Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - highlights this week include an article on the new coming wave of active ETFs, a few practice management pieces, a striking article on insurance companies using social media information for claims and even underwriting, and one of the best pieces I've seen yet on what Occupy Wall Street is really all about. Happy reading!
Weekend reading for October 29th/30th:
The New Wave of Active ETFs - This article from the October issue of Research magazine highlights the emerging new trend of actively managed ETFs, a new direction for what his historically been an area dominated exclusively by passive investment approaches. Major entrants include the PIMCO Total Return Fund, and numerous others are coming soon. The new active ETFs do shift a bit from their passive brethren, though - most notably, because the portfolios will only be transparent at the close of each day (not during the day), and consequently will trade relative to their closing NAV, rather than the precise basket of underlying securities from minute to minute. Whether the trend will stick or not, no one knows; the funds will be less transparent than current ETFs, but more transparent than current mutual funds, and the latter could actually be a serious problem for large mutual funds that risk getting their strategies front-run or arbitraged as they try to build positions. In fact, most who liked active management weren't complaining about the mutual fund structure already, so whether the new active ETFs really capture market share remains to be seen. But they're coming.
Gold - The Fear Index - This article by Professor Somnath Basu in the October 2011 issue of Financial Advisor magazine discusses gold as a proxy for fear in the investment markets - such that investing in gold can in turn help to serve as a hedge against times of market fear that may hammer the price of equities. The article highlights that while the overall correlation of gold to the equity indices has been lower for many years, it was very negatively correlated in the midst of the most recent two bear markets in the past decade. In other words, it may be a near-0 correlation overall, but it appears to be a highly negative correlation when you would want - and need - it the most. But perhaps most striking, though, is the graph at the beginning of the article, showing the meteoric rise in gold over the past decade, relative to how it was priced for the better part of the past 200 years; a challenge highlighted in the article about the uncertainty of how to really value gold, which has also been discussed previously on this blog.
Portability Election Could Trigger Estate Tax Return Avalanche - This article by attorneys Robert Bloink and William Byrnes on AdvisorOne discusses the new portability election for estates, which allows a surviving spouse to inherit a deceased spouse's unused estate tax credit, without the need for a bypass trust to utilize it. The caveat, though, is that to claim the carryover credit, the deceased spouse must file a Form 706 estate tax return (even if the estate was otherwise below the filing limit) and elect portability. And since one never knows if that extra estate tax credit might be needed in the future - who knows, maybe the surviving spouse will win the lottery! - the new rules create a potential avalanche of estate tax return filings for the overwhelming majority of estates that previously had no need to file a 706.
In Few Years, Social Network Data May Be Used In Underwriting - This article in the Insurance Journal highlights what many would probably consider a disturbing new trend: the use of social media data by the insurance industry. As the article points out, at the time of claim, many insurance firms already scour the insured's social media networks, as it has already proven an effective tool for managing fraud. (For instance, claiming whiplash in a car accident and posting Facebook pictures of rock climbing the next weekend.) But a new report from Boston-based research firm Celent suggests social media data could make its way into the underwriting process soon, too, for everything from detecting certain high-risk behaviors to who knows what else. The upshot for the industry is more accurate underwriting leads to healthier insurance companies and "more accurate" premiums; the downside is, to say the least, not everyone is thrilled that insurance companies may be watching what they post publicly. The takeaway, at least in the near term: if this stuff is really a concern to you, double-check the privacy settings on your social networks, and ratchet them down as tight as possible.
Turning Planning On Its Head - This article by Davis Janowski of InvestmentNews discusses the recent release of a new software package for financial advisors called inStream. The software was created by financial planner Alex Murguia, and is intended to smoothly address many of the inefficiencies typical in a financial planning firm's office. Such as? If a market decline knocks a client's portfolio down, the software will alert YOU when the declines have caused the client's Monte Carlo projections to fall below 90% (or some other specified threshold), without you needing to run regular updates just to see if the client is in trouble or not. In addition, the software offers a number of common calculators - such as whether or not to refinance - but automatically pulls in the data from the client's existing plan, and converts the conclusions into client-friendly outputs. Perhaps best of all, the software is free, too, as inStream hopes that it can gain (financially) valuable insights into advisor trends across its entire user base that can be shared with other vendors down the road - and with its users, too. You can also read a separate Janowski article where he took a more detailed walk-through of the platform.
To Get Referrals, Your Clients Must Understand Your Target Market - This article by practice management consultant Stephen Wershing discusses an important but simple concept - if your clients don't know "how to sell you" they won't do a very good job giving you referrals. And if you want them to sell you, you need to tell them how to do it. Wershing highlights the problem with a simple thought experiment: If you asked some of your best clients to go to a cocktail party and refer a few people to you as prospective clients, how would they figure out who the best ones are that best match what you do? If your clients would answer that question "I don't know how I'd figure out who to refer" - you just figured out why you're not getting more referrals. As I've noted in this blog in the past as well, if you don't have a niche, your clients won't know how to refer you - and if you're not very referrable, don't be surprised that you're not getting referrals.
Wealth management and the web 'like oil and water' - This article in Investment News discusses a recent study by SEI Global Wealth Services regarding the use of the web in wealth management services. Their conclusion: wealth management and the web are like oil and water - but only in the minds of advisors. As the article points out, 92% of advisors believe that face-to-face meetings are the most important, and only 4% said online communication is critical; yet 50% of investors surveyed said they want their wealth management firms to upgrade their systems to enable more interactive communication with advisors.
Why America's Highest Paid CEOs Are Insanely Overpaid - This article from Forbes discusses the latest list of America's 25 Highest Paid CEOs, and why (in the author's opinion) they are grossly overpaid. The essential point: while two of the top CEOs were genuine entrepreneurs who really built companies from the ground up (and deserve the compensation they receive), most of them are simply managers of an enterprise that existed before them and will (hopefully!?) continue long after. To me, the article also has striking parallels to our financial planning world as well, although our problem is arguably the reverse: we have no problem compensating our entrepreneurs well, but struggle to figure out how to effectively compensate the managers that must run the businesses we once created.
Wall Street Isn't Winning - It's Cheating - This article from Rolling Stone contributing editor Matt Taibbi, provides another perspective on the Occupy Wall Street movement - but Taibbi does a fantastic job of explaining why iPad wielding, iPod listening protestors trying to decide what bank to deposit their half a million dollars of operating funds are not hypocrites, but in fact sound protestors. Because as Taibbi points out, they're not protesting wealth, and they're not envious of the wealthy; the problem is the wealth that they believe was earned by cheating, Wall Street style. From there, Taibbi provides a list of striking examples that make a distinction between how Wall Street interacts with the world, and how "the other 99%" have to play the game, to emphasize that the protestors aren't upset that Wall Street has winners, they're upset that the Wall Street players "cheated" to get the winner's line with breaks that no one else gets in the real world. This is probably the best explanation I've seen yet to describe the perspective and principles of the Occupy Wall Street movement.
I hope you enjoy the reading! Let me know what you think, and if there are any articles you think I should highlight in a future column!
Great reviews! I’m going to say that the weekend extended to Monday for me. Thanks, Michael.
That’s ok Mark, we’re not checking the due date on your homework this time. 🙂
I think the Tabibi piece is good as an example of what OWS should be about, and what I hoped it would be about. Unfortunately it is about a lot more than that and that isn’t as positive.