Will review: bad news and good news

How do you hold on to will appointments when your institution has been acquired by Engulf & Devour Bank and Trust? If you are now working for E&D, today's Wall Street Journal item [emphasis added] reminds you to wrestle with that question:

It's probably time to revise your will. In January, the federal estate-tax exemption jumps to $2 million per person, from $1.5 million this year. What's more, some states have different estate-tax exemptions. But many wills don't take into account possible changes in federal and state estate-tax rules.

Check with a lawyer to make sure the language in your estate plan still applies with new exemptions. If some plans aren't adjusted, you could, say, inadvertently leave little to your spouse or face an unexpected state tax hit.

Many people's wills also don't reflect their current inheritance wishes because of a major life change. And if a bank or trust company is the executor of your estate, you might have a new executor due to consolidation in the banking industry. Make sure you trust that executor's judgment.

The good news? If you're with a local institution, you have some will-appointment harvesting to do.

Paint the bullseye on the hedge funds

Hard on the heels of this New York Times article suggesting that pension funds have been investing heavily in hedge funds comes this new report from Investment News—Hedge fund boom worrying regulators (registration required). The net worth limitation, intended to narrow access to hedge funds to sophisticated investors, was set in 1982 at $1 million and has never been amended.

The net worth and income requirements may both be modified if the trend toward bring hedge funds to a wider audience continues, according to regulators. However, such restrictions likely won't apply to pension funds, whose managers presumably have all the necessary financial sophistication to choose investments wisely. Still, given the temptation for underfunded plans to load up on hedge funds in an attempt to reach solvency, coupled with demonstrated industry volatility (and scandal), one has to wonder about the exposure of the PBGC.

Are the wealthy asking their trust officers about hedge funds?

We're all shareholders now

Stock ownership continues to boom in America, according to Half of American Households Own Equities, November 2005, a report from the Investment Company Institute. Some 56.9% of households now own equities, up from 15.9% in 1983 and 40.0% as recently as 1995.

The count includes participants in 401(k) plans, which certainly have been an engine of equity ownership, but according to the report three quarters of those who own shares through an employer's plan own stock outside the plan as well.

Boomers: wealth-management prospects or just "skiers'" kids?

Yeah, Boomers are going to inherit all those trillions. Then again, maybe those trillions are sliding down a slippery slope.

Harken to Tina Brown in her Washington Post column today:

There's a new catchphrase in London: Are you a skier? And it has nothing to do with winter sports. It's a quasi-acronym for Are You Spending the Kids' Inheritance?

Is estate planning going to be a hard sell?

How do you sell the idea of estate planning to HNW prospects who never intend to grow old? According to this Newsweek article on Boomers, you better start looking for the answer:

To say boomers expect to stay young isn't just a figure of speech, it is a statistically verifiable fact. "Baby boomers literally think they're going to die before they get old," says J. Walker Smith, president of Yankelovich Partners, the polling company, which found in one study that boomers defined "old age" as starting three years after the average American was dead.

Are you asking the right question?

A final bit of advice from Peter Drucker, the business management guru who died Friday at the age of 95:

"True marketing starts out . . . with the customer, his demographics, his realities, his needs, his values. It does not ask, What do we want to sell? It asks, What does the customer want to buy?"

Private banking: where the profits are

Forbes magazine sees tough times ahead for banks:

Last year Capco, a consulting firm headquartered in Belgium, produced a startling report entitled "The Emerging Crisis in U.S. Banking Profitability," which convincingly argued that the mainstream commercial and individual banking business was about to enter a prolonged dry spell of price competition and compressed profit margins. The report, though, missed one bright spot: banking services for prosperous customers.

For more on the bright spot, see Daddy Warbucks banking.

Active investment management still reigns supreme

Modern portfolio theory says you can't pick some stocks that will do better than other stocks because the market is too efficient—a "random walk."

Bruce Greenwald, the Robert Heilbrunn professor of finance and asset management at Columbia, teaches the Value Investing course once taught by the venerated Benjamin Graham himself. And Joseph Nocera, in a recent New York Times column ($$$), tells us what Bruce Greenwald says:

"Efficient market theory is basically dead."

Nocera explains the belief that investment portfolios can be intelligently designed:

Most business schools emphasize modern portfolio theory, which has as its central tenet that the market is so efficient it can't be beaten with any regularity. . . . As [Warren] Buffet put it to me recently, "You couldn't advance in a finance department in this country unless you taught that the world was flat."

Although Columbia has its share of portfolio theorists, the value investing program that Mr. Greenwald runs preaches something else: that the world is round. Or, more precisely, that the market can be beaten. Not easily, mind you, and not mindlessly. A "value" stock is, at bottom, a cheap stock. And a value investor is someone who has the facility to ferret out cheap stocks that don"t deserve to be cheap, the acumen to understand why certain such companies have what Mr. Buffett calls "a sustained competitive advantage: that will be borne out over time, the patience to wait for the market to come around to his view of things, and the discipline to stick to his value parameters through thick and thin.

Teaching value investing is one thing. Picking stocks that consistently outperform the market is quite another. As noted in the post below, by most rational standards passive investing via index funds is the better bet.

But while the mind says "index," the heart says, "Indexing is less exciting than watching grass grow." Seeking above-market returns is fun, a mild form of gambling if you will. And what's wrong with a little recreational gambling?

Most investors figure the gambles are worth the (hopefully!) modest cost. Supreme Court nominee Samuel Alito, for instance. In Slate, Henry Blodget (remember him?) analyzes Alito's reported investments and finds them generally praiseworthy. But Henry notes that Alito's Vanguard funds are not limited to index funds. They include actively managed equity portfolios, such as Wellington Management and Windsor II.

Even potential Supreme Court justices like to have a little fun!

Indexing: Investment management goes passive.

The case for passive investing is pretty persuasive, as Jonathon Clements points out in this Wall Street Journal column (subscribers only):

Before costs, investors collectively earn the market's performance. After costs, they must -- as a group -- lag behind. Logically, it can't be any other way.

For instance, over the past 25 calendar years, U.S. stock funds have clocked an average 11.9% a year, according to an analysis of Lipper data by Vanguard Group, the Malvern, Pa., fund company. That is well behind the 13.5% annual gain for the Standard & Poor's 500-stock index, calculated by Chicago's Ibbotson Associates.

Damning statistics like this have been kicking around for years. By the 1960s, we had the computer power, market data and analytical tools needed to study investors' performance -- and the results weren't pretty. It became abundantly clear that even professional stock pickers weren't beating the market.

Although Vanguard introduced the first index fund in 1976, so-called passive investing has only gained significant momentum in recent years. Clements cites two reasons:

1. The emergence of fee-based financial advisers, who can recommend low-cost index funds without taking a personal financial hit.

2. The introduction of Exchange-Traded Funds. ETFs allow brokers to give clients the benefits of indexing while collecting the same commission they would get from a stock transaction.

Currently nearly 10% of all long-term mutual-fund assets are in index funds. See The Great Race, a free WSJ article. ETFs are fast proliferating and now account for almost a third of all passive-investment funds.

Nevertheless, Clements doesn't expect active investment management to go away anytime soon. I tend to agree. Any contrary opinions?

The Patient Gardener

I love it when someone else makes the case for Merrill Anderson's services. This time it a consultant writing in Financial Planning magazineThe Patient Gardener: Here's how drip marketing can help you cultivate your image with clients. (registration required). Sound advice here on list development and management.

The most important lesson: Sales requires many contacts. They don't all have to be high touch contacts, but there have to be many. Newsletters provide one very cost effective to achieve this.