By SA For FAs :
Morgan Housel wrote a satire two years ago about two hedge fund managers who walk into a bar , in which the money managers commiserate about their poor returns relative to an index fund while cheering each other with the consolation of the enormous fees they earn. The part I found most amusing occurs when one fellow asks his friend how he deals with clients upset about performance, to which the whiskey-besotted manager replies:
We tell them we're not trying to beat the market. We're trying to manage risk.
They both cackle about that comeback, and then the fund manager elaborates:
You convince them that we have less downside risk than the market. So even though your returns are terrible, you can tell them you have excellent risk-adjusted returns. Throw in some formulas with Greek symbols, and they'll leave you alone.
Housel's point throughout is that investors would be better off with the higher returns and lower fees of index funds than being taken for suckers by an industry that dazzles but doesn't deliver. He also nicely satirizes an industry that has mastered the art of obfuscation.
I too find it annoying when asset managers string together words and phrases like "managing risk" glibly and uninsightfully in an effort to project knowledge and authority. And yet managing risk is a vital issue for investors, which is perhaps why industry professionals know they can shut people up when they talk about it - together with a few Greek symbols, of course.
Managing risk is indeed a longstanding problem in the investment sphere. As I've noted before, an industry coursing with trillions of dollars is all too eager to manage your money, but generally disinterested in managing your risk - at least to the extent of shielding you from it. If you want to buy a mutual fund, ETF or TDF - even one of Housel's preferred cheap index funds - the marketing literature will get you excited about the possibilities of the investment, but they won't be there for you if the investment doesn't work out for you, despite their trillions. That's how the system works, and that's fine for investors who are prepared to manage the risk on their own, as I myself do.
But, what if you don't want to manage all that risk? What if you, not unreasonably, want your money manager to guarantee you results just like other vendors who provide you services do? That is not an unreasonable desire. And, generally, the only corner of the industry that will do that for you is an insurance company, which is a bridge too far for most investors, or so it seems from previous discussions in this forum and elsewhere. Annuity products, which provide an income you cannot outlive, don't enjoy a great public reputation - mainly because of perceived high fees (in fact, they're not always high), surrender charges and an army of salesmen, some of whom have not brought honor to their profession.
So, when I return to the subject of annuities, I generally do so when I see something new or different that might, potentially at least, tend toward the positive attributes of risk management while steering away from the snake oil. An article appearing last week on Bloomberg drew my attention to a potential candidate in this regard, a new firm called Blueprint Income , which leverages the internet to help investors craft a personal pension. Here's how Bloomberg describes the firm's value proposition:
One of Blueprint's innovations involves how deferred income annuities are sold. They typically require five- or six-digit sums in return for a future stream that, should someone die prematurely, may never be used. Carey's website spits out a quote for a contract in 60 seconds and requires an initial investment of $5,000…After the initial investment, buyers can increase their retirement income stream with deposits of as little as $100 a month to create what Blueprint calls 'a personal pension.'
One quibble: Just like in a previous article in which I discussed consumer-friendly guaranteed income innovation, in an article on tontines , the innovator was Moshe Milevsky, whose research revived that antique but efficient form of longevity insurance, so too here: Milevsky is the leading authority on these topics, and he and colleagues Huaxiong Huang and Virginia R. Young previously published a paper on accumulating income annuities via an installment method .
Giving credit where it is due for the innovation, it is nevertheless good to see that someone is making an effort to bring to market this potentially useful method of generating retirement income. So, let us return to Housel's gag about "managing risk." There are some investors who rightly worry about longevity risk - that the assets they have saved may not last as long as they do; and about market risk - that the assets they have saved will plunge in value right when they need it most. Retirement planning is complex, and the number of variables great. An annuity of some sort can relieve investors of those two risks, leaving them to worry about all the others, such as health expenses, forced retirement, inflation, and others.
Finally, a thought about how this type of solution might be especially helpful to those who like Housel's cheap index fund and those who want the help of a financial advisor (not necessarily the same type of investor, but not necessarily opposing philosophies either): One of the biggest difficulties investors face is the uncertainty of how long they will need an income. By creating a personal pension (see any one of several Milevsky books - including those written for laymen ), they can develop a much surer financial plan. For example, an advisor can develop a plan that finances a client's retirement from age 65 to a date certain at age 85, with a deferred income annuity footing the bill from age 85 until the client's passing.
There's a lot of non-all-or-nothing things investors can do to manage risk, and it's a great thing when academic innovators and clever entrepreneurs can bring into fruition consumer-friendly income solutions. Let's hope for more innovation in this important area.
As a side note, I want to welcome regular readers of Montana Skeptic to this digest. I didn't at first understand why new followers were showing up on my SA leaderboard at a rate I have never previously seen before until it came to my attention that he graciously plugged my column. It is a measure of their esteem for him that over 200 have taken his recommendation. So, welcome aboard - I won't be writing about Tesla ( TSLA ), but you didn't need me for that anyway! (And if you're interested in Tesla and not already following Montana Skeptic, then you will definitely want to join his feed !)
Please share your thoughts on this issue in our comments section. Meanwhile, below please find links to other advisor-related content on today's Seeking Alpha.
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