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Cullen Roche  

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  • Greece: What's Next? [View article]
    Hi Lake,

    I don't think Greece is nearly as worrisome as Lehman. The primary reason being that they're not as interconnected. The European banking system has spent the last 5 years selling its Greek debt to sovereigns. Further, the ECB is likely to backstop the entire banking system if Greece were to actually default. Lastly, Lehman was a side effect of a much bigger problem (falling housing prices that resulted from a consumer credit crisis) and that primary disease doesn't exist here.

    It would be a disaster WITHIN Greece and for a few private creditors, but it would not be remotely close to a Lehman style event.

    Of course, if I end up being wrong you can cite this comment and I will gladly admit how wrong I was. But I do not see this playing out like 2008.....
    Jun 30, 2015. 02:04 PM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    A cash mandate is actually the industry norm. The avg equity fund has a 3.5% cash holding. The avg bond fund holds 7%. The average individual investor holds 24% cash.

    And as I stated elsewhere, the banking system cannot remove its cash at the end of the day. Some bank/broker deal is going to end up with cash at the end of the day where it sweeps into their cash program. This cannot be avoided in the aggregate. So, should we start accusing all bank/broker dealers who don't recommend 100% equities to be nefarious? No, that would be totally absurd. The banking system cannot avoid it. Someone holds the cash at the end of the day.

    Since Schwab is a bank/broker dealer they can rehypothecate your assets anyhow. They simply choose to do so with lower risk assets. WealthFront can't do this because they're not a bank/broker dealer so they complained about it because there's literally no reason for anyone to use their service now that Schwab is doing the exact same thing for free.
    Jun 26, 2015. 10:04 AM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Anyone who deviates from global cap weighting is "active". The robos sell themselves as "passive", but they're actively deviating from global cap weighting.

    This industry has made a mess of the term "passive" investing. Anyone who allocates index funds away from the global cap weighting of 45/55 stocks/bonds is an active investor.

    The robot profiling process is plain crazy. 5 questions and it squirts out a cookie cutter portfolio. How can you know an investor's risk profile with 5 questions and no phone call? You can't. And how did they pick all of their funds? And why does picking various value, growth, emerging market, muni bonds and commodity funds make them "passive"? It doesn't. It makes them low fee asset pickers. And how can they pick assets for you appropriately if they don't even know what your voice sounds like? They can't!
    Jun 26, 2015. 03:46 AM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Hi JS,

    The "cash" is a money market fund comprised mainly of T-Bills. Schwab isn't taking money its investors. They are simply choosing to allocate to cash. Saying cash is a "cost" is like saying that stocks are a "cost" when they go down. Will WealthFront be charging a "cost" during the next bear market? No. They are simply overweight stocks relative to bills. Schwab's program isn't hidden fees.

    Besides, some bank/broker dealer ends up with cash at the end of the day anyhow. In the aggregate this can't be avoided. Should we start accusing them all of nefarious practices? No. That would be ludicrous. The WealthFront attack on Schwab was a blatant misrepresentation of the facts that stemmed from what it now clearly becoming a huge threat.

    I mean, there is literally no reason to use WealthFront now. They're doing the same thing Schwab is doing, but it costs more....
    Jun 26, 2015. 03:38 AM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    "extremely limited" is an understatement. I have shown in the past that all of the major Robos (Schwab's included) can be perfectly replicated using a Vanguard 3 fund approach. The Robos all layer on complexity because it gives the appearance of "earning" their management fee.

    And yes, most advisors don't have a good deal of portfolio management expertise so most of the advisors out there are charging you 1% or so to do some version of static 60/40 stock/bond allocation. Unless they're earning their fee for planning advice they probably aren't adding much value.

    Totally agree on stock picking. Complete waste of time 95% of the time.

    Don't agree on using the Schwab Robo though. I still think the allocations are too static. If you want 60/40 just go buy a few Vanguard funds and save the added fees.
    Jun 25, 2015. 01:31 PM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    This is purely false. There is always "cash" in the financial system. All outstanding financial assets are held by someone. Some bank broker dealer ends up holding cash at the end of the day no matter what. And so the bank broker dealers like Fidelity, Merrill Lynch, Schwab, etc will end up holding some amount of cash that they cannot, in the aggregate, get rid of. So they sweep it into their bank and earn a meager profit on it. ALL BANK BROKER DEALERS DO THIS. It is not nefarious or sneaky. It is a simple fact of banking.

    The reason WealthFront made a stink about this is because they're not a bank broker dealer so they can't do this. They essentially misrepresented "cash" as a fee because their portfolios are stock heavy "stocks for the long run" portfolios.

    It's totally irrational to say that cash is a "hidden fee". That's like saying that WealthFront's required equity position will be a "hidden fee" during the next bear market. Cash is just T-Bills. Holding T-Bills is not a fee.

    WealthFront completely misrepresented this position because Schwab has a huge competitive advantage over them. That's it.
    Jun 25, 2015. 01:25 PM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Yes, I am an advisor/portfolio manager.

    Robos charge you a fee to pick assets.

    Human advisors can now implement the same automated service and charge you a fee to pick assets.

    Would you rather have some cookie cutter indexing robot pick your robots or a human who actually knows you? Personally, I would never let a robot manage my personal assets. Some discretionary intervention is not just necessary, but smart.
    Jun 25, 2015. 01:22 PM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Schwab has a 4% required cash holding. But you have to understand that cash is just T-Bills. Historically, T-Bills have generated fine returns and will likely generate fine returns in the future when interest rates normalize.

    It's ironic to me that WealthFront bashed holding T-Bills because what they're really saying is that they can time interest rate increases which is the exact opposite of their supposedly "passive" approach.

    Also, holding cash always looks silly in a big bull market like we're seeing. Then it looks brilliant in a bear market....
    Jun 25, 2015. 01:20 PM | Likes Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Cash is just T-Bills. People who say they don't like holding cash are really just saying they don't like holding bonds. That looks very smart at times and very silly at other times. Personally, I think cash and bonds are a necessary part of any portfolio. And Schwab's new institutional product has just a 4% required allocation which is pretty reasonable. After all, the avg equity mutual fund holds 3.5% cash so it's not that different from standard holdings.
    Jun 25, 2015. 01:17 PM | 1 Like Like |Link to Comment
  • Did Schwab Just Kill The Non-Human Robo Advisor Services? [View article]
    Hi Manya,

    Schwab has two Robo products here. One is self directed and has no management fee, but higher ETF fees than the others. In total, Schwab is now running the least expensive Robo service because they are able to pass along lower costs thanks to using their own ETFs since they don't charge a management fee. WealthFront and Betterment, for instance, have to charge a management fee because they don't earn a profit on the ETFs they use. So, if you use WF or BM you pay the management fee PLUS the ETF fees.

    The new Institutional Robo gives every financial adivor on Schwab's platform access to the Robo portfolios. This is the same fee structure as WF and BM. You pay a management fee to your advisor PLUS the ETF fees. If your advisor is low fee then the costs can be quite low and even lower than many Robos. PLUS you get a human advisor if you need a more personalized or dynamic approach.

    I should add, the coolest part about Schwab's Institutional service is that it can be customized. With WF and BM you buy some cookie cutter version of what is really a 3 fund Vanguard portfolio (total stock, total bond, maybe something else like REITS or commodities). With Schwab's new product you can customize the portfolios how you prefer and still get the tax loss harvesting, auto rebalancing, etc. Plus you have the human advisor....

    I hope that clarifies.
    Jun 25, 2015. 01:15 PM | Likes Like |Link to Comment
  • We've All Been Keynesians For The Last 7 Years [View article]
    Hi ST,

    No worries.

    We live in a representative republic. Policy decisions are always made by a select few. That's how our government works. I agree we could use some "reigning in". But that won't eliminate the need for discretionary decisions and what is ultimately "Keynesian" economics....

    Best,

    Cullen
    Jun 21, 2015. 09:24 PM | 4 Likes Like |Link to Comment
  • We've All Been Keynesians For The Last 7 Years [View article]
    I'm not sure you know what "Keynesian" economics really is. Keynes didn't dislike capitalism. Quite the opposite.

    http://bit.ly/1FvpgPK
    Jun 21, 2015. 07:21 PM | 3 Likes Like |Link to Comment
  • Is Indexing Going To Eat The Financial Markets? [View article]
    I think you're agreeing with my view...

    He asked: "If index funds are not passively managed what investment is passively managed?"

    I have argued that there is no such thing as passive investing. See this piece:

    http://bit.ly/1IfD16W
    Jun 15, 2015. 12:08 PM | Likes Like |Link to Comment
  • Z1 Analysis [View article]
    Hi Dennis,

    See my response to Craig above. That might help.

    Best,

    Cullen
    Jun 14, 2015. 04:05 PM | 1 Like Like |Link to Comment
  • Z1 Analysis [View article]
    Hi Craig,

    The terms saving and investment aren't being used here in the way finance people use them. In fact, finance people misuse the terms. You're not really an "investor" when you buy stocks and bonds. You've merely allocated your savings. You're actually just a saver who has purchased a different type of security than, say, a deposit.

    Saving is income unspent. Investing is spending, not consumed, for future production. Real investing occurs when we build factories or stuff that enhances our future production. This is funded sometimes by issuing securities, but that doesn't mean the securities holders are the ones "investing".

    Anyhow, the red line is the size of the budget deficit as a % of GDP. In a closed economy (S-I)=(G-T). This could be restated as (S-I) + (G-T) = 0. That just tells us that all financial assets net to zero at book value. Saving, net of investment, is equal to the size of the deficit (G-T). So, that means that the deficit adds to the non-government's saving in financial terms. Basically, a govt deficit is an asset for the private sector, but not a liability. This is why deficits can be very powerful in recessions because they directly add to the financial net worth of the private sector.

    Of course, the deficit is a very convoluted way to view the private sector because it is investment that mostly makes our lives so great. Investment is what produces all the goods and services that make life in a modern economy so wonderful. So, netting out investment is silly. That's why I used S = I + (S-I). When you use that equation, as I did in that post above, you can better understand that, even though S=I, that Investment has a massively positive impact on the economy. That is, it is not the deficit that drives our economy, but private sector investment.

    I hope that helps!
    Jun 14, 2015. 04:04 PM | 1 Like Like |Link to Comment
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