MEDIA REVIEWS – October 16-23, 2018

Once again, I’ve added some Advisor Perspectives articles to the (rather thin) editorial fare coming from Investment Advisor these days—although there are four columnists from the magazine who routinely show up on my “high” relevancy list.

In Advisor Perspectives, Knut Rostand not only takes issue with the recently proposed Reg BI standards, but with the SEC’s entire approach to regulating brokerage firms as if they were advisors.  He proposes alternative disclosure language, which the brokerage firms will forbid the SEC from adopting.

Larry Swedroe has an interesting article on whether TIPS or Treasuries make more sense in client portfolios today, and Bob Huebscher reports on Harold Evensky’s final presentation of his long and storied career.  (He will, however, continue in his role as chief investment strategist at Evensky Katz/Foldes.)

Investment Advisor includes the usually great columns by Mark Tibergien, Angie Herbers, Dan Skiles and Tom Giachetti, but this time there’s an additional article that is pretty good: they look at creating a new defined benefit plan out of 401(k) lump sum distributions, with the success or failure based on seven key metrics (or client outcomes).

Articles in Advisor Perspectives with a “high” relevancy rating:

“The SEC Isn’t Giving Us Straight Talk”
by Knut Rostad
Advisor Perspectives, October 3, 2018
https://www.advisorperspectives.com/articles/2018/10/03/the-sec-isnt-giving-us-straight-talk
Relevance: high

The founder and CEO of the Institute for the Fiduciary Standard says that the SEC has been conducting focus groups with consumers, to see how well they understand the Reg BI disclosures, and whether the disclosures that brokers and advisors would be required to give their customers/clients are helping them better understand the nature of the advice they’re getting.  Investors apparently have not been reacting well, calling the new disclosures incomprehensible. 

The problem is that the SEC has been enabling, for years, the brokerage firms’ fiction that they are not sales agents; they are “trusted advisors” (using a variety of names borrowed from financial planning and investment advisor literature).  So it may be impossible to reverse course and give consumers straight talk: that brokers are there to sell you products, not watch out for your best interests.  Worse, a language expert found that Reg BI is written at a 14th grade reading level, when the average American reads at an 8th grade level.

The Fiduciary Institute proposes alternative disclosure for brokers: “We represent issues or underwriters who sell financial products.  We do not represent you.”  For advisors: “We must give you fiduciary advice in your best interest at all times.  We only represent you.”

When hell freezes over. 

“Comparing TIPS to Nominal Bonds”
by Larry Swedroe
Advisor Perspectives, September 30, 2018
https://www.advisorperspectives.com/articles/2018/09/30/comparing-tips-to-nominal-bonds
Relevance: high

Should you buy Treasury inflation-protected securities or Treasuries?  The author focuses on five-year maturities.  As of the writing of this article, the 5-year TIPS was yielding 0.77%, while the 5-year nominal Treasury was yielding 2.76%.  If inflation is higher than 1.99% a year over that time period, then the TIPS investment would offer a higher return.

How likely is that?  The Fed’s survey of professional forecasters projects 2.2% annual inflation over the next 10 years.  The 5-year inflation swap on the markets has a current price of about 2.4%, providing an expected return on TIPS of 3.17%.  Instead of going short on bond durations, investors should prefer TIPS at today’s rates.

“Shiller vs. Siegel: Are Stocks Too High?”
by Marianne Brunet
Advisor Perspectives, October 2018
https://www.advisorperspectives.com/articles/2018/09/28/shiller-versus-siegel-are-stocks-too-high
Relevance: high

Robert Shiller and Jeremy Siegel have different views of the stock market; the former tends to be bearish while the latter is a long-term bull.  At the moment, Shiller’s CAPE ratio is near historic highs.  Shiller says that today’s high stock prices are being driven by high earnings levels that cannot be sustained.  The corporate tax cut led to a spike in after-tax earnings over the short-term.  His prediction is not a crash; it’s lower-than-historical-averages over the next ten years.

Siegel says that the earnings yield is a good predictor of long-term returns, and discounts prices.  He says the CAPE ratio doesn’t forecast future prices, and is biased as a result of the bad economic years associated with the Great Recession.  He’s expecting 5.5% real returns over the next ten years, which is slightly below historical averages.  He says the disparity between stock and bond prices is actually bullish for stocks at the moment.

“The Investment World According to Harold Evensky”
by Robert Huebscher
Advisor Perspectives, September 26, 2018
https://www.advisorperspectives.com/articles/2018/09/26/the-investment-world-according-to-harold-evensky
Relevance: high

The noted investor and financial planning professional gave the last presentation of his career at the Insider’s Forum conference in San Diego; this is a report on what he had to say.   

First, Evensky is concerned about the very expensive market valuations.  This is likely to give us a low-return environment over the next ten years.  In low-return environments (where investors expect real net of expenses taxes and inflation returns of 2% a year), expenses and taxes become far more important than they are when returns are more generous.  Look for low-turnover investments—and that means VERY low turnover; Evensky showed that a manager who cuts turnover from 100% to 50% doesn’t materially impact the taxes taken out of the portfolio.  Managers need to be closer to a 10% turnover rate before they are truly tax-efficient.

Evensky pioneered the core and satellite approach to investing, where the bulk of the portfolio is invested in a buy-and-hold core of inexpensive index funds that trade very little.  The satellites are opportunistic alpha-seeking investments.  Evensky also cautioned the audience to use forward-looking returns in their modern portfolio theory calculations, and not to confuse cash flow with income in their investment mixes.  Evensky showed the audience the results of surveys which suggest that new younger retirees might be spending more after they leave work than they did before, because they have more hours to fill.  They may spend less as they get older, and then more in old age as their health costs go up.

For convenience, and for controlling the panic that clients can experience when markets go down, Evensky will divide client assets into two buckets.  One funds the client’s next five years of cash needs, and tends to be invested in cash and low volatility investments.  The rest is invested for the long term, with a diversified mix of risk-on investments.  The custodian is instructed to send a monthly payment from the cash flow reserve, which is periodically replenished depending on what the investment markets provide.

Perhaps the most surprising part of the talk was Evensky’s mellowing attitude toward annuities. He thinks low-cost single-premium deferred annuities and deferred income annuities could be used for some clients who have low savings and will have trouble affording their retirement and may outlive their income in old age.  Right now, he doesn’t have any clients invested in these products, due to the low bond rates, but he believes that annuities will become more valuable as bond rates go up.

“How to Invest in a Market That’s Due for a Hard Landing”
by Vitaliy Katsenselson
Advisor Perspectives, September 26, 2018
https://www.advisorperspectives.com/articles/2018/09/26/how-to-invest-in-a-market-thats-due-for-a-hard-landing
Relevance: high

Katsenselson is worried.  He thinks Chinese real estate is a debt bomb waiting to explode, noting that the Chinese real estate market is now selling around $202 per square foot, 38% higher than the median price in the U.S., even though U.S. per-capital income is 700% greater than China’s.  Rental yields in China are 1.5% and many apartments were purchased as investments and are sitting empty.  The mortgage cost is around 5-6%.  Chinese consumer debt-to-GDP is much greater than it was in the U.S. during the 2008-09 financial crisis.

And household real estate lending now makes up 22% of Chinese bank assets. 

The author says that generally, around the world, central banks have driven asset prices up with artificially low interest rates, and global debt is exploding.  Global economics are highly-leveraged.  At the end, we learn that his firm’s portfolio holds a lot of healthcare stocks, which have great balance sheets, their business is not cyclical and the aging global population has put a tailwind at their backs.

“The Power of Storytelling”
by Robert Huebscher
Advisor Perspectives, September 25, 2018
https://www.advisorperspectives.com/articles/2018/09/25/the-power-of-storytelling
Relevance: high

This is a report on a keynote presentation at the Insider’s Forum conference, by Hollywood producer Ed Saxon, whose credits include The Silence of the Lambs and Philadelphia.  Saxon said that humans think in stories, and the best stories create an emotion.  We put stories into categories: comedy, suspense, mystery etc. according to how they make us feel.

How is this relevant for advisors?  Advisors can help clients connect their personal story with their money.  Today, there are many venues; we have cell phones, mobile devices, sophisticated animation techniques for movies, and democratized access to a variety of movie and sound equipment.  We have the opportunity to tell our own stories more powerfully than a brochure could possibly do it. 

Saxon talked a lot about the craft of movie-making, but he also said that movie making taught him the value of collaboration, improvisational communication and community among your co-workers.  He said that in conversations with clients, don’t constantly discourage them.  If they want to buy an expensive beach house, instead of saying no, you can’t afford it, come back with something like: “there are great beach houses on Airbnb.”

Articles in Investment Advisor with a “high” relevancy rating:

“New Thinking on an Old Problem”
by Janet Levaux
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/new-thinking-on-an-old-problem/
Relevance: high

Steve Vernon of the Stanford Center on Longevity, along with Wade Pfau of the American College and Joe Tomlinson, an actuary and researcher (who writes excellent articles for Advisor Perspectives) have looked at how workers can translate lump sum retirements into annuity-like income.  They identified eight metrics that need to be addressed:

Annual income

Inflation protection

Liquidity

Bequest upon death

Downside potential reductions in income

Probability of shortfall of income during retirement

Magnitude of any shortfall.

The authors appear to assume that people will take Social Security benefits at age 70, and then follow a Spend Safely in Retirement strategy, which would automatically adjust withdrawal amounts to recognize investment gains and losses, and provide lifetime income no matter how long the participant lives.  No annuity purchase is necessary.

How does this work?  The money is invested primarily in stocks using low-cost index funds, with an emergency fund to cover unforeseen expenses.  The retiree automates the payment of retirement income, and alters those withdrawals from savings based on investment gains or losses to the core portfolio.  The process also converts large unexpected medical costs into predictable monthly Medicare and Medicare Supplement premiums, which are paid from retirement income.   (p. 14)

“Have a Strategy for Future Air Pockets”
by Mark Tibergien
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/your-strategy-now/
Relevance: high

Several favorable trends might be poised to move against you.  The markets won’t be going up forever, and a downturn would reduce AUM revenue.  There may not always be an oversupply of clients and an undersupply of people to advise.

Time to take stock.  What forces of change will be influencing how clients choose to do business?  Are clear market segments emerging, while others are disappearing?  Advisory firms currently serve baby boomers; what drives their goals?  Think about your technology and the way you communicate, and how these might be different for younger generations and staff.

What is the competition beyond your immediate community?  What do your best competitors do well, and how are they setting themselves apart?

What does your business do well?  How does that align with your optimal client?  Are you leveraging your partners and vendors effectively?  Adding supplemental capabilities allows you to deliver services that larger firms offer, while still maintaining flexibility.

How do you define success of your firm?  Is it to become the leading brand in your defined market? 

To take full stock if your firm, talk to your employees and partners, and invite them to present their observations to the rest of the team to start an internal debate.  This will clarify where you need to invest as a business, what type of talent you need to hire, and how best to train your current staff.  (p. 29)

“Stuck in the Mid-Sized Firm Rut?”
by Angie Herbers
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/stuck-in-the-mid-sized-firm-rut/
Relevance: high

You’ve read that the firms in the middle—caught between large national firms and small one-person shops—are getting squeezed out of business.  Herbers says that mid-sized firms can compete on an equal basis, unless they’re still being run by the seat of the owner’s pants, like a small firm, while facing the operational challenges of a larger enterprise.  She says that the average revenue of today’s independent firm is between $3 million and $4 million, up from $400,000 back in 2003.  Controlling that growth means being willing to invest in new partners and employees, technology and marketing.  The benefits of ownership begin to shift from high income to high equity values in the ownership of the business.

Owners of midsize firms have to spend more time working on their business and less with their clients or taking time off.  They have to control their cash flow more closely.  The employees need to function more effectively as a team, leaving little room for the slackers who tend to accrue as the firm grows.  Smaller firms and owners can waste resources offering unprofitable services to unprofitable clients.  Midsized firms have to be more discriminating; no longer can the staff spend 75%of its time on 25% of your clients.

The bottom line: you need to transition to greater operating efficiency if you want to survive the transition from small solo to midsize planning firm.  (p. 33)

“Required: Referral Fee Compliance”
by Tom Giachetti
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/required-referral-fee-compliance/
Relevance: high

If you engage (and pay) solicitors to bring in business to your firm, pay attention.  Under Rule 206(4)-3 of the Advisers Act, there must be a written agreement between the advisor and solicitor setting forth the terms and conditions of the referral arrangement.  The solicitor must provide the prospective client with a copy of the advisor’s ADV or brochure and a separate written disclosure pertaining to the solicitation arrangement (including disclosure of compensation for making the referral).  And the advisor must keep in its records written proof that the solicitor met these obligations—meaning to collect a solicitor disclosure statement executed by the prospective client that also acknowledges that client’s receipt of the advisor’s brochure.

Of course, the solicitor must not have a disqualifying disciplinary history, and the advisor firm should have an ongoing solicitor review process to confirm continued compliance with these rules.  Some states require the solicitor to be registered, and meet certain qualifications.  (p. 43)

“Do You Recognize These Scams?”
by Dan Skiles
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/do-you-recognize-these-scams/
Relevance: high

Consider three common cyber fraud situations.  In one, a client has been preparing you, via email, for more than a month to facilitate a wire transfer.  The client provides you with the receiving account details, and you complete the forms and send them to the client for signature.  The client e-signs off and emails the document back to your firm.  But of course, you need a verbal confirmation, so the lead advisor calls the client and leaves a voicemail message.  The call is returned when the lead advisor is out of the office, the details of the request are logged into the CRM—and the money is transferred to a scamster’s account.  How?  The scammers had gotten access to the client’s email address, and the client had voicemail messages forwarded to email.  The scamster was lucky enough to call in and talk with an associate who was not familiar with the client’s voice.

Number two: a client emails your office saying he’s expecting a year-end bonus.  There are email and phone conversations.  The client gets the funds, and emails your staff for the wire instructions for sending the money to his managed account.  The client receives a swift return email with the wire instructions, but those fraudulent instructions route the money to the fraudster’s account.  Your staff member’s email account had been hacked.

Number 3: a member of your staff receives an email from a friend asking her to review a resume.  The employee clicks on the attachment, but nothing appears to happen.  She replies to the email asking the friend to resend the attachment.  Whoops!  Now a ransomware virus is in your system, and you can’t access any files that the staff person has access to, including files located on your firm’s servers.

Skiles asks: are you subject to any of these scams?  Would your system have prevented them?  (p. 45)

The rest of the articles:

“FINRA’s New Competency Exams a ‘Significant’ Event for Some BDs”
by Melanie Waddell
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/finras-new-competency-exams-a-significant-event-fo/
Relevance: low

The new exam took effect on October 1, designed to require brokers to “demonstrate a fundamental knowledge of regulatory requirements prior to joining a firm.”  We are not told how this is different from the current suite of exams.  (p. ?11)

“Are Energy Companies Investment Fossils?”
by Ginger Szala
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/are-energy-companies-investment-fossils-2/
Relevance: low

An independent research report says the there is significant risk in continuing to invest in coal, oil and gas, and that energy companies are on a long-term decline.  Does that surprise you?  (p. 18)

“Yield Matters in Bond Investing”
by Mark Carlson
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/yield-matters-in-bond-investing/
Relevance: low

High-yield bonds are slowly rising in average credit quality, and a significant decline in their spread vs. Treasury obligations.  The author proposes a “yield maximization” strategy—and see if this makes sense: “This is achieved by using innovative security selection and weighting methodologies that focus on maximizing factor inputs for the yield value factor, while controlling for quality and liquid risk.”

Then the senior investment strategist for FlexShares ETFs recommends the FlexShares High Yield Value-Scored Bond Index Fund.  But for some reason, the magazine forgot to label this column as an advertorial.  (p. 19)

“Best Investment Writing According to Faber”
by Jane Rusoff
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/best-investment-writing-according-to-faber/
Relevance: moderate

Money manager and blogger Meb Faber has edited “Best Investment Writing – Vol 2”, with a variety of essays, including one by Cliff Asness on corporate stock buybacks; one on private equity, two on crypto assets, an essay by Jim O’Shaughnessy on the crash of 1987, and another on forecasting (and the impossibility of doing it accurately).   (p. 20)

“How Can Advisors Bridge the Emotional, Cultural and Generational Divides?”
by Nicholas Arreola
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/how-can-advisors-bridge-the-emotional-cultural-and/
Relevance: low

I’m not sure what the point is here: this is a breezy overview of Daniel Kahneman’s research into mental heuristics (most of which you know), and a scanty review of the idea that “personality can indeed explain behaviors relevant to financial decision” (really?), and that there are some myths and generalizations about differences in generations.  The conclusion is that advisors can help clients understand their fears and help empower them to take control of their financial situation.  Isn’t that what you actually do for a living?  (p. 22)

“Debunking Two Pervasive Millennial Investment Myths”
by Elisa Garcia
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/debunking-two-pervasive-millennial-investor-myths/
Relevance: low

The first myth is that millennials don’t see the value in getting financial advice.  The author assures us, without any supporting evidence, that millennial investors are more likely than any other generation to say that having a financial advisor they trust is important to their financial confidence.  Those who are not working with one new expect to hire one in the future.  Many of them, we are told, are carrying significant student debt, and are reaching important life milestones like starting a family and buying a home.  (Did you not know this?)

The second myth is that these people just stare at their phones all day and don’t want to interact with people.  The author, again without supporting evidence, assures us that millennials actually appreciate the value of in-person interactions when it comes to their finances.  They want you to make the most of your time with them, and they want to be heard.  They want to be valued and validated.  (Is this different from any other generation?)  (p. 28)

“Sizing Up the SEC’s Form CRS”
by Melanie Waddell
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/sizing-up-the-secs-form-crs/
Relevance: moderate

The SEC’s new disclosure proposals have come under fire from the Financial Planning Coalition and the Consumer Federation of America—for the simple reason that they don’t reduce consumer confusion about their choices in selecting an advisor relationship.  The list of where the proposed disclosures fall short is a long one: consumers, when presented with the disclosures, failed to understand the different legal obligations that apply to brokerage and advisory accounts; they didn’t understand the term “fiduciary standard,” and there was little attempt to help them; they didn’t understand the term “best interest” as applied in the disclosures; they didn’t know any more about the different payment models and fees than they had known before, and they didn’t get a clear view of the nature of services offered as part of brokerage and advisory accounts.

The SEC is doing its own investor testing, but it is kind of secretive about what that testing is or how it’s going to work.  The suspicion is that the SEC is intent on forging ahead with its proposal without really caring whether it functionally addresses consumer confusion in the marketplace.  (p. 31)

“Planning Your Life’s Next Chapter”
by Jamie Green
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/planning-your-lifes-next-chapter/
Relevance: moderate

Peggy Cabaniss achieved her goal; she transitioned her firm to her successors.  She now does volunteer work for the investment committees for the John Muir Land Trust, a cancer support group, a local education foundation and the national investment committees of her college sorority and the American Association of University Women.  She also works through NAPFA on a program that brings together retired advisors, the Phoenix Gang, which has met four times with outside speakers and presenting members.  (p. 35)

“The Future is Now”
by Tim Welsh
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/the-future-is-now-5/
Relevance: moderate

Advent/Black Diamond hosted the SS&C Deliver conference in Las Vegas, and heard Ric Edelman tell them that people are going to live to age 150 or longer, which means that clients are going to need advice to change careers over and over again, and healthcare counseling.  Jobs will be destroyed by AI and automation, new jobs will be created, and the idea of retirement will go away.  A panel discussion concluded that AI will take over asset allocation and trading, and that advisors will need to switch from the AUM revenue model and provide advice rather than primarily asset management.  Advisors will need to digitize the account opening, synching data across systems, and creating deep integrations with CRM.  They will need to have all of a client’s financial data in one client portal.

Black Diamond has created a new Rebalancer that will not require advisors to download data and then upload trades to custodians.  (p. 37)

“Merrill Moves to Put Commissions Back in Retirement Accounts; Wells Fargo Hits More Bumps; and Other Industry News”
by Janet Levaux
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/merrill-moves-to-put-commissions-back-into-retirem/
Relevance: low

And the winner of the “longest article title” award goes to… a bunch of rewritten press releases.  Merrill says that bringing back commissions for sales to IRA holders provides more “choice” to consumers.  Morgan Stanley has hired Paul Halpern, a former Betterment executive, as head of deposits and banking services for its Private Banking Group.  The goal is to help advisors boost sales of wealth management services—and the column provides us with verbatim quotes from a press release.  Wells Fargo Advisors continues to have problems with scandals, and now has hired Tim Boostrom as the regional head of its independent advisor “channel.”  The “channel” now includes 14,226 “advisors”—down just 300 from a year ago.  Meanwhile, the bank expects to pay $114 million to wealth-unit customers who have been overcharged over the past seven years.  The firm is also investigating the president of its private bank and head of the wealth management division for routinely referring to female brokers as “girls,” and advising them to put on “big-girl panties.”

Advisor Group apparently put out a press release saying it will speak with at least one qualified woman candidate when filling slots for vice presidents and other top executives.  What appears to be a press release from HD Vest says it is working with Envestnet to provide tools for model management, unified managed accounts and online reporting.  Envestnet will customize its services for the independent broker-dealer.  (p. 39)

“Movin’ On Up”
by Melanie Waddell
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/movin-on-up/
Relevance: moderate

A poll by the Investment Adviser Association found that there are now 12,5789 SEC-registered RIAs, up 406 from last year, and they control $82.5 trillion—although of course that includes mutual fund assets, since mutual funds are RIAs as well. 

The typical RIA has nine employees, has $359 million in AUM over 124 client accounts, and exercises discretionary authority over most accounts.  7,147 advisory firms employ 10 or fewer non-clerical employees, while 11,011 RIAs employ 50 or fewer individuals.  (This is the independent RIA profession.). 95.3% of RIAs are compensated based on a percentage of assets under management.  Only 3.6% charge commissions, down from 4.1% last year.  (p. 42)

“How to Protect Your Clients and Yourself from Cybertheft”
by Fran O’Brien
Investment Advisor, October 2018
https://www.thinkadvisor.com/2018/09/27/how-to-protect-your-clients-and-yourself-from-cybe/
Relevance: low

O’Brien would love to sell your clients a cyber insurance policy.  She says that only 7% if people have one.  The article says that your home WiFi network is the easiest way for cybercriminals to gain access to your personal data.  The second easiest is stealing a laptop or tablet.  (p. 48)