What does managing my investments consist of?
For Sensible Financial®, managing investments means simply:
Navigating the Risk Return Maze
Helping you decide how much future spending power to seek and how much risk to take by providing a clear statement of the risk-return trade-off.
Recommending Passive Mutual Funds
Recommending diversified, low cost investments to accomplish your spending power objective at the lowest possible risk [we recommend passive mutual funds almost exclusively]
Making the Transition.
Doing the work to put the investment program into place: opening accounts, transferring assets, purchasing investments.
Reporting & Rebalancing
Reporting on your Portfolio’s Performance and Recommending investment purchases and sales to restore your portfolio to your desired risk level and target return (rebalancing).
Minimum Asset Level
We have generally found that clients with investable assets of $750,000 or more are most likely to be able to benefit from the services that we offer. However, we can work effectively and efficiently with clients who anticipate having assets at that level in just a few years, even though they may not yet have investable assets at that level.
What will this cost me?
Portfolio Management Fee Structure
Annual Portfolio Management fees begin at less than 1% of assets for portfolios of $500,000 or more.
Portfolio Management Fee Structure (Detailed)
|Less than||Annual Cost||BPS*|
Navigating the Risk-Return Maze
Sensible Financial begins by assessing the expected risk and return of your current investments, classifying each stock, bond and mutual fund into one or more of fourteen asset classes (six bond or fixed income classes, six equity or stock classes, commodities, and US real estate.)
We assign expected risk and return to each asset class based on historical data and current market conditions. We also assign correlations between all the pairs of asset classes (correlation is the tendency of a pair of asset classes to have the same pattern of returns).
Sensible Financial selects asset classes that tend to perform differently from each other over time. When one is down, another tends to be up. This relatively independent performance is the basis of diversification – reducing risk by spreading investment – the proverbial “not putting all your eggs in one basket.” Of course, there will be times when all are down, or all are up. On average, however, the diversified portfolio should be less volatile than the concentrated one.
We calculate the expected risk and return of your portfolio by assigning the appropriate asset class risks and returns to each of your investment securities, and adding up all of the returns and risks. Then we show you what might happen to your portfolio over time, and what might happen if you selected each of several alternative portfolios. You may find that you would prefer one of our alternative portfolios to your current one – you may be surprised by how much risk you are taking with your current portfolio, or by how little return you are targeting.
Finally, we ask you to choose the alternative you prefer. Only you can judge which portfolio you are most likely to be comfortable with. It’s important to be confident that you’ll be able to maintain your commitment to your investment plan even in the face of the inevitable declines that will occur. Changing your allocation in response to market busts and booms exposes you to the risk of selling low and buying high, with the associated damage to your returns.
We Recommend Passive Funds
We recommend a diversified portfolio of passive funds
- We recommend that you hold mutual funds rather than individual stocks or bonds – mutual funds are less risky than the individual securities.
- Individual securities are risky.
- Each security’s risk consists of a market or shared component and a security-specific component.
- Investment returns compensate you only for the shared or market component.
- You can “average out” the security-specific component by holding many securities – you can accomplish this very efficiently with mutual funds
- We recommend that you hold a diversified portfolio of mutual funds.
- Diversification – holding multiple assets with returns that are relatively uncorrelated with (unrelated to) each other – offers greater expected return for the same level of risk, or less risk for a given expected return
- You can diversify – hold multiple uncorrelated assets – more efficiently, less expensively, with mutual funds than with individual securities
- Passive funds offer more expected return at less risk than actively managed funds
- Passive funds tend to cost less (have lower expense ratios) than actively managed funds
- On average, probably as a result of their lower expenses, passive mutual funds tend to outperform actively managed funds that invest in the same asset classes
- Passive funds have less risk than actively managed funds – when you buy an actively managed fund, you accept both the risk of the relevant security universe and the manager risk – the risk of how well the manager will perform relative to the relevant universe
It is very important to understand several facts about investing in general, and passive fund investing in particular:
- Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment, investment strategy or product that this Website refers to directly or indirectly, or even indirectly via link to any unaffiliated third-party Website, will be profitable or equal to corresponding indicated performance levels.
- Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be either suitable or profitable for your investment portfolio. You should not assume that any information presented and/or made available on this Website serves as the receipt of, or a substitute for, personalized individual advice from the adviser or any other investment professional.
- Historical performance results for investment indexes and/or categories generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee. Incurring investment management fees would decrease historical performance results.
Selecting Specific Mutual Funds
For each asset class, Sensible Financial selects a small number of mutual funds (usually one or two) that follow asset class performance closely at low cost (Sensible Financial accepts no payments of any kind from any mutual fund provider).
Collectively, these funds make up a well-diversified portfolio, because
- They are individually diversified (most hold literally hundreds of individual issues).
- They are diversified relative to each other – there is little overlap between the asset classes and funds.
Types of Accounts
Sensible Financial manages assets in several kinds of accounts:
- Taxable accounts such as brokerage accounts, mutual fund accounts, or savings or checking accounts;
- IRA accounts such as Traditional, Roth, or Rollover IRA accounts. We can also help with SEP or SIMPLE IRA accounts;
- 401(k) and 403(b) accounts. We can manage assets in many 401(k) and 401(b) accounts, and report allocation and provide rebalancing advice for most. See the discussion of custodians above.
- 529 and Coverdell (college savings) accounts. Unfortunately, the most efficient 529 accounts rarely support electronic download of transaction and balance information.
- Trust accounts.
- If you have other types of accounts, please ask – we are quite likely to be able to accommodate you.
Making the Transition
Sensible Financial usually recommends that you establish accounts with a custodian with whom we have a “master account.” This keeps our trading and reporting costs low – we can transact in multiple accounts simultaneously, and access transaction and position data electronically. We offer our clients a choice among several efficient investment custodians. We began in 2002 with Ameritrade (now TD Ameritrade). In 2004, we established a link with TIAA-CREF (TIAA-CREF does not support the most efficient trading arrangements, so we do not encourage transferring assets into new accounts there). In 2006, we retained Fidelity to provide custodial services as well.
We prepare all necessary paperwork for your signature, and track account setup and asset movements through to completion.
To the extent that your percentage of assets in each asset class differs from our recommended percentage, we may recommend that you sell some of your current holdings in order to establish the recommended balance.
If you have large unrealized capital gains in your current portfolio, it may be sensible to make a phased transition to the recommended funds even if the portfolio is not in perfect balance immediately. If your current holdings align closely to Sensible Financial’s recommendations in both asset allocation and expense, it may not be worthwhile to trade.
A custodian is a firm that holds (takes custody of) your assets, and provides regular statements about your holdings and transactions. Sensible Financial provides asset management services for assets held at many different custodians.
If Sensible Financial has a master account with a custodian, we have simultaneous electronic access to all of our clients’ accounts there. In addition, we receive direct daily downloads of transaction, position and price information from every one of those accounts. This affords us the greatest possible efficiency in monitoring, reporting and rebalancing. In these situations, we can offer our full asset management service at our lowest fee. We currently have master accounts with:
- TD Ameritrade (the former Ameritrade, and as of March, 2007, the former TD Waterhouse)
- iShares Arkansas 529 plan
- TIAA-CREF (no rebalancing efficiencies here, unfortunately)
Because of these efficiencies, we strongly recommend that you establish accounts at either TD Ameritrade or Fidelity (and 529 accounts at iShares Arkansas).
We recognize that clients may have no choice but to maintain certain accounts (especially 401(k)s) with other custodians, and we believe that including the assets from these accounts in the allocation is important. If your custodian does not offer electronic downloads of transaction, position, and price information, we cannot report performance efficiently.
We use the ByAllAccounts aggregation service to track transaction and balance information for most 401(k) and 403(b) accounts to include them in our Portfolio Management and Integrated Financial Advisory services. We will help you make the necessary arrangements with ByAllAccounts. Then we will be able to include these accounts in reporting and rebalancing. We will also tell you which trades to make in these accounts.
Reporting on your Portfolio’s Performance
When you retain Sensible Financial for investment management services, you grant us a limited power of attorney, so that we can receive electronic statements from your broker(s) and mutual fund company(ies), and trade on your behalf.
Sensible Financial reports on your portfolio’s performance and status (assets, anticipated risk and return versus your preference, etc.) periodically. Our clients can choose quarterly, semi-annual or annual reporting and rebalancing.
Whenever we report on your portfolio’s performance, we scan your holdings, and compare them to your preferred balance of risk and return. If the prices of equities or fixed income securities have changed a good deal, then your portfolio may have shifted in the direction of more anticipated risk than you wish, or toward a smaller expected return. We use New Frontier Advisor’s patented Rebalance Probability to perform this assessment. If the rebalancing probability is high, we will recommend that you restore balance to the portfolio.
If Sensible Financial finds that your portfolio’s balance of anticipated risk and return is significantly different than your plan requires, we will recommend specific trades to re-establish the appropriate anticipated risk and return. We will send you an e-mail or letter that lists the recommended trades and seeking your approval to carry them out. (Some clients choose to give us discretion – authorizing us to trade on their behalf without seeking explicit approval for every transaction).
Once you approve, Sensible Financial executes the trades and sends you a confirming letter or e-mail. You also receive trade confirmation directly from your broker(s) and/or mutual fund company(ies).