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Investment Management Process

Investment Management Process

The Process

We believe that fundamental, valuation, and technical factors form the basis of a sound investment decision-making process. Relying heavily on these three factors, we use a diligent process for designing the asset allocation and security selection framework for portfolios.

Asset Allocation: Building One Portfolio at a Time

The investment climate today offers a sea of opportunities and challenges. We focus on understanding when the market environment is rewarding or penalizing which helps to set the framework of the asset allocation to either a defensive or opportunistic tone.

LPL Financial Research believes that portfolio building starts with a sound, tested asset allocation process. We construct specific portfolios for each of the different themes using an overarching asset allocation process as a guide. All the portfolios must be well-diversified among broad investment types and have the most optimal mix to meet varying investment objectives.

Our asset allocation process is a multi-disciplined, collaborative effort. Each week potential investment opportunities are analyzed with the goal of augmenting longer-term perspectives with shorter-term asset allocation opportunities.

Security Selection: Populating the Asset Classes

Once asset allocation has been established, the next step is to populate each portfolio with securities. We operate on a shared philosophy that diligent fundamental research and a well-defined analytical process, rigorously adhered to, is the key to identifying, recommending, and monitoring investment opportunities that offer the potential for superior long-term, risk-adjusted returns.

The same basic principles are used when selecting both exchange-traded products and mutual funds. When applying qualitative analysis, we examine them differently. The structure of the two types of securities dictates we use different criteria.

Portfolio Construction: Putting It All Together

Once the asset allocation is created and the due diligence is done on the individual securities, it is time for portfolio construction. Making sure the combination of securities leads to a strong performing portfolio is the key finishing step in our process. Simply taking a variety of securities from different asset classes and weighting them in a particular manner does not ensure a strong performing portfolio. Analysis must be done on the portfolio as a whole to make sure the end combination is as strong as we can make it.

From the asset allocation strategy to the selection and combination of underlying investments, each portfolio is specifically designed to address the objectives of your investment theme.

Ongoing Monitoring of Portfolios and Underlying Investments

Once the portfolio has been built and implemented, it is continuously tested and monitored to ensure that it remains true to the original goals. Our investment decisions and model portfolios are monitored closely on a daily basis against their benchmarks, peers, and our own internal metrics. This process ensures that the portfolios are positioned correctly for the short-term and long-term with regard to a variety of factors. Knowing how our strategic point of view, tactical asset allocation, and implementation decisions have performed in the past, and more importantly, why they performed the way they did is a critical input to the decision-making process.

Sell Discipline

The sell discipline framework helps take much of the emotion out of the investing process and helps us monitor the risk-return characteristics of our trades on a real-time basis. The sophisticated and in-depth sell discipline is an important part of the risk control and portfolio monitoring process. The sell discipline enables analysts to determine two critical components:

How long do we wait until we sell an investment that is lagging?

Conversely, how long do we stay with a successful investment idea before taking profits?

The result is that our team can focus on the continued validity of the investment thesis. We monitor such factors as macro variables, valuations, fundamentals, and technicals, among others — to ensure whether the thesis is still valid or if a sell is warranted.

Retirement Income Planning

The shift toward retirement income planning presents tremendous challenges.  The five key risks retirees face are as follows:

Longevity – Many people underestimate their life span and risk outliving their assets.

Health Care Expenses – Rising health care costs coupled with inadequate health care coverage can have a devastating impact on a retirement income plan.

Inflation – Inflation increases the future costs of goods and services and may erode the value of assets set aside to meet those costs.

Asset Allocation – Retirees with a portfolio overly concentrated in conservative investments expose themselves to a greater risk of outliving their assets.

Withdrawal Rate – Aggressive withdrawal rates increase the likelihood that retirees will deplete their assets prematurely.

We understand and plan for the impact of the above mentioned risks on a person’s retirement income plan.  We understand withdrawal strategies, tax implications, and regulations regarding asset distribution.  We stay abreast of changes in relevant government programs including Social Security and Medicare.  We help clients understand income strategies, the implications of working in retirement, and managing health care costs.

We help create a well-constructed retirement income plan.

Retirement Tax Planning

Retirees often receive income from a variety of sources, including Social Security benefits, and distributions from pensions, annuities, IRAs and other retirement plans.

Your Social Security benefits may be completely tax-free or partially tax-free, depending on your total income.   For planning purposes, you should have an idea of whether your retirement income will cause some of your Social Security benefits to be taxed.

Your pension or annuity may be fully or partially taxable. If all contributions to the pension were tax-deferred, then your distribution will be fully taxable. If you contributed some after-tax dollars to fund your plan, then you have some cost basis in the plan contract. Part of your distributions will be a tax-free recovery of your cost basis, and the remainder will be taxable income. Publication 575, Pension and Annuity Income, provides comprehensive information about figuring the taxable amount. Pension and annuity income is reported to you using Form 1099-R. Your plan administrator should calculate the taxable portion of your pension distribution. For planning purposes, you will want to contact your plan administrator to find out what your pension payments will be, and what part of the payments will be considered taxable income.

401(k) Distributions

Distributions from your employer's 401(k) plan are fully taxable since the contributions excluded from your taxable income. Remember that if you make withdrawals prior to age 59 ½, you may be subject to a 10% tax penalty. Distributions from Roth 401(k) accounts are treated the same as Roth IRA distributions.

IRA Distributions

Distributions from your individual retirement account may be fully taxable, partially taxable, or completely tax-free depending on the type of IRA you have.

If you have a deductible Traditional IRA, your distributions will be fully taxable. You contributed funds using tax-deductible dollars, and tax is deferred on both the contributions and the earnings until they are withdrawn.

If you have any basis in a non-deductible Traditional IRA, your distributions will be partially taxable. A portion of your distribution represents a return of your non-deductible investment, and that portion is recovered tax-free.

Distributions from Roth IRAs are completely tax free as long as you meet two basic requirements. Your first Roth IRA contribution was made at least five years prior to any distribution, and the funds are distributed after you reach age 59 and a half. (For more information, see Are Roth Distributions Taxable? in Publication 590. Funds withdrawn from an IRA prior to age 59 ½ may be subject to a 10% tax penalty.)

Required Minimum Distributions

Taxpayers must begin withdrawing funds from their 401(k) and Traditional IRA plans once the taxpayer reaches age 70 and a half. Distributions must start "by April 1 of the year following the year in which you reach age 70½," which is called the required beginning date. For more information, see When Must You Withdraw Assets? in Publication 590.

Roth IRAs and designated Roth 401(k) accounts are not subject to the minimum required distribution rules.  The minimum amount that must be distributed is your account balance divided by the life expectancy figures published by the IRS in Publication 590. You can use Web-based calculators to estimate your minimum distribution, such as RMD calculator from accounting publisher CCH.

Plan to withdraw at least the minimum amount required from your IRA and 401(k) accounts.

Tax Strategies

Retirees have more control over their tax situation, since they can decide how much they need to withdraw from various retirement plans. Retirees can help keep their taxes as low as possible by using these time-tested strategies.

Taking full advantage of the standard deduction or itemized deductions and personal exemptions. Together, your standard deduction or itemized deductions and your personal exemptions represents how much income will be tax-free. Retirees can coordinate taxable distributions with their mortgage payments, real estate taxes, and medical expenses.

Accelerate retirement distributions when you have excess deductions.

If your standard deduction will exceed your taxable income, consider withdrawing more retirement funds than you need. By accelerating income when you have a zero or low tax rates, you'll avoid potentially paying more taxes in a future year.

Plan to take the Credit for the Elderly. There's a special tax credit for taxpayers age 65 or older. But qualifying for the credit takes careful planning. Your adjusted gross income must fall beneath certain limits.

Maximize tax-free income. Taxpayers can exclude up to $250,000 in capital gains from selling a main home (up to $500,000 if married). Also, interest earned from municipal bonds is exempt from federal income tax. It may be subject to state, local or alternative minimum tax.

Defer retirement plan distributions until needed. Keeping your taxable distributions to a minimum will push more income to future tax years.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Long Term Care Planning

Understanding long-term care services and your possible need for services can help you maximize your independence and functioning at a time when you may not be fully independent due to a sudden illness, chronic condition or accident.

In 2008, 21 million people required long-term care services.   About 70 percent of people over age 65 require some type of long-term care services during their lifetime.* Since there is a good chance that you might need long-term care services at some point, it is important to explore your options and plan ahead.

People often put off planning for long-term care because they do not want to think about a time when they might need it.   Most people first learn about long-term care when they or a loved one needs care. However, if you wait until you need services to start planning, your options may be limited. You may not be able to find the information you need to make decisions. You may not have the money you need to pay for the services you want or you may have to rely on your family or others to make decisions for you.

We will help you understand:

  • Services available from your family and in your community
  • Special conditions (such as age or income) that may apply for receiving services
  • Costs of services
  • Public or private payment options available to you

*Statistics according to the Department of Health and Human Services.

Social Security and Medicare Planning

"Social Security won't be there when I retire, so why bother learning about when to start benefits?" This commonly expressed attitude is a big mistake for anybody approaching retirement. Why? Well, for one thing, Social Security income accounted for an average of 64.8 percent of total income for all households with someone aged 65 or older, according to a recent report by the Social Security Administration. Deciding when to start Social Security benefits is probably one of the most important financial decisions aging boomers will make.

Social Security income is a valuable source of retirement income that protects against three significant retirement risks -- inflation, market volatility, and longevity. For many boomers, given the shift away from traditional pension plans, Social Security will provide them with the only income that's guaranteed for life.

But making the best decision about when to start Social Security can be complicated, particularly for married couples. So where can you get good advice? According to a recent survey conducted by Social Security Timing, a financial planning firm that helps people determine optimal Social Security claiming strategies, 77 percent of survey respondents expect to receive advice from Social Security representatives. But the reality is that these representatives are actually prohibited from giving any advice! Social Security representatives are trained to answer factual questions about the benefit rules to help you make an informed decision, but they can't tell you what to do given your specific circumstances.

According to the same survey from Social Security Timing, 84 percent of respondents expect advice about claiming your Social Security benefits to be free, while 92 percent would expect to pay less than $100 for such advice. This is particularly short-sighted, since making the best decision on when to start Social Security benefits has the potential to increase your lifetime payout.

Over half of all survey respondents want their financial planner to give them Social Security claiming advice, yet many financial planners don't understand Social Security's complex rules or the nuances regarding life expectancies. In fact, financial advisors often tell their clients that the best approach is to start Social Security benefits early and invest the income, which, according to my recent analyses, is a strategy that has significant risks.

Of course, not all people need to consult a financial planner to make the best decision about when to start their Social Security benefits -- some people will be able make decisions on their own by studying the informative Social Security Administration website.   I suspect, however, that most people will feel better getting professional help for this important decision. Finding an informed financial advisor may be your best approach, particularly if you need an advisor to help in other areas of retirement planning, such as how to use your retirement savings to generate reliable lifetime retirement income. If this is the case with you, consulting with an experienced financial advisor will be well worth your time and effort. 

So what is Medicare? Simply put, it's health insurance for seniors. Whether you're a snowbird or a ski bunny, a Medicare doctor should never be more than a few miles away.

At the core of this program is what's known as the Original Medicare Plan, a fee-for-service program that's made up of two components: Medicare Part A and Part B. Medicare Part A is hospital insurance, which covers everything from general hospital stays to rehabilitation in a nursing home for acute illnesses. Most people don't have to pay a premium for Part A since they paid Medicare taxes during their working days.

Medicare Part B is basic medical insurance that covers services ranging from doctors' visits and outpatient hospital care to some physical and occupational therapy and even some home health care.

This may be true, but it can still leave a lot of holes in one's coverage. Seniors who opt for Medicare's Original plan (also known as traditional Medicare) often find themselves paying well beyond their monthly premiums. According to the Kaiser Family Foundation, a nonprofit focused on health-care policy, Medicare pays only 56% of beneficiaries' total health-care expenditures. As a result, 87% seniors opt for some sort of supplemental insurance.

The biggest category of non-covered items: prescription drugs, which can cost thousands of dollars a year for people on pricey maintenance medications. Seniors can sign up for a Medicare prescription drug plan to help cover some of those large out-of-pocket expenses. Alternatively, seniors can also purchase a supplemental Medicare plan, called a Medicare Advantage Plan, from a private insurer. The choices will vary by region and range from restrictive HMOs to more costly Preferred Provider Plans and Fee-For-Service Plans. To find a plan in your area check out the government's Medicare Personal Plan Finder tool.

Estate Planning

A recent survey by U.S. Trust found that “there is a gap between the importance the wealthy place on providing family security and what they are actually doing in terms of estate planning.”1 A majority of survey participants have an estate plan in place, but 39 percent indicate their plans are not comprehensive enough to properly manage distribution of their wealth. This may be because leaving a financial inheritance is less important for many of them than achieving other goals, including:

  • Financial security for self and family
  • Financial freedom
  • Travel
  • Quality relationships with family and friends

The survey respondents also had concerns about their heirs’ ability to handle the responsibilities of wealth. Just over one-half had not fully disclosed their wealth to their children and 15 percent had disclosed nothing at all. Some of the fears preventing disclosure included the effect the knowledge might have on their children’s lives and concerns that family money could be wasted.

Make sure estate plan does it all

If one of your priorities is providing ongoing financial security for your spouse and family members, then it’s important that estate planning do more than address tax issues. A comprehensive estate plan should include the priorities shown in the pyramid.

Financial security

Once there is comfort with financial security, it is necessary to establish goals for the distribution of wealth.  Things to consider include:

  • Who will receive the assets?
  • How much will each person/entity receive?
  • How will the wealth be distributed?

Estate protection

Safeguarding your estate comes next. Your estate may need protection from:

  • Creditors or lawsuits
  • Former family members
  • Disgruntled or irresponsible family members
Management continuity

The next consideration is continuity of management and caretaking for the estate. Is a trust or another entity necessary?  It can be a good idea to consider the benefits of:

  • Revocable and irrevocable trusts
  • Life insurance trusts
  • Charitable trusts


Finally, the potential tax burdens related to an estate should be addressed.

Everyone needs a legacy plan

Regardless of wealth, everyone needs a legacy plan. It is common for a person who is not concerned about taxes to simply not plan. This is a mistake. Even if your legacy plan consists of a simple Will and Power of Attorney documents, planning is necessary. Likewise, people who are concerned about taxes, and have engaged in estate tax planning, also need to consider other aspects of estate planning and the long-term effects of their legacies.

This information is not intended to be a substitute for a specific individualized legal advice. We suggest that you discuss your specific situation with a qualified legal advisor.

1U.S. Trust, U.S. Trust Insights on Wealth and Worth™: Survey of High Net Worth and Ultra High Net Worth Americans, 2011 Highlights, p.6. The survey included 457 individuals with more than $3 million investable assets.