Understanding the reasons why
individuals take risks, particularly
unnecessary risks, remains an important question in economics. We
provide the first evidence of a powerful connection between happiness
and risk-avoidance. Using data on 300,000 Americans, we demonstrate
that happier individuals wear seatbelts more frequently. This result is
obtained with five different methodological approaches, including
Bayesian model-selection and an instrumented analysis based on
unhappiness through widowhood. Independent longitudinal data
corroborate the finding, showing that happiness is predictive of future
motor vehicle accidents. Our results are consistent with a
rational-choice explanation: happy
people value life and thus act to preserve it.
living with 3 wives in
one compound and never leaving the house for 5 years –
think Bin Laden called the US Navy Seals himself...
6/2: Past performance- , the S&P
produced twice a year, tracks the consistency of top performers over
consecutive annual periods. The latest Scorecard shows that very few
funds manage to consistently repeat top-half or top-quartile
performance. In fact, over the five years ending March 2011, only 0.96%
of large-cap funds maintained a top-half ranking over five consecutive
6/2: Lotta crap- SUITABILITY
WORKS - According to NAIFA,
the belief that a uniform fiduciary
standard would protect consumers better than the current suitability
standards is a myth. A fiduciary standard requires a financial
professional to put the client's interests first, while a suitability
standard requires advisors to make certain the product they sell meets
the needs of that consumer. According to NAIFA, the suitability
standard is "robust and heavily enforced. A suitability standard is
rules based and objective, as opposed to fiduciary, which is
process-oriented and subjective." Many NAIFA members believe a
fiduciary standard would force them to increase the costs of their
services or leave the business entirely. That would not be a good thing
for the economy or the many current clients of insurance and financial
advisors...especially in the middle markets and small business arena.
is no enforcement. No one has ever taught anything to substantiate
suitability. It is and always has been just a word. This is
moronic- A suitability standard is rules based and
opposed to fiduciary, which is process-oriented and
CREMER, University of Toulouse
(GREMAQ & IDEI),
Centre for Economic Policy Research (CEPR), CESifo (Center for Economic
Studies and Ifo Institute for Economic Research)
PESTIEAU, University of Liege -
Research Center on
Public and Population Economics, Centre for Economic Policy Research
(CEPR), CESifo (Center for Economic Studies and Ifo Institute for
We study the role of social
long term care (LTC) insurance when
income taxation and private insurance markets are imperfect. Policy
instruments include public provision of LTC as well as a subsidy on
private insurance. The subsidy scheme may be linear or nonlinear. For
the linear part we consider a continuous distribution of types,
characterized by earnings and survival probabilities. In the nonlinear
part, society consists of three types: poor, middle class and rich. The
first type is too poor to provide for dependence; the middle class type
purchases private insurance and the high income type is self-insured.
The main questions are at what level LTC should be provided to the poor
and whether it is desirable to subsidize private LTC for the middle
class. Interestingly, the results are similar under both linear and
nonlinear schemes. First, in both cases, a (marginal) subsidy of
private LTC insurance is not desirable. As a matter of fact, private
insurance purchases should typically be taxed (at least at the margin).
Second, the desirability of public provision of LTC services depends on
the way the income tax is restricted. In the linear case, it may be
desirable only if no demogrant (uniform lump-sum transfer) is
available. In the nonlinear case, public provision is desirable when
the income tax is sufficiently restricted. Specifically, this is the
case when the income is subject only to a proportional payroll tax
while the LTC reimbursement policy can be nonlinear.
6/2: You figure it out- Predictive Systems: Living with Imperfect
Robert F. Stambaugh
First draft: September 15, 2006
This version: July 21, 2008
We develop a framework for estimating expected returns—a
predictive system—that allows
predictors to be imperfectly correlated with the conditional expected
return. When predictors
are imperfect, the estimated expected return depends on past returns in
a manner that hinges
on the correlation between unexpected returns and innovations in
expected returns. We find
empirically that prior beliefs about this correlation, which is most
likely negative, substantially
affect estimates of expected returns as well as various inferences
about predictability, including
assessments of a predictor’s usefulness. Compared to standard
predictive regressions, predictive
systems deliver different expected returns with higher estimated
6/2: > The conventional
wisdom regarding the expected returns
and volatility of equities is probably wrong. It is unwise to assume
that U.S. equties will return the 7% real that they have in the past,
or that stocks will be less volatile the longer they are held. First,
investors in U.S. stocks in the past got lucky and that luck is
unlikely to be repeated going forward. Second, the decrease in the
volatility of stock returns over time is based on observed historical
mean reversion; however, the uncertainty of future returns is higher
over time and therefore expected volatility of future returns actually
increases with time.
> Stocks should remain a part of a diversified portfolio;
the amount allocated to stocks should be probably be lower than the
conventional amount that is often recommended. The amount invested in
stocks should be based on consideration of one's human capital. Human
capital is a key factor in making investment decisions.
> In retirement, one's human capital goes to zero. Therefore,
retirees should have a much smaller allocation to equities than
commonly suggested. The 35%, 40%, or more that is commonly recommended
and implemented in many target date funds at age 65, is too much.
> Age-based allocation rules, such as "age in bonds" should not
used in retirement. Instead, one should reduce the allocation to stocks
to a modest level at retirement - 0erhaps 10% to 20% - and maintain
that level throughout retirement.
> "Tail risk" insurance has become very popular since the
crash. However, this insurance has become quite expensive. Perhaps the
rising price of gold and the negative real yields of T-Bills reflects
the desire of investors to hold tail risk insurance. However, investors
who are in a position to tolerate short term loss risk should be selling
tail risk insurance instead
of buying it, or at least not buying it at current prices.
> Passive index investing is the correct way to go for most
investors. There might be active managers who can do better, but you
and I don't have access to them even if there are.
> Invest in yourself first. For the foreseeable future there are
very low expected yields everywhere you look in financial assets such
as stocks, bonds, and commodities accompanied by high uncertainty.
Investing in yourself - through education for example - has high
expected return with very little downside risk.
6/1: I can do that:
three years before U.S. planes began bombing forces loyal to
Col. Muammar al-Qaddafi,,Wall Street heavyweight Goldman Sachs (GS:
140.13, +1.47, +1.06%) reportedly enraged the Libyan leader by managing
a $1.3 billion investment that
lost a whopping 98% of its
Housing prices fell in March to
their lowest point since the
downturn began, erasing the last little bit of recovery from the depths
achieved two years ago..
The Standard &
Poor’s Case-Shiller Home Price Index for 20
large cities fell 0.8 percent from February, the eighth drop in a row.
Prices are now down 33.1 percent from July 2006 peak.
“Home prices continue
on their downward spiral with no relief
in sight,” said David M. Blitzer, chairman of the S.&
Even as the economy began to fitfully recover in the last year, the
percentage of homeowners dropped sharply, to 66.4 percent, from a peak
of 69.2 percent in 2004. The ownership rate is now back to the level of
1998, and some housing experts say it could decline to the level of the
1980s or even earlier
The market signaled further trouble on Friday when the April index of
pending deals was released by the National Association of Realtors.
Analysts had predicted the index, which anticipates sales that will be
completed in the next two months, would be down 1 percent from March.
Instead, it plunged 11.6 percent.
a poll last November about when
people thought the market would
recover. A third of the respondents chose 2014 or later. But in a new
poll, released this month, the percentage giving that answer rose to 54
The sharp decline in prices
since 2006 has meant a lost decade for
many owners. But what may prove even more discouraging to potential
buyers is academic research showing that the financial rewards of
ownership were uncertain even before the crash.
In a recent paper, a senior
economist at the Federal Reserve Bank of
Kansas City found that the notion that homeownership builds more wealth
than investing was true only about half the time.
This study analyzes
leading research in behavioral economics to see whether it contains
advocacy of paternalism and whether it addresses the potential
cognitive limitations and biases of the policymakers who are going to
implement paternalist policies. The findings reveal that 20.7% of the
studied articles in behavioral economics propose paternalist policy
action and that 95.5% of these do not contain any analysis of the
cognitive ability of policymakers. This suggests that behavioral
political economy, in which the analytical tools of behavioral
economics are applied to political decision-makers as well, would offer
a useful extension of the research program.
(Department of Economics, University of
Ruslan Gurtoviy (Department of Business Administration, University of
Verena Utikal (Department of Economics, University of
A small lie appears
trivial but it obviously violates moral commandments. We analyze
whether the preference for othersâ€™ truth
absolute or depends on the size of a lie. In a laboratory experiment we
compare punishment for different sizes of lies controlling for the
resulting economic harm. We find that people are sensitive to the size
of a lie and that this behavioural pattern is driven by honest people. People
who lie themselves punish softly in any context.
5/30: Debt: Joseph E.
Hinterschweiger- “That government debt will grow to
dangerous and unsustainable levels in most advanced and many emerging
economies over the next 25 years — if there are no changes in
current tax rates or government benefit programs in retirement and
health care — is virtually beyond dispute.” debt as a percentage of gross
domestic product is around 65
percent and rising fast. Much of the
recent increase, up from 43 percent in 2007, is the result of the panic
of 2008 and the ensuing recession,
when the government stepped in to mitigate the damage.
Robin Harding in Washington and Shannon Bond in New York
May 26 2011 14:01 | Last updated: May 26 2011 18:15
US economy has stumbled deeper into the mud of another soft
patch, with revised data showing a weaker pattern of growth in the
Bureau of Economic Analysis
kept its growth
estimate at an annualised 1.8 per cent, dashing hopes that it would be
revised upwards, and said that consumption growth was weaker than it
The latest data suggest the recovery will continue to be slow and
painful, with average growth of about 3 per cent. That is only slightly
above the long-run trend and will mean only a slow reduction in
5/29: Getting better- but don't
hold your breath.
The Eurocoin index rose
in May, slightly above the levels of the previous three months.
The main factor was the
performance of foreign trade, which more than offset the negative
effect of share prices.
owned property- owner evicted.
Needs paint and minor repairs- good fixer-upper.
Possible lead contaminates.
Carpets need replacement- minor stains.
Safe neighborhood- close to law enforcement facilities.
As for consumers- generally dumber than clams with money. They never
got even as far as a broker.
And it all boils down to this- tell me what the risk is for the
500 over a period of five years. If you can do that- and I bet no one
reading the article can- then you are truly sophisticated. Unless you
can do that for your own portfolio as well, you are clueless to the
risk of potential loss to the allocation you have selected.
A consumer cannot select the risk of what they are doing by checking a
few boxes off on a simplistic chart from a broker. Nonetheless,
Vangaurd, fidelity et al do it because if they made in more concise, it
would take longer than a commerical for "Can You Dance" and the
attention span is lost.
Brokers like consumers to pick so they can avoid the fiduciary or even
Making money is not that difficult- it is the risk taken for every
dollar expended. If you cannot identify the risk exposure, any offering
or advice is suspect. You do not want to lose what has been earned.
That is the real focus but it is not taught.
PhD MSFP MBA LLB BSCE
Life and Disability Insurance Analyst
empirical literature documents that unexpected changes in
the nominal interest rates have a significant effect on stock prices: a
25-basis point increase in the Fed funds rate is associated with an
immediate decrease in broad stock indices that may range from 0.5 to
2.3 percent, followed by a gradual decay as stock prices revert towards
their long-run expected value. In this paper, we assess the ability of
a general equilibrium New Keynesian asset-pricing model to account for
these facts. The model we consider allows for staggered price and wage
setting, as well as time-varying risk aversion through habit formation.
We find that the model predicts a stock market response to policy
shocks that matches empirical estimates, both qualitatively and
quantitatively. Our findings are robust to a range of variations and
parameterizations of the model.
37 percent of individual advisers were
charging management fees of more than 1.5 percent a year on portfolios
of $250,000 to $500,000 that have an even mix of stocks and bonds.
Meanwhile, just 23 percent levy fees of less than 1 percent.
These old broads and their fast cars................
It will never go as low for the rest of my lifetime
chorus of economists and labor market observers say that the
"natural" or "structural" rate of unemployment has shifted up, meaning
that Americans looking for work should get used to having a harder time
finding it. The unemployment rate is currently 9% and could take until
2016 to reach the natural rate.
so-called natural unemployment rate is somewhere around 7%,
according to Mark Vitner, a senior economist at Wells Fargo. Other
economists peg the natural unemployment rate somewhere between 5.5% and
7%. They said the figure will be held higher by a skills mismatch in
the labor market that has been growing since the 1970s, the recent
extension of unemployment benefits and the 2009 minimum wage increase.
Natural unemployment rate is a
theoretical measure of what share of
the workforce would be unemployed under ideal conditions given the
underlying structure of the economy; that is, what goods and services
that businesses are actually producing and the workers who produce
them. Some economists and observers say that the structure of the
economy has changed coming out of the recession.
1996, the natural unemployment rate has hovered between
4.5% in 2000 and 5.8% in 2010, according to a periodic survey by the
Federal Reserve Bank of Philadelphia. The Congressional Budget Office,
which uses the rate to make forecasts and projections, currently pegs
it at 5.2%.
instance, there are about 600,000 job openings in education
and health services and almost 600,000 in professional and business
services according to the BLS. Both of these sectors have very high
rates of job openings compared to total positions, about 3% each,
meaning that there is a lack of talent to fill the positions. This is
as opposed to construction, which currently has 67,000 job openings,
which is only 1.2% of all such positions.
"Every survey that we've
conducted has indicated that hiring
managers are saying it's harder and harder to find the talent they're
looking for at the professional level."
36.9 million -- are not fit to drive and would fail a
driving test if asked to take one today, according to a new survey of
the nation's drivers.
as that may be, it's actually an improvement. Last year,
38 million received failing grades. Nationwide, the average score this
year increased to 77.9% from 76.2% in 2010.
hold 25% of all retirement monies, primiarily due to rollovers. Overall
In the entire EBRI IRA database in 2008, 38.5 percent of the IRA assets
were in equities, 22.3 percent in
money, 13.6 percent in bonds, 12.1 percent in balanced funds, and 13.6
percent in other assets (Figure 1).4
When combining the allocation of balanced funds attributable to
equities to the equity allocation, the total
equity holdings of IRA owners is 45.8 percent.5 Male and female IRA
owners had virtually identical
allocations in bonds, equities (not including the balanced fund
portion), and money. However, males were
slightly more likely to have assets in the other category, while
females had a higher percentage of assets in
balanced funds. IRA owners under age 45 were more likely to be invested
in equities and balanced funds
combined than those over age 45. Those over age 45 were more likely to
be invested in bonds and other
assets. The percentage of assets in money across each age group was
around 21 percent.
As the account balances increase, the percentage of assets in equities
and balanced funds combined
declines. For instance, among those IRAs with balances from
$10,000−$24,999, 50.4 percent of the assets
were in equities and 20.1 percent in balanced funds (70.5 percent
combined), compared with 37.6 percent in
equities and 11.7 percent in balanced funds (49.3 percent combined) for
IRAs with account balances of
$150,000−$249,999. IRAs with the largest balances ($250,000
more) had more of the assets diversified
across all the asset categories—with the highest percentage
assets in bonds, money, and other assets—
than IRAs in any of the smaller-account balance categories.
Roth IRAs had the highest share of assets in equities (51.4 percent)
and balanced funds (16.7 percent)
(Figure 2). Rollover IRAs had the lowest percentage in equities (at
35.8 percent), but had the highest
percentage of assets in money (at 24.2 percent) and the highest
percentage in bonds. The higher allocation
to equities in Roths compared with rollovers can be explained by two
reasons: Roth owners are younger on
average than rollover owners, and Roth IRAs tend to be supplemental
savings funded by individual
contributions only, whereas rollovers tend to be the main or primary
retirement savings for workers nearing
retirement or retirees. Consequently, the asset allocation reflects the
period of the owner’s life and the share
of the retirement savings the accounts represent.
IRA Type Allocations
Gender—Within each IRA type, the asset allocation differences
between genders is minimal (Figure
3). The bond, equity, money, and annuity allocations are virtually
identical. In traditional IRAs, males had
39.2 percent of their assets in equities, while females had 39.1
percent. The one consistent difference across
the three IRA types (traditional, rollover, and Roth) is that males had
a higher share of assets in other assets,
while females had more in balanced funds.
Age—The asset allocation across ages within each IRA type has
some minor differences, but in
general the percentage allocated to equities and balanced funds
declined as the owner aged, while the
percentage allocated to other assets increased (Figure 4). Assets in
Roth IRAs had the most consistent
trends, with allocations to bonds, money, and other assets increasing
with the age of the owner. The
allocation to balanced funds decreased as the owners aged, with the
allocation to equities increasing with
age among those ages 35–44, before declining through age 70
Traditional and rollover IRAs have similar patterns of asset
allocation, with the youngest owners (under age
25) having higher money, bond, and other asset allocations than those
just older (ages 25−44). Allocations
to balanced funds and equities increase through age 44 then decline as
age increased for both IRA types.
Account Balance—Except for the smallest accounts (less than
$5,000), the percentage of assets in
equities and balanced funds declined across each type of IRA as the
account balance increased (Figure 5).
Rollover IRAs had lower equity allocations consistently across account
balances, while Roth IRAs had
consistently higher allocations. Bond allocations were highest for
traditional IRAs. Roths had the highest use
of other assets, representing 20 percent of the assets for those with
balances of $250,000 or more.
This study investigates
the role of gender in financial risk-taking. Specifically, I ask
whether female investors tend to fund less risky investment projects
than males. To answer this question, I use real-life investment data
collected at the largest German market for peer-to-peer lending.
Investors' utility is assumed to be a function of the projects expected
return and its standard deviation, whereas standard deviation serves as
a measure of risk. Gender differences regarding the responses to
projects' risk are tested by estimating a random parameter regression
model that allows for variation of risk preferences across investors.
Estimation results provide no evidence of gender differences in
investors' risk propensity: On average, male and female investors
respond similarly to the changes in the standard deviation of expected
return. Moreover, no differences between male and female investors are
found with respect to other characteristics of projects that may serve
as a proxy for projects' risk. Significant gender differences in
investors' tastes are found only with respect to preferred investment
duration, purpose of investment project and borrowers' age.
Does personality change
across the entire life course, and are those changes due to intrinsic
maturation or major life experiences? This longitudinal study
investigated changes in the mean levels and rank order of the Big Five
personality traits in a heterogeneous sample of 14,718 Germans across
all of adulthood. Latent change and latent moderated regression models
provided four main findings: First, age had a complex curvilinear
influence on mean levels of personality. Second, the rank-order
stability of Emotional Stability, Extraversion, Openness, and
Agreeableness all followed an inverted U-shaped function, reaching a
peak between the ages of 40 and 60, and decreasing afterwards, whereas
Conscientiousness showed a continuously increasing rank-order stability
across adulthood. Third, personality predicted the occurrence of
several objective major life events (selection effects) and changed in
reaction to experiencing th ese events (socialization effects),
suggesting that personality can change due to factors other than
intrinsic maturation.<br /> Fourth, when events were
according to their valence, as is commonly done,<br />
the environment on changes in personality were either overlooked
or<br /> overgeneralized. In sum, our analyses show that
personality changes throughout the life<br /> span, but
pronounced changes in young and old ages, and that this change
/> partly attributable to social demands and experiences.
In this paper, we study
the individual payoff effects of overconfident self-perception in
teams. In particular, we demonstrate that the welfare of an
overconfident agent in a team of one rational and one overconfident
agent or a team of two overconfident agents can be higher than that of
the members of a team of two rational agents. This result holds
irrespective of the assumption about the agents' awareness of their
colleague's bias. Moreover, we show that an overcondent agent is always
better of when he is unaware of a potential bias of his colleague.
The Fourth of July is Coming
FINRA Ketchum: As
firms face examination and
other changes, they can be prepared by paying attention to fundamental
values, Ketchum said. That includes making sure that financial advisors
are completely educated on the financial products they sell, Ketchum
said, particularly when it comes to Regulation D offerings, and truly
operating with the best interest of the customer in mind.
while firms are tempted to reduce their expenses now, Ketchum
said, they should makes sure they have resources in place to deal with
new regulatory focus areas.
is not the time to reduce your commitment to
financial technology or otherwise on compliance investment,”
annual conference comes amid an ongoing regulatory
debate as to whether to create a self regulatory organization for
investment advisors. FINRA has advocated for expanding its oversight to
include both investment advisors and broker-dealers.
ongoing debate could move forward with hearings this summer,
Ketchum said Tuesday in a press conference, while it is impossible to
predict if implementation will be “this year, next year or
their advisors understand the products they sell and truly acting in
the best interest of the client,
fundamentals of investing, insurance and annuities have never been
do you think of the state of Wall
Street right now?
1. Wall Street is changing -- and not for the better -- because
we’re in a culture of speculation. I would like investments
the star show, and not in today’s cameo role. Furthermore,
we’ve changed from a financial industry that was about
stewardship for the small investor to it being all about marketing,
selling and speculating. And that leads the average investor down the
What’s important to note is that the stock market
create value -- companies create value. If a stock is overvalued,
it’s good for the seller, bad for the buyer, and we are
at volume levels that cannot be sustained. Individual investors should
stay out of the game.
5/25: Bogle: Are you concerned the U.S. will go into default with the
increasing debt burden and the debate over the debt cap?
1. There is always a chance the U.S. could go into default. And
there’s always hope that we are able to handle this before it
gets that far out of hand. But right now we can’t seem to get
movement out of the Congress. It’s a question of political
We’ll be fine if Washington has the guts to change the
A blond city
girl named a.j.
marries a Colorado rancher. One morning,
way out to check on the cows, the rancher says to a.j., 'The
insemination man is coming over to impregnate one of our cows today, so
I drove a nail into the 2 by 4 just above where the cow's stall is in
the barn. Please show him where the cow is when he gets here, OK?' The rancher
for the fields. After a while, the artificial insemination man arrives
and knocks on the front door. a.j. takes
to the barn. They walk along the row of cows and when a.j. sees the
nail, she tells him, 'This is the one right here.' The man,
is dealing with an airhead blond, asks, 'Tell me lady, 'cause I'm dying
to know; how would YOU know that this is the right cow to be bred?' 'That's
simple," she said. "By the nail that's over its stall,' she explains
very confidently. Laughing
rudely at her, the man says, 'And what, pray tell, is the nail for?' The blond
walk away and says sweetly over her shoulder, 'I guess
it's to hang
your pants on.'
5/25: MORE ON SINGLE DIGIT RETURNS Bogle- Reasonable
are that we will have returns of 7-8% in this decade in equities, and
that bonds will yield 3-4% in the same time period.
Banking Crises: An Equal Opportunity Menace”
the worldly wise already knew: Governments around the
world—including our own—are no more inclined to
their true financial condition today than in the past.
collective amnesia by the governed and lack of transparency
by those who govern contribute to the human suffering that ensues in
crisis after crisis. That is precisely why today’s fiscal and
monetary damage control may be nearly as ineffective at stemming the
tide as the various and sundry, and often experimental, interventions
during the Great Depression. That statement is not made lightly.
Early-stage fiscal policy initiatives, which produced
far-less-than-advertised economic multiplier effects, have been
hamstrung by political gridlock ever since. On the monetary side, Ben
Bernanke, unlike many in positions of high political authority or the
body politic itself, knows Depression history. The more pertinent
question: Is he able to apply history’s lessons to
subtly similar yet significantly different set of challenges? Thus far,
the results are not reassuring.
pragmatic solution to economic unpleasantness throughout the
last decade has been to repeatedly inject the economy with the
adrenaline of cheap and easy money. The philosopher shudders in
disbelief. The ongoing attempt to put off the consequences of years of
cumulative excesses by jacking up the prices of assets to levels above
their intrinsic worth is itself not without potentially dire
consequences. The Fed’s current action of pushing interest
down to near zero is having the effect of driving people out of the
safer assets into the riskier ones, of sacrificing the prudent to save
the foolish. Societies have crumbled for lesser transgressions.
the extraordinary excesses built up in recent decades can be
contained with so little proportional consequence boggles the mind.
Whatever their motives, Oz-like governments are playing Russian
roulette behind the curtain, which should be ample cause for us to
match such recklessness with an equal measure of skepticism.
believe that the spectacular market rise currently being
celebrated has underpinnings similar to the cheap-money
“fools’ rally” from 2003 to
2007—and that we
are in both a secular bear market and an economic contraction that may
not have seen its darkest days. Thinking into the future as we are
inclined to do, the only development that would leave us scratching our
heads would be further dramatic moves to the upside. We cannot forecast
if, when, or how far the pendulum might swing, but our record suggests
that sometimes we seem to be slightly ahead of the crowd in sniffing
I cannot figure out the significant upward moveement of the
market with such an enormous deficit, no education about risk
international elements like Greece complewtely defulating on
investors have been unaware of, indifferent toward, or
become accustomed to chronically overvalued markets as the new norm.
They suffered the consequences of ignorance or apathy in
and 2007–09—and, just perhaps, history may repeat
the months or years ahead."
my new book being finished now, I state that there will be a
50/50 chance of two recessions per decade. I DO NOT SEE ANY OTHER
REALISTIC COURSE FOR ECONOMIES SO COMPLETELY OUT OF WHACK.
Behavioral finance- Baby
Boomers on Retirement
"In the interest of creating a healthy and effective retirement system,
it is important that we understand participant emotions about
retirement and how these emotions create barriers to getting needed
professional retirement help. If we ignore participant emotions and
needs and solely focus on the money management, we risk significant
participant inaction." 5/24:
Door to Monetary Awards Against Fiduciaries Is Opening (PDF)
"[T]he Supreme Court has signaled that 'compensatory,' 'make-whole'
monetary relief is available under ERISA's catch-all provision, Section
502(a)(3). . . . . [Also, the] impact of the Supreme Court's holding
that the terms of an SPD cannot be enforced as if they were plan terms
will have to be sorted out in future litigation. The decision appears
to overturn the rule adopted by many circuits . Very
to Join the 401(k)
Wars, Guns Blazing
"Charles Schwab. . . could dramatically change the way that workers
invest for retirement. Schwab announced that it plans to offer
employers a 401(k) package that includes only index funds as investment
options. . . . In one fell swoop, an index-only 401(k) will address
several problems that led policymakers a few years back to consider
massive changes to the entire structure of retirement savings."
Yes it will help with fees. But it will not do essentially
anything with the underlying risk. Investments always have risk. So
what is the risk of the S&P 500. If Schwab does not know- and I
they do not- they cannot be a fiduciary.
To help investors overcome
procrastination, Benartzi suggests that
advisors ask them not to enter the market immediately but rather to
pre-commit to entering at a certain point in the future. If the client
agrees, he or she can then be asked to pinpoint a date when they would
feel comfortable making the move. The result is that the once-balky
client feels both committed and in control.
I disagree. It is the advisers responsibility to determine when is the
best time to invest. A predetermined amount in 2000 or 2008 is a
'guaranteed loss' and serves no purpose. The adviser is responsible for
DCAD as well.
then- An effective way to rebuild trust using behavioral
finance insights is to demonstrate competence and exhibit empathy,
according to Benartzi. One counter-intuitive way for an advisor to
demonstrate competence is to admit the role luck has played in
achieving results for the client. Honesty resonates strongly and
reinforces trust in clients, Benartzi says.
think the more you actually admit luck, the more you can
brag about good outcomes—and explain when performance is
due to bad luck,”
luck can happen. But the losses sustained for 2000 and 2008
were due to incompetence by the advisers. Remember, they are not
trained in the fundamentals of investing.
is bad luck now due to the drop in bond funds? They can now
just effectively earn nothing more than their yield and with a much
higher risk than previous since they can't get any appreciation
Allocation Fund Usage
Rising in 401(k) Plans
"The popularity of asset allocation funds is expected to increase as
investors become increasingly comfortable with relying on the
investment expertise of providers rather than trying to 'do it
What is the investment experience of the providers ? Not with
series 7. Not with a CFP. Not with an insruance license. If
was all so good, few would have lost more than 20% in 2000 or 2008.
belief in the world economy and corporate
profitability is waning, with a majority of fund managers believing
European growth will slow down,
net 8 per cent of investors believe Europe’s economy will
weaken in the next year, says the survey, which was concluded just
before last week’s gross domestic product data from Germany
France provided a positive surprise.
concern is also mounting, with just a net 9 per cent of
fund managers expecting corporate profits to increase and a net 10 per
cent believing the world economy will improve, down from a net 58 per
cent in February.
The survey underlines how
investor confidence in the global growth outlook is falling after a
weak first quarter.
expectations of annualised
first-quarter US growth had started at 4
per cent, before the initial official estimate came in at 1.8 per cent.
spite of worries about growth, risk appetite remains high and
largely unchanged because of the belief that the zero interest rate
policy of the US will continue for some time.
Defensive equity sectors such
as healthcare have performed well,
while cyclical stocks such as energy companies have suffered.
survey showed how investors continue to believe China’s
economy will weaken while demonstrating lower confidence in Brazil, but
at the same time increasing exposure to emerging markets equities.
5/17: SOMETHING'S GOT TO GIVE
â€“ As Medicare
Math 101 explains, Medicare
numbers just don't add up. For example,
an average couple retiring today has paid about $100,000 in Medicare
taxes, but can be expected to receive about $300,000 in Medicare
benefits. In addition, there is no incentive for seniors or their
families to be concerned about the cost of health care. And then we
have the sensitive issue of 25%
of Medicare funds being spent on terminally-ill patients,
it providing care that is not needed, provides no benefit or, worse
yet, negatively impacts a patient's quality of life. Privatizing
Medicare may not be the solution, but any realistic solution is going
to require shared sacrifice.
â€“ Relentless medical inflation marches
on, with the 2011
Milliman Medical Index report
estimating that the cost of health
care for a typical family of four has increased 7.3% this year, to
$19,393. Meanwhile, the Kaiser
Family Foundation reported that
in 2008, the U.S. spent 91% more on
per-capita health care expenditures and 58% more of its GDP on health
care than the average for a group of 15 wealthy nations, including
Canada, Japan and the United Kingdom.
â€“ The 2011 Genworth survey of long-term
reports that the annual cost of long-term care in an assisted living
facility increased 2.4% from 2010 to $39,135, while nursing home costs
increased 3.4% to $77,745. The good news is that the hourly costs for
homemaker services and for home health aide services stayed flat at $18
and $19 per hour respectively
PRICES DOWN AGAIN
â€“ Home prices fell 4.6% during the first
months of 2011 compared to a year earlier. The median home price is now
$158,700, a 30% drop from its 2006 high of $227,100. Much of the blame
for the continuing declined in home prices is being pinned on the sales
of foreclosed properties, which sell for about 20% less than
Will Consume All Tax Revenues by 2049If
the average historical level of tax revenue is extended, spending on
Medicare, Medicaid and the Obamacare subsidy program, and Social
Security will consume all revenues by 2049. Because entitlement
spending is funded on autopilot, no revenue will be left to pay for
other government spending, including constitutional functions such as
5/16: New term
no extra cost, the policy will pay your clients’
one year if they become unemployed
time up to age 65 if they become disabled
that will not increase before age 65
privileges available up to age 65 without
additional medical testing
In this paper, we build
on the emerging literature on group decision-making to study the
i.e., groups are less risk-averse than individuals. Our study
complements past research in two ways. First, we study the group shift
effect under two sources of uncertainty, namely risk where
probabilities are known, and ambiguity where probabilities are
imprecise. Second, we study the impact of the group decision rule
(unanimity and majority) on group shift. Results from a lottery-choice
experiment show a general tendency for the group shift effect,
regardless of the decision rule. The group shift effect, however, is
found to be significant only under risk in the unanimity treatment. Our
study hence provides a clear test of the effect of the decision rule on
the group shift effect under both risk and ambiguity.
5/16: I will be dead by then but...........The Medicare Trust Fund will
be exhausted by 2024 -- five years earlier than estimated in 2010. A
weakening economy is the main culprit for the sudden weakness
The Social Security Trust Fund will dry up by 2036, a year earlier than
previously expected, as social security benefits continue to exceed
payroll tax revenues. Benefit payments are expected to surpass taxes by
$46 billion in 2011. This would mark the second consecutive year of
deficit-funding for the fund and marks the first deficit since 1983
5/15: Oh really???? Rep. McCarthy says that while consumers clearly
need to be protected from broker/advisor abuses, it is also important
to “protect a process that enables individual brokers to
consumers with the advice they need to help ensure they have retirement
security in their golden years.”
5/15: Kitces report- if a VUL policy has a death benefit of
$500,000 and has accumulated up to $200,000 of cash
value, the policyowner pays for cost of insurance
charges on $300,000 (the difference between the death
benefit and cash value, which is the amount at risk for
the insurance company) in addition to other policy
expenses. If the policy, invested heavily in equities for
long-term growth, experiences a significant short-term
decline of 30%, the cash value drops to $140,000. This
in turn causes the amount at risk to increase to
$360,000, which means all else being equal, the cost of
insurance charges will RISE by a whopping 20% (paying for $360,000
worth of cost of insurance
charges, instead of only $300,000) to cover the costs
of the higher amount at risk. As a result, withdrawals
of policy expenses to maintain the coverage will be
higher - rising at the exact time that the cash value
declines (in fact, because the cash value declined),
exacerbating any setback and slowing the pace of a
recovery. In other words, the policy expenses will
actually force the liquidation of even more cash value
during a downturn!
And be careful of loans: Policies that are intended to
ongoing loans must be evaluated especially carefully,
due to the fact that if the policy lapses, the entire loan
balance is treated as part of the proceeds received, even
if the net cash value (after loans) is near $0; in such
scenarios, the policyowner thus may generate an
incredibly large tax liability attributable to a significant
amount of cumulative gains over the lifetime of the
policy, even while having no cash value available to pay
for the tax liability (because it was previously extracted
in the form of loans).
of Issues Attendant with Current Asset-Based Fee Structure for
"One of the great ironies of asset-based fees is that they do sometimes
go down, and at the most 'inconvenient' times. One need look back only
as far as the fourth quarter of 2008 to remember that precipitous
decline in asset values - and asset-value-based fees - at the very same
time that many
noted a steep increase
in the 'care and feeding' of plan sponsors and participants
5/12: TERM INSURANCE:
no extra cost, the policy will pay your clients’
one year if they become unemployed
time up to age 65 if they become disabled
that will not increase before age 65
privileges available up to age 65 without
Can I get a refund for these?
5/12: More home problems:
the last three years, federal agencies have backed
new mortgages as large as $729,750 in desirable neighborhoods in
high-cost states like California, New York, New Jersey, Connecticut and
Massachusetts. Without the government covering the risk of default,
many lenders would have refused to make the loans. With the economy in
free fall, Congress broadened its traditionally generous support of
housing to a substantial degree.
now Democrats and Republicans agree that the
taxpayer should no longer be responsible for homes valued well above
the national average, and are about to turn a top slice of the housing
market into a testing ground for whether the private mortgage market
can once again go it alone. The result, analysts say, will be
higher-cost loans and fewer potential buyers for more expensive homes.
federal government last year backed nine out of 10
new mortgages nationwide, and losses from soured loans are still
mounting. Fannie Mae, which buys mortgages from lenders and packages
them for investors, said last week it needed an additional $6.2 billion
in aid, bringing the cost of its rescue to nearly $100 billion.
loan limits were $417,000 everywhere in the country
before the economy swooned in 2008. The new limits will be determined
by various formulas, including the median price in the county, but will
not fall back to their precrisis levels.
WHEN DID STUPIDITY BECOME
A POINT OF VIEW?
Finances, and Policy Options: A Primer
"Users can download the PowerPoint presentation and sort the slides in
a different order or pick and choose a subset to use. The presentation
includes talking points that go with each slide. . . . The PDF versions
include both the slides and the notes pages that go with them on the
of Retirement Plan Expenses (PDF)
"This analysis is based upon data entered into PlanTools by
professionals evaluating retirement plans. The data reflected in this
analysis is not from a survey - what a service provider might charge a
client, but instead actually identifies what a service provider has
charged a client for the categories of services listed in this
Drivers of Investor
"This paper looks at how participants' decision-making is influenced
by: Prevailing market conditions; Level of engagement and inertia;
Advances in plan and investment menu design."
5/10: Lapse- 12.7
percent of whole life insurance
policyholders will lapse their policies in the first year, 8.1 percent
will lapse in the second year and another 5.5 percent will lapse in the
third year." 12.7 + 8.1 + 5.5 = 26.3% So that means that
cash value insurance policies are canceled within the first 3 years.
5/10: Housing prices-
home prices are down 8% from a year ago, 3%
over the quarter, and are falling at about 1% every month
the percentage of homeowners in negative-equity
positions — with a home worth less than its mortgage
rocketed to 28%, a new crisis high.
, a record 16.3 million
families are upside-down on their home loans
only four metro areas in America that have leveled out, or risen,
lately. Notably, two of those are in stricken Florida — Fort
Myers and Sarasota.
There are tons of foreclosures and short sales on the market. And there
are plenty more sitting in the wings. Banks are holding back big shadow
inventories of homes. And that means you can get a great deal
American Middle Class Under Stress" has some stunning facts
that highlight the struggles the average American is having getting a
decent-paying job and keeping up with rising cost of living.
are just some of the sobering facts:
There are 8.5 million people receiving unemployment insurance
and over 40 million receiving food stamps.
At the current pace of job creation, the economy won't return
to full employment until 2018.
Middle-income jobs are disappearing from the economy. The
share of middle-income jobs in the United States has fallen from 52% in
1980 to 42% in 2010.
Middle-income jobs have been replaced by low-income jobs,
which now make up 41% of total employment.
17 million Americans with college degrees are doing jobs that
require less than the skill levels associated with a bachelor's degree.
Over the past year, nominal wages grew only 1.7% while all
consumer prices, including food and energy, increased by 2.7%.
Wages and salaries have fallen from 60% of personal income in
1980 to 51% in 2010. Government transfers have risen from 11.7% of
personal income in 1980 to 18.4% in 2010, a post-war high.
bottom line is simple says Schwenninger: The middle class is
shrinking, which threatens the social composition and stability of the
world's biggest economy. "I worry that we're becoming a barbell society
- a lot of money wealth and power at the top, increasing hollowness at
the center, which I think provides the stability and the heart and soul
of the society... and then too many people in fear of falling down."
At the current pace of job
creation, the economy won’t return
to full employment until 2018.
The share of middle-income jobs in the United States has fallen from
52% in 1980 to 42% in 2010.
Middle-income jobs have been replaced by low-income jobs, which now
make up 41% of total employment.
17 million Americans with college degrees are doing jobs that require
less than the skill levels associated with a bachelor’s
Just under 30% of flight attendants and 16% of telemarketers have
bachelor’s degrees even though this credential is not
for these jobs.
Over the past year, nominal wages grew only 1.7% while all consumer
prices, including food and energy, increased by 2.7%.
The spending power of many American families has therefore declined.
There are 8.5 million people receiving unemployment insurance and over
40 million receiving food stamps.
Health care spending increased from 9.5% of personal consumption in
1980 to 16.3% in 2010.
The share of personal consumption spent on food and energy has risen
from 13.4% in 2002 to 15.3% in 2010.
While the outlook in the equity market is uncertain, housing prices
have resumed their decline and could fall another 10% to 20%,due to the
pressure from theshadow inventory.
At the end of 2010, 23.1% of all residential properties with a mortgage
were underwater, with total negative equity nationwide of $750 billion.
Over the past three decades, household debt as a share of disposable
income increased from 68% to 116%.
The median value of retirement savings for retirees is $45,000.
The average retiree has a retirement savings shortfall of $47,732, with
larger shortfalls among low-income Americans.
How does overconfidence
arise and persist in the face of experience and feedback? We examine
experimentally how individuals' beliefs about their absolute, as
opposed to relative, performance on a quiz react to noisy, but
unbiased, feedback. Participants believe themselves to have received
`unlucky' feedback and they overestimate their own scores, but they
exhibit no overconfidence in non-ego-relevant beliefs---in this case,
about others' scores. Unlike previous studies of relative performance
estimates, we find this to be driven by overconfident priors, as
opposed to biased updating, which suggests that social comparisons
contribute to biased information processing. While feedback improves
performance estimates, this learning does not translate into improved
estimates of subsequent performances. This suggests that people use
performance feedback to update their beliefs about their ability
differently than they do to updat e their beliefs about their
performance, contributing to the persistence of overconfidence.
We provide an economic
valuation of the riskiness of risk models by directly measuring the
impact of model risks (specification and estimation risks) on VaR
estimates. We find that integrating the model risk into the VaR
computations implies a substantial minimum correction of the order of
10-40% of VaR levels. We also present results of a practical method -
based on a backtesting framework - for incorporating the model risk
into the VaR estimates.
This paper uses monthly
returns from 1802-2010, daily returns from 1885-2010, and intraday
returns from 1982-2010 in the United States to show how stock
volatility has changed over time. It also uses various measures of
volatility implied by option prices to infer what the market was
expecting to happen in the months following the financial crisis in
late 2008. This episode was associated with historically high levels of
stock market volatility, particularly among financial sector stocks,
but the market did not expect volatility to remain high for long and it
did not. This is in sharp contrast to the prolonged periods of high
volatility during the Great Depression. Similar analysis of stock
volatility in the United Kingdom and Japan reinforces the notion that
the volatility seen in the 2008 crisis was relatively short-lived.
While there is a link between stock volatility and real economic
activity, such as unemployment ra tes, it can be misleading.
Never Receives Social
Security Benefits? (PDF)
"We estimate that about 4 percent of individuals aged 62-84 in 2010
will never receive Social Security benefits. This article describes the
prevalence, demographic characteristics, and economic well-being of
Things You Must Be Aware
of as a Plan Fiduciary
"Knowing that you ARE a fiduciary is, obviously, the first thing you
need to be aware of, because there are legal requirements that need to
be followed. Many fiduciaries do not know that by not following the
basic standards of conduct, they are likely to be personally liable to
restore any losses to the plan."
was more bad news than met the
eye to Friday’s jobs report, even beyond the bump up in the
the top-line number of 244,000
jobs created sounded great when it came off the tape, the internals
were somewhat weaker. In particular, the household survey, which is an
actual head count, suggested that the job creation barely kept up with
the expansion of the labor force.
You cannot have a good economy without good jobs. The employment may go
up but if they are all at McDonallds.......
first step in the acquisition of wisdom is silence, the second
listening, the third memory, the fourth practice, the fifth teaching
others." - Solomon Ibn Gabriol
mother should have thrown him away and kept the stork." - Mae West
holds broadly steady in April
In April the Eurocoin indicator stood
at 0.60%, basically in line with the results for the previous two
months (0.57%); this signals the continuation of the underlying
recovery in euro-area economic activity.
The result reflects the positive
responses to business opinion surveys and the good performance of
foreign trade, while developments in the stock market were a negative
— or a “commitment
memorandum” that spells out what to do when the markets move
percent up or down. The adviser and the investor are both supposed to
sign it — agreeing in advance, perhaps, to buy morestocks
in a market plunge, and not to sell. Conversely, when markets soar,
they may be committed to selling overvalued stocks, not buying more of
them — rebalancing the portfolio to restore an agreed-upon
I disagree. If the market moves 10%- 15% in a flat economy, that's a
correction. If it moves more than 10%+ in a bad economy, the losses can
approach 50%. And you wnat to be fully invested???
may have ordered agencies that regulate financial
institutions to stop relying on credit ratings by firms such as Moody's
and Standard & Poor's, but regulators are still struggling to
up with an alternative.
One of the painful lessons of the mortgage meltdown was that
securities stamped with the highest ratings turned out to be poor
5/1: Bibles and investing-We
went to a live event in Colorado
Springs in March, so we are just getting our feet wet. It makes me sick
the money we have wasted on whole life policies. These were sold to us
as the perfect college fund. It was something we signed up for and just
kept paying thinking we were doing the right thing. We have paid just
over $46,000.00 and are in the process of cashing out and hoping we get
$15,000.00, now when our son is 16. It makes me want to cry!! Worse yet, it was purchased through
organization,and that just
seems so much worse!!
5/1: Reply to never using a broker, insurance agent or financial planner
In referencing a broker, that is all I stated. Not MBA, not CFA. A
broker has never been taught the fundamentals of investing. It makes no
sense to use them at all. Secondly, if one buys stocks as their
allocations, they are effectively violating all standards of
suitability via unsystematic risk. How many stocks must you have in a
portfolio in order to be properly diversified? They are not taught how
to use a financial calculator. Actually not much different than RIAs
since most came from the brokerage industry and used the series 7 as
the required knowledge base.
Even with MBAs and CFAs, many still regard standard deviation and
volatility as risk. Categorically false.
An insurance agent has no background and training even in
illustrations. Certainly no insight to all the new products such as
indexed annuities and guaranteed payouts. They are not taught how to
use a financial calculator. One needs an agent with at least 10 years
of experience but because I have been around so long, I do
trust their judgment overall. Experience versus commissions- guess who
will win. Very very few people have done the research to figure out
what the real life applications of product actually are.
A financial planner is what? A CFP? Sorry- as one who go it in 1984 I
said, "I don't think I know that much." And I didn't. And they don't.
The CFP is still just one semester on money. Not a semester on
investments, a semester on behavior- just one semester on everything
universally taught by a CFP. There is no risk of loss. Fact is,
standard deviation is taught incorrectly. Effectively nothing on how
correlations work in the real world. They may be OK for the
sophomoric issues (whatever they may be).
Minimum is a degree in planning. Still not a panacea but at least 75%
more comprehensive than a CFP or ChFC.
Must have insurance license at a minimum and the license to do fee
advisement as required by state.
Preferable to use a fee planner but there are very few who do it the
‘correct’ way. My point is exactly what Rick Ferri
to- financial planners really end up doing a simplistic financial plan
with the almost sole intent to get assets under management. The
‘correct’ way is to charge for time in a retainer.
consumers opt for that strategy since marketing prevails towards
‘beat the market’ like BetterInvesting.org or the
positions and competency suggested by NAFPA, Garret et al.
Pundits can say they are the best. Not one is legal in CA (and most
other states) to do financial planning and nary anyone cares. Marketing
So where does one go?? I have no referrals since I really
know of those that do it on a retainer. Even then I might not refer
since many/most also lost their clients tons of money in the dotcom and
real estate messes. Consumers should know what their risk is given any
allocation. This is done ONLY by use of a personal financial
calculator. No calculator, no fiduciary. They have to learn how to
preserve their assets. AS Peter Bernstein noted, “the
consequences may be greater than the statistics.
But there are no presentations- certainly 401ks- describing
simply because the educators come from the ranks of the ill informed
and may spew out the same rhetoric as the rest of the industry.
Enough for now.
is not only dull himself; he is the cause of dullness in others."
AARP 401(k) Fee Calculator
"This calculator can: Help determine the fees associated with
individual plans and compares them to the average for a low-cost 401(k)
investor. [Free registration is required.]"
5/1: Less retirement:
one-quarter of Americans are worried they won't have enough money for a
employees plan for retirement, many HR leaders and retirement experts
focus on increasing 401(k) savings rates, but they should also focus on
the way employees draw-down their savings when they retire, experts say.
think it is absolutely an issue that HR professionals need to be paying
attention to," says Brad Kuebler, a principal in the Minneapolis office
of Milliman, an actuarial and consulting firm. "There really is a lack
of options for [workers] when they get into the drawdown phase. ...
That is a pretty critical time to start doing research and figuring out
what to do."
in 401(k) plans reached $3.075 trillion in 2010
typical participant in
a 401(k) plan, she said, has about $78,000 in his or her account, which
-- assuming the standard 4-percent drawdown each year -- equates to
about $3,200 a year for that retiree,
benefits-program decision makers weighed in on the topic
of retirement transition. :
overwhelming majority of respondents said
their organizations do not sufficiently prepare employees to
successfully manage their own financial resources in retirement.
Eighty percent are unsure or disagree that their organization
sufficiently prepares employees to successfully manage their financial
directors agree that the organization
shares the responsibility to support the individual in retirement
– almost equally – with the individual.
Respondents said that employees, organizations and government shoulder
41 percent, 37 percent and 21 percent of the responsibility,
vast majority of benefits directors surveyed
lacked confidence in how capable employees are at making sound
decisions about retirement preparation.
rated employees as either “somewhat not capable” or
“not capable,” while 45 percent rated
capabilities as “neutral.”
These survey findings help
debunk a myth that just providing
employees with more retirement-related information or education will
generate better retirement outcomes,”
decades, employers have
devoted a wide range of retirement resources, matching retirement plan
contributions, employee-education efforts, and the like, toward the
goal of helping their employees enjoy positive retirement
lifestyles,” Eckman said. “Add in the immense
the Internet and today’s employees should, theoretically, be
better equipped than ever to make good decisions. But the
nation’s benefits directors are telling us the
Emergency: Despite increasing signs of a stabilizing U.S.
economy, 19 percent of Americans — including 17 percent of
full-time workers — have been compelled to take money from
retirement savings in the last year to cover urgent financial needs,
the Financial Security Index found.
New Ideal Retirement Age
"Most Americans now expect to retire at age 65 or later. Over a third
(37 percent) of workers plan to retire after age 65, up from just 15
percent in 1995."
4/28: Reading- Ron Rhodes- To accept the premise, advanced by
many who oppose the fiduciary standard of conduct, that
investors are responsible for understanding what they read and then
will act prudently thereafter, it is
necessary to conclude that investors are not only armed with timely and
adequate disclosure, but also
that they possess an ability to understand the disclosures which have
been provided to them, both
intellectually and unhampered by behavioral biases. However, consumer
ability to understand is not
only difficult due to the enormous knowledge base required to undertake
decisions in dealing with a
highly complex financial world, but also due to bounds upon human
behavior that limit the extent to
which people actually and effectively pursue utility maximization.
Individuals possess substantial
barriers, resulting from behavioral biases, to the provision of
informed consent, even after full
Moreover, not only can marketers who are familiar with behavioral
research manipulate consumers
by taking advantage of weaknesses in human cognition, but ...
competitive pressures almost
guarantee that they will do so. As evidence of the foregoing, many
insurance agents, and investment advisers have been trained by
consultants to first establish a
relationship with a prospective client based upon trust and confidence,
long before any discussion of
fees or products; such training is commonplace in the securities
4/28: Oy! China has decided to serve the world another surprise.
Following last week's announcement by PBoC Governor Zhou (Where's
Waldo) Xiaochuan that the
country's excessive stockpile of
reserves has to be
urgently diversified, today we get a sense of just how big the upcoming
Chinese defection from the "buy US debt" Nash equilibrium will be. Not
surprisingly, China appears to be getting ready to cut its USD reserves
by roughly the amount of dollars that was recently printed by the Fed, or
$2 trilion or so
4/28: Gas prices- Matt
economist at Ohio State University,
has been studying gas prices
for more than a decade. He's considered some of the usual allegations,
like pricing fixing and collusion among stations. He doesn't entirely
discount those, but he thinks he's found a better explanation for the
fast rise/slow fall phenomenon. Here's his theory in a nutshell: When
prices fall, consumers are so relieved that they stop shopping around
for the best price. That eliminates the normal downward pressure on gas
prices and allows stations to squeeze out a few more cents of profit
while prices slowly fall
4/28: JKimmy Carter and Jeremy Grantham-
demand from developing countries, especially
China, has caused an unprecedented shift in the price structure of
resources: after 100 hundred years or more of price declines, they are
now rising, and in the last 8 years have undone, remarkably, the
effects of the last 100-year decline! Statistically, also, the level of
price rises makes it extremely unlikely that the old trend is still in
place. If I am right, we are now entering a period in which, like it or
not, we must finally follow President Carter's advice to develop a
thoughtful energy policy and give up our carefree and
ways with resources.
4/27: fiduciary- Deputy Treasury Secretary Neal Wolin reiterated Obama
administration support for a universal fiduciary duty for retail
4/27: Like Avis, we are number 2:
to the latest IMF official forecasts, China's
surpass that of
America in real terms in 2016 — just five years from now.
it casts a deepening cloud over
both the U.S. dollar and the giant
Treasury market, which have been propped up for decades by their
privileged status as the liabilities of the world's hegemonic power.
Purchasing Power Parties, the
Chinese economy will expand from $11.2 trillion this year to $19
trillion in 2016. Meanwhile the size of the U.S. economy will rise from
$15.2 trillion to $18.8 trillion. That would take America's share of
the world output down to 17.7%, the lowest in modern times. China's
would reach 18%, and rising.
10 years ago, the U.S.
economy was three times the size of China's.
China's neighbors in Asia are
already waking up to the dangers. "The
region is overwhelmingly looking to the U.S. in a way that it hasn't
done in the past," he said. "They see the U.S. as a counterweight to
China. They also see American hegemony over the last half-century as
fairly benign. In China they see the rise of an economic power that is
not benevolent, that can be predatory. They don't see it as a benign
There are two systems in collision," said Ralph Gomory, research
professor at NYU's Stern business school. "They have a state-guided
form of capitalism, and we have a much freer former of capitalism."
What we have seen, he said, is "a massive shift in capability from the
U.S. to China. What we have done is traded jobs for profit. The jobs
have moved to China. The capability erodes in the U.S. and grows in
China. That's very destructive. That is a big reason why the U.S. is
becoming more and more polarized between a small, very rich class and
an eroding middle class. The people who get the profits are very
different from the people who lost the wages."
This research addresses
the persuasive effect of 99-ending prices and carries out a
choice-based conjoint analysis among 318 shoppers. We propose that
99-ending prone consumers engage in a heuristic process either
consciously â€” they consider a 99-ending
as a signal
for a â€œgood
or unconsciously â€” they round down
This conceptual framework leads to non-intuitive and completely new
sets of hypotheses in the examination of the drivers, mediator and
moderators of 99-ending preferences. Results indicate that consumers
who are more price conscious are more likely to choose 99-ending
prices. Indeed, low involved shoppers (especially those with a low
hedonic and symbolic involvement profile), low educated, low income and
younger shoppers are prone to choose the 99-ending option. We also
demonstrate that the magnitude of this 99-ending effect depends on the
price level of the product category and t he positioning of the brands.
The theoretical contributions to the manner in which consumers process
99-endings has implications for retailers, pricing managers and social
economics", or the application of methods and evidence from other
social sciences to economics, has increased greatly in significance in
the last two decades. An important method by which many of its
predictions have been tested has been via laboratory experiments. In
this paper I survey and assess experimental tests of various
applications of behavioral economics to the specific area of public
economics, or "behavioral public economics". I discuss the basic
elements of behavioral economics, the methodology of experimental
economics, applications of experimental methods to behavioral public
economics, and topics in which future applications should prove useful.
Should one use words
or money to foster trust of the other party if no means of enforcing
trustworthiness are available? This paper reports an experiment
studying the effectiveness of two types of mechanisms for promoting
trust: a costly gift and a costless message as well as their mutual
interaction. We nest our findings in the standard version of the
investment game. Our data provide evidence that while both stand-alone
mechanisms enhance trust, and a gift performs significantly worse than
a message. Moreover, when a gift is combined with sending a message, it
can be counterproductive
research suggests that measures of investor sentiment have predictive
power for future stock returns over the intermediate and long term.
Given the widespread publication of sentiment indicators, smart
investors should trade on the information conveyed by such indicators
and thus trigger an immediate market response to their publication. The
present paper is the first to empirically analyze whether an immediate
response can be identified from the data. We use survey-based sentiment
indicators from two countries (Germany and the US). Consistent with
previous research we find there is predictability at intermediate time
horizons. For the US, however, the predictability disappears after
1994. Using event study methodology we find that the publication of
sentiment indicators affects market returns. The sign of the immediate
response is the same as that of the predictability over the
intermediate term. This fi nding is consistent with the idea that
sentiment is related to mispricing, but is inconsistent with the idea
that the sentiment indicator provides information about future expected
of Professional Designations
States in BLUE
have enacted regulations or legislation or have issued special notices
regarding the use of professional designations by registered
representatives and investment advisor representatives.
Yes you do know what you can potentially lose. Take the percentage of
SD for each allocation of stock and bonds. Figure how long you are
going to hold this. Take the SD and divide it by the square root of the
number of years to be held.
Risk of loss is 1 mnus the number above to the power of the number of
years. That equals the possible loss given just a one standard
More simply, if the economy tanks, figure you will lose from 30% to 70%
of your total assets.
The inverted yield curve is a 100% indicator of recessions where 40%+
average is lost. When you see this curve or similar, you DCA down. Your
losses should not exceed 20% max. Less if bonds holdings were
As for bonds right now- the probability is about 85% that the next
decade or TWO could show losses due to real or perceived increases in
this was a very short lesson. Lots more obviously involved. Also
mandatory to read Bernstein's Capital Ideas and Mandlebrot's The
(Mis)behavior of Markets. Also must have financial
FC? Then you cannot determine risk of loss for your own allocation. If
FC, you do a mix back and forth to see what the loss exposure might be
and what you can supposedly live with. That is if you simply
the allocation. The idea is to adjust risk as correlations move to 1.0.
4/25: Returns: most scholars believe that the equity risk premium has
decreased. A decrease in the equity risk premium decreases the
market’s expected rate of return and it raises the
price-earnings and price-dividends ratios.
Send me money- CEOs
Earn 343 Times More Than
"'Despite the collapse of the financial market at the hands of
executives less than 3 years ago, the disparity between CEO and
workers' pay has continued to grow to levels that are simply stunning,'
I do not earn 343 times fhe average worker and therefore want
money. If not money, send me fishing gear.
Actually most of my decades of accumulation of fishing gear
recently stolen. Know of anyone that wants to get rid of some fresh
water stufff? I am serious. It has been a pretty difficult
Thousands of lure and flies gone.
few examples of affinity fraud from a Wikipedia article on the subject:
"Baptist investors lose over $3.5 Million":
The victims of
this fraud were mainly African-American Baptists, many of whom were
elderly and disabled, as well as a number of Baptist churches and
religious organizations located in a number of states. The promoter
(Randolph, who was a minister himself and who is currently in jail)
promised returns ranging between 7 and 30%, but in reality was
operating a Ponzi scheme. In addition to a jail sentence, Randolph was
ordered to pay $1 million in the SEC's civil action.
On November 16, 2007, Michael
Traynor a Bradenton, Florida, investment broker, who had found many of
his clients though his church and private school social circles, was
arrested on a first degree felony grand theft charge that he had stolen
$6.5 million from his investors. It is believed Traynor stole funds
from at least 34 clients in Sarasota, Manatee and Hillsborough counties
between 2001 and February 2007. Traynor was subsequently sentenced
to 12 years in Florida state penitentiary.
"125 members of various Christian churches
million": The fraudsters allegedly sold members non-existent "prime
bank" trading programs by using a sales pitch heavily laden with
Biblical references and by enlisting members of the church communities
to unwittingly spread the word about the bogus investment.
Value at risk (VaR) is a
risk measure that has been widely implemented by financial
institutions. This paper measures the correlation among asset price
changes implied from VaR calculation. Empirical results using US and UK
equity indexes show that implied correlation is not constant but tends
to be higher for events in the left tails (crashes) than in the right
One of the more
memorable moments of last summer's credit crunch came when the CFO of
Goldman Sachs, David Viniar, announced in August that Goldman's
flagship GEO hedge fund had lost 27% of its value since the start of
the year. As Mr. Viniar explained, "We were seeing things that were 25-standard deviation moves,
days in a row."
4/21: Experts??: Pension plans and participants routinely depend on
experts for guidance in making important investment decisions. They
turn to these investment professionals for reliable advice on how best
to manage and safeguard retirement assets. Most would assume that these
experts give their advice as fiduciaries, obligated to act with
prudence and undivided loyalty to the plans' financial interests,
rather than in their own interests — and that's exactly what
Employee Retirement Income Security Act of 1974 provides. However, a
regulation issued in 1975 by the Department of Labor substantially
narrowed the statutory fiduciary definition, making it far too easy for
today's advisers to avoid fiduciary responsibility,
ERISA's fiduciary standard is one of the highest standards of care
available under the law. ERISA provides that a retirement plan
fiduciary must act with prudence and undivided loyalty to the
participants in that plan. Among other things, the law says that anyone
providing investment advice for a fee, either direct or indirect, is a
fiduciary. The department's 1975 rule restricted this definition by
creating a five-part test for the definition to be met. At the time,
most retirement plans were defined benefit plans; 401(k
Among the key elements of the five-part test was the requirement that
the advice had to be given on a regular basis and that it had to be
given pursuant to a mutual understanding that the advice would be the
primary basis for the investment decision. This means that advice given
infrequently, however flawed or conflicted, is seldom actionable by the
department. That advice could concern all of a plan's assets and it
still wouldn't be treated as fiduciary advice if given on a one-time
basis. Moreover, unless both the plan official and the adviser
understand that the advice serves as a primary basis for the investment
decision, advisers who base their advice on their own financial
interests rather than the plan's can't be held accountable under ERISA
for the resulting losses.
What defines an expert? Not a series 7 that is for sure.
4/21: I must be dead already- for each additional hour of television a
person sat and watched per day, the risk of dying rose by 11 percent.
4/21: History Suggests
Rates May Not Rise Right Away.
The latest official U.S. recession began on 12/31/07 and ended 21
months ago on 6/30/09. In the two prior U.S. recessions experienced in
the past 25 years, the Federal Reserve first raised interest rates 34
and 31 months after the recession officially ended
allows students, parents, and educators to look up individual colleges
and universities, and see what is required to be admitted to each.
A. Most of the literature in this field deals with the yield curve as a
predictor of future activity, but in principle there could be
influences in the opposite direction, from economic activity to the
yield curve. In a dynamic theoretical model with rational expectations,
such as Estrella (2005a), both directions play a role. The term spread
contains expectations of future activity, and it is affected by current
monetary policy, which is influenced in turn by current economic
activity. Empirically, Estrella and Hardouvelis (1990) use U.S. data to
examine the effect of monetary policy on the yield curve, and Estrella
and Mishkin (1997) perform a similar analysis for a panel of European
economies. Evans and Marshall (2001) find consistent evidence that
monetary policy shocks affect the nominal yield curve. In the context
of a vector autoregression, Diebold, Rudebusch and Aruoba (2004) find
that the influence in the direction from activity to the term structure
is even stronger than the predictive relationships (though Stock and
Watson (2003) warn about overinterpretation of such results). In
general, theory and evidence are both supportive of a bidirectional
4/20: Justifiable in most cases: No matter how earnest or committed
employers might be, PPA provided a dangerous weapon that could be used
against them. Employees had to have set, accurate, reliable avenues on
which they could rely for information. If they didn't understand asset
allocation, giving them a pamphlet or telling them about a half-hour
meeting in six months wasn't going to cut it. A serious dip in the
market that brought
losses to retirement plans could result in a raft of lawsuits from
employees who blamed their problems not on their own unwillingness to
learn, but on the company itself.
The point being that the employer or educational provider had a duty to
indicate that investors have at least a 50/50 chance in a decade of
losing over 50% of their invested assets. That is just a
Using information on a
large sample of retail investors and experimental data we find that
risk aversion and risk ambiguity are correlated: individuals who
dislike risk also dislike ambiguity. We show that what links these
traits is the way people handle decisions. Intuitive thinkers are less
averse to risk and less averse to ambiguity than individuals who base
their decisions on effortful reasoning. We confirm this finding in a
series of experiments. One interpretation of our results is that the
high-speed of intuitive thinking puts intuitive thinkers at a
comparative advantage in situations involving high risk and ambiguity,
making them less averse to both. Consistent with this view we show
evidence from the field and from the lab that intuitive thinkers
perform better than deliberative thinkers when making decisions in
highly ambiguous and risky environments. We also find that attitudes
toward risk and ambiguity are re lated to different individual
characteristics and wealth. While the wealthy are less averse to risk,
they dislike ambiguity more, a finding that has implications for
4/19: Don't care: If anybody who had something to do with
employee retirement plans needed a dose of reality regarding the level
of understanding and knowledge participants had about their money, how
it was being invested and what the outcomes were, a recent poll
of the poll, which sought input from HR
professionals and investment counselors, demonstrated dramatically that
a large portion of those who invest in company-sponsored retirement
plans do not comprehend how their money is being invested.
they seem to make no effort to learn. Or, maybe it's
that corporate America has not provided the appropriate tools..
of HR professionals reported that 25% or fewer people
knew what "asset allocation means and how it works," while 68.3% of
investment counselors said the same.
asked whether employees "requested additional
assistance or a meeting," 67.4% of HR pros said that 25% or fewer did
that, while 64.1% of investment folks reported that figure.
climate of knowledge - or lack thereof - that prevails
among employees who invest in company-sponsored retirement plans could
be summed up by one comment from an employee that was related by one
human resources manager in the survey: "I
hear so many bad things about the financial world that I don't know who
I can trust. So, I do nothing."
deficit problem has become crushing since the financial
crisis of 2008. Now for every dollar the federal government spends, it
takes in less than 60 cents in revenue.
budget deficit running at nearly 10 percent of output and
expected to grow will likely further swell a public debt load that's
already more than 60 percent of the country's gross domestic product.
the U.S. has, relative to its AAA peers, what we
consider to be very large budget deficits and rising government
indebtedness, and the path to addressing these is not clear to us, we
have revised our outlook on the long-term rating to negative from
greenback is down about 5 percent against major currencies in
2011, and record low interest rates together with the S&P move
do little to make it more attractive
4/17: TAX HIKES BACK
Well, it has been a solid four months of the current tax rates and
Senate Democrats are discussing plans to introduce tax policy changes
that they say would raise federal revenues and broaden the budget
debate beyond discretionary spending cuts. Some say why not just "tax
the rich," but we say:
There is ample evidence that raising taxes
results in less
revenue. In fairness, some evidence exists that it does raise revenue.
However, those who support raising taxes are the first to give tax
relief and bailouts to boost the economy.
This country has a spending problem, not a
More taxes on anyone simply feeds an
appetite for money and power.
Rarely do tax rates ever go down.
The top 1% of earners currently pay 40% of
income taxes and the top 10% pay about 70% of all income taxes. When is
it enough? (Again in fairness, income taxes are not the only taxes
paid, but are the federal government's largest source of revenue.
Further, the "rich" pay more of payroll and sales taxes also.)
To be certain, a little more in taxes will
not hurt the
rich. They will not suffer but...
The first to be hit will be the employees
of the "rich."
Second hit will be those venders and their
make a living off the "rich." From high-end yacht and auto makers, to
carpenters, to lawn care help, to winemakers, to bartenders, etc., etc.
The "rich" do not stuff their money in a
spend it and/or invest it. Regardless, the money gets directly into the
economy without the "governmental middleman."
The money collected by the government goes
through a corrupt
process where special interests grab money off the top before the money
will ever be used to reduce the debt and/or go to the needy.
"Sharing the wealth" may make people feel
but the long term historical results have never had a good outcome.
Deciding when to retire and
claim Social Security benefits is one of
the most important financial decisions that workers face. Therefore,
ensuring that they have easy access to clear and timely information
about their benefit options is a key goal for policymakers. In 1995,
the Social Security Administration introduced the
“Statement,” a record of past earnings and a
estimated benefits at selected claiming ages that is designed to help
workers plan for retirement. The Statement is now mailed annually to
all workers age 25 and over.
the Statement has the potential to be a very valuable tool,
little research has been done on its impact. A Gallup survey revealed
that individuals who had received a Statement had a significant
increase in their understanding of basic Social Security features. The
most recent U.S. Government Accountability Office report on the
Statement found that 66 percent of workers remember receiving a
Statement and 90 percent of these workers say that they remember the
amount of estimated Social Security benefits. These findings suggest
that the Statement might improve knowledge, but provide no information
about whether it changes behavior
you talking to your
clients about risk?
financial crisis has changed the way clients think about risk, planners
say. Now, many planners are looking for new ways to speak to clients
about risk tolerance in order to improve their investment choices. That
includes revamping questionnaires to better understand how clients
perceive risk and striving to explain investment strategies in clients'
Kind of a joke
Plans Are Designed for
"The other funds offered in a 401(k) normally are a mix of large cap,
midcap and small cap, bonds and international funds. The reason for
this small, diverse group of funds is to allow people to create an
asset allocation model based on the efficient market theory -- which is
heavily in boomers' retirement plans
45% of Americans age 45 to 65 doubt they have the resources to retire
comfortably, and about 65% will depend on Social Security, according to
a survey by the Associated Press and LifeGoesStrong.com. A large
percentage also said the financial crisis has led them to delay
retirement. Only about 10% of respondents reported being very sure
about their ability to retire in comfort based on their current assets
4/12: ERROLD F. MOODY
April 8, 2011
Public Hearing on Definition of Fiduciary
EBSA's Office of Regulations and Interpretations,
Attn: Public Hearing on Definition of Fiduciary
U.S. Department of Labor
200 Constitution Ave. NW
Washington, DC, 20210
RE: U.S. DEPARTMENT OF LABOR
EMPLOYEE BENEFITS SECURITY ADMINISTRATION
DEFINITION OF FIDUCIARY INVESTMENT ADVICE
I have reviewed all the comments on both days of the testimony,
positions by the financial planning community, Schapiro’s
comments on the necessity of consumer education and just about
everything else in regards to knowledge and competency for
‘broker’s, planners, arbitrators, attorneys et al
two decades. There are lots of pros and cons regarding who should do
what, are commissions the devil incarnate, are fee advisers absolved of
ethical conflicts (not even close) but nary a word on whether the
advisers identified can act under suitability rules never mind
fiduciary. No they can’t.
Neither the DOL nor the industry understands the problem. In fact, the
DOL panelists are validating deceit of the industry in their own
testimony. And the bulk of testimony from participants could be an
attempt to validate an egregious deception to the DOL, consumers and
just about everyone else.
What is it? You are all using the term ‘broker’ in
days of testimony. That is almost a complete lack of understanding of
what goes on in the real world. Here is a sample:
“Independent broker/dealers and their representatives are
especially well suited to provide middle-class Americans with the
investment products and services necessary to achieve their retirement
security and other financial objectives and goals.
When I call my broker and say, "Bernie" "what should I buy?"
But if I ask my broker to send me his firm's research on Cisco, and
that research contains a buy rating and a price target available to all
the firm's clients, that advice is not individualized and arguably
should not carry with it fiduciary responsibility, at least when it's
provided to plan fiduciaries.
If all brokers who provide market color or investment information are
deemed to be fiduciaries regardless of the intentions of the parties,
the vast majority of commission-based accounts may move towards
fee-based asset arrangements.
The Department's proposals would deem a broker a fiduciary merely
because it is complying with industry rules intended to set standards
for brokers who are not investment advisers.”
The DOL's expanded definition of fiduciary is expected to limit
brokers' ability to recommend their firms' proprietary investment
products to employers, and to prohibit them from collecting commissions
from product sponsors.
Brokers can continue working with plan clients as recordkeepers without
accepting the fiduciary standard of care, but some plan sponsors might
want to bring in third-party plan advisors to help them make fund
The point is that there are no retail brokers left in the U.S. They
have been called various monikers for decades. First it was
‘vice president’ or ‘senior vice
depending on the amount of commissions generated. In the late
the titles expanded to include ‘financial planners, advisers,
consultants, wealth manager’ and more all with the clear
to show that the individual agent has an extended ability to apply far
greater competency than just acting as a sales person.
Go into Wells Fargo, BofA, Chase, Merrill etc. all across America and
one is inundated galore with supposed professionalism with all the
signs pointing to ‘financial whatevers’. But not a
card with the term broker or registered representative. You have to
live in a tomb to miss this clear marketing attempt to sway the naive
consumer to utilize one of a firm’s unknowledgeable reps
In testimony last year in an arbitration I stated that if you are want
to be called a financial ‘whatever’ you
must be held
accountable to that level of competency. The defense attorney asked if
the use was illegal. It is not. But it absolutely is a breach
a fiduciary duty, suitability et al to attempt to state you are
something other that what you are. To sway consumers with marketing may
be OK with a Bud Light commercial, but the allowance in
for lifetime assets to ‘brokers’ who have had
than a one week course in securities is patently absurd.
I repeat- there have not been any retail brokers for over a
decade. It is a travesty to the public to allow this. Fix
now. It is an absolute breach.
This is the key to suitability and fiduciary ability. I find the
inherent lack of knowledge in the industry to be absolutely abhorrent.
And no one steps up and wonders why so much goes wrong. This
noted about the rule- from 1975- “The advisor must (1) render
advice as to the value of securities or other property, or make
recommendations as to the advisability of investing in, purchasing or
selling securities or other property and do so (2) on a regular basis
(3) pursuant to a mutual agreement, arrangement or understanding, with
the plan or a plan fiduciary that (4) the advice will serve as a
primary basis for investment decisions with respect to plan assets, and
that (5) the advice will be individualized based on the particular
needs of the plan.” OK- how???
Thirty five years ago there may have been some assumption about the
knowledge and ability of a securities licensee. Not any more.
even close. Specifically, “the adviser must render
advice....” How? A series 7 is so sophomoric in its knowledge
base since at least the mid/late 1980s, they are so far behind the
times that they may never catch up.
There are two points to this- the first will invalidate most
‘brokers’ and broker/dealers from offering
to customers. (I am excluding appraisers and more that are outside my
expertise and involvement.) I am directing my commentary to those that
deal directly with the various plans covered by the DOL- for that
matter, any organization or rule including ERISA, SEC, FINRA, state
governmental entities and so on. And that is that a broker or
registered representative, by definition those with a series 6, 7, 24,
63, etc., have never been taught the fundamentals of investing. It is
disingenuous for any governmental organization to suggest competency
(real life knowledge) in working with retirement plans, ERISA
standards, providing education, etc. unless you know what the
background of the agent is. I will repeat this statement again- the
fundamentals of investing have never been taught to a broker, are not
now, and may never will be unless and until the governmental
entities have a clue to what a professional adviser must know. After
all, if one does not know diversification by the numbers, under what
scenario can any instruction, advice, education be passed on to the
public? It is not just diversification that is missing in instruction
for licensing- asset allocation, standard deviation, correlation, risk
of loss, budgeting, efficient market theory, capital asset pricing,
Sharpe ratio and on and on. No training in the use of a financial
calculator. Why would anyone use an adviser who does not know how money
works (though they try to indicate they have a computer at work. Not
There is nothing on ‘suitability’ in licensing
effectively appears as a word only. No real life application of
product. Of course one can say- and the industry does- that
30 years of experience is more than adequate time to address additional
sophistication in the needed areas of investing. And one would
therefore choose a witch doctor with 50 years of experience over that
of a relatively new physician with a full medical degree and residency
overseen by other professionals. A compliance officer or supervisor
with none of the underlying fundamentals as a basis for a suitability
determination is also a pretty useless decisionmaker save for the most
mundane of issues (whatever those may be).
As for the attorneys at any of the firms- there is nothing in the
education that offers the fundamentals of investing. Any subsequent
position has to be based on a very limited opinion rather than the
fundamentals of investing. Never meant one who understood the true
meaning of diversification. Or an arbitrator. Admittedly there must be
some- just never met any.
In fact, I doubt anyone that anyone at the DOL has bothered
learn diversification since my attempt in 1995 to suggest updated
education to the fundamentals. No one knew what I was talking
about. (*How many stocks must you have in a portfolio in
insulate it due to unsystematic risk? If you do not know
then you cannot get to risk. If you cannot get to risk, you cannot get
to suitability.) Sure diversification is mentioned in the
7 classroom material but that is the extent (generally don’t
all your eggs in one basket. And that means??? If it cannot be defined
with numbers, it is pretty useless.) The bottom line is that
sale of most individual securities is a breach of suitability- and
obviously fiduciary responsibility- because there are not enough stocks
in the portfolio to keep risk
‘acceptable’. As a
result of that gross ineptness across all levels of industry knowledge,
we had Enron, Worldcom, Adelphia and devastation on thousands upon
thousands of retirees that should not have happened. Some basic
education- none of which has stayed up with the times over the last 35
years- could have tempered much of the financial ruin and saved many a
Here is the second major problem. Whenever a portfolio is designed,
where the are the numbers for risk? Is there anything taught on risk of
loss in a portfolio? No. So how is risk designed for the consumer? It
starts with a complete hack job with client questionnaires. The
consumer is required to indicate what their risk is. The consumer is
going to the adviser to ask what they should do, not vice versa. The
difficulty is that there are NO definitive standards for risk. What is
conservative, moderate, aggressive, speculative? The answers would be
totally variant for both consumers and advisers. And universally just
as useless. There must be consistency in an explanation of risk.
That statement begs the issue- isn’t risk known by standard
deviation (SD)? No. How about volatility? No. Yet so many offerings to
American consumers tend to include something about standard deviation
as risk since so many ‘brokers/advisors’ use
reports. But there is nary a reader of these reports that has a clue to
the annual standard deviation of the numbers mentioned therein (trick
question which I doubt any reader will recognize. Hence the
It is true that SD goes down over time and that is what is presented-
as though the risk goes down. It is a breach of duty to ever allow SD
to be used even with some caveat or exculpatory disclaimer in the
‘small print’. Why? It is the fact that the risk of
goes up the longer you hold equities. How much you can lose is the key
to deciding what one will do.
And where is risk of loss? Nowhere to be found. This lack of fiduciary
focus is the reason we got into the mess in 2000 and further in 2008.
An inability to teach what is necessary to consumers. If there had been
some simple coursework identifying real life risk, a great number of
Americans could have avoided the bulk of losses they have sustained.
But the risk of loss is not generated in any of the
software by any firm dealing under DOL standards. Or ERISA. One cannot
offer education regarding risk and reward without the necessity and
ability to at least show the exposure to risk for effectively any
allocation. It can be done. It must be done. If not, the Dodd Frank
requirements are useless. (Most allocations will have at least a 50%
possible loss over time- though that can be in as short as one year.)
Every equities investor (401k in particular) needs a fiduciary to
address that statistic (which can only be done by a personal financial
calculator at present. Firms do not want to include it because it would
open up difficult dialogue with the advisor and inherently reduce
Further, any fiduciary viewing the economics before 2000 and
should have identified the overriding economic risks. But where was the
knowledge? Where was the real life element of the inverted yield curve.
(It is a 100% indicator of a recession.) Unemployment. Real Estate.
Dollar. Asia. Even if certain issues are touched upon, there are none
of the potential implications in licensing preparation. In
case, what can one expect from a one week licensing course that does
not include the fundamentals.
And while I am on the subject, where is correlation? No adviser, no
software program can do an allocation without addressing the very
difficult movement of one investment to another. A fiduciary must be
able to do it. But it is not in the series 7, series 24, or any others,
CFPs included. How can you even have suitability applied? You
cannot. And one can sure not be a fiduciary. Since the subject is not
addressed anyplace in any rule, I have to assume that the DOL, SEC,
FINRA and more are clueless to what is necessary for fiduciary
Testimony noted representations to consumers about returns- and of
course the education under 401ks et al include various groupings of
performance coupled with some pretty Powerpoint graphs. Almost
universally they are based on past history that starts in 1900 or maybe
1925, or 1960 or ????? If one backtests (also not taught)
it is possible to make certain scenarios appear better or worse. No
matter, past results are an emotional and professional crutch for
advisors unwilling to spend time in the present and look to the
future. One does not really have to read or think- just let
computer dump out an allocation that is the same for just about anyone
and then sit back with a buy and hold and reap the money from fee
advisement. Just where has the broker/advisor added value?
Doing nothing can work- if one is lucky. It also is the reason
are in the financial devastation we are now in. Yes, there might be
some sophomoric commentary about risk- returns are not guaranteed, etc.
Not good enough when risk of loss can be calculated for each
consumer’s allocation. It can be taught- but again,one needs
personal financial calculator. And the use of a financial calculator is
not required by a broker. Nor attorneys dealing in any securities
matters. Nor compliance officers. Nor supervisors with a series 24, nor
arbitrators. How is anyone going to be a fiduciary to a plan
without knowing how money works? They cannot.
Registered Investment Advisers
Next is the competency of Registered Investment Advisers per se. While
the SEC regs demand a fiduciary duty to consumers, where is the
knowledge to justify it? There are a few CFAs, PhDs, MBAs in the mix
but the bulk of the RIAs came from the brokerage industry and used the
series 7 as the background for the RIA (like myself in 1984). Hence the
comment- the fundamentals are not there either. And recognize that
there are NO continuing education requirements. So why is it not
apparent that the lack of knowledge was one of the key reasons for the
failure of so many allocations in 2000 and 2008?
There have been comments about the inclusion of annuities in the
education and inclusion in 401ks. Where will this education come
from? Certainly not from RIAs. There is nothing that covers
indexed annuities, step ups or guaranteed income streams. Anyone doing
this is going to have to have a insurance license and/or a mandatory
fee insurance license from the 30+ states that require one. Otherwise
how can they present the appropriate knowledge, experience or
No education of retirement can de done without covering the policies
that are already in existence. For the purposes of this short paper, I
will exclude the issues about the necessity of having insurance when
one is younger. It is the fact that many retirees already have
insurance purchased decades ago. Perhaps there is an idle comment about
the decision of whether one needs to keep old insurance that may no
longer is needed or too expensive and that would be it. So just
surrender the policy. And that would be wrong. Unneeded
for the old or sick become an asset that can be sold for greater than
the existing cash surrender value. A fiduciary has to know what a life
settlement is and how they work. This asset could greatly assist many
Long Term Care
No retirement education can exist without addressing the need to cover
for the eventuality of assisted living and nursing home care. It is
expensive and while not being an absolute statistic, it must be
formally addressed in the retirement budget. An RIA has no background
in annuities, life insurance, life settlements or long term care. A
fiduciary explaining retirement is responsible for all of these
sections and more.
I have read most blogs, articles, reports, presentations, etc., on
fiduciary duty for decades and nary a one has ever mentioned competency
via knowledge. FINRA doesn’t want to rock the boat; the SEC
well the SEC and guided by a commissioner who refused to
the fundamentals of investing when at FINRA; state governmental
entities - like the others- are underfunded and not all that competent
either. All have been swayed, cajoled and marketed to
the status quo over the past 35 years. It is financially beneficial for
the industry. Knowledge would certainly slow sales. When I went to the
NASD in the mid 90s with a proposal to instruct arbitrators, I was told
that the industry would never allow it since it would slow sales
(true). In the mid 2000s with another ‘suggestion’
increase education overall, I was met with Schapiro’s office
FINRA was a procedural entity, not a substantiative one. The writing
was on the wall- the industry pretty much controls what happens.
The exponential surge of technology from the mid 1990s has changed
every facet of our lives. Increased volatility is now the norm, as is
24 hour trading, derivatives, lack of pensions, longer lives,
instantaneous transfer of information (not necessarily knowledge),
Alzheimers, terrorism and more. Old school financial
actually the lack thereof - has left consumers and advisers living on
past history as their guide to the future. It is obvious that the old
homilies and inviolate theories that became dogma were and
not suited to this new world order. We need forward thinking
fiduciaries who understand the past but are duty bound to do the heavy
lifting to move into an entirely different economic arena. Thirty five
year old licensing material with no true focus towards risk has left
the entire nation in a financial mess. ‘Brokers’ do
exist and the advisors acting in almost any capacity- and certainly as
a fiduciary- must increase their grasp and understanding of real life
product application. The series 7 and 24 have never provided the
fundamentals of investing.
You can hear all the testimony you want about the formal inclusion of
fiduciary standards. But the key is mandatory education with absolute
coverage of the fundamentals of investing and insurance/annuities.
Dodd Frank has provided an opportunity to scale up an industry far
different from a marketing system with very little substance. Fiduciary
duty is where the adviser has the requisite skills to provide
knowledge. Maybe 35 years ago but not for the last 15- 20 years.
Errold F. Moody Jr
* How many stocks- for the uninitiated, it is up to 350. If you are
trying to establish a formal allocation out of stock, good luck in
analyzing that many and the corresponding correlations (impossible for
both consumers and advisers.)
4/11: backtesting: This was an AIG 10,000,000 policy under premium
financing. The insurance firm out of NY was traveling from
to state presenting illustrations at 10% plus which represented a
‘portion’ of the returns that were shown from past
The return was projected in the illustration for 50 years where they
could not only pay off the loan but have amassed a large sum of money
to boot. (
What the firm had done (prior to 2008)- but a lot are still doing now-
was develop a computer program that went through past history to find
out what indexes worked the best. They would take 75% of the return of
the best that year plus 25% of the second best return and nothing for
the third. They had come up with the S&P 500, Stoxx and the
Seng. It could have been anything- but that is what the computer
But none of the past returns were identified in the contract
went back and got the numbers of each for the past 15 years or so and
computed the results myself. It showed a 17.53% annual average return
by using the various percentages . Heck of a deal. But was it what they
were doing? So I called AIG and talked to the managers etc.
had no clue to what was going on. So I finally got to the floor
attorney and he said that they suggested that agents use not more than
90% of the 17.53%- which was still 15.77%. So the agents had taken
about 60% of the 17.53 to show customers they were being conservative.
The report stopped the transaction but she still wanted to do something
with them. Don’t know what happened after
she was not my client
of Pennsylvania - The Wharton School, CESifo (Center for Economic
Studies and Ifo Institute for Economic Research)
of Pennsylvania - Business & Public Policy Department, National
Bureau of Economic Research (NBER), Institute for the Study of Labor
(IZA), Centre for Economic Policy Research (CEPR), Federal Reserve Bank
of San Francisco, CESifo (Center for Economic Studies and Ifo Institute
for Economic Research), Kiel Institute for the World Economy
document that trust in public institutions
â€” and particularly trust in banks,
government â€” has declined over recent
time series evidence suggests that this partly reflects the
pro-cyclical nature of trust in institutions. Cross-country comparisons
reveal a clear legacy of the Great Recession, and those countries whose
unemployment grew the most suffered the biggest loss in confidence in
institutions, particularly in trust in government and the financial
sector. Finally, analysis of several repeated cross-sections of
confidence within U.S. states yields similar qualitative patterns, but
much smaller magnitudes in response to state-specific shocks.
is still grappling with extreme poverty, but on the other end of the
spectrum, a wealthy class is emerging that could represent
opportunities for U.S. advisors
Of Securities Laws &
The links below will take
visitors to pages within the websites of NASAA members containing
information about individual state, proivincial, or territorial
securities laws, rules and regulations. By clicking on the name of a
state, province, or territory, you will be redirected to that
jurisdiction's website. Information
presented on this Web site is collected, maintained, and provided for
the convenience of the user. While every effort is made to keep such
information accurate and up- to-date, NASAA does not certify the
authenticity of information herein that originates from third parties.
NASAA shall under no circumstances be liable for any actions taken or
omissions made in reliance on any information contained herein or for
any other consequences of any such reliance.
Rule Proposals: Click herefor
a list of proposed state rules.
4/10: Part III --- Administrative, Miscellaneous, and Procedural
Update for Weighted Average Interest Rates, Yield Curves, and Segment
This notice provides guidance as to the corporate bond weighted average
interest rate and
the permissible range of interest rates specified under §
412(b)(5)(B)(ii)(II) of the Internal Revenue
Code as in effect for plan years beginning before 2008. It also
provides guidance on the corporate
bond monthly yield curve (and the corresponding spot segment rates),
and the 24-month average
segment rates under § 430(h)(2). In addition, this notice
guidance as to the interest rate
on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as
effect for plan years beginning
before 2008, the 30-year Treasury weighted average rate under
431(c)(6)(E)(ii)(I), and the
minimum present value segment rates under § 417(e)(3)(D) as in
effect for plan years beginning
CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE
Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the
Pension Funding Equity Act
of 2004 and by the Pension Protection Act of 2006 (PPA), provide that
the interest rates used to
calculate current liability and to determine the required contribution
under § 412(l) for plan years
beginning in 2004 through 2007 must be within a permissible range based
on the weighted average
of the rates of interest on amounts invested conservatively in long
term investment grade corporate
bonds during the 4-year period ending on the last day before the
beginning of the plan year.
Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining
the corporate bond
weighted average interest rate and the resulting permissible range of
interest rates used to
calculate current liability. That notice establishes that the corporate
bond weighted average is
based on the monthly composite corporate bond rate derived from
designated corporate bond
indices. The methodology for determining the monthly composite
corporate bond rate as set forth
in Notice 2004-34 continues to apply in determining that rate. See
Notice 2006-75, 2006-2 C.B.
The composite corporate bond rate for March 2011 is 5.60 percent.
Pursuant to Notice
2004-34, the Service has determined this rate as the average of the
monthly yields for the included
corporate bond indices for that month.
The following corporate bond weighted average interest rate was
determined for plan years
beginning in the month shown below.
For Plan Years
Beginning in Permissible Range
Average 90% to 100%
April 2011 6.06 5.45 6.06
YIELD CURVE AND SEGMENT RATES
Generally for plan years beginning after 2007 (except for delayed
effective dates for certain
plans under sections 104, 105, and 106 of PPA), § 430 of the
specifies the minimum funding
requirements that apply to single employer plans pursuant to §
412. Section 430(h)(2) specifies the
interest rates that must be used to determine a plan’s target
normal cost and funding target. Under
this provision, present value is generally determined using three
24-month average interest rates
(“segment rates”), each of which applies to cash
during specified periods. However, an
election may be made under § 430(h)(2)(D)(ii) to use the
yield curve in place of the
segment rates. Section 430(h)(2)G) set forth a transitional rule
applicable to plan years beginning
in 2008 and 2009 under which the segment rates were blended with the
corporate bond weighted
average described above, including an election under §
430(h)(2)(G)(iv) for an employer to use the
segment rates without the transitional rule.
Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining
corporate bond yield curve, and the 24-month average corporate bond
segment rates used to
compute the target normal cost and the funding target. Pursuant to
Notice 2007-81, the monthly
corporate bond yield curve derived from March 2011 data is in Table I
at the end of this notice. The
spot first, second, and third segment rates for the month of March 2011
are, respectively, 1.91,
5.23, and 6.46. The three 24-month average corporate bond segment rates
applicable for April
2011 are as follows:
2.51 5.59 6.38
The transitional rule of § 430(h)(2)(G) does not apply to plan
years beginning after December 31,
2009. Therefore, for a plan year beginning after 2009 with a lookback
month to April 2011, the
funding segment rates are the three 24-month average corporate bond
segment rates applicable for
April 2011, listed above without blending for any transitional period.
30-YEAR TREASURY SECURITIES INTEREST RATES
Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the
applicable interest rate,
which must be used for purposes of determining the minimum present
value of a participant’s
benefit under § 417(e)(1) and (2), as the annual rate of
on 30-year Treasury securities for
the month before the date of distribution or such other time as the
Secretary may by regulations
prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations
provides that the applicable
interest rate for a month is the annual rate of interest on 30-year
Treasury securities as specified by
the Commissioner for that month in revenue rulings, notices or other
guidance published in the
Internal Revenue Bulletin.
The rate of interest on 30-year Treasury securities for March 2011 is
4.51 percent. The
Service has determined this rate as the average of the daily
determinations of yield on the 30-year
Treasury bond maturing in February 2041.
Generally for plan years beginning after 2007, § 431 specifies
requirements that apply to multiemployer plans pursuant to §
Section 431(c)(6)(B) specifies a
minimum amount for the full-funding limitation described in section
431(c)(6)(A), based on the
plan’s current liability. Section 431(c)(6)(E)(ii)(I)
that the interest rate used to calculate
current liability for this purpose must be no more than 5 percent above
and no more than 10 percent
below the weighted average of the rates of interest on 30-year Treasury
securities during the fouryear
period ending on the last day before the beginning of the plan year.
Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining the weighted average interest
rate. The following rates
were determined for plan years beginning in the month shown below.
For Plan Years
Beginning in Permissible Range
Average 90% to 105%
April 2011 4.28 3.86 4.50
MINIMUM PRESENT VALUE SEGMENT RATES
Generally for plan years beginning after December 31, 2007, the
applicable interest rates
under § 417(e)(3)(D) are segment rates computed without regard
a 24-month average. For plan
years beginning in 2008 through 2011, the applicable interest rates are
the monthly spot segment
rates blended with the applicable rate under §
417(e)(3)(A)(ii)(II) as in effect for plan years
beginning in 2007. Notice 2007-81 provides guidelines for determining
the minimum present value
segment rates. Pursuant to that notice, the minimum present value
transitional segment rates
determined for March 2011, taking into account the March 2011 30-year
Treasury rate of 4.51
stated above, are as follows:
First Segment Second
2010 2.95 4.94 5.68
2011 2.43 5.09 6.07
Industry Outlook: High Hurdles loom in 2011 & Beyond;
regulatory reform a work in progress, both in the United States and
globally, carriers face an extended period in which they won't know
what will be expected of them, what compliance demands and costs
they'll face, or even whether they can remain viable in certain
They got that right
Institute at Wharton
Regulatory and Compliance Professional (CRCP) Program