Abacus clients include entrepreneurs, business owners, working professionals, athletes, entertainers, inheritors, divorcees, and retirees. For comprehensive wealth management services, most of our clients have a net worth of over $1 Million. For clients with less than $1 Million or those who don't desire comprehensive wealth management and financial planning, we provide a globally-diversified, sustainable asset management service to investors with as little as $50,000 to invest.
A single client engaged us to help him significantly reduce taxes on his mid-six figure annual income, invest for an early retirement, obtain the appropriate amounts and types of life and disability insurance, and coordinate an estate plan with his attorney. In the first three years of the engagement, we helped this client amass over $500,000 of pre-tax money in a retirement plan. After several years of advising him, a competitor offered $6,500,000 in cash and $35,000,000 in shares of their publicly traded stock to buy his company.
We brought in a tax attorney to help structure the sale, allowing our client to defer his capital gains taxes for over twenty years. Due to our client's philanthropic goals, we had also created a charitable vehicle to which he had donated his highly-appreciated company stock prior to the sale contract being executed. For this, he obtained a large tax deduction to offset other income and avoided capital gains tax when the sale occurred. Our planning allowed him to donate over $1,000,000 to the charitable causes he was most passionate about at a net 'cost' of less than $300,000.
Due to the publicly traded stock he received in the acquisition, he found himself with excessive exposure to a non-diversified asset that he had no control over. Working with his acquirer's general counsel, we helped to negotiate the ability to hedge this concentrated stock position, protecting a sizable portion of his net worth from a possible decline in the stock's price.
A senior executive with a major Hollywood studio engaged us to help him decide when his optimal retirement date should be, and how to maximize the various assets he owned. These included a 401k, stock options, a deferred compensation plan, life insurance, a stock and bond portfolio, and several commercial real estate investments.
After creating a comprehensive financial plan, we found that there were two major issues: 1) there was too much exposure to the company's stock, and 2) his commercial real estate was not performing as well as it could be.
We worked with the client, his CPA, and a company benefits professional to reduce his exposure to the company's stock. Our strategies included exercising and selling stock options in a tax-intelligent manner, changing asset allocations within his 401k and deferred compensation plan, and hedging company stock that he had acquired in his own portfolio.
After analyzing the real estate operating statements, rent rolls, and similar properties, we assisted the client in refinancing two of his buildings and selling another (through a 1031 tax deferred exchange). These changes took his cash-on-cash yield from 4% to over 9% while not creating any additional tax liability.
A philanthropist with a substantial (mid eight figure) net worth retained us to oversee every aspect of her financial well-being, including portfolio management, philanthropic policy creation, grant structuring, real estate advice, estate planning, insurance review, business strategy, communication about money with children, and education planning. A primary question of hers was "How much can I afford to give away each year?"
Using all the relevant data on her income, expenses, assets, and goals, we created a lifetime cash flow projection. We then used Monte Carlo simulations to see how her plan would hold up through a wide variety of future economic scenarios. We even went so far as to see how she would fare if the Great Depression were to begin again tomorrow. The result of this analysis was that she could increase the amount of her annual charitable giving more than ten-fold without significantly risking running out of money.
We then worked with her and her estate planning attorney to set up the right types of philanthropic entities through which to effect her new giving program. We managed the assets within her new trusts and charitable foundation in our capacity as a fiduciary, and made sure that cash disbursements went out to her recipients in a timely fashion.
After inheriting $3,500,000 from her late mother's trust, a middle-aged woman and her husband initially tried to make investment decisions for themselves. They worked with the attorneys to finalize the estate, and then placed the money with a well-known national brokerage firm. Their broker would call with suggested investments, and they would generally go along with the suggestions, not knowing how to evaluate them. At first, the investment markets were rising, so they felt good about the relationship. But then the stock market began a prolonged correction. After 18 months, they had been hearing so many bad things about stocks that they got out of the market and put the entire trust in a local bank money market fund.
After about six more months of lackluster stock market performance, the major indices began to rise, earning over 20% in the following nine months. It was at this time that their estate planning attorney referred the inheritors to Abacus, and they called us to develop a cohesive investment and financial plan.
After learning more about their goals, which included educating their three young children and taking care of an ailing parent, we helped them create an investment strategy that they would stick to through good and bad markets. One of the first recommended steps was to diversify out of most of the individual stocks that had been held by their parents for decades. We provided a detailed cash flow projection to help them understand how much they could afford to spend each year without risking running out of money prematurely, and then managed their assets in accordance with the agreed upon policy for years to come. Each month, we wired a set amount to their local bank, which they used to cover their living expenses. The Abacus process and investment philosophy had allowed them to stop worrying and second-guessing their investment decisions, and to focus on their kids and other life interests.
Signing with the NFLincluded a $150,000signing bonus and a six-figure salary. Unlike many of his peers, our client sought out a professional financial advisor. Taking our advice, our client saved the bulk of his windfall and mostly avoided extravagant spending.
He was cut from his team right before his second season began, and when he was picked up by another team, he had to relocate to a new city which almost doubled his living expenses for a short time. His savings allowed him to cover his increased expenses, allowing him to focus on training instead of worrying about how to pay his bills.
Our client was nervous about her impending retirement in two years, given a recent market decline. Her assets had fallen to less than $800,000, which she didn't think was enough to fund her desired lifestyle.
We looked closely at her future pension income and real estate investments and found that her goals were already met, and we were able to substantially lower the risk in her investment portfolio. With her new found peace of mind, she was able to increase her travel budget and philanthropic endeavors as well as helping her daughter buy a first home.
An unmarried couple with two children had $250,000 in sixteen investment accounts at four brokerages and banks. They had no visibility into how well their money was invested and how it was allocated. We were able to consolidate all of their accounts to one institution and provide them with a single quarterly statement summarizing all of their investment assets.
We helped them determine their overall risk tolerance and developed a savings plan to automatically fund their retirement accounts each month.
One of their major concerns was around estate planning and providing for their children. We were able to structure their accounts and set-up multiple beneficiaries so that the accounts automatically transferred to the right person in case of a tragedy. Since they had no other real assets, they were able to avoid paying an estate planning attorney, and instead started funding college savings accounts.
Disclaimer
The case studies discussed on this website are representative of work that Abacus has done for past and present clients. The results obtained and the services provided may or may not be the same for you or other clients now or in the future. Please see the disclaimer section of our website for more information, or contact us to find out what services we think would be most appropriate in your situation.
Abacus' wealth management services include goal-setting, lifetime cash flow projections based on various future scenarios, as well as tax, insurance, estate, and philanthropic planning. We begin with the Personal Goals Discovery, a one-to-two hour meeting in which we learn about the goals that will be central to our client's financial plan. We then collect all the nuts and bolts financial data that we need to analyze how much you should earn, spend, and save to reach your most important goals.
This comprehensive financial analysis outlines which goals are achievable under various financial circumstances. We often have several potential scenarios for the client to consider. It is generally after the presentation of this analysis - called the Enough for Life Report, that our Wealth Managers make specific financial and portfolio management recommendations.
If retirement is one of your goals, the Enough for Life Report will analyze when and under what other circumstances that goal can be achieved. Should you save more money? Through which tax-favored vehicles? Can your present standard of living be maintained? How aggressively or conservatively should your financial assets be invested to have the highest probability of retiring at the desired time?
Many of our clients are business owners who are unaware of the many types of retirement plans that can be utilized to reach retirement goals. Tax laws are allowing some of our clients to contribute hundreds of thousands of dollars to retirement plans on a pre-tax basis. Each plan has different requirements as to how much can be set aside each year, whether an annual contribution is required, and who in the company must be covered. For those who don't own their own business, we analyze and explain the various choices available through their employer - 401k, pension, deferred compensation, employee stock purchase plans, and other benefits. Regardless of employer, we help our clients choose their best options for retirement savings.
Those nearing retirement or in retirement face a period of tremendous uncertainty. After a lifetime of earning income and accumulating assets, clients are faced with having a finite asset base to meet their future living expenses. The assets that have been accumulated must last for the remainder of their lives, which is a daunting proposition in an age of longer life expectancies. Some investment risk must typically be assumed because inflation will erode the purchasing power of a portfolio over time. We build customized portfolios to balance these risks, while educating our clients to the types and levels of risk that they are assuming.
We provide two important services; estate planning and trust investment management. First, in conjunction with our client's estate planning attorney, we help analyze and suggest the most appropriate estate planning tools that might be used. We also make sure that our client's personal goals about their heirs, home, business, and philanthropy are at the core of any estate plan drafted. Too often, estate plans are designed only to minimize taxes and not to create vehicles for the continuation of the client's values and legacy to future generations. Second, we are able to manage the trusts and charitable funds that are created in estate plans. We have relationships with several corporate trustees that do not manage investments. In conjunction with our wealth management expertise, this arrangement allows our clients more flexibility than is typical of most corporate trustee relationships.
As part of comprehensive financial planning, we advise our clients on the proper amount and type of insurance for their needs. This advice can cover life, disability, property, automobile, earthquake, hurricane, long-term-care, and umbrella liability insurance. In addition, we can direct our clients to no-load and low-load insurance products that may not be available through the typical insurance agent. And because we don't sell any insurance ourselves, our advice is unbiased.
Our clients often own life insurance products, including whole life, term life, variable life, universal life, and/or annuities. Each policy has a unique cost structure, and many of the policies' fees are not obvious. Unfortunately, the combination of very loose disclosure laws and a competitive sales environment have led to the recommendation and purchase of many insurance products that are not in the client's best interests. While there are good reasons for owning life insurance, we often find that our clients can accomplish many of their goals in a more cost effective way than with the insurance they own.
Many of our clients are passionate about their communities and the world at large. They make personal and financial commitments to organizations that improve people’s lives, seek to find cures for disease, and provide solutions to intractable problems, among others.
Abacus has significant expertise in assisting clients with tax-intelligent philanthropic strategies. We are able to advise on tax-appropriate vehicles to use to accomplish a client's philanthropic objectives, as well as which assets make the most sense to use for funding such a vehicle. In addition, we have relationships within the community that can help clients identify the charities with whom they wish to partner in the pursuit of achieving their philanthropic goals.
As a Fee-Only™, independent Registered Investment Advisory firm, Abacus has the flexibility and fiduciary obligation to manage client portfolios based on historical evidence rather than Wall Street hype. After studying the evidence presented by the world’s stock, bond and real estate asset classes, our Investment Committee members have come to the following conclusions:
Stock picking and market timing cause dramatic underperformance for most managers, and those that do out-perform cannot be identified ahead of time with any reliability. This has been true in both efficient asset classes such as US large stocks, and inefficient asset classes such as small-cap stocks and international stocks over most time periods.
Even though they have unparalleled access to the best managers, the majority of the country’s largest pension plans and endowments underperform the market benchmarks. This underperformance is largely attributable to costs, stock picking, and market timing.
The evidence-based investor can add significant value by allocating part of a stock portfolio to diversified baskets of small-cap stocks and value stocks. Further, the evidence shows that the smaller the market capitalization of a portfolio of stocks, the more likely it has provided higher returns, and been less correlated to large stocks. Similar benefits have been observed in “value stocks,” companies that are among the cheapest 30% of the market, as measured by their book value to market capitalization ratio.
Traditional index funds have significant benefits which include discipline, low turnover, reduced costs, diversification and lack of subjectivity, all of which have been shown to add significantly to investment returns. However, typical index funds also have drawbacks, including higher costs in certain asset classes, and a rigid brnecessity to follow a brand-name index that can lead to less than optimal trade executions. Abacus generally utilizes passive institutional funds that are not available to the general public, and which capture the benefits of indexing while avoiding its drawbacks.
Most equity investors buy when they’re optimistic, and sell when they’re pessimistic, leading to sub-par returns. By following a disciplined rules-based rebalancing schedule that factors in trading costs and taxes, investors are able to systematically “sell high” by trimming the most appreciated asset classes, and “buy low” by investing in the lower-appreciating asset classes, especially when their emotions would have them do the opposite.
Fixed-income investors are not adequately rewarded for taking credit risk (investing in below-investment grade credits) or interest rate risk (investing in a bond portfolio with a duration of more than five years). If an investor has a greater appetite for risk, the best risk-reward trade-off is obtained by increasing one’s allocation to equities and alternatives, while keeping the fixed income portfolio conservative (short-term duration and high investment grade credits).
This philosophy drives all of our investment decisions. Whether you are a comprehensive wealth management client or are solely taking advantage of our asset management services, our disciplined investment strategy can help you reach your goals and give you more peace of mind. If you're interested, please read more about the process to become a client.
As a Fee-Only, independent Registered Investment Advisory firm, Abacus has both the freedom and fiduciary obligation to manage client portfolios based on historical evidence and objective analysis rather than on self-interest.
In addition to investment returns, many of our clients have found that there are other ingredients in overall financial success.
Studies by the University of Michigan and Harvard have confirmed what our clients have reported: that adding an extra $1 million to one's wealth does not add significantly to one's happiness or well-being. We have used this awareness to inquire skillfully into our clients' dreams and beliefs about money and whether these beliefs have served them or not. We ask many specific life intention questions beyond the standard "When would you like to retire?"
For example, a client was working 60 hours per week in a stressful work situation in order to save enough money to fulfill his dream of owning two vacation homes. A typical financial advisor might have just told him "If you save $50,000 each year for 23 years, then one day (as long as the real estate and equity markets cooperate) you'll be able to buy those homes and finally achieve your dreams and be happy."
Instead, we met with the husband and wife and asked them:
"What were the messages you received about renting homes versus owning homes when you were growing up?"
"What are you hoping these vacation homes will really do for your family?"
"How could you realize these goals and dreams without the extra stress of overwork (with its attendant limited family time) and needing to save so much money for 23 years?"
After several meetings and phone calls, it become clear that because the client had always thought renting was "throwing money down the drain," he felt compelled to own even though it was causing him so much stress.
"Why not RENT vacation homes at the coast and in the mountains and see how you like it?" we asked. "Why not spend quality time with your family NOW, instead of the distant future?"
When we did the objective financial analysis on a spreadsheet, the numbers revealed that for him, renting would be a far less risky path than owning. And he certainly was pleased not to have to defer his pleasure for so many years.
Our commitment to our clients is both to help them invest appropriately to better meet their goals and to define financial sufficiency so that clients have peace-of-mind today AND in the future. We want to ensure that your goals and money are supporting a life that is both fulfilling and sustainable.
To learn more, please watch the presentations on our Education Page
As a Fee-Only™ firm, all Abacus principals and financial advisors sign and adhere to the following fiduciary oath administered by NAPFA, the industry association which regulates the term Fee-Only™:
“The advisor shall exercise his/her best efforts to act in good faith and in the best interests of the client. The advisor shall provide written disclosure to the client prior to the engagement of the advisor, and thereafter throughout the term of the engagement, of any conflicts of interest, which will or reasonably may compromise the impartiality or independence of the advisor.
The advisor, or any party in which the advisor has a financial interest, does not receive any compensation or other remuneration that is contingent on any client's purchase or sale of a financial product. The advisor does not receive a fee or other compensation from another party based on the referral of a client or the client's business.
What the Fiduciary Oath means to the client:
The advisor shall always act in good faith and with candor.
The advisor shall be proactive in disclosure of any conflicts of interest that may impact the client.
The advisor shall not accept any referral fees or compensation that is contingent upon the purchase or sale of a financial product. ”
At Abacus, this commitment to objectivity includes not accepting any gifts in kind valued at more than $100. Abacus does receive research and education from various financial services firms with which it places business.
We charge an annual fee of 1% on the first $3 million of assets we manage. Our fees are reduced for amounts over $3 million.
Please review our presentation on low costs to learn why this is important.
Adobe Flash Player not installed or older than 9.0.115!
Sustainable Investing: The Advantages over Socially Responsible Investing
By Barrett Porter, CFP
June 15, 2010
Each of us runs on our own moral compass when it comes to what we define as "irresponsible" behavior. Socially conscious investors have been wrestling with how to integrate their social and environmental concerns into their investment portfolios for over two decades.
Until 2008, many investment products addressed our social concerns, but usually at the expense of our investment needs. Many investors want the world to be a better place, but not at the expense of their personal financial security. The question then becomes: can a conscious investor create a better world with his or her portfolio without sacrificing any of the returns along the way? This article will address that question by looking under the hood of the current Socially Responsible Investing (SRI) and Sustainable Investment (SI) portfolios that are available to the public.
The Costs of Being Socially Responsible
Utilizing traditional SRI mutual funds to build an entire portfolio is a bit like using a grenade to get rid ofa few weeds. Such funds are not able to customize their holdings to your specific social concerns. In other words, companies that you would otherwise be content to own may be excluded, and companies you vehemently dislike may still find their way into the fund. SRI funds offer an acceptable level of diversification, but the current menu consists almost entirely of actively managed (high cost) mutual funds.
For investors to make an educated decision about being socially conscious with their portfolio, it would behoove them to know the difference between active and passive investing, and which approach their mutual funds are using. More often than not, the total costs of an actively managed mutual fund, which include the expense ratio, the fund's internal (invisible) trading costs, and possible loads, reduce the fund's overall return to the point where passively managed low cost index funds would have been a more profitable choice.[i]
Why not just create a customized stock portfolio of socially conscious companies?
To integrate an investor's social concerns at a custom level, she would have to build a portfolio of individual stocks.To provide perspective, a portfolio at Abacus uses mostly institutional mutual funds that provide an investor with ownership in nearly 11,000 stocks. If an investor considered himself diversified by owning a few dozen large US company stocks, a custom portfolio might suffice. It becomes unrealistic when you seek to own a share of the thousands of small and "undervalued" companies (value stocks) all around the world. Such a strategy has historically provided higher returns than one that owns only big US companies (IBM, GM, Home Depot, McDonalds, etc). [ii]
Let's assume that a globally diversified portfolio utilizing institutional index mutual funds continues to outperform the S&P 500 by just 2% annually and earns 9% annually over the next 20 years, while the S&P averages a return of 7%. [iii] If a $200,000 portfolio of individual securities was fortunate enough to keep up with the S&P 500 net of all costs (an unlikely event), you would be leaving almost $350,000 on the table over 20 years.
The Screens
Negative Screening
The "socially irresponsible"A-list (according to most SRI mutual funds) includes weapons, nuclear power, tobacco, alcohol, pornography, animal testing, and gambling. Such mutual funds may exclude stocks (negative screening) if significant revenues are generated from any of these. A "bad" stock can be excluded from a mutual fund for its role as a retailer, a wholesaler, an affiliate, an owner, or even an "enabler." For example, a paper manufacturer can get the boot if significant revenues are derived from cigarette companies that purchase and utilize the paper for the production of cigarettes. A company that's in the business of making cars can be screened out if it has an ownership stake in a gambling operation, and so on.
Subjective Screening
Mutual funds may also use a more subjective screening process where companies are included or excluded based on their record in human rights, shareholder rights, or on the environment, to name a few. A subjective screening requires a great deal of research since there is no black and white standard for what passes as good or bad.
Best-in-Class Screening
A third type of screening, known as "best-in-class", involves a mutual fund owning more of the companies that score well in some areas and less of those that score poorly. In some cases, the worst of the worst can be removed entirely from the fund until they get their act together. This type of screening is less likely to favor a particular sector (energy, utilities, technology, etc), since companies are judged against their industry peers. In other words, Exxon is judged against Chevron, not Google. As a result, the basic tenets of asset allocation and diversification are not violated. There is merely a tilting of the holdings towards the more responsible companies. Because the three most important predictors of a fund's performance are its exposure to each industry, the average size of the companies it owns, and how expensive they are relative to their book value, best-in-class screening appears to offer the highest probability of equaling or exceeding the returns of a portfolio with no social screens (more to come on that point). [iv]
Meir Statman, the Glenn Klimeck Professor at the Leavey School of Business at Santa Clara University, studied each type of screening and category independently to see if there is a relationship between returns and the type of screening used. [v] He concluded that the screening process with the greatest positive impact on returns, came from a best-in-class screening approach, and more specifically, in the areas of community, environment, and employee relations.
Sustainable Investing: Where Passive Investing and Socially Conscious Meet
As defined by Abacus, a Sustainable Investment portfolio has a dual purpose. First, an environmental screening is applied to a portion of the portfolio to incentivize publicly-held corporations to reduce their environmental footprint and take proactive steps to conserve resources. The portfolio must also adhere to the academic principles that give an investor the highest possible returns for a given level of risk. Based on the academic studies that exist today, this rules out the use of most actively managed mutual funds regardless of how well intentioned they may be in addressing investors' social concerns.
Currently, one of the only passively managed socially screened mutual funds that are designed to keep up with (or perhaps outperform) non-screened passive funds, and which utilize best-in-class screening, are the DFA U.S Sustainable Core and DFA International Sustainable Core funds. Already one of the most utilized fund companies among fee-only advisors, DFA became the first to integrate environmental screening into passively managed low cost funds which include U.S. and foreign stocks, large and small, and growth and value.
The Results
Each of the following funds holds a blend of U.S. stocks (large, small, value, and growth). The core difference lies in the screening methodologies employed and management style. DFA's funds are all passively managed and Calvert's funds are mostly actively managed.
Performance comparisons can only be drawn from the last two years since DFA's screened offerings were launched just over two years ago. Two years is not a long enough time horizon to qualify as "statistically significant" when comparing mutual fund performance. However, we know that there has historically been a direct correlation between costs and returns (the higher the costs, the lower the returns, on average). The expense ratio of the Calvert fund is more than twice that of the DFA sustainable fund, and it significantly underperformed the screened and non-screened DFA funds during the recent one and two-year periods.
First, we'll see how DFA's traditional fund performed compared to the new fund with environmental screening. Then we'll look at how DFA's screened fund has done compared to a more traditional SRI fund - Calvert's Capital Accumulation Fund.
DFA versus DFA (ending 3/31/2010)
1 Year Return
2 Year Returns
DFA US Core Fund
55.71%
-2.71%
DFA US Sustainable Core Fund
57.18%
-3.97%
DFA versus Calvert (ending 3/31/2010)
1 Year Return
2 Year Returns
DFA US Sustainable Core Fund
57.18%
-3.97%
Calvert Capital Accumulation
55.42%
-6.72%
Doing Well and Doing Good
While it's too early to set an expectation that the movement towards environmentally conscious living will translate to higher returns for companies that respond more fully to this demand, the evidence at least shows, so far, that it's possible to integrate the best elements of the socially conscious investment universe into a low-cost passively-managed portfolio, without breaking the rules of portfolio theory.
In order for you to decide between a portfolio that is in line with your "belief systems" (SRI) and one that addresses the needs of the planet as a whole (SI), imagine how you might respond to the following hypothetical question: Are you willing to own $5 worth of tobacco stocks in order to have an extra $5,000 for a non-profit that educates kids about the dangers of smoking? If your answer is no, you will require some extra customization with your socially screened portfolio, and you will pay higher costs in order to achieve it. If your answer is yes, than a passively-managed environmentally screened portfolio that utilizes DFA's sustainable core funds, is the first step towards "doing well and doing good" with your investments.
[i]S&P Indices Versus Active Funds Scorecard, August 20, 2009
