Inside Information

Angie Herbers has written a really interesting review of what appears to be a very interesting white paper about... reducing client stress in your office. There are a variety of reasons for this, chief among them that communication works better in a relaxed atmosphere, and clients are more likely to follow your recommendations. The way you ask questions and the environment you ask them in seem to be important.

I also thought the article on broker-dealer due diligence was very revealing, but perhaps not in the way the author intended. I mean no disrespect; it's good information, but it also suggests that the business environment for broker-dealers is awfully difficult these days. Mark Tibergien always offers great advice and information, as does the Angie Herbers column, and Dan Skiles and Tom Giachetti. And you might find it interesting to know some of the biggest compliance violations in the broker-dealer world. [Read more »] 

If you have already graduated (or received a certificate from) one of the schools providing financial planning education, the cover article for this issue of Financial Planning magazine probably isn't relevant to you. It is interesting, though, to see the variety of programs and sizes of programs out there.

Meanwhile, you can look at Martin Shenkman's advice on how to prevent clients from losing control of their assets, Allan Roth's "state the obvious" review of all the "alternative" funds that have not performed well, and Joel Bruckenstein's collection of the interesting tech sessions he's attended in the past five months. And my column, for a change, made a few good points. [Read more »] 

By far the highlight of this issue of the Journal is the Klontz/Britt article that talks about money scripts and how they are related to a variety of money behaviors. The article focuses on dysfunctional behaviors, and offers a few guidelines on how to spot their sources. But it also makes available two assessment instruments in the appendix, both of which might help you assess clients on your own. It would be interesting to see if these correlations hold up if many advisors had their clients take these evaluations and send the results (anonymously, of course) to the researchers, and give them a statistical sampling of the population.
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The election is over. The hard work continues. [Read more »] 

What does currency risk mean to your investment return? [Read more »] 

What do the "one-percenters" have to say about raising their taxes? [Read more »] 

Before I get too deeply into my commentary, please take a look at the chart to the right, which shows the monthly mutual fund flows, in billions of dollars, into/out of bond funds (green bars) and stock funds (blue bars) since the end of July, 2008--measured in billions of dollars as per the scale on the left. Take your time; I'll be here when you get back.

Welcome back. I think it's pretty clear that, after everybody sold all their investments like lemmings during the 2008 disaster, an enormous amount of money has poured into the bond side of the stock/bond allocation over the past four years, and a corresponding tidal wave of consumer investment dollars has continued to flow out of stocks. Seeing the actual dollar flows in graphical form--taken from the Investment Company Institute website--makes one wonder how we managed to sustain a mini-bull market in stocks since March of 2009. It also suggests that an awful lot of people have parked their money in what they believe are the safe haven of fixed-income investments, and are safely divested out of those risky stocks.

There may once have been some logic to this--at least short-term. The Fed, with its QE3 program and ongoing Operation Twist, has been driving interest rates lower in two of the major components of the Barclay's Capital Aggregate Bond Index using the simple expedient of buying everything in sight with newly-created money. As David Schawel points out on the Advisor Perspectives forum (http://advisorperspectives.com/newsletters12/Will_Bonds_Be_Burnt_to_a_Crisp.php#) roughly 18% of the index is represented by Treasury bonds, which, as a result of the greater demand manufactured by the Fed, have generated a total return of 3.77% so far this year as 10-year rates have fallen to (at this writing) about 1.625%. Rates on corporates have fallen in synch, and prices have accordingly appreciated.

But how long will that continue? If we look at the risk/reward profile for this massive bond component of consumer portfolios going forward, it becomes clear that above-yield returns are not the most likely scenario. If the rate on 10-year Treasuries were to fall dramatically, down to 1.25%, investors would reap an annual gain of about 3.5%. If yields were to rise to 2.5%, investors would lose 8% on the year. You can draw a similar picture for mortgage-backed securities and corporate issues.

In fact, the most likely scenario for the future is that someday soon, the U.S. economy will start growing at levels the Fed finds acceptable, at which point all the twisting and QE activity will cease, pulling the rug out from under the bond market and sending rates back up to where market conditions probably would have led them on their own. Investors will be spooked by the losses, and you'll see that graph suddenly turn around, driving rates up further as demand suddenly becomes oversupply. If there is a predictable rush to the exits, I wouldn't be surprised if rates rise much faster than any economist today is predicting.

To me, this is reminiscent of 1987, when there was a long accelerating increase in money flowing into bond funds, followed by a catastrophic rise in interest rates in the early spring. Money poured back out of bond funds into stocks, locking in losses and creating the next bubble which burst spectacularly on Black Monday.

I think everybody who communicates with the investing public--including, of course, advisors--has an obligation to sound a warning: specifically, to tell anybody who will listen that the prices of fixed income investments have been distorted by the Fed at the same time that record amounts of investor dollars have tipped the supply-demand see-saw dangerously over to one side. This is a classic bubble, and when it bursts, you're going to see people blindsided with losses which might eventually be comparable to what they experienced in 2008--only this time in the (ever-expanding) part of their investment nest egg that they believed were safe and conservative.

It's going to be a shock. I hope you're preparing now. [Read more »]