What Every Boomer's Investment Adviser Should Know

To relate to their Boomer clients, investment pros need to know stuff like . . .

How much did the first Corvette cost?

When did Dylan release "The Times They Are A Changing'?

When did IBM introduce the PC?

How high were mortgage rates in 1981?

In what year did Viagra first go on sale?

Fortunately, a few weeks ago The Washington Post covered these questions and others in a clever timeline for the Boomer era, What a Long Strange Trip It's Been.

Not all Boomers share the same memories or the same outlooks. Those born in the late 1940's experienced JFK and Camelot. Those born at the tail end of the Boomer cohort grew up with Watergate, long lines at the gas pumps and double-digit inflation.

Most Boomers were born into an age of rising stock prices. But look what happened in 1965, when the last Boomer baby turned one. As shown in the chart from iTulip, the real Dow Jones Industrial Average began a slow, devastating crash. The youngest Boomers, still in school, may not have noticed. But the 1965-1982 catastrophe still influences the thinking of older Boomers.

"Orphan" trusts

This sort of publicity is not helpful to the trust industry.

Can it be countered?

Ivy League Champ Yale 28, Harvard 23

The Game in November probably won't be that close. Our headline refers to endowment returns. Yale recorded a 28% return for fiscal 2007, The New York Times reports, easily topping Harvard's 23%.

Those investment returns aren't quite as amazing as they would normally seem. For the same period, even an S&P 500 index fund returned close to 20%.

What's truly awesome? Yale's annualized ten-year return: 17.8%

Over a decade, at that rate, $10 billion turns into $51 billion.

The SEC doesn't care for seminars

The Securities and Exchange Commission evidently considers retirees to be among of their core constituencies. They have an entire page of links for seniors here. Among them:

No Free Lunches: Seniors — Beware of Investment Seminars
and
"Senior" Specialists and Advisors: What You Should Know About Professional Designations.

Because I'm on the lookout for financial services marketing ideas, I get quite a few e-mails from outfits that provide prepackaged seminars to brokers and financial planners. They seem to have fallen on hard times lately, the effectiveness of seminars seems to be in decline just as the SEC attacks are beginning. If seminars don't work, what does?

Was Your Favorite Billionaire Booted Off the Forbes 400?

This year even a net worth of $1 billion wasn't enough to make the Forbes list of the 400 richest Americans. To make the cut for 2007 required at least $1.3 billion.

Is “Retirement” the Word for It?

Marketers of investment products and services use the word retirement a lot. Too much, most likely. Their prospective customers aren't necessarily looking forward to retirement. They're dreaming of financial independence.

Nevertheless, for lack of a better word, retirement is topic A in today's Wall Street Journal. See their Encores section (subscribers.)

People should start planning the who, where and how of retirement sooner, the Journal argues. Sound theory. In practice, variables including health, wealth, layoffs, divorce and relocating children tend to upset the apple cart.

One in four Americans age 65-74 works. Among the affluent the ratio may be closer to one in three. Some are working online, as you'll see here.

According to this Guidelines report, the whole concept of retirement needs rethinking:

Today, people live longer, possess greater wealth, and work well past the previously accepted “retirement age.” However, this does not mean people are postponing traditional retirement, but rather they are transforming their lifestyles to bridge between their career-driven years and the point at which they truly retire, ceasing all employment.

Most people who are approaching retirement or are well into their retirement years reject how retirement is defined, or at least how it is characterized. Only one in four Americans age 50 to 70 say “the end of your productive years” is an accurate description of retirement; the leading-edge baby boomers decidedly reject this label with 54 percent calling it inaccurate.

The Guidelines report also notes "a dramatic increase in interest in trusts and more complicated vehicles to pass on wealth."

The Kindest Tax Cut of All?

From Al Kamen's In the Loop column:

Bushism of the midweek. From yesterday's news conference: "We dealt with a recession, a terrorist attack and corporate scandals. And we did it by cutting taxes."

One more cut in capital gains, and Osama's toast.

Chase Manhattan's Nest Eggs Revisited

Chase Bank no longer offers trust services. (Click "Creating a legacy" under Plan your Future on the Chase site and you get an invitation to e-mail a "Financial Advisor.") Trusts now fall under the JPMorgan brand.

Half a century ago, Chase was more than a leading corporate fiduciary. Chase Manhattan ran the best-known trust advertising campaign of all time.

Here's an early example from 1956. You can buy the ad on eBay for $18.00.

Note that before the Kennedy era, middle-aged businessmen weren't expected to look physically fit. That's why potbellies were nicknamed "corporations." Surprised to see no businesswomen in this club car? In 1956 I doubt that a woman could have been invited as a guest.

By 1965 the Chase Manhattan nest egg ads had embedded themselves in popular culture. Don't remember if the New Haven RR's 5:31 to Darien still had a club car by then, but it certainly had a bar car. If I had poked in my head and shouted, "A better way to take care of your nest egg," a chorus of well-lubricated voices would surely have responded, "Talk to the people at Chase Manhattan!"

This 1965 ad rightly assumed that everyone knew the catch phrase.

For more about Chase Manhattan's nest egg campaign, click here.

World's Happiest Trust Beneficiary (Quaker School Division)

What a story! Thank you, Harvard, for not letting Warren Buffet into your B school. Thank you, Warren, for applying to Columbia and studying under Professor Dodd instead.

The George School is to receive $5 million a year for 15 years from a charitable lead trust, followed by annual payouts of $10.7 million for another five years. Thus the present value of Barbara Dodd Anderson's gift will be considerably less than the total of the payments: $128.5 million. Even so, the present value of the gift must exceed the school's present endowment.

The Philadelphia Inquirer reports that the trust was funded with Anderson's 200 original shares of Berkshire-Hathaway, plus cash.

Anyone know why the trust was structured as it was? Why the larger payments in the last five years?

Have the Good Times Gone?

Jim Gust is probably right in his comment to the preceding post. Americans can't be savers, It's our patriotic duty to be consumer spenders.

Hedge fund managers with annual compensation of hundreds of millions of dollars or more have done their patriotic duty in recent years. But today's New York Times sees ominous signs of backsliding.

Southampton's Old Trees estate, with two pools and 21 bedrooms, ought to be a steal at $48 million. But . . .

A few years ago, as markets boomed and the new hedge fund rich banked paydays that surpassed $1 billion, Old Trees, with its Gatsbyesque allure, might have been snapped up by a brash executive looking to crash the old money gates of Southampton.

But a cautiousness has begun to creep in, brought on by recent turmoil in the markets, uproar over a lavish birthday party for the private equity executive Stephen A. Schwarzman, and calls from Capitol Hill to increase taxes on hedge funds and private equity billionaires.

In August, leading hedge funds showed a loss of 2.5 percent, according to the HFRX index compiled by Hedge Fund Research. On the surface, it does not seem like a lot, given the billions of dollars that hedge funds have accumulated. Yet it was the largest monthly reversal since a 3.8 percent decline in April 2000. Taken together with larger downturns at several prominent funds, the number represents a stark reminder that the fast and easy returns of recent years are on the wane.

Can Spenders Become Savers?

Representive Rham Emanuel had an op-ed piece (subscription) in The Wall Street Journal last week. One sentence made me do a double take:

Every American who works ought to have the chance to save. But today, too many don't.

Huh? No chance to save? Chances are everywhere.

Some cities seem to have a bank branch on every corner. Bank of America alone has over 5,700 branches nationwide.

Online banks welcome anybody who'll have their paychecks deposited to their accounts, then offer enticing rates on CDs.

IRAs? If you'll agree to put aside $15 or $20 a month, a number of mutual fund companies will welcome you.

Workers who don't have access to 40-1(k) plans have access to IRAs, not to mention everyday savings accounts. Once savers have enough to invest, they don't even really need an IRA, not while the top tax rate on dividends and realized gains is only 15%.

By the way, where did the notion arise that people could not save and invest for the long term without using an account labelled "retirement?"

What Congressman Emanuel seeks, his column reveals, is more ways to make people into savers. That's a tall order.

Some people are born savers, and probably have IRAs.

Most people are spenders. They'd rather put $15 a month into iTunes and ring tones.

You may enroll spenders in 401(k)s or other retirement plans. But few will retire financially independent. They'll borrow from their 401(k)s first chance they get. And they'll cash them in, despite tax and 10% penalty, as soon as they change jobs.

Hoping to push a young adult toward saving rather than spending? Good luck! A guide Albert Crenshaw compiled for The Washington Post last year may help. See Simple Steps to Begin Investing.

Why Harvard Couldn't Pay El-Erian Enough

It wasn't the money; it was probably the hate mail. Today's New York Times explains:

“Being the chief investment officer of an endowment is one of the hardest jobs in the investment business because there are so many constituencies involved,” said Verne O. Sedlacek, president and chief executive of Commonfund and a former chief financial officer at Harvard Management Company. “In my job, I have 1,800 clients with one objective — investment performance. An endowment has one client with 1,800 objectives.”

Consider the constituencies: students who may want you to shed your holdings in companies that do business in Sudan because of the genocide in Darfur, or professors who do not make a lot of money and happen to have very specific expertise in just about everything. It is a clash of civilizations; liberal academia meets cold, crass capitalism.

“I’ve never been called names worse than those I was called by professors and others on campus,” one former endowment head said. “It gets personal very quickly.”

Old-Fashioned Annuities Stage Modest Comeback

"Market turmoil is prompting more people to buy stodgy insurance products like immediate fixed-income annuities and whole-life insurance," The Wall Street Journal (subscription) reports.

Individual annuity sales increased 6% in the second quarter to a record of $66.5 billion, according to this Investment News item. That total included $1.7 billion in fixed immediate annuity sales, a 13% increase over the year-earlier period.

Deferred annuities sell better because sales agents are better rewarded, the Journal notes:

"Deferred annuities are where the agents can make lots of money, so that is where the abuses occur," says Ed Long, director of legal programs for Healthcare and Elder Law Programs, a nonprofit group whose Web site, annuitytruth.org, is aimed at educating older people about annuity scams.

Even buyers of immediate annuities and traditional life insurance need to exercise due diligence. For wealth managers and their clients, the Journal offers this crib sheet:

$2.3 million wasn't enough to keep him

Earlier we commented on Harvard's eye-popping 23% return for its endowment funds last year. The top manager behind that investment success, Mohammed El-Erian, will be leaving after just a year and a half on the job, reports The Wall Street Journal. El-Erian took the helm of Harvard Management Co. after Harvard alumni groused about the "extravagent" pay packages of his predecessors (reportedly as much as $35 million in annual performance bonuses).

Harvard's endowment grew by $6.7 billion in 2007 (of which $1.1 billion was transferred to the University for its operations). If it were a hedge fund on the 2 and 20 plan, the endowment would have incurred investment management expense of about $1.9 billion, by my reckoning. El-Erian was paid $2.3 million for his services. Quite a bargain.

El-Erian now goes to Pimco, where he will be the heir apparent to Bill Gross. No word on his new pay package.

Astor Will Contest: a “Smoking Letter?”

From a New York Times report:

Mrs. Astor’s only son, Anthony D. Marshall, a principal beneficiary of [her presumed last] will, has said that she was competent and even witty at her 100th birthday party in March 2002, about two months after she signed the will. His lawyers have also said that Mrs. Astor was examined in 2004, a month after the last change to the will, and understood conversations without a problem.

But a letter written by Mr. Marshall on Dec. 26, 2000, paints a different picture, expressing serious concerns about his mother’s mental state. The letter was written to Dr. Howard M. Fillit of New York, an expert in geriatric medicine who is also a neuroscientist, and it appeared to respond to his diagnosis that Mrs. Astor may have been suffering from dementia or Alzheimer’s disease.

In the letter, Mr. Marshall shared graphic observations of Mrs. Astor at age 98.

“She is delusional at times, having asked me, ‘Are you my only child? Do you have another son?’ (I have two sons),” Mr. Marshall wrote.

In the letter, Mr. Marshall also explained that his mother had “a tendency to wander” and to get lost while at her estates in Briarcliff Manor in Westchester County and in Northeast Harbor, Me.

Can Fiduciary Instincts Survive in a Sales Culture?

"The Mole," Money Magazine's undercover financial planner, has been reporting from the Financial Planning Association's annual convention:

After the [ethics] presentation, I wandered into the exhibit hall for a little food and drink. Walking past some of the booths, I was pleased to see many financial institutions that preach low-cost, long-term investing represented.

Unfortunately, there was a greater representation of institutions that deliver sub-par performance along with high sales fees - these funds are not so good for the consumer, but can pay handsomely to us financial planners.

In spite of the idealized view we planners have of our profession and our duty to the consumer, there are inherent conflicts. We want to do well for you but we also want to build wealth for ourselves. To pretend these conflicts don't exist may well condemn financial planning to that of a sales occupation.

Frisky geezers

Retired folks don't want to be categorized as "retired" (the acronym "AARP" no longer stands for anything, it's an identity unto itself), and according to this washingtonpost.com article they don't care much for "seniors" either. AARP evidently now refers to its members as "grown-ups."

I won't take offense if you won't.

The article goes on to point out the prominence of 70-year-olds today. Even better, apparently disability rates in this age cohort are falling.

Which means that when we advise to plan for a 30-year retirement, that might be on the low side.

Restaurants: a Hedge Fund Alternative?

Hold the hedge funds. Accredited investors (those worth $1 million+ or with incomes of $200,000 or more) are putting money into restaurants. So reports The Washington Post:

Many restaurant owners and chefs around the country rely on wealthy private investors with an appetite for risk to help open the doors their new restaurants. Chef Robert Wiedmaier recently tapped private investors for sums of $50,000 to $200,000 for the more than $3 million he needed to open Brasserie Beck in the District. Michel Richard, the world-famous chef behind the seriously expensive Citronelle, raised about $3 million from 44 investors to open Central Michel Richard, a modern bistro.

* * *

"The country is just extremely interested in food right now, much more than ever before," said Mark B. "Chipp" Sandground Jr., a lawyer at Kalbian Hagerty who represents Wiedmaier, Richard and many other District chefs and restaurant owners. "People use restaurants so much now. They are not just for going out for their anniversary. People go out all the time. Pretty much everyone has an opinion on a new restaurant."

But that does not mean the opinions are always positive. The American palate is fickle, and a few bad meals served up to a particularly chatty customer base -- or, worse, a powerful reviewer -- can quickly sink a restaurant. That, in large part, is why Sandground and his chef clients constantly remind potential investors this: Investing in restaurants is not for everyone. As Wiedmaier says, a restaurant investor must be able to say, "If I lose it all, great, at least I had fun." Asked who should invest in restaurants, Sandground said: "Easy. I can sum it up in one sentence: People who can afford to lose 100 percent of their investment."

Investing in D. C. restaurants has attracted young professionals with high net worths for some time. See this report in the International Herald Tribune. On the West Coast, the trend heated up in dot.com days, according to this 1999 item.

For investors strong of stomach and not faint at heart, upscale eateries have obvious appeal. If a hedge fund goes bust, you merely lose your money. If your restaurant goes bust, you lose your money but first you can enjoy one last dinner.

Update: Paul Sullivan addresses this alternative investment here.

Another September Slump on the Way?

Why does the S&P tend to go down rather than up in September? Sam Stovall's Business Week column offers several theories.

Is a bear market coming? Maybe. Stovall points out that most bear markets aren't so bad.

[T]he only times that the S&P 500 did not recoup all that it lost in a prior bear market in fewer than two years was following bear markets in excess of 40%, which occurred in the early 1940s, early 1970s, and early in this decade. So if this pattern holds true, we won't likely see another one of those mega-meltdowns for another 25 years.

For a less sanguine view, consider this chart from a David Leonhardt column($) last month. It charts the price/earnings ratio the way the great Graham and Dodd thought it should be calculated. To minimize misleading fluctuations in corporate earnings from year to year, G&D believed investors should look at a moving average of earnings over five or ten years.

"Based on average profits over the last 10 years," Leanhardt observes, "the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off."

Perhaps the bears won't growl this winter. But the supply of uncertainty will be ample, enough to make investors seek hand-holding from experienced advisers.

Hidden Treasure?

Instead of leaving with the crowds of Summer People, this guy with a metal detector showed up at our beach this week, seeking treasures left behind, lost or overlooked.

Contrarian investors are welcome to draw inspiration from the scene.

Columnist Confronts "Free Lunch"

From Michelle Singletary's Washington Post column, You Know What They Say About a Free Lunch:

I'm not quite ready for membership in AARP, but increasingly I've been getting invitations in the mail for me and my husband to attend investment seminars that promise to help us ensure we have enough money to retire.

The notices use all the right buzzwords. But I have a special place for those invitations -- the trash.

* * *

You make yourself more vulnerable by your willingness to attend a "free" seminar on investing.

The fact is it's not enough to trust that you will spot a fraud just because you know the old adage: "If it's too good to be true, it probably is." That warning is useless because the con men and women are so good at making something that sounds too good seem so true.

Trust Fund Bitches, Tabbies and Chimps

The media are calling Leona Helmsley's pet, Trouble, a rich bitch, but The New York Times reports that Mrs. Helmsley did not approve of those who called Trouble a dog. "Princess" was the preferred designation.

Trust fund pets have been more numerous than one might think, as John Campanelli reports here.

Chase? JPMorgan? JPMorganChase?

Oh what tangles can marketers weave, when multibranding they do conceive.

On the TV broadcast from the U.S. Open the other day, an announcer admitted confusion:

"We just showed the ball was in on the 'Chase Review.' But the logos behind the court say JPMorgan. Which is it?"

A day later the TV cameras were showing Chase logos behind the court in some shots. Yesterday an announcer took pains to say the Chase Review was brought to us by JPMorgan Chase.

Exercising due diligence, the Senior Assistant Blogger consulted the JPMorgan Chase web site. Here you can read how their branding works.

Although news reports refer to JPMorganChase as seeking appointment as administrator of Brooke Astor's estate, for branding purposes trust services seem to be offered by JPMorgan Private Bank.

Family offices are offered the benefits of a corporate fiduciary under a different heading: trustee services. More upscale?