Archives for June 2022

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Investing Blog Roundup: Schwab to Pay $187 Million for Misleading Robo-Advisor Clients

Several years ago when Schwab first announced their “Intelligent Portfolios” robo-advisor platform, there was a ton of press coverage, for one major reason: there were no fees other than the fees of the funds.

But once Schwab actually made the program available and people could see the portfolios created, there was one question that struck me as well as many other people: why’s there so much cash? Even for a retirement account for a young investor requesting an “aggressive growth” allocation, there was still a significant allocation to cash.

Here’s how the SEC explains what was going on:

Schwab’s own data showed that under most market conditions, the cash in the portfolios would cause clients to make less money even while taking on the same amount of risk. Schwab advertised the robo-adviser as having neither advisory nor hidden fees, but didn’t tell clients about this cash drag on their investment.

Schwab made money from the cash allocations in the robo-adviser portfolios by sweeping the cash to its affiliate bank, loaning it out, and then keeping the difference between the interest it earned on the loans and what it paid in interest to the robo-adviser clients.

So now Schwab has to pay $187 million back to clients who were harmed.

Recommended Reading

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Do You Invest Your Money as Prudently as You Would Invest Somebody Else’s?

The Uniform Prudent Investor Act is a model law that outlines the principles a trustee has to follow when investing the trust’s money. The Act, or something similar, has been adopted in all 50 states. So, roughly speaking, the rules set forth in the Act are the rules you have to follow if you’re managing money on somebody else’s behalf.

And as it turns out, it’s actually a great set of guidelines for managing one’s own money.

The Act begins with various wording about its applicability. And then we get into the nitty gritty with the following opening instruction: “A trustee’s investment and management decisions respecting individual assets must be evaluated not in isolation but in the context of the trust portfolio as a whole and as a part of an overall investment strategy having risk and return objectives reasonably suited to the trust.”

The key takeaways here?

  • Decisions should not be made looking at one piece of the portfolio in isolation. Instead you must take an overall portfolio approach.
  • You must consider the purpose of the money and the circumstances of the investor — and craft the portfolio to suit those.
  • The relationship between risk and return is the fundamental point of interest when making investment decisions.

And then the Act provides us with the following list of things to consider when making decisions:

“Among circumstances that a trustee shall consider in investing and managing trust assets are such of the following as are relevant to the trust or its beneficiaries:

  1. general economic conditions;
  2. the possible effect of inflation or deflation;
  3. the expected tax consequences of investment decisions or strategies;
  4. the role that each investment or course of action plays within the overall trust portfolio, which may include financial assets, interests in closely held enterprises, tangible and intangible personal property, and real property;
  5. the expected total return from income and the appreciation of capital;
  6. other resources of the beneficiaries;
  7. needs for liquidity, regularity of income, and preservation or appreciation of capital; and
  8. an asset’s special relationship or special value, if any, to the purposes of the trust or to one or more of the beneficiaries.”

Key takeaways:

  • We’re concerned with real returns (i.e., after inflation).
  • We’re concerned with after-tax returns (i.e., tax-efficiency is important).
  • We’re concerned with total return. (In other words, even if the beneficiary is spending from the portfolio, the focus must be on total return, rather than income/yield.)
  • And again, one individual asset should not be considered in isolation. It’s about the portfolio as a whole. And you have to consider the investor’s individual needs and circumstances.

The concept of diversification is sufficiently important that it gets its own (brief) section: “A trustee shall diversify the investments of the trust unless the trustee reasonably determines that, because of special circumstances, the purposes of the trust are better served without diversifying.”

Investment costs get their own section as well: “In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.” And the following comment is provided: “Wasting beneficiaries’ money is imprudent. In devising and implementing strategies for the investment and management of trust assets, trustees are obliged to minimize costs.”

Diversifying and minimizing costs are not just suggested; they’re required.

The Act then concludes by making various important points about conflicts of interest and the trustee’s duty to put the beneficiaries’ interests before the trustee’s own interests, but those are not really relevant to our purpose here.

So, if you were a trustee for somebody else, you would be legally obligated to manage their money pursuant to the above principles. Are you treating your own money as well as you would treat somebody else’s?

Investing Blog Roundup: Help Wanted

Update: Thank you, everybody! Several people came through, and both projects are now proceeding.

I’m currently seeking assistance with two projects. If you think you could help with either of the following, please get in touch. (And please let me know how you would like to be compensated for such work — hourly rate, etc.)

First, I could use the assistance of an attorney with expertise in probate and related topics, who could serve as technical editor for a book I’m writing. The book is about the next financial steps to take after the death of your spouse and will include a brief section on acting as executor/administrator of the estate.

Second, I could use the assistance of a software developer who can help with speeding up the calculation time for the Open Social Security calculator. The upgrade to Angular 13 dramatically increased the time it takes to run the calculation. (I haven’t deployed the update in question yet, for that reason. The latest version on GitHub does reflect the upgrade to Angular 13 though.) I have to imagine that there’s an array of opportunities for improvement, given that I’m not really a software developer but rather somebody who just took an “I’ll figure it out as I go” approach to building the whole thing.

Recommended Reading

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Social Security Statement Discrepancies Regarding Delayed Retirement Credits

A reader writes in, asking:

“Historically, I have seen perfect agreement between my benefit statement on and the results calculated by the SSA’s AnyPIA software.  The latest statement, however, shows a deviation between benefit amounts for the years between FRA and age 70 and the corresponding benefit amounts calculated by the AnyPIA software. Specifically, the benefit amounts shown on the statement are smaller than those shown in AnyPIA.

If my recent statement is correct and there are real reasons for the different escalation for the years between PIA and age 70, it would be of interest to me and maybe your other readers as well?”

The difference has to do with the timing of delayed retirement credits being implemented. Delayed retirement credits (i.e., the benefit increases that you get from waiting beyond your full retirement age) become effective:

  • In January of the year following the year they were earned;
  • In the month of attainment of age 70; or
  • In the month of death, if we’re talking about a widow(er) receiving benefits on the work record of somebody who died after FRA without yet having filed.

What the new statements are showing is what your benefit would be immediately upon filing. They don’t mention that, for filing ages beyond FRA and before 70, there would be a benefit increase in the following January.

In other words, the amount shown on the statement is what you would receive for the duration of the calendar year in which you file. And in January of the following year it would increase to the amount that’s being shown by AnyPIA.

For example, imagine somebody with an April DoB and a full retirement age of 67. And let’s imagine that he files for his retirement benefit in October of the year after his FRA (so he’s filing at 68 and 6 months). We know that the increase per month of delay is 2/3 of 1% of your “primary insurance amount” (which works out to 8% of your PIA for a year of delay). And he has delayed for 18 months (1.5 years). So we might expect that his retirement benefit would be 112% of his PIA. But it isn’t. Not just yet, anyway.

Delayed retirement credits only become effective in January (unless you file at age 70, in which case they’re applicable immediately). So for right now, the only DRCs which have been made effective are the ones from the prior calendar year (i.e., from April-Dec of his full retirement age year). So his benefit will initially be credited with 9 DRCs. So his benefit from Oct-Dec of the year in which he files will be just 106% of his PIA. And then in the following January his benefit will be credited with the DRCs from his year of filing. So it will be increased to 112% of his PIA.

Some questions people often ask when they encounter this information for the first time are:

  • Why is the SSA doing this?
  • Do I ever get back the additional amounts for the months that weren’t initially credited with all the DRCs?
  • What implications does this have for filing decisions?

As far as why the SSA does this, it’s just because that’s how the law is written. Why the law is written that way, I really couldn’t say. (I do think though that the SSA’s new statements could be clearer about what they’re showing you.)

As far as whether you ever “get back” the benefit amounts from the months that weren’t initially credited with all of the DRCs, no, you don’t. There’s no lump-sum payment later to make up for it.

As far as what implications this has for filing decisions, the short answer is: almost none. With regard to this topic, the “best” filing month is January, because it would mean that any DRCs you have earned are made effective immediately. And with regard to this topic, the “worst” filing month is July, because if you file in July you’ll be “missing” 6 DRCs for 6 months. But even then, the total amount “missed” is just 24% of your PIA.

If we imagine a single male in average health with a PIA of $2,000, 24% of his PIA is $480. The expected present value of lifetime benefits for this person is somewhere in the ballpark of $340,000, per Open Social Security. $480 is just 0.14% of that PV. (And it would be an even smaller percentage for a woman, for anybody in better than average health, or for a married couple.) Point being, if you are considering two potential filing ages and a 0.14% change is enough to sway from one to the other, the takeaway is not “oh this one is actually better” but rather that they are equally good. That difference ($480) is going to be overwhelmed by the uncertainty of how long the person lives and whether filing 6 months earlier or later turns out to be better in that regard.

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