MEDIA REVIEWS – September 24-30, 2020

If you haven’t had a chance yet, please consider taking Marie Swift’s 13-question “Conversations That Matter” survey on how advisory firms and their clients have responded to the pandemic.  You can access the survey here:

This is the second Advisor Perspectives review that I’m sending out this month; I covered the first half of the month two weeks ago, and these are articles from the past two weeks.  I enjoyed writing the M&A article (“Crazy Valuations”) that you’ll find toward the bottom, and enjoyed reading the Larry Swedroe summary of whether returns are impacted by companies’ ESG scores.  David Blanchett really REALLY doesn’t get why more advisors aren’t recommending annuities (two articles) and there’s an article that helps you calculate the lifetime value of a client relationship.

The articles:

“Why Annuity Demand Fell During the COVID Crash”
by David Blanchett, Michael Finke and Time Jorgensen
Advisor Perspectives, September 15, 2020
Relevance: high

The March market crash drove assets to the safe haven of government bonds, but not, the authors not, into annuity investments.  An online retirement survey conducted by the American College found that most people didn’t know the payout on a single-premium immediate annuity (SPIA), and apparently many were wildly off-base in their guesses.  (Correct answer: 6% or so for a 65-year-old male.)  Only 23% knew that SPIAs were more expensive for younger buyers, and half that number understood that a variable annuity with a GLWB rider would continue to make income payments when the investment account falls to zero.

But many of the respondents felt that having a guaranteed monthly income source is important.  Women, people without a college education, non-whites and those with less wealth placed the greatest value on lifetime income.  Curiously, annuity products were less valued than the guaranteed lifetime income that they offer; the suggestion is that many people are leery of buying a product.

During the pandemic, demand for guaranteed income increased at a lower rate than the interest in taking less investment risk.  But only 38.7% reported being less comfortable with investment risk during the market uncertainty; 52.8% responded that they didn’t plan to change their investment allocation.   Strangely, the most risk-averse were less interested in annuities than those who were less risk-averse—the opposite of what you might expect.  The authors conclude that most people don’t understand annuities, and they are not likely to buy a product where their knowledge is so limited.

“Client Lifetime Value: It’s Not Just About the Revenue”
by Gretchen Halpin
Advisor Perspectives, September 15, 2020
Relevance: high

Client lifetime value (CLV, in this article) is the total worth of a client to the business, when you take into account the average yearly revenue and profit the client will contribute during the lifetime of the relationship.  You calculate this number by multiplying the revenue by the profit rate, by the average years of retention, and then divide this by the cost of doing business.  (But doesn’t the profit margin already take into account the cost of doing business?  And shouldn’t this be calculated on a net present value basis?  And shouldn’t the profit figure be more complicated, so you distinguish between clients who hardly demand your time vs. those who are constantly calling you?)

To this, the author adds the value of client referrals and the AUM they add. 

What would you use this calculation for?  The author says that it helps you make better decisions about which clients to try to attract, and also which clients to engage for referrals.  Also, if your CLV is high, you can afford to invest more in marketing efforts.

The article then veers off into client journey mapping, beginning when the prospect is introduced to the firm, to the first meeting, and then the touchpoints that lead to the prospect signing on as a client and the services thereafter.  (These are not described in any detail; it is recommended that you HAVE a map of the client journey.)

“Should Clients Wait to Purchase an Annuity?”
by David Blanchett
Advisor Perspectives, September 15, 2020
Relevance: high

Interest rates are low, and so too are single-premium annuity income guarantees.  So why not wait to make an annuity purchase until rates rise?

The author crunched some numbers and found that super-conservative investors whose portfolio is composed of government bonds, and older annuitants (age 75+) delaying the annuity purchase doesn’t make sense, even if rates do end up rising.  Meanwhile, investors under age 65 would be smarter to delay the purchase.

Better still, the article says, is to dollar-cost average; that is, to purchase annuities over time.  That reduces the regret associated with future changes in rates and still guarantees consistent lifetime income. 

The methodology?  The article shows that there is almost a total correlation between AAA-rated bond yields and annuity payouts.  A chart shows the annuity payout rates associated with different bond yields, and it’s very interesting.  When yields are 2% (as they are today), a 60-year-old can expect an annuity payout rate of 4.52%, rising to 5.14% for a 65-year-old, to just over 6% for the 70 year old, and then to 7.29% and 9.21% for people age 75 and 80, respectively.  If rates were to rise to 4%, then the payout rates would go up to 5.74%, 6.34%, 7.19%, 8.46% and 10.38% for those respective ages.  The chart shows what the rates would be if long-term AAA-rated bonds rose to 6%, 8% and 10%.

One point here is that younger annuitants are impacted more than older ones by lower interest rates—because the duration of the payments is greater.  The benefits associated with mortality credits are also lower for younger annuitants.  Further analysis suggests that older individuals are better of not delaying their annuity purchase regardless of what interest rates do. 

“The Planning Issues We Faced in the Pandemic”
by Lizzie Dipp Metzger
Advisor Perspectives, September 21, 2020
Relevance: high

I’m not sure what to make of this article.  On the surface, it’s about how clients need planning and outreach from their advisors, but then suddenly it veers into how important it was to sell clients annuities and life insurance policies, because those provided the cash that clients needed (the life insurance policies?) During the downturn, which means clients didn’t have to liquidate their portfolios during the rapid downturn.  No word on how this strategy worked during the subsequent recovery.

“The Performance of Stocks with the Worst ESG Scores”
by Larry Swedroe
Advisor Perspectives, September 2020
Relevance: high

We are told right up-front that high ESG risks can destroy shareholder value.  So is there an ESG premium on expected returns?

The author cites several studies which show that firms with LOWER ESG scores exhibit higher expected returns, but then focuses on a November 2017 study looked at whether these low scores have destroyed shareholder value.  It found that negative ESG events were associated with significant negative abnormal returns over short time periods, and firms with high ESG risks tend to have more ESG issues over the next year than firms with lower risks.  Firms with high ESG risks had weaker operating performances (return on equity, one-year sales growth, net profit margin and return on assets), more negative earnings surprises and more negative earnings announcements than their peers.  Most importantly, a portfolio of U.S. firms with the worst histories of ESG issues experienced a negative abnormal return of about 3.5%—and similar results were found for European companies.

“Five Things Advisors Need in a Marketing Director”
by Christine Golden
Advisor Perspectives, September 23, 2020
Relevance: high

The author says you should look for someone with B2B experience—that this is more relevant than B2C experience because the financial services sector has a long, logical, process-driven sales cycle.  You want to generate leads and then nurture the relationship until and after the prospect becomes a client.

Second: a skillset to implement marketing plans across multiple channels.  You want a candidate with PR experience, exceptional writing skills and strong knowledge of digital channels like social media and search engine optimization.

You also want someone with high emotional intelligence, since he or she will be collaborating with each individual member of your advisor team.  They should have an affinity for art and science (marketing is a creative industry), and be capable of adapting to new technology and changing consumer behavior.  The article recommends “Where Good Ideas Come From” by Steven Johnson.

“Planning Considerations for Parents with Developmentally Challenged Adult Children”
by Jill Poser-Kammet
Advisor Perspectives, September 23, 2020
Relevance: high

The article starts with a longish story of a developmentally-disabled man who lived with his parents until they died, and he became the responsibility of his competent brother, yet refused his help and, well, the bottom line is that the situation continues to be a mess.  The author offers some recommendations to advisors. Help the family have “the conversation” to make clear the roles other family members will play in the life of a developmentally-disabled family member.  Where will this person live after the parents can no longer take care of him/her.  Has legal documentation been executed to support the ongoing care of the adult child.  Has the family brought in a care manager, special-needs attorney, guardianship attorney, and an estate planning attorney who understands special-needs issues? 

“How Donor-Advised Funds Can Help Clients’ Favorite Charities”
by Ken Nopar
Advisor Perspectives, September 2020
Relevance: high

The senior philanthropic advisor for the American Endowment Foundation says that executives at donor-advised funds often sit on boards and committees of nonprofits—and can help you help those organizations succeed and survive.  Only some of the things he recommends are going to be helpful to a financial planner, but…  The DAF team can meet with donors and find out help them understand the benefits of contributing through a DAF vehicle.  They can list information on their websites that makes it easier for charities to vet the organization (tax ID number, address and contact information to get information to access ACH funds), and they can thank or engage donors every time a grant from their DAF is received.  Apparently many donors discontinue support if their support is not properly thanked.

The DAF team can also help with tax issues; the article mentions donating low-basis assets like privately-held stock or real estate.

“Investors Sell Stock at Fastest Pace Since 2012 in Market Dip”
by Vildana Hajiric and Lu Wang
Advisor Perspectives, September 25, 2020
Relevance: high

Advisor Perspectives republishes Bloomberg articles from time to time, and I don’t usually cover them.  But this one caught my eye.  It says that executives at larger corporations have been selling shares of their own firms over the last four weeks—as tracked by Sundial Capital Research.  This is the fastest exit from stocks since 2012.

The article notes that Sundial saw a similar exit right before the major downturn in March, when executives—who know more about their companies than anybody—accurately timed the market and sidestepped the short but intense bear run.  The article is careful to say that this doesn’t mean the market will be going down over the next month or two, but that is clearly the implication.

“Inside the World of Crazy M&A Valuations”
by Bob Veres
Advisor Perspectives, September 27, 2020
Relevance: high

This is a writeup of a keynote remote presentation from the Insider’s Forum conference, where Peter Mallouk of Creative Planning and Tom Orecchio of Modera Wealth Management talked about their philosophies and war stories on M&A activities.  Both firms tell us that they look for a cultural fit with the merger/acquisition firm before anything else; if that doesn’t exist, they walk away.  Mallouk said that he has more than 100 potential acquisitions in the pipeline, but often these are weeded out with an initial phone call.

Creative Planning buys firms for cash, while Modera mostly buys with stock.  Creative Planning, therefore, is not taking on new partners, while Modera now has 17 partners, many of them owners of companies that were merged into Modera.

The most interesting part of the article comes near the end, when it is revealed that both firms, once the cultural part of the fit is confirmed, will then move on to making the numbers work—the deal terms and acquisition price is the least complicated part of the transaction.  But both firms are buying EBITDA—that is, the cash flow of the acquired firm.  In return, they’re getting much more: they are acquiring the talent of the firm, and also the best idea of each acquisition, assimilating these ideas into their marketing and client services strategies.  Those latter two benefits are essentially free.

“The Promise of Value Versus the Allure of Growth”

by Michael Lebowitz

Advisor Perspectives, September 27, 2020

Relevance: high

The gist of this is that growth stocks have outperformed value stocks, since 2010, by an amazing 6.11% a year—and the author expects a record amount of mean reversion before long.  The article includes a chart which shows that the discrepancy between value and growth is at record levels—and notes that many companies in the growth category have enhanced their share value, not by reinvesting in their operations, but with financial engineering and stock buybacks.  The result, he says, is like a coiled spring ready to snap back. 

Reversion to the mean may mean overcompensation.  The author compares today with 2000, the last time we built up a significant discrepancy between high returns for growth stocks vs. mediocre value returns.  Over the next two years, value stocks beat growth by over 70%.  The current discrepancy is longer and greater, which means the return differential might be higher.  Look for value stocks to outpace growth over the next couple of years—perhaps by record margins.

“Fashions and Investment Folly”
by Larry Swedroe
Advisor Perspectives, September 2020
Relevance: high

Certain investing behaviors come in fashion and then go out of fashion, and the author blames herd mentality.  The article cites Wall Street marketing machines; when the biotech craze occurred, these firms rushed to create biotech mutual funds.  When the technology craze hit, there were suddenly hundreds of tech funds.  Many funds exploited the demand for investing in the Internet.  The crazes would peter out and the funds would have made money while investors lost theirs. 

Beyond that, the “Wall Street machines” will incubate several similar funds, hoping one will hit on a great track record that can be sold to the public as a great investment story.  The similar funds that don’t achieve high returns are quietly folded. 

The article suggests that investors should build globally-diversified portfolios, ignore the noise of the market, and adopt the winner’s game of passive investing.  Instead of searching for the next hot fund, t hey can spend their time on more important issues.