Scott Burns Answers 13 More Questions on AssetBuilder

Here is the second post covering the email interview I did with Scott Burns. He answers 13 more questions on a range of topics that include Assetbuilder.

The views expressed about John Huggard are those of Scott BurnsScott Burns - Couch Potato Portfolio. I included his response to my question.

Once again his responses raised more questions in my mind but I think it important to post the text as it was received and let you decide what you think.

More General Questions on AssetBuilder and other topics

1. The book makes a good case for consumption smoothing. I like the idea very much. Is there a plan to integrate  Asset Builder and E$Planner into some sort of total financial retirement management system?

We’re going to focus on low-cost asset management. My personal hope is that there will be an “unbundling” of asset management and financial planning. This will allow asset management costs to decline and it will allow financial planning to be done on a professional services basis. Scott Baradell can send you a link to a magazine interview that discusses this in some detail.

2. It seems AssetBuilder is targeting individuals, I assume using IRA’s and the like.. More and more there is a push for Employer 401K plans where there are some real advantages from Employer contributions. Is this a market Asset Builder is going after?

Not at the moment. Our goal is to attract and serve self-directed investors who understand the benefits of indexing and risk efficiency. We believe there is a gigantic market of people who are under-served by conventional delivery systems because they only have assets of, say $100,000 to $500,000. What has surprised us is that many of our clients have portfolios in excess of $1 million. We believe the abuses and expenses in the current system will continue to create new clients for us— people who want to take the index path and reduce costs.

3. With respect, there are some critics on the forums about AssetBuilder and misleading performance claims. In particular one forum member cites the performance charts include the costs of the funds but not the transaction fees charged by Schwab nor the Advisor Fees. Is this the case and if so how do the charts look when these are included?

This is being changed. Future representations will be adjusted for estimates of costs. Since some accounts are larger than others and would have lower transaction fees as a percent of assets, the result will be that many clients will experience better results than we post.

4. There are also complaints about using made-up performance results for funds that did not exist at the beginning of the period used. What is your response to this?

The funds may not have existed but the indexes did. So it is reasonable to include them in model portfolio results.

5. What about the complaint that AssetBuilder does not use a fixed fee structure which goes against what I understand has been your previously stated position of using fixed fee services?

We have never advocated fixed fee services. We have always focused on expenses as a percentage of assets managed.

6. What is “mean variance optimization exactly? How does it benefit a Baby Boomer?

A good start here is to read about modern portfolio theory in Wikipedia: http://en.wikipedia.org/wiki/Modern_portfolio_theory .  If mean variance optimization can be done, any retiree has the prospect of larger withdrawals, with safety.

7. What is the Redemption Rate through this Credit Crunch period from AssetBuilder?

We’ve never made that calculation.

8. In  an interview with RR you quoted 4 big myths about money and investing. I agree they are all myths and need challenging. I have a question on the third one. The third one is that risk diminishes the longer your invest term. You said it is a myth and that it doesn’t and failing to take risk into account can work to dramatically reduce your standard of living late in retirement. If we enter a long term bear market how will AssetBuilder protect a Baby Boomers nest egg?

This is the position Zvi Bodie at Boston University takes. What you can see using ESPlanner is that variance risk puts a downward slant on portfolios in distribution. More important, the odds that a retiree will have to reduce his standard of living due to a market decline increase as he ages. Check the related graphics in “Spend ‘til the End”.

9. Also in that interview you make the distinction that AssetBuilder is all about investment management. You go on to say, “We offer a portfolio review, enabling potential clients to compare the cost, diversification and trailing performance of their current investments with an AssetBuilder portfolio of similar risk. That helps potential clients to tune in better to the importance of risk and its implications. From that foundation, they can select one of our risk-measured model portfolios. My question is, what is the on-going investment management process to ensure my nest egg will last 20-30 years?

There is no guarantee. Future events could totally overwhelm portfolios because portfolios are built based on demonstrated returns and volatility for asset classes. Basically, it assumes a highly normative world. Global diversification reduces some of the risk, but it does not eliminate it.

10. On one of the forums there is the following, “Moshe Milevsky has shown that the sequence of portfolio gains and losses has critical effect on portfolio survival. If the typical portfolio incurs a loss every 3 years or so (which is really the norm) it takes a smaller loss than you think for your expected retirement income to go up in smoke. Asset diversification has a smaller benefit than is commonly expected, since the volatility of stocks is quite large and dominates compounded return if you hold the 60-70% commonly recommended by financial advisors to offset long-term inflation. I think it is critical to consider social security, inflation-indexed annuities, and “hedging” investment strategies discussed by Milevsky and Zvi Bodie. SB has given some attention to Social Security and annuities in his writings and books. However, I’d like to see more discussion of “hedging” as opposed to “diversification” strategies for managing one’s retirement investment portfolio.” Is hedging something you might consider doing in AssetBuilder in the future?

Hedging tends to be very expensive, so we don’t have much enthusiasm for it. We prefer diversification and risk reduction through portfolio construction.

11. I read an article by Michael P DeGeorge in The Dallas Morning News where he responds to your article entitled, “7 Sins of Variable Annuities” I believe that Baby Boomers with a small nest egg should not risk a high percentage of it in Equity Funds (Indexed or Managed). The new Living Benefit Variable Annuities seem to be offering much better value than older variable annuities according to John Huggard and  can ensure much of the nest egg can be passed on to our heirs. Have you reviewed these new products and do you believe a combination of risk based assets like Indexed Funds and Annuities can provide a Baby Boomer with a less volatile and guaranteed retirement income in retirement?

It has been demonstrated that John Huggard has problems with both logic and arithmetic. He is a source used by salespeople, not by anyone with a serious interest in evaluating products. Here’s a link to a column about Huggard:

http://assetbuilder.com/blogs/scott_burns/archive/2002/07/23/Dis_2D00_Informing-the-Public.aspx

If you examine the living benefits offers in terms of the time value of money you will find that the typical investor is exchanging $1 and getting about 62 cents back. A column on this was scheduled but has been delayed by the current market upheaval. It should be in print by the end of October. Meanwhile, here’s a link to one that I wrote last year:

http://assetbuilder.com/blogs/scott_burns/archive/2007/11/02/magic-in-finance-part-2-an-alternative-to-living-benefits.aspx

12. In June 2008 you responded to a question in an article entitled, “Fixed-income ladder can provide security in retirement”. In it you might recall you advised the person to consider a 5 year income ladder using fixed investments. Is this still something you advocate if a Baby Boomer is investing with you in AssetBuilder too?

Some of our clients put a portion of their money into a ladder and then increase the risk level of their AssetBuilder portfolio. The basic idea is to defer, as long as possible, making withdrawals from the portfolio that is likely to have some volatility. The longer the investment period, the greater the odds that you’ll get close to the expected return.

13. I’m just curious but how did you get from biology and poetry to financial commentator? What was the journey?

Actually, I went from aspirant astronaut to biology, to writing and all that happened in the four years I was at MIT. By the time I was in my late 20s I had figured out that having an ability with numbers and an ability with words in the same body was a really good thing and that it would allow me to do what I really wanted to do which was write and communicate. I’m attaching a file “American Generations” that provides a lot more detail. It was nominated for a Pulitzer prize in 2005.

End of Questions

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