Our Philosophy/Commitment

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We Implement a Passive Investment Strategy

In finance, the efficient-market hypothesis proposes that financial markets prices fully reflect all information that is publicly available. Furthermore, it asserts an investor cannot consistently achieve returns in excess of average market returns, on a risk-adjusted basis, because the information is publicly available when the investment is made. The efficient market debate plays an important role in the decision between active and passive investing. Active managers argue that less efficient markets provide the opportunity for outperformance by skillful managers. However, it’s important to realize that a majority of active managers in a given market will underperform the appropriate benchmark, over time, whether markets are efficient or not. This is based on the fact active management is a zero-sum game, in which the only way an investor can profit is for another investor to lose. Furthermore, when trading and management costs, turnover and taxes are included, even marginally successful active managers may underperform traditional index benchmarks. (1)

In their mid-year 2013 report, McGraw Hill Financial published their S&P Indices Versus Active Funds (SPIVA®) scorecard. The results of the scorecard provide the following facts:

  • 72.1% of all domestic equity funds were outperformed by their respective benchmark, for the five year period ending June 30, 2013.
  • 65.9% of all international equity funds were outperformed by their respective benchmark, for the five year period ending June 30, 2013. (2)

Empirical evidence confirms that passive investment strategies increase the investor’s probability of a positive investment experience.

(1) Efficient Markets Hypothesis, Andrew W. Lo – To appear in L. Blume and S. Durlauf, The New Palgrave: A Dictionary of Economics, Second Edition, 2007.
(2) (SPIVA®) scorecard, McGraw Hill Financial, Mid -Year 2013.

We Utilize Dimensional Fund Advisors to Implement this Passive Strategy

As part of our annual due diligence process, we research the investment options available in the marketplace. Our research shows that mutual funds and exchange traded funds are the most practical and mutual funds are the most efficient and cost effective option. Furthermore, we have concluded that mutual funds offered by Dimensional Fund Advisors are the best option to implement the passive investment style for the following reasons:

  1. Founded in 1981, they are investment advisors to some of the most prominent corporate defined benefit and defined contribution plans, public retirement plans, foundations, endowments, and Taft-Hartley plans. As of December 31, 2013, Dimensional had approximately $335 billion in assets under management.
  2. Their fund lineup provides global diversification, a fundamental underpinning for optimizing returns for a given risk level, and include all major asset classes; domestic and international equities, real estate and fixed income. A globally diversified DFA portfolio provides an investor with approximately 18,000 securities in 44 countries.
  3. Their management fees and turnover ratios are amongst the lowest in the industry.
  4. They have a consistent investment philosophy; employing strategies that are rooted in the research of leading financial economists and practitioners. This consistent process provides plan participants with an increased chance of having a successful investment experience and achieving their goals.

The Primary Custodian of Our Portfolios is Charles Schwab

A lot of due diligence goes into the selection of a custodian for our clients’ funds.

The primary investment firms in the custodian marketplace are Charles Schwab, Fidelity Investments and TD Ameritrade. As part of our annual due diligence process, we research the custodian marketplace and have concluded that Charles Schwab Bank & Trust Company continues to provide the most cost efficient service and advanced level of technology for our clients.

Since 1987, the Financial Advisor Division of Charles Schwab has been delivering custody services to financial advisory firms. As of December 31, 2014, Charles Schwab Bank has custody of $1 trillion in assets for financial advisory firms.

We Utilize a Passive Investment Strategy, but are Active with Regard to Our Clients

Location Optimization – For a client who has a mixture of accounts including taxable, traditional IRAs, Roth IRAs, and 401k accounts, it is helpful to construct one portfolio that includes multiple asset classes divided among different accounts. The ultimate purpose of this approach is to help optimize after-tax returns.

Tax Loss Harvesting – In a market downturn, there is a silver lining. Tax loss harvesting is the recognition of losses so that you can reduce future tax liabilities either due to rebalancing or capital gains distributions.

Cash Flow Management – When someone needs funds, especially in retirement, a lot of thought goes into which pools of their money to consider distributing. In some cases it is important to have at least five years of cash flow in fixed investments, in case of a downturn in the stock market.

Rebalancing – Periodic portfolio rebalancing is an important strategy for risk management, allowing you to adjust your current allocation back to your target allocation. Rebalancing most frequently involves selling asset classes that have appreciated significantly and buying asset classes that currently have a lower value.