NewsLetter - May 2017
FOOD FOR THOUGHT
My friend Skip sent me a copy of a research paper from the University of Chicago titled “Brokers vs. Retail Investors: Conflicting Interests and Dominated Products.” The abstract noted:
“Brokers utilize the space of available products to price discriminate across consumers, selling high fee products to unsophisticated investors and low fee products to sophisticated investors… I find that holding brokers to a fiduciary standard over the period 2008-2012 would have increased investor returns by as much as 2.73% per annum.” https://economics.sas.upenn.edu/events/brokers-vs-retail-investors-conflicting-interests-anddominated-products
SAME SONG, SECOND VERSE
From my partner, David G. Over the 15-year period ending December 2016, 95.4% of U.S. midcap funds, 93.2% of U.S. small-cap funds, and 92.2% of U.S. large-cap funds trailed their respective benchmarks, according to the latest S&P Indices Versus Active funds scorecard. The analysis, known as SPIVA, is published semiannually by S&P Global using a methodology that includes funds that have been liquidated or merged out of existence.
BIG $ BILL
From AARP — Our nation’s health care bill: $3.2 trillion annually Health care spending increased 5.8 percent from 2014 to 2015.
FRAMING — ALSO FROM AARP
What can $3.2 trillion buy?
12,800 Hope diamonds
820 One World Trade Center buildings
533 one-way manned missions to Mars
WELL, AT LEAST I HAVE COMPANY
My friend Tom posted this National Council on Aging table on Facebook:
ONE MORE GURU BITES THE DUST
From the Wall Street Journal, “A Wall Street Whiz Loses His Mojo.” “Jack Meyer trounced rivals when he ran Harvard University’s endowment in the 1990s. But as a hedge-fund manager, he is struggling.
“His Complexity Capital Management LP has lost $1 billion of its clients’ money over the past few years as once reliable options trades backfired. Investors pulled more than $3.5 billion from the bond shop last year, its fifth down year in a row.”
“HOW LOWER INVESTMENT COSTS HURT INVESTORS”
When I first saw this headline, my skeptical self said, “Sure, this is some way to con investors to overpay.” It turns out I was wrong. Jay Mooreland, the author, brought up a point I had not considered.
When the price of a good or service goes down, it is almost always a good thing. We all love sales, myself included. Getting a “deal” on something can activate the dopamine receptors in our brain and give us a temporary high. Recently, there have been many new “deals” in the investment realm, from low cost advisory services to a reduction in online trading commissions. Let me explain how these could be bad for investors. Personal Advisory Services There are a few institutions that offer investment management, financial planning, and access to a Certified Financial Planner professional for around 0.30%. That is a significant discount to the traditional advisor model where the cost may be closer to 1.00% – 1.25%. Money is flocking to these institutions because of great advertising and very low cost. But at what price? If investors were rational, it would be a
Personal Advisory Services
There are a few institutions that offer investment management, financial planning, and access to a Certified Financial Planner professional for around 0.30%. That is a significant discount to the traditional advisor model where the cost may be closer to 1.00% – 1.25%. Money is flocking to these institutions because of great advertising and very low cost. But at what price? If investors were rational, it would be a no brainer. But we know that all humans act irrationally (make errors in judgement and influenced by emotions). Let’s be honest — the #1 detractor from investor performance is the investor him/herself. In other words, it’s the choices made, not the fee of the program or underlying investment. There is ample evidence to back this up.
How do firms offer comprehensive services at such a discount? It’s called scale. And when you scale something, the personalization and individuality suffer. Sure you get a plan, but how robust is it? You have access to a CFP, but how many hundreds or thousands of people have been assigned to that same CFP? When things are going well it isn’t an issue, but when the inevitable shoe drops, will that advisor have the bandwidth to hold your hand, listen to your concerns and coach you along the way? Not if they have to do that for hundreds or thousands of others. Low prices are always better than high prices, when all else is equal. But in this case, all else is not equal — and therefore the adage of “you get what you pay for” should be considered. http://theemotionalinvestor.org/lower-investment-costs-hurt-investors/
Morgan Stanley will no longer offer mutual funds from the Vanguard Group, says Reuters, citing media reports.
Morgan Stanley brokers will stop selling Vanguard’s mutual funds as of Monday, a Morgan Stanley spokeswoman tells Reuters in an email. The intent of the move is to trim less popular and underperforming funds, she tells the newswire.
AN EXCELLENT SITE
Terry Savage.com http://www.terrysavage.com/
Terry provides excellent personal financial planning advice. Her Personal Organizer is terrific. http://www.terrysavage.com/pdf/personalfinancialinventory.pdf
A BIT OF BRAGING
Investment Management Consultants Association Awards Recognize Outstanding Achievement in Investment and Wealth Management Industry
SAN DIEGO – The Investment Management Consultants Association® (IMCA®) presented five prestigious awards today at its 2017 Annual Conference Experience recognizing outstanding contributions to IMCA and the investment and wealth management industry.
The J. Richard Joyner Wealth Management Impact Award honors individuals who have contributed exceptional advancements in the field of private wealth management, embodied by IMCA’s Certified Private Wealth Advisor® (CPWA®) program. The award recognizes key innovations and thought leadership in any of the following CPWA knowledge domains: human dynamics, wealth management strategies, client specialization, and legacy planning. The 2017 recipient of the J. Richard Joyner Wealth Management Impact Award is Harold Evensky, CFP®, chairman, Evensky & Katz, a 30+ year fee-only investment advisory firm, and professor of practice in personal financial planning, Texas Tech University. He served on the International Association for Financial Planning Board, CFP Board of Governors, Board of Examiners, and International CFP Council, and as chair of the TIAA-CREF Institute Advisor Advisory Board. He is on the advisory board of the Journal of Retirement Planning and is the research columnist for the Journal of Financial Planning. He is the author of The New Wealth Management and coeditor of The Investment Think Tank and Retirement Income Redesigned.
WHERE’S THE WEALTH?
Which cities matter most to the ultra-high-net worth? WealthManagement writes that the Knight Frank Wealth Report, ranking cities based on current wealth, private investment in property, number of first- and business-class flights, and forecasted future wealth, found:
ACTIVE VERSUS PASSIVE MANAGEMENT
Do you ever wonder why E&K/FF is so heavily passive in its equity allocations but all active in fixed income? The 2016 Year-End S&P SPIVA Scorecard helps explain it.
Percentage of Funds Outperformed by Their Benchmarks
I DO LOVE LUBBOCK, GO FIGURE
I THINK THE WORLD MAY BE COMING TO AN END
Details & Care: Heavily distressed medium-blue denim jeans in a comfortable straight-leg fit embody rugged, Americana workwear that’s seen some hardworking action with a crackled, caked-on muddy coating that shows you’re not afraid to get down and dirty. Only $425!
JUST A FEW THINGS WOMEN INVENTED
From my friend Gloria:
1. The Car Heater
3. The Fire Escape
The fire escape was invented by Anna Connelly in 1887.
4. The Life Raft
5. Residential Solar Heating
6. The Medical Syringe
7. The Modern Electric Refrigerator
8. The Ice Cream Maker
9. The Computer Algorithm
Ada Lovelace is essentially the first computer programmer due to her work with Charles Babbage at the University of London in 1842. In fact, her notes were an essential key to helping Alan Turing’s work on the first modern computers in the 1940s.
10. Telecommunications Technology
Some of the Telecommunication Technology developed by Dr. Shirley Jackson includes the portable fax, the touch tone telephone, solar cells, fiber optic cables, and the technology behind caller ID and call waiting.
11. The Dishwasher
12. Wireless Transmission Technology
Hedy Lamarr, a world-famous film star, invented a secret communications system during World War II for radiocontrolling torpedoes. This technology also paved the way for innovations ranging from Wi-Fi to GPS navigation.
13. Closed-Circuit Television Security (CCTV)
14. The Modern Paper Bag
15. Central Heating
17. Computer Software
Dr. Grace Murray Hopper was a computer scientist who invented COBOL, which was the first user-friendly business computer software system, in the 1940s. She was also a rear admiral in the U.S. Navy and the first person to use the term “bug” in reference to a glitch in a computer system when she literally found a bug (a moth) causing problems with her computer.
MORE FOOD FOR THOUGHT
EVEN MORE FOOD FOR THOUGHT
From Jason Zweig, one of my favorite financial reporters, in the Wall Street Journal.
“Investors Believe in Magic”
“Investors believe the darndest things. In one recent survey, wealthy individuals said they expect their portfolios to earn a long-run average of 8.5% annually after inflation. With bonds yielding approximately 2.5%, a typical stock-and-bond portfolio would need to grow at 12.5% annually to hit that overall 8.5% target. Net of fees and inflation, that would require approximately doubling the 7% annual gain that stocks have produced over the long term.
“Individuals aren’t the only investors who believe in the improbable. One in six institutional investors, in another survey, projected gains of more than 20% annually on their investments in venture capital — even though such funds, on average, have underperformed the stock market for much of the 2000s.
“Although almost nothing is impossible in the financial markets, these expectations are so farfetched they border on fantasy.”
Hope you enjoyed,
Evensky & Katz / Foldes Financial Wealth Management