A Disservice Was Done
I have purposely not read "Stairway To Heaven," the
article you critiqued in your editor‚s note in the June Issue of
Financial Advisor, because I didn‚t want Mr. Anthony‚s comments to
affect my comments to you. Basically, I am troubled by your failure to
address the "yield to maturity" concept that is a critical and defining
aspect of any bond. It would appear that you are considering bonds in a
similar performance class to equities when you say, "... studies show
that bonds, over the long term, are just as volatile as equities." This
may indeed be true if one views equities and bonds as the same type of
investment vehicle.
But to do so, would be a mistake.
Bonds have something stocks can only wish for, that
being a maturity date. And along with credit quality, purchase price,
call features and the ever-important yield-to-maturity calculation ...
bonds can offer advisors and their clients important tools that can be
used very effectively in the right situations. I‚d gladly stipulate to
the study you mention; holding bonds, especially long-term issues like
the 30-year Treasury, can certainly produce wide swings in values at
any given point as interest rates move up or down. And bond mutual
funds are the most dangerous way to invest in bonds because, with
apologies to that old saw, "a rolling bond mutual fund gathers no
maturity."
But a savvy advisor who, 1) understands the
critically important bid-ask environment in which bonds are bought and
sold and which can, unlike stocks, produce an unlimited spectrum of
prices for a given bond at the same moment, 2) has the ability to
inject transparency into a buy/sell process that is totally obscured by
the archaic, clouded way bonds are traded, 3) has access to a network
of effective bond traders, 4) has reasoned and well-researched insight
into the interest rate environment, 5) has the courage to help clients
understand the important differences between equities and bonds
(Equities MAKE money, Bonds YIELD money), such an advisor is worth
their weight in gold!
Finally, I would respectfully introduce you to the
concept of "inoculation." This is an approach wherein bonds can be used
to guarantee a client a stream of money regardless of how the markets
might gyrate. If you have a second‚s doubt about the validity of this
approach, just look at the portfolios that were destroyed because
clients were forced to make withdrawals during falling markets like the
2001, 2002, 2003 period. Believe me, clients with bonds that kicked out
regular dividends like clockwork may have had a temporary decline in
the value of the equity portion of their portfolio, but the checks
never stopped coming, and they never had to sell anything into a
falling market and sustain a loss that could never be recovered.
The evil in bonds are bond mutual funds that have no
maturity and wherein net asset values can plummet in rising interest
rate environments when investors redeem in a panic as they see their
statements. Individual bonds acquired with the intention of being held
to maturity (or until potentially called) are far different than
stocks, and I believe you did a disservice by not pointing these
differences out to those who are less knowledgeable.
Craig Carnick
Carnick & Co., Colorado Springs, Colo.
Editor‚s Response: Thanks. Next month
we‚ll publish a letter from a reader who was equally outraged for
diametrically different reasons.
The Future Of Advice
I enjoyed your latest editor‚s note [May 2005]. In
March of 2000 "walking with their (my) feet" is what I did after 12
years with Morgan Stanley–leaving behind a substantial golden handcuff.
The reason: It is clear that a fiduciary standard of care is the future
of financial advice. However, we face a momentous task. We must educate
the public, the end users of our craft in addition to financial
advisors. I applaud the FPA and others for fighting on our behalf, but
equally important is the need for a campaign to educate the public and
advisors about the meaningful difference between a suitability and
fiduciary standard. I fear that very few truly understand the issue.
I became so frustrated by the fact the public does
not really "get it" or care that I authored a book based on the
Foundation for Fiduciary Studies‚ 27 practices to educate the public
"one investor at a time." Your magazine is in a powerful position
to aid in this effort.
Congress will not act in the best interests of
investors until they fear losing their seats; investors acting as
educated voters may provide a much needed push to right this wrong.
Tim Hatton, CFP, CIMA, AIF
Hatton Consulting Inc., Phoenix, Ariz.
CPA Planners Offer Experience
Just when I thought it was time to once more venture
forth and read your magazine, it contained another bash-the-CPA
article. Amazing that they seem to be included in magazines during tax
season.
I have to agree with your writer ["Accounting For
CPA Referrals," May 2005] that not all CPAs are prepared to provide
financial planning, nor are all CFPs or MBAs, either. I would not
expect a CPA who works for a major CPA firm to provide accounting
services for a small mom and pop business. It‚s simply two different
levels of service. Therefore CPAs who do not invest the time and effort
in financial planning should not pursue it. CPAs, under their code of
professional ethics, would not accept clients or provide professional
services to them if they do not possess the knowledge of that industry.
That would not be in their clients‚ best interest or theirs. On the
other hand, I believe a CPA who truly takes on the mantle as a
financial planner will simply do it better.
Anyone can call themselves a financial planner, as
evidenced by the many insurance companies and large brokerage firms now
using that term. What separates CPA planners from others is their depth
of experience, knowledge of taxes and the connection between that
knowledge and financial planning.
In my case, a majority of my clients are individuals
and small businesses. My knowledge of their total financial picture
allows me to provide a focused approach to their particular financial
situation. My goal is to provide them with tax-saving financial
solutions. I combine my tax-planning expertise, knowledge of
investments, retirement plans, life insurance, health plans and other
planning vehicles to leverage their money, while concentrating on
providing them with a solid retirement plan and reducing current and
possibly future taxes while still meeting their current life goals. It
is simply the most effective way to give the client what they desire
most: simplicity, or for some, one-stop shopping.
Many articles on CPAs entering the planning market
question their competence, but show envy of the client loyalty and
respect individuals have for their CPAs. Many CPAs haven‚t embraced
financial planning, but for those who have, myself included, it is the
most enjoyable and rewarding area of practice. For those non CPAs,
unless you accept the fact that within the next ten years CPAs will be
a force to reckon with in the financial planning field, you surely will
be left behind.
Brian E. Glickman, CPA, RFC
Smithtown, N.Y.
LETTERS TO THE EDITOR
July 1, 2005
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