How Should Advisors Compete With Online Financial Advice Apps? By Partnering With Them
Thursday, January 16, 2014 17:22

In recent years, a line was drawn in the sand between on-line advisers and human advisers. The on-line community staked out their turf by suggesting that human advisers will die out like dinosaurs. That’s not happening. Human advisers and on-line advisers both have qualities and both are gaining assets. I believe the line in the sand will wash away this year and vertical advisers will appear.

On-line advisers have figured out that human advisers offer services to a different clientele and more affluent segment of the marketplace. At the same time, human advisers understand the importance of brand recognition and are trying to figure out how to offer on-line services for a future affluent on-line audience. A practical solution is the vertical adviser – one company that does it all.

I’m a human adviser. My company’s investment specialists speak one-on-one with all our clients to set investment policy and assist with other personal financial matters. It’s a great model that offers high profit margins, but there are challenges. First, one-on-one advice creates a natural ceiling in the number of relationships per investment specialist. Second, it’s not a model that works well when an investor has less than $500,000 in assets.

The business model of an on-line adviser is quite different that the human adviser. Their goal is to bring asset management to the masses by letting computers do the talking. It’s Wall Street’s equivalent of Ask Siri.

Look under the hood of most on-line investment management firms and you’ll find a VC funded software company that has an investment overlay. The employees are mainly of software engineers sprinkled with a few investment specialists.

Two firms I’m most familiar with are Betterment in New York City and Wealthfront in Palo Alto, California. Betterment is run by Jon Stein, a former bank consultant who has an economics degree from Harvard, a finance degree from Columbia Business School and a Chartered Financial Analyst (CFA). Wealthfront is run by Andy Rachleff, a well-known venture capitalist and tech entrepreneur who has a BS from the University of Pennsylvania and an MBA from Stanford University.

I’ve been to both Betterment and Wealthfront and know their CEOs. I’ve met the management teams and the staff. My view is that both firms are well run, have dedicated people, and are extremely focused on delivering high quality, low-cost on-line investment management services to the masses.

On-line companies also have challenges. Their immediate challenge is cash flow. A secondary challenge will be client retention in the years to come.

Cash flow can’t yet sustain the business of on-line firms. Based on SEC ADV filings, the average client asset holdings at on-line advisers is well below $100,000.  I calculate that the average client is paying less than $50 per year in fees. It’s going to take a lot of clients to generate positive cash flow using this model.

The second problem is client retention. This is an issue on two fronts. First, nervous investors want to talk with someone during difficult times in the markets. It isn’t known yet if a computer will be able to keep clients calm when the next bear market hits. There could be a lot of terminations. Second, on-line advice may not suffice as clients become more affluent. I believe many affluent investors will pay more to talk with a real human being rather than a computer. This could lead to terminations down that road as clients’ accumulate assets in their accounts and become lucrative to the on-line firms.   

Here is where the vertical adviser idea comes in. A well run human adviser firm has positive cash flow and one-on-one services. What’s needed today is better back-office technology to be more profitable, and better brand recognition with the next generate of affluent investors. On-line advisers have technology. What they need today is more cash flow, and they need the mechanism to retain clients in the future as those clients gain wealth.

I believe human advisers and on-line advisers should erase the line in the sand and form alliances. I see unbounding opportunity for more client choices, increase profitability through productivity, and increase cash flow across the entire business model. It’s a natural next step for the adviser industry. 


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Speaking For Nearly Two Hours At A Webinar About 2014 Investing, Fritz Meyer Amazingly Gets A 4.9-Star Rating; Get Two CE Credits
Wednesday, January 15, 2014 03:16

Fritz Meyer spoke for 110 minutes yesterday about the economy and investments and received an average rating of 4.9 out of five stars.

Please for a moment appreciate this accomplishment: Fritz spoke for nearly two hours straight to a large audience of independent financial planning practitioners about the highly controversial and technical topics of investing and economics and he managed to earn a 4.9 star rating from attendees! That’s quite a feat.
Don’t take my word for it. Look at the comments below.
Fritz told me he had a lot to say this month. So we doubled up on his session to give attendees two units of continuing professional education credit instead of the usual single unit of CPE credit. CFPs, CIMAs, CPWAs, and CIMCs can still get two credits by listening to a replay of the session, while CPAs only received credit if they attended the live session. See this post for details about getting continuing professional education.
Fritz covered everything from why Wall Street’s “top” forecasters are selling snake oil to the subtleties of income inequality.
We will post Fritz’s answers to attendee questions in a couple of days. In the meantime, please replay the session. It is guaranteed to help you get your investment practice off to the right start in 2014.
Comments from attendees:
  • Fritz always does a great job!
  • Very informative.
  • It was my first and I do not know how this works on getting CE credit but I do like the topic and the format.
  • Great job.
  • One of Fritz’ best webinars. Great job by Andy, too.
  • I always enjoy Fritz's presentations.
  • Fritz is awesome!
  • Good in depth summary of 2013 and look ahead into this year.
  • Excellent!
  • Excellent presentation!
  • Excellent!!!
  • Awesome! Loved the 2 CE credits!
  • We need Fritz in Washington!
  • Brilliant man.
  • It's probably just senility... but the slides go by a little too fast to allow me to comprehend what they are graphing, what the parameters are, even what the axes represent and what kind of scale is involved - all while trying to absorb Fritz' excellent commentary.
  • Fritz is the best.
  • Terrific.
  • Very good overall.
  • Excellent.
  • Excellent and good material for use with client education process.
  • Very good summary of where we are going into the New Year.
  • Outstanding!
  • Appreciated the 2 hour format and 2 hr CE's!!!
  • Excellent as always! Thank you.
  • Excellent - In the one hour presentation Fritz is always running over and skipping slides etc. I would suggest that the 2 hour presentation should become the norm for his presentations. He has enough new and interesting information to pull it off. Thanks.
  • Always try my best to catch Fritz's webinars. They are excellent and very valuable to my knowledge base as an advisor.
  • Excellent overview.
  • fantastic as always.
  • Great Job! Great Content! Thanks.
  • Thanks Fritz! Great job.
  • Excellent content. Poll questions were, at times, too focused on specific numbers as opposed to key points. Whether a specific number was 1.9 or 1.7 was not the point the presenter was trying to communicate.
  • Not a question, but I will comment that some of the polls seem to ask about minute that test how well a particular number was committed to memory instead of the key points or takeaways.


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Expect Double-Digit Losses In 2014; Here's My Forecast For Performance Of Sectors, Styles, And Countries
Monday, January 06, 2014 10:27

Tags: earnings | global investing | sector investing | stocks

If 2014 is a “normal” year, with earnings growing at 6% and P/E ratios at 15, the U.S. stock market will lose about 15%.


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The following is a brief summary of my annual market review and forecast, which you can peruse in more detail here. The commentary is divided into three sections:
The Future: Despite popular opinion to the contrary, 2014 is likely to disappoint rather than delight, but you can use a formula I provide to draw your own conclusions - just plug in your estimates for earnings growth and P/E. Also, momentum effects point toward continuing problems in material stocks and good relative performance from certain growth companies. Similarly, some sectors in foreign countries are projected to perform better than others.
The Present:  A 33% return on the U.S. stock market is among the best and places the past five years in the better category as well, in sharp contrast to the previous five years, which were among the worst. The U.S stock market has outperformed all other asset classes.

The Past: I provide tables and histograms of returns on U.S. stocks, bonds, T-bills and inflation, going back 88 years.

Favorite Posts Of 2013 About Behavioral Finance And Math From CFA Institute
Saturday, December 21, 2013 15:38

Tags: behavioral finance | CFA | investment management

Lauren Foster writes a blog for CFA Institute's private wealth practitioners. Perhaps because Foster’s blog is off the beaten path for most financial planners, A4Aers might want to look at it. I'll be tracking it regularly for you.

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Foster spent a lot of time this past year curating content about about two major themes,  behavioral finance and math.
In perusing Foster’s favorites of 2013, are some real gems, like a New York Times opinion-sectoin piece by Steven Strogatz explaining in simple diagrams the math concepts underlying economic catastrophe. And then there's a link to a video of The Wall Street Journal’s Jason Zweig interviewing Nobel Laureate Daniel Kahneman about behavioral finance talking about how he first started thinking about silly human decisions when he was evaluating officer candidates for the military.


What Could Make Me More Cautious About Stocks? Are Companies Sitting On Piles Of Cash And Not Investing? Answers To Advisor Questions From The November 2013 Economic And Market Update Webinar
Monday, November 25, 2013 15:47

At my November monthly economic and market webinar for Advisor4Advisors, attendees asked a number of questions that we did not have time to answer. Thanks for your thoughtful questions. See my answers below.


What type of indicators or data would you be focusing on to make you a bit MORE cautious about the US stock market? An earnings slide? Substantially higher 10-year US bond? Spike in inflation?
The main thing that could make me more cautious on stocks would be obvious deterioration in the key economic data – the monthly ISM purchasing managers surveys, the index(es) of leading economic indicators and the employment numbers, both weekly unemployment insurance claims and the monthly new jobs report. And, yes, if we started to see ominous signs pointing to higher inflation, it would be a big negative. Rising bond yields, no—as I point out in the charts. Rising bond yields have been entirely consistent with rising stock prices.

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Advisors4Advisors members ($60 annually) can view the replay of the sessoin and receieve CFP Board or IMCA continuing education credit. 

When will business investment pick-up?  Are businesses still sitting on piles of cash?

True, businesses are sitting on piles of cash and their ability to borrow cheaply has rarely been stronger. In the following chart, see how business investment in plant, equipment and inventories contributed a total of +1.0% to the third quarter’s +2.8% total GDP growth. Not bad considering that business investment constitutes only about 6% of the total GDP. The post-recession pattern of business investment actually looks pretty typical to me. Significantly weak post-recession business investment, I think, is something of a myth.


In my opinion, lower-range GDP growth is largely due to repressive fiscal policy in Washington DC, i.e. higher taxes, regulations, etc.  You seem to disagree, correct?
No disagreement from me. In the equation ∆ GDP = ∆ productivity + ∆ labor force, these are factors that work significantly against productivity gains, the key driver of GDP growth that I was discussing. So, for example, if a company has to hire one additional employee in order to cope with increased government regulation (filing forms, etc.), then that company’s output per employee suffers. Similarly, higher taxes take away from a company’s ability to purchase additional productivity-enhancing equipment, denying the company a means to improve output per employee.
On slide 25 (below), the pattern is very erratic. Does you expect it to smooth out as illustrated. Or will it continue to have more dramatic moves?
I assume the reference to page 25 refers to the long-term volatility in actual year/year GDP growth. No, I do not expect this pattern to change in the future. The U.S. will undoubtedly continue to experience a great deal of cyclicality in its economy for the foreseeable future. The flat squiggly line that I inserted as a “forecast” for GDP growth is simply an illustration of Prof. Gordon’s forecast for a trend rate of growth in the years ahead.


Won't proposed lowering of corporate taxes also add to higher profit margins in the future if Congress changes the tax on corporations?

Yes, they might. I say “might” because it would depend on whether lower tax rates actually result in lower corporate taxes paid. Congress might couple lower tax rates with the elimination of the many deductions (“loopholes”) that companies can currently claim.
According to the Bureau of Labor Statistics, the percentage of Americans over age 16 who have a job or are actively seeking one fell to a new 35-year low in October at 62.8%.  With the labor participation rate as low as it's been historically, and with the real unemployment rate in the low double-digits when factoring in those working part-time who want full-time work and those who have simply dropped out of the workforce, is this a worrisome picture—even moreso as Obamacare works its way through the system and has led to lots of shifts in payrolls already such as retailers, leisure and hospitality, etc?  
The decline in the labor force participation rate that you describe is a function of both the slow cyclical recovery from recession and secular changes in Americans’ propensity to get a job and go to work. The participation rate peaked at 67.3% in 2000 and started rolling over well before the last recession. The October figure is 62.8% as you point out. The historical context is important and I think the secular drivers of a declining participation rate are a part the story here and there’s really nothing much we can do to change them. If bad policy is contributing to lack of hiring, that is worrisome. However, I have great faith in our system to correct course which it very well might do with respect to Obamacare specifically.
Doesn’t the BNP Paribas study about active managers suffer from survivorship bias?
I referred to the FundQuest BNP Paribas Group study dated June 2010 in making the point that an appropriate application of Modern Portfolio Theory might include actively-managed funds in addition to indexed funds and ETFs. Whether or not the study suffers from survivor bias, I do not know. However, even if it does, and based on my own observations, my point is that in some asset categories there do exist actively-managed funds that have consistently beaten their index benchmark and, therefore, might deserve consideration in an asset allocation strategy. In some categories these outperformers might be small in number, indeed, or even non-existent. Whereas generally I believe that index products are probably the optimal solution, I do not believe that indexing, everywhere and always, is the superior strategy. Particularly in less-efficient parts of the global markets, or when it comes to alternative strategies, active management in some cases might prove to be superior to the index.






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