Now is the Time to Check Your Portfolio for Downgrades

file0001539596844The month of December has many of us looking towards the New Year with eager anticipation. With 2013 showing positive signs of turn around and the economy picking up steam, why not dream about even brighter days ahead in 2014? While we always encourage our clients to have an eye toward the future, it is also crucial to make sure that their portfolio is performing at its absolute best before filing year-end regulatory reports. Here are a few things to consider with regard to portfolio downgrades:

Bonds
If the bond positions in your portfolio fall below investment grade quality, they could severely affect the quality of your surplus. Once a bond drops from a “BBB” rating to a “BB” rating (or lower) it is considered to be “junk” status, taking it out of the rankings of solid investments available in your portfolio.

Mutual Funds
Mutual fund investments by town mutuals are required to be rated 4 star by Morningstar in order to be considered a qualified investment.  When a mutual fund is downgraded by Morningstar to a point below the required 4 star rating, you are likely to receive negative commentary from the OCI if that fund is still held by you at the time of your year-end report and you are not on top of the situation. You should have a procedure in place to regularly monitor the Morningstar ratings for each of your mutual fund holdings to ensure their continued compliance with OCI regulations.

Preferred Stock
Some investors have been tempted to move into preferred stock investments in this era of very low interest rates.  However, such stock also carries S&P or Moody’s ratings.  A downgrade in the rating of your preferred stock can have the same effect as a downgrade in the rating of one of your bond investments.

The failure to recognize downgrades within your portfolio before filing your regulatory reports could result in serious OCI non-compliance issue. Bonds and preferred stocks downgraded to “junk” status are no longer Type 1 but are now Type 2 investments. Do you have an adequate surplus in the amount of your Type 1 investments to be able to accept a reduction in  Type 1 investments and still remain in compliance with the OCI requirements?

This leads to the obvious question “how can we be sure that we have solid investment offerings in our portfolio before our reports are filed?” The best way is to develop the necessary procedures yourself to monitor these types of things or hire a trusted financial advisor (we always recommend a fee-only advisor) to perform this important ongoing due diligence work for you. Your advisor is intimately aware of the latest ratings for all of your investment instruments and can give you solid advice in restructuring your offerings if downgrades develop. And (of course) if your advisor is truly fee-only, you can rest assured their recommendations concerning needed changes to your portfolio arise from legitimate concerns about quality or compliance issues with some of your investments and not simply because the broker needs to make another sale.

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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