Thursday, March 30, 2006

The good news: Millions of Boomers have built High Net Worths on their own

Last year almost nine million U.S. households had a net worth of at least $1 million, excluding primary residence. The heads of most of those millionaire households were under 60. Who says Boomers can't hang onto money?

Saving and investment was the primary source of this household wealth. Only 19% reported having shared ownership of a business or professional partnership.

Two out of every five millionaire households don't yet have an investment advisor. Gentlemen and ladies, start your sales presentations!

The bad news: Most Boomers won't inherit more than chump change

Most Americans born between 1946 and 1964 have little hope of an inheritance, as The New York Times reported recently.

Hundreds of billions of dollars are passing through estates each year, but about 7% of estates account for half the total wealth.

Tuesday, March 21, 2006

Why Americans save less than nothing (Hint: it's homeland security)

Randy Cassingham's This is True newsletter called my attention to this amazing story, reported by the Providence Journal.

Running up debt has become such a dominant theme of national policy that individual Americans who don't follow suit are now suspected of treason.

All the poor guy did was try to pay down his credit card debt. That Un-American activity was sufficient to ID him as a potential terrorist. Presumably, Dubya, Dick and Rummy figured Walter Soehnge was recharging his available credit so he could buy a plane ticket and crash into the Washington Monument.

I sure can see why Walter was "madder than a panther with kerosene on his tail."

Looks like it's time for a career change, folks. Get out of wealth management and into debt counselling!

Monday, March 20, 2006

Why worry about inflation? Because it's creepy.

Consumer prices barely budged last month. For the twelve months ending in February, the CPI crept up a mere 3.6%.

Somehow, inflation in real life doesn't seem that tame. Wondering why, I consulted the list of price changes recorded by The Wall Street Journal in its year-end reviews. Here's a sampling of price changes from 2000 to 2005:
Big Mac DOWN 4%
Pair of jeans UP 4%

Midsize auto UP 9%

Funeral UP 16%

Movie ticket UP 22%

Unleaded gasoline UP 49%

Year in college (Penn State) UP 54%

Single-family home UP 55%

Day in hospital UP 87%

Clearing clogged sink (Roto Rooter) UP 138%
For some of the above, obviously, inflation has done more than creep.

To be fair, a Big Mac isn't the only item that costs less than it did five years ago. Prices of laptops and TVs have come down, too. But the proliferation of technical gadgets has probably cancelled out any net advantage for many families. Ringtones, iPods, iTunes downloads and assorted other teenage necessities were luxuries or unobtainable five or ten years ago.

Even 3.6% inflation can get nasty in the long run. The other day on the radio, a financial planner was urging 40-year-olds with no savings to start investing enough to give them a $1-million retirement fund by age 65. That won't be easy, and it may not be adequate.

If inflation creeps at an average rate of only 3.6%, their million will have no more buying power than $415,000 or so has today.

Friday, March 17, 2006

The Dow hit five-year highs this week. Is it on its way to the stars?

To celebrate the Dow's resurgence, you and your clients might enjoy tackling the question Warren Buffet posed in his Berkshire-Hathaway shareholders letter:

Q. Between December 31, 1899 and December 31, 1999, the Dow
rose from 66 to 11,497. Guess what annual growth rate is required to produce this result.

A. The Dow increased from 65.73 to 11,497.12 in the 20th century, and that amounts to a gain of 5.3% compounded annually. (Investors would also have received dividends, of course.) To achieve an equal rate of gain in the 21st century, the Dow will have to rise by December 31, 2099 to – brace yourself – precisely 2,011,011.23. But I’m willing to settle for 2,000,000 . . . .

Thursday, March 09, 2006

To hedge-fund investors, those red flags still look green

Troubles at Atlanta Hedge Fund Snare Doctors, Football Players, The Wall Street Journal reports. Which proves that wealthy doctors and millionaire footballers are just as colorblind as investors in various other hedge funds, like Bayou, that now exist only in painful memory.

Fund manager Kirk S. Wright said he generated returns of 27% per annum, the Journal notes:
In hindsight, there were many red flags at International Management: unusually consistent high returns, vague descriptions of investment strategies, aggressive marketing, no auditing, and secretive behavior by the manager. The firm's demise comes as hedge funds, which are lightly regulated investment vehicles for institutions and wealthy investors, face new SEC registration requirements that have stirred a debate about how much oversight is necessary.
Elsewhere in the news today, it was reported that a new miracle drug might cure those addicted to gambling. Do you suppose hedge-fund investors could negotiate a discount if they offered to buy the stuff by the case?

Wednesday, March 08, 2006

If proprietary funds can't make the cut, what's next?

Today the Riverwalk Golf Club in San Diego hosted the premier sporting event of the year for trust and wealth managers: the ABA Golf Tournament.

Tomorrow, golf bags and plus fours will be out of sight as the 2006 Wealth Management and Trust Conference settles down to business. As in recent years, one high-priority topic will be "open architecture." Clients don't like the idea of being tied to a bank's proprietary funds. Judging from the Conference program, neither do beneficiaries: sometimes they get mad enough to sue.

Citigroup and Merrill Lynch have already sold or spun off their proprietary funds. Major banks are expected to follow suit.

What's next? A recent Barron's cover story (only available to paid subscribers, alas) spotlights separately-managed accounts. Investors in separate accounts own actual stocks, not units of a comingled fund. Separate accounts offer tax-management advantages, plus the opportunity for some customizing, such as no tobacco stocks. SA's can be used as core holdings or, like hedge funds, as niche products.

As of Dec. 31, Barrons's notes, assets in retail separate accounts rose to $678 billion, 18% above the total a year earlier. That surge followed a 16% increase in 2004. Major wirehouses have been the big distributors of separate accounts thus far, but Barron's sees banks gaining a 10% market share by 2010.

Separate accounts tend to have high minimums, though they're coming down. And they tend to be pricey, with average annual expense of 1.7% by one estimate. But these days, even mutual-fund expenses approach 2% on average.

The lower cost alternative? Exchange-traded funds. Independent investment advisers are discovering they can use a handful of ETFs and low-cost bond funds to produce efficient portfolios simply. And annual expense is minimal. Barron's notes that the iShares Russell 3000 (IWV), a popular exchange-traded fund, has an expense ratio of 0.20%.

What's your institution doing?

How wealth managers rebut Buffet

Warren Buffet is a great communicator but an awful poster boy for the premise that investment managers are a waste of money. If you looked at his latest letter to Berkshire-Hathaway shareholders (see previous post), you saw the evidence.

In the long run, like from 1965 through last year, Buffet hasn't just beaten the market, he's trounced and trummeled it:

Berkshire-Hathaway average annual return: 21.5%

S&P 500 average annual return: 10.3%

Buffet's record demonstrates that some people really can produce superior long-term returns,

Can these superior performers be identified? Yes, at least if you're Yale's David Swensen. Over 20 years, the managers he chose for Yale's endowment racked up a 16% annual return.

As long as people like Buffet and Swensen exist, affluent investors will hope for above-average returns. And they'll be willing to pay for investment advice.

Monday, March 06, 2006

Wealth managers (and especially Hedge Hogs) receive a Buffeting

When Yale's great investment manager, David Swensen, wrote an earnest but dull book about the high cost of employing generally useless vendors of market-beating techniques, most investors didn't read it.

When John Bogle, Vanguard's patriarch, rants about high investment costs, he draws only limited attention.

But Swensen and Bogle are communications amateurs. The Oracle of Omaha is a pro.

In his letter to Berkshire-Hathaway shareholders, Warren Buffet turns his skills to the subject of "How to minimize your investment returns." Better read it. A lot of your clients and prospects will be reading it, too.

Buffet argues that investors are destined to receive returns substantially below the theoretical averages because they repeatedly shoot themselves in the wallet.

To visualize these self-inflicted wounds, Buffet asks us to imagine that a single family, the Gotrocks, owns every business whose shares are available to investors.

Collectively, the Gotrocks enjoy a return equal to the earnings of their businesses, less taxes. Individually, various members of the Gotrocks clan figure they can do better. So they hire a helper, a broker. When the helper does nothing but cost them money, they hire another helper, a money manager to tell the broker what to buy. And when they realize they're even worse off, they hire a financial planner or consultant to help them pick the right money managers.

What fools these mortals be, says the Oracle:
The Gotrocks, now supporting three classes of expensive Helpers, find that their results get worse, and they sink into despair. But just as hope seems lost, a fourth group – we’ll call them the hyper-Helpers – appears. These friendly folk explain to the Gotrocks that their unsatisfactory results are occurring because the existing Helpers – brokers, managers, consultants – are not sufficiently motivated and are simply going through the motions. “What,” the new Helpers ask, “can you expect from such a bunch of zombies?”

The new arrivals offer a breathtakingly simple solution: Pay more money. Brimming with selfconfidence, the hyper-Helpers assert that huge contingent payments – in addition to stiff fixed fees – are what each family member must fork over in order to really outmaneuver his relatives.

The more observant members of the family see that some of the hyper-Helpers are really just manager-Helpers wearing new uniforms, bearing sewn-on sexy names like HEDGE FUND or PRIVATE EQUITY. The new Helpers, however, assure the Gotrocks that this change of clothing is all-important, bestowing on its wearers magical powers similar to those acquired by mild-mannered Clark Kent when he changed into his Superman costume. Calmed by this explanation, the family decides to pay up.

And that’s where we are today: A record portion of the earnings that would go in their entirety to owners – if they all just stayed in their rocking chairs – is now going to a swelling army of Helpers. Particularly expensive is the recent pandemic of profit arrangements under which Helpers receive large portions of the winnings when they are smart or lucky, and leave family members with all of the losses – and large fixed fees to boot – when the Helpers are dumb or unlucky (or occasionally crooked).

Thursday, March 02, 2006

What can you promise new wealth-management clients?

A savvy trust-company exec once told me that affluent investors won't let you manage their money unless you promise them results. That's a problem. Most investment promises aren't worth the hot air required to make them. But the trust-company exec had a solution:

"O.K., I tell the guy. Give us your money to invest, and I promise we'll lose it more slowly than you'd lose it yourself!"

That's still a pretty safe promise to make, according to Mark Hurbert's column in The New York Times:
MOST mutual fund investors have only themselves to blame if their portfolios seriously lag behind the market. That is the conclusion of a new study that says the typical investor has an atrocious sense of timing.

People tend to dump mutual funds just before the funds enter several-year periods of above-average performance, and to buy funds that are about to sag. In fact, the study found that the performance of most fund portfolios would improve markedly if the owners just left well enough alone.

The study, "Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns," was conducted by two finance professors, Andrea Frazzini of the University of Chicago and Owen A. Lamont of Yale.
Lamont and Frazzini note that some investors do seem to be Smart Money when it comes to picking a hot mutual fund, one that will do well for the next quarter. But in the longer run, "individual investors have a striking ability to do the wrong thing. They send their money to mutual funds which own stocks that do poorly over the subsequent years."

The Dumb Money pays a significant cost for moving out of stock funds they consider "cold" and moving to those they consider "hot." They probably cut 1% or more off their annual return. And that's in addition to the 1% or more by which managed funds tend to lag the market because of annual fees and expenses.

When you help HNW investors avoid being Dumb Money, you do them a service.