Today's blog is a simple yet powerful idea for your clients who are generally risk-averse or nervous about the current markets but would like to see the potential for higher growth in their investment portfolio. This strategy may allow you to gather assets and earn an advisory fee on assets coming to you from competitors.
Shifting Risk from Principle to Rate of Return
Many times, investing involves a careful balance between risk and return. We believe the Dunham Insured Deposit Marketplace (IDM) is a dynamic cash deposit account in the Dunham advisory strategies that can help shift this balance in your client's favor. Dunham built IDM to provide your client with a high level of principal protection, as described below while providing what we consider a competitive yield.
Let us unpack this idea you may find helpful.
Using Safety of Principal and Yield as an Investment Strategy
You begin by opening an advisory account at Dunham, where IDM is the cash deposit account we use. IDM is backed by up to $50 million in FDIC insurance. With the client's money in IDM, their initial investment is now secure.
This starting point allows you to put the gross yield of 5% to work (as of 7/30/2023). After accounting for Dunham's 25 basis point program fee and assuming you charge a 50 basis point advisory fee, the net yield still stands at what we consider, a strong 4.25%.
While this strategy works for any amount invested, as an example, let us consider a client with an initial investment of $1 million. Each month the IDM generates an approximate cash return of $3,541.66, based on the current rate net of fees specified above. We suggest an 'interest sweeping' strategy. This method involves moving the monthly cash returns into a diversified portfolio of stocks and bonds while the principal remains unaltered.
This use of interest earnings only is the crux of the strategy: "shifting risk from principal to rate of return." The principal stays safe and secure, and only the returns bear the brunt of market fluctuations. Even in scenarios of significant market downturns, similar to the 2008 financial crisis, the client's principal remains protected. The rate of return might lessen, but there is a positive cumulative return from inception on the advisory account, and the initial investment is not compromised.
Added Benefit: Dollar Cost Averaging
A pivotal aspect of this strategy is the technique of dollar-cost averaging. By consistently reinvesting the interest earnings, you can potentially mitigate the impact of market volatility for your clients. Regular investments mean buying more shares when prices are low and fewer when prices are high. This unemotional investment strategy could lead to higher long-term returns.
This strategy using IDM offers a novel approach for financial advisors to guide clients in these uncertain markets. It focuses on securing the principal investment while the returns are put to work in the market, bearing the risk and reaping the rewards.
Combining this with the proven technique of dollar-cost averaging, you can offer your clients a strategy that protects their wealth while seeking growth.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only, and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
All examples are hypothetical and are for illustrative purposes only. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues. The solution for an investor depends on their and their family’s unique circumstances and objectives. No two markets are the same and past performance is not an indication of future results.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
If you participate in the IDM offered by Dunham Trust Company (“DTC”), DTC is acting as your agent. DTC also serves as custodian of the Custom Asset Allocation Programs and is an affiliated entity of Dunham & Associates Investment Counsel, Inc., (“DAIC”), a Registered Investment Adviser and Broker/ Dealer. Member FINRA/ SIPC. DAIC is the sponsor of the Dunham Asset Allocation Program.
The FDIC insurance limit for all insurable capacities in the IDM is $250,000 per account owner, per bank, in accordance with FDIC rules. The IDM program banks may be excluded from receiving program deposits in the event that total assets at a program bank (including assets that are held with the bank outside of DTC’s IDM) exceed the FDIC insurance limits. It is your obligation to monitor your account(s), your FDIC coverage and your FDIC insurance eligibility. See www.fdic.gov for more details regarding FDIC coverage.
Excluding a bank from holding your Insured Bank Deposit balances may result in a lower available program limit for FDIC insurance. The bank list is subject to change.
See the IDM Disclosure Booklet for details, limitations, and eligibility requirements to participate in the IDM.
For the IDM, the program interest rate is impacted by several factors, including the total amount paid on deposits by the program banks, the fee paid to DTC and a fee paid to a third party that assists DTC in operating the program. DTC determines the portion of revenue it receives as a fee. The fee paid to DTC will affect the interest rate and may exceed the amounts paid to clients in the form of interest. The rate of return for the sweep option shown will vary over time and may be lower than rates available to clients making deposits directly with the bank, or at other banks, or available by investing directly in other money market funds. Neither the program banks nor DTC is required to offer the highest rates available or rates comparable to money market mutual fund yields. In contrast, money market mutual funds generally seek to achieve the highest rate of return consistent with their investment objectives, which can be found in their prospectuses.
DTC, at its discretion, may determine that your account is ineligible to participate in the IDM. IDM provides up to $50 million of FDIC insurance.
The deposit rates and annual percentage yields are variable and may change at any time at DTC’s discretion. Interest will be accrued daily and credited monthly.
Unlike the IDM, non-deposit investments held by your Broker-Dealer (such as DAIC), are NOT FDIC INSURED / NOT BANK GUARANTEED / MAY LOSE VALUE.
Please carefully consider the above information before selecting the Bank Deposit Sweep option for your uninvested cash balance. If you have any questions, please contact your advisor.
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Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC.
Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company.