MEDIA REVIEWS – June 17-30, 2018

This month’s Advisor Perspectives articles are interesting.  Have you ever wondered whether factor investing has any applicability in the fixed income side of a client’s portfolio?  Have you ever seen real numbers that show how hard it is to generate positive returns when you’re chasing hot fund manager track records?  Those are two of the recent Advisor Perspectives articles reviewed here, along with a pretty good article that looks that the key factors you want to pay attention to if you make annuity recommendations.

Financial Advisor, meanwhile, has a good profile of Condor Capital Management, and maybe the best profile of Hightower that I’ve seen so far.  And I will always pay attention to a Philip Palaveev article, this time talking about how best to instill entrepreneurship in your firm’s next generation of advisors.

Articles that received a “high” relevance rating:

“Do Factors Work in Fixed Income Investing?”
by Larry Swedroe
Advisor Perspectives, June 7, 2018
https://www.advisorperspectives.com/articles/2018/06/07/do-factors-work-in-fixed-income-investing
Relevance: high

The director of research for the BAM Alliance note that factor investing has become popular in the equity markets, but little research has gone into its effectiveness in fixed income investing.  A new article by three researchers at AQR Capital, soon to be published in the Journal of Portfolio Management, finds that factor investing could boost portfolio returns in the bond markets.

Using some elaborate measuring tools, the authors back-test value, momentum, carry and defensive style premiums to different global economies’ government bonds, and across corporate credits, both investment-grade and high-yields.  They found higher returns when all four factors were applied to all of the government bond opportunities, going long the most attractive, shorting the least attractive.  They found that all the style “bets” except carry worked well in corporate bonds, and there was low correlation among the different style selection factors.  But they also collected their results gross of trading costs and fees, and note that much of the improved performance goes away when the relatively high cost of trading corporate bonds is factored in.

“New Research on Performance Chasing”
by Larry Swedroe
Advisor Perspectives, June 4, 2018
https://www.advisorperspectives.com/articles/2018/06/04/new-research-on-performance-chasing
Relevance: high

Chasing hot stocks and funds tends to produce below-average returns—we kind of all know that, right?   The author notes an article in the Spring 2018 issue of the Journal of Investing (http://joi.iijournals.com/content/early/2018/02/05/joi.2018.1.067), which delves into why investors are likely to get poor results from performance-chasing.  The article notes that it would take an impractically long time to differentiate talented from lucky managers based on track record alone.  It imagines 20 managers, none of whom has talent.  Based purely on luck, one of those 20 untalented managers over a five year period will generate a significant alpha, and there is only a 14.8% chance that a talented manager will beat all 20 untalented managers over a five year period.  The performance-chasers will end up with an untalented manager 85.2% of the time. 

The odds get lower if you default to less than a 5-year track record.  Even after 15 years, the odds only rise to about 55%.  To achieve a 95% probability of selecting a talented manager, you need a 38-year performance track record.  By that time, the manager would have received so much new money that reproducing that track record would be very unlikely.

“Five Warning Signs When Examining a Variable Annuity”
by David Stone
Advisor Perspectives, June 4, 2018
https://www.advisorperspectives.com/articles/2018/06/04/five-warning-signs-when-examining-a-variable-annuity
Relevance: high

The author says that all the annuity riders and guarantees have taken a relatively simple concept and made it illiquid and expensive.  Annuity companies have focused their marketing efforts on complex features that have become commoditized.  If the fees are 3% or more, it totally wipes out the value of tax deferral, and clients can’t make sense of the product.

So what are the warning signs to watch out for?  Start with the mortality and expense fees.  If the value of tax deferral is between 100 and 200 basis points a year, does it make sense to pay more than 60 basis points a year? 

Second: administration and annual maintenance charges, which can be as low as zero, or a flat $35, or (warning signal) 10 basis points.

Third: rider fees, the riders providing living and death benefits.  The guaranteed minimum withdrawal benefits may add as much as 150 basis points, and a simple return of premium death benefit can add another 15-20 basis points.

Fourth: surrender charges that span a specific number of years, and decrease typically by a percentage point a year.  They may range from 7% to 20%, and may apply for from 7 to 20 years.

Fifth: underlying fund expenses.  The expense ratios of subaccounts in a VA can be dramatically higher than the comparable fund outside the VA, and some VAs will refuse to include ETFs or low-cost options from managers like Vanguard and DFA.

Financial Advisor:

“CFP Board and NAPFA Collaborate to Strengthen Financial Planning Profession”
by Jadah Riley
Financial Advisor, June 2018
https://www.fa-mag.com/news/cfp-board-and-napfa-collaborate-to-strengthen-financial-planning-profession-38881.html?issue=302
Relevance: high

The collaboration means that all new CFP professionals will receive a one-year membership with NAPFA, and the CFP Board will encourage new CFP professionals to explore the educational events offered by NAPFA.  NAPFA will encourage member involvement in the CFP Board.  (The article does not say that only persons who are fee-only will be granted this automatic membership.)   (p. 22)

“Ensuring the Future of Your Firm: Growing G2 Entrepreneurs”
by Philip Palaveev and Richard Schartz
Financial Advisor, June 2018
https://www.fa-mag.com/news/ensuring-the-future-of-your-firm–growing-g2-entrepreneurs-38862.html?issue=302
Relevance: high

The authors report that many founding advisors regularly lament that their successors lack entrepreneurial spirit, but they’ve talked with those younger professionals and found them eager to build and create.  They need some encourage and experience—and a willingness by the founder to embrace change rather than fight it.  The authors point out that an entrepreneur is not necessarily someone who starts a business; it can also be somebody who manages and assumes the risk of an enterprise.  They propose “team entrepreneurship,” where the risks are shared by groups of staffers.

The real issue that irritates founders is that the next generation is not “selling;” that is, bringing in new business.  Founders are partly to blame; they avoid the word or the concept of selling, and replace it with euphemisms.  That causes the next generation to avoid the activity altogether, feeling that there is something repulsive about it.  The founders and leaders must serve as role models in business development, and embrace the sales role and call it what it is.  They should bring staff into prospect meetings, and see how they message the business and convey why clients should choose them and their firm.

When founders retire, the next generation can make changes that can be defined into four categories:

1)  Developing people and growing talent, which is usually a weak point for the first generation of a firm.

2)  Developing new client service models, and perhaps finally writing a definitive definition of “wealth management.” 

3)  Expanding into new markets and demographics.

4) Improving and innovating the operations and financial management of the firm.

The article tells us that entrepreneurship can be developed; it is not some genetic trait.  When you look for people to train in that role, ask yourself: do they have the potential to be “rock stars” in their current roles?  Do they view learning as a journey that never ends?  Do they look for ways to contribute to the business beyond their job functions?  Can they see the business in its entirety, and understand how it might achieve success in the future?  Are they a good cultural fit for the firm? 

The next generation of entrepreneurs will not look like the founders.  The world, and the business, are evolving.  35 years ago, we did not depend on technology the way we do today, and client service models have evolved dramatically.  The final admonition is to put safety around the evolving entrepreneurs, so they can try new ideas and expand their horizons without feeling like these are dangerous activities.  You have to mentor and develop them—and learn to call “sales” for what it is, and not denigrate it.  (p. 26)

“Don’t Let Robust Portfolios Seduce Clients Into Retirement”
by Robert Laura
Financial Advisor, June 2018
https://www.fa-mag.com/news/don-t-let-robust-portfolios-seduce-clients-into-retirement-38866.html?issue=302
Relevance: high

The author says that he was initially supportive of clients who were offered a lucrative buyout package and wanted to retire, but now he isn’t so sure.  Being able to afford retirement, by itself, is not a good reason to retire.  A study found that retirement increases the probability of having at least one diagnosed physical condition by 60%, and suffering from clinical depression by 40%.  Men who take Social Security early see a 20% increase in mortality risk.  Retiring later appears to delay the onset of Alzheimer’s, according to the International Journal of Geriatric Psychiatry.

So what do you do with that client who is excited about an early retirement package?  Remember that people age 50 and older are likely to remain unemployed for 5.8 weeks longer than someone between the ages of 30 and 49.  If the client does find a new position, chances are it won’t pay as well as the one she left.  Taking the package means potentially taking on the loss of purpose and a curtailment to a long career.  Maybe they take the package, but then the plan becomes one of making sure the client doesn’t run out of career, good health and time in the process.  (p. 33)

“Small B-D Outlook Improves”
by Dan Jamieson
Financial Advisor, June 2018
https://www.fa-mag.com/news/small-b-d-outlook-improves-38868.html?issue=302
Relevance: high

With the demise of the DOL Rule, smaller independent broker-dealers are facing a far less onerous regulatory environment than many of them anticipated.  Private equity investors are once again looking for acquisitions—including Atria Wealth Solutions and Lee Equity Partners buying CUSO Financial Services, Cadaret Grant & Co., and Sorrento Pacific Financial.  An LPL super OSJ, Independent Financial Partners, is forming its own BD, with 550 reps and $50 billion in AUM. 

Yet there are 109 fewer BDs than there were last year, and the attrition rate has remained steady.  State securities regulators, convinced that FINRA is not an effective regulatory, are stepping in with additional oversight, and the Dodd-Frank act requires broker-dealers to be audited each year.

The states may have a point.  FINRA has proposed to drop the requirement for BDs to supervise the independent RIA firms run by their registered reps.  Smaller firms have to be more flexible in allowing reps to do business their way, and give more personal attention.  Advisors at larger BDs are frustrated by consolidation, being sold, and then sold again when their BDs have been acquired by ever-larger competitors.  One competitive advantage is being able to help reps offer more financial planning services.  (p. 39)

“Hightower at 10”
by Eric Rasmussen
Financial Advisor, June 2018
https://www.fa-mag.com/news/hightower-at-10-38860.html?issue=302
Relevance: high

The article opens with a pretty good anecdote that is presumably there to illustrate the benefits of working with Hightower, the consolidator of former broker teams.  Heather Ettinger, co-manager of Fairport Asset Management ($1.5 billion AUM), a version of which was founded by her father, wrapped Fairport into Hightower and used Hightower’s expertise to launch Luna Wealth Advisors, a new firm that would focus on female clients.  Hightower let her offload technology and compliance chores, it vets vendors and lets her network with advisors doing similar things.  It has helped her tuck in a couple of advisors with a total of $150 million in assets.

Most of you know Hightower was founded 10 years ago by Elliot Weissbluth, who brought in David Pottruck, formerly CEO of Charles Schwab & Co., and Philip Purcell, former CEO of Morgan Stanley.  This was the golden age of rollups, when Rudy Adolf sought to buy majority stakes in large RIA firms that would operate independently under the Focus Financial Partners network, when Joe Duran’s United Capital was acquiring mid-sized RIAs under a common platform; when Shirl Penney founded Dynasty Wealth Partners as an alternative for discontented warehouse brokers.

Hightower’s value proposition was helping brokers migrate their businesses toward a fiduciary model, and gain the economies of scale necessary to provide the infrastructure of large Wall Street firms.  The 2008 financial crisis provided to be a windfall, as the brokerage firms had to write down billions of dollars in subprime mortgages.  Today, the firm has $55 billion under management, with 209 advisors on 92 teams with 76 offices in 33 states.  The home office has 600 employees.  The affiliated advisory teams pay more than 10% of their revenue for back office services that they would not be able, we are told, to replicate on their own.

The plan was not to go public, but the firm sold part of itself to private equity firm Thomas H. Lee last November, allowing it to pay off old investors and gain $100 million in growth capital that can be used for new acquisitions—like Salient Private Client in Houston, with $4.5 billion in client assets and a trust company.  Pottruck, chairman of the board of directors, announced he was leaving the firm in April, replaced by Thomas H. Lee executive advisor Gurinder Ahluwalia. 

The article profiles a former Morgan Stanley advisor who has $1.5 billion in assets, who left because he wants to write for National Review and appear on Fox Business—verboten in the brokerage model.  It talks about an RIA firm with $225 million in assets whose growth had stalled, and needed a partner to take the next step.  Another Morgan Stanley team, with $500 million, wanted to “loosen the handcuffs a little when talking with clients.”  A former Merrill broker wanted to explore the advice rather than brokerage model.  Her clients were skeptical about whether she worked for them or for Merrill.  A longtime UBS broker brought $225 million in client assets after he finally realized that the wirehouses are not able to fully embrace the fiduciary model.  (p. 42)

“Young at Heart and Age”
by Christopher Robbins
Financial Advisor, June 2018
https://www.fa-mag.com/news/young-at-heart-and-age-38861.html?issue=302|
Relevance: high

Ken Schapiro, 53, founder of Condor Capital Management, is an aficionado of being dropped off a helicopter to ski in remote, undeveloped slopes.  His staff’s average age falls in the low 30s.  He founded Condor as a fee-only investment firm when he was 23 years old, right out of graduate school.  The firm now has over $1 billion AUM, and grows by hiring interns, giving them real client work and testing them out to see if they’d be a good long-term fit.  The article talks about the challenges of employing young adults who go through a lot of transitions: marriage, children, moving into their first home, moving again—and then profiles two young staffers who started dating at the firm.  Schapiro had to take over managing the female staffer and the arrangement worked.

Client portfolios come from seven models, using “efficient, low-cost funds” (no other details are given), and the staffers work out of cubicles.  Staff members, by policy, receive the smartphone of their choice after they’ve worked at the firm for three years.  The firm pays for the phone, the plan and upgrades every two years.

Meanwhile, Schapiro has launched Backend Benchmarking, to track the performance of the entire investment industry, and do research into various investment strategies.   (p. 48)

“Fine-Tuned Emerging Markets Investing”
by David Sterman
Financial Advisor, June 2018
https://www.fa-mag.com/news/fine-tuned-emerging-markets-investing-38869.html?issue=302
Relevance: high

The MSCI Emerging Markets Index rose more than 60% in 2016 and 2017, before falling 10%.  An increase in global trade tensions and higher interest rates have put pressure on companies located in emerging countries, though these places are where the highest GDP growth can be found—6.5% in Asian markets.  The article questions whether some of these countries should be classified as “emerging” at all, noting that even Vietnam now has 1,200 publicly-traded companies.  (p. 55)

The rest of the articles:

“Some BDs Feeling Margin Pressure”
by Staff
Financial Advisor, June 2018
https://www.fa-mag.com/news/some-b-ds-feeling-margin-pressure-38879.html?issue=302
Relevance: moderate

Cerulli’s latest report on the U.S. BD marketplace says that wirehouses are seeing shrinking profits due to the high cost of recruiting and retention packages to keep their most productive brokers onboard.  Independent BDs are dealing with high technology, compliance and operations costs.  Insurance BDs have been spooked by the DOL’s fiduciary rule, and all are suffering from a migration of top advisors toward fee-driven business models.  But the BDs and wirehouses are fighting back, negotiating revenue-sharing arrangements with fund and insurance companies.  (p. 17)

“Women in Focus in Houston”
by Staff
Financial Advisor, June 2018
https://www.fa-mag.com/news/women-in-focus-in-houston-38880.html?issue=302
Relevance: low

The magazine lauds its own Invest in Women conference, saying that brokerage firms lag the rest of the developed world in hiring and promoting women.  The gender pay gap is closing very slowly; it will take 38 years to reach pay equity.  Black women, at this rate, will need 110 years, and Hispanic women 180 years.  The conference also looked at how the profession could serve younger and less wealthy clients, but provides no details.  (p. 18)

“Younger People find Long-Term Care Insurance is Harder to Get”
by Jadah Riley
Financial Advisor, June 2018
https://www.fa-mag.com/news/younger-people-find-long-term-care-insurance-is-harder-to-get-38882.html?issue=302
Relevance: moderate

Younger people are being turned down for LTC policies like never before.  People age 70 and over have the highest rejection rate (44%), while the decline rate for applicants age 50-59 was 22%.  The decline rate for people below age 50 went up from 12% in 2014 to 20% in 2017—and the most common reasons were existing health conditions.  (p. 22)

“Whats’ Real and What’s Fake in Planning”
by Ross Levin
Financial Advisor, June 2018
https://www.fa-mag.com/news/what-s-real-and-what-s-fake-in-planning-38865.html?issue=302
Relevance: moderate

Levin points out that none of us are perfectly objective, and little is certain in our complex, adaptive world.  Clients have their own biases.  Millionaires go to a party of billionaires and feel poor.  Retirees feel like they have to live on dividends, making them feel poorer than they really are.  Everything is fake and real at the same time.  The important thing is to be able to adapt as conditions change.  Levin cautions against making big irrevocable decisions, and prefers making the smallest changes possible to address the need.

The second half of the column talks about how people spend the first half of their lives focusing on how they fit in, and the second half figuring out spiritual matters—why they’re here.   His firm helps clients relate to both questions by helping them want what they already have.  They help clients better understand their values and align their behavior with them.  (p. 29)

“Four Keys to Unlock the Future”
by William Olinger and Benjamin Doty
Financial Advisor, June 2018
https://www.fa-mag.com/news/four-keys-to-unlock-the-future-38867.html?issue=302
Relevance: moderate

Investment management is becoming more of a commodity, so advisors need to redefine their value.  When it comes to portfolio management, behavioral coaching is key, and you need a goals-based exploratory process with new clients.  The second key is building a long-lasting culture in a growing firm, one that lays the foundation for continuing prosperity in the future.

The third key is the principle of conservatism—particularly being conservative about future income streams and expected returns on client portfolios.  High returns create unrealistic scenarios in a client’s mind.

Key number four is to emphasize asset allocation over security selection.  Choosing wisely between passive and active options is important, but the advisor of the future will be doing a great job of managing beta.   (p. 35)

“Bond Managers Unchained”
by Christopher Robbins
Financial Advisor, June 2018
https://www.fa-mag.com/news/bond-managers-unchained-38871.html?issue=302
Relevance: low

The 30-year bull market in bonds is turning around.  Should advisors move to unconstrained bond strategies to weather the changing climate?  We hear from several bond managers who look at the central banks, at macroeconomic factors, at bottom-up analysis of individual securities and at shifting from asset-backed securities to government bonds to corporate to high-yield, depending on market conditions.  Some say that short-term. Treasury bonds are attractive again; others are locking in higher rates for longer periods.  (p. 59)

“M.D. Turned Manager Embraces Change”
by Marla Brill
Financial Advisor, June 2018
https://www.fa-mag.com/news/m-d–turned-manager-embraces-change-38872.html?issue=302
Relevance: low

A profile of Elizabeth Jones, co-manager of the Buffalo Discovery Fund.  (p. 62)

“Uncapped Fixed-Indexed Annuities”
by Ben Mattlin
Financial Advisor, June 2018
https://www.fa-mag.com/news/uncapped-fixed-indexed-annuities-38873.html?issue=302
Relevance: low

The fixed-income annuity lets holders benefit from increases in a designated index, like the S&P 500, but with a floor of 0% returns.  Most of them have a cap, so accounts don’t get the full benefit of index increases.  Others give a percentage of the gains in the index.  And annuity holders don’t get the benefit of dividends.

The article focuses on a breed of this annuity that have limited liquidity and are therefore long-term investments in the accumulation phase.  There are formulas that DO limit the returns, but they are not hard limits; they take into account participation rates, spreads, margins and other measures to collect from shareholders.  Each term gets its own participation rate and cap—say 65% of the index’s return with an 8% cap.  For some reason, the article calls these “uncapped” fixed-income annuities.  The conclusion: these are appropriate for conservative investors who like to have principal protection features.  (p. 65)

“Effortlessness: Working and Living in Your Zone of Genius”
by Ron Rubin and Jennifer Geoghegan
Financial Advisor, June 2018
https://www.fa-mag.com/news/effortlessness–working-and-living–in-your-zone-of-genius-38874.html?issue=302
Relevance: moderate

How do you get in “the zone?”  Find your own zone of genius—which usually happens by trial and error.  If you’re uncomfortable speaking before a large audience or trying to make a home repair and it never seems to work, you know that’s not it.  In your business life, take an inventory of how you spend your time, and then draw a circle around the things that you dread doing, and put a check next to the things that you really enjoy.  Then…. It’s time to do something scary: rely on others to do things that you previously handled yourself, so you can spend more time in your zone of personal genius.  The goal is to live and work effortlessly… someday.  (p. 80)