Journal of Wealth Management

Letter from the Editor JWM Winter 2024

2024-09-26T12:55:19-07:00

Equity Premium Income ETFs: How much income do you get to keep after taxes?

2024-05-18T09:13:35-07:00

Equity premium income ETFs focus on dividends and call writing to enhance the cash flows produced by the portfolio. However, not all equity premium income ETFs are taxed the same and many of these funds were designed with nontaxable retirement accounts in mind. Taxable investors should understand how the fund is structured and how the distributions are taxed before investing in these funds. The good news is that fund managers have tools at their disposal that can make these funds more tax efficient.

EX-POST CHERRY PICKING

2023-11-18T16:12:14-08:00

ABSTRACT

Financial planners and institutional investment consultants are making a mistake. One that is problematic and meaningful. They’re basing their forward-looking Capital Market Assumptions (CMAs) unduly on U.S. stock/bond returns during the post-industrial era (i.e., the last 74 years). This is a problem because U.S. returns during this period were exceptional and non-repeatable . . . being the result of relative American exceptionalism during the post WWII era. But this is nothing new, exceptional, unexpected, or in the least sense rare or unexpected. Instead, it’s vanilla, normal, and fully expected.

Throughout history (the last 1000 years), there’s always been a top-dog nation or economy. The determination of which nation would hold this role was determined by relative comparative advantage . . . defined within the context of current-day technologies and economic structures. India, China, Portugal, Spain, Netherlands, France, United Kingdom, and most recently the U.S. all held this enviable position. But for good reasons, no nation’s ever been able to maintain permanent dominance. The U.S. is no different and its rise and inevitable fall are consistent with the last thousand years of economic development. As a consequence, setting forward-looking CMAs on a rare and exceptional period drawn from out of history (essentially, ex-post cherry picking both the geography and time period) is offensive and a clear violation of due diligence and fiduciary duty. We can do better as advisors/consultants to our clients.

This article attempts to lay out the data that supports the argument that American exceptionalism was real, genuine, and vital during the post-industrial era (the last 74 years). That this exceptionalism was driven by clear and unambiguous relative advantages. But these relative advantages are no more. And as a consequence, to forecast that future U.S. investment market returns will continue to be “higher return” and “lower risk” than the rest of the world is unwarranted and lacks foundation.

KEY TAKEAWAYS

U.S. capital market returns were higher during the post-industrial era (the last “74 years”) than during longer time periods.
Capital market returns for the World-ex-U.S. were lower than for the U.S.
Superior U.S. returns resulted from American Exceptionalism during the post-industrial era.
The factors that drove American Exceptionalism were real, genuine, and substantive, but are no more.

Calendar Anomalies: A Portfolio Approach

2024-04-04T16:36:24-07:00

The study aims to evaluate the effectiveness of active portfolio strategies based on calendar anomalies. The first part of the study, tests the presence of calendar anomalies like the day of the week, date of the month, and month of the year and the second part reports the performance of calendar anomalies based active portfolio strategies in the US and Indian markets. The study tests the calendar anomalies not only at the index level but also at the product level using the top five funds (selected based on the highest Asset Under Management) in both the US and Indian markets. It collects the daily closing prices of S&P 500 Total Return Index (TRI) and Nifty Total Return Index (TRI) and daily Net Asset Values (NAV) of top five funds in the US and India for the sample period June 30, 1999 to December 30, 2022. Study finds the mix evidences about the presence of calendar anomalies. The results vary across different type of anomalies, presence of anomalies at indices and funds levels, and anomalies between the US and India. The study reports the findings of calendar anomalies using portfolio approach against the conventional wisdom. The performance evaluation of calendar anomalies based portfolio strategies suggests that returns of none of the day, date or month is significantly different from the other days, dates or months. The study concludes that calendar anomalies are just a ‘statistical gibberish’ and not a ‘real anomaly’, having a consistent pattern generating abnormal returns, at least in the context of portfolio management.

Risk, Returns and Wealth Creation: Insights from Private Market Investments

2024-07-03T10:12:34-07:00

In recent history, institutional investors have increased allocations to alternative assets in an effort to boost portfolio returns. The attention is now turning to individual investors. Significant partnerships, private platforms and organizations have emerged to democratize access to alternative investments. The Department of Labor also took a position in 2021 suggesting that private equity may be prudent for inclusion in individual retirement accounts such as in 401(k) and 403(b) plans. While institutional investors have decades of experience investing in alternative assets, the vast majority of individual investors do not. Consequently, relatively little is known about optimal alternative asset allocations for individual investors. This article presents historical risk and return characteristics from private investments including venture capital, private equity, private credit and real estate, and constructs portfolios building on a traditional 60/40 (public equity / public debt) allocation with varying levels of a private markets index, to examine portfolio risk and return tradeoffs. Findings reveal that there are portfolio benefits to both returns and risk from adding a significant allocation to alternative investments and that wealth impacts can be sizable over time.

CLIENT-INITIATED SCAM TRANSACTIONS: WHEN SAFEGUARDS FAIL

2024-01-31T10:04:50-08:00

Financial cybercrimes and internet scams are on the increase. Moreover, the tax code imposes additional penalties on victims of financial scams. Clients engaged in fraudulent financial scams are often in a psychological state that encourages them to lie or misrepresent financial transactions and not even recognize obvious indicators that they are being scammed. Existing safeguards are insufficient for protecting clients from financial cybercrimes in which the client or customer initiates scam transactions. Interventions are required beyond the requirements of current law, regulations, and practices. Banks, brokers, and financial advisors are best placed to interrupt financial cybercrimes involving client-initiated transactions. This article reviews the cases of two scam victims to illustrate the nature of these crimes. Then it explores the major laws and regulations for their inadequacy to deal with client-initiated scam transactions, concluding with practical recommendations for meeting the current challenge.

Toward an Integrative Theory of Goals-Based Wealth Management

2023-11-01T12:30:52-07:00

In Hearl (2022), efforts to save wealth management were considered with a focus on the disciplinary status of wealth management as a field of study. In that article, the author concluded that wealth management was not yet a discipline. Furthermore, the article concluded that this disciplinary failure was due to certain theoretical and methodological deficits. With the aim of remedying these deficits, the present article refers to the story of Alfred Nobel, the Nobel Foundation, and the prizes that bear his name. Some have said that such prizes were Alfred Nobel’s attempt to change his reputation as a “Merchant of Death”. The present article reviews his reputational legacy and suggests that wealth managers should adopt a reputation orientation and strategic management processes and practices in addressing client’s reputational legacy related goals. In addition, the Legacy Enterprise concept is introduced as an object of research and a suggested top tier object of focus in strategic goals-based wealth management.