Diversification Exhortation
As I sit here and read my July copy of Registered Rep., I am a little dismayed that the focus of the magazine continues to be almost exclusively on stocks and bonds. One of the biggest factors affecting not only the practices of your readers but their investors during the tech bust was that they were too centrally focused and did not look at all the opportunities available to them.
One opportunity that should certainly appeal to reps — particularly those involved in estate planning — is securitized commercial real estate.
The Internal Revenue Code allows owners of investment real estate to defer their capital-gains and depreciation-recapture liabilities indefinitely. Given the power of compounding, this is significant. Furthermore, U.S. property laws provide estate planners for a step-up in cost basis to fair market value on date of death, thus ultimately removing the liability altogether if an heir were to dispose of an asset at that level. Step-ups are not new, but they can cost an investor 50-75 basis points in an annuity to achieve the same result.
Your readers can benefit significantly by knowing this solution is out there and available to them. While we continue to press diversification in client portfolios, we must also encourage diversification in practices with your readers.
Trevor L. Gordon
Vice President of Marketing
Argus Realty Investors
San Juan Capistrano, CA
Another Side of Monte Carlo
While your article “Why Some Advisors Just Say No to Monte Carlo Simulation” (May 2003) has generated some interest in our “historical audit” methodology, I cannot ignore some misrepresentations presented as facts in this article.
The author stated, “For starters, it [Monte Carlo] doesn't recognize that portfolio performance depends at least as much on the sequence of future investment returns as it does on the average of those returns.” I don't know what research the reporter did, but this is exactly what Monte Carlo measures. While some of the vendors of old tools have snapped on a feature to compete with Monte Carlo simulations that show the probability of achieving different average returns, all of the true Monte Carlo simulators in the marketplace measure both the impact of potential average returns and the sequencing of returns. It is why advisors use Monte Carlo and it is absurd to state that is does not do this. It is what it does.
The author also said, “The thousands of iterations Monte Carlo simulators produce can lull clients into believing they've considered all the possible financial outcomes they could experience, when in fact the numbers generated may have little relevance to their particular financial situation.” If you have a basic understanding of statistics, one would understand such problems are dependent on the inputs to the engine and not the methodology. The numbers generated will only have little relevance if the inputs have little relevance, which is obviously true of any modeling method, not just Monte Carlo.
The articles also states, incorrectly, “This kind of simulation is not capable of connecting investment returns with realistic cash flows.” Modeling cash flow goals, including the effect of one-time extremes as well as recognizing a client's fickle nature, is the power of Monte Carlo when used as an ongoing monitoring tool.
David B. Loeper, CIMA, CIMC
CEO
Financeware
Richmond, VA
Fees Are Where It's At
The article “Fees? Sigh, Ho Hum” in your March 2003 issue focuses on the reluctance of some brokers to move from a commission-based business to a fee-based approach, particularly during today's down market.
Nationwide Financial conducted its own survey of financial professionals in December of 2002 to gauge their opinions about the move to a fee-based planning focus. The survey found that more than 76 percent have made the transition from commissions to fees, and more than 59 percent of those surveyed believe their payouts will increase, while only 3 percent stated they will decrease.
Regardless of market conditions, the move to a fee-based planning focus from a transactions-based (commissions) focus is the long-term direction the industry is heading, and the financial services industry as a whole needs to stand at the ready to assist.
Peter Golato
Senior Vice President of Sales
Nationwide Financial Services