There was an interesting article recently in Bloomberg entitled: College tuition in the U.S. rises faster than inflation, again. In the article, Bloomberg reports results from a recent study conducted by the College Board. The study shows the continuation of a trend we have seen for decades. This year, inflation (measured by the personal consumption expenditures index) was 1.4%, while college tuition and fees rose at a rate above that. For private nonprofit colleges the average increase was 3.7% and for in-state residents at four-year public schools, costs rose 2.9%.
According to the article, "the good news is that increases this year are smaller than the average for the past five-, 10- and 30-year periods, and more public school students saw no increase at all." However, student loan debt is rising and most Americans' real incomes haven't grown in over 10 years.
Monday, November 17, 2014
Tuesday, March 11, 2014
The Future Role of the Financial Advisor
There was an interesting article recently in the Wall Street Journal on the role and fee structure of financial advice. See: http://blogs.wsj.com/moneybeat/2014/03/07/the-incredible-shrinking-management-fee/
ETFs have made it so simple to invest (that is, if you believe in efficient markets) that perhaps it is time to reevaluate the percent of assets under management (AUM) fee structure. I like the idea that in the future, financial advice may involve specialized individuals working together under one roof (financial advisor, accountant, lawyer, etc.).
It will be interesting to see if WiseBanyan succeeds.
ETFs have made it so simple to invest (that is, if you believe in efficient markets) that perhaps it is time to reevaluate the percent of assets under management (AUM) fee structure. I like the idea that in the future, financial advice may involve specialized individuals working together under one roof (financial advisor, accountant, lawyer, etc.).
It will be interesting to see if WiseBanyan succeeds.
Saturday, February 22, 2014
Should the Fed Police Foreign Banks?
An article from Wednesday's Wall Street Journal discusses new rules that will be imposed on some foreign banks with U.S. operations. These rules will subject them to the same types of capital requirements, debt levels, and annual stress tests, that are now imposed on U.S. banks under Basel III. The regulation is an effort to prevent further government bailouts and moral hazard when banks become "too big to fail." The rules are geared toward enforcing better risk management and will require banks to have some "skin in the game," that is, if their legal teams can't figure out a way to sidestep the new rules.
Foreign banks with U.S. operations must have $10 billion or more in assets in order to be forced to adhere to the Fed's new rules. The rules will not be imposed until July 2016, which will give the banks' lawyers plenty of time to devise strategies to thwart them. Perhaps they will move their U.S. operations overseas, or sell off assets so that they come in under the threshold.
The Fed justifies extending the rules to foreign banks, by saying that foreign banks dealing with American customers must be kept on the same playing field as their U.S. competitors.
An interesting working paper on minimum capital requirements and their effect on WACC can be found here or here.
Foreign banks with U.S. operations must have $10 billion or more in assets in order to be forced to adhere to the Fed's new rules. The rules will not be imposed until July 2016, which will give the banks' lawyers plenty of time to devise strategies to thwart them. Perhaps they will move their U.S. operations overseas, or sell off assets so that they come in under the threshold.
The Fed justifies extending the rules to foreign banks, by saying that foreign banks dealing with American customers must be kept on the same playing field as their U.S. competitors.
An interesting working paper on minimum capital requirements and their effect on WACC can be found here or here.
Wednesday, February 12, 2014
Obama's MyRA Plan might lead Horses to Water...but...
At his recent State of the Union Address, President Obama discussed his plan for helping low to middle income Americans save for retirement by creating the MyRA. Since then, as more details have been revealed, many journalists have written about this savings vehicle, which is slated to be available in the coming months.
A nice summary of the plan, with opinions that I largely agree with, is found here.
Basically, the MyRA will be set up like a Roth IRA. Roth IRAs allow investors to invest after-tax dollars and withdraw the money in retirement tax-free. There is no immediate tax benefit for investing today, but your investment will grow tax-free and withdrawals (at age 59 1/2 and older) will be tax-free. Depending on your current and future tax brackets, Roth IRAs can be the best type of retirement vehicle.
However, the MyRA will have limited investment options. These accounts will solely invest in government savings bonds, and will be backed by the U.S. government, meaning that savers can never lose their principal investment (protected like with FDIC). Don't be fooled into thinking that because the principal is protected, you will be free of risk. The MyRA will pay the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan. In 2012, this fund's yield was 1.47%. Inflation over that same period (as measured by the CPI figures) was 2.08%. Purchasing power risk is a very real threat to this type of account.
The MyRA accounts will stay with you when you switch jobs or contribute to the same account from multiple part-time jobs. The MyRA will be free of all administrative fees. The balance is capped at $15,000 -- this is truly geared toward low to middle income Americans. After that (or once it has been opened for 30 years), the owner has to roll it over into a Roth IRA (they can do this anytime).
Contributions can be withdrawn at anytime without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will be forced to pay taxes on withdrawals and will possibly owe a penalty, just like a Roth IRA.
All in all, I don't really understand how the creation of this new retirement plan will help Americans save. The tax incentives already exist with Roth IRAs. Middle and low income Americans are already eligible for these plans. Guaranteeing the principal and eliminating administrative fees are benefits, but the low return likely makes this a poor investment. For comparison, the Barclays iShares funds that match the G Fund most similarly are the iShares Barclays 7-10 year T-Bond fund (ARCA:IEF) with an average maturity of 8.38 years, and the 10-20 year T-Bond fund (ARCA:TLH), which has an average maturity of 14.36 years. You can compare these funds' returns to the S&P 500 or any other market proxy to see for yourself how badly it has fared in the long-run.
The returns on the MyRA might be low enough to disappoint investors and discourage them from further saving in general. Worse yet, by capping the account's value at $15,000 we might give some Americans the idea that $15,000 is savings enough for retirement.
Can we come up with a better incentive for Americans to start saving for retirement? Especially younger Americans, for whom Social Security may not exist to help? What about a government matching program? Or an incentive to actually go ahead and roll over that $15,000 into another retirement vehicle rather than spending it?
What ideas do you have?
A nice summary of the plan, with opinions that I largely agree with, is found here.
Basically, the MyRA will be set up like a Roth IRA. Roth IRAs allow investors to invest after-tax dollars and withdraw the money in retirement tax-free. There is no immediate tax benefit for investing today, but your investment will grow tax-free and withdrawals (at age 59 1/2 and older) will be tax-free. Depending on your current and future tax brackets, Roth IRAs can be the best type of retirement vehicle.
However, the MyRA will have limited investment options. These accounts will solely invest in government savings bonds, and will be backed by the U.S. government, meaning that savers can never lose their principal investment (protected like with FDIC). Don't be fooled into thinking that because the principal is protected, you will be free of risk. The MyRA will pay the same variable-interest-rate return offered by the G Fund, the Government Securities Investment Fund in the federal employees’ Thrift Savings Plan. In 2012, this fund's yield was 1.47%. Inflation over that same period (as measured by the CPI figures) was 2.08%. Purchasing power risk is a very real threat to this type of account.
The MyRA accounts will stay with you when you switch jobs or contribute to the same account from multiple part-time jobs. The MyRA will be free of all administrative fees. The balance is capped at $15,000 -- this is truly geared toward low to middle income Americans. After that (or once it has been opened for 30 years), the owner has to roll it over into a Roth IRA (they can do this anytime).
Contributions can be withdrawn at anytime without penalty. However, anyone who withdraws the interest they earned in the account before age 59 1/2 will be forced to pay taxes on withdrawals and will possibly owe a penalty, just like a Roth IRA.
All in all, I don't really understand how the creation of this new retirement plan will help Americans save. The tax incentives already exist with Roth IRAs. Middle and low income Americans are already eligible for these plans. Guaranteeing the principal and eliminating administrative fees are benefits, but the low return likely makes this a poor investment. For comparison, the Barclays iShares funds that match the G Fund most similarly are the iShares Barclays 7-10 year T-Bond fund (ARCA:IEF) with an average maturity of 8.38 years, and the 10-20 year T-Bond fund (ARCA:TLH), which has an average maturity of 14.36 years. You can compare these funds' returns to the S&P 500 or any other market proxy to see for yourself how badly it has fared in the long-run.
The returns on the MyRA might be low enough to disappoint investors and discourage them from further saving in general. Worse yet, by capping the account's value at $15,000 we might give some Americans the idea that $15,000 is savings enough for retirement.
Can we come up with a better incentive for Americans to start saving for retirement? Especially younger Americans, for whom Social Security may not exist to help? What about a government matching program? Or an incentive to actually go ahead and roll over that $15,000 into another retirement vehicle rather than spending it?
What ideas do you have?
Wednesday, February 5, 2014
Industry Veterans help us to Prepare for Rising Rates
Coming off an extraordinary year for equities, 2014 has started off incredibly, and expectedly, rocky. I have been watching as the market indices and the market's fear gauge -- the VIX -- or volatility index, move up and down like yo-yos.
To make educated decisions, investors can't ignore macroeconomic principles and must also revisit history for clues as to behaviors that might repeat themselves. In the U.S. we have been in a period of declining interest rates for so long, that many investors and financial advisors don't realize how a rising interest rate environment will effect portfolios. I found this article in the Wall Street Journal from January 20th to be quite relevant and timely. It describes how young people working in the financial industry are looking toward veterans in the industry for insight on how a rising interest rate environment will affect them and their clients.
I will repeat a few interesting quotes here: "Many advisers have been through at least one big stock-market swoon. But many haven't been practicing long enough to live through a sustained period of rising interest rates. ... Rates have risen for relatively brief periods in the past couple of decades, for instance in 1994. But financial professionals say that the conditions they are girding for now haven't been seen since the early 1980s—significant rate increases likely to last for several years and affecting prices of bonds and bond-based mutual funds. That brings the risk that investors could be hit with negative returns."
We live in interesting times.
To make educated decisions, investors can't ignore macroeconomic principles and must also revisit history for clues as to behaviors that might repeat themselves. In the U.S. we have been in a period of declining interest rates for so long, that many investors and financial advisors don't realize how a rising interest rate environment will effect portfolios. I found this article in the Wall Street Journal from January 20th to be quite relevant and timely. It describes how young people working in the financial industry are looking toward veterans in the industry for insight on how a rising interest rate environment will affect them and their clients.
I will repeat a few interesting quotes here: "Many advisers have been through at least one big stock-market swoon. But many haven't been practicing long enough to live through a sustained period of rising interest rates. ... Rates have risen for relatively brief periods in the past couple of decades, for instance in 1994. But financial professionals say that the conditions they are girding for now haven't been seen since the early 1980s—significant rate increases likely to last for several years and affecting prices of bonds and bond-based mutual funds. That brings the risk that investors could be hit with negative returns."
We live in interesting times.
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