SOMEONE with $100 million has nothing to fear, not even fear itself.
But not long ago, a client with such assets called and asked Bruce Bickel, her wealth adviser at PNC Wealth Management, to put her on a budget.
“She said we’ve never done this before, and we think we should,” said Mr. Bickel, managing director of private foundation management services at PNC. “It’s all relative. Their loss has put them in a fear response.”
The Boston Consulting Group predicted this week that worldwide wealth would not return to 2007 precrisis levels until 2013. It also said it found that the number of millionaires was down 18 percent and that, across the board, clients of wealth management firms had lost trust in their advisers.
Even though stock markets have rebounded from their lows this year, wealthy investors have not rushed back in.
Nancy Rooney, head of the Northeast investment business for J.P. Morgan private wealth management, which serves clients with $1 million to $25 million, said she has seen two types of investors become cautious in their investing.
The first have new money and had not experienced serious market swings before. They had been focused on their quarterly gains and largely ignored the risks. Having lost a lot more money than they thought possible, they are struggling with the shock of it.
Or, as Mr. Cochran put it, “Many people thought they were gunslingers.” Now, he said, “They’re not gunslingers any more.” Mr. Holley described the sentiment as a return to “meat and potatoes” investing.
Now, that group is focused more on the risk of an investment than its possible return. One result is they are poring through all the disclosures before investing, and they are not as worried about missing out if they are pressured to invest too quickly.
The second group is older and held wealth longer. They exhibited almost a knee-jerk reaction to the crisis and put a lot of money into cash early on. They continued to stand on the sidelines through the initial rebound. Only now are they looking to invest in safe assets, like preferred bonds secured by United States government obligations.
“We are very gradually working with them,” Ms. Rooney said. “For many of them, it was a loss of confidence in themselves as well as in the markets.”
The Treasury is allowing its year-old guarantee of money fund assets to expire, in one of the first big reversals of the government’s involvement to stem the financial crisis.
The unprecedented backstop was put in place a year ago after one of the nation’s biggest money funds, the Reserve Fund, suffered a run on assets because of losses tied to Lehman Bros. IOUs that it owned.
The government’s blanket guarantee of fund accounts had the desired effect: After a record outflow of $120 billion in the week ended Sept. 23, fund assets quickly stabilized. Confident investors soon began adding more cash to the funds -- even though the Treasury’s guarantee only covered industry assets as of Sept. 18.
After hitting a record high of $3.85 trillion in January money fund assets have been gradually declining, reaching $3.45 trillion this week. But the slide more likely is the result of investors pulling cash to invest in riskier assets (i.e., stocks and bonds) than because they’re worried about the U.S. guarantee expiring.
With the Federal Reserve committed to holding short-term interest rates near zero indefinitely, the funds are earning little on the short-term corporate and government debt they buy. Their investors, in turn, are earning next to nothing, even though most funds are waiving all or most of their management fees: The average taxable money fund pays an annualized yield of just 0.06%, according to IMoneyNet Inc.
Imagine a couple that put $120,000 into a 529 tax shelter for a grandchild a year ago. If the market had continued to boom, that money would have grown tax-free. As long as it was eventually spent on qualified tuition expenses, no tax would have been paid on withdrawals. These 529 plans are terrific tax shelters for middle-class couples with children or grandchildren.
Obviously, though, investing has been a hazardous occupation of late. Imagine that same couple now looks at the 529 and realizes those investments have plunged to just $70,000 in value.
Yikes. That's a $50,000 loss.
The couple can close the account and withdraw the money. At that point, they may be able to deduct nearly all of that loss from their taxable income. That wouldn't restore all the money lost, but could at least soften the blow.
Many Americans may be missing out on this deduction. Most 529 plans are sold through financial advisors, but comparatively few know about this rule. (For those seeking more details, they can be found in IRS Publication 970, Tax Benefits for Education, page 51, and in the Federal Register, Vol. 73, No. 13, page 3445.)
There are lots of caveats. This is one of those things you don't want to try on your own with consulting your tax accountant.
The typical American household made less money last year than the typical household made a full decade ago.
To me, that’s the big news from the Census Bureau’s annual report on income, poverty and health insurance, which was released this morning. Median household fell to $50,303 last year, from $52,163 in 2007. In 1998, median income was $51,295. All these numbers are adjusted for inflation.
In the four decades that the Census Bureau has been tracking household income, there has never before been a full decade in which median income failed to rise. (The previous record was seven years, ending in 1985.) Other Census data suggest that it also never happened between the late 1940s and the late 1960s. So it doesn’t seem to have happened since at least the 1930s.
And the streak probably won’t end in 2009, either. Unemployment has been rising all year, which is a strong sign income will fall.
What’s going on here? It’s a combination of two trends. One, economic growth in the current decade has been slower than in any decade since before World War II. Two, inequality has risen sharply, so much of the bounty from our growth has gone to a relatively small slice of the population.
Why does anyone have a debit card? I am deadly serious about this question. Not long ago, I switched banks, going from one end of the spectrum to the other. I had been with US Trust, which has great service if you are doing anything complicated and can live with their 9-5 schedule, but costly if your needs are more plain vanilla. They were bought by Bank of America, the good people all left, and I figured if I was going to be with a regular retail bank, I might as well go with one that was cheap, had 24/7 service and good branch hours, and I wound up at Commerce Bank, now TD Bank.
Commerce tried foisting a debit card on me. It took some doing to get an ATM card instead. I do not know why people use debit cards, so perhaps readers can explain this mystery to me.
If your wallet is stolen, someone can pretty quickly drain your account and even go into overdraft. Unlike credit cards, where your losses are limited, you have no recourse. Having had my wallet taken more often than I care to recount and having had the perps run up truly impressive credit charges charges in a mere 10 minutes the last instance (they seem to be getting more savvy over time), the last thing I would want to carry is a debit card. The ATM pin affords you some protection; you have none with a debit card.
Now that would seem to be a sufficient reason not to carry a debit card. Then we have the fact that banks charge particularly aggressive over-limit fees on debit cards. From the New York Times:
When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.
Peter Means’s bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward.
So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.
Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge…
This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer’s balance.
In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.
I don’t get it. Debit cards are inferior to ATM cards (less security) and in some cases, higher fees (at my bank, if you have a line of credit established, you do not incur an overdraft charge if you go into the credit line). So why does anyone have a debit card? Is this a perverse example of behavioral economics, where the bank offers the worst “opt in” alternative (debit card) and consumers have to take the energy to opt out and get the better products?
And these debit cards, which ten years ago were deemed to be losers for the industry, have been redesigned into cash cows:
Debit has essentially changed into a stealth form of credit, according to critics like him, and three quarters of the nation’s largest banks, except for a few like Citigroup and INGDirect, automatically cover debit and A.T.M. overdrafts.
Although regulators have warned of abuses since at least 2001, they have done little to curb the explosive growth of overdraft fees. But as a consumer outcry grows, the practice is under attack, and regulators plan to introduce new protections before year’s end. The proposals do not seek to ban overdraft fees altogether. Rather, regulators and lawmakers say they hope to curb abuses and make the fees more fair.
Yves here. But we are already getting the usual defenses:
Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.
“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.
Yves here. I bet you he does not keep a running balance on his checking account. Back to the story:
Some experts warn that a sharp reduction in overdraft fees could put weakened financial institutions out of business.
Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.
Yves here. Garbage in, garbage out. Does not distinguish between debit card overdrafts and check overdrafts. The two are mingled. Back to the story:
For years, banks had covered good customers who bounced occasional checks, and for a while they did so with debit cards, too. William H. Strunk, a banking consultant, devised a program in 1994 that would let banks and credit unions provide overdraft coverage for every customer — and charge consumers for each transgression.
“You are doing them a favor here,” said Mr. Strunk, adding that overdraft services saved consumers from paying merchant fees on bounced checks.
Yves here. Favor? Banks are not in the favor business. This is an insult to the reader’s intelligence. Here is a key bit:
But many of the nation’s banks have found that overdraft fees are easy money. According to a 2008 F.D.I.C. study, 41 percent of United States banks have automated overdraft programs; among large banks, the figure was 77 percent. Banks now cover two overdrafts for every one they reject…
Most of the overdraft fees are drawn from a small pool of consumers. Ninety-three percent of all overdraft charges come from 14 percent of bank customers who exceeded their balances five times or more in a year, the F.D.I.C. found in its survey. Recurrent overdrafts are also more common among lower-income consumers, the study said.
Just wait. The next argument in defense of these practices will be that it is cheaper than payday lending.
"As many advisers have looked to expand their practices, they have realized that their highest value activity is spending more time with their existing clients and acquiring new clients," according to CA, which produced an analysis of its survey for FPA Insight, a research newsletter for institutional members. "As they search for ways to better focus their activities, they have looked for the things that were essential to their practice and those that they could outsource. For many advisers, this meant looking to the outside for help with portfolio construction."
Portfolio construction is a part of an adviser's practice that has only grown in complexity. During the bear market of 2000-2002, many advisers were forced to accept that their core talent was not managing client assets. In addition, there are more products available than ever before for financial advisers.
The mutual fund universe alone boasts more than 8,000 choices before taking into account a growing selection of separate accounts, exchange-traded funds (ETFs), and alternative investments. Added up, it presents a dizzying array of choices for the financial adviser.
Our survey results confirm advisers' feelings on this topic. More than 75 percent of advisers agree that portfolio construction has grown more complex.
In addition, more than 70 percent of advisers report using a wider range of products, changing their product allocations, and using more complex products. One can see how an ever-widening product universe would affect the complexity and volume of products used by advisers. In fact, the most common reason given by advisers about why portfolio construction has grown more difficult is that it has grown so time consuming.
Outsourcing this task, however, is not a widespread trend. Just over half of the advisers responding to this quarter's survey stated that they never outsource any portion of the portfolio construction process. There are a number of reasons advisers have resisted making this move. Despite an industry move to more holistic planning and deeper client relationships, many advisers are offering many of the newer products in an effort to distinguish themselves. In addition, clients are more sophisticated and, in some cases, are demanding these new products. Finally, many advisers come from a deep investment management heritage and may have begun their career recommending individual stocks.
Although the reasons may differ from adviser to adviser, the net effect is the same-this is not a task over which many advisers are willing to completely give up control.
Although advisers have a stated objection to fully outsourcing this task, a different picture emerges when examining their daily activities. More than half of advisers report using third-party tools to help determine asset allocation. For those advisers associated with a Broker-Dealer (B-D), exactly half report using platform tools to determine asset allocation.
These same advisers report getting help from their B-D in the form of model portfolios, research and due diligence, training and education, and integrated product platforms. Although these advisers might not consider themselves outsourcers of portfolio construction, many of these are activities that leverage outside expertise in order to help save them time.
CA believes these shifting product trends will only continue. When asked what products they use in constructing a core satellite portfolio, ETFs ranked as a popular option for both the core and the satellite portions of the portfolio. This reflects the flexibility of this emerging product. Advisers can deploy the product as a low cost, indexed option at the core of a client portfolio.
However, as product development accelerates, many advisers are seeing the advantage of using more narrow offerings or taking advantage of intraday trading. Not surprisingly, more than half of the advisers surveyed reported that they plan to increase their allocation to ETFs in the coming year.
