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In a video interview with Barron's Jack Otter, Chris Davis, chairman at Davis Funds explained his philosophy on investing in businesses rather than stocks, such as Bank of New York and Google.
"When we buy a business, we aren't thinking 'What's our exit strategy?" or "Are we going to find a greater fool to sell this business to at a greater price?" We're thinking about our return being driven, determined, by the cash flows produced by that business," Davis said. "Imagine buying an apartment building for $1 million and it produced $70,000 of income. You'd say, 'I've got a 7% return.' Now, a few years later, that was up to $100,000, you'd say 'I'm getting a 10% return.' You wouldn't debase your return on what you could sell the apartment building for every day. You'd look at the cash to generate the return. And that's how we look at the businesses we invest in."
Davis said another bad idea is to entrust your investments to a fund manager that has no skin in the game. "Can you imagine a client giving us money to invest and our investing it in companies where the CEOs didn't own any stock in the companies that they're entrusted to manage? And yet just like you say, 47% of domestic equity managers don't have a single dollar in the funds that they manage. And by the way, only 12% have more than a million dollars invested alongside their clients," Davis said.
"We want to be with owner operators, we want managements that have skin in the game, we want our incentives to be aligned. That's a critical tenet when we look at companies, why shouldn't that be a critical tenet when we look at an investment manager," David said.
How Advisors Can More Easily Advise Clients On Their 401(k)s (Wall Street Journal)
Advising clients on their 401(k)s can be cumbersome, however, a Schwab study showed that almost 60% of clients with a defined contribution plan are seeking advice. Kevin Clark from Quintessential Retirement Services wrote in the WSJ that it's important for advisors to take responsibility for these needs.
" So I think that advisers have a choice, really: they can simply surrender to those robo-advisers or find a way to automate the 401(k) advising process with technology of their own," Clark said. "There are a host of powerful software options out there that are helping advisers deliver information to clients more efficiently. Many allow you to load in your allocation strategy, and using their algorithms and fund information, the programs tailor advice to clients' individual 401(k)s. That means no more pie charts or time-consuming research."
" Advisers need to be far more active in the 401(k) advising space and now, with this kind of technology available, there's really no reason for them not to be. Clients are asking for this advice and it's only reasonable that it be available from someone they not only trust, but someone who also understands the role of their 401(k)s in the context of their larger financial picture," he said.
Money Fund Reforms Passed By The SEC May Not Be Enough (InvestmentNews)
The SEC has passed reforms on money market funds in an attempt to strengthen the financial system and increase transparency. "Among the reforms, which passed on a 3-2 vote, money market funds that serve institutional clients and invest in private debt will now be required to let their share price fluctuate from $1 a share," wrote Trevor Hunnicutt at InvestmentNews. But some industry experts are skeptical about the reform's impacts.
" Many investors use money-market funds as a way to park cash they don’t want to invest in risky assets but near-zero interest rates have depressed the yields on the funds. That, combined with the reform efforts, have led some fund firms to start pitching other products, like very short-term debt funds, as alternatives to money market funds," Hunnicutt said.
"In an interview after the commission meeting, Jerome M. Schneider, a portfolio manager for the Pacific Investment Management Co., said that interest in the firm’s actively managed short-term debt products has been driven in part by institutional investors reconsidering their allocations to money market funds since the Reserve Primary Fund "broke the buck" in Sept. 2008. He said the firm may consider other products as a result of the change to a floating net asset value," Hunnicutt wrote.
How To Protect The IRAs Your Clients Pass On To Their Heirs (Financial Planning)
Under a June Supreme Court ruling, inherited IRAs are not protected in bankruptcy. This means that your clients' heirs could lose their IRAs if they run into financial problems. Ed Slott from Financial Planning gave a couple suggestions on how to protect these IRAs once they are passed on.
" For clients in states with no inherited IRA protection, there are other approaches that advisors might use. Perhaps the most obvious, especially in situations where bankruptcy or general creditor protection for your clients’ beneficiaries is a major concern, is to name a trust as the IRA beneficiary," Slott said. " If a trust is drafted properly, it can help shield assets from the trust beneficiaries’ creditors, while still allowing the trust to stretch distributions from the inherited IRA over the life expectancy of the oldest trust beneficiary."
"I f your clients do not need all or a portion of their IRA for retirement purposes, another option is to use some of the IRA money to buy life insurance and leave the insurance to a trust. Life insurance is, for a host of reasons, a much more trust-friendly asset than an IRA or Roth IRA, and life insurance proceeds are generally tax free - reducing the impact of the trust tax rates," he said.
When It's Acceptable To Dip Into Your Child's College Savings (Wealth Management)
With the costs of college rising, parents need to plan ahead for their children's education. However, Chris Taylor from Reuters wrote that dipping into 529 plans isn't always a horrible thing, and is preferable to spending from a retirement account. " With non-qualified distributions, in most cases you are looking at a 10 percent penalty on earnings. Withdrawn earnings will also be treated as income on your tax return, and if you took a state tax deduction on the original money, withdrawn contributions often count as income as well," Taylor said.
"Not ideal, of course. But if your other option for emergency funds is to raid your own retirement accounts, tapping college savings is a last-ditch avenue to consider. Not only because you do not want to blow up your own nest egg but because it could make relative tax sense. As the saying goes, you can borrow money for college, but not for retirement," he said.
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