With the election now in books, it’s important to reiterate SigFig’s view about managing your portfolio in an uncertain future. For many people, investing for the future is a very long-term endeavor, with most people living through 10-to-12 Presidential elections over the course of their careers. In the grand picture, last night’s events represent a single moment in a long lifetime.
At the same time, markets tend to disfavor uncertainty. Most projections had Clinton winning the election and with a Trump victory, stock market volatility is likely to increase, as the election’s unpredictability is weighed and priced in. Nonetheless, we encourage our clients to stay the course.
In practical terms, holding a diversified portfolio insulates our clients from some of the medium and longer term impact of an unexpected result. This is because there are likely certain industries, companies, and countries which will do better under a Trump Administration than they might have with Clinton in the White House. Furthermore, though Trump could act quickly to undo some of the Obama Administration’s economic agenda, significant changes in direction would would require the cooperation of Congress and the Courts.
On the whole, the future may become more challenging for investors, yet a diversified portfolio remains the most appropriate long-term approach to managing your investments.
Our investment research team is constantly looking for ways to improve your model portfolios that deliver the highest possible expected return for a given level of risk. Today, we are excited to introduce to you an update to your portfolio that will provide you with more diversification and greater tax efficiency.
Our team developed investment models which expand the number of investable asset classes. We can now execute broader, more diversified portfolio management without incurring transactions costs.
Here are the changes that are happening on October 29, 2015:
- We are introducing portfolios especially designed to address tax differences between individual taxable accounts and tax-advantaged retirement accounts.
- We are breaking fixed income into more categories—from two to five, though not necessarily increasing the total percentage allocated to fixed income.
Note: Municipal bonds are relevant only to taxable accounts, and will therefore not be implemented for tax-sheltered accounts.
- We are dropping real estate from the taxable accounts while keeping real estate exposure in your tax-sheltered account, so your tax impact is kept to a minimum.
- We added features such as multiple allocations, so different accounts can be managed to different levels of risk.
How is this beneficial for you?
A broader, more diversified portfolio is a big win. The impact of additional asset classes has wide-reaching implications for our portfolio construction. When new asset classes are included in the traditional mean-variance optimization model, their inclusion often means we can create lower-risk portfolios without losing any expected performance. Some asset classes have superior volatility and return tradeoffs, while others may exhibit worthwhile inclusion in portfolios because of correlation effects with other holdings.
With these changes, we can deliver higher expected returns to our clients by allocating portfolios sensitive to the tax impacts of the underlying holdings. For example, some asset classes, such as real estate, tend to produce higher tax liabilities than long-term stock holdings and offer better after-tax returns in retirement accounts than individual brokerage accounts.
Our investment analysis expects that over the long term, these modifications could produce additional annual returns ranging from 0.5% to 1.0%. Over a 20-year investment horizon, that could mean an additional 29% to 60% in total return.
How does this impact your portfolio?
SigFig will begin transitioning Managed Account clients automatically into this new portfolio, starting on October 29, 2015. If you prefer your current allocations, we can continue managing your portfolio accordingly. You must contact SigFig client support to do so at (855) 9-SIGFIG or email@example.com.
In practice, the transition from our existing allocations to the new portfolios means a couple things for our investment team and our customers. First, we’ll conduct a tax-sensitive rebalancing of your portfolio. We will sell ETFs in the asset classes that we plan to replace or adjust, and we will buy commission-free ETFs in the new asset classes with the goal of improving your portfolio’s performance.
In tax-advantaged accounts like IRAs, there are no tax impacts with this rebalancing. Our team will execute the transition to the new allocations. After all, we want to make sure that you have as much of your hard-earned investment dollars working for you.
In taxable individual and joint accounts, we strive to minimize tax impacts. Generally, we’ll be able to liquidate strategically in holdings to avoid a net capital gain. It is possible that the realized capital gains of some ETFs offset the realized losses of others.
In the United States, physicians do more than uphold the Hippocratic Oath. They have a fiduciary duty to their patients. In other words, doctors are required by law to put the interests of the patient above their own.
Now, imagine if a group of American physicians argued that they should be exempt from this standard.
As the White House considers a proposal to expand the fiduciary standard to brokers and insurance agents, we are hearing exactly that argument when it comes to financial advice.
Given how much consumers stand to lose from questionable financial advice, it’s hard to believe that all advisors do not have to operate under a fiduciary standard already. Registered investment advisors and 401(k) plans, for example, are fiduciaries. Some professional designations, such as Certified Financial Planner, also carry a fiduciary promise.
In most states, however, brokers and insurance agents operate under the lower standard of suitability, under which an advisor cannot recommend an investment grossly out of line with the investor’s age, risk tolerance, or liquidity needs. The advisor can, however, recommend an expensive fund that pays him a commission, even when a cheaper fund exists.
We’ve explained again and again how high fees can decimate investors’ nest eggs. Those arguing against the fiduciary standard are effectively saying, “We can’t make enough money if we’re forced to treat our clients fairly.”
One possible argument against expanding the fiduciary standard could suggest that hiring a fiduciary is no guarantee that you’ll get good advice, and that it would make more sense to enforce the standards already in place before expanding them.
This argument doesn’t make sense. There are bad doctors out there, too, but no one seriously believes that lowering the standard of care for doctors would result in better choices or outcomes for patients.
The fact is, anyone who wants to hire a fiduciary can do so. Most investors, however, do not know what the fiduciary standard is or whether their advisor meets it. As the SEC puts it:
“Investors typically make no distinction between broker-dealers and investment advisers, and most are unaware of the different legal standards that apply to their advice and recommendations.”
This is particularly true when the advisor operates under the suitability standard. No broker will intentionally wear a button saying, “Ask me why I don’t put my client’s interests first.”
Whether they work for brokers, RIA firms, or insurance agents, financial advisors perform similar jobs and have significant influence over their customers’ livelihood. We should hold all advisors to a consistent standard of care: the fiduciary standard.
Generating investment income is a goal for many investors, especially for those in or approaching retirement. Unfortunately, most investors who seek income do a poor job of it. They are often poorly diversified (64% of income investors own three or fewer stocks*), or generate low yields by investing in cash and bonds, and almost always have US home-country bias.
With that in mind, the investment team at SigFig set out to create a well-diversified portfolio with a generous income stream while managing risk. Today, we are excited to unveil SigFig Diversified Income, a portfolio that is designed to target a 4% income yield by blending eight different income-generating ETFs. By diversifying across many asset classes and geographies, our Diversified Income portfolio provides 4% gross annualized yield** with half the volatility of the S&P 500.
Unlike traditional wealth management firms who frequently have high minimums of $1 million or more and charge high fees of over 1%, the SigFig Diversified Income portfolio has a minimum investment requirement of $100,000 and management fees of 0.50% which include all trading commissions. And unlike bonds and CDs, which can be hard to sell before they mature or are subject to early withdrawal penalties, our Diversified Income portfolio can be sold at any time, for any reason.
At SigFig, our mission is to help investors improve their portfolios by balancing risk and return and minimizing fees. With this product, investors who seek income can do so at reduced volatility and at very low cost.
Want to know more? Click here to speak with a SigFig Investment Advisor, who will answer any questions you may have.
* Data is from investors who have synced their investment portfolios with SigFig who are 40+ years old with at least 30% of the portfolio in dividend stocks or AGG/BOND/TIP. Historical data to calculate yields and volatility are from Yahoo Finance and Google Finance.
** Target yield of 4% is net of underlying fund expense ratios and gross of management fees. Since its inception 5/31/2012, the Diversified Income portfolio has gross annualized yield of 4.3% and net annualized yield of 3.8%.
Additional disclosures: Target returns are based on model performance and do not represent actual client accounts. There are inherent limitations with model portfolios, such as the limited impact of market factors related to executing trades or liquidity, among other limitations. The target results are not an indicator of the returns a client would have realized or will realize in relying on the Diversified Income portfolio. Past performance is no guarantee of future return. All investments carry a degree of risk. For more information and disclosures, please visit https://www.sigfig.com/l/terms.