I've discussed the various compensation models that financial advisors use. An understanding of these models is clearly helpful when trying to select an advisor or create your personal finance team, but what about the true impact to you and your portfolio's performance? Do you feel that you have a clear sense of what your investment costs amount to? Are you using a full-service broker or insurance agent to help you invest? If so, you're almost certainly paying too much.

Let's examine mutual funds. These funds are used heavily by large brokerage firms because of the high fees that are generated by them and the ease in which brokers can allocate client accounts. Most broker-sold mutual funds come with a variety of commissions and fee's that are often overlooked by the client. With exception of the trading costs which are listed on your brokerage statement, these other fees are not reflected seperately on the brokerage statement. As a result, many investors are clueless as to the true amount they are spending.  Here are some of the most common additional mutual-fund fees:

Front-end loads: These are commissions to investment intermediaries as sales commissions upon the purchase of the mutual fund. These sales charges are not part of a mutual fund's operating expenses.  In mutual funds with separate classes of shares, these fees  are found within Class A shares.

Back-end loads: These sales charges are used with mutual funds that have share classes, and are assessed upon sale of the mutual fund. These commissions are paid to a financial intermediary as a sales commission, and like front-end loads are not included in a fund's operating expenses. In mutual funds with separate classes of shares, these fees are found within Class B shares.

Level-loads: These sales charges are not assessed at purchase or sale, but rather applied annually as a fixed percentage of a mutual fund's average net assets. Unlike front-end and back-end sales charges, these 12b-1 fees are included in a fund's operating expenses, and are present in class C shares of a mutual funds that have separate classes of shares.

12(b)1 fees: The annual marketing or distribution fee of a mutual fund paid as a reward to selling fund shares. There are many critics of these particular fees as it is currently believed that commissions paid to salespersons have nothing to do with enhancing the performance of the fund -- the initial premise for the creation of this type of fee.

Management and administrative fees: to compensate the funds investment advisor for investment portfolio management and administrative fees not included in the funds' "other expenses" category.


Trading costs: the cost of buying and selling securities through your broker. These fees can range significantly from broker to broker.

While I like to give advisors the benefit of the doubt, I am constantly surprised that most stockbrokers, so called 'wealth advisors'/'financial advisors' with large brokerage firms, and insurance salespersons are unable to provide clients with a clear picture of how much they are paying in total investment costs. I suspect that the reason these individuals are unable to provide such detail is that they probably don't know the answer, and may not have the adequate information  information accessible to provide an reasonable response.  To calculate the true investment costs paid, one would need to review the investment prospectus for every product in a portfolio, calculate the total cost for each, add sales fees based on each transaction in the account, and then include the asset-management fee charged separately (and usually on a quarterly basis).  

All of these fees seriously degrade your investment performance. Take an initial $10,000 investment in a mutual fund that has an 8% annual return on investment, a front-end sales charge of 3% and annual operating expenses of 1.25%. Lets say that you pay a $60 commission to purchase the fund and you pay your wealth manager 1% of assets under management, per annum, for investment management services.

So, you would pay $300 in commission to purchase the fund and operating expenses of $131 throughout the year. At the end of the first year, assuming an 8% return on investment, you would be left with an account value of $10,345. But we didn't deduct the $60 transaction charge nor the $100 in annual advisory fees paid on this particular account.  The net result is $10,185 or a 1.85% return on invested capital. I'm pretty sure we can all think of better ways to generate 1.85% on our money without giving away over 6% of our 'theoretically earned return' to do so.  The math gets even worse when you consider that transactions costs, as well as investment management fees are generally deducted in advance (quarterly, in advance, for investment management fees).

Mutual fund fees are likely only one of the myriad of ways you are overpaying, however. Have you purchased whole-life insurance policies or annuities with their incredibly high mortality expenses and surrender penalties?  What about wrap fees?  The list goes on and I'll certainly tackle these items in a future post.

So how do you invest with more prudence? For starters, I'm not suggesting that all mutual funds are bad, in fact many of them perform quite well. Be sure to review prospectuses carefully and fully understand how fees are being assessed. If you are managing you own money, look for low cost funds. Vanguard offers funds with an average expense ratio of 0.19%, or 83% less than the industry average of 1.11% (source), and do not come with 12(b)1 fees.  If you are looking for more professional guidance and a customized and tactical approach to fit your needs, be sure to work with an independent and fee-only investment advisor who will be sure to keep your portfolio low-cost and true to its intent.

Best regards,

Jason M. Gilbert CPA/PFS, CFF
T: 516-665-1940
E: [email protected]

What do highly successful people have in common?  Many of their shared traits have been well documented, as have their behaviors and routines.  We've heard of some: waking up early, adhering to a calendar, and making sure to fit in time for exercise.  However,  what about the activities we don’t read about?  I have had the unique luxury of working with some extremely successful individuals in my advisory business and I've observed the evolution ‘the personal finance team,’ as a relatively new and powerful planning strategy.  So what is a personal finance team, and why is it so important to highly successful people?  

What is a personal finance team?

A personal finance team is a small group of professionals who work in collaboration to advise on both business and personal affairs.  This group consists of, at a minimum, a financial advisor, a CPA, and often an attorney.  Occasionally, a personal mentor or business coach is added to the team.

So why build a personal finance team?

Centralize expertise

A personal finance team can centralize all financial decision-making and provide an efficient and effective way to tackle important issues and keep on track with achieving financial goals.

An emphasis on focus

In order to stay focused on productivity, highly successful individuals have come to rely on their personal finance teams to handle critically important financial decisions in their absence.  

A comprehensive viewpoint = better decision-making 

A personal finance team provides for a comprehensive and holistic understanding of financial circumstance which in turn leads to far better decision-making.  Just imagine the value you could derive by having your CPA and financial advisor sit down to discuss a financial strategy for you.

An increased sense of control

Many highly successful individuals are naturally control centric.  They have high conviction in their own abilities, and they find it difficult to delegate responsibly to others.  By building a team of highly skilled and trusted individuals, highly successful people are able to feel more in-control of their financial affairs, and feel that they are making more informed and intelligent decisions.  

So how does one go about building this all-star team?

Understand your circumstance and evaluate your needs

A good starting point is to select a CPA and financial advisor.  You can always add to this core team based on your needs for, say, an insurance broker.  If your starting team is strong, you can always ask them for recommendations.

Always use referrals

I've come to realize, both professionally and in my own personal capacity, that referrals are best.  Ask your family and friends for good recommendations, interview the professionals, and make sure they are a good personal fit.  Can you see yourself talking about every-day matters together?  If you can relate to your advisors on personal matters, it's like you'll be able to discuss business matters.

Find someone who understands business and thinks like a business owner

This is a pretty important point as many advisors (especially CPAs) often fall into the trap of thinking like accountants.  Make sure your advisors understand the specifics of your business and are able to discuss the continuity of your business plan and risks associated with it.  

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
O: 516-665-7800
E: [email protected]

We live in a world where information is easily accessible and relatively inexpensive.  In this day and age, we can all be curators of information, research analysts, or self-proclaimed experts on just about any topic.  Personal finance and investment recommendations abound, and a simple Google search for "how should I invest my money" uncovers dozens of articles touting the very best way to do so.  With all of this information at our disposal, how do we determine what financial advice makes most sense for our own individual needs?  Which "author" do we trust with the right combination of stock and bond recommendations for our Roth IRA?  And should we seek our professional guidance, or simply implement all this free investment advice ourselves?  

These are all loaded questions, and there is no "real" right answer when it comes to information you find on the internet.  There are a lot of very qualified professionals and academics who use blogging and other forms of paid authoring as an outlet to explore topics of interest, and even supplement their own income.  My suggestion is to read as much as you possibly can.  Follow authors on twitter and engage in conversations.  Ask questions.  This process will not only be educational, but it will help you sift through the vast universe of information in order to weed out salesy and biased publications.  

The same process should be implemented when searching for a professional advisor.  If you're in the market for an advisor, learn as much as you can about them, and weed out those who do not appear to have best interests in mind.  Get to know the advisors capabilities, credentials, and affiliations.  Read any work they have authored, ask insightful questions about their financial planning approach and investment philosophy, and become familiar with how they are compensated.  An advisors fee speaks volumes about the advice you can expect to receive from them. 

I discussed fees in an earlier post, but here is a more complete breakdown of how advisors get compensated:

Commission only: These advisors receive commissions on the sale of financial products (such as mutual fund front-end loads, back-end loads, 12(b)1 fees, and trading charges).

Commission and fees: This is called fee-based, and is the most popular form of compensation for advisors.   These advisors receive a fee for developing a financial plan and then receive commissions (see above) after selling you insurance and investment products recommended in your financial plan.

Salary plus bonuses: These advisors are compensated with a salary plus an incentive that reflects any new business the advisor has brought to the business.  These advisors may receive higher bonuses by recommending or selling certain products and services over other options.

Fee-only: These advisors provide advice and/or ongoing investment management and are not registered representatives of any financial services company.  These advisors have no financial stake in the recommendations they provide to you and they are required to advise only products they believe are in their clients financial best interest.

So which compensation model do you think yields the most independent and unbiased investment advice?  The clear answer is the one whereby the advisor isn't beholden to commissions, and one in which the fee-structure is clear and transparent.  A fee-only advisor is incentivized by increasing the value of his or her client accounts.  Most operate with a flat fee-structure that bills against a clients assets under management (AUM).  By increasing the base (AUM), a fee-only advisor can generate a higher aggregate fee.  This alignment of interest between client and advisor is the cornerstone of a sustainable financial advisory relationship.  Be sure to keep it in mind when shopping for a financial advisor. 

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
Tel: 516-665-1940

Personal financial planning can be a complex process that requires discipline, focus, and patience.  That said, it is far from rocket science, and most people can be highly successful in implementing a sustainable plan with the right framework in place.  While your circumstance may require some modification to items listed below, I think the following personal finance "best practices" encompass just about all of the financial 'wisdom' one needs to stay on the right financial footing.

Save and invest 20% of your income

Many advisors advise that clients save at least 10% of their income.  I suggest that my clients strive to save 20% of their income. This increased savings goal provides for some wiggle room in months that have additional and unexpected expenses.  The other reason I recommend 20% is that the additional savings made today enables you to harness the power of compounding (i.e. this money is invested and its’ earnings are further reinvested year-over-year).  It's far better to save and invest more now then try to catch-up later.

Keep at least 3 months living expenses in safekeeping for emergencies

This money should be kept in reach and accessible, but ideally far enough away that you do not feel compelled to spend it.  By emergencies, I am referring to out of the ordinary events that would put a significant strain on your monthly cash flow (for example, your car breaks down, you endure a flood in your home not covered by insurance, etc.).  I recommend that this money be put in a high-interest bearing account that has debit-card access.  That way, in the case of an emergency, you don't have to rely on a credit card to cover an unexpected expense. Please refer “6 saving strategies you can start using today” for specific bank recommendations.

If you have kids: Draft a will and buy term-life insurance worth 10-20 times your household income

Protecting your family should be priority #1, and both a Will and term insurance policy provides for the direction and protection to accomplish this goal.  If you don't have adequate funds to hire an attorney (wills can cost anywhere from $1,000 and up), you can use sites such as Legal Zoom to draft your own will using a standard template.  

Term insurance is inexpensive and will provide the security your dependents need.  A healthy individual in their 30’s can secure a $500,000 term policy for less than $350/year.  You should plan on shopping for policies that cover anywhere from 10-20 times your household income (so a family with combined income of $100,000 should look for between $1-2MM). I tend to recommend higher amounts of term-insurance coverage as there seems to be a natural break point in how these policies are priced. Each incremental dollar of coverage over $500,000 costs less. For example, say a $500,000 policy costs $325/year, a $1MM policy may only cost $475. Stay away from whole life, universal life, or other forms of permanent insurance.  These kinds of policies are more appropriate for estate planning once you have already exploited and maxed out your tax advantaged accounts.

Put at least 20% down and always choose a conforming loan

Avoid paying Private Mortgage Insurance (PMI), a fee you will incur if you put less than 20% down on a property.  Also avoid non-conforming loans, which generally carry higher interest rates, additional upfront fees, and insurance requirements.  You will accomplish both of these by purchasing a home you can afford. 

Pay off high-interest debt first and pay your credit card off each month

Revolving high-interest debt is a sure fire way to cramp your cash flow, preclude the ability to save, and ensure that you will be making interests payments for a very long time.  The best way to avoid high interest debit is to not spend money that you don't have in the bank.  This "golden" rule has proven itself over and over again.  Those who master it find themselves on far better financial ground.  Pay off that high-interest debit first, avoid using credit for “float”, and pay that credit card balance off in full each month.

Max the match on your 401(k) and maximize tax-advantaged saving vehicles like Roth IRAs, SEPs, and 529 accounts

As I pointed out in an earlier blog post, a match on your company-sponsored 401(k) is essentially free money and it would be silly to pass it down.  You should also take advantage of other saving vehicles provided you are eligible to do so.  You should discuss these saving vehicles with your advisor or CPA to determine which (if any) is most appropriate for you.

Invest invest invest!  But pay attention to fees, avoid actively managed funds, and hire a financial advisor who is committed to the fiduciary standard

The key to wealth accumulation is to make constructive use of the money you save regardless of your income.  Be smart about how you invest and be keenly aware of fees, which are sure to erode your performance.  Vanguard target funds are a good DIY approach if you are just getting started out.  If you are at the point where professional insight would be of value, be sure to hire a financial advisor who is committed to the fiduciary standard (please read more about this standard on my earlier blog post: "How to choose the right financial advisor for you").

This list is not meant to be all-inclusive, and your individual circumstance may require some more tactical guidance.  Be sure to confer with your financial advisor about your specific needs.  If I can be of any assistance, please feel free to contact me.

Best regards,

Jason M. Gilbert, CPA/PFS, CFF
Tel: 516-665-7800

Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. The IRS says when you sell a capital asset, such as stocks, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is a capital gain or a capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.

A “paper loss”— a drop in an investment’s value below its purchase price — does not qualify for the deduction. The loss must be realized through the capital asset’s sale or exchange.

Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For more information on the tax rates, refer to IRS Publication 544, Sales and Other Dispositions of Assets.

If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).

Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040. There is a worksheet in last year’s Instructions to Schedule D to figure a capital loss carryover to this year. This is usually a very complicated matter, so please contact us so that you may receive the professional advice you deserve.

This will be the first of numerous segments discussing portfolio allocation, and recommendations in an volatile   environment. Please feel free to email us with questions/comments.

What is Asset Allocation?

At the base of any portfolio allocation is the premise that the best-performing asset varies from year to year and is not easily predictable. At the same time, poorly performing investments could be the result of multiple factors including, but not limited to, market conditions, earnings, rumors, and/or changes in board/management. The thinking goes, by having a mixture of asset classes, sectors, and geographies, an investor is best prepared to achieve the best risk adjusted return* by hedging against individual risk drivers while diversifying to capture holistic opportunities.

The laymen’s thinking almost makes more sense — an allocation is the equivalent of a pie (the sum total of different slices). Each slice is the equivalent of an asset class, sector, or geography. As these classes (slices) increase/decrease (grow/shrink) the pie (allocation) must be rebalanced. An investor would effectively sell winners (bigger slices) and buy losers (smaller slices) to get the allocation (pie) back into symmetrical shape. After rebalancing, the allocation (pie) is larger than it was initially — the investor made money by diversifying.

A Note on Risk Adjusted Return*

We live in a risk-reward world, that is the more risk you take the more benefit you might be able to derive from that risk (at the same time, higher risk increases the extent to which you can lose). Entrepreneurs take a phenomenal risk in building businesses. Beyond the financial and time investment, an entrepreneur foregoes the opportunity to build a career and achieve stable income. While they might succeed and profit tremendously from a successful business venture, they may decide to exit the business, losing any investment made while owing significant debt. The term “Risk Adjusted Return,” aims to find that happy level of risk by which a rational and risk averse investor is willing to subject their money to in order to achieve an acceptable return.

So what is the proper allocation for you to achieve the risk adjusted return that you desire? Well, the first that you should probably determine is how much risk are you willing to take? Shaping an asset allocation is going to be largely impacted by your personality — will you be able to sleep at night knowing that your money is being subject to significant market fluctuations? Do you need immediate liquidity? These are important questions to ask yourself before you begin designing your own allocation (or buying pre-packaged products [to be discussed in the next segment]).

For those individuals who aim to preserve their capital (and this is their #1 priority) I would generally recommend that a portfolio be be structured to maintain in excess of 80% of their value in cash and cash equivalents (money markets, treasuries and commercial paper). High liquidity is a major benefit of this portfolio allocation — many individuals favoring this portfolio style have a need for capital within the next 12 months. Please note, while this structure may have less market risk, it does open you up to the risk of losing money over time because the appreciation of assets may not keep pace with inflation.

For individuals desiring current income, we can expect a similar (majority) component of the portfolio to be composed investment-grade, fixed income obligations of large, profitable corporations, real estate (usually REITs), treasury notes, and, to a lesser extent, shares of blue chip companies with long histories of continuous dividend payments. Usually, the investor who prefers this type of allocation is one who is income-oriented — usually nearing retirement or structuring some way to preserving the principle (with some upside potential) of a significant cash inflow (inheritance, etc.).

For most of us, we can find a certain level of comfort in a “Balanced Portfolio.” Most people find a sense of emotional comfort in knowing that this portfolio is structured as to balance long-term growth and appreciation of assets and current income. An ideal mix of assets would include those that generate cash as well as those that appreciate over time. Well balanced portfolios mitigate the risk of medium-term investment-grade fixed income obligations, shares of common stocks in leading corporations (some but not all that pay dividends), and real estate holdings via REITs. Generally, a balanced portfolio is always vested (meaning very little is held in cash or cash equivalents unless the investor (either you or a portfolio manager) has determined that there are no compelling opportunities.