Weekend Reading for Financial Planners (Feb 18-19)

Posted by Michael Kitces on Friday, February 17th, 8:27 pm, 2012 in Weekend Reading

Enjoy the current installment of "weekend reading for financial planners" - this week's edition highlights an interesting discussion by Morningstar about the challenges of evaluating tactical investment managers, an article by Bob Veres with tips on resources when starting a practice and outsourcing solutions, and an article by Joel Bruckenstein about a new integrated cloud solution for advisory firms. We also highlight some compliance-related articles for RIAs tying to the slew of new rules and regulations impacting investment advisors this year thanks to Dodd-Frank, a summary of the Rydex|SGI AdvisorBenchmarking study, and some tips to deal with the tax treatment of client investments in gold. We wrap up with Mauldin's weekly investment article - this week continuing his discussion of the decisions facing the US and how much impact the president and elections do or don't have on the outcome, an intriguing look from Oaktree Capital chairman Howard Marks at the challenging realities of assessing performance records, and a piece by Moshe Milevsky about "Gompertz' Law" and the mathematics of mortality assumptions. Enjoy the reading!

Weekend reading for February 18th/19th:

Here's A Reality Check For Investors Considering Tactical Funds - This article from Morningstar Advisor discusses the challenging reality that because of the huge variety in how tactical funds work - or what even constitutes a tactical fund (an issue previously highlighted on this blog) - it is extremely difficult to evaluate them. Of course you don't "need" to add a tactical fund at all, but if you want to, the article suggests several qualitative aspects to consider, including: Know what the fund is really trying to do and what it compares itself to; Know what the fund is actually doing by getting regular (e.g., monthly) reporting of its positions; Evaluate whether the manager is likely any good, with whatever track record and qualitative measures you can; and Understand how you really intend to use the fund (opportunistic position? core position? alpha generator?). Although as regular readers of this blog know, I am generally a believer in the evolution towards tactical, this article provides a nice summary of very legitimate qualitative concerns regarding such strategies.

Chicken and Egg - This article by Bob Veres in Financial Planning magazine explores the "chicken and egg" problem faced by many new firms - you need size, scale, and time to be able to hire employees, have better back office services, and improve your efficiency, but you can't have most of those thingswhile you're trying to build the business from scratch in the first place! Veres highlights a few options to help shortcut many of these blocking points for startups, such as Shareholders Service Group (SSG) for new RIAs who have little or no assets yet, or getting off-site outsourced help for everything from a receptionist to bookkeeper to compliance to operations staff via Virtual Solutions for Advisors. Veres also highlights Jennifer Goldman of MyVirtualCOO.com, an option for creating a virtual Chief Operating Officer for your firm as it grows.

An Integrated Cloud Solution - This article by technology consultant Joel Bruckenstein in Financial Advisor magazine provides a nice overview of the ways firms are moving themselves to the cloud, and the different types of solutions available on the cloud. More broadly, though, the article makes the point that most software providers are shifting to web-/cloud-based applications; at some point, there may be little purpose to your local desktop computer in its current form, because nothing will run on it anyway! Instead, computers will be simple machines with a monitor and an internet connection that you use to interface with the cloud. The article also features the particular offering of a provider called External IT, which provides a comprehensive "Portal Desktop" solution.

Advisors' Priority List - How They Get It All Done - This article from AdvisorOne highlights the recent Rydex|SGI AdvisorBenchmarking study, looking at how advisors were spending their time in their practices in 2011 compared to 2010. The most noticeable differences - a dramatic increase in time spend on portfolios, and a noticeable uptick in marketing, coming at the cost of a reduced focus on business administration, business strategy, employee training, and compliance (although the last in particular seems to be enjoying a burst of outsourcing activity). Overall, the mix of services that advisors provide has not shifted significantly overall, although the study's authors suggest that more advisors in the future look to be offering investment services to other advisors and charitable giving planning. Advisors also noted a continued focus on the CFP designation in particular, which garnered 3-7 times the support of any other designation. 

Many Advisors Face March 30 Deadline - This article from Financial Advisor magazine notes the implementation of new rules under Dodd-Frank that will force RIAs with less than $100 million under management (or $90 million for established advisors) to switch from Federal (SEC) to state regulation by June 28th, although the changes begin with an updated Form ADV Part 1 amendment for all SEC-registered advisors due by March 30. The article also highlights that in fact, many states actually have more arduous paperwork and oversight requirements than the SEC did; some advisors are finding that the state registration process may generate its own huge deficiency letter of issues to address. To say the least, the takeaway is that if you're under $100 million of AUM, you'll want to be working on this now if you haven't started already.

Top 10 Compliance To-Do's for 2012 - This article by attorney Tom Giachetti in Investment Advisor magazine highlights 10 "To-Do's" for RIAs in 2012. Giachetti not only highlights the aforemented March 30 deadline for the updated Form ADV Part 1 and the potential switch to state regulation by June 28th for smaller advisory firms, but also the new initial written disclosure statement for Form 2A, updating policies and procedures manuals since Dodd-Frank, preparing for a regulatory exam, and more. If you're an RIA, this article is a great checklist for major issues and changes you should have tackled already, or be working on now, for 2012. 

A Golden Headache - This article in Financial Planning magazine explores the taxation of gold investments in client portfolios - specifically, the difference between the taxation of gold mining stocks or mutual funds that held them, versus the taxation of direct gold bullion pooled investments like the SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) exchange-traded funds. The key distinction for the ETFs: because they actually hold the underlying gold bullion, they are taxed as collectibles, which are taxed at ordinary income rates up to a maximum rate of 28% (for those in the 33% or 35% tax brackets). On the plus side, though, the gain on gold does still count as a capital gain, which means it can be offset by capital losses on other investments. Some investors respond to these tax challenges by holding gold inside of IRAs, which appears permissible when held in ETF form, but could be problematic if the client wishes to maintain direct possession of the bullion. 

The Answer We Don't Want To Know - In his weekly article posted on Advisor Perspectives, John Mauldin continues his discussion from recent weeks on the choices facing the US regarding its deficit, and some of the implications of the election this year. First, though, Mauldin makes the point that we tend to give more credence to the President's impact on the economy than it really deserves; looking at an alternate history with Gore winning in 2000, it's hard to see how the economic path would have necessarily been much different, or even if Dole had beaten Clinton in 1996 or Bush Sr. in 1992. Nonetheless, Mauldin makes the case that as we reach the point where we must confront the deficit, something must be done. And Mauldin implies that something will get done regardless of who wins in November; the only question is the means by which it is done, and how it is implemented. Because the alternatives are too horrendous.

Assessing Performance Records - A Case Study - This article by Oaktree Capital chairman Howard Marks explores Marks' own experience as the chairman of the University of Pennsylvania endowment fund from mid 2000 until mid 2010. During the time period, Marks' generally conservative investment process - and task in taking over an endowment that would have been considered "poorly diversified" by endowment standards in 2000 - led to a modest underperformance across the time period, but a dramatic outperformance during the financial crisis that allowed the University of Pennsylvania as an institution to whether the storm with minimal impact on ongoing operations. In the process, Marks explores many of the real challenges involved in evaluating and assessing performance, even over a time period as long as a decade, and presents many of the challenging questions that investors face in evaluating their advisors as well. Overall, this is not so much an evaluation of Marks in particular, as an intriguing thought piece around the challenges of assessing performance results of advisors.

Gompertz' Law of Mortality - This article by Moshe Milevsky in Research magazine, an excerpt from his coming book "The 7 Most Important Equations For Your Retirement" discusses the roots of "Gompertz' Law" - a mathematical formula that quantifies how mortality increases over time. The article provides an interesting look at how Gompertz arrived at his famous equation (at least, famous in the world of retirement income math geeks), which essentially shows that for humans, the probability of dying rises by just under 10% per year (9.75% to be exact). In other words, if your odds of dying at age 48 are 0.2%, then your odds are about 0.22% the next year, and 0.242% the following year. Ultimately, most planners aren't going to apply this equation directly, but it's interesting to see the roots of how we first determined that our mortality rises by 10% every year.

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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