Advanced Wealth Management and Financial Services Marketing
Sober and Useful Description of Scope of Problems by MIT Economists
Finding strong stable counterparties, custodians, banks and partners is the critical challenge now. This gives you a fact-base for discussing the situation.
Martin Feldstein and Simon Johnson MIT economists talk about the causes and current status of the crisis.
Economic Recovery: Are Happy Days Here Again?
Published : June 10, 2009 in Knowledge@Wharton
Most financial experts at Wharton and elsewhere insist that the much-talked about recovery is not here yet, despite some of the first hopeful data in months — and they remain concerned that the recovery will be weaker and take longer to gain momentum than past slowdowns.
U.S. could be in full recovery mode by the fourth quarter of this year if the current trend lines continue — but even he concedes that is a large “if.”
Indeed, a June 10 “Beige Book” report from the Federal Reserve Board said that economic conditions remained weak during mid-April through May. Conditions deteriorated in many regions of the country, the survey found, as commercial real estate and labor markets continued to struggle.
Several Wharton experts express fairly pessimistic views about the recovery — predicting that positive growth may not be here yet, and that even when it does arrive, it will probably take several years for employment rates to return to so-called normal levels. Even if the U.S. gross domestic product turns positive by the end of 2009, they note, the American economy will remain close to the bottom of the large trough that began in late 2007, with a long way to climb for jobs, home prices and other key economic indicators just to get back to where they were.
“Many of the underlying problems remain — and we still haven’t seen the worst in terms of consumer problems,” says Mauro Guillen, Wharton professor of international management and sociology and director of the Lauder Institute at Penn. He lists some of these problems as:
- Ongoing mortgage woes for U.S. homeowners — highlighted by the latest statistics showing about 12% are behind on their mortgages or in foreclosure
- Deepening crisis in consumer credit card debt
- Looming troubles for commercial real estate
- Ongoing issue of so-called “toxic assets” on the books of larger banks, which may continue to impede their ability to make the loans that would spur a recovery.
Structural Factors
Franklin Allen, a finance professor at Wharton and co-director of the Wharton Financial Institutions Center, has taken a fairly negative view throughout the current crisis. He argued earlier this year that some large U.S. banks might have to be nationalized before any serious economic rebound could begin. So, it should not come as a surprise that Allen does not now believe that recovery is at hand, or that it will be widespread.
“I think this [financial crisis] will be a watershed event that will change many things going forward,” Allen says. He is especially concerned about the issue of structural joblessness; the U.S. Bureau of Labor Statistics recently reported that some 27% of the nation’s 12.5 million unemployed workers have been without a job for more than six months, a record-high rate. “The real problem is that long-term unemployment is going up dramatically,” Allen says. “Unfortunately, many people in their late forties and early fifties may never get jobs again.”
The problem, according to Allen’s perspective, is that some sectors of the economy face large structural obstacles for regaining jobs even when the leading economic indicators turn positive. This is particularly true in industries that are losing out to newer technologies — such as America’s hard-hit newspapers — or manufacturing, the sector where the job losses have been heaviest since 2007.
Allen predicts that “the auto sector will shrink substantially — fewer workers, fewer dealers at least for the domestic auto companies. There is likely to be an expansion of Toyota and Honda production in the U.S. which may offset this to some extent.”
More broadly, Allen believes that the housing and other property markets must show signs of stabilization before the economic recovery can truly be considered underway. He says the recent surge on Wall Street should not be ignored but that the rally seems to be a bit “short-sighted.”
Jobs and Joblessness
One indicator that economists find problematic is unemployment. The U.S. jobless rate for May has reached 9.4%, the highest in a generation, and experts say that hiring typically lags well behind the earliest rumblings of a recovery, such as an increase in consumer confidence. That is because some companies are still reluctant to lay off people during the depths of the downturn — retaining what Wharton professor of finance Nicholas Souleles calls an “overhang” of extra employees.
“Some firms still have this overhang, so they might be slow to add new workers — especially if they’re uncertain what the strength of the economic recovery might be,” Souleles says. Edmund Phelps, a Nobel Prize-winning economist at Columbia University, recently predicted that the so-called “natural unemployment rate,” which has been about 5.5%, could rise to 6.5% or even 7% in the wake of the meltdown.
In addition to lagging joblessness, economists say the nature of this credit crunch appears to have brought on a sea change in the core habits of American consumer, whose spending — fueled by an increase in credit card and home equity debt — has driven an increasingly large proportion of U.S. economic growth since the 1980s. Now, many Americans are cutting back on debt and building up their savings accounts, if they can. The personal savings rate, which averaged 0.9% from 2004 through 2007, has climbed to 4.2%.
“The savings rate has been driven down so low, because people have been able to borrow against their houses, or they have a lot of stock appreciation, and people didn’t need to do as much in the savings department,” Guillen says. “Now they are acknowledging that these have reversed.” However, the problem with the virtue of savings is that the reduced consumer spending that comes with it can put downward pressure on economic output and growth, which continues to slow the pace of new hiring.
One issue that economists have been worrying about recently is whether interest rates will rise — in response to rising government debt to finance economic stimulus programs, bank bailouts and general overspending — and how much that might hamper the recovery before it gets very far off the ground. The yield on U.S. government bonds rose to the highest levels in six months near the end of May, largely driven by worries over government borrowing.
“There will be difficulties in getting a triumphant return to 4% or 5% rate of growth in the GDP with low inflation — that will be hard because the banks cannot lend and it will be hard because the government will ultimately raise interest rates because of inflation,” Guillen says. And he is very concerned that a sharp rise in interest rates will clip the wings of the incipient recovery before it takes flight.
Are Consumers Confident?
The problem, according to some economic experts, is that while consumers and business leaders are anxious for any hopeful signs of a recovery, the upbeat psychology will not last if banks are not lending money or if consumers continue their recent focus on paying down debts and saving rather than on shopping.
Wharton faculty say that economic downturns that are triggered not by the conventional business cycle but by a financial crisis — as was also the case in the Great Depression of the 1930s — tend to have much slower and more shallow recoveries. Guillen argues that the nature of the banking crisis — with the billions of dollars lost or tied up in mortgage-backed securities and other troubled assets — makes this recession fairly unique.
“In the last 70 years, we’ve had seven recessions — but none of them came this way, with the kind of Third World banking that used to happen in Latin America or in Asia,” Guillen says bluntly. “We have a financial system that is very sick because of the decisions that were made, that consumers went along with and China went along with. That makes it a difficult situation to fix.”
Most economic experts stress that the recovery — regardless of whether it begins by the end of this summer or is deferred until early next year — is merely the start of a very long process to return employment, housing prices and other indicators of economic health back to 2007 levels, and then beyond.
“GDP growth is measured quarter to quarter,” Souleles says. “If there is growth, we will still be well below where we were when the recession started. And we will probably be below that trend line for a long time.
The technical term for how we all “understand” something within the cognitive sciences is called “framing.”
We think, mostly unconsciously, in terms of systems of structures called “frames.” Each frame is a neural circuit, physically in our brains. We use our systems of frame-circuitry to understand everything, and we reason using frame-internal logics. Frame systems are organized in terms of values, and how we reason reflects our values, and our values determine our sense of identity.
All of our language is defined in terms of our frame-circuitry. Words activate that circuitry, and the more we hear the words, the stronger their frames get. But if our language does not fit our frame circuitry, it will not be understood, or will be misunderstood.
But the frame circuitry in our brains doesn’t change overnight. Just using the language of scientific facts and figures does not mean that the significance — especially the moral significance — of those facts and figures will be understood. That moral significance can only be communicated honestly and effectively using the language of value-based frames, preferably frames already there in the minds of who you are speaking with.
Most people don’t understand all the facts and figures thrown at them. People think in terms of fundamental values like freedom and responsibility, and themes that are close to their everyday lives, like health, jobs, and their children’s future
Your ideas like these have to be repeated over and over.
Neuroscientists are beginning to advance explanations of social behavior in terms of underlying brain mechanisms.
Two distinct networks of brain regions have come to the fore. The first involves brain regions that are concerned with learning about reward and reinforcement. These same reward-related brain areas also mediate preferences that are social in nature even when no direct reward is expected.
The second network focuses on regions active when a person must make estimates of another person’s intentions. However, it has been difficult to determine the precise roles of individual brain regions within these networks or how activities in the two networks relate to one another.
Some recent studies of reward-guided behavior have described brain activity in terms of formal mathematical models; these models can be extended to describe mechanisms that underlie complex social exchange. Such a mathematical formalism defines explicit mechanistic hypotheses about internal computations underlying regional brain activity, provides a framework in which to relate different types of activity and understand their contributions to behavior, and prescribes strategies for performing experiments under strong control.
Mark Elzweig, Mark Elzweig Company, Ltd. May 2009
Investors have a message for financial advisors and their firms: We want flexibility. We want regular input — and we still want
you as a partner. So, sayonara strait jacket products. Adieu to mandatory asset allocation models.
Rigid products like separately managed accounts hemorrhaged assets during the market wipeout and continue to bleed.
At Dover Financial Research Jean Sullivan, managing principal, says you can see the trend toward greater control in managed solutions products. In the fourth quarter of 2008, separately managed accounts saw net asset outflows of $21.4 billion, accounting for 83% of outflows in the fourth quarter in managed solutions. The bleeding continued in the first quarter, with outflows of $16.4 billion, according to Cerulli Research. Products that enabled advisors to be flexible did much better, actually adding assets modestly. And that trend is continuing this quarter, says Sullivan, who conducts the research for the Money Management Institute.
Cash headed into programs with more advisor discretion.
The money went either to managed solutions where the broker was a portfolio manager or at least an advisor who could re-jigger allocations. It also went to traditional transactional strategies that enable advisors to buy and sell assets opportunistically. Sometimes that meant going into cash - which SMAs don’t allow. “Investors are looking for more flexibility. People were laid off. Equities are down. Money moved to the sidelines,” says Sullivan. And now some people think their brokers can do better than outside managers.
Return of the stock jockey? Not exactly.
But the numbers indicate that the pendulum is swinging back. Over the past ten years, wirehouses have been discouraging stock pickers, rewarding advisors who could accumulate assets and bring in fee-based accounts. The market turmoil highlighted that some of the products hamstrung advisors at critical moments. Advisors who moved clients into cash were punished financially — although they undoubtedly earned the undying gratitude from clients. And we see that some managed solutions clients are questioning the model: Why pay a fee to lose money?
Investors want control but still seek advice avidly.
New research from Mast Hill Consulting Inc. and Sway Research Llc shows that even investors who think of themselves as free spirits are hungry for service. According to the study, Hearts & Wallets, 44% of the respondents who use full service firms called themselves general contractors — that is, they are captains of a team of advisors. Twenty-seven percent of the “self-directed” also dipped into the full-service model. “I would have expected that to be 0%,” says Laura Varas, principal, Mast Hill.
The new world order: Advice first, validation second.
The market upset, the Internet, they have all changed the way investors think about their money. In the old model, Wall Street assumed that investors who were deeply involved in decisionmaking would show up at their doors with a game plan. “That’s a harmful concept,” says Varas. The reverse is true. “General contractors don’t know what they want. They are going to ask professionals what to do. Then they are going to check the advice. They’re triangulating.”
Who will come up with a new model to respond to changing investor needs? Wall Street is still recovering from the subprime crisis. But it needs to move fast before someone else does. Brokerage firms excel at products, but investors are seeking something else. The race is on to see who can meet the new needs.
Research shows a large divergence of opinion between how professional wealth managers felt they performed during the credit crunch and what their clients think.
- Wealth managers believe they acquitted themselves well, many clients feel they were poorly served and are reviewing their relationships as a result.
- Abiding problem with wealth management is the conflict of interest facing most advisers: they are supposed to advise clients on what is best for them in the long run but are incentivised in the near term to sell financial products. While these interests may converge, frequently they do not.
- Scepticism over the value and independence of advice permeates the wealth management market.
The success of multifamily office at the top end of the market may hold the secret to reinventing the industry.
- The imperative for family offices is that they act solely as buyers and never as sellers of products. “To be an organization that really serves families well requires independence from intermediaries, like banks,” he says.
- The waters are muddied, however, by family offices that expand to offer standalone investment products or even banking services, and by the numerous private banks and wealth managers that also have so-called family office divisions.
- “Many investment companies claiming to be family offices are nothing more than hedge funds and asset managers looking for clients and assets.”
- “Only one question really gets to the heart of the issue: how are you paid?”
- “2008 was a wonderful year for multifamily offices in general in terms of differentiation because it was the first year for a while in which it was easy to spot the difference. Our client portfolios significantly outperformed the private banks and we were able to avoid all the nasty elephant traps.”
“Multifamily offices have been winners from the financial crisis not because they are multifamily offices but because they are independent advisers. Rather than a flight to quality, there is a flight to advice with clients happy to pay for what they believe to be independent.”
Here is a good quick radio interview and update on the field. We find it very impressive - link
Likely the accumulation and usefulness of this knowledge will be exponential. Because:
- The technology is cheap and scaleable
- Animal models are a match for human
- Applications are usually only 1-2 steps from the research
- The pace of accumulation of knowledge is very fast. Typically 6 months from research idea to results/publication. This cycle time is 2-3x faster than traditional economics/academic knowledge
- This also triggers more energy and creativity being directed at the field while good new ideas are identified and bad ones eliminated more quickly. A vituous cycle.
Perhaps most signficant - regulators and policy makers are very interested in this work as a scientific basis for regulation.
Like all biological processes and systems - it’s all very mechanical!!
“Before the financial crisis of 2008, it was rather difficult to convince people that we all might have irrational tendencies…Still, the terrible loss of homes and jobs has been a very high price to pay for learning that we might not be as rational as Greenspan and other traditional economists had thought.”
from Predictably Irrational Blog: full post
Women Prefer Blogs/Facebook To Twitter - Jason Lee Miller | Staff Writer
Losing interest in traditional media?
Women keep their personal lives and business lives very separate when it comes to social media, according to the 2009 Women in Social Media Study by BlogHer, iVillage, and Compass Partners. While women consider blogs great sources of information, especially regarding purchases, the vast majority of women use social networks solely for keeping in touch with family and friends.
Over half (55%) of the women surveyed in said they participate in some kind of blog activity (publishing, posting comments, reading), and 53% use social networks.
But here’s the kicker: Women use social networks in the purest sense only; 75% use them to keep in touch with friends and family, and not so much as information sources or for making purchase decisions. That’s a major insight considering this is the half of population making 85% of purchase decisions in the US.
In contrast, women rely more on blogs for the business of life, and are twice as likely to use blogs than social networks as an information source (64%), for advice and recommendations (43%), and opinion sharing (55%). Women are 50% more likely to use social networks merely as a means of keeping in touch.
A third of those participating in social networks are loyal to just one and do no other social media activities on a weekly basis. There are likely infinite reasons for that, but it sheds a rather harsh light on why only 20% of women appear to use Twitter.
It could mean that most want all of the networking under one roof for convenience, and only desire one-to-many communication if it involves people they know and trust. It could also mean that Twittering is still considered a medium for celebrities, politicians, and digital hipsters; the survey found that women who themselves blog are significantly more active across all forms of social media.
“Bloggers have a broad reach in the social media population and the survey demonstrates that women who blog are the most actively engaged social media participants — constantly seeking out new ideas and ways to share their opinions about those ideas,” said Susan Wright, president of Compass Partners.
And other women are listening, perhaps more than they are to traditional media. Thirty percent are watching less TV, 31% are listening to less radio, 36% are reading fewer magazines, and 39% are reading the newspaper less.
Numbers like that indicate a huge shift in the media landscape: the sex making the most purchase decisions are rejecting traditional media in favor of online sources. Forty-five percent of women in the survey said they decided to purchase an item after reading about it on a blog; among the women in the more digitally savvy BlogHer network, that number is 85%.
Women bloggers are twice as likely to share a positive purchase experience on blogs and/or message boards and about 40% more likely to share a negative experience. So it’s a good idea to be very, very nice to women bloggers, especially since they are likely to carry significant influence with non-blogging women.
“At a time when the economy is top of mind for more than 70 percent of these active social media participants, women who blog are turning to online resources, including blogs, to help them make their day to day purchasing decisions,” said BlogHer cofounder Elisa Camahort.
The results of the survey are concluded according the answers of 2,821 women in the general US population, 1,008 women in the BlogHer network, and 788 women in the iVillage network.
Representation of Confidence Associated with a Decision by Neurons in the Parietal Cortex
Roozbeh Kiani and Michael N. Shadlen
The degree of confidence in a decision provides a graded and probabilistic assessment of expected outcome. “…information accumulates over time until a threshold is reached, with noisiness in the inputs related to decision errors.” …the same neurons that represent formation of a decision encode certainty about the decision.
The same neurons that encoded the information used to make a choice also encoded the extent of certainty and the degree of confidence in one’s decision.
