How Much Will College Cost? Pt. 1

You’ve had a baby and you want to help pay for their college...

The first hurdle is realizing the time to save is now and that the benefits of saving take time to realize. Saving money can be hard and some people are better at it than others as the delayed gratification of saving is all they need to put money away.

Perhaps these folks find it easier to live by Benjamin Franklin’s famous axiom, “A penny saved, is a penny earned."

However, most Americans do not enjoy the pain of saving money. The emotional reward of spending is too great to overcome. As a result, we believe people need both a refined process and a little coaching to make the task of saving for college as easy as possible.

Thus, if you want to save for your child’s college, here are three steps to making the whole thing easier:

1.     Educate

2.     Automate

3.     Recalibrate

For this blog, we will start with Step 1. Subsequent blogs will highlight Steps 2 and 3. By the end of the series, we are hopeful you will have a more rounded understanding of what needs to be done to better prepare and save for your child’s (or children’s) education.

1.  Educate yourself.

How much will college cost?

(To simplify the analysis, we are going to assume your child will attend an in-state public university. If you would like other analyses, please contact us.)

Between 2006-07 and 2016-17, published in-state tuition and fees at public four-year institutions increased at an average rate of 3.5% per year beyond inflation, slightly lower when compared to 3.9% between 1986-87 and 1996-97 and 4.2% between 1996-97 and 2006-07.

The inflation rate from August 2006 to August 2016 was 1.68% per year. In other words, $10 in August 2006 had the same buying power as $11.81 in August 2016. (inflation calculator)

When we combine the increase in tuition and the inflation over that time period the average rate increase of a public four-year institution was 5.18% (3.5% + 1.68%) over the decade ending August 2016.

Screen Shot 2017-10-25 at 9.09.40 PM.png

The above chart is an estimated cost for attending the University of Iowa for one academic year as an in-state student. The student’s parents have college savings, so she is only eligible for an estimated grant/gift of $2,000. The rest will be funded by loans or in our case, college savings.

If we use the cost of college today, $19,533 per year, and forecast it forward using 5.18% college cost growth, the cost of a four-year degree at the University of Iowa in 18 years is projected to be:


However, we are using assumptions in the growth rate. Let’s look at a range of possible tuition growth rates in the below chart

Screen Shot 2017-10-25 at 9.02.45 PM.png

With the range of possible college cost growth rates, the cost of a four-year degree from the University of Iowa can range from $143,948.66 to $302,936.27.

How much should I save?  

The geometric average of the S&P 500 from 1928 through 2016 is 9.52% and from 2007-2016 the return was 6.88 percent on average per year.

For our analysis let’s assume the cost of school is $209,516.27 and we’ll be conservative and use a 6% return on our money per year.

So, how much do we need to save in order to pay for 100% of our child’s school at the University of Iowa?

$479 per month

$479 per month is a large number and not realistic for many. However, even if you are able to save half of that you will put your child in a better place than many Americans who come out of college burdened by debt.


Challenges Women Face Preparing for Retirement

A couple weeks ago, we had the opportunity to present to a women's leadership group within a large corridor organization.  We were tasked with presenting the basic framework of how one might improve their financial position, prepare for retirement and provide solutions and tools to assist in that endeavor. Knowing we were presenting to a group of women, we felt compelled to discuss the unique realities women face as they prepare for retirement and life during their “golden years.”

Many remain unaware, but women in general face unique challenges as they begin their careers, prepare for and live through their retirement. These realities hit close to home, as we have spouses in the workforce and I have a 17-month-old daughter at home who will eventually be a career woman.

What are these realities you ask?

Generalizing of course, women tend to have to save more than their equivalent male counterpart to have the same amount of assets at the time of retirement. Presented differently, two new college graduates enter their first job earning the same starting salary and will retire at the same future date. One is female the other male. The table below illustrates the difference in annual savings required for both individuals to attain the same amount of assets at retirement. Our industry has coined this the “gender retirement gap.”

Source: Garnick, Diane, “The Longevity Challenge: Preserving Health, Income, and Standard of Living Through Extended Retirement” CFA Institute. March, 07 2017. < The Longevity Challenge: Preserving Health, Income, and Standard of Living Through Extended Retirement>.

Source: Garnick, Diane, “The Longevity Challenge: Preserving Health, Income, and Standard of Living Through Extended Retirement” CFA Institute. March, 07 2017. < The Longevity Challenge: Preserving Health, Income, and Standard of Living Through Extended Retirement>.

Contributing factors include societal norms, gender pay gap and risk tolerances. More specifically, women spend less time in the workforce, (although improving) women earn less than equivalent male counterparts and women tend to be more risk aware and thus assume less risk with their portfolios.

What we have touched on thus far only relates to preparing for retirement, but actual retirement presents another set of challenges for women. During retirement, women tend to spend more. This is largely due to the reality that women live longer than men. Moreover, women tend to spend more on healthcare and are the sole providers during late stages of retirement.

From an advisor vantage point, it is important to plan for these realities. I am not referring to the need for you to walk into an insurance office to purchase long-term care insurance, I am referring to the need to address these realities as you plan for retirement and if you’re in retirement, plan to have accelerating expenses during the later stages in life. Improper planning may result in significant impairments to income expectations in retirement and worse, depletion of assets during your late stages in retirement.

The full presentation can be accessed below:

4 Money-Related Lessons

Courtesy of: Strategic Communications

April is Financial Literacy Month.

In observance of these 30 days, we have included below four money-related lessons we at MFG believe every person should know. This is not an exhaustive list, or even the ‘Top 4’ necessarily. However, these are four principles that jumped out to us because they are often misunderstood or because we have recently discussed them.

Let’s get to it.

Your home is not an investment.

Using data from the Federal Housing Finance Authority, a home purchased in Iowa for $100,000 in 1991 would be worth $230,420 at the end of 2016 (remember this is the average home in Iowa). That is a 3.26% annual return. Inflation alone would have grown $100,000 to $180,415.30.

Shelter, one of Maslow’s most basic needs, is necessary. However, let’s assume the $100,000 is invested in the S&P 500 in 1991 (ignoring transaction costs and taxes). What is the balance at the end of 2016? $1,137,163.

Even if a $100,000 home was purchased in Washington D.C., the best home value return of the period, it would have grown to $497,960.

The bottom line: although your home value will likely appreciate, it is far below the expected return of the stock market. Thus, your home should not be considered an alternative to retirement savings.

Timing is everything. Also 99% Luck.

In the illustration above we used 1991 through 2016 as our timeframe because that is when average home data was available. It also coincided with the 1990’s bull market. This inflated the ending value, right?

Not really. To compare apples to apples, we analyzed rolling 26 year periods in the S&P 500 dating back to 1926. If you had invested $100,000 in the S&P 500 at the beginning of 1975, 26 years later your $100,000 would have grown to $4,713,321, an almost 16 percent annualized return.

What if you didn’t have $100,000 to invest in 1975? What if your grandma left you the money a year later? $100,000 invested at the beginning of 1976, one year later, would have grown to $3,032,811. I don’t know about you, but I think ~$1,700,000 is a disparity.

Would the person who invested one year earlier than you be smart enough to admit their higher ending value was entirely because of luck?

I’ll make a lot more money when I get older. I’ll save then.

Let’s assume that you’re 35 years old, want to retire at 65 (30 years from now), have $50,000 in a 401(k) and that you are adding $10,000 per year to that account.

If your portfolio returns 6% per year, after 30 years you will be the owner of a $1,077,756 portfolio.

What if you decide to start saving at 45 instead? You still have $50,000 in a 401(k), but now you only have 20 years to save because you still want to retire at 65. For an ending portfolio value of $1,077,756, assuming 6% annual returns, you would need to save $24,939 per year or almost $15,000 more than what was required of you at age 35.

Given you can’t control sequences of returns, do you want to leave your retirement future up to Mr. Market generating large returns? If not, save more money earlier in life.

We’re all emotional, Including you.

Here’s a just a few biases to watch out for:

  • Self-control bias:

    • How hard is it for you to save money, i.e. to make the tough decision to pay yourself first? Self-control bias is why we eat the second bowl of ice cream and why the median U.S. family has only roughly $5,000 in retirement savings.

  • Overconfidence bias:
    • “Me? Oh yea, I can outperform the stock market. I can pick stocks that double. I can manage my own portfolio. This stuff is easy.” Often these investors underestimate the portfolio risk that is leading to these returns, among other concerns.

  • Loss aversion bias:

    • Investors feel more pain losing $10 than joy when winning $10.  Let’s go back to our 26-year rolling returns. If an investor buys $100,000 worth of the S&P 500 at the beginning of 1969, they would have experienced losses of 8.24%, 14.31%, and 25.90% in 1969, 1973 and 1974, respectively. After 1974, the investor has had enough. He decides to pull his portfolio (now $81,844) out of the market because he does not want to lose anymore. In 1975, the S&P 500 returned 37%. Reluctantly the investor put his money back into the market at the beginning of 1976, seeing the returns from 1975. What is the portfolio value in 1994? $890,613. Had he stayed invested in 1975, his ending portfolio value would have been $1,220,096.

Planning and investing are hard. But, anything worth sacrificing for is tough. #LetsGo

Disclaimer: Past returns are not indicative of future gains.

·      Inflation calculator:

·      ‘State of American Retirement’

·      S&P 500 return data came from Aswath Damodaran’s website:

The Apple of Buffett's Eye

Photo from CNBC

Photo from CNBC

Despite owning 9 percent of IBM, Warren Buffett, aka “The Oracle of Omaha” does his best to avoid technology companies. However, in the last six months Buffett’s company Berkshire Hathaway has purchased a stake in Apple. On February 27, Buffett told CNBC he more than doubled his holdings in in the company and that Berkshire now owns over 2.5 percent of Apple.

This had investors scratching their heads. Why would the Oracle, who avoids technology almost whole-heartedly, invest billions in a hardware company whose better days may be behind it?

My guess is that Warren still believes in Apple for three key reasons:

1.     The price paid for Apple was at or below fair value.

2.     Management is strong.

3.     Capital allocation decisions are benefiting shareholders.

Intrinsic Value

A key tenant of the Berkshire Hathaway philosophy, which is influenced mostly by Buffett and his longtime business partner Charlie Munger, involves buying companies with a no-limit holding period. If Warren and Charlie can forecast earnings over the next five years and the resulting cash flows are at or below current market prices, Berkshire will consider an investment in the company. However, to forecast future earnings, the company must be in Buffett’s “circle of competence,” i.e. he does not attempt to value companies he does not understand.

For Apple to be in the “circle of competence,” Buffett turned to Philip Fisher's 1958 book Common Stocks and Uncommon Profits. Summarizing the book’s influence on his Apple purchase, Warren told CNBC, “He talks about something called the 'scuttlebutt method,' which made a big impression on me at the time, and I used it a lot. It's essentially going out and finding out as much as you can about how people feel about the products that they use."

Buffett did his research on Apple, forecasted cash flows into the future, discounted them to present value and decided that Apple fit Berkshire Hathaway’s philosophy of buying great companies at fair value. 

Tim Cook’s Leadership

In October 2011, Steve Jobs passed away and Tim Cook took over Apple with the impossible task of filling Jobs’s shoes. At first, shareholders assumed a clean handoff and no dip in innovation. Apple shares (split adjusted) soared from ~$58 in October 2011 to over $95 by August 2012. However, the love affair was short-lived and shares were back to ~$56 less than a year later.

Tim Cook stayed the course, kept his head down. He oversaw the release of an Apple Watch, incrementally improved the iPhone, and secured business in China. The news media highlighted Apple’s lack of new game-changing products, but Cook kept selling iPhones, also known as the world’s best cash generating machine yet.

Buffett had to be impressed with Cook’s ability to ignore the noise and Cook even reached out to Buffett when pressures were mounting to make use of the cash Apple was amassing.

The result? Since 2013, when Cook talked with Buffett, shares of Apple have rallied from ~$56 to over $140. So, what did Warren say?

Share buybacks, of course.

In 2013, Cook was under pressure from all corners of Wall Street. Some wanted Cook to buy Netflix, Disney and the rest of the world. Others wanted him to increase dividend payouts (ex. David Einhorn wanted a preferred stock that paid a dividend in perpetuity) and many were seeking share repurchases (ex. Carl Icahn had dinner with Cook). Cook took the phone and called Mr. Buffett for an unbiased opinion.

“When I was going through [the question of] what should we do on returning cash to shareholders, I thought who could really give us great advice here? Who wouldn't have a bias?” Cook told the Washington Post. “So, I called up Warren Buffett. I thought he's the natural person."

"I would run the business in such a manner as to create the most value over the next five to 10 years. You can't run a business to push the stock price up on a daily basis,” said Buffett. “Berkshire has gone down 50 percent four times in its history. When that happens, if you've got money you buy it. You just keep working on building the value."

Fast forward to late 2016 and early 2017 and it is no surprise Berkshire found value in Apple shares and believes in the management. Tim Cook has not made a large acquisition that is dilutive to earnings growth and has followed Buffett’s advice.

Below is an excerpt from Warren’s 1984 Annual Letter.

“Many corporations that consistently show good returns both on equity and on overall incremental capital have, indeed, employed a large portion of their retained earnings on an economically unattractive, even disastrous, basis. Their marvelous core businesses, however, whose earnings grow year after year, camouflage repeated failures in capital allocation elsewhere (usually involving high-priced acquisition of businesses that have inherently mediocre economics). … In such cases, shareholders would be far better off if earnings were retained only to expand the high-return business, with the balance paid in dividends or used to repurchase stock (an action that increases the owners’ interest in the exceptional business while sparing them participation in subpar businesses).”

Considering all of the above, is actually no surprise that Berkshire owns more than 2.5 percent of Apple: 2.5 percent may not sound like much, but keep in mind, Apple is the most valuable company in the world and worth $737.14 billion… with a “B.”

5 Ways to "Adult" Financially

Adulting (v): to do grown up things and hold responsibilities such as having a 9-5 job, paying a mortgage or rent, having a car payment, or completing any of the other duties that makes one think of grown ups.

One of the hardest parts of adulting is admitting you're not young anymore. Every year that goes by is another year of compounded interest lost. Below are five easy ways to set your financial future as an adult on the right path. 

1. Participate in your employer's retirement plan: If your employer offers a retirement plan, they often match a portion of your contribution. Take advantage of the free money and contribute at least the amount needed to receive the company's match. 

2. Stock pile an emergency savings: At some point down the road things won't go well. Maybe you wreck your car, you lose your job, or something happens to your home. Having emergency savings will limit some of the financial pain (although maybe not the emotional pain) and having one should be a priority today. Have at least 3 months of liquid savings that will not be touched unless there is an emergency. You don't want to use a credit card if things go bad. 

3. Contribute to a Roth IRA, if eligible: Roth IRAs are too good to pass up. If you're eligible (under the income threshold) contribute as much as possible each month. You'll be happy you did 30 years from now. 

4. Create a student debt repayment plan: Debt burden slows down family formation and home ownership. Create a plan to knock it down even if that means working extra. Prior generations worked extra jobs to accomplish goals and we should not think of ourselves differently. 

5. Pay off credit cards each month: If you're rolling over credit card balances each month that means you're spending too much. Stop it. 

The hardest bias to overcome in order to make the transition to adult, is self-control bias. As your Saturday nights move from the dance floor to the couch and Netflix, your priority from spending should transition to savings. Focus on these five ways to improve your finances in 2017 and in 2018, take your financial planning to another level.  

Maddon, Chapman and a Lesson For Investors From the Cubs

My mother and I went to a Cubs game last summer for her birthday. She was supposed to go with my father, but he wasn't able and I jumped at the opportunity to visit Wrigley. The Cubs played the Mariners in an interleague game soon after trading for closer Aroldis Chapman, a fireballer with a 100-plus MPH fastball who was supposed to help the Cubs win a World Series. The Cubs led most of the game, but in the 8th inning the bullpen was in a tough spot. Manager Joe Maddon went to his new closer, one of the best in the game, to get the last four outs and help the Cubs keep their 1-0 lead. With two runners on Chapman gave up a hit that led to a three-run inning and the Cubs ended up losing 4-1.

After the game Maddon was questioned about his use of Chapman in the 8th inning. Closers are generally used in the 9th inning to "close" out a game and Chapman said pitching in the 8th inning wasn’t "his favorite thing to do."

Maddon’s response to Aroldis’ comments?

“I didn’t know that. Not that it would matter, but I didn’t know that. I was not aware of that.”

"Not that it would matter."

Joe Maddon was going to stick to his process of making baseball decisions regardless of Aroldis’s feelings. He has one of the best relievers in baseball and he was going to use him in a critical moment of the the game without a thought about what the outcome may be. In investing, as in baseball, we cannot go back and change decisions after the results are tallied. Only hindsight provides the answers of what should have been done. Should I have allocated more to stocks? Should I have sold my position sooner? This kind of brainstorming is useful in accessing the strength of an investment process and tweaking an established system, but if a portfolio is built on proven, successful long-run analysis, short-term skepticism will often lead to bad outcomes. 

Taking a pool of money, investing in securities to fund someone’s lifestyle expenses over the course of thirty years is not an easy task. But, it becomes harder if second-guessing cannot be avoided and faith is lost because of short-term outcomes. Most Americans are saving for a goal that will last more than a year, maybe to fund things like schooling or retirement. The point is one quarter in 2016 should not change a strategy that is built for success over the course of twenty years. It may not work every time, but on average the optimal strategy will prevail. Stick to the process.

Do you stop going the speed limit because one day you got in a fender bender? Do you stop working out because one time you sprained your ankle?

Diversification can be frustrating. If done properly, not all assets have positive returns at the same time. The beauty of risk reduction is that assets are not correlated, so they move in different directions at different times. If one asset class is winning, another may be losing. 

From our friend Ben Carlson at Wealth of Common Sense: "The problem for many investors is that they only want to be invested in the best performer so they end up chasing what’s worked well lately. Seeing these kinds of relative performance spreads invites the hindsight bias to allow us to assume we knew exactly what was going to happen."

Carlson continues: "Diversification is not fun, but intelligent investing shouldn’t be about having fun."

The Cubs would go on to play in the World Series. Down 3 games to 1, in a seven-game series, Maddon brought Chapman into Game 5 with one out in the 7th. He pitched the rest of the game, recording an 8 out save and helped the Cubs avoid elimination. In Game 6, another must-win game, Maddon again brought Chapman in early; this time in the 7th inning, achieving 4 outs. 

Maddon’s use of Chapman in Games 5 and 6 kept the Cubs alive and in Game 7 with the game on the line, Joe went back to Chapman. With the opportunity to win their first world Series since 1908, Chapman was brought into the 8th inning with a 3-run lead, but with two outs, Chapman gave up three runs and the game was tied, going to the top of the 9th in the World Series. The Cubs didn’t score in the 9th and Chapman was brought back in for the bottom of the 9th to try and keep the Indians from scoring in a tie game and keeping the Cubs hopes alive. That he did. Chapman shut down the Indians and Cubs would score in the 10th inning and go onto win, giving Chapman the win rather than the save.

Maddon’s use of Chapman was often criticized, even in Games 5 and 6, which were must-win games. 

To this Maddon would reply: "But the point is when you work a game like that, there is not an eighth game, there is only a seventh game. Everything you saw us do that night I planned out before the game began and felt strongly about it and still do. Just take away one hit by Davis and it worked out pretty darn well."

Second-guessing is easy. Maintaining a disciplined approach through the good and bad times is not.

Maddon has summed this all up well: “The process is fearless, because I don't want to spend time on the outcome. For me, it’s really about staying in the moment and not worrying about the outcome of the game or managing toward the outcome. It doesn't do anybody any good.” 

Looking for a financial advisor? This is your playbook.

Created by Libby Levi for

Created by Libby Levi for

Often times changes in consumer behavior lead to changes in industries. The success of companies within those markets will be decided by their ability to operate within the new environment. For example, Blackberry’s inability to pivot quickly enough led to the duopoly of Google’s Android system and the iPhone. Similarly, the consumer’s growing preference for lower-cost investment vehicles led to new regulations in the financial services sector.

On April 6, 2016, the U.S. Department of Labor (DOL) issued its final rule expanding the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). The rule expands the application of the fiduciary standard (a legal or ethical relationship of trust) to all intermediaries involving ERISA plans (think 401(k) plans) and now individual retirement accounts (IRAs).

Until now, many broker-dealers, investment advisors, insurance agents and others have offered advice outside of the fiduciary standard. There was less stringent oversight regarding products and investment vehicles used in client accounts because they only needed to prove it was suitable for a client, even if it was not in their best interest (fiduciary). As a result, the DOL’s Fiduciary Rule is changing how financial advice and financial service companies are operating.  Merrill Lynch, for example, will no longer give retirement savers the option of paying a commission for funds held within retirement accounts.

For consumers seeking financial advice in a post-Fiduciary Rule world, here are four important questions to be asking:

1. Does the advisor work for an RIA (Registered Investment Advisor)?

Each RIA operates under the Investment Company Act of 1940 and must act in the best interest of every client. An RIA has a fiduciary standard by law, thus, the new Department of Labor regulation does not materially impact how they operate their business other than requiring additional paperwork and documentation to comply.

2. What if the advisor does not work for an RIA?

Beginning in 2017, every advisor will have a fiduciary obligation for retirement accounts. All retirement accounts must be managed in the best interest of the client. For many companies that means they will no longer be selling commission-based products inside retirement accounts. If they do, a best-interest contract will be signed disclosing the commission and stating it is still in the client’s best interest. However, many companies are not taking the litigation risk of best-interest contracts and will forgo the commissions.

According to Thrivent Financial’s complaint against the law, if it were to continue to engage in such transactions “it would be subject to steep and serious penalties under federal law. As a result, without an exemption, the new rule would almost completely eliminate Thrivent’s ability to offer financial products to its members in connection with their retirement planning through IRAs.”

Although non-RIA firms will slow down commission sales in retirement accounts, that may not be the case for taxable accounts. For individuals and couples that have saved extra money outside of retirement accounts and want to invest it, the Department of Labor fiduciary rule does not apply to these taxable accounts. If a prospective advisor suggests non-traded REITS and variable annuities with this portion of your portfolio, be very skeptical.

3. Does the advisor have a management fee?

The standard in the RIA industry (and soon in the broker world) is an assets-under-management fee (AUM). As brokers/agents transition away from income through commission-based mutual funds, accounts may still be invested in mutual funds. If an advisor is charging an AUM fee on an account invested 100 percent in mutual funds, be skeptical. This is an expensive way to invest.

Given the time needed to service smaller accounts going forward, companies are increasing their management fees. Edward Jones clients with less than $100,000 will be moved to fee-based and the management fee will run between 1.35 and 1.75 percent.

Another issue is the change in responsibilities and the skills required to meet them. Ask yourself, “If a broker/agent managed assets by receiving a mutual fund commission, do they have the skillset to manage asset allocation under the new standard?”

Although the new regulations will force companies into the assets-under-management fee model, promoting a focus on investment management, the firm should also include other services. For example, does the advisor also provides financial planning for their clients? Investment advisors must not only pivot to a management fee model, they must also add value to their clients through other services. This will be a challenge for some and may require a multi-disciplinary team to assist with client services.

4. Is this the first time you’re looking for financial advice?

Unfortunately, for young investors the new rules will limit their options. Before the ruling, an advisor could justify their time to work with a young investor by charging a commission. A 1% commision on $5,000 is $50 per year. A 5% commission on $5,000 is $250. A busy advisor can justify spending time with a young investor more easily with the latter approach.

Given the fiduciary obligation on retirement accounts and the industry shift to an AUM fee model, there’s some concern young investors and all investors with smaller accounts will be left with little advice. In fact, Edward Jones will stop accepting retirement accounts of less than $5,000. 

How New Technologies Are Helping Companies Reduce Footprint

The office of tomorrow looks and operates differently from those of today. Our offices reflect, in part, a belief in mobile computing, team structure and productive utilization of physical office space. Gone are the days of dedicated large private offices, desktops, and old digital phone systems. 

What does tomorrow's office look like?

For starters, future offices are likely to include full mobility, cloud storage, real-time team collaboration, and a greater focus on improving physical locations to drive collaboration and productivity. As many Fortune 500 companies continue to witness slower than anticipated revenue growth, prudent managers have placed a great deal of effort into managing costs and transitioning to mobile computing and remote collaboration.  This will help improve employee productivity, reduce overhead, and manage costs moving forward.

Among other noticeable trends and data, a recent discussion with a friend who has lived and worked in Chicago for a number of years in the ad agency space substantiated this. Her comments were that enterprises were outfitting space and on-boarding technology in order to improve collaboration, creativity, and worker productivity.  Take a look at the new digs in the main library of The University of Iowa where you have a study environment reflective of how our future generation works and learns.

Photo credit: "The University of Iowa"

The CCIM Institute recently published 10 trends in office design.  For further reading concerning office utilization and design, navigate to the following link:

At the center of the technology component lies cloud computing.  Microsoft and Amazon are two dominant players in the space.  For the sake of this write-up, let us focus on Microsoft.  It now seems long removed, but only five or so years ago, many believed Microsoft had failed to pivot from a desktop software application and largely missed the cloud computing revolution. In reality, Microsoft has transitioned and many of their software and productivity solutions now exist in the cloud.  In fact, Microsoft's cloud solutions appear to keep the decay from their legacy Windows and mobile phone business at bay.

Microsoft released their Fiscal Year-End earnings report on July 19.  Their own CEO, Satya Nadella had the following to say, "The Microsoft Cloud is seeing significant customer momentum and we're well positioned to reach new opportunities in the year ahead."

The biggest revenue gain came from their Azure cloud segment. Adjusting for currency this segment saw a revenue increase of 9.6 percent.  The Azure product alone accelerated revenue by an impressive 102 percent year-over-year.  The other two products driving cloud growth are Microsoft's 365 productivity tools and MS Dynamics CRM. This segment produced revenue growth of 7.6 percent, adjusted for currency fluctuations. Commercial sales of MS 365 increased by 54 percent.     

Credit: WSJ

It was reported that Microsoft management's team expects their capital investments in cloud computing will begin to slow and earnings will reflect margin expansion by way of economies of scale.

We utilize Microsoft's most recent earnings report as a proxy to validate the transition many companies are exploiting by utilizing mobile platforms to deliver improved employee productivity, security and scale within their technology solutions. 

There is little doubt the office of the future will appear and function much differently than they do, in large part, today.  As a firm that prides itself on delivering "best in class" service for our clients, we will always innately seek to implement technology solutions to drive efficiencies and deliver the service our clients have become accustomed to.

If you are operating a business and would like to know more about how companies are exploiting technology to improve company performance, we would like to hear from you.  Please contact us.

Does your current advisor use these investments?

What if I told you full-commission sales for nongraded REITs were down 70.5 percent from last year; that overall sales for these REITs are projected to be 25 percent lower than 2013; that commission revenues for an industry leader’s alternative investment division were down 86.7 percent from 2015? 

Sales for these products have declined, but the ‘why’ in this case is in need of some explanation as it is more disturbing. 

Nontraded investment REITs are sold by financial advisors who clear through broker-dealers. For decades, these investment vehicles provided large payouts to the advisors. Typically an advisor is paid a 7% commission on the sale and the broker-dealer receives 3%. Someone who has saved his or her income meets with an advisor and puts $100,000 in a nontraded REIT. Immediately, $7,000 of that sum goes to the advisor, who benefits regardless of the investment’s performance. The broker-dealer receives $3,000, as well. The client will often not know this because the investment, net of commissions, is not reflected on investment statements. Instead, the client receives a statement that shows their investment worth $100,000. 

Why aren’t nontraded REITs being sold like they used to? 

Simply put, the federal government is forcing advisors and broker-dealers to be more transparent about the investments. Beginning in the first quarter of 2017, advisors must disclose the true asset value of investors’ accounts up front. Statements will no longer list the position before commissions. Instead, the client mentioned above would receive a statement that will show an $88,000 investment after fees and commissions. 

In addition, earlier this year the Department of Labor passed a new rule requiring anyone dealing with retirement accounts to act as a fiduciary. This means that every advisor managing retirement accounts must do what is in their clients best interest. Some advisors may be able to justify the sale of nontraded REITs, however, many see the rule as a harbinger for a stricter standard. Instead of staying with the status quo, they are quickly moving toward more transparent and lower cost products. 

If client-first rules are decreasing the sales of nontraded REITs, does that mean advisors have been acting outside of their client’s best interest?

Unfortunately, it does.

Midwestern Financial Group in an independent Registered Investment Advisor, always acting in our client’s best interest. No product sales, thus no commissions.  

My Experience On The Pokemon Bandwagon

Saturday night, after a nice dinner with my parents, my wife and I took our dog for a walk around our neighborhood. During dinner my parents laughed about their experience watching people playing Pokemon Go and I decided I needed to give it a try. FOMO (fear of missing out) had set in and the only way I could have an opinion was to play it. 

After my adventure I concluded that whether Pokemon continues to be a huge success or a short-term fad, augmented reality is here to stay. As I watched the British Open on Sunday I asked myself: what if through the camera on my phone I could play putt-putt golf in my own backyard? The possibilities are endless and as the bridge of augmented reality connects virtual reality, the world will forever change. 

As for Nintendo, their stock price has benefited from the Pokemon craze. On June 15, Nintendo shares traded for 15,055.00 yen in Japan and a month later shares are worth 27,780.00 yen, an 84.5 percent one-month return. 

Drivers Of Nintendo’s Share Rise

Much can be attributed to FOMO among speculators and retail investors. Last fall, Niantic, the developer of Pokemon Go announced they were creating the game in conjunction with the Pokemon Company and Nintendo, so some level of success was already priced in the stock. In fact on August 14, 2015 Nintendo shares reached 24,025; thus today, the price is only 15.6 percent higher. Often retail investors will get caught up in momentum trades and sometimes will be left holding the bag as professional traders exit their positions. Yahoo! Finance reported that searches for “Nintendo” are surging on Robinhood, a mobile stock-trading app aimed at millennials.

Nintendo’s stock has also risen for fundamental reasons. Although Nintendo only owns roughly 13 percent of Pokemon Go, according to Macquarie Research analyst David Gibson, revenue per user is about $0.25 per day with over 25 million playing it daily, per research from Survey Monkey. In another report, published by SensorTower, Pokemon Go players were spending more time on the app than Facebook. Profits from the games may be muted for Nintendo, but the Pokemon Company owns the publishing rights to the game and Nintendo owns 32 percent of that. 

Lastly, expectations for future revenue streams have soared. Already speculators are anticipating the same success for augmented reality games featuring Mario and Zelda. Using unit sales, Mario is a larger franchise than Pokemon, but Zelda is much smaller than both. Sustained business success would have to come from new games and franchises, and that is a hard business. King Digital, the creator of Candy Crush Saga brought $7 billion of stock public in 2014 at $22.50 per share and only two years later was purchased by Activision Blizzard for $18 per share. In 2014, shares of King Digital went as low as $11.35. 

Other Companies Benefiting From the Craze

Alphabet, parent of Google, is an obvious beneficiary. Niantic Labs, the developer of Pokemon Go, was spun out from Google in September 2015 to be an independent company, which allowed them to partner with companies outside of Google’s influence. Soon after their spinoff, Google, Nintendo and the Pokemon Company invested $30 million in Niantic to support their products, including Pokemon Go. In addition to their unknown ownership of Niantic, Pokemon Go uses Google Maps technology and requires users to login through a Google account. 

In addition to Alphabet, wireless providers Verizon, AT&T and others may benefit from the development of augmented reality gaming. Pokemon Go users are not at home connected to wifi networks, instead they are outside, walking around, using data to power the maps technology in order to add Pokemon to their Pokedex. There is no way getting around the use of wireless data and Pokemon Go rewards players for the more they walk. 

Courtesy of Yahoo! Finance

Courtesy of Yahoo! Finance

Brexit and What It Means to Your Portfolio

Brexit and What It Means to Your Portfolio

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Monsanto Receives Bid From German Bayer

Update: Monsanto Confirms Bayer Bid

Last Thursday, Bloomberg News reported Bayer, the German chemical and drugs group, was in preliminary and internal discussions to buy Monsanto.  As soon as the news hit the wires, Monsanto's stock was up 10 percent in early trading.  If this report is indeed true and the courts do not view the acquisition as being in violation of anti-trust laws, this would mark the third blue chip mega deal in the agrichemical space in the last six months after ChemChina acquired Syngenta and DuPont announced its merger with Dow Chemical.

Rumored Deal Insight

According to some estimates the offer could come in as high as $65 billion, a premium of 48 percent over the current market capitalization of Monsanto which is approximately $44 Billion.  This deal, if approved by regulators, would create a conglomerate with a combined market cap of $134 Billion.  If recent mergers within the agrichemical space serve as an indicator, this deal will likely yield an opportunity for Monsanto shareholders to receive part cash and part equity in Bayer.  A quick Google search will yield the results of the 120 year history of Bayer AG.

Of particular interest within the sector is the perceived driving force behind recent consolidation - that of synergies. Simply put, synergies in the realm of mergers and acquisitions embody the opinion that financial value and company performance is greater when all sums of both companies are combined than existing in isolation.  The concern for some is that in today's low growth environment, in particular revenue growth, large mergers offer a real chance for shareholders to realize financial gain as the acquiring company begins to realize these synergies.  Often times a substantial sum of these synergies are are byproducts of cost cutting efforts or operational efficiencies.

Of course, a potential merger of this magnitude would be subject to the regulatory scrutiny that the Dow Chemical and DuPont deal faces and China National Chemical Corps's bid to acquire Syngenta.  That said, Bloomberg News reported their sources, consisting of analysts and legal experts, did not feel as if the rumored deal between Bayer and Monsanto would raise significant anti-trust red flags as the two companies products do not have significant overlap. 

This is just a rumored merger, but often times where there is smoke there is fire, whether its Bayer or BASF, there is consolidation in the industry proven by the prior deal with Dow and the DuPont agreement.  So with certainty the competitive landscape in agricultural products will look differently a decade from now.  

Business Owners: Valuation In It's Basic Form

For business owners, often their wealth is derived entirely from their business. Their business pays for their living expenses and will often fund their retirement. Thus, it is critical business owners understand how their business is valued and the underlying value drivers. This blog post only scratches the surface, but provides a simple framework to structure business decisions. 

The value of an asset is largely derived from the amount of cash it produces. The cash produced is called ‘free cash flow’ (FCF). Free cash flow is the cash an investment generates after laying out the money required to maintain or expand its asset base, also knows as capital expenditures. Cash flow provided by the investment allows other opportunities to be explored that can generate more cash flow. 

The amount of FCF an investment generates is used to determine the investment’s value. To determine this value, add the cash distributed today with the expected cash distributed in the future and discount the cash flows to today’s dollars. In short, the value of an asset is determined by the calculated cash flow and the discount rate used to value future cash flows according to today’s dollar terms. 

Here’s an example: 

Jim owns a small manufacturing business that sells $1 million of nails each year and earns a profit of $250,000 annually. Jim plans to expand his operation and over the course of three years double his profits each year. After adjustments, his cash flow generated is expected to be $300,000, $500,000 and $750,000 for Years One, Two and Three, respectively. Beyond those three years Jim expects his cash flow to grow by three percent annually in perpetuity. 

An investor is interested in buying Jim’s business, but she requires a 20 percent rate of return meaning that over a certain period of time (most likely one year), she is expecting to see a 20 percent growth on her investment. If that is the case, how much is she willing to pay Jim for his nail-manufacturing business?

Assuming a 20 percent required rate of return, the cash flows presented and three-percent growth in perpetuity, Jim’s business is worth at least $3,660,948 to her. If she already owns a similar business and would be able to cut costs through synergy, the value to her may be even more. 

As a business owner attempting to determine the value of your company, or as an owner of cash producing assets, answer these questions:

  • What are my projected cash flows? 
  • How can I maximize my cash flows? 
  • What is the appropriate required rate of return? 
  • What steps can I take to minimize the required rate of return of a buyer? 

For a more detailed look at your business, given the importance of it's value, give MFG a call so we can help out. 

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6 Reasons to Use a 529 Savings Account

Photo provided by Flickr

Photo provided by Flickr

Over the past few weeks, much of our commentary has focused on how to navigate volatile markets.  However, this week we would like to pivot a bit and provide you with a brief explanation of why you should consider a 529 investment vehicle.  With college expenses accounting for a much larger expense item than most could have ever imagined, 529 plans offer a tax-efficient way to invest in your children's or grandchildren's future. 

Below are the top five reasons to use a 529:

  1. Tax deferred growth and tax free withdraws: All invested assets grow tax deferred and your money is never taxed as long as your assets within this account are used for qualified education expenses.
  2. State tax breaks for invested capital: Many states offer a state tax break for invested assets. Be sure to check with your state or financial advisor to understand if such tax breaks exist where you reside. The State of Iowa does offer a state tax break on invested amounts up to $3,188 per beneficiary account.
  3. Everyone is eligible regardless of income hurdles: There is no income limit on those who wish to utilize 529 accounts for their loved ones.  
  4. Typically 529 accounts state offer a very low cost means to save and invest.  For example, the State of Iowa utilizes Vanguard low-cost investment options
  5. Donor-controlled account: 529 accounts allow you to remain in control of how the assets are invested and when distributions are made.  Unlike alternative education savings vehicles (ex. UTMA/UGMA), you are not obligated to turn the assets over when the beneficiary becomes an adult.
  6. Flexibility: You are free to change beneficiaries when desired, the account can be rolled over to another 529 once every 12-month period and investment changes can be made twice per year.

As you can see 529 accounts offer tremendous benefits for those who desire to save for college.  In addition to basic college savings, 529 accounts can exist as an estate planning tool for those actively gifting assets from their estate. 
At MFG, we welcome a conversation with those seeking to understand how 529 accounts can become part of their estate plan.