I. Investment Advisory Services

II. Working with 3 factor

III. 3 factor’s Investment Management Approach

IV. General Questions


I. Investment Advisory Services

What is a Reg­is­tered Invest­ment Advisor?

Financial advisory firms that man­age client’s port­fo­lios are required to reg­is­ter either with the SEC or with the states where they con­duct business.

What is a fee-based investment advisor?

A fee-based investment advisor is compensated by clients soley through a fee on the portfolio assets under management.  Fee-based investment advisors do not charge commissions on trades; nor do they sell investment products (e.g., annuities or insurance) which also are paid for through commissions.  3 factor operates as a registered, fee-based investment advisor.

Why should I hire 3 factor vs. other invest­ment advisors?

We have writ­ten exten­sively in our research where we com­pare 3 factor‘s ser­vice to other index advi­sors who employ DFA.  These stud­ies indi­cate that increased per­for­mance is due to two fac­tors: sys­tem­atic re-bal­anc­ing and advanced tax engi­neer­ing.  With­out a large invest­ment in soft­ware, imple­ment­ing these tech­niques would be dif­fi­cult if not impos­si­ble.  Only a small num­ber of advi­sors have made such invest­ments, and those that do charge a lot.  By the same token, it would be a very unusu­ally moti­vated indi­vid­ual investor who could and would imple­ment these techniques.

I am a self-directed investor: Can 3 factor add value for me?

The aver­age indi­vid­ual investor sig­nif­i­cantly under-performs the mar­ket.  For exam­ple, an arti­cle in the Jour­nal of Finance found that a typ­i­cal indi­vid­ual investor under-performs the mar­ket by as much 3.7%.  With an experienced and capable invest­ment advi­sor and a dis­ci­plined process, long-term per­for­mance should improve.  We pro­vide a long-term, indexed, diver­si­fied, invest­ment strat­egy at a low price and improve per­for­mance using the “3 factor Engine™”.

But of course the self-directed investors does not pay any advi­sory fee. For those folks a few ques­tions follows:

  • Do I believe in the tech­niques (sys­tem­atic re-bal­anc­ing and advanced tax engi­neer­ing) increase returns?  Am I capa­ble of imple­ment­ing these techniques?
  • What is the added value of DFA funds?

Note: as we’ve dis­cussed else­where, while we believe that DFA funds are excel­lent instru­ments to build pas­sive port­fo­lios, we are not com­fort­able assign­ing a value to their over-performance at this time.

If after care­fully con­sid­er­a­tion you believe that the above two points don’t exceed 3 factor’s low investment advisory fee (0.50%), then you should con­tinue man­ag­ing your own assets.  Oth­er­wise, let’s talk.


II. Working with 3 factor

Who holds my money?

We custody all client assets at Charles Schwab & Co.  Schwab is the indus­try leader in asset cus­tody for inde­pen­dent advi­sors; we selected them due to their high qual­ity ser­vice, secu­rity, and low cost structure.

What is your man­age­ment fee?

3 factor’s invest­ment advisory fee is 0.50% of assets man­aged for portfolios up to $3M.  Above $3M, our advisory fee drops to 0.35%.   Our typ­i­cal min­i­mum account size is $500,000 with a $625/quarter min­i­mum fee.

How does 3 factor offer such low investment advisory fees?

We deeply believe that the indus­try stan­dard investment advisory fee of 1% of assets under man­age­ment is sim­ply out of step with the very premise of pas­sive (aka index) invest­ing.  3 factor has made sub­stan­tial invest­ments in tech­nol­ogy, mostly in our cus­tom re-bal­anc­ing and tax loss har­vest­ing soft­ware- the “3 factor Engine“. By lever­ag­ing this invest­ment we are able to auto­mate many of our day-to-day operations..

Do you have a min­i­mum account size?

Most of our clients have portfolios of at least  $500,000.

How do I get started?

In our ini­tial con­sul­ta­tions, we will out­line our approach.  Once you deter­mine that 3 factor offers the sound invest­ment ser­vices you’re look­ing for, we will have more in-depth con­ver­sa­tions to exam­ine your full finan­cial sit­u­a­tion.  Together we will develop an invest­ment pol­icy state­ment and a cus­tom asset allo­ca­tion, which we will imple­ment and mon­i­tor.  We will help you open new accounts as needed and trans­fer assets to these accounts.

How do you ensure my pri­vacy and confidentiality?

3 factor Man­age­ment is a fidu­ciary and, as such, has strict pri­vacy and con­fi­den­tial­ity poli­cies.  More­over, in con­junc­tion with our tech­nol­ogy part­ners, we have safe­guards in place to pre­vent data being compromised.

How long does it take to switch my accounts to 3 factor?

If you are already with Schwab, the process can be com­pleted in a week.  If you have a large num­ber of accounts need to be opened and assets trans­ferred from insti­tu­tions other than Schwab, the process can take a few weeks.

Do I need to be involved in day-to-day trading?

No.  Fun­da­men­tal to becom­ing a client is work­ing with your 3 factor advi­sor to jointly develop an indi­vid­u­al­ized Invest­ment Pol­icy Guide­line (IPG).  The IPG guides our sub­se­quent main­te­nance of your account, i.e. your asset allo­ca­tion, rebal­anc­ing para­me­ters, fund choices, etc. The 3 factor Engine™ helps auto­mate account main­te­nance by con­stantly mon­i­tor­ing your accounts for oppor­tu­ni­ties to tax loss har­vest and/or rebal­ance.  When the Engine deter­mines that trades are required, we review the Engine’s trade rec­om­men­da­tions before sub­mit­ting them.  We are here to serve our clients… and are a phone call or email away.

Is web access available?

Yes. We have two web portals:

  • Schwab  — Clients access their accounts 24×7 via Charles Schwab & Co which pro­vides infor­ma­tion on account activ­ity and a plethora of reports.
  • “AssetView” – This web based ver­sion of our ‘indus­trial strength’ re-bal­anc­ing and tax-loss har­vest­ing soft­ware, the 3 factor Engine™.  3 factor “AssetView™” was designed to help our clients stay focused on their ulti­mate goals and not focus on the short term. “Asset View” lets clients view their hold­ings exactly as we do…holistically, whether their asset allo­ca­tion is in-line with their per­son­al­ized asset allocation.
How do you help pre­pare for tax day?

Most of the work is done by Schwab.  They will send the IRS a form 1099s at year’s end.  By virtue of the recent secu­ri­ties leg­is­la­tion, this report include cost basis infor­ma­tion as well as trans­ac­tional infor­ma­tion.  In addi­tion, Schwab also pro­vides both hard copy and online real­ized and unre­al­ized cap­i­tal gains & losses reports.

Is there a charge for an ini­tial consultation?

There is no charge for an ini­tial con­sul­ta­tion.  Only by get­ting to know you and your unique finan­cial sit­u­a­tion can both par­ties deter­mine if there is a strong fit.

Is there a cost to ter­mi­nate the advi­sory contract?

Both 3 factor and the client may ter­mi­nate the advi­sory con­tract at any time, for any rea­son with­out any ter­mi­na­tion cost.

III. 3 factor‘s Investment Management Approach

What do I do with my cur­rent holdings?

We will ana­lyze your exist­ing port­fo­lio and will pro­pose a real­lo­ca­tion con­sis­tent with our invest­ing phi­los­o­phy.  While it is often in the client’s best inter­est for us to man­age their entire port­fo­lio, we will in any case rec­om­mend a port­fo­lio that con­sid­ers all of your assets.  For clients with low cost basis secu­ri­ties in a tax­able account, we would work with you to imple­ment a new allo­ca­tion that is sen­si­tive to your tax situation.

When would you change my allocation?

Changes in finan­cial sit­u­a­tion and invest­ment objec­tives can and should influ­ence your asset allo­ca­tion.  For exam­ple, as you get older, we would nor­mally rec­om­mend increas­ing your bond hold­ings to reduce the volatil­ity of your portfolio.

How often do you re-bal­ance my account?

Gen­er­ally, we re-bal­ance your port­fo­lio when one or more asset classes fall out­side of their spec­i­fied range.  Our research indi­cates this is more effec­tive than re-bal­anc­ing on a reg­u­lar sched­ule.  For a dis­cus­sion of our advan­taged re-bal­anc­ing tech­niques, click here.

Do you man­age retire­ment accounts (IRAs, 401ks)?

Absolutely.  We man­age tax­able and non tax­able accounts so as to cre­ate a uni­fied port­fo­lio, incor­po­rat­ing all aspects of your invest­ments into a com­pre­hen­sive strat­egy. If you are under an employer plan, we would take that into account.  With cus­to­di­ans such as Schwab, we can roll over your cur­rents IRAs.

Do you man­age tax­able accounts dif­fer­ently than retire­ment accounts?

Most of our client port­fo­lios have at least one tax­able account and at least one tax-deferred account.  By man­ag­ing port­fo­lios holis­ti­cally, our tax-advan­taged re-bal­anc­ing can reduce your taxes.  For exam­ple, when an asset class is at too high a per­cent­age of the over­all port­fo­lio, the 3 factor Engine™ will first look for losses it can take in a tax­able account.  These losses can off­set other gains, low­er­ing your tax bill.  If there are no losses to take, it will then try to sell that asset class in a tax-deferred account, which would not be a tax­able event.  Only after exhaust­ing those options will the 3 factor Engine™ seek to bring that asset class into bal­ance with the min­i­mum pos­si­ble gain in the tax­able account.  Indus­try and aca­d­e­mic research sug­gests that Opportunistic re-balancing is sig­nif­i­cantly more tax-efficient than the typ­i­cal quarter-end or year-end re-balancing; and our own stud­ies using his­tor­i­cal mar­ket data cor­rob­o­rate the research findings.

I have no tax­able accounts: Can 3 factor add value for me?

Our research shows that clients with a mix­ture of tax­able and non-taxable accounts achieved the max­i­mum ben­e­fit from systematic re-balancing,  advanced tax engi­neer­ing, and low fees*.  For clients with­out tax­able assets, our stud­ies indi­cate that there is also a sig­nif­i­cant ben­e­fit.  Specif­i­cally, our data indi­cated that a $1M non-taxable account dur­ing the period 1997 to 2012 showed an increased return of 0.64%per annum rel­a­tive to a stan­dard advi­sor who charges a pro­gres­sive fee (0.9% on the first $500k,…).  This is pri­mar­ily due to the effect of oppor­tunis­tic re-bal­anc­ing rel­a­tive to sim­ple, quar­terly re-bal­anc­ing. Please click here for details.

Do you try to increase per­for­mance by mar­ket timing?

Absolutely not.  Decades of research shows that mar­ket tim­ing does not work and hurts per­for­mance.  Mar­ket tim­ing often adds expenses and results in increased taxes.  It is more effec­tive is to have a prop­erly diver­si­fied port­fo­lio that enables investors to ride out bear mar­kets and sur­vive to enjoy the fruits of bull markets.

Major mar­ket move­ments can be com­pressed into days, so try­ing to time them exactly can wipe out years of poten­tial gains. The fol­low­ing table shows why mar­ket tim­ing does not work:
Bull mar­ket time period S&P Return (annu­al­ized)
8/82 — 8/87 26.3%
8/82 — 8/87 less 10 top days 18.3%
8/82 — 8/87 less 20 top days 13.1%
8/82 — 8/87 less 30 top days 8.5%
8/82 — 8/87 less 40 top days 4.3%
Source: Invest­ing Demys­ti­fied: A Self Teach­ing Guide, Paul J.Lim, McGraw Hill

Do you rec­om­mend inter­na­tional funds?

We believe that for­eign stock and bond expo­sure can help increase returns and lower over­all port­fo­lio risk.  Inter­na­tional stock mar­kets rep­re­sent more than half of the world stock mar­ket value and include the fastest grow­ing mar­kets.  A key tenet of mod­ern port­fo­lio the­ory is that a prop­erly diver­si­fied port­fo­lio should have a vari­ety of asset classes that don’t move together all the time.  Adding inter­na­tional funds to a portfolio improves diversification.

Is your invest­ing style tax-efficient?

Index invest­ing, by its very nature is tax effi­cient, with its low port­fo­lio turnover.  Our cus­tom tech­nol­ogy sup­ports tax loss har­vest­ing, spe­cific tax lot iden­ti­fi­ca­tion, opti­mal asset loca­tion and whole port­fo­lio, tax-sensitive re-bal­anc­ing, which together achieve fur­ther tax efficiencies.

How do your port­fo­lios com­pare to bal­anced funds from firms like Fidelity?

Many firms pro­vide off the shelf prod­ucts such as bal­anced funds or tar­geted port­fo­lios.  These are good prod­ucts, although they tend to have high expense ratios.  We believe, how­ever, that every­one has unique con­sid­er­a­tions and do best when their invest­ment port­fo­lio takes these into account.  No one dis­putes that a cus­tom made suit fits and looks better.


IV. General Questions

What is the “Effi­cient Mar­ket Theory”?

The effi­cient mar­ket (EMT) the­ory holds that stocks are always cor­rectly priced since every­thing that is pub­licly known about the stock is reflected in its price.  The clear impli­ca­tion of the the­ory is that investors are much bet­ter served buy­ing large groups of stocks rather than select­ing indi­vid­ual secu­ri­ties.  There are numer­ous read­ings avail­able, among them this arti­cle by the prin­ci­pal orig­i­na­tor of EMT, Eugene Fama.

Can I beat the market?

It’s hard for investors to accept, but decades of research have shown that the stock and bond mar­kets are highly effi­cient.  Over the long run, few investors can out­per­form the mar­ket.  Tak­ing into account fees in mutual funds and other costs, it’s a nearly impos­si­ble task.  Rec­og­niz­ing this, the­o­rists such as Charles Ellis of Green­wich Research and Prince­ton econ­o­mist Bur­ton Markiel have out­lined effec­tive strate­gies that investors can use to make these forces work for the investor.

Are you a finan­cial plan­ning company?

3 factor con­cen­trates all its resources on being the best invest­ment man­age­ment firm we can be, specif­i­cally work­ing to max­i­mize the returns from index invest­ing.  Thus, we are not a “tra­di­tional” plan­ner.  Nonethe­less, as part of devel­op­ing an indi­vid­ual Invest­ment Pol­icy Guide­line (IPG), we cer­tainly do dis­cuss plan­ning issues.  Typ­i­cally in devel­op­ing a client’s IPG, we run Monte-Carlo sim­u­la­tions.  For client who would like to have a comprehensive finan­cial plan, there are a hand­ful of com­pe­tent hourly plan­ners to which we refer our clients.

Better Returns Through Research

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Past per­for­mance is not a pre­dic­tor of future performance.

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “3 factor’s Method­ol­ogy and Invest­ment Risks” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analysis.

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.