The checkerboard economy

Over the next several years our economy is expected to become a crazy quilt made up of regional patches of prosperity and decline, based on local susceptibility to the recent epidemic of housing fever (Janet Morrissey, InvestmentNews):

"Housing is a very local business," said David Goldberg, an analyst with UBS Securities LLC in New York. Although certain issues are affecting housing demand nationwide, "recovery and timing of recovery" are going to be much more locally driven, he said.

"We believe Texas; Charlotte, N.C.; and Atlanta will be among the first to recover," Mr. Goldberg said. On the flip side, he added that Florida, inland California, Phoenix and Las Vegas will likely lag the rebound. [...]

A report issued in May by New York-based RREEF Alternative Investments, the asset management branch of Deutsche Bank AG of Frankfort, Germany, made similar predictions about an earlier recovery for Texas and the city of Washington but added a few other markets as well. It also named Baltimore, Boston, Charlotte, Chicago, Portland, Ore., Raleigh, N.C., San Francisco, San Diego, San Jose, Calif., Seattle and the New York/ New Jersey corridor as housing markets able to clear out their housing inventory within a two-year horizon.

"There could be some attractive opportunities in these markets, where the turnaround horizon is relatively short," the report said. Markets that will take more than three years to rebound include Miami, Jacksonville, Orlando, Palm Beach and Tampa, Fla., Las Vegas, Phoenix, and Riverside and Sacramento, Calif., according to the report.

Some financial advisors are recommending that clients who are looking to relocate should consider the early-recovery markets first.

Unfortunately, the fever that gripped south Florida and similar areas will have a depressive effect on those areas for at least several years, as affluent families choose to avoid the specific regions that lag behind the housing recovery.

Something's gotta give

A disturbing trend among 401(k) investors (Sue Asci, InvestmentNews):

While workers continue to put money into their 401(k) plans during the current downturn in the economy, they are investing at a lower rate, a survey released yesterday by Putnam Investments found.

The 152 advisers that responded to the online survey, conducted in May, reported that 89% of plan participants are continuing to save and 85% of plan sponsors are continuing to provide matching contributions.

But 21% of participants are now contributing at a lower rate and 4% have stopped altogether.

Obviously, energy and food prices are rapidly rising, and everyone needs to pay for these necessities somehow. But to steal from your retirement income tomorrow just to burn a few gallons of gas today is counterproductive. Your future is literally going up in smoke — as car exhaust.

Pay for a present necessity with a future necessity, and you will never be able to make up for the lost time that will erode the compounded value of whatever you save later. Beyond the money not contributed today, the money that money would earn is lost forever. Better to cut some other unnecessary expense out of your life today rather than to take food off your own table tomorrow.

Some chefs refuse to swallow their own cooking

No wonder so few funds can beat their benchmarks — their managers don't trust their money to them either (Sue Asci, InvestmentNews):

Morningstar Inc. today released a study indicating that many fund managers live by a philosophy of “invest as I say, not as I do.”

The Chicago-based fund tracker found that 47% of the managers of U.S. stock funds reported no ownership in their funds at all.

Morningstar also found that 61% managers of foreign stock funds do not hold positions in their funds, compared with 66% of managers of taxable bond funds, 71% of managers of balanced funds and 80% of managers of municipal bond funds.

The study was the first comprehensive look at fund ownership among the some 6,000 funds in the firm’s database, said Russel Kinnel, director of fund research at Morningstar.

The article notes certain circumstances in which it is inappropriate for managers to invest in a fund (e.g., managing a single-state bond fund for a state in which they do not reside), but overall this result shows that a significant minority of funds are "gimmicky, market-driven" products, as lovingly described by Morningstar's Kinnel.

And the award goes to...

How do you think the concept of retirement income will acquire any real traction in the industry? Did I hear you say "awards"? (Investment News):

The Retirement Income Industry Association will honor advertising groups and academics in the industry at its annual meeting and awards dinner. The dinner will be held Sept. 17 at the Royal Sonesta Hotel in Cambridge, Mass.

The awards will be given to researchers and institutions that provide the most helpful contributions to financial advisers as the industry shifts its focus from accumulating assets to the retirement income distribution phase.

“There are clients who need advice right now, and the market won’t wait for the industry to catch up,” said Francois Gadenne, founding chairman of the Boston-based RIIA. [...]

The awards will be given in four categories: practical research, advertising, defined contribution communications and retail communications. Leaders in the financial services media will head a selection committee in each group.

Suzanne Siracuse, publisher of InvestmentNews, will head the retail-communications awards committee.

The RIIA defines itself as a "national organization whose members are defining the future of retirement security."

College vs. retirement: no contest

Many investors see investing for college versus investing for retirement as some kind of either-or dilemma. It's not. (Lisa Shidler at InvestmentNews):

Americans are split on whether to save for their children's college education or for their own retirement, according to a new study.

The study completed by Country Insurance & Financial Services in Bloomington, Ill shows that 43% believe saving for college is more important while another 43% say retirement takes precedence.

The study also showed that 40% of respondents do not think they have enough knowledge to make the right financial decisions about saving for college. And, 25% of them estimate the costs of college and think it will cost less than $50,000 to send children to college.

As my co-blogger Karen Valdez once explained it to me: "Plenty of people will lend you money to go to college, but nobody will lend you money for retirement."

It makes a great deal of sense: a loan for college uses the future earning power as collateral. In retirement, there is no future earning power — it's sad but true.

Here's the rule of thumb: Always, always, always invest to the max for retirement first. What's left can go to investments for college.

A tale of 27 trillion dollars

It is the best of times, it is the worst of times. All the rules of client-advisor relationships are about to change, says Moss Adams guru Mark Tibergien (InvestmentNews):

Along with the increase in demand for financial advice, clients have more power in the relationship with their financial consultants, who are competing in a small talent pool, said Mark Tibergien, principal of Moss Adams LLP of Seattle.

Mr. Tibergien, who spoke yesterday afternoon in Hollywood, Fla. at the annual financial products and services conference held by Pershing LLC of Jersey City, N.J., noted the sweeping changes in demographics and said that “boomers and their children are extraordinarily demanding.”

“There’s an oversupply of clients and an undersupply of talent,” he said.

“Seventy percent of the industry is made up of sole practitioners who don’t want to grow.”

The changes range from the amount of money clients will have and the competition from new advisers, he said.

Currently, households have $22 trillion in investable assets, with another $5 trillion likely to be added to that by 2012, he said.

Over the same period of time, the number of advisory firms registered with the Securities and Exchange Commission will increase to as many as 20,000, up from the current figure of 14,000, he said.

This is news to me. Tibergien predicts that the number of advisory firms will grow by almost 50% in the next five years. Will they all be sole proprietors?

Because we are seeing more and more consolidation in financial services, it would be interesting to know the expected growth in the number of advisors, as opposed to firms. Then we would have a better idea of whether or not the industry is truly equipped to serve the needs of aging boomers and their trillions.

Regulators Take a Closer Look at Retirees

Regulators are have expressed concerns over retirees and structured products. With the shifting mountain of money in retirement plans and anticipated inheritances, retirees are turning to a "new generation of packaged products" designed to suit income needs. However, most do not understand the products and rarely read prospectuses. Do retirees need regulation or education?

For details take a look at Regulators see risks in new products article in Investment News.