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Have an Investment Philosophy to Guide your Way

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We believe that successful investing requires a sound investment philosophy. Elroy Dimson of the London Business School once defined risk as “more things can happen than will happen”. We are very fond of this simplified definition because we look at the investment world as a continuum of possibilities and probabilities. We believe the goal of portfolio construction should be to prepare a client’s portfolio for an uncertain future with many potential paths. Building a sound investment philosophy gives investors the focus and confidence to maintain their strategy when markets go haywire. Below are some of the major tenets of our philosophy:

  • Time Frames are Critical – We believe that investments should be allocated based on goals-based time-frames. Being forced to sell equities to generate cash-flow for spending needs at a market trough can have a significant negative impact to future income. Therefore, we recommend allocating a portion of your portfolio to stable asset classes (i.e. – fixed income) to support short-term spending needs. On the other end of the spectrum, having a significant allocation to stable asset classes for long-term spending needs can significantly hamper long-term compounding returns. We believe that by projecting cash-flow needs, we can better allocate your portfolio with a focus on both protecting your portfolio over the short-term and maximizing growth in your portfolio over the long-term.
  • Less Asset Classes can be More – We believe that each asset class in a portfolio should have a defined purpose. We are opposed to a portfolio filled with a hodge-podge of investments in the name of “diversification”. At a high level, the three primary functions of investments are protection, growth and diversification through non-correlated returns. We believe that, in general, bonds should provide downside protection, equities should provide growth and alternative investments should offer non-correlated performance. We believe that any additional asset class must offer a compelling and well-defined value to the portfolio. Otherwise, capital will be diverted from the more efficient asset classes depriving the portfolio of its optimal allocation.
  • Less Managers can be More – Again, we believe that each investment in a portfolio should have a defined purpose. We believe both passive strategies and active strategies can play an important role in portfolio construction. However, we believe that active managers should be used in moderation, should have a specific role and should complement the core strategies. Otherwise, with too many holdings, active managers get over-diversified and end up looking like a very expensive index fund. Core strategies should be the low-cost and tax-efficient diversifiers.
  • Tax-Efficiency is Key – Investors only get to keep their after-tax returns, so we are always cognizant of an investment’s tax efficiency. For example, we typically recommend and employ tax location by investing less tax-efficient assets in tax-sheltered portfolios. However, this can play havoc on withdrawal strategies unless managed correctly. We believe having a dynamic withdrawal strategy that combines tax location with proper ordering of portfolio withdrawals can add significant value over time.
  • Don’t Forget to Rebalance – We believe disciplined investing requires regular rebalancing. Rebalancing is a mechanical way to sell high and buy low. Studies continuously tout the benefits of rebalancing, but selling “winners” to buy more of the “losers” can be a difficult “pill to swallow” – both in rising and declining markets. Rebalancing can be the ultimate test of trusting one’s investment philosophy, but it also has the potential for the most long-term reward.

Anyone can have great returns when the markets are heading higher. We believe, however, disciplined investors who apply sound investment philosophies are more likely to have success over the long run where markets do what they do best – move up, down and sideways. Connect with us to learn more about what we can do for your portfolios.

Please click here for important disclosure footnotes.

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The Difference Between an Advisor and a Broker

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While at a recent get-together, a common question among the group was raised – “What’s the difference between an advisor and a broker”. After letting the group debate the topic for a few minutes, it was clear that this remains an area of continued confusion. It is no surprise that so much confusion exists. In the world of investment advice there is a very important, but commonly misunderstood distinction between the two; both of whom often hold themselves out to the public as “financial planners” and “financial advisors”. Registered Investment Advisors must adhere to a fiduciary standard. The fiduciary standard requires that investment advisors do what is in the best interest of their clients and that they always put their client’s interest before their own. There is no gray area in the fiduciary standard. Investment brokers are subject to a far less stringent suitability standard, which may be full of conflict.

What’s the Difference?

Registered Investment Advisors:

Registered Investment Advisors working under the fiduciary standard must adhere to the following rules:

  • Must act in the best interest of their client
  • They must put their own interests below those of the client
  • Must execute trades on a “best execution” standard
  • Must not buy investments in their own account before their client’s account
  • Their duty of loyalty must always be to their clients

Investment Brokers:

None of the above fiduciary requirements apply to an investment broker’s suitability standard. In the eyes of the Securities and Exchange Commission, an investment broker’s job is to help disseminate investments brought to market by their brokerage firm. Most of the large Wall Street firms fall under this suitability standard. These firms often use their clients as a means to sell their own products. These products oftentimes pay higher commissions to the selling broker and are frequently more expensive and less optimal to the end-client. Brokers are typically incentivized to sell their firm’s investment products, which creates substantial conflicts of interest between the investment broker and their clients. More specifically, the suitability standard:

  • Only requires that the advisor has to plausibly conclude that his/her recommendations are suitable. That is, the investment recommendation should not be unsuitable. Further, what is recommended does not have to be specifically in-line with your stated objectives and profile.
  • Requires that transaction fees are not excessive
  • Has less strict disclosure requirements for potential conflicts of interest between the broker and client

What is Stage Harbor Financial?

Stage Harbor Financial is a registered investment advisor and fully embraces being subjected to the more stringent fiduciary standard. Furthermore, all Stage Harbor advisors are all CERTIFIED FINANCIAL PLANNING™ Professionals, which comes with its own fiduciary standards. Stage Harbor takes this fiduciary responsibility very seriously as we believe trust is the most critical ingredient in building client loyalty and we never want to jeopardize this trust by putting our interests ahead of the interests of our clients. Therefore, you can be confident that as a client of Stage Harbor Financial, we will always do what is in your best interest, not ours. Connect with us to learn more.

Please click here for important disclosure footnotes.

 

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The Significant Value of Financial Planning

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A recent CFA Institute report noted that less than 30% of wealthy families value “non-investment advice”, when seeking a wealth advisor. For a firm that spends a significant amount of time, energy and resources making sure that we are on the cutting edge of delivering “non-investment advice”, this really stung. If we were not so confident in the value that comprehensive financial planning brings to our clients, we may have abandoned these services. However, we have seen too many success stories not to persevere. Unlike investment performance – which have returns and benchmarks – putting a value on financial planning can often be tricky. Luckily for us, Morningstar and Vanguard have done just that.

Morningstar estimated that a good advisor could add 1.82% of annual performance per-year in what they termed “advisor gamma”. This resulted in an expected 22.6% increase in income during retirement. The major drivers of this added value (or gamma) were total wealth asset allocation (which includes the allocation of pensions and Social Security), dynamic withdrawal strategies and tax-efficiency. Morningstar also noted that their study did not fully consider all aspects of financial planning and additional planning aspects such as estate planning and risk management could offer additional value.

Vanguard concluded that, on average, good advisors could add approximately 4% of pre-fee returns per year, which they termed “advisor alpha”. They assumed the advisor would charge 1% per year (note: Stage Harbor charges considerably less), resulting in a 3% return after fees. Similar to Morningstar, Vanguard suggested that dynamic withdrawal strategies and tax-efficiency were two of the biggest contributors to this performance. However, they added behavioral coaching as their top contributor to advisor value. Behavioral coaching is an advisor’s ability to guide clients through the ups-and-downs of the markets with discipline and without making emotional (and oftentimes detrimental) decisions.

Vanguard also noted that the quoted 4% alpha is a long-term average and, like variability in investment markets, may not happen every year. These returns can be lumpy wherein certain events can create outsized planning opportunities while other years may have fewer opportunities. This suggests that an advisor who is able to develop an in-depth understanding of his/her client’s goals, fears, and financial details is best positioned to develop and implement a plan that is able to anticipate opportunities.

The most exciting part of these reports is that they only studied basic financial planning strategies and, in our opinion, hardly scratch the surface of what truly advanced financial planning can offer. For example, we are proud to have helped our clients save significant taxes by building multi-year (sometimes multi-decade) income tax strategies. Additionally, we have advised our clients on advanced estate planning strategies that have saved significant estate taxes for beneficiaries. Contrary to common belief, successful gift and estate planning strategies are not limited to later in life.  They are often most advantageous when they are planned prior to major income or life events. Furthermore, financial planners fill many roles that do not have a direct financial benefit; such as helping to prevent senior fraud, the financial education of widows or the next generation and helping to build family legacies.

We are passionate about the craft of financial planning as we are confident in the value that it provides. We also believe that others should be more focused on its value, as too much money is being wasted due to inefficient planning.  Connect with us to learn more about customized financial strategies for you and your family.

Please click here for important disclosure footnotes.

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How We are Different – Part 1 (Our Structure)

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Independence: Publicly traded companies have to report quarterly earnings and have a duty to shareholders to maximize share value. This can lead to short-term thinking. For example, some companies operating under this paradigm may make decisions based on the short-term impact to “the bottom line”.  Unfortunately, this approach may incentivize management to raise client fees, keep their employee head-count low or elect to defer investing in the business, such as in new technology or employee retention and growth. While this may maximize the next quarter’s profits, it can negatively impact you given it has a tendency to lead to a lower level of client service and employee loyalty. We believe that this short term thinking is at odds to building a successful partnership with clients.

As a privately owned Registered Investment Advisor, Stage Harbor maintains a long-term perspective and has a duty of loyalty only to you. The partners of Stage Harbor Financial all plan to partner with your family for multiple decades. We are also committed to building a culture of like-minded employees that will see this vision through for many generations.  Therefore, instead of a quarterly outlook, we make our decisions based on a much longer-term perspective, and one that is acutely focused on what we believe is best for you. By making all decisions with a sole focus on your success, we recognize Stage Harbor can thrive.

Incentives: Our incentives are completely correlated with your success. In larger firms, advisors often have pressure to sell proprietary products or cross-sell with other business lines of the company. These products are generally more profitable to the parent organization or create additional revenue streams. As an independent firm, you can always be confident that we are recommending what we believe to be the best solution available to meet your specific needs.

Our Role as a Fiduciary: As an investment advisor, we are subject to a fiduciary standard of care. This fiduciary standard requires that all of our recommendations and guidance are in your best interest. This is a standard that we fully embrace. This fiduciary standard is much stricter than the suitability standard that most brokers must adhere to. Furthermore, all Stage Harbor advisors are all CERTIFIED FINANCIAL PLANNING™ professionals, which comes with its own fiduciary standards. Therefore, as a client of Stage Harbor Financial you can be confident that we are always working in your best interest.

Our Relationships: At many organizations, advisors add as many clients as possible without regard for capacity and providing a good standard of care to each client. At Stage Harbor, we are delighted to work with a small number of wealthy families. By maintaining a low advisor to client ratio, we are able to build stronger relationships with you and your family and we can be more proactive with our communication.  Further, we are absolutely focused on ensuring your advisor does not exceed his/her capacity and is fully supported by experienced staff.

Transparency: Your Stage Harbor-managed portfolio is aggregated onto a single fee schedule that is simple and transparent. The fees that you pay are easily calculated and understood. When we combine our independence, fiduciary responsibility and transparency – you can be confident that we are always acting in your best interest. Lastly, you have 24/7 access to your account and financial plan information through Stage Harbor’s secure client portal, accessible through your computer or mobile device.

Competitive Fees: At Stage Harbor, we recognize fees impact your overall returns. Given your success is our foremost focus, it is a sensitive topic for us. As such, we have established a fee schedule that you will find very competitive while ensuring we can still provide your family with leading service, planning and investment solutions. While most of our competitors begin with a management fee of 1% or higher, our fees start at 0.80%. This rate would be further reduced as the assets under management reach additional break-points. Please find our fee schedule here.

Being different has never felt so good. Connect with us to learn more about how our differences can lead to your successes.

Please click here for important disclosure footnotes.

 

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How We are Different – Part 2 (Our Advice)

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Offering great financial advice is the most consistent way to add significant value for our clients. It is this value to our clients that drives our passion for the field of financial planning.  We take great strides to stay at the forefront of planning techniques by investing heavily in the best technology and the best people.

Like many firms, we call ourselves comprehensive financial planners, as we look at all aspects of our clients’ financial picture. This includes retirement planning, estate planning, tax planning, risk-mitigation planning and investment management. However, we go well beyond basic financial planning. A few areas where we differentiate ourselves from other advisors include:

Tax Planning: We work closely with our clients’ CPAs to build truly advanced tax-strategies. Tax planning is one of the “low-hanging fruits” available to maximize client wealth. We use top-of-the-line portfolio rebalancing technology to build and maintain tax-optimized portfolios while performing tax efficient and risk-appropriate withdrawal strategies.

Furthermore, almost all families that we work with experience stages of higher and lower income. It is also common for these families to have years with higher tax deductions or significant capital gain events. These variations create great income tax planning opportunities. By knowing you and your ongoing situation we are able to anticipate these year-to-year variances allowing us to build multi-year tax projections. This long-term outlook can help us implement advanced planning strategies that can result in significant tax savings.

Estate Planning: Our passion for financial planning extends into advanced gift and estate tax planning strategies. We also work closely with our clients’ estate attorneys on the up-front implementation and the ongoing administration of these strategies. In addition to implementation, we also focus on educating our clients on all estate planning matters. However, what separates us is that we look at all aspects of estate planning. We believe that many advisors spend too much time preparing the assets for the beneficiaries and not enough time preparing the beneficiaries for the assets. Before implementing any strategies, we work with you and your family on the softer side of estate planning. In addition to building a plan that saves estate taxes and protects the assets, we want to help you create a thoughtful plan that thinks about the long-term well-being of the beneficiaries as well as the legacy that you want to leave. A properly executed estate plan is not a stack of paper that is drafted and then forgotten in a filing cabinet. Instead, it is a continuous process of communication and education so that when the time comes, future generations will be ready for the responsibility that awaits them.

Technology: We place advanced technology at your fingertips. This technology helps organize and simplify your life by providing an electronic vault for all of your important financial documents. We also have technology that creates “what if” scenarios in a client’s retirement plan. Furthermore, this technology can automatically track spending and savings, which are critical components to financial planning. Finally, this technology can incorporate your outside assets (such as your company sponsored 401k plan) into your overall asset allocation, making sure that all of the your assets are working together.

Being different has never felt so good. Connect with us to learn more about how our differences can lead to your successes.

Please click here for important disclosure footnotes.

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What’s with the Bird?

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How long we may have gazed on a particular scenery and think that we have seen and known it, when, at length, some bird or quadruped comes and takes possession of it before our eyes, and imparts to it a wholly new character. The heron uses these shallows as I cannot. I give them up to him.
– Henry David Thoreau

Simple yet meaningful. Stage Harbor’s logo, the Great Blue Heron, represents a good many of the characteristics that Stage Harbor built its foundation on…including independence, versatility, patience, and self-determination. In fact, we feel these same characteristics are shared by the families we partner with everyday. It is, for that reason, that we feel the Great Blue Heron also symbolizes the strong bond we share with your family.

Independence:  For Stage Harbor to deliver the highest levels of service along with leading financial planning and investment management solutions, independence was a must. Really, what better image to symbolize freedom than a bird? Our independence is what enables us to be responsive to the needs and requests of our clients, helping us to be truly connected to families like yours. Further, we recognize that the financial planning we perform everyday has a primary focus of providing you with independence and financial freedom so important for you to live the life you want.

Versatility: The Great Blue Heron is found throughout most of North America (and beyond) and can find a home near virtually any body of water, adapting to lakes, marshes, swamps or shorelines. You can enjoy watching them in the salty water of our namesake, Stage Harbor, and we often observe them in the freshwater of the Charles River near our office. Further, its ability to operate on land, air or water perfectly displays its versatility. This versatility enables the Great Blue Heron to be a true survivor and one of the longest living birds on the planet. The financial services industry has evolved and will continue to evolve. Stage Harbor is committed to staying at the forefront on industry changes to ensure you aren’t left behind. Additionally, we recognize that investment markets are constantly moving up, down, and sideways. Stage Harbor believes constructing an investment allocation for all market environments, uniquely built to serve your specific needs is imperative to navigate these varied market environments.

Patience: Ah…our great blue heron, simply standing there. The great blue heron is well known for its balance and its ability to patiently await the appropriate opportunity. These characteristics are in perfect alignment with our approach. Maintaining discipline is essential to ensuring success with both financial planning strategy and investment management.

Self-Determination: The blue heron has a majestic seven foot wingspan that can help the bird fly great distances with little effort giving it the freedom to go wherever it desires. Stage Harbor was formed with that in mind…we followed our heart. Sure, other paths may have been easier. Those other paths, however, would have resulted in a less optimal solution for you. We are determined to always operate with a clear mind and clear conscience that we are always doing what is in your best interest. Only then can we collectively spread our wings and achieve new heights.

Simple yet meaningful…the sense we hope to generate for you through our holistic planning and investment approach.

When the heron takes to flight, what a change in size and appearance! It is presto change! There go two great undulating wings pinned together, but the body and neck must have been left behind somewhere.
– Henry David Thoreau

Please click here for important disclosure footnotes.