Scott Burns on His New Book, The Housing Market, and Gas Prices… (an Interview)

Scott Burns is a busy man. However, he’s not too busy for AFM readers, which is a good thing! Below is an email interview I had with Scott about what’s going on in his life. If after reading the interview, you have questions, please leave a comment and I’ll see if I can get Scott to stop by and answer them. Enjoy!

It has been two years since I last interviewed you. What have you been up to?

I’m still writing my syndicated column. But I left the Dallas Morning News and started AssetBuilder, a registered investment advisor firm.

In that interview, you mentioned that you were working on another book. Is it finished? What’s it about?

Simon & Schuster just released Spend ’til the End* on June 10th. Like The Coming Generational Storm*it’s a book economist Larry Kotlikoff and I wrote together. Spend ’til the End*is grounded in consumption smoothing— the idea that we all try to maintain a smooth and level standard of living throughout our lives. While the idea seems obvious, achieving a level standard of living isn’t easy. Worse, conventional financial planning virtually guarantees that you won’t be able to do it.

Conventional financial planning, for instance, virtually always tells us that we need to replace 70 percent to 85 percent of our final earnings at retirement. This is entirely bogus. It ignores fundamental realities like debt and children. It also ignores the fact that we can choose to spend down some of our savings once we are retired.

Unless you have a very high income, paying off your house and other debt, modest savings, and Social Security will allow you to maintain your lifetime standard of living. I’m talking about at least 90 percent of all households in America.

Here’s a link to a column demonstrating the idea: The N Factor and Retirement Planning

You have also become involved in a new advisory business called AssetBuilder. Can you give us a little background on how you became involved? What’s your roll with the company?

I’m the Chief Investment Strategist, primary communicator and researcher. AssetBuilder was conceived over dinner with Kennon Grose, a friend and former Microsoft executive. We both liked index investing and wanted to build an efficient, low-cost delivery system for asset management. We believe AssetBuilder is a significant challenge to what I call the “legacy distribution system”— the complex of brokerage and insurance products that takes so much of the investors return in worthless fees.

We knew there were lots of do-it-yourself investors out there who understood index investing but seldom executed in a timely way. We also knew that optimizing risk using mean variance optimization was more than most people could do.

That’s what AssetBuilder does. We build mean variance optimized portfolios using what we believe are the best index funds available— the ones run by Dimensional Funds Advisors. And we do it at very low cost (45 basis points down to 25 basis points).

We figure that every $1 of revenue we make takes about $4 or $5 out of the conventional financial services industry— and puts it in the pocket of the investor, where it belongs.

How’s the business coming along? Have you had a warm reception?

This is an idea that people get. As of this May we had $124 million in assets under management. That’s double what we had only 4 months earlier. We now have about 300 clients in 24 states.

Growth like that is a good indication of having an idea whose time has come. I don’t think an Internet based advisory business would have worked as recently as 5 years ago, but it clearly works today.

What type of client is a good fit for AssetBuilder?

In terms of assets, our clients cover a really broad range. What they share, however, is a common sense approach to investing. They invest for probable returns, not possible returns. Possible returns is what Wall Street sells. Sizzle. Not steak. AssetBuilder invests in efficient index funds, delivers major diversification, and focuses on building efficient risk/return portfolios.

We believe our focus on the risk element will make it possible for those who are drawing from their portfolios to draw somewhat more.

Are you still writing your column for the Dallas Morning News?

The Dallas Morning News is now a syndication client rather than my employer. I now write two columns a week rather than three. I do a good deal of additional writing on the forums we have at the AssetBuilder website.

Now let’s talk a little about the economy…

The housing market has taken a beating over the last year or so. Are things bad in the Dallas area? Do you think the worst is over?

Dallas has foreclosures but it was never part of the price bubble that has caused so much misery in Florida and California. Dallas also still has significant net in-migration. You can see how much by getting a U-Haul quote— it’s expensive to move from San Diego to Dallas but the same truck will cost a fraction if you happen to be moving from Dallas to San Diego…

How did it become such a big mess in the first place?

Three major factors caused the problem:

1. Congress eliminated taxation of home gains up to $500,000 for a couple. That made housing a tax-free investment for most people. This isn’t talked about very much, but when you reduce taxes on something, you increase its value;

2. Securitization of the mortgage market broke the chain of responsibility. No one in the profit chain had any consequences for bad loans. It was the toilet assumption— flush it, and it will go away— in full operation;

3. Reduction of lending standards because they stood in the way of ever-expanding profits for every part of the debt-chain.

What are your thoughts on the steps that the government has been taking to clean up this mess? Are you a fan of the bailout?

It’s all too little, too late— government as usual. I’m not a fan of any bailout. We need to clear the markets as soon as possible. That means thousands of people who should never have bought houses, whether to live in or for investment, will eventually lose those houses to foreclosure. But it also means that thousands of other people with better credit will have the opportunity to buy those houses at reasonable prices.

Last question: How high do you think gas prices can go before they have a negative impact on the economy? Or, are we already there?

We’re already there. High gas prices (and energy in general) act like a tax on the economy and reduce consumer spending power. The same high prices are also reducing the value of vehicles that aren’t efficient, so millions of people will be upside-down on their vehicle loans. That’s a double hit to future spending power. You won’t hear it on CNN but millions of Americans have far more at risk in the used car market than they have in the stock market…

That’s the end of the interview. One thing really stood out to me and that was Scott’s first reason for the housing crisis: Congress eliminated taxation of home gains up to $500,000 for a couple. I never thought about it but that makes a lot of sense. I’m not saying there should have been a tax on the gain in the first place but obviously removing the tax sort of opened the floodgates.

A big thanks to Scott for taking time out from his vacation to answer these questions.

*Affiliate Link

10 thoughts on “Scott Burns on His New Book, The Housing Market, and Gas Prices… (an Interview)”

  1. Although I greatly appreciate a company that keeps fees low and puts money back in the pockets of investors, I question the credentials of this company and it’s leaders. Neither Scott, Kennon nor any of the leadership staff have any of the standard certifications one would expect with an investment firm. There are no CFAs, CFPs, CPAs, etc. Granted, these credientials don’t mean you are an expert, they simply mean you’ve been rigorously tested and certified to manage the assets of other people. Granted Scott has been writing about Personal Finance for the better part of 50 years. Does that make him a good investment advisor? My opinion is No.

  2. Tom,

    Good point. However, there are lots of CFPs running around that are masked salesmen. In other words, lots of salespeople use designations as marketing tools.

    I don’t think it is necessary to have a professional designation in order to help people invest their money.

  3. I can’t speak for anyone’s skills as an advisor, but I can comment on JLP’s point. At my previous firm, one of our top advisors had a CFP. But he was hardly doing any advising at all. He was a smooth talker that could sell anything to anyone.

    And he did. He sold variable annuities almost exclusively, regardless of the client’s situation. The same annuity, with the same expensive funds, and usually tacking on some riders for a few more basis points.

    His credentials did nothing more than attract more potential clients, and trick them into thinking that whatever he told them to do was in their best interest.

    The professional designations can certainly help, but by themselves, are nearly worthless. They have to be considered in context since great advisors can go without one, and others who take the time to pass the tests can be complete slimeballs.

  4. JLP and Jeremy,

    I guess in my comment I put too much emphasis on having a “special investing” designation. I agree that many certified investment advisors are slimeballs, I would group many brokerage firm employees in that category. The point I tried (and failed) to make was that I question their qualifications as asset managers. The fact that they chose to exclusively offer DFA funds, I think, proves my point. They are severely limiting the asset allocation of their clients. Yes, DFA funds come in a wide range of asset classes, but not being able to choose other funds only limits any portfolio’s return. My intial impression of the website was WOW, but after digging through the information it is 95% flash, 5% researched substance. Again, I think exclusively choosing DFA also proves that. It’s almost like saying there are a million investment choices out there, instead of researching them all and choosing the best, we are going to pick one “brand” and stick with it because it’s less work for us. They are making investing simple and cheap, both for the investor and for the client, and that’s great, but I struggle with handing my assets over to a PF writer and a computer programmer. The public just needs to be careful, do extensive research, and not get caught up in flashy websites when choosing an asset manager.

  5. I agree with both of you 100% on removing the tax for house sales. I have never ever heard that mentioned when people are trying to find blame for the housing crisis. It really makes a ton of sense if you actually think about it though.

    Very interesting interview by the way!

  6. I am a fee-only, Napfa advisor who is now in direct competition with Scott and AssetBuilder. But, I appreciate what they are doing. He is helping many folks who would otherwise fall victim to the Wall Street fee machine.

    Concur with JLPs comments on CFPs. I am a CFP, and I think most of them got it so they could use the credential to push inappropriate product. Of the 70,000 CFPs, I bet 1/4 are really worth their salt. The others are salespeople. I remember eating lunch with a planner from Merril. He had been in the business for 25 years. He said since studying for the CFP, he, for the first time in his career, felt comfortable discussing tax and estate issues with clients. Made me feel bad for the clients he worked with for the past 25 years. What kind of advice did they get?

    As far as DFA funds, they are solid. I prefer lower cost ETFs, but I do believe in the value tilt that Fama/French advocates.

    I totally agree with Scott’s point about taxation of the home. The interest write off is another reason so many people want to buy a house. How many times do people say you are throwing money away on rent when you could be getting a tax break by owning. Total hogwash in some cases.

  7. I think that AssetBuilder addresses DFA funds versus Vanguard on their website and the point made is that the DFA funds have lower costs. It seems to me that half the point is not to become a stock picker or, in this case, a fund picker except as it address the segment. But why not go for the lowest possible cost, fund-wise and management fee wise at that point?

  8. Kirk

    I agree with your comment concerning taxation of the home, and if you are a long time reader of Scott’s column concerning the federal income tax deduction for mortgage interest and ad velorem taxes, he agrees also.

    I am not sure, however, that his interview addressed that issue. What I think he was referring to was the lack of a tax liability in capital gain (or loss) incurred when the home is sold. Lack of a home capital gains tax liability has led to extensive speculation. Check the accelerated increase in the value of the stock market when capital gains taxes were reduced in the mid 1990’s.

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