TheMoneyGeek Unplugged

St. Petersburg Florida – The last day of the NAPFA 2009 Investments Conference finally brought warmer temperatures to go along with the beautiful Florida sunshine we’ve been seeing; of course, it showed up just in time to for us to head home.  The day kicked off with a presentation by Moshe A. Milevsky, Ph.D, Associate Professor of Finance at York University entitled “Are You a Stock or a Bond?” The quirky title notwithstanding (it’s his book title), this presentation proved to be today’s highlight and perhaps the highlight of the conference.

Moshe has a dynamic presentation style that makes you want to sit up and pay attention.  As he flashed numerous press clippings of more employers dropping defined benefit plans (estimated to be one large company freezing its benefits every 10-14 days), he explained how we are all becoming responsible for creating our own personal pension plan.  With longevity risk increasing every day (over 2 million people in the U.S. are over 90 years old), companies are turning corporate liabilities into personal liabilities under the guise of increasing shareholder value.

Moshe went on to explain that, for most of our lives, the most important asset on our personal balance sheet is often never listed or estimated–that is, our human capital or earning capacity.  When we are young, our human capital far exceeds our financial capital.  As we age, our financial capital begins to exceed our human capital until we retire and rely exclusively on our financial capital.  In asking “are you a stock or a bond”, Moshe encourages us to try to estimate the value of our remaining human capital and attempt to classify it as a stock or a bond, and factor it into our asset allocation.  Depending on the nature of your work, you may classify yourself as a bond (e.g., a tenured professor) or as a stock (e.g., an investment banker in this economic environment).  He goes on to explain that we often ignore this asset in our portfolios to our detriment, even though we may classify defined benefit pensions as fixed income instruments.   In addition, workers often over-invest in sectors or industries they know well (e.g., investment bankers investing in financial stocks), when they should really diversify to sectors they don’t know much about (e.g., technology.)

Next up were Paula Hogan CFP®, CFA and Scott Witt, FSA, MAAA to co-present “Income Protection – Immediate Fixed Annuities vs. Variable Annuities with Living Benefits”.  The two had worked up an extensive comparative case study using a 60 year-old male investing in a 15-year period certain immediate annuity (with inflation protection) versus a variable annuity with guaranteed living benefits of 5%.  The retiree invested 20% of his portfolio in the annuity.  As you might expect, the conclusion was that the benefits of the 15-year period certain annuity were greater than the variable annuity even though the variable annuity had the potential to generate far greater income for the retiree.  Paula explained that “most people care about maintaining their standard of living more than the wealth that they accumulate.”

Scott MacKillop of Frontier Asset Management got the next to last presentation slot and discussed “Outsourcing Investment Management”.  As you can imagine, he discussed the many advantages of outsourcing and the CEG Worldwide studies which concluded that advisors who use turn-key asset management programs (TAMPs) generally have more revenue, better margins and better results.  Scott cautioned advisors to look to see who funds these types of studies and make sure that they’re not funded by companies that have a vested interest in promoting investment management outsourcing.  He also observed that many TAMPs are pretty much available for sale even before they start business, citing the example of Genworth Financial purchasing two large outsourcers recently.  So obviously you want to ensure that the provider you may be considering is not just setting up shop to sell itself in short order.

The conference ended on a high note with a panel discussion entitled “Comparing Investment Management Procedures” including Cheryl Holland of the Abacus Planning Group, Janet Briaud of Briaud Financial Advisors, Frank Moore of Vintage financial services, LLC and moderator Palmer Jones of Palmer Jones & Associates, Inc.  Palmer peppered the panel with various questions about how they run their investment management practices including the type of research resources they used, the software employed, their investment philosophy, and their asset allocation approach amongst others.  I was surprised to hear that Janet had pared down all her clients’ allocation to equities to around 25% in 1999 in anticipation of a long bear market.   I was equally surprised that she had done that with all of her clients, young and old.  Her thinking was that a downturn was coming and of course, it did happen, and she admitted that perhaps she was a bit early.  At this point, Janet has sold off all Treasuries given that she believes that the downside is far greater than the upside.

Some of the reading resources the panel used in their practices included The Economist Magazine, Financial Times Newspaper, John Mauldin’s Frontline Thoughts, Woody Brock’s Economy Newsletter and Dan Ferris’ Extreme Value Newsletter.  All of the panelists indicated that they read for about two to four hours per day to keep up with changes in the industry. “What may be more important is what you don’t read” added Janet.  Most of the panelists acknowledged using Morningstar Principia or Workstation for fund research.  Palmer indicated that he used the Investors FastTrack system, but did not elaborate.

The interesting question came at the end when Palmer asked the panelists about their worst and best decisions made in their firms.  Cheryl said that the worst decision she probably made was to add certain asset classes too early, or perhaps before she had performed adequate due diligence on them.  Her best decision was to hire a Chief Investment Officer and purchasing iRebal.  Frank said that his worst decision was probably to not pay enough attention to the cash situation, that is, letting his clients manage their own cash needs in certain ways.  Janet indicated that purchasing a closed-end tax-free bond fund at the wrong time was probably her worst decisions.  All agreed that they everyone in this business makes mistakes; the key is to make more good decisions than bad ones.

I would rate the Conference as a great success and want to thank the Committee and the NAPFA staff for putting so much time and effort into putting it on.  While I had hoped for a bit more nuts and bolts “how-to” sessions, I was pleased with the conference.  I hope that they decide to put it on again next year, and maybe, just maybe, it will be a bit warmer.