Women Are Changing the World of Wealth

On Wall Street and elsewhere, the management and deployment of Big Money has traditionally been men's work.  That's changing, as two names in the news remind us:

Catherine Keating has left Commonfund to become CEO of BNY Mellon Wealth Management. In an interview last year she explained why the investment management industry needs diversity.

Laurene Powell Jobs holds an MBA from Stanford and controls billions left by her late husband, Steve Jobs. As described in this feature in The Washington Post, her approach to impact investing and philanthropy is impressive.

P.S. You've got to chuckle  at Silicon Valley's reaction to the name of Powell Jobs' project, Emerson Collective. "Emerson? Emerson? Never heard of him. What was his startup?"

Ray Dalio's “Slightly Better” Returns

Now that real life has blended with reality TV, you can't blame the Main Stream Media for stressing out. Still, this lengthy NY Times piece on Ray Dalio, who runs Bridgewater, world's biggest hedge fund firm, seems a bit snarky. For instance:

Since it began, Pure Alpha has made investors an annual average return after fees of 11.9 percent, slightly better than the 9.5 percent average yearly return for the Standard & Poor’s 500.

Slightly better? Any stock picker who can beat the S&P by one percentage point over long periods is

Bridgewater's Westport, CT headquarters

exceptional. Two percentage points? Almost miraculous. With Pure Alpha Dalio has done better by 2.4 percentage points. Compare:

At the S&P's 9.5% average annual return, in ten years a $100,000 investment grows to 247,823.

At Pure Alpha's 11.9%, in ten years a $100,000 investment grows by an additional $60,000, to $307,823.

Over extended periods, that "slightly better" return will make you seriously richer.

Even if Active Investing Doesn't Pay, We Need It

Fewer than one of five actively managed equity mutual funds did better than comparable index funds over the past ten years. Although results over shorter periods weren't quite so bad. the majority of actively managed funds underperformed. As a result, Jason Swieg reports in the WSJ, some fund managers have thrown in the towel. They're buying a few ETFs rather than assembling portfolios of stocks.

Meanwhile, investors continue flocking to index funds.  Yet as a Cullen Roche column points out, all investors cannot do nothing but index. Active investors and active investment managers are needed to keep the market honest. See also Is Passive Investment Actively Hurting the Economy in The New Yorker. (Are index funds really responsible for the higher fees charged by large banks?)

Inexpensive online investment services based on index funds seem destined to become the basic investment platform for millennials. Even so, as their wealth grows they might enjoy setting up a side account of shares in selected companies, They'll gain the sense of being actual stockholders. And despite returns likely to be sub par, they'll be performing a public service – doing their part to keep stock prices in line with business realities.

Best Wealth Management Commercial, U.S. Open

Before Federer and Djokovic finish their match, let's declare BNY/Mellon the clear winner for "Best Wealth Management Commercial" during ESPN's TV coverage of the US Open tennis.

BNY/Mellon's "Perlman" reinforces the theme of its print ads: unlike most banks, we actually manage our clients' investments. In the commercial, the violin soloist at a Perlman performance turns out to be the ungifted Rhea, not Itzhak. 

For years and years, we heard that banks were dweebs who ought to outsource the job of choosing investments. The outsources, of course, were no better than the banks. It's fun to see BNY/Mellon strike back.

Wealth Management, Swiss Style

Finding investment banking profits hard to come by, major Swiss banks are emphasizing the more lucrative business of wealth management, the NY Times reports.

Skill in stock picking is not required, judging from a survey of brokerage accounts at one large Swiss bank. Clients who followed their advisers' advice when buying stocks did worse than those who selected stocks on their own.

U.S. wealth managers who have lost clients to "more sophisticated" Swiss institutions are entitled to smirk.

From Robo-Advisers to Real Robot Advisers?

Fans of human wealth management deride inexpensive, online investment services as robo-advisers. Where's the personal touch?  Where's the ability to encourage the timid, soothe the nervous and restrain the reckless?

It's coming, if not already here. As border agents, writes UNC professor Zeynep Tufekci, robot "avatars" with emotion-detecting software do a better job than humans in detecting visitors with invalid documents.

Today, machines can process regular spoken language and not only recognize human faces, but also read their expressions. They can classify personality types, and have started being able to carry out conversations with appropriate emotional tenor.

"Most of what we think of as expertise, knowledge and intuition," Tjufekci observes, "is being deconstructed and recreated as an algorithmic competency."

We'll see how far robots can go as wealth managers. Meanwhile, perhaps we should worry about their intrusion into domestic life. Husbands, beware! What woman wouldn't prefer a perceptive, sensitive companion that recognizes her every mood?

In Defense of Investment Advisers

After collecting their one percent annual fee, most investment advisers are doomed to underperform the market. More likely than not, an amateur investor could do better – just invest in index funds, sit back, be patient and get richer.

Investment advisers, not to mention brokers, appear redundant. – useless or worse. William Berstein sees them as a threat to financial health and happiness:

As an investor, you must recognize the monsters that populate the financial industry. *** … most “finance professionals” don’t even realize that they’re moral cripples, since in order to function they’ve had to tell themselves a story about how they’re really helping their customers.

Some critics are less polite.

Polite or not, the critics ignore a key reality: Most people cannot invest sensibly on their own. At best, perhaps a third are willing and able to put their money into a few diversified, low-cost funds and stay the course.

Others need somebody to hold their hands and discourage them from buying high, selling low. Some are reluctant investors. In begone times they would have been contented savers, putting their money into 3.5-percent savings accounts and 6-percent CDs. Nowadays they must seek investment help or grow poorer.

In short, most people with money to invest still need advisers. What’s different is the adviser’s mission. Instead of tilting with windmills and seeking to beat the market, the adviser’s aim should be to produce better results for the investor than the investor would achieve on his or her own.

And that goal should be often achievable;. The bar is set surprisingly low. From 1994 through 2013, the S&P 500 produced an annualized return of 9 percent. The average stock fund investor earned 5 percent.

Some estimates suggest the gap in returns is even greater after accounting for all fees and other expenses.

Does a 20 percent increase in investment performance sound worthwhile? By controlling expenses with ETFs and limiting fruitless trading, an adviser could achieve that impressive improvement merely by increasing the investor’s annualized return from 5 percent to 6 percent.  A low-cost, exceptionally patient adviser might achieve 7 percent – a 40 percent improvement!

Helping clients beat the average investor rather than beat the market doesn’t sound glamorous. It won’t earn advisers enough to acquire a beach house in Malibu. But it is doable.

Like politics, investing is the art of the possible.

Less Banking, More Wealth Management?

Fitch, the rating agency, has seen the future of U.S. banking. It's wealth management.

Wealth management, including advisor-based guidance and asset management, provides recurring sources of income and requires less capital usage than traditional bank loan products.  Wealth management services can strengthen and make stickier relationships with good customers, which tend to provide additional deposit funding, as well as opportunities for cross-selling a bank's core products, such as mortgage lending.

Digital Wealth Management

Online investing is heating up.

Wealthfront just grabbed another $70 million in financing. Personal Capital raised another $50 million. Charles Schwab announced its own robo-advisory service.

Will the Boomers' children be the generation that abandons face-to-face investment services?

Is Investment Advice Too Expensive?

 After WWII, when the wealthier members of the Greatest Generation opened investment management accounts at a bank or trust, their annual expense was probably about 1.5% to 2% – half a percent as a management fee plus one percent or more in "full-service" brokerage commissions.

These days, investment management fees tend to be higher but, with luck, transaction costs are lower. Total annual running costs probably are about the same.

Could change be coming at last? Will relatively low-cost online services lead to a price war? As we suggested recently, not necessarily – at least not in the high-net-worth segment of the market. The sums multimillionaires pay for investment services don't seem so extravagant when you consider the cascade of fees they face when traveling.

This year, hotels will collect more than $2 billion from fees they tack on to their room rates. My favorite: a $25 fee for putting your own can of Coke to cool in the minibar.

By the time a high-net-worth investor returns home, he or she may see wealth management as a bargain.

Cracking the Mystery of Modern Wealth

Say you're seriously rich, perhaps sublimely rich. Have you lost track of exactly what you own and what it's worth? Are you prepared to pay $50,000 or more to find out?

See Wealth Managers Enlist Spy Tools to Map Portfolios.

Note: when it comes to derivatives, private equity, venture capital, collectibles and other alternative assets, "exactly" can be a relative term.

Triumph of the Target-Date Funds

You read it here, five summers ago: Because needs and intentions differ for people reaching retirement age, target-date funds may not find much of a market.

Ha! Needs and intentions do differ, but target-date funds are on a roll. These auto-managed portfolios already hold about 20 percent of 401(k) money, and they're attracting more than 40 percent of the new funds flowing into 401(k) plans.

Target funds will maintain their momentum, Barron's predicts (subscription required, but I accessed the article via a Google search).

Looking out five years, target-date funds may be the only investment that most Americans have in their 401(k) plans. That would be quite an achievement for a product that was barely known just a decade ago. 

Supreme Court Gives Active Investing a Boost?

Companies that issue significant "misstatements" may claim "no harm, no foul" because the stock market isn't always efficient.

In reaching this conclusion, Jeff Sommer of The New York Times notes, the Supreme Court was influenced by Robert Shiller, Yale's Nobel Prize economist.

Investors may continue to rely on the efficient-markets hypothesis in forming class-action groups, and may assume that share prices reflect corporate misstatements. But corporate defendants may now try to prove in specific cases that there was no connection between their statements and price movements. 

Perhaps active investing, a pointless activity were the market truly efficient, isn't dead yet.

Indexing 2.0: Smart Beta

On average, monkeys throwing darts at the stock listings could outperform most investment managers. Actually, Barron's notes, they can do even better. They can beat the S&P 500.

Reason: the monkeys are assumed to invest an equal number of dollars in each stock they hit upon, regardless of market capitalization. Equal weighting seems to produce better returns. 

[T]he S&P 500 Equal Weight index has returned 9.1% a year over the past 15 years, beating the S&P 500 cap-weighted index by a whopping 4.6 percentage points a year.

Inspired by the monkeys, so-called smart beta investing has produced an expanding list of quasi-index funds not weighted by market capitalization. The more sophisticated models sound a lot like automated stock picking.

Does smart beta investing have legs? Whether passing fad or significant trend, Paul Sullivan's renaming seems appropriate:

[A] better, if less marketable way to think about smart beta might be to call it “lazy alpha”….

The Biology of Risk

This Sunday Times column got a lot of attention by revealing why investment advisers can't truly measure their clients' risk tolerance … and why the Fed might do Wall Street a favor by becoming less transparent.

Retirement Investing is Personal

From Dueling Strategies for Your Retirement Funds:

For anyone approaching retirement, an important investing question is: Should your strategy be "to" or "through"? *** 

The "to" refers to preserving savings for an expected retirement date; the goal is to get "to" that date without last-minute harm to your nest egg. Generally this means cutting back sharply on riskier investments—namely stocks *** 

A "through" strategy means tilting a portfolio to keep increasing savings well into, or "through," retirement. That means higher allocations to stocks and other riskier investments despite a bigger risk of losses.

The strategies aren't dueling. As we discussed five years ago, different retirees have different goals. See The Trouble With Target Date Funds.

The Age of Asset Management

Finally got around to reading Bloomberg Businessweek's Asset Managers are the New Banks. Should have been more prompt.

One of the more disquieting parts of covering banking regulation is how often, in an interview, either a regulator or a banker will say something like this: Regulators have to treat banks with some respect. If they clamp down too hard, the money will go somewhere else, to a place we only dimly understand. Beyond the banks, the logic goes, there be monsters.

In a speech last week to a group of asset managers in London, Andrew
Haldane, in charge of financial stability for the Bank of England, began to map out the land of the monsters. The number of people saving money in the world has grown larger, older, and richer, he said. Life expectancy is rising—as is population and per-capita GDP. And all these rich old people need to put their savings somewhere. It is not going into savings accounts but instead into a category known as assets under management, or AUM: pension funds, exchange-traded funds, hedge funds, private equity.

AUM in the U.S. was about half of GDP in the 1940s; it has now grown to almost two and a half times GDP.

Read Haldane's speech.  Conventional asset management, where funds are managed by stock and bond pickers, is being squeezed between high-cost alternatives, such as hedge funds and private equity, and low-cost index funds and ETFs. Old-fashioned prudent investing seems to have succumbed to the temptation of market timing. Just like the much maligned small investor, many pension funds tend to buy high, sell low.

The good news: Asset management should continue to boom globally. "In China and India, personal financial assets have grown at a rate of 25% per year for the past 20 years."

Private Banking Reinvented

In the wake of the Great Recession, obtaining loans from one's banker has become more and more difficult and time-consuming. The wealthy set is turning to a quicker, easier alternative, Paul Sullivan reports: high-end pawnbrokers.

Hock shops for asset-rich but liquidity-restrained borrowers are springing up both online and in bricks and mortar. Suttons & Robertsons, an English firm founded in 1770 and catering to the "blue chip, wealthy crowd," opens a New York store this month.

Objects pawned aren't limited to Rolexes, jewelry and the family silver. One borrower parted with

one of his two Bentley GTs. (Your humble blogger probably will never realize his dream of a Bentley convertible. But if he does, he promises not to pawn it. Never!)

Marketers of investment services learn to follow the money. High-end pawn shops could offer promising opportunities. If a need for funds arises from divorce, for instance, one man's liquidity problem should lead to one woman's liquidity event.

“Watson, Find Me Some Alpha!”

Watson, IBM's eager-to-learn computer, was a winner playing "Jeopardy." Making big money in the business world is proving more difficult, reports the WSJ. Watson's possible career paths include health care and wealth management:

IBM is developing versions of Watson that can match cancer patients to clinical drug trials or recommend an investment strategy after reviewing a customer's portfolio.*** 

Citigroup Inc. has been collaborating with IBM since March 2012 to develop a version of Watson that can recommend financial products to consumers. It hasn't been launched yet.

IBM hopes Watson can earn $1 billion a year. That's a lot of Alpha.

1963: The South Rises

Five decades ago, northerners left their wealth to be looked after in New York, Boston or Chicago when they headed to Florida. With this ad, from December, 1963, First National of Palm Beach sought to get in on the action. 

The ad had a name illustrator: Paul Calle. He was best known as a designer of postage stamps, notably this one: