MEDIA REVIEWS – November 8-15, 2017

This month’s issue of Investment Advisor is awfully thin and the magazine has gotten a little bit weird—witness the cover story, which is really an infomercial for alts investments written by an executive of an alts investment firm.  So I’ve decided to start something I should have done a long time ago: review articles by the much more substantial Advisor Perspectives online magazine, which explores investment and practice management topics in greater depth.  I’ve cherry-picked four of the better recent articles—including a skeptical but substantive look at high-dividend investing by Larry Swedroe; Allan Roth’s list of ten things that he believes investment advisors are getting wrong about their investments; and an article I wrote which harvests some staff development wisdom from Philip Palaveev, founder of The Ensemble Practice.  Plus Advisor Perspectives editor Bob Huebscher reporting on what could go wrong with the current investment scene—and the possibilities aren’t pretty.

You can click on the links and explore the other articles for yourself while I get better at reviewing their full offering.  For Investment Advisor, the highly-rated articles come from the usual suspects: Mark Tibergien, Dan Skiles, Angie Herbers and Tom Giachetti, plus a nice guest piece by Caleb Brown.

Articles that received a “high” relevance rating:

Advisor Perspectives:

“Slaughtering the High-Dividend Sacred Cow”
by Larry Swedroe
Advisor Perspectives
Relevance: high

Many investors prefer dividend-paying stocks, for a variety of psychological reasons, including a desire for income from their portfolios.  But the author cites studies showing that a value-tilt portfolio that AVOIDS dividends actually has provided much better after-tax performance, historically, than a portfolio of high dividend-paying stocks—particularly for investors in the higher tax brackets.  If possible, convince clients that it’s more tax-efficient and provides higher diversification if you create income from liquidating positions systematically, than if you chase and try to live on dividends.   (online only)

“The Ten Worst Mistakes that Advisors Make”
by Allan Roth
Advisor Perspectives
Relevance: high

Roth says the number one issue on his list is taking too much equity risk with the bull market now well over eight years old.  This is not the first time; advisors took on a lot of risk in the 2007 market as well, but portfolios are even more aggressive today.

They are also buying risky bonds or bond funds—either barely investment grade or junk.  Reaching for yield will cause the bond allocation to behave like stocks right when portfolios need a shock absorber in the next downturn.  High-quality bonds performed well during the last downturn.

Advisors are doing what clients want: which means high equity exposure and higher-paying bonds.  It’s important to push back when you disagree.

4: Thinking you can predict the markets.  Roth cites advisors who have been predicting that bond rates would go up for the past five to seven years.

5: Building complexity into portfolios.  He doesn’t see why more advisors don’t simply invest in a total U.S. stock, total international stock and total bond index fund.

6: Failing to build a tax-efficient portfolio.  Stock index funds are tax-efficient, and tax location adds advisor alpha.

7: Concentrating on income rather than total return.

8: Not telling clients to pay down their mortgages.  Does it make sense to borrow money at 4% only to lend it out at 2.27% by buying bonds in the portfolio?  Roth says more advisors don’t make this recommendation because it reduces their assets under management.

9: Showing income that isn’t.  Meaning?  With muni bonds, statements show income of 3.5% to 4% tax-free, which is twice what the muni bond is showing.  That’s because the advisor bought the bonds at a premium. 

10: Chasing past performance.  Money poured into smart beta funds a few years ago when performance was hot, and now that money is pouring into index ETFs.  Advisors are chasing low-vol funds.  (online only)

“Albert Edwards—The Fed Credit Bubble and What It Will Do to the Markets”
by Robert Huebscher
Advisor Perspectives
Relevance: high

The global strategist for Societe Generale in London is worried about a number of things.  Spain and Italy are uncompetitive with the rest of the Eurozone, which will lead to increasing dissent—something the EU does not deal well with.  He’s worried about the next recession, when equities will collapse from 18 times forward earnings, currently, to around eight times.  He says that never in history have financial assets been so overvalued, and he blames QE for extreme asset inflation.  The IMF says that over 20% of U.S. corporations could go bust because of excess leverage, and the corporate bond market would be crushed.  However, the proposed recession could be a year way.

Edwards also worries about China, which has become a boom and bust economy and is currently dealing with a credit bubble.  The nation lurches from tightening to easing, back and forth, like a ship that can’t keep an even keel.  A recession in China could slow the U.S. economy.   (online only)

“Eight Rules for Developing the Next Generation of Leaders”
by Bob Veres
Advisor Perspectives
Relevance: Unrated

This is a report on Philip Palaveev’s keynote presentation at the Insider’s Forum conference.  The founder of The Ensemble Practice consulting firm started by telling the audience that the most successful firms are those which have the most talented and competent advisors and support staff (i.e., they are wealthy in staff talent), and in general they got that way by being better at developing the skills of their younger staff members.

The “rules” were as follows:

1) Hire inexperienced but talented staff members, and create processes for training in-house, and for giving younger advisors valuable experience.  Great line: “I can’t tell you how many times we spent seven years looking for someone with five years experience.”

2) G2 employees should also take responsibility for enhancing their skills and careers.  The firm has a responsibility to open doors and provide training, and the younger advisors have an obligation to walk through the doors and take advantage of the opportunities.

3) The best way to create and define these in-house opportunities is to create a career track.  This helps define “progress” and helps staff members self-assess how quickly they’re progressing toward their career goals, and defines what they need to do to get to the next rung of the ladder.  It also creates transparency; why are you not being promoted?  What do you need to do to get there?

4) The track is built on a foundation of technical expertise.  In the first stage, the younger advisor must master the technical details, before they can expect to become lead advisors.

5) In the training process, you have to be willing to let younger advisors make costly mistakes.  The analogy here is letting a young driver get behind the wheel. Yes, it’s dangerous, but there is no other way the novice driver will learn to control the car.  Will you lose clients?  Maybe, but that’s a necessary price for developing lead advisors.

6) Never make the mistake of treating all your employees equally.  This was a tough sell to the audience, but Palaveev argued that if you promote and give bonuses based on seniority or equality, then your best, most ambitious contributors will get frustrated and go somewhere else where their extraordinary contributions will be recognized.  Better: create a clear career track, and put your most ambitious, talented people on a fast-track, with more access to mentoring and educational opportunities.

7) There will be times in an ambitious person’s career when a work-life balance can’t be maintained.  This, too, is a difficult issue, but Palaveev said there are periods in your career when you have to work really, really hard, and take extra time to finish everything.

8) Every successful advisor will have to learn how to manage him/herself. This not only means taking full advantage of opportunities, but also managing emotions during difficult times and inevitable disputes, and especially around clients.  This, Palaveev said, is what truly makes you a professional.

At the end, Palaveev said not to push the pace too fast.  A career is not a sprint; it is a marathon.  If you go out too fast, you could burn out or miss out on an important development stage.  (online only)

Investment Advisor magazine:

“Trump Names New EBSA Chief as Wagner Bill Gets House Panel Nod”
by Melanie Waddell
Investment Advisor, November 2017
Relevance: high

The President has nominated Senate Finance Committee senior counsel Preston Rutledge to fill Phyllis Borzi’s shoes at the Department of Labor; his job will be to emasculate the DOL fiduciary rule.  Rep. Ann Wagner (R-Mo) got her Protecting Advice for Small Savers Act of 2017 through the House Financial Services Committee by a 34-26 vote, so it now goes to the full House.  Basically it would prevent the DOL Rule from being enforced, and require all fiduciary rulemaking to come out of the SEC.  Waddell says that the Act would get the DOL out of the broker-dealer space.

New SEC Chair Jay Clayton, meanwhile, says that investors need “choice” as to what kind of relationship they want.  He wants consistency between the SEC and DOL. He’s concerned about all these state fiduciary laws that are cropping up in Nevada, New York, New Jersey and Massachusetts.  SIFMA is also worried about a state-by-state encroachment of the fiduciary standard.   (p. 13)

“The Last Firm Standing”
by Mark Tibergien
Investment Advisor, November 2017
Relevance: high

Tibergien talks about four stages of a consolidation phase in any industry or sector, and notes that financial planning and investment advice are in the early stages of this phenomenon.  Stage one, the opening phase, sees new companies emerge from a newly deregulated or privatized industry.  This began when registered reps broke away from brokerage firms and affiliated with independent broker-dealers.  Some eventually went fee-only, but few dreamed of building a bigger business until, well, they became bigger businesses, and had to hire professional management and impose a certain degree of executive discipline.

In stage two, the consolidation phase, major companies begin to buy up competitors and form empires.  The markets could be local, regional or national, defined by type of client or firm expertise.  Consolidators capture their major competitors in their most important markets.  Tibergien says that some will succeed; others will lack a clear strategy and fail to consider how they will build a critical mass.

Stage three, the focus phase, is where firms expand their core business and try to outgrow the competition.  The top three firms in this phase will control 35-70% of their defined market, and participate in mega-deals and larger-scale consolidation.  They will face threats from startups which attempt to disrupt their business; witness how quickly Schwab and Vanguard recognized the robo-threat and created those capabilities themselves.

Stage four, the balance and alliance stage, sees the titans reign, and growth becomes more difficult to achieve.  The firms are defending their current position.  The title asks which of the current firms will make it all the way to this stage of evolution; we don’t know, but it’s fun to speculate.  (p. 27)

“How the Magic Six Can Empower Your Firm”
by Angie Herbers
Investment Advisor, November 2017
Relevance: high

You hire an experienced lead advisor, and immediately give this person face-to-face client responsibilities.  Right?

Maybe not.  Remember, this person comes in having to deal with a new business, new people, a new culture, new systems, new procedures—and new clients.  Few can handle all those things at once and be productive immediately. 

Is there a better way?  Start a six-week training program for new lead advisors to learn about their new firms, how they work and how they will best fit into the new procedures.  that seems like a long time, but it’s an investment in success for the lead advisor, potentially the difference between disappointment and meeting expectations.  If that advisor needs to be replaced in a year or two, skipping the six-week training will prove to be an expensive mistake.

What does that training look like?  Break down what the new advisor needs to know about your firm into six areas, and take a week to cover each area.  Week one: a general overview of your company. Include policies and procedures.  Week two: general administrative procedures and how the office functions.  Week three: the firm’s client experience.  Week four: how the firm markets itself and how it communicates its value.  Week five: client onboarding.  Week six: ongoing client service.

What if you don’t have these topics clearly defined?  Then have each department work on it; your firm will be better for it.  (p. 31)

“Prepare Now for Business Recovery Events”
by Dan Skiles
Investment Advisor, November 2017
Relevance: high

You’ve noticed that some hurricane activity has recently shellacked Houston, Puerto Rico and Florida, which has temporarily shut down advisory firms.  That should remind you to have a business recovery plan in place.  It should be a living document, which receives ongoing attention as your firm evolves, adds new staff and services.  Do you have backup solutions?  Every employee should have specific roles and responsibilities in a disaster.  Plan for time stoppages; if power outages last for a day or two, what will you and your employees do during that time?  Maybe it’s time to get a backup generator or a plan to drive to where power is available.  You should have multiple communication channels for colleagues and employees, so you can share and receive information.

Finally, do test drills on a regular basis.  Make sure you include multiple variables and different team members in each drill, and see what went right and what needs to be fixed.   (p. 41)

“SEC to Advisors: Stop Sloppy Ads”
by Tom Giachetti
Investment Advisor, November 2017
Relevance: high

Last September, OCIE published its National Exam Program Risk Alert, and it includes warnings about how you market yourself.  Are you presenting performance results without deducting advisory fees, or that compared performance results to a benchmark without disclosing whether you’re comparing apples to apples?  Are you showing hypothetical or back-tested results?  Are you cherry-picking only certain successful accounts?  Are you puffing up the awards, accolades or rankings that you’ve achieved—or failing to disclose the fact that you paid a fee to participate?  Do you include lapsed professional designations on your Form ADV supplements?  (p. 43)

“Climbing the Ladder”
by Caleb Brown
Investment Advisor, November 2017
Relevance: high

If you’re an associate planner who plans to take on a lead advisor role, then read this list of recommendations carefully.  Volunteer to manage the internship program at your firm, because you understand students better than the senior leadership.  Choose one technical skill you want to sharpen, based on the clients your firm works with or the niche you want to carve out.  Help senior planners leverage themselves by identifying some of their clients that you can take a lead role with.  Volunteer to try out new software planning programs to ensure that your firm is using best in class solutions.  Start developing new client relationships, take on leadership roles in FPA NexGen or NAPFA Genesis, start or join a study group, take a course to improve your communication skills and reach out to potential ally to strengthen your relationship.  Volunteer to serve on the board of a local nonprofit.  You’re looking for ways to improve your knowledge, interpersonal and leadership skills.   (p. 48)

The rest of the articles:

“Say Hello to a New Low-Cost Index Fund; Latest Thinking on Active vs. Passive”
by Staff
Investment Advisor, November 2017
Relevance: low

This is a review of new products on the market.  Schwab introduced the 1000 Index ETF.  Blackrock has released a report that disputes the idea that their ETFs distort investment flows, create stock price bubbles or aggravate a decline in market prices.  Of course they don’t.  Stadion Money Management has created a target date “solution” called TargetFit, which “make target solutions better” in three ways: multiple glide paths, participant education, and the use of ETFs.  (p. 15)

“Charting a New Course”
by Cliff Stanton
Investment Advisor, November 2017
Relevance: low

The chief investment officer of an alts shop (361 Capital) is given the opportunity to write a cover article that is really an advertisement for alts.  How did the editorial staff submit to this blatant conflict of interest?  Stanton doesn’t shy away from the opportunity; he says that “risk control strategies” using alts is becoming “the new normal.”   He puts his firm in the company of GMO, Research Affiliates, AQR, BlackRock and JPMorgan (one is free to doubt those firms have even heard of 361 Capital) that U.S. stock investors shouldn’t expect more than 1.5% real returns over the next 5-10 years.

The solution?  What do you think?  Recommend alts!  The problem is that advisors just aren’t getting it; they still think alts are private equity, hedge funds, managed futures, real estate, commodities and derivatives.  Instead, we are told, think of them as vehicles that can go long or short, that may employ leverage, that may use derivatives—but, well, Stanton says, “too often we find that investors… make decisions based on labels.”  We are told “alternative strategies attempt to generate “unique sources of alpha;” they try to “manufacture returns with low correlations to traditional asset classes and with less volatility; they aim to provide downside protection when markets take a turn for the worse.”  Really cool, are these alts.

So get out and sell the alts!  “We believe that part of our job is to educate clients about the strategies that we run,” says Stanton.  You and they are on a mission.  The article tells us how to select and use alts.  It exhorts the reader: “Don’t be left behind.”  Protect your clients!  The bigger message here is that Investment Advisor magazine is open to allowing product companies to write their own advertisements as cover articles.  This could be a significant marketing opportunity.   (p. 21)

“Take Three: Borg’s Back as NASAA Chief”
by Melanie Waddell
Investment Advisor, November 2017
Relevance: moderate

The headline refers to Alabama Securities Commission Director Jo Borg, now president of the North American Securities Administrators Association.  He will focus on scams against seniors, cybersecurity preparedness (and a new cybersecurity checklist for advisors) and unpaid arbitration awards.  The organization is also concerned about mandatory arbitration clauses in broker-dealer consumer contracts, and would like to reform the securities arbitration system.  About one-third of FINRA awards handed down in 2013 are still unpaid.  A new financial technology committee will explore crowdfunding, robo-advisors and cryptocurrency issues.  (p. 29)

“Titles in Focus (Again)”
by Bob Clark
Investment Advisor, November 2017
Relevance: moderate

The CFA Institute, noting widespread investor confusion, has recommended that the SEC adopt a title-based regulatory approach, that brokers not use the term “advisor” or give investment advice.  A 2015 followup letter to the DOL recommended that only those subject to the ’40 Act or ERISA be allowed to use the titles “advisor” or “adviser.”  A 2017 letter to the SEC stated that brokers should be clear about their titles, and where they stand with their clients’ interests.  Former SEC Commissioner Luis Aguilar agrees, saying that broker-dealers aggressively market as advisors, causing confusion among investors.  Clark says he agrees.  (p. 33)

“Updates on Annuities, RMDs, and Courting Senior Citizens”
by Staff
Investment Advisor, November 2017
Relevance: low

TIAA issued a white paper saying that few workplace savings plans provide annuities to guarantee that savings will last through retirement.  They should be concerned about longevity risk.  Craig Israelsen of Utah Valley University says that clients should not fear required minimum distributions, which, if taken properly, will provide income for a full retirement (to age 95 or so(.  And Jackson National Life expects Social Security Benefits will be the major retirement program for most Americans.  Americans should focus on guaranteed lifetime income, but they are unaware of the value of annuities.  BNY Mellon’s Pershing says that advisory firms can concentrate on retired seniors and become a trusted resource—but only if they understand that these retirees are vigorous and healthy.  (p. 35)

“Independent Firms Highlight Key Issues, Growth Trends at Conferences”
by Janet Levaux
Investment Advisor, November 2017
Relevance: low

The Investment Advisor editor spent a few days in San Diego at Commonwealth’s annual broker-dealer meeting recently, and she talks about the warm welcomes and the growth that is being reported.  Wayne Bloom, CEO of Commonwealth, expects a better version of the DOL rule, without the provision for class-action litigation.  Meanwhile, at a Raymond James meeting for women advisors in Tampa, FL, the firm noted that fully 15% of its advisors are women.  The firm proposes to increase that by creating a yearlong curriculum for registered sales associates who have an interest in becoming financial advisors.

Levaux also attended LPL Financial’s top producer meeting in Rancho Palos Verdes, CA in October, where the firm executives talked about retaining advisors from the former National Planning Holdings acquisition.  The firm also wants to help more advisors grow their retirement plan business.  (p. 38)

“Why Words Matter”
by Fran O’Brien
Investment Advisor, November 2017
Relevance: moderate

When you use the word “affluent” or “high net worth” on your website or client communications, those on the receiving end don’t feel like you’re talking to them.  Most people don’t think of themselves as wealthy, and assume you are not working with people like them.  They describe themselves as “successful” or “accomplished.”  (p. 44)