’s a good fit. You need to be aligned with the investment philosophy put forth—you don’t need to be able to do it yourself, but you should understand it and be comfortable with it. I would ask a prospective adviser: What is your investment philosophy, and how do you implement it? Perhaps view a proposed portfolio. It is important to realize that any one adviser is not a good fit for everyone, so meet with at least two or three.
Ask them if they will be a fiduciary for all of the work they do for you. And understand where your money will be custodied—which firm is it, and is it financially strong with a good service reputation.
We believe that the market is often but not always efficient, providing opportunities for investors that have done their homework on companies they can truly understand. Our philosophy is to build a universe of companies with strong competitive positioning and above-average profitability. We also consider management’s role and seek what we call “owner-operator” executives with meaningful ownership in the company. It’s not perfect, but if management has a big stake in the company, their interests tend to be more aligned with ours.
A big issue in Orange County is that as clients age, the next generation becomes involved in the family’s business and finances. It is critical to develop close relationships with all family members and provide them the information they need to make decisions. Several people have discussed with us a need for income generation in a low-interest rate world.
Sid Miramontes
President
Miramontes Capital
Irvine
Our Orange County clients have two major concerns that are echoed throughout the nation: Do I have enough money to retire, and can I afford to maintain my current lifestyle in retirement? We all want to be sure that we will have a successful transition into retirement with consistent income. Other important questions from our OC clients include how to protect capital from downside risk, where to make money, and when to take Social Security.
We have seen movement out of real estate investing into the capital markets due to the interest write-off restrictions.
One of the big trends in Orange County is to put clients’ retirement assets into a 60% stock/40% bonds mix for the portfolio, which we believe is a big mistake in money management. This cookie-cutter approach puts many retirees at a disadvantage for a myriad of reasons. Every client is unique, and their portfolios should be customized to their particular needs.
Regarding the RIAs versus brokers debate, it all comes down to the alignment of interests. RIAs operate on an agreed-upon fee and do well when our clients’ portfolios grow. Our interests are aligned with our clients. Brokers’ compensation is derived from commissions on the buying and selling of securities. Whether the investor makes money or not, the broker makes money with every trade. Brokers will also sell products that may not be right for the portfolio when they can earn a high commission on specific products. For example, if there are two identical investments and the only difference is cost, the broker dealer would have an incentive to choose the product that costs the client more, so they can reap the higher commission.
There’s a lot of debate on the fiduciary rule, because right now, most big banks will only provide those investments that offer them the biggest cut. They are still required to find you the investments that fit your risk criteria but are not required to find you the cheapest investments. As a fiduciary, we’re required by law to find you the cheapest investments that fit your risk criteria. Clients in Orange County are very concerned because they want to work with an adviser who will act in their best interests.
Another red flag would be a cookie-cutter approach to wealth management where advisers or firms push you to three to four fixed portfolios they use for all clients. My belief is that portfolios should be customized to that particular client’s needs, not to that adviser’s needs. Technology and world events require us to pay attention and use information to rethink our portfolios, look for new ways to mitigate risks, and be aware of investment opportunities that may not have existed even five years ago.
We commonly see advisers and firms charge fees in the 1.25% to 1.50% range. Our management fees are lower, which includes a high-service model built in that consists of communication and education. At Miramontes Capital, we work with individuals from various industries, in every level of sophistication.
With the markets at all-time highs and interest rate concerns, we’re very careful that we are not buying in at the top of the market. At Miramontes Capital, we are sector specialists. Sector selection continues to be our leading investment philosophy and will not change in the future.
Jeff Motske
Chief Executive
Trilogy Financial
Huntington Beach
Times are definitely changing for financial advisers in Orange County. Many of the changes, though, start with our clients.
My clients are concerned about the significant increases in the market and hence when the next correction will be and how they are positioned to handle it. Others are focused on evaluations of real estate, particularly the high-end market. High-income earners and high-end businesses are leaving the state due to tax changes and the political climate, which puts pressure on high-end real estate. Additionally, as interest rates rise, the affordability of those houses goes down because loans become more expensive. Many are also concerned about what’s going on in Sacramento. They are wondering how new regulations will affect the housing market, and if they will cause high-paying jobs to leave the state and possibly deter other high-paying jobs from locating here. Many fear that the California they will raise their children in will not be the California in which they grew up.
Their issues become my issues. Our investment philosophy, which is rooted in investment behavioral finance, has not changed in the past year. We believe that our clients need good information to make informed decisions. Because we see our partnership with them as a lifelong relationship rather than a transactional opportunity, our way of supporting our clients through evolving times won’t change.
The idea of an adviser being a fiduciary is new terminology for many clients, many of whom first heard the term because of the Department of Labor ruling. We at Trilogy Financial have always felt we already work in this capacity, but our advisers are now finding themselves explaining what being a fiduciary means and how that impacts the service they provide. While many financial advisers in Orange County have long been acting in the best interest of their clients, the debate about the fiduciary rule centers around the increased scrutiny and potential litigation, both individual and class-action.
Jamie Salter
Market Investments Team Leader
J.P. Morgan Private Bank
Irvine
My move from New York City to Orange County this year has been exciting—an entirely new state, city, team and client base all at once. I’ve found so far that while the source of wealth in Orange County tends to be a bit different—more entrepreneurs, business owners and real estate wealth versus financial principals—their needs and concerns are not.
The dialogue is nuanced based on investment experience, tax status and inherent biases, but their goals remain the same: build a durable, customized portfolio that can last through cycles and meet specific goals, whether they be funding a current lifestyle, providing for future generations or philanthropic legacies.
“Is the growth cycle over?” This is a question we’re getting from many of our Orange County clients.
We’re in the longest expansion of the post-war era, and many are wondering if recent market volatility is signaling the end of this cycle. Portfolios have to be adjusted to reflect macro risks, but our job is to help clients stay vested if it is consistent with their long-term goals. While it can be tempting to allow short-term market movements and large-font news headlines to drive your decisions, both our real-world experience and research suggest that that can actually work against investors. Later cycle investing is difficult, for sure. Do we need to think about appropriate duration and subsectors of our fixed-income allocations? To be more selective with our equity sector allocations? To identify investments that can flourish in a down cycle? Yes to all. Intelligently managing opportunities is intensely important, regardless of the maturity of the cycle.
The tax overhaul cannot be ignored by investors. I often joke with my wife that we moved to the only place with a state and local tax regime higher than that of New York City—and right before the rules around their deductibility changed. P.S.: She doesn’t think I’m that funny.
The bottom line is that taxes matter, and every investment decision we make has to consider after-tax returns. The same applies to estate taxes. Even on our best days as investors, the alpha we generate for clients can pale in comparison, both in magnitude and persistency, to structural tax alpha that comes with a properly planned estate structure. If we’re offering complete long-term wealth management services and being true advisers to our clients, we must consider both.
