Enjoy the current installment of “weekend reading for financial planners” – this week’s edition highlights a few articles on advisor use of social media, an interesting look at whether promoting financial literacy is a red herring for real consumer protection in financial services, and a good technical article on planning issues for unmarried couples. Also included is a controversial discussion of how TIPS may not be quite as “safe” as we make them out to be, and a look at a new series of mutual funds that may attract increasing client attention in the coming years. We finish with a quick look at a Forbes article discussing the decision by a major firm with 80,000 employees to completely phase out email over the next 18 months in lieu of meetings, telephone calls, text messaging, and social media for communication; will this be a failed experiment, or a glimpse into the future of business communication? Enjoy the reading!
Weekend reading for December 31st/January 1st:
The Myth of Financial Literacy: Most Consumers Don’t Want It – This blog post by AdvisorOne columnist Bob Clark sets forth a striking but controversial notion – that in the end, most consumers don’t really want financial literacy, and that our focus on financial literacy is a red herring for real consumer protection. Clark makes the point that as the world becomes increasingly specialized, we simply don’t have the time or interest to become “literate” in everything; just as most people don’t really want to know how their WiFi works, they don’t really want to know how the financial services industry works, either. And as Clark highlights, it’s not as though other professions focus on a “literacy” problem in their area of expertise; we don’t have a medical literacy, accounting literacy, or legal literacy crisis in America. Clark suggests that ultimately, the key is regulation of financial services providers, so that the public can rely upon them to be competent, stay current, be ethical, and put their clients’ interests ahead of their own… not to teach the public to be “literate” enough to avoid those who don’t adhere to those values.
Social Media Losing Some Appeal With Financial Advisors – This article from Financial Advisor magazine highlights a recent research announcement by Aite Group suggesting that advisors are becoming disenchanted with the buzz surrounding social media. Success in driving new business through social media channels appears to remain low, and fewer advisors are looking to expand their social media presence in 2012. Criticisms appear to range from suggestions that it just doesn’t work, to ongoing major concerns about compliance (82% of firms with a written policy on social media limit or prohibit its use). Nonetheless, I can’t but wonder how many of these firms were really effectively using social media in the first place, or whether these results are akin to saying “Marketing doesn’t work; I ran an ad once in the newspaper, got no clients.” Any form of marketing requires sustained persistence for sustained effectiveness.
Social Media in Investment Management – This white paper from portfolio management software provider Advent provides a great overview of social media landscape for advisors, and in particular its compliance issues and some ways to navigate those concerns for the four major channels: Facebook, Twitter, LinkedIn, and blogs. It highlights both what is known and unknown from the regulatory perspective at this point (including that FINRA actually has provided more concrete guidance for registered representatives than the SEC has for registered investment advisors), emphasizing that in reality to the extent social media is just a new forum for communication, most compliance issues aren’t really new; for instance, a recent SEC action against an advisor front-running stocks he promoted on Twitter would have been just as illegal using any other communication medium, as would sharing inside information. Instead, the greatest new compliance complication for social media seems to be the ramifications of sharing other people’s non-original content; in other words, is sharing or “Liking” an article about an investment an endorsement of that investment? The white paper finishes with a nice “Best Practices” framework for a comprehensive social media compliance policy.
Planning Ideas and Considerations for Unmarried Couples – This article from the Journal of Financial Planning’s “Between The Issues” segment discusses some of the unique challenges present when planning for unmarried couples, whether same-sex partnerships or heterosexual cohabitating couples. As the article notes, effective use of both financial and health care powers of attorney become especially important, as unmarried couples otherwise have very limited access to each other’s financial and health care decisions. For longer term relationships, a Domestic Partnership Agreement is advisable, to stipulate how increases in the couple’s net worth will be divided in the event the couple later separates. And estate planning in general becomes more complex, especially for higher net worth couples, because there is no marital deduction available to shelter assets from taxation. Although several sections of this article are a relatively basic primer for financial planning in general, it’s still a good read to highlight how some traditional planning tools are “distorted” and must be adjusted when applied in an unmarried couple context.
Are TIPS Really Safe and Worry-Free? – This article by professor Wade Pfau on Advisor Perspectives makes the point that while TIPS do provide an inflation-adjusted real return, they are not without risks in the real world. Those risks range from reinvestment risk, to the possibility that historical TIPS yields were an aberration never to be seen again (due to an irrationally low inflation-risk premium and an artificially high liquidity premium in the early years), to the incredibly high savings requirements to secure a lifetime income with 2% real yields, to the fact that TIPS still face interest rate risk if they have to be liquidated before maturity. And of course, there’s always the risk that the entity who pays the interest (the US government) is also the entity that measures inflation to determine the yield; who’s to say they won’t change the measure in the future to save money? The point of the article isn’t to bash TIPS, but it does point out some valid concerns to be borne in mind.
Cliff Asness: A Hedge Fund Genius Goes Retail – This article from Fortune magazine discusses hedge fund – and now mutual fund – manager Cliff Asness of AQR Capital Management. The article discusses Asness’ research on momentum investing, emphasizing the well-respected rigor of his research supporting that such investment strategies can enhance returns with reduced risk. Although the article doesn’t discuss the details of his research, it does emphasize Asness’ credibility, as his strategies have built a $42 billion investment base in only 13 years, and the evidence in his research has even been acknowledged by famed efficient-markets advocate Eugene Fama. Asness notes that the momentum strategies tend to work even better when also coupled with valuation-driven strategies (as they tend to outperform at different points in the market cycle), although notably the strategies have not fared as well in the past 3 (albeit highly unusual) years as they have historically. Nonetheless, AQR is expanding its offerings in a remarkably affordable mutual fund format; if Asness’ success continues, expect to hear clients start asking about AQR funds.
CEO Bans Email – This striking article from Forbes discusses the somewhat controversial decision by Atos CEO Thierry Breton to ban email as a communication medium in his company. And Atos is not a small company; it’s one of the biggest international IT companies in the world, with 8.6 billion Euros of revenues and 80,000 employees across 42 countries. But the company is phasing out emails in lieu of using in-person meetings, telephone calls, and text message and social media platforms that Breton likens to the spoken word, noting that he believes only 10% of emails received by his staff every day turn out to really be important. He hopes that eliminating email will reduce the deluge of unnecessary information that consumes employee time, distracts them, and reduces productivity. And it’s worth noting that Breton is not some young next-generation “kid” – he’s a 56-year-old who has not only been Atos’ CEO for the past 3 years, but has held held numerous major leadership positions, including several executive roles for private companies, as well as French Minister of Economy, Finance, and Industry.
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!