Frontline News
December 2, 2011
• Page 4 of 4
The Schwab survey included 510 investors with a minimum of $250,000 in investable assets and at least $25,000 in bonds purchased in the last two years. The survey respondents averaged nearly $500,000 in bonds and had an average of $1.8 million in household savings and investable assets.
The survey shows only 35% of the investors believe they always get the best price from their bond broker, 40% say they don't know how to get the best price, and 40% say it's either too complicated or too time-consuming to shop for the best price.
Michael Martin, president and chief investment officer of Financial Advantage Inc. in Columbia, Md., says the bond industry is inherently less transparent than other investments. "The interest rate and credit quality are two drivers of the price, as well as the duration of the bond," he explains. "For bonds, the middleman is in the driver's seat and the client is in the dark." Martin says he doesn't see that situation changing anytime soon.
Mike Nozzarella, an advisor at The Tarbox Group in Newport Beach, Calif., says larger advisors have tools available to help them garner more information about bond transactions, but that the sector remains a black hole for most retail investors. "If you're buying a bond, there is no way of knowing what the broker bought it for or if they are taking it from their own inventory," he says. "It's just one of those areas where there's still little transparency for the individual investor."
Nozzarella says that the Municipal Securities Rulemaking Board is attempting to make more information available about municipal bonds on its Web site (http://emma.msrb.org). Even so, he adds, many investors might lack the background to evaluate the available information.
Crawford says Schwab is trying to make bond trading more transparent by providing comparisons of bond prices so investors can see what other firms are charging for the same bonds, making available trade history so that investors can see how the bond has traded, and being up front about its own mark-up of $1 per $1,000 bond on U.S. bonds.
He notes that Schwab's system of providing comparisons can assist advisors.
"If you can satisfy the client that you are getting the best price, they can see the value you are delivering," Crawford says. "Advisors are beginning to demand this information so they can provide the best service to their clients."
-Karen DeMasters
Risky Business
People who participate in online communities are more likely to make risky financial decisions than those who don't, according to a new joint study conducted by three major universities.
The study, Does Online Community Participation Foster Risky Financial Behavior? used a series of field and laboratory studies to examine the behavior of people participating in message boards and chat rooms on two Web sites.
The paper cites a study of 600 lenders conducted by the peer-to-peer lending site Prosper.com over an 18-month period. It indicates that lenders who participate in online communities possess riskier loan portfolios and lend their money to borrowers with worse credit ratings and greater chances of default than non-participants.
In another controlled field experiment conducted with more than 13,000 eBay customers over a two-year period, the researchers found that those who joined the online community engaged in riskier bidding behaviors by placing more bids on each item and spending more for items they won.
The study, to be published by the Journal of Marketing Research, was co-authored by Utpal Dholakia, a professor of management at Rice University; Jack (Xinlei) Chen and Juliet Zhu, professors of management at the University of British Columbia; and René Algesheimer, the chair of marketing and market research at the University of Zurich.
The authors assert that online community participants tend to believe that the community will support them in difficult situations, and this perceived support causes them to make riskier financial decisions. The more active the participants are within the online community, the riskier their financial decisions tend to be.
Dholakia contends that these online communities are different from social networking sites such as Facebook because the participants involved are typically strangers whose identities are unknown to the consumer. The study's main finding that online community participants engage in riskier decision-making is widely applicable, Dholakia said.
"If, for example, members of a discount brokerage firm's online community invest more aggressively by buying riskier stocks that perform worse than market averages, this would affect them adversely and also hurt the firm's standing and brand name," he said.
--Jim McConville
RIA M&A Deals Getting Bigger
While the third quarter generated only a slight increase in overall mergers and acquisitions in the financial advisory industry, the total amount of assets under management of purchased and merged firms grew significantly, according to Pershing Advisor Solutions' Real Deals Quarterly Update.
The total firms acquired or merged in the third quarter had $1.35 billion in median assets under management, up from $800 million in assets for the typical firm in the second quarter, and a 75% hike versus the year-earlier period.
After being largely absent from RIA acquisitions in 2010 and the first half of 2011, private-equity firms were acquirers in three of the eight deals in the third quarter. Those three deals accounted for more than 70% of the assets of target firms that quarter, according to the report.
Eight of the third-quarter deals targeted retail-focused RIA firms with at least $50 million in AUM or $500,000 in annual revenues, one more firm than the previous quarter's.
Warburg Pincus LLC made the largest deal when it bought a controlling stake in The Mutual Fund Store LLC, a fee-only RIA with more than $6 billion in assets. The deal will help speed up The Mutual Fund Store's growth as it aims to strengthen its national brand, the report says.
Elsewhere, the Carlyle Group purchased a minority interest in Avalon Advisors LLC, a deal that Pershing says should help Houston-based Avalon, which has nearly $4 billion in assets, expand beyond Texas.
TARP Spelled RISK
The federal government's bailout of teetering banks in late 2008 aimed to increase financial stability and stimulate lending to U.S. consumers and businesses during the depths of the Great Recession, and three years later people still debate whether the Troubled Asset Relief Program ultimately was a success or failure. But according to two University of Michigan professors, TARP didn't have much impact on the total amount of originated credit, and if anything caused aid recipients to approve riskier loans and to make riskier investments.
In a recent study, two professors from the school's Ross School of Business, Ron Duchin and Denis Sosyura, said that TARP banks shifted their credit origination toward riskier mortgages, as measured by the borrower's loan-to-income ratio. The approval rate of mortgage applications by the riskiest groups of borrowers increased about 9% in 2009, to nearly $860 million in new loans to these groups.
The duo also found that banks that received federal money boosted their investments by 9% in risky securities such as mortgage-backed securities, long-term corporate debt and equities "acquired to profit from short-term price movements." In doing so, they replaced safer assets such as Treasury bonds, short-term paper and cash equivalents.
"Our analysis suggests that TARP participants actively increased their risk exposure after receiving federal capital," Duchin said. "In particular, recipients invested capital in riskier asset classes, tilted portfolios to higher-yielding securities, and engaged in more speculative trading, compared to non-recipient banks."
Advisors Often Overlook Client Collectibles
Collectibles, an often overlooked asset in estate planning, could provide some unexpected windfalls for advisors' clients, according to Bonhams auction house. Unfortunately, many wealth managers and advisors are unaware of the hidden value of tangible, collectible assets, said Leslie Wright, director of the North American trusts and estates division of Bonhams. Furthermore, their clients are often unaware of the need to stay abreast of the increased or decreased value of their collections or personal property.
Too often advisors don't question clients about such valuables in their possession, said Wright, who led a session on the estate planning aspects of collectible investments at a recent Napfa conference in New York.
Bonhams, a privately owned British auction house, is the third-largest auctioneer after Sotheby's and Christie's.
"The art and collectibles markets can fluctuate tremendously in either direction, with potentially substantial effects on the estate plan in place," Wright told Napfa attendees. She cited heavy, dark wood furniture that was all the rage in the 1990s but is now out of vogue. For example, an armoire that was worth $20,000 to $30,000 at the height of popularity now fetches only $2,000 to $3,000.
On the other hand, a Maynard Dixon painting, "Summer Clouds," painted in New Mexico, sold for $57,500 in 1998 and ten years later sold for $330,000--a whopping 475% increase.
Wright underscored that wealth managers and others need to include art and other collectible objects when assessing client assets. As part of her job as a liaison with the estate planning community, she recommends that advisors talk with clients about their personal tangible property and ascertain if they have any art or collectibles and, if so, what's the approximate value of the collection. Other questions advisors need to ask is whether the collection is insured, if the client has an inventory of collectibles and, if so, where is it kept? And do the clients have a company they would prefer to hire for appraisals or advice after their passing?
--Bruce W. Fraser
Advisors Working Harder For Income And Yield
With baby boomers going from growth to distribution, financial advisors are looking for income for their clients. But given the puny yields of Treasurys, investors can't rely on traditional bond strategies anymore.
That's the challenge for advisors, says Scott Colyer, chief executive and chief investment officer of Advisors Asset Management (AAM), a provider of investment products and services to the advisory industry. "In my generation, we were taught well about equities but not so well about managing individual bonds, doing credit research or trying to manage maturities in a changing interest rate environment."
Colyer notes that the credit rating acumen of Moody's, Fitch Ratings and Standard & Poor's has come under fire because of the role they played in the housing bubble debacle. Since then, some financial advisors are doing their own credit research or finding new sources of credit research. He says credit research around fixed-income bonds involves being familiar with the debt of a company, its profitability, long-term outlook balance sheet and knowing whether an investment in the company will pay off at maturity.
AAM, through its educational arm, AAM University, teaches classes to advisors in areas such as advanced portfolio management in fixed income securities, credit analysis and analyzing corporate capital structures. Colyer says he's seeing advisors staying fairly short in their Treasury maturities because they're afraid rates will go up. They're also looking for income via dividend-paying equities, and he says advisors are showing greater interest in principal-protected notes.
Colyer adds that advisors are also adding real estate investment trusts (REITs) and preferred equities to the income portion of client portfolios.
"Real estate investments tend to do well in times of inflation," Colyer says. "Although the housing market is still broken, we think there's value in buying a diversified portfolio of REITs made up of commercial buildings, apartment buildings or self-storage facilities."
Regarding preferred equities, he adds that financial advisors have the burden of doing research on the underlying credit just as with a corporate bond.
-Juliette Fairley