Hot Off the Web- January 19, 2015

Contents: Retainer based business model for advice? returns not primary driver in search for adviser, Clements: money myths, Canada’s housing slowing? U.S. renters take it on the chin, longevity annuities to shine in U.S. in 2015, OSC/SEC retreat on cooked books at Nortel, Ellis/Munnell/Eschtruth: retirement problems and solutions, retirement age? financial industry about products/sales not advice, rebalancing not ‘factors’ the real source of outperformance (if any) in “smart beta”, forecasting is useless except about “an idea whose time has come”, forget about “smart beta” and look for new portfolio building blocks, can academics save finance-(not)? what’s best about retirement is control of one’s life and time!

Personal Finance and Investments

In InvestmentNews’ “Some financial advisers abandon asset based fees” Robyn Post discusses the pressures on advice business models based on some percent (typically around 1%) of AUM to move of a retainer based model. This is increasingly driven by the realization that “the value of financial advice can at times far exceed that of investment advice, he said, so it makes sense to separate investment management and advisory fees.” This actually makes sense for the advisor since the total advisory fee is not exposed to the effects of a market drop, and is better for clients who prefer the lower cost of index based portfolio implementation so instead of paying for stock-picking they pay for more high value services like financial planning and real financial advice.

On a related topic, in the NYT’s “When judging financial advisers, look beyond the annual return” Paul Sullivan discusses the relevance (or lack thereof) of returns in selection/evaluation of an adviser. He quotes, Tom Robinson CFA Institute Managing Director for Americas, who notes that while “returns are a piece of the puzzle…but I’d probably look at those last…What comes before returns when assessing your adviser? Communication tops most lists, but that is a pretty fuzzy thing to measure. Helping clients set goals and then holding them to them is on the list. But so, too, is the humility to admit what they know and do not know.” On returns, what should be looked at is risk-adjusted return, and the benchmark is performance “against other investors with similar risk tolerance”.

In the WSJ’s “Misguided money ideas I keep hearing” Jonathan Clements discusses three money myths: taking early Social Security at 62, superiority of individual bonds to bond funds, never prepaying a mortgage because of the tax breaks. He calls these “dubious contentions that I hear again and again”. By the way I am almost finishes Clements’ new book “2015 Money Guide”, as expected it full of personal finance and investment wisdom explained in simplest possible terms and will also turn into a great reference book on personal finance questions that crop up (and Canadians can skip the many U.S. specific sections discussing college savings vehicles, Medicare/Medicaid and tax sections pertaining to the arcane specifics of U.S. retirement products like Roth or not-Roth IRAs/401(k)s.)


Real Estate

The December 2014 Teranet-National Bank House Price Index was off -0.2%, after a November drop as well. but it is noted that such drops are not unusual for November and December. On a YoY basis the index was still up 4.9%. Among cities easing in December were Calgary (-1.1%), Montreal (-0.9%) and Vancouver (-0.4%). Toronto (+0.3%) and Ottawa (+0.1%) were up during the month. YoY increases among others were registered by Calgary (+8.3%), Toronto (+7.2%) and Vancouver (+5.0%). Montreal and Ottawa were essentially flat for the year at +0.3% and +0.1% respectively.

In WSJ’s “A tough time for renters” Kris Hudson reports that US nationwide rents were up for the fifth consecutive year; vacancy rates in 2014 were the lowest since 2000 at 4.2%, while rents were up +3.6%. Some cities saw significant increases last year: e.g. San Jose (+9.2%), San Francisco (+7.3%), and Miami (+6.0%)


Retirement Income and Pensions

In InvestmentNews’ “’Longevity’ in annuities could be the big 2015 focus” Darla Mercado reports that for 2015 “income in retirement is becoming a new focal point from a policy perspective, particularly as the Treasury Department develops guidance that makes it easier for taxpayers to use deferred income annuities … AIG was the first to launch a product under the Treasury’s QLAC guidance. That product allows people with a 401(k) or IRA account to use up to 25% of the balance (up to $125K) — whichever is less — to purchase the contract. Money in the QLAC isn’t subject to required minimum distribution rules that would require them to take money from their qualified retirement plans at age 70 1/2.” (In Canada there are no longevity insurance products, and never mind such “qualified” products specially designed tor RRIFs. I’ve been trying to raise awareness on the need for such longevity insurance products for over a decade, but so far zero impact. Perhaps, now with the introduction of such “qualified” products will get the attention of Canadian government and insurance industry. If priced right, some insurance products can be valuable.)

In the Ottawa Citizen’s “Nortel allegations finally fade away, with no apologies and no blame” James Bagnall reports that the OSC and the SEC “terminated their quests to prove that former Nortel executives had cooked their company’s books…. One of the country’s greatest companies slipped through the cracks and no one has been held to account.” (This outcome was of course fully predictable. There is no way to prove “cooking of books” unless you can find evidence, such as emails, indicating that there was an explicit intent to do so to achieve some reporting objective, rather than just making judgment calls on allocating and/or releasing accounting reserves, and the like. Honest accountants can disagree on the appropriate levels of such reserves. This article is important because it recapitulates the incompetence of the company’s management and board in handling these matters, which ultimately contributed significantly to the demise of Nortel. The other important piece in the article is a short summary of the state of the bankruptcy litigation, now in its sixth year. Some will argue that most of the real illegality and/or injustice has occurred since the bankruptcy, in the way pensioners have been dealt with. That may not be entirely correct, as there are many more who share the blame among legislators, regulators, board/management, and pension ‘professionals’ for illegalities/incompetence/stupidities leading to both actions and failure to act before the bankruptcy to protect pensioners’ rights.)

In InvestmentNews’ “Finding solutions to key challenges of modern retirement” Mary Beth Franklin reports that Ellis, Munnell and Eschtruth’s new book “Falling short: The coming retirement crisis and what to do about it”  discusses howOur retirement income systems are contracting just as our need for retirement income is growing…(with) the shift in responsibility from employers to individuals and the magnitude of the coming crisis”. “Social Security is replacing less of preretirement income, traditional pension plans are being supplanted by 401(k)s with modest balances, and employers are dropping retiree health benefits.” Solutions are proposed, but on an individual level working longer and delaying start of Social Security are also recommended. (I haven’t read it, but the authors’ are well qualified to provide recommendations on retirement solutions.)

And speaking of working longer, in the NYT’s “When outside factors dictate retirement Age” Elizabeth Olson explores how the decision to retire is arrived at; some decide on retirement age based Social Security eligibility, while others dig deeper for “less measurable, considerations like life expectancy, changing technological demands of the workplace and fear that age bias will limit continued employment”.


Things to Ponder

In the Financial Post’s “iShares Canada’s new chief Warren Collier takes on a changing market” David Pett interviews the new CEO of the leading (by volume) ETF provider in Canada. His listed priorities include: “listening to clients (advisors)”, “helping them identify solutions…through iShares”, “bulk of my time with on the road with salespeople meeting with advisors”, “advisors out there trying to figure out how to add value for clients and I think we can help them”; other segments of interest are: direct investors (DIYs) and institutional investors. The interviewee notes that” You are seeing more interest in smart beta products, in particular, minimum volatility products…” (This is not a pot-shot at this CEO, but these comments are representative of much of the financial industry in total- the focus is on developing/selling products that the “channel” (‘advisors’) will push to the end customer and fashionable products that the customers hear about in the press and might ask for. This has nothing to do with real advice that people need to have delivered to them and doing so with a fiduciary level of care.)

In the Financial Times’ “The math professor’s smart-alphas add up” Steve Johnson reports that a “smart beta” pioneer argues that “smart beta” pushers don’t understand that the actual source of its market-beating returns (if any) is not being “tilted towards these (e.g. small and/or value, etc) risk factors tend to outperform the traditional market capitalization weighted indices”, but it is due to rebalancing. So instead of buying small cap and value stocks, for example, he proposes to buy stocks based on volatility and correlation; but it is high rather than low volatility stocks which are the target, as these “provide better fuel for rebalancing”. “Such stocks are then combined so as to minimize correlation, lowering the volatility of the overall portfolio.”  (The thesis that rebalancing is the source of excess return rather than ‘factors’  makes sense, even if the alternate strategy proposed does not pan out.)

In’s “Forecast follies: 2015 edition” Larry Swedroe takes another swipe at forecasters by reviewing a list of predictions for 2015 that he’s been hearing, but notes that “historical evidence is conclusive that there are no good economic or market forecasters.” Then he proceeds to table his two “sure things” based on Victor Hugo’s “there is one thing stronger than all the armies of the world, and that is an idea whose time has come.” His predictions: “actively managed funds will continue to lose market share to index funds and ETFs” and “broker-dealers will lose market share to RIAs who provide a fiduciary standard of care”. (I can’t argue with that!)

In the’s “Legends of indexing: Lee Kranefuss” being interviewed by Heather Bell and critiques “smart beta” term which he believes should be retired. Instead he argues that “we need to rethink what the fundamental building blocks are of constructing a portfolio, and provide ETFs as tools to implement a portfolio strategy based on those building blocks”. He thinks that mutual funds are “a very archaic idea” and will be supplanted by ETFs in every area. He thinks that the biggest mistake that investors make is “hunting for alpha”, rather than thinking of risk/return.

In Bloomberg’s “Can wonks save finance from itself” Luigi Zingales discusses some of the good, bad and ugly of finance, how popular resentment “undermines the stable environment that a healthy financial system requires”, and what if any role financial academics might play. Items mentioned where academics can contribute are: ”empirical research to expose problems with the industry”, “not allow the rigor of our theoretical work to fall prey to lobbying pressure” and “Professors need to make social norms, or at least business reputation, a part of regular MBA classes”. (Good luck with that; conflicts of interest are everywhere, including the academic world.)

And finally, in the USNews&WorldReport’s “The 3 best things about being retired” Dave Bernard lists some of his favorite things in retirement, like: having time to exercise, every day is Sunday, and more time for creative activities.  “But until I began waking up day after day in complete control of my own life and calendar, retirement remained just an interesting concept. I looked forward to it without truly comprehending its potential…I am learning it takes effort to make the most of the wonderful freedom that fills my days. But I am also realizing that the effort is well worth it. The freedom to make choices that impact how I spend my time is certainly one of the best things about being retired.”


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