Morningstar Patents Retirement Savings

Hedge Fund Regulation 16 Jul 2007

Well, maybe not retirement per se.  But Ibbotson (now under the Morningstar umbrella) recently convinced examiners at the US Patent Office that adjusting a retirement portfolio based on the amount of time until a worker retires was patent-worthy.  According to the US Patent Office website, the patent was awarded on May 8, 2007.  But it wasn’t until last Friday that the firm released a statement saying “Nyaaa, nyaaaa!  We gotta a patent!” (we paraphrase here).

This patent reminds us of Research Affiliates’ recent patent on fundamental indexation (see related posting, “The Patent King of Pasadena“).  Both make liberal use of the terms “machine-readable medium…” and “processor performs the steps…” to differentiate their “inventions” from generic and broadly-understood concepts.  Says Ibbotson’s statement:

“The method provides a model for portfolio construction based on balancing an investor’s financial capital and human capital. Financial capital is defined as an investor’s current savings, such as money already saved in a retirement account. Human capital is an investor’s future potential savings, and is often the single largest asset an investor has.”

Human capital is a well-used term that usually refers to a firm’s employees.  But Ibbotson uses a more quantitative definition that captures the present value of an individual’s future earnings. Still, the patent itself acknowledges the generic core of the idea:

“Although the impact of Human Capital on investor portfolio choices have been studied by many academics, this concept has not been used in the management of retirement plans or to automatically switch allocations of assets in the portfolio of an investor or plan participant.”

The firm draws inspiration from academic work such as this one written by John Ameriks of Vanguard and Stephen Zeldes of Columbia University which suggests only a small portion of Americans actually alter their portfolios as they age.

While Roger Ibbotson and Peng Chen have written some interesting papers (see related posting), our jury is out as to whether such “inventions” should be patentable.  It appears as if you only need to develop a piece of software that automates an existing, widely-recognized financial concept in order to win a patent these days.

What if William Sharpe had patented the first computer-generated CAPM, or Harry Markowitz had patented Mean-Variance optimization?  (For his part, Sharpe has always offered the software versions of his research for free on his website.)

In fairness, Cheng, Ibbotson (and Arnott) are not the only ones who have been hanging around the patent office lately making questionable filings.  In fact, the list of citations on their patent includes other hum-dingers such as:

  • “A web-based investment advisory system and method to assist financial advisors in delivering personalized investment advisory services to investors.” (link)
  • “Systems and method for improving investment performance” (link)
  • “Method and apparatus for enabling individual or smaller investors or others to create and manage a portfolio of securities or other assets or liabilities on a cost effective basis.” (link)

Always quick to jump on the bandwagon we’ve got dibs on “a method and apparatus for delivering blog postings about alpha”.

– AM

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