Topics: Crooked advisors, stocks risky, condo living? US housing market factors, resurgent Phoenix? pensions + ERP + savings rates, ETF regulatory tightening? stewardship of assets, concierge and retainer medicine, Goldman toxic exit.

Personal Finance and Investments

In the Globe and Mail’s “How to spot a crooked advisor” Rob Carrick interviews CFA Institute’s Steve Horan who says that asking family and friends for referrals is how people got entangled with Madoff.  Instead he suggests: start by checking if they are registered to give advice and/or sell securities  (in Ontario the OSC, rest of Canada Canadian Securities Administrators), whether they have a history of regulatory problems (brokers , mutual fund salesmen) and for more details see Banerjee’s How to do a background check on your advisor), then ask advisor how (s)he is compensated, are funds with an independent third party custodian, what are educational and professional credentials of those working on your account, and are operational controls in place to detect self-dealing employees.

In WSJ’s “Why stocks are riskier than you think” Bodie and Taqqu warn that people who took big hits in the market in 2008 that they shouldn’t be persuaded that the only way to make up for the losses is being heavily in the stock market and that they should not worry because “the risk of stocks diminishes the longer you hold them”.  They then suggest that you think deeply about your goals and categorize them into two buckets: basic (“bare bones level of income” or ‘musts’) and aspirational (‘wants’). However, they recommend inflation protected bonds (ladder of TIPS dated to correspond to timing of future basic spending ‘musts’) for the basic goals; for aspirational goals they suggest option strategies (e.g. zero-cost collars), mutual funds using hedging strategies, investments with guarantees and “structured products”.  (They are right about stocks being risky even in the long-run see my Time Diversification: Stocks are less risky over the long-term??? (Not!) blog. It is also a good idea to separate musts from wants when looking at your goals, but I am uncomfortable with their corresponding investment strategy, especially given current bond valuations. For myself, I am more comfortable in using sizes of musts and wants to set savings (and spending) rates and risk-tolerance, and then use portfolio implementations along the lines described in my couple years old blog Asset Allocation II.) You might also be interested to read the article mentioned in the Pensions section below about the Economist’s view that savings rates for retirement should be revised from 10% to 20% range, given expected lower equity risk premiums (ERP) in the future.

Real Estate

Elizabeth Rogers does a credible job dissecting the pros and cons of moving to a condo versus staying in your house during retirement in the Zoomer’s  “Is condo living right for you?”  Pros mentioned might include: no (outdoor) maintenance work, shared costs, lifestyle (pool, socialization opportunities, gym), price (might be cheaper, though less so recently), location (e.g. downtown) and security (doorman, immediate neighbours). Among the cons mentioned: price (might be more expensive than a house), potentially lower future appreciation, (high) condo fees, special assessments, still responsible for inside of your unit, and rules/restrictions. She recommends that you secure expert help to fully understand: provincial regulations, condo rules, different forms of ownership, condo fees (what’s included/excluded), rules about renting, quality of management and appropriate insurance.

In the Bloomberg sourced Financial Post article “Why some U.S. housing markets do better than others” Edward Glaeser does a little data mining  in house markets to see what might explain why some markets are still much higher than in 2000 (e.g. NYC and Washington) while other have seen massive declines (e.g. Detroit and Las Vegas). The article also includes some interesting house price charts. “The five factors that best predicted price growth between 2001 and 2011 were the share of adults with college degrees, housing permits per capita, median family income, median housing value and the closest distance to the Atlantic Ocean or the Gulf of Mexico. To reduce the power of outliers to shape results, I took logarithms of all of the variables, except the percent of adults with college degrees. Apart from distance to the ocean, the variables all come from the U.S. Census Bureau.) But he concludes that macroeconomics aside the future price of housing will be determined by supply and demand. Places with few restrictions (Las Vegas and Phoenix) will see limited price appreciation whereas places that severely limit new construction but have dynamic economies will see price appreciation.

Coincidentally, in the WSJ’s “Rise in Phoenix housing shows path back” Nick Timiraos sees Phoenix as a source of lessons for the rest of the U.S. in its “nascent real-estate rebound”. After 55% price decline since 2006, having the 3^rd highest foreclosure rate in 2009 and with hundreds of thousands of homeowners still underwater, Phoenix appears to have hit bottom. Inventories (appear to) have dropped and “the sharp drop in home prices has brought new buyers into the market”. “Phoenix has found a viable formula. Low prices are igniting demand from first-time buyers and investors who are converting the homes to rentals…. And the region is benefiting from a surge of buyers from Canada who are using their favorable exchange rate to scoop up bargains in the desert. Local mom-and-pop investors are also playing key roles in soaking up supply… prices rose by 2% in Phoenix, the biggest increase of any metro area in the country. Over the past year, prices in Phoenix are down by 1.2%, the smallest drop since its prices started falling in 2006.” (As the old sayings go…one swallow does not make a spring…and forecasting is difficult, especially about the future.)

Pensions

The Economist’s “Too much risk, not enough reward” opines that equity risk premiums are being over-estimated based on 20^th century experience. “Investors are betting that high returns from equities will pay for decent pensions. They are kidding themselves… (same as) Individuals who are funding their own pensions… If they want a comfortable retirement their contributions need to be more than 20% of current salary, rather than the current average of just 10% or so. The high returns from equities in the late 20th century made investors lazy. Such returns may not come back. If employees want a decent retirement income (or if employers are to keep their promises), they must put more money aside.” (And by the way, if you are invest in (Canadian) mutual funds with MERs of 2-3%, you might consider upping that to 30% of current salary!)

Things to Ponder

In the Globe and Mail’s “Regulators starting to tighten the leash on ETFs” Tim Kiladze writes that “Not only do regulators want to ensure that investors aren’t getting screwed, they’re also worried about the effects ETFs have on marketplace stability.” The Bank of England is concerned that “complexity, opacity and interconnectedness of ETFs can “amplify propagate stress across markets.” The International Organization of Securities Commissions (IOSCO) is looking at: similar rules to mutual funds on selling ETFs that match clients’ risk appetites and objectives, disclosure of what the ETF does (from classic vanilla index based physical to esoteric synthetic derivatives based implementations), leveraged/inverse  index or commodity based products, disclosure of extent of counterparty risk (especially swap-based synthetics).

In the Financial Times’ “How to be  a better steward of our assets” Will Hutton argues that that in a high performing economy requires “engaged owners who steward the assets they control so they will perform well” and that Britain’s stewardship is lacking as half the economy is controlled by PLCs (public limited liability companies); while PLCs have the advantages of professional management and easy access to capital, their ownership has become too transient, and are driven short-term profit expectations with “a bias against investment and innovation”. He advocates closing the “vast gap between managements of PLCs and their owners” and “to find ways to support better family firms, co-operatives and employee-owned enterprises, where that gap is narrower by definition”.

In Bloomberg’s “Wealthy families skip waiting rooms with concierge medical plans” Elizabeth Ody writes about the available exclusivity in access to medical services for those in the U.S. who can afford the services at $2,500 to $30,000 per year to buy an “alternative to conveyor-belt medicine” from company which “organizes medical records, has emergency physicians available around-the-clock and connects patients to a network of top doctors throughout the world”. Other available services are for “$1,500 to $1,800 a year in membership fees for access to a primary-care doctor whose practice is generally limited to about 600 patients. The fees, which also cover certain preventative-care services, generally aren’t covered by traditional health insurance… Part of the rush toward high-end, private services may stem from a growing gap in the availability of health-care providers. There was a shortage of about 13,700 physicians in the U.S. in 2010, which may rise to about 91,500 in 2020 and 130,600 by 2025… An increase in doctors moving to a concierge or retainer business model could reduce access further”. (The supply/demand picture is likely to deteriorate with boomer demographics driving growing needs without a corresponding increase in supply. Significant innovation will be required to minimize access limits to health-care services even compared to today’s “conveyor-belt medicine” (which by the way for Americans with good insurance is far superior to that available to the average Canadian). Some people can readily afford, while others will be willing to prioritize health-care over travel/holiday and other luxuries; concierge and retainer businesses will thrive. In Canada, where the (narrower) “conveyor-belt” has been in operation for a lot longer and medical school enrolment has been strictly controlled as a means of containing healthcare expenditures, access will become more challenging (increasing wait times) and user-fees will increase. And while Canadian universal healthcare will likely survive, those who’ll be willing and able to pay for quicker access will have the mechanisms either at home or in the U.S.)

And finally, in the NYT’s  “Why I am leaving Goldman Sachs”, Economist’s “A noisy exit” and WSJ’s “Executive calls Goldman culture ’toxic’”  discusses the public resignation letter of a 12 year Goldman employee re-opening the accusations of: toxic culture shift resulting in part from the move from partnership to public company organization, and the corresponding shift from concern about reputations to only profits, from doing right by the customers to maximizing profits off the customers (referred to as “Muppets” by executives), and inherent conflicts of interest for a company simultaneously providing advice and acting as an investment bank and market-maker/counter-party. An analysis on what happened and some implications can be read in NYT’s “Public exit from Goldman raises doubt over new ethic” . In the Financial Times’ “Goldman’s ‘Muppets’ need treating like true clients” Frank Partnoy discusses the differences between Goldman’s ‘clients’ those to whom the bank acts as an advisor and  owes a fiduciary duty level of interaction and those unsophisticated ‘clients’ to whom the bank  acts as market-maker/counterparty to whom no such duty is owed; this issue is addressed in Dodd-Frank as to how to deal with ‘special entities’ (pension funds and municipalities) but the industry is still fighting it tooth and nail.