Executive Summary
Enjoy the current installment of "weekend reading for financial planners" - highlights this week include two great year-end wrap-up articles on technology, including an overview of Financial Planning magazine's huge annual tech survey, and technology highlights from consultant Bill Winterberg in MorningstarAdvisor. Also included in a striking interview with research and planning pioneer Bill Bengen, who suggests that safe withdrawal rates are still valid, but that buy and hold isn't, and an interesting article from Angie Herbers in Investment Advisor about some owners who may be experiencing "owner's guilt" over the profitability of their business, and making some bad decisions as a result. Then there's a quick look at some thoughts about the new cost basis reporting rules that are being implemented by the IRS, and two somewhat non-traditional investment and economic pieces from some industry stalwarts, Howard Marks of Oaktree Capital and Jeremy Grantham of GMO. Enjoy the reading!
Weekend reading for December 10th/11th:
{Financial Planning Annual} Tech Survey - This Financial Planning magazine article by Joel Bruckenstein discusses the results of Financial Planning magazine's technology survey - a remarkably comprehensive look at what financial planners are using, from client relationship management software to portfolio management systems, from smartphone and tablet use to Windows operating systems. Notably trends include the migration to cloud- (web-)based systems, as use of Redtail CRM moves from 2% in 2007 to 32% in 2011 (although skewed heavily to smaller firms), dethroning Microsoft Outlook as the most common hub of client information, and the incredibly rapid adoption of tablets, with 38% of advisors owning a tablet since the launch of the iPad just two years ago. In terms of financial planning software itself, MoneyGuidePro is beginning to dominate the scene, rising from 20% of respondents in 2009 to a whopping 45% this year, with runners-up NaviPlan, Profiles, and eMoney all coming in around 17%. Overall, this article is incredibly rich with detail of the entire technology landscape in the financial planning world.
2011's Best Tech for Advisors - This MorninstarAdvisor article by technology consultant Bill Winterberg reviews three exceptional technology products or services that Winterberg recognizes as the "best tech" of 2011. The winners include the TD Ameritrade Institutional Veo Open Access Architecture as Best Back-Office Technology for its integration support with other financial services software (with some other institutional vendors including Schwab, Fidelity, Pershing, and Tamarac taking honorable mention), the Orion Mobile App (for iPad2) for Best Client-Facing Technology (able to be private-labeled for a firm to deliver information to its own clients) with honorable mentions to Figlo and Join.me, and Innovation of the Year to the MacBook Air (honorable mention to the iPhone 4S).
William Bengen on Risk, Volatility, and Safe Withdrawal Rates in Today's Markets - This interview with researcher and financial planner Bill Bengen in the current issue of the Journal of Financial Planning brings forth some striking comments. Bengen suggests that his 4.5% safe withdrawal rate framework still holds in the current environment, but also suggests that buy and hold is "an invitation to disaster" in the current environment. Bengen believes that the next stage of retirement income planning will include varying the investment portfolios and approach based on the market environment... in fact, Bengen points out that his clients currently have "almost negligible" equity exposure in their portfolios, with the lion's share in U.S. Treasuries, which in turn is hedged by gold.
Owner's Guilt: Manage It, Before It Manages You - This article by Investment Advisor columnist Angie Herbers discusses the idea of "owner's guilt" - where a financial planning firm owner creates a business that becomes so effortlessly successful and profitable, that the owner may actually feel guilt about making so much money so easily. As a result, the owner may begin to express dysfunctions in the practice, ranging from selling/transferring partial ownership of the firm to successors who shouldn't really have it (or at least, not at that price), to constantly tinkering with the firm's operations and creating busy work because the owner just isn't comfortable having idle time in the day while the firm is so profitable. It's not clear how widespread this phenomenon of "owner's guilt" really is, but I have to admit that I think Herbers is on to something, as I have witnessed these behaviors from more than a few owners over the years.
New Cost Basis Reporting Best Practices - This article by Dan Skiles of SSG discusses the new automatic cost basis reporting rules which came into effect for stocks in 2011 (and for mutual funds in 2012 and bonds and other securities in 2013). Under the new rules, custodians will report the cost basis of sales of "covered securities" - securities purchased after the new effective dates - directly to the IRS on Form 1099-B. On the one hand, this may make some reporting simpler for clients, once all securities are covered in a few years. In the transition, though, Skiles points out a number of messy complications, as clients have some covered positions and some noncovered positions, or worse a blend of covered and noncovered shares of the same stock or mutual fund. The key best practice from the article: make sure your numbers in your portfolio management software are reconciled to the custodian's, or the reports you produce for your clients - or even the tax-sensitive transactions you conduct on their behalf - could be wrong.
It's All Very Taxing - This investment memo from Oaktree's Capital's chairman Howard Marks provides some striking perspective on the fiscal difficulties facing the US right now, and the challenges in designing an appropriate national tax policy to help address the issue. In the process of taking a hard look at a number of "standard" pillars of tax policy, from the preferential treatment of capital gains, to deductions for mortgage interest or state and local income taxes, Marks poses interesting questions to make you think about just what "fair" means when we ask everyone to "pay their fair share."
The Shortest Quarterly Letter Ever - The quarterly investment letter from GMO's Jeremy Grantham discusses his not terribly upbeat perspective on the markets, including some strong statements about problems that may slow growth (and returns) in both the world and the US for years to come. Notably, though, Grantham suggests that the markets will sustain at current P/E levels - even if not justified by long-term growth - until there is a decline in profit margins, or a material increase in inflation expectations. Until then, he suggests that optimism will continue to maintain a floor and an upward bias to markets. Once the trend breaks, though, Grantham suggests that we may still be in for a sustained low-return era, comparable to markets of the 1970s.
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! And click here to sign up for a delivery of all blog posts from Nerd's Eye View - including Weekend Reading - directly to your email!
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