Executive Summary
With the never-ending onslaught of information in today's world, I am often asked what I am reading, as someone who consumes perhaps an abnormally large amount of financial planning content. Accordingly, I've decided to start a new column for this blog, called "Weekend Reading" - where I'll share a few of the more interesting articles I've read in the current week. The goal is to keep it to no more than an hour's worth of reading; something you can do in a single sitting when you're taking a rest over the weekend and trying to keep up with the financial planning world. Here I offer up the first week's articles. I hope you find it helpful!
Weekend reading for September 24th/25th:
Rethinking Small Caps: This article by Gary Miller and Scott MacKillop from the September issue of Financial Advisor magazine challenges the conventional wisdom - and the well-known research of Eugene Fama and Kenneth French - that small caps provide superior risk-adjusted returns. The article highlights what the authors believe was a significant flaw in the original small-vs-large analytical framework (using monthly returns instead of annual returns), and in their reworking of the research on an annual basis, small caps do still outperform, but not by enough to justify their higher volatility. This article will make waves in the investment industry. A more robust version in a peer-reviewed Journal is coming; for now, this is the (very interesting) teaser.
IRS Clarifies Deductibility of Advisory Fees by Estates and Trusts: This article by attorneys Robert Bloink and William Byrnes on the AdvisorOne website discusses recently reissued proposed regulations by the IRS regarding the deductibility of investment advisory fees by trusts and estates. After several years of confusion - and some early pronouncements by the IRS that significantly curtailed the deductibility of such expenses for estates and trusts - the latest guidance is more favorable for deducting fees.
Counterparty Risk in Large Total-Return Funds: This article by Robert Huebscher, editor of Advisor Perspectives, shares a new concern for advisors to consider when invested in funds: counterparty risk. The article discusses the rising use of credit-default swaps and interest-rate swaps being held in various total return bond funds - including the popular PIMCO Total Return Fund - which on the one hand can be an effective means to gain exposure to certain markets, and/or to generate additional return, but on the other hand puts forth a new form of default risk. I'd make a case that arguably, a bond fund that focuses on default risk all day long should have some skillset for monitoring the default risk of their counterparty as well as their bond issuers... but do you really know how much due diligence your fund manager is doing?
Personal Capital Aims to be Next-Generation Financial Adviser: This article from the New York Times' Bucks Blog by Tara Siegel Bernard discusses an emerging new firm called "Personal Capital" which was highlighted at this week's Finovate conference (on financial and banking technology innovation). The company is targeting people aged 35 to 65 with $100,000 to $2 million in assets, who are looking for basic financial advice and help investing their portfolios. The key difference? The entire platform is virtual, with all the advisors based in San Francisco, working with clients nationally. Many planners have been dismissive that such a platform could be viable. But Personal Capital's CEO, Bill Harris, is no slouch; he's the former CEO of PayPal and Intuit, has some impressive people helping out on his team (including Rob Foregger who co-founded EverBank and Jay Shah who was the Chief Information Officer at E-Loan). Harris also has raised $28 million(!) from investors for the venture; expect to hear more from/about this company, along with another competitor in this space, Kent Smetters' Veritat Advisors ("Finally, financial planning for everyone").
The More Friends the Better: This article in the Wall Street Journal by reporter Daisy Maxey discusses the rising use of social media amongst financial planners, with examples from a number of well-known planners about how they're using social media - for instance, not only is social media being used for business development, but also by following clients on FaceBook or Twitter, you may discover things about their goals and dreams, that have financial planning relevance (as I've highlighted in a previous blog post on using social media to deepen client relationships).
So what do you think? Is this a useful new column? Do you want weekly reading suggestions going forward? Leave your feedback in the comments please!
