Wireless Web access is the next big thing. About 90 million Americans have cellular phones and about half of them now have digital services allowing them onto the Web, according to Paul Kagan Associates. A few weeks ago, I joined the wireless Web-enabled generation. I found the wireless online world is a confusing mess. But if you put in some time, you can find the right solution. And, if you read on, you'll find out why I think the RIM Blackberry pager is probably the best solution for independent financial advisors right now, and probably will remain the top choice for at least another year or so.
My wireless journey began on a trip to Los Angeles. While waiting for a flight to leave LaGuardia - which meant I was guaranteed time to kill - I called Nextel, my cellular carrier, and asked them to hook my I1000 phone up to the Internet. The account was connected and my phone Web-enabled in about 20 minutes.
It was exhilarating! There I was walking through the airport, checking out news headlines, accessing local movie times and performing a number of other functions. I was one thrilled nerdy guy! I literally had the World Wide Web in the palm of my hand.
Once the novelty wore off, I turned to retrieving email over my phone. That was a little complicated. The Internet link through Nextel is, of course, different from the one I use in my office, which hosts my mail server. To pick up email on my phone, I would have to forward all the email coming into my office at my regular email address to my new Nextel phone email address. This is what you'll probably want to do with any wireless device you buy, so I'll explain how you do it.
Nextel's Internet service comes set up with an easy-to-use link to Microsoft Hotmail, a free email service. You can check a Hotmail account from any Web browser, which makes it convenient for frequent travelers. So I asked Theresa Rokus, my assistant, to configure my email software on the desktop computer in my office with a "rule" or "filter" that forwarded all my email to a Hotmail account. The rule said that all email that comes in for me should be forwarded right away to my Hotmail account. A copy of all my email remains on my desktop in the office, but another copy of all incoming emails would be automatically sent to my Hotmail account. I have my office email program set up to automatically check for new traffic every 15 minutes. This is pretty easy to set up if you have a DSL or Cable connection to the Web, which is continuous; it's a bit more complicated if you're still on a dial-up phone line.
By the time I got to Los Angeles, the rule was set up in my email software and all my mail was being forwarded to my Hotmail account, which was accessible over my phone. What a disappointment. I couldn't read most of the messages because they contained text that cannot be read by a Web-enabled phone. I couldn't read attachments, for instance. Also, my phone has a screen that's only about 2 inches wide and 1 inch high. You're scrolling all the time. Plus, logging into your email account or replying to a message is maddening.
The dial pad for a phone just isn't meant for use as a keyboard. To type the letter "c," you need to hit the key for the number 2 because that's also the key for the letters a, b and c. So you need to hit it three times till you see the letter "C" comes up on the screen. That's how you type each letter. And if you need to type in the "@" symbol or some punctuation, such as period, you have to go through special keys. I lost patience quickly.
I have to admit that viewing my brokerage account at Schwab on the web-enabled phone is cool, and it was easy to set up. You can get prices on your whole portfolio. In addition, there's even a way to set up alerts. So you can be alerted by your phone ringing when one of your stocks drops by 50%, for instance.
I signed up for an alert to hit my phone through Schwab - a service available to all of the broker's retail clients. The alert goes to my Hotmail account. Nextel offers an alert service through MSN MoneyCentral.
The alert feature is something you should care about a great deal. More and more people will embrace it in coming months. Your clients will be able to get real-time quotes, news, and alerts from their brokerage firm - Schwab, Fidelity, Waterhouse, and many independent B/Ds clearing through Fidelity, Bear Stearns and other big clearing firms. And if your clients will be getting alerts, you'd better sign up, too. Otherwise you may be caught flat-footed when a client calls you on the golf course and asks why Intel is down and what do you think - right now.
Granted, you have to be a geek to figure out how to hook this stuff up, but it's only months before this financial technology will be widespread. Brokerages, after all, are handing out wireless Web features for free. But overall, my experience with the Web-enabled phone was not fulfilling. For one thing, you can't really view real Web sites. The only sites you can see are the ones that have written pages formatted specifically for these tiny devices using WAP - Wireless Application Protocol. You can't see Investment Advisor's Web site, for instance, or the vast majority of sites, for that matter. You just see text, no pictures. And even the text pages have to be written in WAP to be viewed on a phone's screen.Palming It
So advisors need a fuller solution. You need not only to have news and stock alerts pushed to you. You will also need a device that can transact trades and allow you to conduct business wirelessly. To see how you'd do all that, I stepped up to the next level: a Palm Pilot, from Palm Incorporated. Palm was nice enough to send me a Palm Pilot VIIx, the newest model in the line. The model costs as little as $378 from retailers, and you can Web-enable it for about another $40 a month.
The Palm was very exciting initially. The device was a cinch to set up and synchronize with my desktop. The Palm VIIx and other Palm devices come with a cradle for charging the battery and connecting to your desktop machine. If you have phone numbers, addresses, email address and other contact information in Microsoft Outlook on your desktop, all of that contact information automatically gets loaded onto your Palm. So will all of your appointments.
After you install Palm's HotSync software onto your desktop and cradle your Palm device, all of the contact information and appointments gets sucked into the Palm device. Whenever you make a change in the desktop or Palm, the software updates the desktop of Palm with the newest information. Within 30 minutes of getting the Palm, I was synched with all my contacts and appointments and ready to view the Web.
The Palm uses the BellSouth network to get you online. Coverage nationwide is good, but before you sign up, check to be sure your reception in the area where you'll use your device most has good coverage. In Long Island, New York, the device worked fine.
The Palm VIIx comes loaded with applications that clip the most important snippets of information from a site and let you see e*Trade, Excite, Fidelity, ePrudential, USA Today, MapQuest and many other locations. You can also go to Palm.Net, a Web site where you can download about 400 applications. You'll find dozens of cool apps, like a Fodor's guidebook to thousands of restaurants and hotels, travel information, and dozens of sites with financial news, stock quotes and portfolio tracking capabilities.
But the Palm device was still not everything I was looking for. Everything on the Palm is text and you can't see any graphics. Plus, you can't really browse the Web with the Palm Pilots. On my VIIx, I could only view sites offered through Palm.Net. So almost as soon as I got my hands on the Palm VIIx, I decided to also get a look at the Compaq IPAQ. The Compaq IPAQ uses the new Microsoft Windows CE operating system for Pocket PCs.Pocket Rocket
This version of Windows is very different from the Palm operating system. The Pocket PCs come with Pocket versions of Word, Excel, and Internet Explorer. These devices, which include the HP Jornada and Casio Cassiopeia, have color screens that are backlit. So, although they are about the same size as the screen on a Palm Pilot, the screens on Pocket PCs are brighter than the Palms and you can see color graphics. Plus, they let you actually browse the Web. They resize just about any site to fit on their screen. You can read attachments on your email. These are real computers.
When I tried to obtain a review copy of the IPAQ from Compaq, I found there were none to be had. Indeed, the IPAQ is the hottest wireless device on the market and are hard to find anywhere. This is because they are better than the others using the new CE operating system. The IPAQ has 206 MHz processor, versus a 150 MHz chip on the others. So it's much faster. Plus, it looks sleeker.
Desperate to get an IPAQ, I went to dozens of reseller Web sites. No good. One night, I traveled to six local retail shops trying to find one. No luck. On my way back from the mall, I noticed that a new electronics superstore was having a grand opening. Turned out, the new Wiz in Plainview, New York, was not open yet. So at 9:00 the next morning, I showed up and headed directly for the PDA display. Victory!
But, like so much computer hardware, the IPAQ is a complicated device. You need an expansion sleeve to make it work with a modem, and you need a modem. The expansion sleeve and modem are also impossible to obtain. I found the AirCard 300 modem on sale for $500. To get the expansion sleeve, I make a bid on e-Bay, offering to pay $235 for an item that sells for $150. I lost the e-Bay auctions, but I got an email from a guy who wanted to sell me the expansion sleeve for $235. I felt like I'm deep into the wireless underworld now. I bought it.
The Palm VIIx comes complete with sleeve and modem.; the Palm V and III models each need a separate modem, and you run into similar complications about finding a place to buy one and getting hooked up into the right service. That's why when dealing with such devices, it's a good idea when buying a device with a separate modem to go to a reseller. Good ones include OmniSky.com, MobilePlanet.com, and GoAmerica.com. All have special hardware deals and roaming agreements with carriers.
After all the rigamarole, I got my IPAQ to work. But not smoothly. I had at first signed up with a demo account from Verizon, the big phone and wireless carrier. Reception from my house is terrible. So I called GoAmerica, another Internet service provider that resells service from ATT Wireless and Verizon. They gave me an ATT account, and my reception was great. The lesson: Before you buy a device and settle on an ISP, find out about coverage in your area. Also, if you go to Verizon directly to sign up, you won't get free roaming to another carrier. But you will get that if you go to a reseller, like OmniSky or GoAmerica.
Browsing the Web using the IPAQ is great. You still run into the email problems, however. You need to forward all emails from your desktop machine to your PDA, which is not ideal. However, if you use Microsoft Outlook for your email, redirecting all your email to your wireless email account can work nicely.
But all throughout my wireless journey, the one thing I was searching for is a way to help advisors use this technology to serve clients better. Throughout all my talks with Mobile Planet, Compaq, GoAmerica, Palm, Schwab, Fidelity, Waterhouse and others, the one thing that I was after was a way for advisors to get real time quotes and alerts. I found the IPAQ can do everything better than the other devices but it comes up short in doing this. You can get quotes and alerts on an IPAQ, but the device came up short because its battery life is so short. I forgot to plug it into its charger one weekend, and the system went dead and lost a bunch of its key settings.The Blackberry Solution
This brings us back to Blackberry. You get a Blackberry via Fidelity, whose National Financial Corporation is one of the biggest clearing firms on Wall Street. Fidelity has developed its own wireless application for brokers at its 200 correspondent clearing firms. Only about 30% of the firms are using it, according to Fidelity's Pat Janscy, but that's because wireless is still in its infancy.
The National Financial wireless application lets brokers get quotes, financial news and alerts on as many stocks as they want. Margin positions can be monitored and wireless trading for brokers is about to be rolled out. Clients of the broker also get the same information. But the Fidelity wireless service is not yet available to independent RIAs who aren't affiliated with B/Ds clearing through Fidelity Institutional Brokerage Group.
The Fidelity Blackberry RIM device is about the size of a pager, and you can set it to vibrate whenever you get new email or stock alerts. Fidelity plans to upgrade to a new Blackberry model soon, but even the older unit now in use was my favorite wireless device for advisors because it can handle alerts better than any of the other devices. The Palm VIIx cannot handle alerts (the Palm III and V, which use an external modem called a Minstrel, can both issue alerts by ringing or buzzing).
The IPAQ can also issue alerts. But these devices have a big limitation. The Palm devices and IPAQ must handle alerts in sleep mode. In sleep mode, the modems stay on but the actual Palm or IPAQ is powered down. When an alert comes in, the modem wakes up the Palm III, V, or IPAQ. The device would ring when an alert is triggered. But the battery on a Palm or IPAQ won't last for much more than a day - if that much. The battery on a RIM Blackberry pager will last at least five or six days, and maybe more. And the RIM is always on.
The latest Blackberry RIM is the 957. Its screen is slightly smaller than a Palm or IPAQ. The Blackberry is a little smaller than a Palm and about half as thick as the Web-enabled IPAQ and a quarter of its weight. You can tuck it into your sport coat or clip it to your belt and be comfortable, and that's a big convenience. You won't think twice about carrying it with you wherever you go.
The Blackberry has no stylus that needs to be carried around to tap the screen, as is the case with the Palms and IPAQ. Instead, Blackberry has a keyboard that you hit with your thumbs. Once you get used to it, it's fine for writing two-line emails. The Blackberry also lets you synch up to your desktop machine, so you can download your calendar and contacts into the device.
If you're not a Fidelity client, you can buy a Blackberry equipped to deliver real-time stock prices and alerts from Aether Systems of Owings Mills, Maryland. Aether is the firm that powers Schwab's PocketBroker, which gives real time live quotes and alerts wirelessly to Schwab retail clients. It also powers stock alerts for Nextel. John Shepley of Aether says the company offers Reuters Market Clip Service for $49.95 a month, and that will provide you with alerts and news real time on stocks.
Aether does not yet offer a Web browser on the Blackberry pager. Aether plans to offer a Web browser for $20 a month in the next few months. GoAmerica, another wireless ISP services, offers a browser with many news and information services that works on the Blackberry 957 and allows you to browse the Web at a select group of Web sites. But the GoAmerica's browser does not include real time quotes and alerts.
The only drawbacks to the Blackberry is that the screen is not in color and it doesn't have a word processor or Excel. For advisors, whose main goal is to be able to travel around town or around the country and stay in touch with their office and their portfolios, those shortcomings may be minor compared with Blackberry's long battery life and ease of use.
Are Equities Riskier Than You Assume?
Two academics who wrote the book on equity risk premium argue that they are
Eugene Fama and Kenneth French, two academics whose ideas wield great influence in the world of investment advisors, are sparking a troubling discussion about the future of the stock market. In a soon-to-be published 34-page paper entitled, "The Equity Premium," Fama and French say investors have been paid so much from stocks in recent years that they've actually received returns for future years. What's different about this argument that the market's return should revert to an historical mean is its rigorous dissection of the stock market's relationship to the economy.
The equity premium is the amount of extra return you get from stocks compared with riskless fixed income securities such as U.S. Treasury bills. The premium has been on the order of 7%, on average, over the last 75 years. Investors and advisors have in recent years used a building block approach to quantify the equity premium and make projections about stock returns. Many financial plans and asset allocation rely on this type of calculation, which extrapolates returns based on historical results. "If you happen to live in a period when realized gains are different from expected capital gains, then you might want to try to measure the equity premium in other ways," says French. The paper he wrote with Fama does just that, adding a fresh perspective to the way equity returns are projected. Instead of calculating the historical equity premium and extrapolating that into the future, they examine corporate earnings and dividends to take a more fundamental approach.
"What we say in our paper is that, particularly over the past 20 years, expected returns have been falling," says French, a professor of finance at Massachusetts Institute of Technology's Sloan School of Management. "Because of that, realized returns are high. Because future required returns are lower, you can have higher returns today."
Don't let the simplicity of this prediction about the market's returns fool you. The analysis in their paper is anything but simple. While Fama and French come from the ivory towers of academia and are considered contenders for the Nobel Prize, these two professors also have real world experience in applying their theory.
In his 1963 Ph.D. dissertation, Fama introduced the efficient market theory, which holds that the actual price of a security will be a good estimate of its intrinsic value. Fama's idea and his subsequent work with French helped lead to the development of index funds and the spread of passive investing. Fama is now a professor at University of Chicago, but he and French, in addition to teaching, are consultants to Dimensional Fund Advisors, a family of index funds open only to advisors and institutional investors. The pair designed and continues to develop Dimensional's value and tax-managed strategies.
French and Fama, in their paper, compare the equity premium from 1872 to 1999 with realized returns or this period. To estimate the equity premium, they revive an equation developed in 1962 by Myron Gordon. Gordon devised a dividend growth model that relies on realized dividends and earnings. Fama and French say that between 1872 and 1949, the after-inflation equity premium derived from the Gordon model is in line with the 4% real return actually realized by investors in large-cap stocks. But between 1950 and 1999, there's a disconnect--the equity premium derived from the Gordon model is 3.4% a year, while investors realized real stock returns more than twice as great, at 8.28%.
"I read this paper and say, man, is this tied down tight," says Roger Gibson of Gibson Capital Management in Pittsburgh. Gibson says that, by tying corporate America returns to the economy, the paper comes to a startling conclusion: "If the actual returns on the stock market in the past 50 years reflects what returns should have been, then those returns would represent the cost of capital for corporate America," says Gibson, author of "Asset Allocation: Balancing Financial Risk." He adds: "If the cost of capital for corporate America is three percentage points higher than corporate America's return on equity over the past 50 years, then corporate America has been unprofitable. Moreover, if corporations can get a higher rate of return from stock investing than from running their own businesses, then what they should do is liquidate and take the proceeds and invest in the stock market."
The Fama and French method of estimating the equity premium and projecting returns differs from the building block method of comparing equity returns to bond returns historically to arrive at the equity risk premium and then extrapolate that into the future. This method is widely ascribed to Roger Ibbotson, chairman of the Chicago consulting firm Ibbotson Associates and professor of finance at the Yale School of Management. It is widely referred to and relied upon as a framework for modeling the future by advisors throughout the investment world.
Peter L. Bernstein, perhaps the nation's leading financial historian and author of eight books about finance and economics, says the Fama and French projection of lower returns is a better gauge. Bernstein says their approach is "very fundamental." He says projecting historical returns into the future is a much less reliable way of predicting future returns. "That someone else will pay you more for a stock than what you paid is not a valuation, it's a bet," he says. "One is pie in the sky and the other way of looking at it is a hard nosed financial calculation."
Ibbotson says his historical model for examining the risk premium and projecting future returns is no less legitimate a way than the approach used by Fama and French. While his historical approach is more prominent, he says he has long suggested it be used along with a more fundamental perspective.
Ibbotson points to a 1984 article published in the Financial Analysts Journal, which he authored with Jeffrey Diermier and Larry Siegel. They used an alternative way to forecast stock market returns by examining the stock market's participation in the economy. He says the article applied a variant of the Gordon model to forecast stock returns. Ibbotson says he is now working on a paper updating the return projections using what he terms a "supply side" approach akin to what French and Fama have done. "I view it as two totally different ways of looking at the equity risk premium, but both have benefits," says Ibbotson. "Both methods are legitimate and it makes sense to use more than one method."
If you want to join the debate, French has posted an earlier version of "The Equity Premium" at his Web site, web.mit.edu/kfrench/www/working_papers.html. Read it, but realize this is not just an academic issue.Down With Tradition
The implications for financial advisors are significant because the underlying assumptions about future returns are under attack by two of the nation's smartest financial economists. "Fama and French are saying that the traditional ways of looking at these matters and the market are way out of range," says Bernstein.
Says Gibson: "A lot of people have been going to higher and higher equity allocations in the last few years and there are many investors, perhaps even a majority, that have higher equity allocations than they can likely withstand in a normal bear market. People have over-allocated to equities, maybe not in terms of their time horizon but certainly in terms of their ability to tolerate volatility."
Gibson says some advisors may now want to consider lowering the return assumptions in their financial projections for clients. In addition, the importance of diversifying beyond equities may also become more important to advisors. Still, Gibson says he does not expect the Fama and French findings to become a watershed event causing a total reevaluation by advisors and investors - unless the market drops suddenly or goes sideways for a few years.
Harold Evensky, one of the nation's leading financial advisors, says the Fama and French argument does not persuade him to lower his return projections on long-term financial plans. "Even though my gut and almost everything suggests Ibbotson is probably high with his projections, I don't think it's practical to do planning with anything much lower," says Evensky. "No one really knows the right answer and I don't have a huge amount of confidence in assuming the right real return assumption is 3% annually, versus 6% to 7%."
Evensky says clients simply would resist making such low return assumptions in financial plans. "I might be intellectually right and actually right but no one would act on it." Perhaps they may if French and Fama's latest research is proved correct.