Enjoy the current installment of "weekend reading for financial planners" – this week’s edition highlights a study from the Journal of Financial Planning suggesting that proactive use of reverse mortgages can actually increase sustainable retirement income, two practice management articles about focusing on organic growth in your business and documenting your office procedures (including the fact that often you, the planner, are the greatest roadblock to that process). We also highlight an interesting piece from the Wall Street Journal suggesting that investors may now be investing so much in index funds that markets really are becoming less efficient and more correlated, a fascinating interview with Woody Brock suggesting that there’s a difference between "good deficits" and "bad deficits" for government spending, and an adaptation of the upcoming annual shareholder letter from Warren Buffett in Fortune magazine that highlights why investing in stocks is so much more productive than investing in bonds or gold for the long run. We wrap up with three somewhat offbeat articles, one about how governments could use our behavioral finance irrational tendencies to help be better citizens (and have fun doing it!), a second that questions whether we are all really as busy as we think and claim we are, and a final article that highlights Pinterest, the latest emerging "social network" site that is growing like wildfire (with 73 million users already) and that you’ll probably hear more about in the coming year. Enjoy the reading!
Weekend reading for February 25th/26th:
Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income – This article in the February Journal of Financial Planning by Barry Sacks and Stephen Sacks explores the use of various reverse mortgage strategies to support a retiree’s ongoing retirement income withdrawals. The article primarily explores two strategies: using an ongoing lifetime payment from a reverse mortgage to supplement income, which implicitly reduces withdrawal needs from the portfolio in the early years until inflation pushes spending requirements higher; and taking reverse mortgage payments "as needed" by using the reverse mortgage for spending when the markets are down, and using the investment portfolio when markets are up. The results show that ongoing reverse mortgage strategies result in significantly higher sustainable withdrawal rates (with the "as needed" strategy very slightly outperforming the ongoing reverse mortgage withdrawal strategy). In fact, the reverse-mortgage-plus-portfolio strategies offered greater success at 5% withdrawal rates than portfolio-only strategies do with just 4% withdrawal rates. This research supports prior analysis of reverse mortgage strategies in the November 2011 issue of The Kitces Report, which similarly suggested that reverse mortgages may be more effective as an ongoing strategy than a last resort. Ultimately, there are several assumptions in the Sacks’ research that may be challenge, so I don’t necessarily view this as "the final word" on using reverse mortgages for ongoing income strategies, but expect to see more research on this topic in the coming years.
Process Implementation: Moving Toward a More Efficient Office – This article by Joni Youngwirth from Investment Advisor magazine explores how to make your office more efficient – primarily, by crafting flowcharts and checklists of your office functions and processes, and then using them as guidelines for how the process should consistently be done in the future. What’s notable about this article is that Youngwirth points out that in many cases, the biggest problem for implementing efficiency is YOU, the advisor, who throws a wrench in the works of efficient staff operations. The article highlights several case studies where a firm’s efficiencies break down – such as "things get busy" and "lack of commitment" and makes suggestions for how to address them, including working around the advisor who may be the problem (e.g., if the advisor is bad at writing notes after a meeting, block out a brief amount of time after each meeting, or at the end OF the meeting, for dictation of important notes that are recorded and transcribed later). As Youngwirth suggests, although it may feel difficult to take the time to build the checklists in the first place, they’re also crucial to getting efficiency done right, and for improving further in the future.
Best Advice for 2012: Risk Being A Bit Boring And Focus On The Organic Growth Of Your Practice – This article on RIABiz by Philip Palaveev, president of Fusion Advisor Network and former industry consultant with Moss Adams, suggests that in 2012 the best tip for advisors may be to simply focus internally on organic growth. With market returns low and the advisory space more competitive than ever, firms that wish to grow must focus on developing business with and through their existing clients. Palaveev also suggests that mergers will continue to be the trend in 2012 (as opposed to acquisitions), and that recruiting bonuses will continue to be popular with brokers but unpersuasive to most advisors. Overall, Palaveev is someone who in my opinion really has his finger on the pulse of the industry, and this article is a good summary of his views and outlook for the coming year.
Woody Brock on Solving America’s Fiscal Problems – This interview by Advisor Perspectives with Dr. Woody Brock highlights some ideas from his new book "American Gridlock: Why the Right and Left Are Both Wrong" about how American can break its political gridlock and solve its fiscal problems. Brock puts forth many intriguing ideas, including most notably that there is a difference between "good deficit" spending and "bad deficit" spending. The latter generally entails transfer payments that just hand money to citizens but don’t create any productive value. The former – "good deficits" – are investments a country makes in infrastructure that generates a long-term economic growth return to the country. Brock suggests that if the US were to shift to more genuine infrastructure-oriented policies, such deficit spending truly could lift the country out of its debt morass. In other words, the bottom line is that our debt problems are not because we deficit spend, but because of how we deficit spend.
Simple Index Funds May Be Complicating The Markets – This article by Jason Zweig in the Wall Street Journal highlights recent experts who have suggesting that the markets may have reached a tipping point, where so much money now flows into index funds that markets are losing their efficiency. The result is a rising correlation across all markets and indices, as money doesn’t just flow in and out of particular investments, but in and out of index funds in the aggregate, moving markets in lockstep. Notably, though, this may not be true of all asset classes (the article suggests more diversification into international stocks, emerging markets, and investment grade bonds), and it’s not clear how much is attributable to index funds alone (as the past 20 years has also witnessed the rise of online trading and a dramatic reduction in transaction costs for average investors to access the markets). Nonetheless, the recent trend is clear – equity markets are showing a disturbing rise in correlation, implying that intra-equity asset classes may not be the diversifiers in the future that they have been in the past.
Warren Buffett: Why Stocks Beat Gold And Bonds – This article in Fortune is an adaptation of upcoming famous annual shareholder letter by Warren Buffett to Berkshire Hathway investors. Buffett starts by defining investing behavior itself as "the transfer to others of purchasing now power with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future." In turn, this also means that investing risk is "not measured by beta… but rather by the… reasoned probability of that investment causing its owner a loss of purchasing power over his contemplated holding period. Assets can fluctuate greatly in price and not be risky as long as they are reasonably certain to deliver increased purchasing power over their holding period." Accordingly, Buffett highlights that because of the risk of inflation and currency debasement, fixed income investments may have a beta of zero, but a risk that is huge. Similarly, Buffett laments that gold is neither "of much use nor procreative" – as a result, its value only increases on the basis of the "belief that the ranks of the fearful will grow." By contrast, Buffett notes that for the price of all the world’s gold, you could instead by all U.S. cropland (400 million acres that produces $200 billion of output per year) plus 16 Exxon Mobils (which each earn $40 billion per year). A century from now, 400 million acres of farmland will have produced a staggering amount of crops, Exxon Mobil may have delivered a trillion dollars of dividends to investors (and you can buy 16 of them), while 170,000 tons of gold will still be the exact same 170,000 tons of gold, having not changed in size nor produced anything. If you could choose between bonds, gold, or all that, which would you choose?
Making Good Citizenship Fun – This op-ed article by Professor Richard Thaler in the New York Times highlights an emerging trend – using behavioral finance research not to help people avoid bad behaviors, but to leverage those behaviors to incentivize good public policy results. For instance, a city in Taiwan created a small lottery for dog owners who cleaned up after their pets; leaving the dog waste into a special depository made the individual eligible to win small gold ingots, "literally turning dog waste into gold." The top prize was worth about $2,000, and the city reported that the initiative cut fecal pollution in the streets by half. Another test lottery program took fines from bad drivers, and pooled a portion of them as a lottery prize to people who were recorded for good driving, with similar promising results. Across all of this, the basic point is that we can use behavioral finance tendencies – such as our irrational overvaluation of the possibility of winning a lottery prize – to incentivize and reward good behavior, rather than simply to punish bad behavior. One wonders if such techniques could be used effectively to alter client spending and savings habits as well.
Are You As Busy As You Think? – This article from the Wall Street Journal highlights the fact that we are often not really as busy as we think we are. As a result, we stress about having too little time to do everything we need to do, when the reality is that we just need to be more efficient and productive in the time we are working. The author’s simple suggestion – keep a time log, and see where the time really goes. Be honest about what’s done and for how long, and record it. When you go back and look at the results, they may surprise you. In turn, what this means is that instead of saying "I don’t have time" what we should be saying it "it’s not a priority". Let that be the litmus test for your activities. If it sounds ridiculous – for instance "I don’t go to the doctor because my health is not a priority" you’ll see quickly what to change.
Is Pinterest the Next Big Social Network? Learn How Financial Advisors Can Participate – This article from FinancialSocialMedia.com explores Pinterest, the latest emerging new social network site. As the article highlights, Pinterest is not just another site to "network" with people like LinkedIn or Facebook; instead, while YouTube is about videos and Facebook is about friends, Pinterest is about making pinboards of pictures and articles that you can share. The article suggests a few ways this might be used, such as a pinboard to share relevant news and interest articles with your target audience (such as a series of golf articles if your clients are avid golfers), or a pinboard that shows the suite of offerings available from your firm. Also notable is the fact that Pinterest users are currently 82% female, which may make Pinterest especially relevant, or irrelevant, depending on your target client. Overall, I suspect virtually none but the most technology-avant-garde advisors are going to jump on the Pinterest bandwagon soon, but with 73 million users in just a few months, expect to hear more about Pinterest in the coming 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!