An interesting week to say the least

This highlight from Stratfor stood out to me, and then the subsequent quiet from the government:

“The New York Stock Exchange has temporarily suspended trading because of technical issues, Bloomberg reported July 8. Earlier the same day United Airlines grounded all of its flights because of technical problems, but flights have since resumed. It is unclear if the two are related.”

— Stratfor

I apologize, but there were other anecdotal reports of system outages across the USA.  The statistician in me doesn’t believe in the randomness of this.  

Pundits talk about the “Wall of Worry” and the ability for a bull market climb it.  China, Greece, etc…what is there to be excited about?

In the FinTech space, a war of words erupted amongst the larger robo-advisors.  Too bad this battle is being fought in a lifeboat still way adrift at sea.  No consumer is paying attention to this dialogue however "well intentioned".

Rather than ramble on about my market views (negative), I am going to keep this week’s missive quick as I found an excellent read for you for this weekend.  Michael Singer, who wrote The Untethered Soul, has come out with a new book: The Surrender Experiment.

The Untethered Soul is a classic.  The Surrender Experiment is another one.

In the midst of this noisy global chaos both might help provide some shelter.

Have great weekend! 

It's time to go...

The perspective as an ex-pat is interesting. My recent trip to the USA only highlighted it. I could not help but look at some of the activities in the United States and shake my head and wonder: How is this nation with so many gifts and blessings, so capable of self-sabotage?

We were not back from LAX for more than several days before the news began.

I won’t go into my views on gun control, politics, etc. I will save that vitriol for when we meet and can break bread. For now, I will stick to the markets.

That said, I keep going back to the old quote by William McChesney Martin and “time to take away the punch bowl.” Fed policy has been well signaled and the American investor needs to prepare.

Institutional investors seem ahead of the game already with regards to their own cash positions…some more extreme than others. But even Los Angeles manager TCW has been preparing portfolios for the change in rates. Maybe it is time to hold cash?

But, investors will no doubt rally behind a Greek relief trade. But again ask yourself: What will cause this market to rally any further?

For those who want to buy stocks I would argue: Why pay anything at all? I am not offended, ignore my advice to wait on the markets and go invest. If so, do it as efficiently as possible.

The folks at Replicas seem to have this figured out. Top managers in one account for only $9.95. Full disclosure, I have a vested interest in this platform. I personally believe that investment fees will soon go away. Here’s the link to their large cap portfolio on the Motif broker-dealer platform.

Why not take that a step further? Let’s remove the wealth management fees too! Imagine that. No investment fees and no wealth management fees. Possible? Absolutely. Here’s a link to network of planners nationwide that have this figured out. Again, I have some skin in this game.

But, despite my seeming altruism, I would argue you should keep your powder dry. While you are at it, take some powder off the table. Does powder go into a mattress?

This “free-ness” led me to an interesting conclusion. It was a somewhat obvious one, but a conclusion nonetheless. All of the robo-advisors aren’t providing advice at all. They are 100% geared to investing. That’s it. "Robo-allocators" would be a better description (tip of the hat to Hardeep Walia at Motif).  Which begs an interesting question: Does advice go away? Or, is advice only sought in bear markets?

People forget that passive investing took a HUGE hit in the Great Recession. “Stocks for the Long Run” did not ring true for investors who saw liquidity dry up. What say you robo-advisors? That’s right…you don’t read blogs.  

But, if we really want to look at advice folks need to pay attention to the AI initiatives in Asia.  There in Singapore is the model of robo-advice.  And guess what?  People trust it.

Our trip state-side resulted in a series of good reads for the summer. Here’s my list if you need to knock down some reading:

The Great War of Our Time

The Martian

Extraordinary Comebacks: 201 Inspiring Stories of Courage, Triumph and Success

A Spy Among Friends: Kim Philby and the Great Betrayal

Stumbling on Happiness

Each of these provided me enough left brain/right brain activity to keep me challenged. It was nice to kick back on Sunday AM with a good cigar and a good read.

This trip we spent a considerable amount of time in the Santa Ynez Valley. That has always been our home away from home for many, many years.

While there, we had the chance to get caught up with Mark Horvath, one of the more talented winemakers in the Valley. Our family was fortunate to have him come over and let us taste some of his wines. They are definitely worth a look on their website. Just let them know that we sent you over.

On that jet lagged note I will end this missive. We landed at Changi yesterday and I thought I would attempt this before the exhaustion set in. I have to admit, it is nice to be back in our new home in Singapore. The kids seem safer now.

Vacation and Vocations

As I decompress this Summer vacation, I have had some time to think about what we have seen the past year.  There’s been a lot of innovation and disintermediation...as silly/simplistic as that may sound.  It seems that no profession is safe from Silicon Valley.

For years we denigrated vocations.  Despite being somewhat lucrative, becoming a plumber was looked down upon. Now, in an economy so heavily weighted towards services that are being automated/outsourced…it makes one wonder:  Maybe a vocation is not so bad after all.

A while back a company called Upstart focused on making loans to students who showed great promise.  They have since changed to a P2P loan model.  David Girouard is their CEO.  I spoke with him one time about this at a hedge fund event in San Francisco in early 2014.  The data he had was remarkable…most folks shouldn’t go to college at all.  They never get beyond the student debt given their wages.  Makes one wonder again…maybe a plumber is not so bad after all.  They cannot automate that. 

Look no further than Disney to see what a PR disaster it could be when outsourcing goes horribly wrong.

Are you bullish about the market?  Then you are in the minority.  All of the money managers I respect are concerned about the market.  I know…I am contradicting the “buy and hold” mantra we all know so well.  But when Sweden’s largest money manager is quietly dumping stocks “ahead of the herd, I worry.

In the time I have taken vacation, I have not seen/heard one bullish argument from anyone.  Instead, I have been seeing/hearing a lot with regards to higher rates and the implications for the HELOCs out there in the USA.  Mortgage resets will be difficult for the consumer to bear. 

So, with a Fed signaling higher rates, and smart money leaving the market it might be time to reconsider what your portfolio is up to.  If you want to take advantage of some “virtual advice” feel free to contact one of our affiliated wealth managers now by clicking here.  See what they have to say.

Reminds me of an old book I recommended some years ago: Willful Blindness.  Are we there again?

As I drove through California the drought was so OBVIOUS.  Everyone is talking about it, yet no one is doing anything.  They cannot change the water levels, but they can move to the water.  Why wait?   Below is a photo from a California golf course I used to play at regularly.  It used to be exceptionally lush...now look at it:

Brown, brown, brown...

But, as we visited friends the allure of California did sink in.  Maybe that is the problem…it is too beautiful and the senses refuse to accept the change.  Nevertheless, I always enjoy the Bernat wines.  Full disclosure, I know the winemaker personally, so I am biased.  But they are good.  Here’s the link to Sam and Shawnda’s site and tell them I sent you over!

Bringing it full circle, I don't see a computer disintermediating the vineyard...famous last words?

On that note, let’s get ready for the weekend!

Free Elephants & Hybrid Robo-Advisors

In the days before the dot-com crash of 2001, there was a LOT of free stuff.  So much so that folks began to describe the phenomenon as “free elephants.”

Sure, it was nice to have the technology, or whatever else it was that was being given away…but it begged the question” “Did you really need it?”

Hence the analogy of a free elephant.  Sure it is free, but what do you need an elephant for?

The comparison to the hybrid advisor platforms is apt.  All of them have focused on back-office, and to some extent, middle office functionality.  None are focused on THE crucial variable: Client Acquisition.

There are a lot of tools being given away, but even if you had them, would they work?

The data coming back from the advisor community, and their providers is “no”.

I suspect in the interim there will be a lot of picks and shovels sold to advisors.  This is appropriate as there is an informational arbitrage to be exploited…advisors simply do not know any better.

For them right now, tragically, the FREE elephant is looking quite good.

Why robo-advisors look set for malfunction

GREAT article from the research team at Morningstar.  Deja vu?

Why robo-advisors look set for malfunction

By Min Ho | 8 May 2015 (5 days ago) 
Keywords: morningstar | roboadvisors charles | schwab wealthfront

There has been a lot of noise about the provision of low-cost, automated strategic asset allocation portfolios to retail clients. But the economics doesn't add up, says Morningstar.

Fund research firm Morningstar has questioned the viability of robo-advisors, pouring cold water on their potential threat to wealth and asset managers.

In a recent research paper out of the US, the firm says few standalone robo-advisors will be materially profitable and many won’t be standing in a few years’ time.

It finds the economics of robo-advising challenging with low fee rates averaging 0.25%, given they will need to invest heavily in advertising or consolidate to gain scale.

“Robo-advisors need near industry-leading expense, efficiency and substantially more scale to be profitable,” said Michael Wong, Chicago-based equity analyst for Morningstar.

“The current legion of standalone robo-advisors will have to invest heavily in advertising, or consolidate to gain scale, be acquired or partner with established brokerages, or go out of business.”

However, Tao Jin, head of investment management in Asia for Morningstar, pointed out that robo-advisors might not be so overstated for Asia, given the difference between wealth management and distribution landscapes in the US and Asia. In the US, the fee-based financial advisory model dominates, although in Asia bank distribution and commissions are still the norm.

"Robo-advisors in Asia offer a low-cost alternative investment solution to the traditional bank-dominated advisory model," said Tao, nothwithstanding forecasts that the fee-based financial advisory model will be introduced in Asia before long.

Morningstar defines robo-advisors as offering automated, semi-tailored strategic asset allocation portfolios directly to retail customers. They are positioned between discount brokerage and full-service wealth managers. A risk-tolerance questionnaire usually algorithmically determines an appropriate portfolio composed of low-cost ETFs.

Using a range of comparable companies, Morningstar estimates the break-even client asset level for robo-advisors is between $16 billion to $40 billion – which it says is eight to 20 times the current level of leading robo-advisors.

“Robo-advisors will have to use much of the capital they raise to pay for the tens to hundreds of millions of marketing dollars needed to gather assets and reach a profitable scale,” noted Wong.

“Even after they become profitable, their slim operating margin and low average account size imply that it could take a decade or more to recoup advertising costs.”

He points to a competitive advantage for traditional wealth management firms, saying they should focus on their value-added services such as access to hedge funds and insurance, generating alpha and providing more holistic financial planning.

Nevertheless, Morningstar says the $16-$40 billion break-even point for robo-advisors is achievable given the addressable market of millennial and lower-net-worth households that full-service wealth managers don’t focus on.

At the end of 2014, the entire robo-advisor industry had assets of $20-$30 billion, and the leading independent robo-advisors assets of about $2 billion. That compares to the $2 trillion of firms such as Bank of America-Merrill Lynch and Morgan Stanley, and $2.5 trillion for investment services firm Charles Schwab.

However, to reach these investors robo-advisors will need to invest heavily in marketing. It estimates leading robo-advisors Wealthfront and Betterment would need to spend $60-$150 million and $240-$600 million in advertising to achieve $16-$40 billion of client assets.

“Once the robo-advisors break even, depending on their long-run operating margin, it could take years before any of the accounts they add become truly profitable,” said Wong.

Morningstar suggests Charles Schwab is one of the only companies with a viable business model delivering wealth management to the masses. The firm launched an online advisory solution, Schwab Intelligent Portfolios (SIPs), in the first quarter. It charges no advisory fees, account service fees or commissions.

Schwab’s expenses as a percentage of client assets are below 20% and it has access to more than nine million brokerage accounts and about $2.5 trillion in client assets.

“This means it can grow its online advisory solution to a profitable scale via low-cost promotion to current clients,” said Wong. “The company can also leverage its existing $250 million of annual marketing to simultaneously increase awareness of Schwab Intelligent Portfolios and its overall brand.”

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