Brokerages next big threat? Portfolios-to-go - InvestmentNews

http://www.investmentnews.com/article/20110408/FREE/110409923

Brokerages next big threat? Portfolios-to-go

Some say cheap, prepackaged investment models could do to financial advisers what Expedia did to travel agents

 

April 8, 2011 7:30 am ET

 

Andy Cohen, 47, uses exchange-traded fund portfolios recommended by MarketRiders Inc. to manage his retirement plan and children's college savings. He's charged about $10 a month.

“I don't have enough money that I have a dedicated wealth manager,” said Cohen, who lives in San Mateo, California, and is chief executive officer of Caring.com, which offers resources for children helping aging parents. “It got me a much more diversified portfolio than I could have ever done on my own.”The next thundering herd on Wall Street may be the ranks of low-cost portfolio managers such as MarketRiders and Folio Investing, which cater to self-directed investors like Cohen. Sites that sell prepackaged portfolios have attracted more than $3 billion in assets over the last three years as more investors leave their full-service brokers.“Individual investors have started to realize they can actually do some things as self-directed investors reasonably well, if they're given a platform that allows them to invest more intelligently,” said Steven Wallman, chief executive officer of Folio Investing, where investors can purchase predesigned and customized index portfolios for $29 a month.Some of the firms, such as Flat Fee Portfolios, are too new to have any performance history. MarketRiders can't track the actual performance of its customers' accounts, since it doesn't have custody of their assets. Covestor and Wealthfront Inc., which give users access to third-party investors, publish performance history for the managers they work with on their sites.“Who are the people that are advising me when I'm going to a faceless website?” said Chris Walters, head of wealth management for Pasadena, California-based CitizensTrust. He said investors should be concerned by the lack of performance history available from some of the firms. Losing ClientsBank of America Corp.'s Merrill Lynch and Morgan Stanley Smith Barney, the top two full-service brokerages by client assets, had combined outflows of about $150 billion during 2009, the most recent year for which data is available, and about 10,600 financial advisers left the firms that year, according to Aite Group, a Boston-based research firm. Merrill Lynch hasn't seen a trend of investors leaving the broker, said Selena Morris, a spokeswoman for the bank.“The number one source of accounts is what we would refer to as full-commission brokers,” said Peter Sidebottom, executive vice president of product, marketing and client experience for Omaha, Nebraska-based TD Ameritrade Holding Corp., which caters to do-it-yourself investors.'Wolfgang Puck Express'Traditional brokerages are focusing more on their wealthiest clients in an effort to improve profitability, so the customers leaving these firms tend to be the ones with the smallest accounts, said Katharine Wolf, senior analyst for Cerulli Associates, a Boston-based research firm.“They're not looking to target a client that has, say, under $250,000 to invest,” she said.Those investors are potential customers for services such as Flat Fee Portfolios, which began opening accounts in February. Clients with assets of less than $250,000 are offered several predesigned portfolios with an annual review for a fee of $129 a month.It's the “Wolfgang Puck Express” of portfolio management, said Mark Cortazzo, founder of Flat Fee Portfolios, referring to the celebrity chef who sells gourmet dishes for low prices at his fast-food restaurants. The portfolios are managed by Macro Consulting Group in Parsippany, New Jersey.“It's for people who want good quality asset management,” at a price that is “accessible to a much wider demographic,” he said. The firm charges $199 a month and provides semiannual reviews for accounts with at least $250,000.Lack of ControlAt Hedgeable Inc., investors can choose from among 20 different exchange-traded fund or stock model portfolios. Fees for the service, which began opening accounts through its website in December, range from 0.75 percent to 1.5 percent. Investors like the transparency of the Web-based business models, said Mike Kane, founder of the New York-based firm.“Traditionally in the investment advisory world you hand over to your adviser say $100,000, and they invest it how they see fit. You meet with them once a quarter or once a year and you really don't have any control beyond that,” Kane said. Hedgeable investors can view up-to-date account information including transactions and holdings on their mobile phones, he said.E-Mail ExchangeSome of the services leave investors in control of their assets and others take discretionary authority over client accounts. With Flat Fee Portfolios, managers have discretion over client assets. MarketRiders gives advice on investment decisions, such as rebalancing, and investors may then choose whether to apply it to their own brokerage accounts. Other than Folio Investing, which is a broker-dealer, all of the firms are registered with the U.S. Securities and Exchange Commission as investment advisers.“The beauty of it for me is that monthly e-mail that just says ‘Here's how to do it,'” said Cohen, who has been using MarketRiders for about two years. “If I didn't get that e-mail I'd never do it.”Prepackaged portfolios from Folio Investing may contain individual stocks, mutual funds or exchange-traded funds. The McLean, Virginia-based company's moderate portfolio for investors planning on retiring in 2040 is composed of 10 exchange-traded funds and notes that track stocks, real-estate investment trusts and commodities, including the PowerShares QQQ fund, which follows the Nasdaq-100 stock index.That portfolio returned 3 percent annualized over the three years to April 6, compared with average returns of 1.3 percent for 2040 target-date mutual funds, according to Folio Investing and Morningstar data.Hedge FundCovestor, which began managing money in November 2009, tracks the portfolios of about 30,000 users who choose to make their investment actions viewable to others on the site, and users may have their accounts track the trades of about 150 pre- screened managers on the site.“It's like an open-source hedge fund,” said Perry Blacher, chief executive officer of London-based Covestor. Some of the managers on the Covestor site are professional investment advisers registered with the SEC and some aren't. The managers range from Atlas Capital Advisors, a San Francisco-based registered investment adviser that manages $175 million for high-net-worth investors, to “an ophthalmologist in Wisconsin,” Blacher said.Global Reach“Investors should always be very careful to check out the people providing investment advice,” said Patricia Struck, administrator for the division of securities of the Wisconsin Department of Financial Institutions, “especially when what they're giving you is not tailored to your needs.” SEC spokeswoman Florence Harmon declined to comment on the Covestor business model.These sites don't represent a competitive threat to traditional brokerages, said Jim Wiggins, a spokesman for Morgan Stanley Smith Barney.“People don't come to Morgan Stanley Smith Barney for discount trading,” he said. “They come for professional money management and to access some of the products and services that are only available through a global investment bank.” He declined to provide the range of fees full-service brokerage customers pay.‘Cookie-Cutter Approach'MarketRiders, based in Palo Alto, California, has $2.7 billion in user portfolios. Traditional brokerages had about $4.7 trillion in assets under management at the end of 2009 and account for about 38 percent of all U.S. wealth-management assets, according to Aite data. Folio Investing, which is closely held, has “multiple billions” invested, said Wallman, who wouldn't provide a specific figure. Covestor's Blacher, who wouldn't disclose assets, said the company is gaining about 15 percent in assets each month.“I have yet to see a cookie-cutter approach that is as appropriate as a customized approach, and that's what you give up when you go to one of these types of services,” said Walters of CitizensTrust, which is the wealth-management division of Ontario, Canada-based Citizens Business Bank. Walters's firm has an average client account size of $4 million. Wealthfront Inc., which started in October 2009, lets users invest as little as $10,000 among 40 different registered investment advisers who normally have account minimums of $1 million. The firm has about $180 million in assets invested through its site.Mass Management“We're trying to deliver institutional-class asset management to the masses,” said Andy Rachleff, chief executive officer of Palo Alto, California-based Wealthfront. He said the firm chooses investment managers to participate the same way endowments do, by examining managers' historical trade details rather than just their performance history. Rachleff is the vice chairman of the University of Pennsylvania's endowment investment committee.Wealthfront managers have returned an average of 30 percent from the site's start in October 2009 through Feb. 18, compared with a 27 percent gain in the Standard & Poor's 500 Index. The managers charge average fees of 1.3 percent.Richard Ferri, founder of Troy, Michigan-based Portfolio Solutions, builds index fund and exchange-traded fund portfolios for clients and rebalances them periodically for a fee of 25 basis points. A basis point is 0.01 percentage point. Rebalancing during times of market turmoil may add about one percentage point to returns annually, he said. The firm has almost $1 billion in assets under management.Saving MoneyInvestors could save more money on their investments and improve their returns by skipping services such as MarketRiders and making decisions themselves, said Burton Malkiel, professor of economics at Princeton University and author of “A Random Walk Down Wall Street.” The 10th edition of the book was published in January.He recommends investors hold a mix of the Vanguard Total World Stock Index exchange-traded fund and a broad-market bond exchange-traded fund such as the iShares Barclays Aggregate Bond Fund or the Vanguard Total Bond Market exchange-traded fund, and rebalance annually.“I don't want to pay 25 basis points to anybody to do that for me,” said Malkiel.--Bloomberg News--

Business Students to Invest Real Money

http://www.redlandsdailyfacts.com/ci_17703205

The New Normal?

“It’s Different This Time”

These are four words that should be banned from the investment lexicon.  We heard it in the late nineties when the “new economy” was predicted to lay waste to the old model that solid fundamentals and profits were necessary components for growth in stock valuations. The bursting of the Tech Bubble in early 2000 showed that it was, much to the surprise of the vox populi, not different that time.

Over and over again, the financial media is replete with articles and interviews that profess that the current situation – a snapshot in time – is the new constant. To support the message they cite an unremitting string of experts all confirming that the world has changed, the old theories are banal and that “it is different this time”.  Don’t be fooled.

The financial markets are a complex, dynamic organism.  The averages are never the actual result and any one of a series of exogenous events can cause the markets to surge forward or retreat as the case may be.  That said, the Law of Large Numbers tells us that markets – however volatile they may be right now – will perform in a certain way over a longer period of time.  Moreover, it is statistically important that we have had these tumultuous markets to provide additional support for more stable markets going forward.

The current debate is whether the tried-and-true asset allocation philosophy is somehow passé. Again, I would caution you against falling for this specious argument.  Harry Markowitz, who won a Nobel Prize for his work on Modern Portfolio Theory (MPT), established mathematical certainty for the need to diversify.  One of the major tenets of MPT is that an efficient portfolio is one that is diversified among different asset classes. The concept of diversification is that these various assets classes will not go up in tandem nor will the go down in tandem, thereby smoothing out the returns of the collective portfolio.  In other words, don’t put all of your eggs in one basket; sound advice in any environment.  Yet, the new argument that you will be hearing is that this strategy will no longer work.  The major claim against traditional asset allocation is that, with a global marketplace, correlations have converged to the point that the strategy of diversification has lost its effectiveness.  Said another way, the asset classes (foreign and domestic, big companies and little companies, traditional and non-traditional asset classes) now move together so closely that the value of having one investment zig while the other is zagging is no longer possible. While it is true that the benefits of multi-asset class investing have been muted in recent years, it is nonetheless a cornerstone of intelligent investing and will remain so.  Studies show that the correlations between asset classes are very dynamic; they change from year to year for a litany of reasons.  One thing is clear, in periods of high volatility – such as we are presently experiencing – correlations converge. So the current behavior of asset classes to move together is not anomalous but rather is it quite consistent with empirical evidence that these interactions are very fluid and will change from market to market, economic cycle to economic cycle, etc.

Another controversial theory that is gaining attention is that it is bonds, rather than stocks, that will perform the best over the long run.  Again, much of the support for this argument depends on the aphorism that “it’s different this time”. As support for this argument the pundits are showing that, for the past 40 years, the relative return of bonds has beaten those of stocks. Why 40 years instead of 50 years? What if we would have run those calculations last year, or the year before? Is the result the same or is it only during certain 40 year periods?  The convenient part of the last 40 years is that it ended with an equity market that had one of its worst years on record.  Furthermore, within that period of time, runaway inflation resulted in interest rates at levels we will likely not see again in our lifetime. Notwithstanding, it is because of the poor performance of stocks over the past 18 months that investors should consider them in their portfolio today.  It was the low of 1932 that formed the foundation of the tremendous returns earned over the following five, ten, twenty and thirty years.

In August of 1979, the cover of Business Week suggested the death of equities.  Over the next year the S&P 500 had appreciated by 16%, over the next five years its annualized return was over 20%; hardly the death of the asset class.

The vicissitudes of the stock market require a watchful eye.  It is not enough to just buy a collection of stocks and hold them for the long term. You must be diligent in your approach, mindful of your exposures and strategic in your asset class decisions.  And take heart; the principles of successful investing are not that transitory.  It is NOT different this time.

Originally published in the Orange County Business Journal April 13, 2009

Tax Worries Coloring Investment Decisions - WSJ.com

http://online.wsj.com/article/SB10001424052748703418004575455533507633368.html

Worries Over Tax Hikes Coloring Business Decisions

By JOHN D. MCKINNON, BEN LEVISOHN And JUSTIN LAHART

The uncertainty over looming tax increases is starting to affect both investing and corporate decision-making.
The economy remains the biggest factor in many investors' and businesses' decisions. But worries over whether Congress will extend some of the expiring Bush-era tax breaks are emerging as another important one.
Stock prices of utilities, for example, recently have appeared to be factoring in the possibility of significantly higher dividend taxes next year, several analysts say. Some companies are pumping up dividend payments this year to beat the possible 2011 tax increase, and their shares have rallied.
Small-business owners say unease about tax policy, along with the economy, has led them to hold off on hiring and investment. And many advisers are encouraging well-to-do clients to sell appreciated assets to avoid higher capital-gains taxes.
Congress hasn't decided how to address the tax cuts from the George W. Bush administration, which are set to expire Dec. 31. President Barack Obama proposes to allow taxes on dividends and capital gains to rise to 20% from the current 15% for higher earners, defined as families with incomes of more than $250,000.

But many congressional Democrats want to let dividend tax rates, along with ordinary income rates, rise next year for higher earners to as much as 39.6%.
A senior House aide said late last month that Democratic leaders hadn't decided yet whether to end the current rates on dividends and capital gains for higher earners, or to extend them for everyone. Republicans are largely united in calling for a complete extension, although House GOP Leader John Boehner on Sunday signaled a measure of flexibility. If Congress takes no action, investment taxes would go up virtually across the board.
The broadest impact of higher investment taxes could come on financial markets. But analysts and economists differ over the likely effect.
A July analysis by Barclays Capital suggested that increasing taxes on investment income, as many Democrats advocate, could trim about 9% off the S&P 500 index. Talley Leger, vice president of U.S. portfolio strategy for Barclays Capital, called it "a potential headwind for stocks for the next couple of years."
A 2005 study by three economists at the Federal Reserve, looking back at the market response to the 2003 Bush tax cuts on dividends, concluded there wasn't a significant impact on overall stock values.
Alan Auerbach, a professor at the University of California at Berkeley who also has studied the effect of the Bush tax cuts, said the evidence suggested that repealing the changes probably would produce a "small negative effect" on financial markets.
Citigroup Global Markets forecasts that if all the proposals to raise dividend tax rates take effect for higher earners, investors could pay an additional $39 billion in taxes in 2013.
"That's a big effect, and probably a bit bigger than some market participants believe," said Steven Wieting, U.S. economist at Citigroup Global Markets.
There are signs that tax concerns have been affecting a range of transactions on the ground. Analysts say spreads between utility-stock dividend yields and yields on some other securities recently have reflected expectations of a top dividend tax rate in the low-30% range.
"The stocks could initially fall if dividend tax rates reset to marginal rates, but we don't think it will be permanent," said Dan Eggers, a utility equity research analyst at Credit Suisse Group in New York.
Some companies are squeezing in big dividends before year's end. In anticipation of its conversion to a real-estate investment trust, Weyerhaeuser Co. plans a $5.6 billion accumulated-earnings dividend payout this year, most of it in the form of stock. Pharmaceutical company Warner Chilcott PLC has arranged to borrow more than $2 billion to make an extraordinary dividend payment of $8.50 a share to shareholders.
While dividends are getting most of the attention, wealthy investors also are facing big incentives to realize capital gains by selling assets.
"We advise people that if they have gains to take or oversize positions that need to be diversified, sell them before the end of the year, rather than wait and pay higher taxes," said Sam Katzman, chief investment officer at Constellation Wealth Advisors in New York.

Small-business owners, especially older ones, also face tax incentives to sell soon.
"If someone is planning on selling a business, they should do it now," said Chris Walters, an executive vice president based in Pasadena, Calif., at CitizensTrust, the wealth management arm of Citizens Business Bank.

Some are hesitating, hoping for higher prices in the future. And business owners who sell now can face risks, because of the way such deals may be structured. Chris Hesse, head of the tax practice at LeMaster Daniels in Spokane, Wash., said a client in his early 60s sold his remaining shares in a business in a 10-year installment deal, and chose to pay all the tax at once this year, in anticipation of higher rates in the future. That looks like a smart strategy—unless the buyer can't make the future payments.
The prospect of higher taxes in 2011 and beyond also could be weighing on business owners' operational decision-making. In its July survey of small-business owners, the National Federation of Independent Business found that 22% of small businesses said the most important problem they faced was taxes, up from 19% a year earlier. More businesses—29%—identified poor sales as their No. 1 problem, but that was down from 34% a year earlier.
Democrats say that less than 3% of small-business owners would be affected by changes in tax rates for high earners. Republicans counter that the changes would affect roughly half of all such income, possibly more.
"It's like deer in the headlights. Nobody is doing much of anything about expanding or hiring or investing in new equipment," said Ken Keith, owner of Kasbar Inc., a Winston-Salem, N.C., accounting firm that works with small businesses.
Target Plastics Inc., a Salem, Ore., maker of custom plastic products, used to have seven employees, but now it has only two full-time workers, with an additional person working half-time, said owner Melissa Hescock.
"I've basically cut back because of the amount of taxes," Ms. Hescock said, including recent state increases and anticipated future federal boosts. "I have fewer people doing more work."
Write to John D. McKinnon at john.mckinnon@wsj.com and Justin Lahart at justin.lahart@wsj.com

Counterintuitive Asset Allocation

WSJ Blogs- http://blogs.wsj.com/financial-adviser/2010/06/14/voices-chris-walters-on-counterintuitive-asset-allocation/

VOICES: Chris Walters, On Counterintuitive Asset Allocation

In theory, wealth advisers thoroughly interview clients before creating a strategic asset allocation, in order to ensure the resulting asset mix corresponds to a client’s financial goals and risk preferences. But I recently reviewed a number of asset allocations that were appropriate from an age perspective but questionable from a standpoint of the clients’ situation or inclinations.

Take the case of a couple in their early eighties with no heirs; he a retired economist, she a former university professor. Ordinarily, older investors are advised to maintain a relatively modest risk in their portfolio. However, this couple was confident that they had more money than they could ever spend, and did not require significant investment income. Their goal was to build as large an investment portfolio as possible to bequeath to a charity. They understood that this entailed assuming greater risk, but felt that if their $5 million portfolio lost even half its value, their quality of life would not be endangered.

The upside of assuming greater risk was that their favored charity might ultimately receive a larger bequest. The couple was willing to take that chance. Our team helped the couple create an investment portfolio diversified across a range of equities and other risk assets, with only a small allocation to fixed income.

Another example of counter-intuitive asset allocation is a 38-year-old man who had $15 million in investable assets due to the sale of a family business, and was looking for a new entrepreneurial opportunity. On previous advice, he had $15-million spread across a 70-30 blend of equities to fixed income, assuming that this allocation was appropriate based on his age. I observed that this would be appropriate for most people below the age of 40, but asked the young man to consider what might happen in the case of a severe market downturn.

I also pointed out that since he was intent upon assuming a high level of risk in a new entrepreneurial endeavor, it didn’t make sense for him to take on relatively high risk in both his investment portfolio and his new initiative. My team constructed a portfolio that contained risk assets, including hedge funds, but had ample fixed-income exposure and liquidity.

Then there was the couple, in their early sixties, with financial assets of $2.2 million spread across a 401(k) account and personal savings. They planned to retire in four years. Their aggregated asset allocation was divided almost equally between equities and fixed income, in order to help ensure that their assets could offset the impact of inflation over a lifespan that might extend another two or three decades.

However, the couple was concerned that the cash stream produced by this asset allocation, along with Social Security, would not generate the level of income they desired. They were also apprehensive that a significant equities market downturn at this point in their life would leave them with even less ability to generate income.

All About Investing in 'Muni' Bonds - MarketWatch

http://www.marketwatch.com/story/all-about-investing-in-muni-bonds-2010-03-20-1946440

March 20, 2010, 7:47 p.m. EDT

All About Investing in 'Muni' Bonds

Municipal bonds, once the purview of the belt-and-suspenders crowd, have gotten a lot more intriguing in the past couple of years.
The worst of the financial crisis has passed, but much of the investment world's angst has been transferred to the government debt markets. Exotic places like Greece and Dubai are facing debt difficulties, but such problems also have become more acute closer to home.
California faces a budget mess. New York is romping through now familiar fiscal follies. Rising pension costs from Phoenix to Pittsburgh are making government books tougher to balance. It all raises the question: Are municipal bonds still a safe, shrewd investment?
Short answer: Yes.
Longer answer: But they aren't the no-brainers they used to be.
"Things have changed, and we really have to do far more due dilligence on issuers than we did in the past," says Chris Walters, executive vice president at CitizensTrust, the wealth-management division of Citizens Business Bank in Pasadena, Calif. "In the old days, everyone was pretty much an investment-grade entity and [general obligation] bonds paid a lot lower yield. That's not the case anymore; everything's gotten more challenging from a risk-management perspective."

California, Detroit Borrowing

Despite the challenge, investors have continued to gobble up municipal-bond offerings. California recently sold $2.5 billion in muni bonds -- $500 million more than it expected to sell. This comes less than a year after the Golden State found itself issuing IOUs in lieu of checks when the state went through one of its periodic budget meltdowns. Fiscally challenged Detroit managed to sell $250 million in bonds this month, even though it hasn't managed to pull together its finances in a timely manner in the past few years.
Investors are being attracted by higher-than-usual yields. California was paying 5.7% on bonds maturing in 2036. Detroit's bonds maturing in 2035 yielded 5.35%. Treasurys expiring in 2040 yield 4.64%, according to Ryan ALM, a market-data firm. Usually, municipal bonds sport yields lower than comparable Treasurys, but things are less-than-usual these days.
One thing that hasn't changed for munis is their tax advantage over Treasurys and other taxable bonds. Interest isn't taxed at the federal level and many states and localities don't tax that income, either.
Investors also believe that despite the nasty headlines, municipal bonds remain sound investments. In the case of California, investors probably see it as the quintessential state that is Too Big To Fail.
That echoes the view of Greece (Germany will step up) and even Dubai World, where the neighboring Emirate of Abu Dhabi has taken steps to assure investors. "The federal government won't let California default any more than the European Union will let Greece default," says Mr. Walters. "And California is far more important to the U.S. than Greece is to the EU."
With the environment shifting, muni-minded investors should consider tweaking their approach. While the last big muni default took place in 1994 when Orange County blew up, smaller municipalities have since failed, including Vallejo, Calif., in 2008.
The muni-bond standard strategy is to "ladder" various munis across, say, 10 years (though a ladder can stretch out even further or be shorter). But that can be a costly endeavor. Often, it's much easier to use funds to build diversification.
Closed-end funds are a popular approach. These funds are available at both the national and state level. California, New York and New Jersey residents have a plethora of such funds to choose from, underscoring their heavy use of the muni-bond markets.
Most bond investors, especially in the muni space, are focused on income, or yield, and many funds, especially in riskier jurisdictions, have handsome yields. But it's important to bear in mind that higher yields are signaling investor concern. No free lunches in the marketplace!
Among state funds, the BlackRock California Municipal Income fund /quotes/zigman/288690/quotes/nls/bfzBFZ+0.80% (BFZ) is currently yielding 7.1%. The Nuveen New York Municipal Value fund /quotes/zigman/236209/quotes/nls/nnyNNY+0.76% (NNY) is yielding 4.4%. In the national fund category, the Pimco Municipal Income fund /quotes/zigman/287029/quotes/nls/pmfPMF+0.12% (PMF) yields 7.4%.

Mutual Funds, Too

Investors also can tap actively managed mutual funds, such as the Nuveen Insured Municipal Bond fund (NMBIX) yielding 4.55% and the shorter-duration focused Oppenheimer Limited Term Municipal Bond fund (OPITX) yielding 4.91%.
In the current environment, with risks relatively higher than usual, Kristopher Burak of Rehmann Financial in Lansing, Mich., recommends focusing on shorter-duration investments.
Mr. Walters echoes the careful approach. He says state general-obligation bonds and state education bonds are among the safer issues because they take priority in terms of government spending, even when a budget isn't in place.
A great resource for investors is the Electronic Municipal Market Access Web site, emma.msrb.org. It's run by the Municipal Securities Rulemaking Board, a government agency charged with watching over the muni-bond industry. The site has educational information as well as market data about recent trades.