Shelly Banjo lists “Seven questions to ask when picking a financial advisor” in the WSJ. The questions include: adviser’s background (at Finra.org, http://adviserinfo.sec.gov, www.cfp.net and www.fpanet.org), clients’ recommendations (use a grain of salt with this), compensation mechanisms, checks and balances (auditor, custodians, etc), track record (not an end in itself but to understand decision making process).
The Financial Times’ John Authers raises question about “efficient markets” and discusses “Where can asset allocation go from here?”“The traditional research suggesting that it (asset allocation) is far more important for final returns than stock selection was amply borne out last year. The sell-off when it came was largely indiscriminate, but big macro asset allocation bets involving bonds, commodities and currencies made a lot of money. The consensus approach entering the crisis was what might be called “naive” or mechanistic asset allocation, where the manager has a target allocation to each asset class, and rebalances periodically. This is a covert form of market timing, as it forces managers to sell asset classes when they have become relatively expensive, and buy them when they are relatively cheap.” “Last year, this approach would have been painful; it mandated regular big purchases of stocks and sales of bonds, even as markets fell.” Authers’s possible solutions may be more dynamic timing of rebalancing and possibly “rebalancing to top of a band, rather than a precise target.” (Certainly advice worth considering.)
Murray Coleman of IndexUniverse.com reports that “ETFs ready for prime time in retirement plans?”. Until now you couldn’t invest in ETFs with a 401(k) (U.S.-RRSP equivalent) except by going through difficult contortions and high costs. Things are beginning to change though the expected total annual cost of 1.5% is still high, though claimed lower what would otherwise be available to small and medium size firms targeted; the package includes back-office provider, custodians, record-keeper, third party administrator. “In the last 30 days, we’ve been rolling out a next-generation 401(k) platform for ETFs,” said Moerchen, whose Fort Wayne, Ind.-based retirement service provider works with about 500 different companies across the country. “Consultants and advisers have been asking for something like this for years.” (A step in the right direction; I haven’t heard of similar plans in Canada as yet.)
WSJ’s Anne Tergesen reports that “Retirement outlook drops to record low”. EBRI report on U.S. public opinion survey indicates that workers who are “very confident about having enough money to retire comfortably” dropped from27% in 2007 to 13% in 2009. Current retirees those “very confident of being able to afford a financially secure retirement” dropped from 41% in2007 to 20% in 2009. Corrective action “Among those who have lost confidence in their ability to retire comfortably, 81% say they have cut spending, 38% say they are working more hours or have secured a second job, 25% say they have sought advice from a financial professional, and 25% report saving more.” However, some of workers’ expectations to delay retirement may not be realistic “due to health problems, downsizings or obsolete skills. Moreover, while the survey has consistently found that about two-thirds of workers plan to work after retiring, fewer than 35% of current retirees say they have actually held down jobs at some point during retirement.” (So desire/plan to work in retirement does not lead actual work in retirement! You should factor that into the plans as well.)
There are a growing number of articles reporting on the implications of bankruptcies on pensions (by the way you can also read my just posted thoughts on Systemic Failure in Canada’s Private Pensions: Who could have prevented it? What could be done now?):
The Financial Times’ Charles Millard writes that at end of 2008 U.S. pension system had $2,100B liabilities and $1,600B in assets requiring $50-100B annual incremental company pension contributions at a time of low affordability in “Vampire pensions could be a corporate nightmare”. The implication is that these required payments could drive many companies into bankruptcy and have growing deficit for the PBGC (the U.S. Pension Benefit Guaranty Fund). The author, ex-PBGF director, recommends legislative changes to allow some flexibility for PBGF to prevent driving companies into bankruptcy.
In Financial Post’s “Abitibi out of options”, Karen Mazurkewich reports that CDSs (Credit Default Swaps) which are a form of insurance against a corporation defaulting on their bonds are complicating matters when a company runs into financial trouble and tries to work out a deal with bondholders. Karen reports that for the CDSs to pay off the corporation must go bankrupt, so if the bondholder bought CDS insurance on the held bonds(which by the way the bondholder doesn’t have to disclose) it has no interested in a workout with the company, in fact it is in its interest to push the company into bankruptcy. Quoting a lawyer “It’s the only insurance policy ever written where the holder of the policy has incentive to burn down the house”. “In the past, you assumed that everyone is acting to maximize value, but when you have people who actually prefer to minimize value, it’s a destructive process,” he added. (I guess, we’ll be seeing more and more companies now driven into bankruptcy, rather than agreeing on a workout; the implication on pensioners with underfunded pensions at such companies is not promising.)
And finally, one of the readers of this website (RLD) recommended the excellent Nightly Business Report that you may be interested in watching as well. Asset allocation, risk (investment, longevity, inflation), withdrawal rates, retirement/financial check-up, emergency funds, working longer, planning, etc are all discussed in the 30 minute program.