Plain English can bring your financial topic to life

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Must an article about how to prevent another Flash Crash be difficult to understand?

Not if you use plain English, as Floyd Norris did in “Time for Regulators to Impose Order in the Markets,” his May 14 column in The New York Times.

Here’s Norris’ first sentence: 
“If your machine makes a mistake that the dumbest human would never make, then maybe you don’t have a very good machine.” 

Even a child can understand Norris’ lead sentence. Norris created an image in my mind that made it easier for me to follow the rest of his column about the changes he believes are needed for the New York Stock Exchange.

The next time you write an investment or financial article, try to use plain language to introduce your topic. Your readers will thank you.

Related posts
* Financial writers clinic: Lessons from Floyd Norris of The New York Times
* Vary your paragraph length like New York Times columnist Floyd Norris
* Financial writers clinic: Rhythm can help you

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Copyright 2010 by Susan B. Weiner All rights reserved

R Koo, "Lessons from Japan: Fighting a Balance Sheet Recession" at #CFA2010

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Lessons from Japan? What lessons can we learn from Japan? They did everything wrong, didn’t they?

The questions above are the reactions that Richard Koo, chief economist of the Nomura Research Institute and author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession often gets when he presents on  “Lessons from Japan: Fighting a Balance Sheet Recession,” as he did on May 18 at the CFA Institute’s annual conference.

Koo made the case that the U.S. should continue fiscal stimulus until deleveraging by the private sector is complete. If we fail to do so, we risk a double-dip recession once people become complacent about economic recovery, he said. Meanwhile, the deleveraging is necessary because of “the bursting of a debt-financed asset price bubble that leaves many private-sector balance sheet liabilities than assets.”

The U.S. recession is a lot more like Japan’s than most people realize. Koo’s first graph showed a striking similarity between the path of U.S. housing prices, 1992-2010, and Japanese housing prices, 1977-1995.

Japan’s recession management has been more successful than you might think. This is especially true in the sense that Japan’s gross domestic product (GDP) grew during the recession despite massive loss of wealth and private sector deleveraging, Koo said. 

Japan could have done even better if the government had consistently supplied fiscal stimulus until private sector deleveraging ended, Koo said. He estimated that Japan might have suffered only seven to eight years, instead of 15 years, if it hadn’t tried to “pull the plug” on fiscal stimulus.

The U.S. has a tough task in front of it. Maintaining fiscal stimulus for an entire period is almost impossible during a peacetime democracy, said Koo. 

Here’s a startling pronouncement: The U.S. has overtaken Japan in savings. This is the result of the recession, said Koo. This jump in the savings rate means that the U.S. could internally finance its fiscal stimulus. 

Interest rates will stay low, said Koo, because nobody is borrowing or lending. We have to get corporations to borrow money before we can even contemplate reducing the budget deficit, said Koo.

Some people think that the U.S. will be different from Japan because it cut interest rates more aggressively. But Koo countered that monetary policy doesn’t have much impact in this kind of recession because you can’t spur borrowing.

MAY 19 UPDATE: Here’s link to Bloomberg.com interview with Richard Koo on the topic of his #CFA2010 presentation.

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Copyright 2010 by Susan B. Weiner All rights reserved

If you enjoy my #CFA2010 tweets…

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…you may also enjoy my free monthly e-newsletter with practical tips for your client communications. You’ll also find at least one investment or wealth management article. 

I often report on presentations to the Boston Security Analysts Society, so you know you’ll see topics of interest to CFA charterholders.

Topics in the May 2010 issue included

  • Watch out for inflation, says veteran value investor, Jean-Marie Eveillard
    Treasurys vs. Treasuries–Which is the right spelling? 
  • How to guest-blog on personal finance or investing 
  • Poll: How do you sign your business emails? 
  • Last month’s reader poll about ghostbloggers 
  • Morgan Creek Capital’s Yusko on investing

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Copyright 2010 by Susan B. Weiner All rights reserved

GMO’s Jeremy Grantham on "The Ethical Hole In Finance" at #CFA2010

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I think the financial industry has lost its way and become a rogue industry. It’s out of control. 

These are the comments with which Jeremy Grantham, co-founder and chief strategist of GMO opened “The Ethical Hole in Finance” part of his presentation to the CFA Institute’s annual conference on May 17.

Grantham criticized the decline of ethics in investment banking since the golden years of the 1960s. Back then head of investment banks would never have permitted today’s unethical practices. “They would have shot you,” said Grantham.

“The ethical standard today is ‘Don’t go to jail if you can possibly help it,’ ” said Grantham.

Grantham said the shift from partnerships to public companies has accelerated the decline in investment banks’ ethics. It would help to return to partnerships, but that isn’t going to happen, he said. A more practical step is to require investment banks to spin off their hedge funds.

Grantham suggested that investment management firms should shift their business to more ethical companies. However, he admitted, GMO has not made this change. Grantham said that if you take business away from the firm that does business one-quarter point cheaper, that’s not in the short-term interests of your clients, even though it’s in their long-term interests. There’s a “creative tension” between these two forces,” he said.

Follow the CFA Institute’s annual conference
You can learn about presentations at the CFA Institute’s annual conference as they occur. Read the CFA Institute’s conference blog or follow the conference using the #CFA 2010 hashtag on Twitter.

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Copyright 2010 by Susan B. Weiner All rights reserved

Dan Ariely says disclosure may hurt investors: Report from his #CFA2010 talk — #CFA2010

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Most investment professionals, including CFA charterholders, figure that more disclosure about financial advisors’ conflicts of interest will help investors.

Not so, said Dan Ariely, author of Predictably Irrational, to the CFA Institute’s annual conference on May 16. In fact, disclosure may not improve investors’ decisions.


Two countervailing forces apply when a financial advisor reveals conflicts of interest, said Ariely.

Let’s assume the financial advisor tells a client that he’ll receive a higher payment if the client chooses Fund A over Fund B.

On the one hand, the client will tend to discount the advisor’s opinion because of the potential bias, said Ariely. On the other hand, the advisor will feel freer to push Fund A because he has revealed his conflict. Ariely believes that this second force will overwhelm the client’s discounting of the advisor’s opinion. As a result, investors end up no better off despite disclosures. 


You can watch Ariely present
Some of Ariely’s past presentations have been captured on video. You can view Ariely on YouTube. 


Follow the CFA Institute’s annual conference
You can learn about presentations at the CFA Institute’s annual conference as they occur. Read the CFA Institute’s conference blog or follow the conference using the #CFA 2010 hashtag on Twitter.
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Copyright 2010 by Susan B. Weiner All rights reserved

Hear Roger Ibbotson on asset allocation for free on May 27, thanks to CFA Institute

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Roger Ibbotson will speak about “The Importance of Asset Allocation” in a live audio webcast on May 27 at 1:00 p.m. EDT. You can register on the CFA Institute’s website.

This event is free, even to non-members of the CFA Institute.

If you read “Roger Ibbotson attacks asset allocation ‘folklore,’ ” you know I think Ibbotson is worth hearing.
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Copyright 2010 by Susan B. Weiner All rights reserved

Morgan Creek Capital’s Yusko riles up Tweeters with comments on investment fees

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Mark Yusko, CEO and chief investment officer of Morgan Creek Capital, got off easy when he spoke to the annual meeting of the Financial Planning Association of Massachusetts (FPAMA) last week. Nobody at the FPAMA questioned Yusko’s opinions about investment management fees. But plenty of my Twitter followers took issue with Yusko. Still, nobody’s saying that one should always choose the cheapest fund.

What Yusko said
Yusko seemed to suggest that fees rise along with the investment manager’s ability to deliver performance.

He made the following statements:

  • “If you pay low fees, you have your money managed by the worst people” 
  • “In what business does the best person not charge more?”
  • “The idea that you want to minimize costs makes no sense.”
  • People say they know that indexing beats hedge funds, but for a 20-year period, S&P 500 returned 6.5% vs. 13.2% for hedge funds.

Disagreement
@BillWinterberg was the first to weigh in on my tweets of Yusko’s comments.

 
@MariposaCap agreed with Bill.

@NathanGehring raised another issue, saying “By charging higher fees the manager may feel a need to take additional risk to justify the fee.” He also questioned Yusko’s hedge fund returns.

Paul Puckett (@investiphobia) emailed me saying, “Disagree, over the long term the opposite is generally true. Expenses are one factor, not the only factor when choosing managers.”

One lonely defender, but some room for higher fees
Only one person tweeted in Yusko’s defense.

Still, as Paul Puckett noted, nobody suggests that expenses suggests that expenses should be the only consideration when you’re choosing a manager. In fact, this theme came up later in the day at the FPAMA conference. 

Fees matter, said Karen Dolan, Morningstar’s director of fund analysis, in “Beyond Stars: Using Fund Analysis to Improve the Investor Experience.” As her slide stated, “Advisors have responded by moving assets to cheaper funds, but there’s more we can do to close the gap.” 

Stewardship and portfolio analysis are also keys to choosing good funds, said Dolan. The fund families on her list of “Top Wealth Creators” over the past decade–American Funds, Vanguard, Fidelity Investments, Franklin Templeton, and PIMCO Funds–have all been good stewards, she said.

The great debate about what really matters in fund selection is likely to continue.


Related posts
* Morgan Creek Capital’s Yusko on investing
* “Using Trading Costs to Identify Better Mutual Funds” in Advisor Perspectives (2007)

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Copyright 2010 by Susan B. Weiner All rights reserved

Timely, creative financial ad from Northwestern Mutual

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Somebody was on the ball in Northwestern Mutual’s marketing department or ad agency. 

I like their new ad, which I spotted in yesterday’s Wall Street Journal. You can view the complete ad on Northwestern’s website.

I like this ad because it
* Plays off a timely topic as well as people’s emotions
* Is written in a conversational tone, without any 10 dollar words or extensive compliance disclosures

Nice job!
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Copyright 2010 by Susan B. Weiner All rights reserved

How to improve your financial planning client relationships

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You can improve your relationships with financial planning clients by encouraging them to communicate honestly with you from the very beginning. 

This is the main lesson I took away from Shari Harley‘s presentation on “How to Say Anything to Anyone: Paving the Way to Powerful Working Relationships” to the annual conference of the Financial Planning Association of Massachusetts.


Ask for honesty
Harley suggested that audience members achieve this by saying, “I want a great relationship with you. If I do anything that violates your expectations, frustrates you or causes you challenges, please tell me. I promise I will say thank you.”

Assuming that your client says “yes” to your request, then you can add, “I hope I can do the same with you.” This sets the stage for two-way communication. If it works, you’ll never be surprised again by a client defection. 

I asked Harley what she’d recommend saying after “thank you” when a client gives negative feedback. Don’t say anything other than “thank you” right away, she suggested, because you’ll feel defensive. Go away and think things over. You can follow up later.


Follow up with questions
Don’t stop with your initial agreement to be honest with each other. Follow up with questions that help you to understand your client better, said Harley.


Here are some of her suggested questions:
1. Who was the best service provider you ever worked with?
2. What made him/her the best service provider?
3. What are your pet peeves?
4. Do you prefer email or voicemail?
5. What do you wish I would start, stop and continue doing? 

I can see how these questions would benefit me as a service provider and a client. It’s time to rev up my courage and start asking more questions.

I believe Harley’s approach could benefit you in your professional and personal life.

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Copyright 2010 by Susan B. Weiner All rights reserved

Small-cap investing opportunities according to Artio’s Dedio

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“Opportunities in Smallcap Investing” was the title of the presentation that Samuel Dedio, head of US equities for Artio Global Management, delivered to the 2010 annual conference of the Financial Planning Association of Massachusetts. The growth of options trading was his most interesting theme, in my opinion. By the way, if you don’t recognize the name Artio Global Management, it was formerly Julius Baer. 

Where the opportunities lie 
Dedio identified opportunities in financials sector, including regional banks, online brokerage companies, and insurance. He figures that “industry consolidation and stimulus spending may potentially benefit this area.” 

Industrials and materials stocks will benefit from emerging markets’ demand. For example, Dedio likes silver, where supply is not keeping up with demand. Compared with gold, silver has many more industrial applications, yet it trades at a discount to gold.

In healthcare, Dedio likes companies that can help implement cost savings. This means companies in diagnostics, medical technology, pharmaceuticals, and home healthcare providers.

The survivors of the 2009 shakeout in retailers will benefit in 2010. “We expect margins (and earnings) to recover more rapidly than in prior cycles,” wrote Dedio in the consumer discretionary section of his handout.

Finally, in technology, Dedio focused on the undervalued importance of semiconductors. 

Options: Why online brokerage may thrive 
Dedio particularly likes online brokerage companies with exposure to options trading as a play on demographics and rising interest in making money through options. 

“The younger generation eats it up,” said Dedio, referring to options trading. This is apparently tied to younger investors growing up with computers and to educational efforts by companies such as Think or Swim.

“Don’t 85% of options expire worthless?” asked an audience member. That’s exactly what makes options a great business, according to Dedio. Investors have to buy more options on an ongoing basis. 

Dedio displayed a graph showing that total monthly equity option trading volume has more than doubled since the year 2000. Monthly trading volume, which was under 100 million until January 2004, has been  200 million–and sometimes exceeded 350 million–during the period January 2008 to September 2009.

Dedio’s one concern about options trading is pricing pressure. However, cost cutters are at a disadvantage in the options arena, where education remains critical. Education requires more robust margins than cost cutters manage.
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Copyright 2010 by Susan B. Weiner All rights reserved