Welcome to the CFALA e-newsletter, a periodic publication with stories about noteworthy events and programs sponsored or hosted by the society, guest articles by members, book reviews, and other items of interest to CFALA members. Click on the headlines below to read the full stories. And if you’d like to contribute a story suggestion or, even better, write an article, we’d love to hear from you. Please email Executive Director Laura Carney at laura@cfala.org.

*Please note that the content of this e-newsletter should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of  CFA Society Los Angeles.

In this issue ...

• Veterans Qualify for CFA Tuition Benefits

• Can Robo Advisors Properly Gauge an Investor’s Risk Tolerance?

• We must reform ourselves before the regulators do it for us

• Aswath Damodaran's YouTube channel

• The effects of easy monetary policy on the U.S. stock market, 1862

• The Federal Reserve has some advice for your love life

• Obama Administration elevates role of behavioral science in government services

• CMOS takes a break with John Perry and The Art of Procrastination

Veterans Qualify for CFA Tuition Benefits

Veterans Day is November 11 and now is a good time to recognize the attributes Veterans bring to our industry, programs that other local CFA Societies sponsor and programs that CFA Society Los Angeles supports in an effort to recognize sacrifices they have made and opportunities available to all who have served.
A clear connection between CFA Institute and Veterans is the approval of CFA Institute suite of programs (CFA and CIPM programs and the Claritas Certificate) for GI Bill benefits. The GI Bill (or Post-9/11 Veterans Educational Assistance Act) is a program that provides a variety of educational benefits to a Veteran who has served three years on active duty after September 11, 2001. These benefits can also be passed to a spouse or children after serving (or agreeing to serve) ten years. There is even a tiered benefit structure for those serving less than 3 years or for those that have a service-connected disability. The CFA Institute programs can be found on the Veterans Affairs website where verification of the programs is confirmed.
As you can imagine, the process to obtain GI Bill benefits involves several steps including an application for tuition reimbursement eligibility. According to the Department of Veterans Affairs website, the application process takes between 8 to 12 weeks for processing. In addition, full tuition is required at the time of registration for the exam, but reimbursement will not occur until 8 to 12 weeks after results are posted.
Locally, CFA Society Los Angeles offers a program that is unique and available well beyond Southern California. The USC/CFALA CFA Review program is offering a full scholarship for internet access to the streaming media recordings of the CFA review courses to members of the United States armed forces who are serving on active duty in the United States, abroad or at sea, and to Disabled Veterans of the United States armed forces. While live instruction is the cornerstone of the program, candidates are provided with supplemental study tools including access to recorded classroom lectures. It is these recorded classroom lectures that are being made available free of charge to qualified service members.
Other local societies get involved with the Veterans community as well. CFA Society of Philadelphia has sponsored programs with Wall Street Warfighters. The mission of Wall Street Warfighters Foundation is to identify, develop, and place service disabled veterans in careers in the financial services industry. CFA Philadelphia has aimed to raise awareness of veterans’ issues and to encourage their members to hire disabled veterans when they seek to fill positions.
Large financial firms also step up to assist Veterans in their transition to civilian life. The 2015 Veterans on Wall Street (VOWS) Symposium and Hiring Fair will be held on Veterans Day at Goldman Sachs Headquarters in New York. This symposium features resume reviews, a networking lunch and a hiring fair. Last year there were over 150 employers and 250 transitioning Veterans at the event.
The armed forces is not typical training ground for financial analysts or other positions in our industry. But today’s Veterans bring a strong work ethic, the ability to work well under pressure and an ability to operate highly complex technology. Even if the background is not traditional, these are certainly qualities most consider important when adding personnel.
By Tom Derse, CFA

Can Robo Advisors Properly Gauge an Investor’s Risk Tolerance?

Robo advisors offer value by providing investors with model asset allocation strategies that are rebalanced periodically. Robo advisors look at an investor’s risk tolerance questionnaire, along with the target date needed for the portfolio, to set the asset allocation accordingly. By definition, robo advisors will miss all the behavioral finance concepts essential to proper investment management.
The first place where robo advisors fall short is in understanding an investor’s true risk tolerance and investment experience. A few members of the Ethics and Advocacy Committee are financial advisors and in our experience in managing portfolios, investors can overestimate their risk tolerance and investment experience. The client may tell you that they can withstand high risk and volatility but in reality they are more risk averse. Recall the behavioral finance concept of loss aversion, which states that investors are not risk averse, they are loss averse. A loss hurts more than a gain of the same magnitude. It is up to the human financial advisor to uncover these behavioral issues before designing a portfolio to make sure the investor is properly protected in an adverse market.
The issues surrounding proper risk tolerance and potential losses are magnified as the portfolio size gets larger. For example, let’s assume the robo advisor overestimated an investor’s risk tolerance and created an overly aggressive asset allocation. Then, during a difficult period, the investor panicked and liquidated the portfolio resulting in a 20% loss. While no amount of loss is easy to swallow, losing 20% on a $1,000 portfolio is more palatable than losing 20% on a $10 million portfolio.
The easiest way to discern true risk tolerance is to ask the investor to explain their investing history (including real estate and private equity) and how they handled difficult periods such as the global financial crisis. If the investor panicked and pulled out during difficult periods, the investor’s true risk tolerance is much lower than would be stated on a questionnaire. If the investor has no experience investing in risky assets, the advisor must adjust the asset allocation to include this lack of experience. The robo advisor would not catch this and would over allocate to high risk assets. Then during a difficult market the investor would perhaps sell at the wrong time.
Another challenge with robo advisors is understanding an investor’s knowledge of complex products such as structured notes or some other “alternative” investment product. It is very difficult to properly gauge an investor’s knowledge and experience of complex products with a questionnaire. For investors with little knowledge of the components of structured notes (i.e. zero coupon bonds and derivatives), most structured notes are not suitable. Only a human advisor would be able to properly incorporate these products into an investor’s portfolio. For investors who do understand complex products, they can be a great addition to a portfolio. For investors who do not understand, these products can add complexity and confusion.
Robo advisors can be a nice fit for some investors. However, they lack an ability to truly know their client’s risks, behaviors, and experience. Human financial advisors get to know their clients on a more personal level and can customize the portfolio accordingly. This service is valuable and necessary to most high net worth individuals.

CFA Society Los Angeles Advocacy and Ethics Committee

We must reform ourselves before the regulators do it for us

The investment industry continues to brace itself for further regulatory reform. In this InvestmentNews Other Voices essay, CFA Institute President and CEO Paul Smith, CFA, challenges the investment profession to instead take the initiative in reforming itself in three key areas. Read more... 

Aswath Damodaran's YouTube channel

Aswath Damodaran, professor of finance at the Stern School of Business at New York University, offers eight extensive playlists (and counting) on the subjects of Corporate Finance, Valuation, and Investment Philosophies on his YouTube channel. Damodaran recently also posted a video on Volkswagen's pre- and post-scandal valuations. Read more... And more...  

The effects of easy monetary policy on the U.S. stock market, 1862

Author and Wall Street Journal columnist Jason Zweig tweets this brief yet intriguing excerpt from William Worthington Fowler's Ten Years in Wall Street; or, Revelations of Inside Life and Experience on 'Change. Read more... And more... 

The Federal Reserve has some advice for your love life

With tongue firmly planted in cheek, Bloomberg Businessweek's Luke Kawa summarizes the findings of a recent Federal Reserve study examining the role of credit scores in the formation and dissolution of committed relationships. Read more... And more... 

Obama Administration elevates role of behavioral science in government services

Can behavioral scientists' insights help improve the design of federal programs to better serve Americans? This article by the Association for Psychological Science discusses President Obama's September 15 executive order, and some of the strategies tested by agencies in collaboration with the now formally established SBST (Social and Behavioral Sciences Team). Read more... And more... 

CMOS takes a break with John Perry and The Art of Procrastination

In this CMOS (Chicago Manual of Style) Shop Talk interview, John Perry, author and emeritus professor of philosophy at Stanford University, explains the notion of "structured procrastination." Your Curation staff managed to complete Perry's book on the subject during the rapid approach of this e-newsletter's publication deadline. Read more... And more...