Category: MoneyCrashers

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The Rise of the Robot Investment Advisers

online investingIn the past five years, a new type of financial advisor has emerged to compete with traditional investment advisory firms. Funded by venture capitalists, these new advisors exploit the latest technology to offer competent investment advice in exchange for drastically reduced fees.
 
Just as technology changed the full-service brokerage industry by lowering transaction costs and enabling online trading, it will also ultimately change the practice of investment advisors by automating portfolio management and investment advice. According to Grant Easterbrook, analyst at Corporate Insight, “These newcomers offer average Americans access to low-cost advice and investment solutions with fewer potential conflicts of interest and greater performance transparency.”

The Rise of the Virtual Advisors

Automated online portfolio management services – what many have dubbed “robo-advisors” or virtual advisors – have been available for the past decade. They offer convenient, transparent portfolio management for accounts both large and small through easy-to-use websites – and all for 20% to 30% of the cost of traditional advisory firms. According to Institutional Investor, Corporate Insights estimates that this group currently manages almost $17 billion in U.S. assets.
 
Robo-advisors generally share a common philosophy of money management:

Passive Investment Strategy

Based on the concepts of Nobel Prize-winning economists Eugene Fama (Efficient Market Hypothesis) and Harry Markowitz (Modern Portfolio Theory), robo-advisors do not attempt to “time the market” by projecting its direction up or down. Nor do they try to pick “winners” and “losers” of individual stocks. They invest in broad sectors of securities or market indexes—exchange-traded funds (ETFs)—to diversify risk and secure average stock market returns.

Algorithm-Based Advice

Robo-advisors rely on proprietary software to automatically create and maintain portfolios of index funds. These portfolios are designed to fit broad client investment goals, and are tailored to factors such as age, risk tolerance, expected retirement date, and so on. For example, the criteria to select a specific portfolio might be based upon a goal, such as retirement, to be achieved by a certain future date, with the ratio of equity to debt securities based solely on the time-frame between the investor’s current age and retirement age.

Extended Investment Term

According to Betterment, an analysis of the Standard & Poor’s 500 Stock Index between 1928 and 2014 indicates that the longer people stay invested, the less loss they risk and the greater their possibility of gain. For example, about a quarter of all one-year investment periods between 1928 and 2014 experienced losses in value, while less than a tenth of the 10-year investment periods resulted in a loss. Similarly, the median cumulative return was substantially greater for 10-year holding periods than one-year periods. In other words, the longer you stay fully invested in a broadly diversified portfolio, the greater your chances of gains.
 
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Vaccination Debate: Should Immunizations Be Mandatory for Children

Baby-Vaccines-175058_LChildhood immunizations have been controversial for centuries. To many, the idea that protection or immunity can be gained by deliberate exposure to a disease is counter-intuitive. That unease, coupled with the possibility that a child might have an allergic reaction to a vaccine’s ingredients, is enough to cause many parents to question the wisdom of inoculation.
 
Anti-vaccination sentiment began early, even prior to Dr. Edward Jenner’s creation of the first smallpox vaccine in 1796. In Boston in 1721, Reverend Edmund Massey published a paper titled “The Dangerous and Sinful Practice of Inoculation,” which argued that diseases were sent by God to punish evildoers and that attempts to prevent them, therefore, were sinful.
 
By the late 1800s, anti-vaccine movements, present in both Great Britain and the United States, were active. The Anti-Vaccination Society of America was founded in 1879, and the protest against vaccinations continues today. Ironically, the movement expanded even as the number of smallpox outbreaks was reduced because of inoculation.
 
By 1900, many states—including New York, Massachusetts, California, and Pennsylvania—passed laws requiring vaccinations for any children attending public schools. Now, this is required by all 50 states—though all do provide some form of medical, religious, or philosophical exemption. The U.S. Supreme Court ruled in 1905 that states have the right to enforce compulsory vaccination laws, a ruling subsequently confirmed in 1922 and most recently in 2014.
 
Despite the opposition, vaccines for smallpox, rabies, typhoid, cholera, diphtheria, tuberculosis, tetanus, polio, measles, mumps, and rubella were in use by the 1970s. In 2014, the Centers for Disease Control estimated that vaccinations had prevented more than 21 million hospitalizations and 732,000 deaths among children since 1994.

The Andrew Wakefield Study

The controversy over mandatory vaccinations for children has intensified since the publication of a study in The Lancet in 1997 by British former physician Andrew Wakefield linking the measles-mumps-rubella (MMR) immunization to autism.

Claims Within the Study

Wakefield’s study involved 12 patients treated at a London hospital. He and his colleagues reported that all 12 children had intestinal abnormalities and development regression beginning one to fourteen days after the MMR vaccination. The study went on to suggest that the vaccine caused a gastrointestinal syndrome in susceptible children that triggered autism.
 
Recognizing the profitability of a public controversy – fueled by all parents’ desire to protect their children – the popular press and fringe-favoring talk show hosts in the UK and U.S. immediately fanned the flames of public reaction and spread news of the study far and wide. According to a Salon article, U.S. newspapers mentioned the link 400 times in 2001 and more than 3,000 times in 2009 – and there were five times the number of television evening news stories on the link in 2010 than in 2001. As a consequence, vaccination rates in Great Britain decreased significantly.
 
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How to Write and Update A Will

will1While you can’t take your property with you when you die, you can direct how your assets will be distributed by making a will. Unfortunately, some people never get around to the task, and instead die “intestate” – a legal term dictating how all property greater than the sum of your enforceable debts and funeral expenses, in the absence of a will, is distributed. Surprisingly, almost half of all adults die without a will, according to a 2012 Rocket Lawyer survey. In such cases, state law determines who gets what – including custody of minor children.
 
It is not just the poor and uneducated who die intestate. Celebrities such as Howard Hughes, Pablo Picasso, and Sonny Bono all failed to have wills, as did Swedish author Stieg Larsson, best known for “The Girl With the Dragon Tattoo” series of novels. As a consequence, distribution of their property to loved ones and business partners was delayed and expensive.
 
Unfortunately, even those with the foresight to prepare a will often forget to update its provisions as their circumstances change over the years—the birth and maturity of children, accumulation or divestiture of assets, or changes in personal responsibilities, for example. Therefore, the transfer of their assets may be inconsistent with their final wishes, overly expensive, and a source of emotional pain and frustration for their loved ones. In the worst circumstances, the estate passes (escheats) to the government, an undesirable result for almost all people.

Creating a Will

Some people elect to postpone or avoid writing a will because they falsely believe that taxes and administrative expenses may reduce the amount of funds (what lawyers call the “corpus” of the estate) that will be distributed to their heirs. However, a will does not complicate the distribution of an estate, but is intended to facilitate the passage of assets and maximize the benefits of the parties. Failing to write one only complicates matters for those who will be left to pick up the pieces.
 
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How to Prepare to Sell Your Business

sellbiz1New job applicants get haircuts, shine their shoes, and practice their interview skills while preparing to hopefully land a position. Those seeking to sell a home often repaint inside and out, primp the landscaping, and clean from top to bottom before hosting an open house.
 
And a business owner who hopes to receive a fair price for his or her company would be wise to engage in such “dressing up” activities as well. While it may go without saying, putting your best foot forward is always the best strategy to maximize the value of any sale.

The Importance of Seller Objectivity

Achieving a sale at the price you want means that you should look at your company as objectively as possible, problems and all. This prepares you to counter any buyer’s objections or degradation of your company’s value, and allows you to maximize assets and minimize (or at least be prepared to handle) flaws.
 
Recognize that it is easy to get an inflated sense of importance, especially when a stranger comes calling with an interest in buying your company. After all, starting and running a successful company is not an accident, nor a matter of luck. Long-term business success requires a combination of intelligence, guts, and hard work.
 
As a consequence, many owners assume interested buyers understand the business opportunity and profit potential of their company. They presume that an acceptable offer will be forthcoming, only to be surprised when the would-be buyer tells the owner that their baby – the company – is ugly.
 
Getting the highest price for your business requires a thorough understanding of the opportunities and threats facing your business. Potential buyers focus on the future of a business, not its past. Accordingly, why would any potential buyer be interested in your company? Does it offer unique products or services? Does it dominate its geographic and industry markets? Does it have capabilities and capacity that are difficult or expensive to replicate?
 
Buyers are most interested in those companies whose products and services are in growing markets with unrestricted pricing flexibility or obvious expense reduction possibilities. They seek under-utilized – but valuable – assets that can be exploited, especially by the potential purchaser. Similarly, any threat to the business must be identified, quantified, and strategized.
 
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