Enjoy the current installment of "weekend reading for financial planners" – this week’s edition highlights a new research piece in the Journal of Financial Planning on dynamic asset allocation and itwo innovative new financial planning software offerings. There’s also a good practice management piece by Angie Herbers, and two strong (but not particularly bullish) investment pieces by Mauldin and Hussman. We wrap up with a light piece about how quickly the world is changing, and that the key to success in business in the future is about "learning as fast as the world is changing." Enjoy the reading!
Weekend reading for February 4th/5th:
Dynamic Asset Allocation: Using Momentum to Enhance Portfolio Risk Management – This article in the February Journal of Financial Planning by Jerry Miccolis and Marina Goodman, a continuation of their article series on Modern Portfolio Theory I highlighted in weekend reading a month ago, explores the concept of dynamic asset allocation – where the asset allocation of the portfolio changes in response to ongoing adjustments in expected returns, volatility, and correlations of the available asset classes. The article suggests that in practice, dynamic asset allocation is simply a more advanced form of rebalancing, and still built on a valid Modern Portfolio Theory core. The key is to acknowledge that markets exhibit both momentum (tendency to continue in the current direction), and mean reversion (tendency to snap back after going too far in the same direction for too long). The article then explores ways to build a dynamic asset allocation approach using moving averages, with significant results. One wonders about the opportunities available if this momentum research was overlaid on top of the recent JFP article using market valuation as another tactical asset allocation input.
inStream, In The Moment – This article by Joel Bruckenstein in Financial Planning magazine explores the new cloud-based planning platform inStream. Bruckenstein notes that what NaviPlan did in the 1990s and MoneyGuide Pro did in the 2000s, revolutionizing planning software in their decades, inStream may do in the 2010s, by trying to address key shortcomings in other platforms. The major differentiator for inStream is the ongoing monitoring it provides of client situations; for instance, while all financial planning software might have an input for a client’s mortgage, inStream actually monitors the client’s mortgage rates against current rates and sends the advisor a notification when it might be time to refinance. Or alternatively, inStream runs updated Monte Carlo projections on clients daily, and sends you a notification when a client’s probability of success falls below a specified threshold. In other words, it’s proactive planning software that in turn helps the planner be proactive with clients. Another innovative aspect the software is exploring is crowdsourcing; for instance, you could find out what other advisors were doing for a client with similar circumstances to your own (although right now the feature isn’t available, as inStream doesn’t have enough planners on the platform yet, and Bruckenstein shares some skepticism about whether it can deliver). Overall, the biggest caveat is simply that because the platform is new, the actual planning capabilities of the software are still somewhat light, although Bruckenstein notes that that is easily enhanced in the future. But perhaps best of all… it’s free, so it costs you nothing to take it for a spin and test out the features yourself. Check inStream out here.
Fast, Easy Game – This article, also by Joel Bruckenstein but in Financial Advisor magazine, discusses another software offering for financial planning called GoalgamiPro by Advisor Software, although the software makers characterize it as more of a tool for a client check-up than a true financial planning software package. Bruckenstein provides a full walk-through of the navigation of the software and how it works, and while it reads long, Bruckenstein emphasizes that in reality it’s very quick and easy to input data. The final output provides a comparison of the client’s current balance sheet, and the net present value of the client’s spending goals, to see whether the client has enough. In the end, Bruckenstein acknowledges that full planning firms would likely use other software for more robust analysis, but that GoalgamiPro might be useful as a starting point for a client discussion, as it’s quick and easy. And GoalgamiPro is implementing updates very regularly, so the tool may become more robust over time as well.
Advisors’ Bad Behavior – This article on the AdvisorOne platform is an interview with Ralf Scherschmidt, portfolio manager of the Oberweis International Opportunities Fund. The title of the article itself is a bit of a misnomer, though; although it starts out by discussing the fact that advisors have been slow to recognize and act on the emerging behavioral finance research, the real focus of the article is about how Scherschmidt uses behavioral finance principles to make good stock picking decisions. For instance, Scherschmidt finds that because of our tendencies to anchor and not change our beliefs, shifts in the fundamentals for companies are actually not rewarded in the marketplace nearly as fast as efficient markets theory would suggest, creating an opportunity to take advantage of the impending trend by identifying it and acting promptly. Nothing revolutionary in this article, but it is interesting to see a well thought out investment process predicated on the idea that markets are so inefficient that it actually is possible to identify real-time changes in a company’s fundamentals and be rewarded for acting on that (entirely public) information.
Survey for Success – This article by Angie Herbers in the February issue of Investment Advisor explores the idea of using surveys not to understand what your clients want, but what your employees want. Herbers highlights that there is a significant chasm in the perspective between firm owners and their employees, owing first and foremost to the fact that firm owners by definition are entrepreneurs who started their own firms, while most employees are not (if they were, they wouldn’t be working for someone else!)… which in turn means that the reasons the firm owner started the firm may be very different than why the employees joined it. Accordingly, what makes the firm owner happy at work may not be what makes the employees happy. But often firm owners don’t even realize they have a problem. Herbers’ recommendation: survey them (and she provides some tips on how to do it), and find out if they really are happy or not. What you do about the results (especially if employees really are unhappy), will be the subject of a future column; Herbers’ point here is simply that knowing if you have a problem is the first step.
The Transparency Trap (free registration required, but worth it!) – In his weekly letter, John Mauldin looks at the recent Fed’s "transparency" announcement to keep rates low until 2014. Mauldin notes that this essentially means the Fed does not expect a significant recovery for the next several years (and Comstock Partners calls it an act of desperation). It also means there’s no hurry for businesses or individuals to borrow money to get lower rates; you can wait and see. This is the classic makings of a liquidity trap, where pushing more money into the system doesn’t help; but Mauldin suggests there is now also a transparency trap, where the Fed has communicated so openly about their economic views that they may be forced to implement monetary policy to match it, or risk dangerously swaying the markets even further. Mauldin also notes that the recent Q4 GDP number was weaker than the 2.8% headline implies, suggests that the US may be heading for a recession this year in light of a potential shock coming from Europe, and points out that rising central bank operations are resulting in increasingly correlated markets (which is nice to the upside but poses risks to the downside!) and that central bank actions will dictate much in the coming year.
Warning: Goat Rodeo – In his weekly piece, John Hussman suggests that the markets are like a "goat rodeo" – Appalachian slang for a chaotic, high-risk, or unmanageable scenario requiring countless things to go right in order to walk away unharmed. Hussman suggests that the current environment still represents a highly elevated risk, characterized by an "’exhaustion’ syndrome that has typically been followed by market losses on the order of 25% over the following 6-7 month period" and that upside is limited given the reduced long-term expected returns on equities in the current environment. While some recent indicators have improved, Hussman’s research suggests recession risks are still high, and that we may be in the midst of a "whipsaw trap" where markets stage a final rally before beginning a bear market decline.
Are You Learning As Fast As The World Is Changing? – This brief piece by Bill Taylor, author of Practically Radical and cofounder of Fast Company magazine published on the Harvard Business Review blog, makes the point that in today’s world it’s not just about out-hustling, out-muscling, and out-maneuvering the competition, but about out-thinking the competition by crafting a better view of where your business and industry is going and getting your firm there before anyone else does. To do this requires a constant focus on learning and continuously exposing yourself to new ideas. Taylor recommends three key steps: have a wide field of vision (don’t just try to draw on inspiration looking at the same stuff everyone else is looking at); realize that the best new ideas may be old ideas from unrelated fields; and don’t be a loner (your most powerful insights may come from asking questions of those around you). Do you continuously challenge yourself to keep learning as fast as the world is changing?
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!