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Investment Fees Can Invalidate The 4% Rule – Forbes

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The 4% Rule has helped generations of retirees estimate how much they can spend each year in retirement. What many don’t know, however, is the role investment fees played, or didn’t play, in the creation of the rule. For example, does the rule still work if a retiree pays an advisor 1% a year in fees? Does it work if a DIY investor pays mutual fund fees of 1% or more?

In this article, we’ll look at five key things every investor should know about the 4% Rule and investment fees. 

1. The 4% Rule Ignores Fees

First, the 4% Rule ignores fees. William Bengen, the father of the 4% rule, published his paper in 1994. In his analysis, he assumed the retiree paid no investment fees. In fact, he didn’t even discuss fees in his paper. Instead, he just assumed returns based on large cap U.S. equities and intermediate term U.S. Treasury bonds.

For those who pay no fees, or virtually no fees, Bengen’s assumption works out just fine. But who pays virtually no investment fees?

2. DIY Index Fund Investors are Safe

If you are a do it yourself investor and invest in low cost index funds, relying on the 4% Rule is consistent with Bengen’s analysis and assumptions. To be clear, a DIY investor doesn’t pay an advisor a percentage of their assets (called Assets Under Management, or AUM) for investment advice.

In addition, these retirees invest in very low cost index funds. For example, firms such as Vanguard, Fidelity and Schwab offer index funds that cost 10 basis points or less. Fidelity even offers some mutual funds that don’t charge any expense ratio. While these funds charge a fee in most cases, the fee is as close to 0% as one can get. As a result, these investors can continue to rely on the 4% Rule as developed by Mr. Bengen.

3. Fees Risk Running Out of Money in Retirement

What about everyone else? For those that pay advisors, invest in expensive mutual funds, or both, what happens if they ignore the fees and continue to rely on the 4% Rule?

In short, ignoring fees increases the risk that one will run out of money in retirement. And the increased risk is significant, particularly for those who spend 1% or more in fees. Bengen’s original 1994 paper gives us some insight into the risk.

In his paper, he considered several initial withdrawal rates beyond four percent. In fact, he considered initial withdrawals ranging from one to eight percent. What he found with withdrawal rates of five and six percent are instructive for our purposes. Why? They give us some idea of how investment fees of one to two percent will affect the longevity of a portfolio in retirement.

To be clear, it’s not a perfect analogy. Unlike spending in retirement, investment fees aren’t adjusted for inflation. Because investment fees are typically calculated as a percentage of a portfolio, the actual fees move higher or lower based on the portfolio’s value. Bengen’s analysis, however, still gives us a rough idea of the effect fees can have on a portfolio. So what did he find?

At an initial 5% withdrawal rate, many retirement years he examined saw portfolios exhausted in just over 20 years. Bump up the initial distribution to 6%, and some years saw portfolios run out of money in about 15 years. There were still years where the money lasted 30 years or more. But the number of years where it didn’t grew substantially. More importantly, there’s no way to know in advance whether a retiree picked a “good” year or a “bad” year to retire. In fact, it may take a decade or more into retirement before one knows. And by then, it’s too late.

4. Fees Reduce What You Can Spend in Retirement

For those not comfortable ignoring fees, and good for you, one option is to reduce spending by the amount of investment fees. For example, let’s assume one pays an advisor 1%, and they in turn invest in mutual funds that cost 1%. That’s 2% that comes out of a retiree’s portfolio every year. 

A $1 million portfolio would pay $20,000 a year in investment fees. In year one of retirement, a retiree could spend $40,000 following the 4% rule. In our hypothetical, however, $20,000 of that, or half of the spending allowance, would go to an advisor and mutual funds. In other words, a 2% fee just wiped out 50% of our budget. Even a 1% investment fee would wipe out 25% of what a retiree could spend.

5. Low Cost Options for Investment Help

For those who need investment help, there are low-cost options. Here I’ll list three potential alternatives that would allow a retiree to get some help and still adhere to the 4% Rule.

Low Cost Advisor

The first is a low cost advisor. And by low cost, I mean 30 basis points or less. One example is Vanguard’s Personal Advisory Service. It costs just 30 basis points and they invest in low cost index funds. Vanguard’s PAS is not perfect. I think they’ve had growing pains as Vanguard has seen explosive growth. You also can’t meet in person. It’s still a solid option from the pioneer of index fund investing.

Flat-Fee Advisors

Many advisors today offer their services on a flat fee basis, rather than charge a percentage of AUM. Now here we have to be careful. We are not talking about fee-only advisors. While they have a fiduciary duty to their clients, so do flat-fee advisors. The difference is that fee-only advisors charge based on a percentage of a client’s portfolio. A flat-fee advisor charges a flat fee regardless of the portfolio’s balance.

An example of a flat-fee advisor is Mark Zoril of PlanVision. He is not going to manage investments and make trades for his clients. Instead, he’ll provide a comprehensive financial plan including an investment plan. With a recommended portfolio in hand, a retiree can then allocate their portfolio accordingly.

More and more advisors are offering low-cost AUM services, flat-fee services or both. You can find a list of some of these advisors here.

Digital Advisory Services

A third option is to use a digital advisory service, sometimes referred to as a robo-advisor. These are companies that use technology to help with everything from portfolio construction to rebalancing to retirement spending. Two examples are Vanguard’s Digital Advisor Services and Betterment. Both charge low fees and offer tools to help retirees invest their money and take distributions for spending.

Whatever approach one takes, the key is to understand how investment fees affect the 4% Rule. Arguably the best approach is to use low-cost index funds that one manages on their own. For those that need some help, seek out one of many low-cost advisory services.

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Listings boom, trading frenzy fuel record 2020 for investment banks – The Journal Pioneer

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By Lawrence White

LONDON (Reuters) – A surge in blank-cheque investment vehicle fundraising and frantic pandemic-related trading in 2020 boosted investment banks’ income by a record 28% from the year before, a report showed on Friday.

Revenues for the 12 largest investment banks tracked in research firm Coalition Greenwich’s index rose to $194 billion, the highest annual total for the industry since the survey began around a decade ago.

The trading bonanza showed how Wall Street and European banks benefited as the COVID-19 pandemic sparked global government and central bank action, upending asset prices and sending investors scrambling for safe havens.

Later in the year banks feasted on the craze for so-called blank-cheque or special purpose acquisition companies (SPACs), which raise money to acquire another company without specifying which one to their investors in advance.

Just one part of a listings boom which also included more traditional initial public offerings (IPOs), SPACs raised a record $82 billion last year and the trend has been gathering steam in 2021, boosting fee income for banks organising the deals.

Fixed income, currency and commodities (FICC) income rose 41% year-on-year, the Coalition report said, with commodities revenues hitting record levels as investors sought safe havens in precious metals and as oil prices surged later in the year.

Central Bank intervention to stimulate flatlining pandemic-hit economies also drove strong trading in credit products, except for more complex structured debt which risk-averse investors largely shunned.

In equities, derivatives volumes hit their highest level in a decade, Coalition said, but again more complex structured products underperformed as companies axing dividends in the first half of the year hit derivatives tied to such payouts.

JOB CUTS

Despite the bumper year, frontline revenue-producing bankers faced job losses, Coalition said, with positions down 1% from a year earlier to 48,700 as banks cut structured equity derivatives jobs in particular on waning demand.

That meant revenue per employee rose across all business lines, with the trend most evident in FICC where the measure rose to some $6 million, up 44% from 2019.

Banks kept bonus increases modest even as income soared, mindful of being seen to splurge too much amid an economic crisis and looking ahead to likely tougher times this year.

Coalition’s index tracks Bank of America , Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Societe Generale and UBS.

(Reporting by Lawrence White; Editing by Kirsten Donovan)

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With Ansys Off 24% From Recent High, Investment Opportunity Awaits – Forbes

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It’s not often that a conversation with a CEO leaves me dazzled. But that’s what happened to me on March 4 after speaking with Ajei Gopal, CEO of Ansys, a Pittsburgh-area engineering software company.

This 50 year old company enjoyed 24% revenue growth in the fourth quarter — reporting some $1.7 billion in 2020 revenue and finishing March 4 trade with a $26.7 billion market cap — and it looks to have a bright future ahead.

The recent swoon in tech stocks and disappointing guidance have taken a big bite out of its shares — since February 12 Ansys has fallen 24% from its peak of $404, according to Morningstar.

For those who believe it’s smart to invest in companies with great long-term growth potential when the stock price is down, . Here are three reasons I think Ansys is worth examining:

  • Large market opportunity
  • Winning competitive strategy
  • Compelling growth trajectory

(I have no financial interest in the securities mentioned in this post).

Ansys Financial Results

Ansys software simulates the physical world so product developers can get products to market faster and at a lower cost without the need to build a physical prototype.

Ansys’s more than 4,000 employees invent and apply its simulation expertise in a range of disciplines — including physical structures, fluids, semiconductors, power, optical, and electromagnetics — to serve over 50,000 customers in industries such as aerospace, defense and automotive.

Its customers include BMW, Porsche, Lucid Motors, Honeywell, Samsung and Axiom Space which plans to launch the first private mission to the International Space Station later in 2021

Ansys reported expectations-beating revenue and earnings per share growth for the final quarter of 2020. According to Zacks Equity Research, its 24% increase in fourth quarter revenues was 11% above the Zacks Consensus Estimate. Its $2.96 EPS for the quarter was 18% higher than Consensus and 32% more than the year before.

Ansys has beaten estimates for several quarters. Zacks noted that the company had exceeded revenue and EPS estimates for four consecutive quarters.

Ansys guided investors to expect slower growth for all of 2021. According to Nicole Anasenes, Ansys CFO, full year 2021 non-GAAP revenue is forecast to be up between “6% and 11% — in the range of $1,790 million to $1,875 million.”

She guided 2021 EPS in the range of $6.44 to $6.92, according to Ansys’ Q4 2020 Earnings Call Transcript — the midpoint of which is up 34% from its fully-diluted 2020 EPS of $4.97.

Large market opportunity

Ansys is aiming at a large, growing market opportunity. As Gopal told me, Ansys’s total addressable market is $8.5 billion and is “growing significantly — we expect it to triple in the next seven to 10 years.”

The pandemic had a mostly positive effect on demand for Ansys’s services. “While liquidity challenges reduced demand for our services among small and medium-sized businesses, the pandemic increased the number of R&D engineers who were working from home.”

Ansys helped its larger customers keep their R&D going. “Our larger customers were initially concerned that R&D — which is the last thing that companies cut in a recession — would fall apart. But we saw that engineers are perfectly capable of working from home without going into the labs. We proved that we could make engineers successful,” said Gopal.

Winning competitive strategy

Large companies have accelerated their product development roadmaps during the pandemic. “This has created more demand for our products. There has also been strong demand from designers of eco-friendly electronic vehicles and in commercial aerospace,” he explained.

To win new customers, Ansys must persuade engineers and “higher ups.” As Gopal said, “The engineers — who are the end-users of our product — have a strong vote. And when we talk with division presidents, they look for personalized return on investment analysis. I met with such an individual who had a reputation as very tough. He told me that 25 years before, he had been an engineer and Ansys’s product had fixed a problem that enabled him to meet his deadline. He has become our biggest champion.”

Ansys persuades such engineers to use its products thanks to the accuracy of its simulations and the ability of its products to integrate different scientific disciplines. “We polled customer CEOs for four years and they love the accuracy of our products. We are represented across all scientific disciplines. For example, in crash testing we can integrate disciplines — such as fluid flow, electronics, and structural — to simulate airbags,” he said.

Ansys builds very close technical relationships with its customers. As Gopal explained, “We have ACE [Ansys Customer Excellence] engineers — including 760 PhDs. They are skilled to know what customers are looking for and help them solve problems — for example, when they are struggling to get their models working.”

Ansys takes affirmative steps to keep the company from losing its ability to sense and adapt to changing threats and opportunities. “There are 4,800 people in the company and it feels like we are a startup — we’ve more than doubled the number of people since I joined in 2016,” he said.

Ansys uses many organizational methods to keep the startup feel. “Our ACE engineers help with the sprint of agile development — they can figure out how to prioritize our R&D portfolio in part based on how customer needs are changing. We are not monolithic — we encourage business units to be responsible for physics. There is interaction across the company. We have 1,000 companies in our startup program that are pre-revenue — founders and a dream. We give them heavily discounted software and we learn from them. And we partner with 3,000 universities who use Ansys for R&D and we help them in curricular development,” said Gopal.

Compelling growth trajectory

Ansys has a compelling longer-term growth trajectory. “We have five tailwinds: electrification — electric vehicles and submersibles; autonomy — self-driving care and automatic robots; 5G telecommunications — which has finicky signals; industrial Internet of Things; and Ecoactivity.”

Analysts were somewhat disappointed with Ansys’s 2021 guidance. As Morningstar

MORN
Equity Analyst Julie Bhusal Sharma wrote, “[Ansys’s] guidance was a step down from what we were projecting in 2021 on both the top and bottom lines. We continue to view shares as overvalued and recommend waiting for a greater pullback before investing.”

It is possible that its share could fall further — presenting an even better entry point for those looking to Ansys as a long-term investment in a good company.

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Listings boom, trading frenzy fuel record 2020 for investment banks – Cape Breton Post

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By Lawrence White

LONDON (Reuters) – A surge in blank-cheque investment vehicle fundraising and frantic pandemic-related trading in 2020 boosted investment banks’ income by a record 28% from the year before, a report showed on Friday.

Revenues for the 12 largest investment banks tracked in research firm Coalition Greenwich’s index rose to $194 billion, the highest annual total for the industry since the survey began around a decade ago.

The trading bonanza showed how Wall Street and European banks benefited as the COVID-19 pandemic sparked global government and central bank action, upending asset prices and sending investors scrambling for safe havens.

Later in the year banks feasted on the craze for so-called blank-cheque or special purpose acquisition companies (SPACs), which raise money to acquire another company without specifying which one to their investors in advance.

Just one part of a listings boom which also included more traditional initial public offerings (IPOs), SPACs raised a record $82 billion last year and the trend has been gathering steam in 2021, boosting fee income for banks organising the deals.

Fixed income, currency and commodities (FICC) income rose 41% year-on-year, the Coalition report said, with commodities revenues hitting record levels as investors sought safe havens in precious metals and as oil prices surged later in the year.

Central Bank intervention to stimulate flatlining pandemic-hit economies also drove strong trading in credit products, except for more complex structured debt which risk-averse investors largely shunned.

In equities, derivatives volumes hit their highest level in a decade, Coalition said, but again more complex structured products underperformed as companies axing dividends in the first half of the year hit derivatives tied to such payouts.

JOB CUTS

Despite the bumper year, frontline revenue-producing bankers faced job losses, Coalition said, with positions down 1% from a year earlier to 48,700 as banks cut structured equity derivatives jobs in particular on waning demand.

That meant revenue per employee rose across all business lines, with the trend most evident in FICC where the measure rose to some $6 million, up 44% from 2019.

Banks kept bonus increases modest even as income soared, mindful of being seen to splurge too much amid an economic crisis and looking ahead to likely tougher times this year.

Coalition’s index tracks Bank of America , Barclays, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan, Morgan Stanley, Societe Generale and UBS.

(Reporting by Lawrence White; Editing by Kirsten Donovan)

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