THE STATE OF THE ADVISORY SERVICES INDUSTRY | Today we are operating in an entirely different business environment than just a few weeks ago by virtue of recent court and the SEC rulings. If you charge a fee for your services, use a financial planning designation, provide asset allocation services, use a program or process to determine investment recommendations, advise trust assets, work with IRAs or opine on pension or 401(k) assets, have discretion, provide overarching investment strategy, or make investment recommendations in the context of all your client's holdings (which is essential in order for you to add value) you are acting in a fiduciary capacity and are required to acknowledge your fiduciary status. If you cannot, or your NASD member broker/dealer will not allow you to acknowledge fiduciary status, the SEC now requires you to use a consumer warning that states in writing to the effect, I am acting in a sales capacity and am not obligated to act in your best interest. We must now go far beyond good intentions as very specific duties are entailed in fulfilling our fiduciary obligations. This is beyond open architecture in investment product and technology or a UMA. An audited prudent investment process is required. The SEC calls this an eligible investment advice arrangement prior to its initial audit. This audited prudent investment process (1) eliminates fiduciary liability for the broker/dealer by virtue of an annual audit of its prudent process, (2) allows for conflicts of interest if fully disclosed in a new advisor disclosure statement and (3) provides a safe harbor for advisors to acknowledge and provide fiduciary counsel. The State of the Advisory Services Industry explains recent court and SEC rulings, the new business environment in which we all must work and advances the intellectual capital necessary for large scale institutionalized support for fiduciary counsel. This is a must read for every advisor and institution of good will.
INDEXES GONE WILD by RON SURZ | Some wild swings are happening to our favorite indexes this year. The S&P 500 shows domestic value stocks winning the performance race while the Russell 200 shows just the opposite, with growth outperforming value. Outside the US, the EAFE (Europe Australia Far East) Index has outstripped both the S&P and Russell, but has far underperformed the broad foreign market. The EAFE has been easy to beat. The variance in these indexes are important considerations because we rely on these indices to show us who is winning and losing. In the first half of 2007, our assessments of success or failure will rely on our choice of benchmarks. Half of the equation of your successfully managing your client's portfolios is getting the portfolio benchmark right. This article is a revelation on why using off-the-shelf benchmarks is neither in your or your client's best interest.
THE UNIFIED DELIVERY PLATFORM by BEVIN CRODIAN, PHD | Bevin Crodian, former head of Fiduciary Services at Smith Barney, in concert with his business partner Bob Lage, CFA, have a point of reference and depth and breadth of understanding of the advisory services industry and its technology that is unparalleled. Bevin's counsel is widely admired and highly sought after. In this article Bevin makes the case that the industry must evolve to a unified platform for products and services not a unified product, which is an old idea inconsistent with the reality of today's technology. Today we have real time data and analytics that afford and extraordinary level of counsel, why would we want to cripple ourselves with outdated legacy systems and outdated thinking of 15 or 20 years ago, when we are well beyond that in practice? Innovation and our ability to adapt will increasingly be essential to our success and the value we add. There is significant opportunity to modernize the processes and technologies we avail ourselves to in order to add value. The intellectual capital, vision and leadership embodied in today's existing advance technology is why Bevin is held in such high regard and why his advice is so highly sought after. This is a very important article to forward to your colleagues you rely upon for best in class advisory services support. Let's elevate and foster discussion on technological innovations of today, not marginal incremental patches to out dated technology of yesterday that cannot take us where we want to go.
RECONCILING THE ROLE AND COUNSEL OF THE ADVISOR WITH THEIR FIDUCIARY OBLIGATIONS by RON RHOADES, LLB | There have been many initiatives to develop fiduciary standards, some focusing on good intentions, some authoritatively based on statute, case law, and regulatory opinion letters. Ron Rhoades is a well versed student of them all. As an attorney and as an advisor, Ron's Comment Letters to the SEC on behalf of the advisor are always among the best documented and reasoned. Here Ron and a group of interested advisors seek to consolidate prior efforts to define fiduciary counsel by advancing a coordinated approach to advisory services reform that would support fiduciary counsel. This 73 page document is worth the read because it fore shadows financial services reform which is inevitable as the industry evolves through innovation. The rapidly changing competitive business environment of today has far out dated the facts and circumstances of 1940 upon which our present regulatory framework is based. The title Ron has given this document is Financial Intermediaries: Opportunities to Enhance Standards of Conduct. This document will take you deep into where the industry is headed.
LIABILITY INDEXES: CAVEAT EMPTOR by RON RYAN | Ron Ryan is the former Director of Fixed Income at Lehman and has designed many of the popular Lehman Indexes. Importantly, Ron designed the first Liability Index in the US and since has been on a mission to help clients understand their liabilities unique risk/reward behavior so strategies could be created in accordance to each client's specific liability schedule (the correct duration and cash flow schedule). Nearly two decades later, the industry has awakened to the necessity and rationale behind custom liability indexing. Today there are several liability indexes being marketed, the question is what benchmark best represents your client's economic liability driven investment objective. This is world class advice from the guy who invented liability indexes. If you have Pension Plans, Banks, Insurance Companies, Lotteries, Nuclear Decommissioning, essentially any institutional clients, this article provides you with deal making/decision making intellectual capital that makes a difference.
BROKERS AS FIDUCIARIES by FRED REISH | What is the difference between a broker providing an investment recommendation as a salesman and their providing investment advice which triggers fiduciary responsibility? Fred Reish, whose is the industry's best known and perhaps the foremost authority on fiduciary counsel, shares the answer. A must read.
In this issue of SENIOR CONSULTANT you will find the following, just hit the title to download each article:
With the new SEC disclosure statement being required of all advisors who can not declare they are acting in as fiduciary capacity, every advisor in the industry is asking, “How do I profitably and automatically manage an extraordinary degree of account detail as cited in investment policy, dictated by client directive and required by regulatory mandate for an unlimited number of custom client portfolios, on a fully transparent basis at the lowest possible cost, while out performing the market, all in a fiduciary construct? Read on to see how this preemptive value proposition is within your reach as an individual advisor and is less expensive than what you are now paying to participate in your firm’s wrap fee/advisory services/UMA programs. Once fiduciary counsel is within the reach of the individual advisor, the debate of whether an advisor can declare their fiduciary status becomes moot, as it is now the choice of the individual advisor not their supporting firm. The consumer clearly prefers their advisors to act in their best interests and fulfill their fiduciary obligations. The new disclosure statement makes it clear who is acting in the consumer’s best interests even if the brokerage industry considers it a violation of their internal compliance protocol for advisors to acknowledge their fiduciary obligations. The opportunity to win business has never been greater, this report will show you how to do it.
Will the vast majority of consumers served by NASD member brokerage firms ever have the benefit of their advisor acknowledging their fiduciary obligations and acting in their client’s best interest? The SEC staff “tools and hats” interpretation of the Merrill Lynch rule cited in the SEC’s letter to the SIA of December 16th, has established that the 568,000 licensed advisors within the brokerage industry have little or no hope of acknowledging their fiduciary obligations or acting in their clients best interests. These SEC staff interpretations have not been vetted in the public domain as is customary in creating public policy, they are not a rule, regulation or statement of the SEC, will not hold up to the scrutiny of prudent experts in the public domain, and are clearly not in the best interests of the investing public. At risk is the professional standing of all advisors within NASD member firms and the relevance of fiduciary responsibility as a consumer protection and a professional standard. Advisors within our NASD member firms are silenced, as it is a violation of their firm’s compliance protocol to acknowledge or advance their fiduciary responsibilities. The only way to level the playing field and assure the consumers best interests are being served is to have the SEC staff interpretations vetted in the public domain. If we can’t rely on fiduciary principles being a regulatory imperative, it must become a professional imperative. Our industries best and brightest must act in our client’s best interest and assume a leadership role. This is the most important issue ever to surface in the industry as it forever casts in concrete whether the vast majority of consumers served by NASD member brokerage firms will ever have the benefit of their advisors acknowledging their fiduciary obligations and their advisors acting in their best interests. This is a must read as you can shape the course of the financial services industry. If we don’t act now we are culpable in the industry and NASD member firms in particular loosing the faith and trust of the investing public.
With the new SEC disclosure statement required on January 31st, we are in an entirely new competitive business environment. For the first time ever, it is important how we do business. A prudent process is needed to fulfill our fiduciary responsibilities. Historically it didn’t make any difference within the brokerage industry how you did business as long as you generated a high level of gross commission revenue. Historically it didn’t make any difference to your custodian how you did business as long as you had assets to custody. Thus today when a declaration of fiduciary status is required, there is no large scale institutionalized support for fiduciary counsel. As an advisor you are on you own when it comes to creating your prudent investment process, you have to reinvent the wheel every step along the way. The Society of Fiduciary advisors, a not-for-profit membership association, has been created to help you fulfill your fiduciary responsibilities, at a time when there is no other resource to which to turn. There are sixteen steps to your providing fiduciary counsel and the SFA is there to help you every step along the way. This report helps you reason through the steps necessary for you to fulfill your fiduciary obligations.
There is convergence of market forces that compel the financial services industry to acknowledge the fiduciary obligations of its advisors. The Department of Labor which is a principle supporter of fiduciary responsibility when it comes to qualified plans has ruled if you advise your clients on all their holdings, and the client has qualified plan assets, you are held to a fiduciary standard of care, even if you have no direct involvement with the plan. NASD member brokerage firms might take note, if they don’t allow their advisors acknowledge their fiduciary obligations, they are putting their advisors in an untenable position. They are held to a fiduciary standard but cannot acknowledge it and their firm will not support it. Very interesting read.
The world is connected (flat) as never before, lowering political and trade barriers, making it possible to instantaneously do business with billions of people across the planet. Globalization is not driven by major corporations or giant trade associations but by individuals: desk top freelancers and innovative startups all over the world (especially in India and China) who can compete and win not just low wage manufacturing but increasingly high-end work as well. Success today comes from those who recognize and understand shifts in the competitive marketplace. Pam raises three questions that will help you to become invaluable to your clients.
Capital Market Consultants, LLC (www.cmarkc.com) will provide readers with selected monthly updates in chart and table form from their CMC EResearch™ on-line research product. CMC is an independent consulting services resource for RIAs and mid-to-small sized financial firms which find it more effective for their business to outsource rather than build their own in-house technical resources. In order to elevate the role and counsel of the advisor, it is important that break-through advances in the data, processes, technologies and investment methodologies be embraced for the faster, better, cheaper delivery of financial products and services. CMC is a reliable first user of such break-through innovations.
For January, the equity markets were strong across the board, although the energy sector resumed its dominance. Performance of the new S&P/Citi Style Indices are also charted and discussed; the insights are surprising. On the economic front, an unexpectedly strong January Retail Sales report has many rethinking 2006 GDP growth and the next moves by the Federal Reserve.
HAPPY NEW YEAR!
2005 will go down as the most eventful year in the history of the financial services industry.
If you missed our spring and summer issues we have had hundreds of thousands of hits following the events leading up to the emergence of a new profession of Fiduciary Advisors on January 31st which is discussed in this issue. Just hit “Fast Breaking Innovations” on our home page (www.SrConsultant.com ) and scroll back a few months to get the scoop on what is about to occur. This is the most extraordinary time ever to be in the financial services industry and we all have the opportunity to take full advantage of it. Put on your seat belts, it’s going to be one of those years.
In this issue of SENIOR CONSULTANT you will find the following, just hit the title to download each article:
We all have been waiting for this our entire careers. There is finally an easy way for consumers to discern those of us who have been doing the hard work of adding value and fulfilling our fiduciary responsibilities. On January 31st the SEC will require all advisors who can not acknowledge they are acting in a fiduciary capacity to use a disclosure statement that makes it clear who is acting in a sales capacity and are not obligated to act in the consumers best interests and who is acting in a fiduciary capacity and are acting in the consumer’s best interest. This is the ultimate in marketing differentiation as every consumer wants their advisor to act in their best interests. Those that can, through a audited, documented, prudent process, will win accounts at will. If you ever wanted to exponentially grow your business, opportunity is knocking. All you have to do is be prepared and just open the door to a whole new world of fiduciary counsel. This is a must read.
Advice as we know it is not scalable as it can mean anything the advisor wants it to mean. But Fiduciary Counsel can be defined and in doing so, advice becomes scalable and fiduciary counsel becomes manageable. The Society of Fiduciary Advisors has defined Advice based on statute, case law, regulatory opinion letters as it applies to individual investors. This, in concert with the SFA publishing next month the enabling resources necessary for fiduciary counsel, answers the training (“how to”) and resource (“chance to”) questions necessary for the profession of Fiduciary Advisors to emerge. The unresolved cultural question (“want to”) that remains, can only be answered by the advisor and the advisor’s supporting firm. If we know how to provide fiduciary counsel and the enabling resources are available and the consumer demands it and can discern it by the new disclosure statement, nature will take its course. This is the beginning of the development of large scale institutionalized support for fiduciary counsel which will bring fiduciary counsel with in the reach of all advisors who wish to act in their clients best interests. This 47 page document provides unprecedented insight into fiduciary counsel. We are indebted to the SFA, its members and contributors for the thousands of hours that went into creating the FISI (Fiduciary Investment Standards Initiative) for Individual Investors.
At the high end of the banking and brokerage industry there is a convergence in the counsel being provided as both are based on the same fiduciary principles. Smartleaf’s sleeveless decentralized overlay management technology managed at the advisor level utilizing model portfolios resolves both the biggest challenges faced by the banking (the use of best in class outside managers with out killing their margins) and brokerage (empowering advisors through expert systems to go beyond their technical proficiencies and interests to address and manage a broad range of investment and administrative values required by regulatory mandate for an unlimited number of unique custom portfolios). This is the faster, better, cheaper technology that will bring fiduciary counsel within the reach of all. It eliminates complexity, reduces cost and adds value in tangible ways. A must read.
Conventional wisdom holds that it is not possible to beat the market and leading academicians maintain the only prudent approach to long-term investment is a style neutral strategy. So virtually all advisors who use active managers are worried about their ability to add value in portfolio construction. This need not be a problem, the solution is availing yourself to an outsourced investment methodology with a proven record of beating market neutral strategies, which allow advisors to compete very favorably with the biggest names in the institutional world. RowPyn’s Equity Investment Rotation (EIR) methodology, verified by the University of Chicago’s Center For Research In Security Pricing, is such an investment methodology. It beats the market by 70% at the same risk as the market and is documented over the past eight years. If you are like the rest of us and would like to draw upon an outsourced investment discipline that will guide you to outperform, resources like RowPyn are what you are looking for. Read on to discover how it works. It is not complex, it is not expensive, just follow EIR signals or use it as a core holding.
Starting this issue, Capital Market Consultants, LLC (www.cmarkc.com) will provide readers with selected monthly updates in chart and table form from their CMC EResearch™ on-line research product. CMC is an independent consulting services resource for RIAs and mid-to-small sized financial firms which find it more effective for their business to outsource rather than build their own in-house technical resources. The focus of their research observations each month will reflect prevailing market conditions. In order to elevate the role and counsel of the advisor, it is important that break-through advances in the data, processes, technologies and investment methodologies be embraced for the faster, better, cheaper delivery of financial products and services. CMC is a reliable first user of such break-through innovations.
It has always been a matter of trust whether consumers could rely on the advice of their advisors. Effective July 22nd the SEC requires a disclosures statement which makes it clear to the consumer whether the advisor is acting in a fiduciary capacity or whether an advisor is acting as a broker, just making investment alternatives available, requiring the consumer to determine investment merit on their own. The broker’s declaration of fiduciary status, which is in violation of their firm’s internal compliance protocol, is now the advisors most important marketing differentiator. The level of counsel a broker provides is no longer artificially suppressed to the level of counsel provided in 1940—if their supporting firm creates large scale institutionalized support for fiduciary counsel. The SEC has brilliantly created consumer demand for fiduciary counsel, has effectively engaged the competitive market forces of the free market to create large-scale institutionalized support for fiduciary counsel and has made it in the enlightened best interest of the financial services industry to do so. Every consumer prefers value to be added and their advisors to be accountable, so advisors who can declare fiduciary status will take significant market-share away from those who can’t. You, the fiduciary advisor, are reordering the financial services industry around fiduciary principles, one client at a time. (Download this article in pdf format.)
The SEC recognizes there are things that are out of our control as advisors that prevent us from declaring our fiduciary status. We may not be able to individually register as an RIA independent of our firm and thus have no control over form ADV. Our supporting firms may have relationships with money managers that create conflicts of interest with our clients that are beyond our control. How our brokerage firm manages trade execution may create conflicts of interest that are beyond our control. Our declaration of our fiduciary status may not be allowed. All these issues must be managed in favor of fiduciary counsel and the consumers best interests, yet the advisor has little power to change these industry practices, until now. On June 1 st the SEC and the DOL issued a consumer advisory recommending ten questions the advisor must answer before the consumer engages the services of the advisor. The purpose of the advisory is to create very high visibility for these issues on behalf of the consumer and the advisor, by making their resolution a condition of doing business. We discuss each of the ten questions, establishing a contrast of how you can answer them today and how you would like to answer them. The difference is how far your firm has to go to support fiduciary counsel. This is a short course on how to avoid conflicts of interest that may impede you from declaring fiduciary status and provides you with a means to influence how your firm can resolve conflicts that keep you from declaring fiduciary status. This also gives you ammunition win business from advisors whose firms are not responsive to eliminating and/or mitigating high profile conflicts which are not in your client's best interests. (Download this article in pdf format.)
At this stage of the game, with interest rates having apparently bottomed out and stock valuations far from what could be considered cheap, what does that mean for future stock and bond returns? Studies by Arnott and Bernstein (2002), Asness (2000), Ibbotson and Chen (2003), and Siegel (2004) have determined that equity risk premium could be as low as 0% or as high as the historical excess return of stocks of 5%. Thus it is safe to assume that the truth lies somewhere in the middle or that stock will be less attractive going forward than they have been in the past. The opportunity to out perform lies in diversifying outside of traditional asset classes and hiring opportunistic managers—complexity provides opportunity particularly in global bond and private equity managers. A very well reasoned Cliff Stanton makes a compelling case for where we will the opportunities that will out perform in today's low return investment environment. (Download this article in pdf format.)
Energy Stocks Pump Up Market Returns by Ron Surz
The year is two thirds over and the US stock market has been disappointing with low single digit returns of 3.4%. The only bright spot is energy stocks, up 38%. In fact because energy stocks account for 9% of the market, the entire markets return (95x38%=3.4%) is attributable to energy. Ron Surz examines sector and style performance for the US and Foreign markets year to date and reviews the hedge fund markets. (Download this article in pdf format.)
Industry Waiting For The Other Shoe To Drop: Will Brokers, Who "Are" Providing Advice, Be Held To A Fiduciary Standard? by Stephen C. Winks. The SEC's much anticipated vote on April 6th (permanently exempts "brokers" who "are not" rendering advice from being held to a fiduciary standard) has initiated a history making course of action by the SEC over the next ninety days to modernize our outdated consumer protections. The important regulatory issuses of today have been and are being obsfuscated by abstract legal arguements based on the original intent of the authors of statutes some seventy years ago, prior to any regulation being in place, prior to technological advances that could not have been envisioned. The most important outcome of the SEC's April 6th "broker exemption ruling" is that it is concerned about the pervasive confusion about consumer protections confirmed by focus groups, and that its future rulings must make sense and be understood from the perspective of the consumer. For the first time in 70 years the balance of regulatory power with in the SEC has swung from the broker/dealer to the consumer. The SEC sees how illogical and confusing it is for the industry to maintain that "investment advisors don't render investment advice." On or before July 6th we will very likely see a ruling that "brokers" who "are" rendering advice should be held to the same fiduciary obligations of advisors, and much, much more to follow. The stakes are high as broker/dealers would be required to acknowledge and support the fiduciary counsel of their advisors, the consumer would be well served and the competitive market stature of our leading firms will be determined on the basis on the depth and breadth of their support of fiduciary counsel. Over the next ninety days the industry will be charting a course, where our fiduciary obligations to our clients will have never been so clear. The role and counsel of the advisor and their supporting firms is being greatly elevated in alignment with the consumers best interests. Learn what is comming down the pike. There could not be a more exciting or rewarding time to be in the financial services industry as innovation creates new opportunities for leadership. (Download this article in pdf format.)
The Business Purpose Statement: How To Use Your Values To Differentiate Yourself by Michael Lovas. Most investors buy because the advisor has connected on an emotional level, thus values are important. We resonate with investors because of common shared beliefs, thus a carefully crafted business purpose statement confidently presented powerfully connects us to our clients. Not only do you feel a difference in articulating something you really believe in, but your clients do as well. The Business Purpose Statement makes you magnetic because your words mean something--there is a connection rather than a disconnect, which we often see in mission, vision, value statements. Michael Lovas walks you through how to create a Business Purpose Statement using your words that connects you to your clients. This is not features, advantages, benefits; this is connecting on an emotional level. Good Stuff. (Download this article in pdf format .)
Investors Succumb To The Opiate Of The Common Investor: Where Do We Find A True Guru To Follow by Larry Klein, Remember Joe Granvill, Howard Ruff, how about Precter's Elliot Wave Theory or more recently Harry Dent. For a while they were all too good to believe. Wouldn't our job be less stressful if the market was dependent on one variable for which a guru has unusual insight. This simplistic regression is the only way the human mind can satisfy itself for predictibility, admist choas. Larry Klein takes us down memory lane and affords us a few lessons that can only be learned by experiance. (Download this article in pdf format.)
Is Your Wealth Management Team A 10 ? by Steven Drozdeck and Lyn Fisher, Is it possible to offer "continueous comprehensive counsel" without a team? Not a chance. In an article intended for use with clients, Steve Drozdeck and Lyn Fisher help clients understand the value of your team. Teams are essential, not just because the advisor can't afford to spend highly valuable client acquistion/service skills on administrative functions requiring much less skill, but inorder to exceed client expectations in all areas requires distinct and necessaryily different skill sets than that of the advisor. You know you have a good team when the sum of your parts are greater than the whole--which means you are literally adding value. Great for use with clients. (Download this article in pdf format.)
Senior Consultant, Vol. 8, No. 3
Democratizing Professional Investment Counsel by Michael S. Falk, CFA. The shortcomings of the industry in trying to educate participants in participant-directed plans has less to do with the efforts than the audience. The 85% of DC plan participants want assistance in investing. The market reality is DC plan participants are reluctant investors who do not have the time, desire or knowledge to invest for him or herself. So how does the industry find an economically viable way to help thousands of DC plan participants with their DC Plan investments? Michael Falk poses a brilliant solution. (Download this article in pdf format .)
Warning! Peer Groups Are Hazardous To Our Wealth by Ron Surz, PPCA. If a new lifesaving medical technology were created, it would just be weeks before specialists around the world would be apprised of the breakthrough and in a few months thousands of physicians would be saving lives using this technology. Why isn’t this true in the investment industry when breakthroughs occur in investment performance evaluation technology? What does this say about our industry? Are we so focused on selling investment products that how we use them to add value is not really important, thus rendering performance evaluation immaterial? Performance evaluation is all about making judgments as to whether performance is good or bad. It doesn’t matter how managers in other peer groups have fared, since they should be compared against their passive alternative. What does matter is the degree of success you experience against your benchmark. As obvious as this sounds, why isn’t everyone doing it? Ron Surz explains. (Download this article in pdf format .)
An Investors Guide to Wealth Management Teams by By Steven Drozdeck and Lyn Fisher. Don’t you wish that your clients could differentiate you from the hundreds of advisors you are competing with who, to the client, all seem to be saying the same thing? The second best thing is for advisors to help clients understand the differences by sending to clients and prospects articles that take your clients deep into your practice and make it easy for them to see and understand the difference in your value proposition. Steve Drozdeck and Lyn Fisher have designed a series of articles just for that purpose. The first article helps clients understand the importance of an advisor being able to leverage through a team within their practice and outside their practice. The client or prospect can’t help but get the message, the advisor can’t do it all alone, and it is not in the client’s best interest if the advisor prefers to act alone. (Download this article in pdf format .)
Be Succinct and Provocative(R) by Jerry Rosenstrach. Jerry Rosenstrach is one of our industry’s treasures. Having run marketing for several major firms, he has seen and done it all. Jerry understands sales, what works and what doesn’t work, and has a refreshing perspective on how simple and effective marketing can be. Jerry starts by asking a very simple question--what was the client take away from your last conversation? Would your client even remember? This is like Vince Lombardi starting training camp with “Gentlemen, this is a football” to a team that would later go on to win a Super Bowl. Jerry has a lot to say, it is the simple things that count and work the best. (Download this article in pdf format .)
A New Year, A New Profession – Fiduciary Advisors for 2005: How We Get There From Here by Stephen C. Winks. The events that have unfolded in 2004 promise to make 2005 the most eventful and perhaps the most important year in the long history of the financial services industry. SEC Chairman Donaldson observes that the industry will see more change over the next three years than we have seen over the past 50 years. Leading this industry-redefining change is the advisors' acknowledgement of their fiduciary status. But Harvard Business School professor Clayton Christensen counsels us in his book, The Innovator's Dilemma, that innovation is not the strong suite of our largest institutions, whether they be wirehouses, trade associations or money managers. Innovation, particularly if it is disruptive technology, cuts across the grain of status quo and challenges the carefully crafted, honed and refined business models of our dominant institutions. Thus, the industry's abhorrence to any changes to its proven, highly profitable and finely-tuned business models creates a blind spot that denies advisors and investors the benefits of the extraordinary innovations which have occurred and will continue to occur within the financial services industry. This is why our dominant institutions will not acknowledge our fiduciary responsibilities as advisors and why enabling resources and support for fiduciary counsel have not been made available. If innovation is to occur, even if it is required by regulatory mandate, it must occur outside our largest institutions, led by an ecumenical group of advisors who are acting in a fiduciary capacity and have no turf to protect or self-interests, counter to fiduciary principles. The Society of Fiduciary Advisors (SFA) is being organized by our industry's leading advisors to foster innovation in support of fiduciary principles which will greatly elevate the role and counsel of the advisor. Together with other fiduciary advisors, you can be integral in changing the course of the financial services industry, reshaping it around fiduciary principles. To learn how, just read on. (Download this article in pdf format.)
Finding An Outstanding Trustee: What Wealthy Families Look For in a Trustee and How They Get It by John P.C. Duncan. The multi-family private trust company and the boutique trust company that John Duncan describes in this article may be the very business models that advisors, who are acting in a fiduciary capacity, will gravitate toward. John wrote the model trust laws now adopted in 40 of our 50 states and is intrigued by the large number of advisors who have substantial assets, who are working in a fiduciary capacitys and who have grown beyond the ability of their NASD-member firms to support their work. John has created more private trust companies for wealthy families the past several years than any other law firm. I have asked John to give us insight into these private trust companies and how it would be viewed by families relative to their other options. In the process, you will understand how powerfully positioned many of you are to create what John calls "boutique trust companies," which require very little additional work than that which you are presently providing. John is working with Congress for the approval of interstate private trust/boutique trust companies. (The House has already approved it; the Senate still needs work.) Though important states like Georgia, Florida, Alabama, Colorado and California are among the ten states that have not modernized their state trust laws, over the next few years, we will see interstate trust companies emerge from large advisor practices that will greatly benefit the investor and the advisor and the industry (Download this article in pdf format.)
The SEC's New Failure to Protect Investors: The Defeat of the Proper Application of Fiduciary Duties to Investment Advisory Activities by Ron A. Rhoades. There is not a more complete or eloquent response to the SEC's request for comment on broker exemption to the Investment Adviser Act of 1940 than that of Ron Rhoades. I have asked Ron to write on the broker exemption to the '40 Act, and he has authored an even more definitive piece. Ron's encyclopedic recall in authoritatively citing source material, facts and principles makes this article extraordinary. Ron writes with such passion that little room is left for one to reasonably counter his arguments. This is a must-read for anyone who does not see the inequities of the broker exemption and how it is inhibiting the entire industry from doing the right thing. (Download this article in pdf format.)
Perspectives on 2004 and Beyond by Ron Surz. Before we decide which trends will continue or reverse, we must know what the trends are - and there is no one better than Ron Surz to get a fix on the global markets. In an amazing piece, Ron tells us about 2004, the fourth quarter of 2004, the past five years and the decade, hedge funds, the past 79 years with risk and return on stocks, bonds, T-bills and CPI. Extremely insightful. A companion piece will be published next month on the global markets. (Download this article in pdf format.)
Macro-Strategic Planning(R) by Mike Hernacki. For the wealthy, the value the advisor adds has little to do with money. This may seem strange to those of us who grew up in the financial services industry and are trained to provide investment and administrative counsel consistent with fiduciary principles. It would indeed be nice if all our clients defined our client relationships in the context of our strengths, yet if that were the case, wouldn't we be self-centered, rather than client-centered? The secret to working with ultra-high net worth clients is that it is rarely about money; it is about helping them discover a sense of well-being derived from their wealth. Discovering what gives the client a sense of well-being - whether it is supporting education, the arts or civic causes - is essential to building a long-term relationship with ultra-high net worth clients. If you discover that by supporting the arts, the client derives a significant amount of gratification, and then your counsel in having their arts foundation and its governance set up for perpetuity is invaluable to the client. By extension, you are the perfect person to articulate and execute your clients' wishes. We are trained to manage the foundation's assets, but the real value to the client is the sense of well-being derived from the foundation. The process of discovering what clients really care about is called Macro-Strategic Planning(R) (MSP). MSP is essential in establishing and maintaining long-term relationships with ultra-high net worth clients. Mike Hernacki provides insight into exactly how MSP works. (Download this article in pdf format.)
It Is Time To Overhaul Our Compliance Protocol by Stephen C. Winks. On January 7, 2005, when the SEC requires advisors to declare their fiduciary status, certainly every advisor in the industry would like to assure their clients that they are acting in a fiduciary capacity. Yet, for the advisor to put investors' best interests ahead of their own and that of their supporting firms, and to fulfill their fiduciary responsibilities, they would actually be violating the internal compliance protocol of their supporting NASD member firm. As odd as it may be, in advisors doing the right thing and acknowledging their fiduciary responsibilities, they would be subject to disciplinary action, be branded a compliance problem and possibly even be terminated by their supporting firm. Virtually all of the industry's 658,000 licensed financial advisors understand that fulfilling their fiduciary responsibility is essential to ensuring the trust and confidence of the investing public, yet we work within a legal construct that does not acknowledge that investment advisors render investment advice or that advisors have fiduciary responsibilities. It is time we overhaul this long outdated compliance protocol so it is possible for advisors within NASD member firms to fulfill their fiduciary obligations. (Download this article in pdf format.)
What About Leadership? by Dan Thatcher. It is becoming readily apparent, even to consumers, that there is a leadership crisis within the financial services industry when it comes to "doing the right thing." Leadership engages our values, thus we cannot talk about a crisis in leadership and say leadership is values neutral - it's all about values. Dan Thatcher lays to rest several myths about leadership and provides five action steps that lead to what our industry needs the most - leadership with the courage of conviction. (Download this article in pdf format.)
Independence Day: The Critical Need for Unbiased Advice by Brent Longnecker and Chris Crawford. In a business environment that requires transparency and accountability, the demand for unbiased, unconflicted counsel has never been greater, particularly from board members who govern the decisions of many of the institutional market segments we serve. Using compensation committees as an analogy, Brent Longnecker and Chris Crawford share with us how important unbiased advice is to board members. This article is terribly important in emphasizing the complex role of board members and how important truly unbiased advice is to the board. Your greatest credential is to always act in your client's best interests and understand why the integrity of your advice is so important. Brent and Chris explain this beautifully. (Download this article in pdf format.)
Mapping High Achievement: "A State of Being" or "A State of Becoming"? by James M. Wendling. Regardless of the condition of the capital markets, would you like to assure that 2005 will be materially better than 2004? In the last few weeks of December, it is time to reflect on the course you will pursue next year. On January 7, a new code of ethics will be required, fiduciary status will become an important competitive issue, and you will have to decide which path you will take - to declare fiduciary status or not. High achievers have a very special sense of mission and a clear direction in how to get there. Much of this is internalized; it is a sixth sense. But there is a conscious process in which everyone can achieve this same sense of purpose. Jim Wendling will walk you through a self-discovery management discipline, employing the Pareto Principle that will consciously elevate you above the 80% of advisors who are in a state of becoming, to the 20% who are in a state of being, and ultimately, to the top 4% who achieve peace of mind. (Download this article in pdf format.)
When Called Upon, Will Advisors Respond to Fill the Leadership Vacuum in Fostering Fiduciary Counsel? by Stephen C. Winks. How will the ethical imperative of fiduciary counsel be perpetuated? Regulators require it, consumers demand it, technologists want to facilitate it, but our supporting firms will not acknowledge it. Thanks to the SEC requiring advisors to declare their fiduciary status on January 7, 2005, the professional standing of the financial services industry is about to be reordered around fiduciary principles, and we are about to discover through a self-selection process, who our industry's leading advisors are. New industry leadership is required that is focused on fiduciary principles, not self-interests. If we cannot count on our NASD-member support firms or the industry's trade associations for their support, we cannot count on their leadership. Only our leading advisors who are focused on the investors' best interests can fill this leadership vacuum. The SEC's call for the acknowledgement of our fiduciary status requires an organized, concerted effort by advisors to democratize advisor access to the enabling resources necessary to declare fiduciary status. You can be integral to making this happen. Read on .... (Download this article in pdf format.)
The Politics of "Minority or "Emerging" Manager Programs by Ted Siedle. The politics of investing is a topic rarely discussed as we presume that investors are rational and their investment rationale is driven by economic considerations, not social concerns or political correctness. Yet, the reality of investment committees that are often comprised of laymen with little background in investments, will likely reflect their personal interests which may even be in conflict with their fiduciary responsibilities and our professional standards of prudence. Ed Siedle provides us with great insight on the resurgence of plan sponsor interest in minority and emerging managers and how we might respond. (Download this article in pdf format.)
The Defined Contribution Market Is Going Through Big Changes - For the Better by Richard M. Todd. Plan sponsors, who have wondered why their retirement plans was being offered for free by their plan providers, are now discovering why. The SEC is questioning plan providers on the practice of mutual funds sending undisclosed soft dollars back to plan providers, making it impossible for plan sponsors to fully understand plan costs. By burying plan cost in mutual fund expenses, plan participants are not just bearing the cost of the plan, but the plan cost incurred by participants are, in most cases, excessive. Rich Todd makes a compelling case for why investment management consultants are invaluable in bringing clarity to the 401(k) market. (Download this article in pdf format.)
Hedge Fund Practices of Brokers Come Under Closer Scrutiny by Victor L. Zimmermann, Jr. The NASD is focusing on hedge fund sales practices and the due diligence brought to bear in the examination and evaluation of hedge funds. Victor Zimmerman helps us reason through how we should approach the use of hedge funds. (Download this article in pdf format.)
SEC to Decide by Year's End on the Relevancy of Fiduciary Responsibility in Ensuring the Investing Public's Trust by Stephen C. Winks. Unless the SEC steps in, the best and brightest of our industry's financial advisors, who have assumed the initiative at great personal expense to fulfill their fiduciary responsibilities, may actually be prohibited from declaring their fiduciary status. With NASD member firms and the SIA maintaining that commission sales and fiduciary counsel are mutually exclusive, the investing public's best interests are not being served, the financial advisor is put in an untenable position where it is not possible to fulfill their fiduciary obligations and the industry is defying legislative and regulatory intent. The result is the loss of the investing public's trust. The SEC will let us know before year's end if it is possible for advisors supported by NASD member firms to fulfill their fiduciary responsibilities. This time, however, the CEOs of NASD member firms will have a personal stake in ensuring the investing public's trust. Hang in there; the SEC is on the way and has a lot to say about ensuring the investing public's trust. (Download this article in pdf format.)
A Primer for Model-Based Sponsor Platforms: Manager Selection and Fee Considerations by Kevin D. Freeman. If you want to take a look at what the industry will look like in a few years, Kevin has taken an excellent shot at it. There is no question that asset management fees will be unbundled, and we will be buying real-time buy/sell research built around model portfolios. Overlay management will allow us to construct custom portfolios for each client built around custom benchmarks. Sophisticated tax management tools will be built in utilizing expert systems that will allow us to offer tax efficiency in ways that might personally be beyond us. This rules-based technology of which Kevin speaks can electronically plug-in important parts of our fiduciary responsibility as it pertains to disclosure, reporting and prudent process. This is the precursor to process management where, by the virtue of working within a highly structured investment process, advisors and their supporting firms can address and manage the full range of investment and administrative values necessary to fulfill their fiduciary responsibilities. (Download this article in pdf format.)
Life's Persistent Questions: After Mid-Life, We're Driven to Deal With What Our Life Means by Betty Booker. If you ever wanted to add value for your clients, particularly those with substantial assets, you often find it is not about money. My friend, Henry Simmons, and I often talk about what is important to consumers, particularly as we become older; and it is nothing like you would have imagined it to be in your 20s, 30s, or 40s. Henry, who has a Ph.D. in psychology, has a unique perspective, teaches at Union Theological Seminary and the Presbyterian School of Christian Education, and chairs the Center on Aging there. If you are like me, you are frustrated by the impracticality and vagueness of "life planning" and other theoretically great ideas that are unexecutable because they are not science-based disciplines, i.e., more hype than substance. I believe Henry's approach, which is based on psychology and theology, not only makes immense sense but has universal application in helping us work with high net worth clients after mid-life. I hope you glean as much from Betty Booker's article on Henry as I have over the years. - SCW (Download this article in pdf format.)
Walking your Client Through the Philanthropy Maze by Doris Rubenstein. When the opportunity presents itself to work with foundations, profit-sharing plans or some other entity that requires technical expertise outside of your comfort zone, to whom can you turn for help? The financial services industry is structured around financial products so there is little or no support built around serving defined contribution plans, Taft-Harley plans, public funds or defined benefit plans which transcend any individual investment product. There is plenty of help if you want to sell mutual funds or annuities, but little in addressing and managing the full range of investment and administrative values required of foundations and the plethora of other investment entities that have unique requirements by their very nature. Doris Rubenstein helps walk us through the philanthropy maze and is one of many outsourced emerging technical experts through whom we can leverage to become effective in serving a broad array of market segments, â€¦ something not typically available within our NASD member firms. The emergence of this type of outsourced technical expertise is the precursor to the emergence of a process management organizational structure within our supporting firms. (Download this article in pdf format.)
Can Hedge Fund Managers Win the Dart Board Game? by Ron Surz. If you have clients with substantial assets, you are likely using hedge funds and, if you are, there is a good likelihood that there is a lot more to know than you know. Ron Surz again makes us look like geniuses with his new HedgePODs technology. This is mandatory reading for everybody who uses hedge funds. It empowers you to have unusually keen judgment and insight in an area of investment that is fraught with mystery and hyperbole. (Download this article in pdf format.)
Does the Advisor's Declaration of Fiduciary Status Require a New Generation of Industry Leadership? by Stephen C. Winks. Early next month, when the SEC requires advisors to have a code of ethics and formally declare fiduciary status, virtually every advisor in the industry will be faced with the prospect of having to compete with and being held accountable to a much higher level of counsel than our supporting NASD-member firms (both independent and full-service) are willing to acknowledge. On October 5, 2004, "doing the right thing" becomes literally synonymous with fulfilling one's fiduciary responsibility. Harvard Business School professor Clayton Charistensen tells us in his book, The Innovator's Dilemma, "Under the traditional corporate planning process, it is impossible to justify enormous capital investment in emerging, yet-to-be profitable business models." It is "irrational" to abandon a proven business model for the unknown. A new generation of industry leadership must emerge to acknowledge and support our fiduciary status. Just as it has taken 40 years for modern portfolio theory to reach the retail investor, it could take another 40 years for fiduciary counsel to emerge if we are to rely on the industry to slowly evolve. It is within the power of our industry's most consciously competent advisors through a concerted effort to democratize access for all advisors to the enabling processes, technologies and support infrastructure necessary to declare fiduciary status and fulfill fiduciary responsibility. Learn how this is possible within the next 24-36 months. (Download this article in pdf format.)
Speech by SEC Staff: Put the Compliance Rule to Work - IA [Investment Advisor] Compliance Best Practices Summit by Lori A. Richards. We gain uncommon insight from this March 15th speech of Lori Richards, the SEC Director of Compliance and Examinations, who outlines the position of the SEC on adopting a code of ethics, establishing written policy and procedures, and appointing/designating a chief compliance office by October 5, 2004. The first half of the speech is particularly instructive and applicable for financial advisors, though it was directed to the audience of money managers, and should establish an expectation in your minds of whether your supporting firm (independent or full-service) is prepared to help you in declaring your fiduciary status. There is an interesting dichotomy emerging, given that the SEC has said, "it will aggressively pursue those who have violated federal securities laws and breach their fiduciary obligations." Some firms are working very hard to further insulate themselves from fiduciary responsibility, minimizing our role and counsel as advisors, while others are acknowledging fiduciary responsibility and are working to manage fiduciary liability, empowering our relationships with our clients. This is the beginning of the industry being reordered around fiduciary principles, which is a very important criterion in evaluating the support your firm is providing, or lack thereof. (Download this article in pdf format.)
Cowboy Ethics: What Wall Street Can Learn from the Code of the West by Jim Owen. Jim Owen, like many of our industry's most capable advisors, is both embarrassed and ashamed by the ethical breaches and scandals within the industry. The more capable and accomplished the advisor, the greater the sense of betrayal that has resulted from the loss of the investor's trust and confidence. Few have been greater advocates for fiduciary principles and fee-based counsel than Jim Owen. Jim makes a timely call for a higher ethical standard than can be achieved by regulation. Wiping the industry slate clean can't be accomplished by regulation. It requires inspiration. We must transform ourselves from the inside out - one person, one firm, one organization at a time. Jim brilliantly uses the metaphor of cowboy ethics to deliver a very powerful message that is irrefutably on target. This is a message that must get out to our clients and our firms, and Jim has found a very entertaining, unthreatening way to say it. (Download this article in pdf format.)
Accepting Fiduciary Responsibility: What's An Advisor To Do? by Mike Flinn. One of the most profound drivers of the financial services revolution is that the web has democratized access to open architecture and has facilitated transparency. We not only know what things cost, but we can unbundle services and delineate - on a comparative basis - the features, advantages and benefits of each. Nowhere is this transparency more compelling than in trust services. It was not that long ago that it was legislated by states that assets held in trust must be custodied within that institution, which meant they were also most likely managed by that institution. Performance was poor, costs were high and investors had no options. That is not the case today. Today, independent trust companies allow your assets to remain custodied at their present custodian while providing access to services that are not otherwise available, allowing you to fulfill your fiduciary responsibilities with both individual and institutional clients. Their services are priced at a level that empower advisors to offer a value proposition that is preemptive in counsel, cost and value added to major commercial banks, private banks and institutional consulting firms. Mike Flinn provides insight into how top RIA's and advisors, both at wirehouses and independent firms, are gaining access to extraordinary resources (like AIMR-compliant composite performance reporting, which incorporate all client holdings from all custodians, etc.) that greatly elevate our counsel. (Download this article in pdf format.)
Part III: Are You An Advisor Or Reporter? by David B. Loeper, CIMA, CIMC. Can clients really discern high level fiduciary counsel from a wrap fee program or a packaged advisory service? Does the client sufficiently appreciate the intricate details of the confidential, privileged information we develop in working with them quarter after quarter, that provides us with an understanding of the client and the unique insight that literally makes us the value added? There is a huge difference between fiduciary counsel, and building and managing large numbers of portfolios against a custom benchmark. There is a huge disconnect between what is being sold and what is being delivered. David Loeper helps us understand how to connect with clients and deliver on the customization and the personal values that each client deems most important to them. (Download this article in pdf format.)
Election Year Wish List for Economic Policy: Are We on the Verge of the Greatest Creation of Wealth in the History of Mankind? by Stephen C. Winks. Thanks to the brilliant work of Graham Tanaka, we now understand that massive increases in unmeasured productivity, attributable to advances in digital technology, not only fueled the extraordinary economic expansion of the 1990s, but did so without the anticipated increases in inflation and interest rates called for in the conventional economic models of the time. Based on decades of economic experience and thought, the economic models and policy of old are no longer reliable in today's new digital economy. We are at a historical economic inflection point. If we can advance a new economic model and policy which fully accounts for digital deflation, we are in for the greatest creation of wealth in the history of mankind. (Download this article in pdf format.)
Part II. Are You An Advisor Or Reporter? by David B. Loeper, CIMA, CIMC. David Loeper raises the important questions of "Does the client really value our services?" and "Do they really connect to the technical considerations we manage and the metrics we use?" By virtue of working in the context of prepackaged process, could it be that we confuse what the client values with how we sell and value our services? A most thought-provoking article from one of the industry's thought leaders. (Download this article in pdf format.)
Are Your Values Keeping You from Doing What's Right? by Mike Hernacki. When working with ultra high net worth clients, it quickly becomes clear that what motivates them and what is of value to them typically has little to do with money. It is what their money does in educating underprivileged children or supporting the arts in their community or another passion from which they derive a sense of well-being and value. Though the primary focus of the financial services industry has always been on financial products, as the industry evolves to fee-based counsel, we are discovering that serving our most highly desired clients requires much more than just investment acumen. Our investment skill is not particularly rare. We must understand or establish what about a client's wealth gives them a sense of well-being because in their minds, that is what is most important to them. What is rare is how to apply it so that it maximizes value for the client. Mike Hernacki, in a series of three articles, will share how helping a client understand what is important to them is the key to unlocking serious assets. He starts with the difference between values and principles, which lays the foundation for what is to come. (Download this article in pdf format.)
Investing in a Hedge Fund of Funds: What Really Matters by Jeff Joseph. What is the biggest risk in a hedge fund of funds? If you are like me, I incorrectly guessed investment risk. The biggest risk is actually the operational risk associated with managing the fund of funds which surprisingly represents half the risk of the fund of funds investment. There is no reason for this being true, except hedge funds of funds are unregulated. For those who oppose the regulation of hedge funds, this is a massive red flag saying investors can't rely on hedge fund of funds managers to do the right thing: to put the investor's best interests ahead of their own. Recent pricing scandals at well-known hedge funds like the Clinton Group, Lipper and Beacon Hill, underscore the need for (1) transparency, (2) independently verified valuations and (3) far more liquidity. Jeff Joseph provides invaluable insight on how we can become more discerning and, with slight structural changes, how we can alleviate many of our fund of funds concerns and aggressively drive down their operational risk. Great insight, well said. (Download this article in pdf format.)
How Do You Assimilate Within Your Practice The Processes, Technology and Division of Labor Necessary to Fulfill Your Fiduciary Responsibilities? by Jon Carroll. Whether you are a registered investment advisor with the SEC or engaging your counsel for a fee under the auspices of a NASD member brokerage firm, you are pretty much on your own in developing the processes, technology and resources necessary to address and manage the broad range of investment and administrative values required to fulfill your fiduciary responsibilities. Jon Carroll reasons through how you assimilate within your practice the resources necessary to offer high level counsel and reminds us you are not in this alone, as resources are emerging to help. (Download this article in pdf format.)
The Third Rail of the Financial Services Industry: Trade Execution, Best Execution and Beyond by Stephen C. Winks. Should the fiduciary obligation of best execution and the advisor's fiduciary responsibility depend upon the actions of a trading desk which is beyond the advisor's control? The problem is that the advisor cannot seek best execution when they engage a money manager on their client's behalf because it is the money manager's responsibility to secure best execution. Money managers typically treat advisory (wrap) program assets as directed business and put the associated trades at the end of their trade rotation, and it is a common practice for money managers to do the bulk of their trades exclusively with the trading desk of the firms which directed the assets they are trading. This formula clearly does not result in best execution. The regulatory question that is raised is when a money manager distributes the proceeds derived from trade execution to the advisor's client's account, is every one of the advisor's clients receiving the same price, and if not, what is the decision-making process used? One client cannot consistently get a better price than another. Yet, if a wrap program manager trades through 30 trading desks of sponsoring program firms, they will have shown the trade 30 times before the last order is filled, making best execution difficult at best. Many would argue this is an important reason why there is dispersion between a manager's institutional performance composite and its wrap fee separate account performance composite. As you will see, this is easily managed but requires an orchestrated solution likely advanced by the Money Management Institute before it becomes a regulatory problem. Given today's regulatory environment, it is in the best interests of the investor, the advisor, their firm, their trading desk, the money manager, and the industry that the issue of best execution be resolved for advisors working within the context of advisory (wrap) programs. (Download this article in pdf format.)
Part I. Are You An Advisor Or Reporter? by David B. Loeper, CIMA, CIMC. How does the financial services industry empower all financial advisors with varying degrees of skill and interests to actually be able to add value for each of their clients? There must be a construct within which the advisor is empowered to add value with limited flexibility so that the most complex considerations and deliberations are highly controlled with little opportunity to deviate from the pre-ordained, highly-packaged solution. David Loeper argues this lowest common denominator wrap fee program construct simply makes advisors reporters, as the value that is added is a function of the program and not the counsel of the advisor. Yet, once the advisor is immersed in sufficient knowledge to actually engage their counsel for a fee, there is a liberation required of the financial advisor as there is a far greater level of counsel that the advisor can provide than that which is possible within a wrap fee program construct. David, one of the industry's leading advocates of fee-based counsel, offers terrific insight and as you will see, has a lot to say. (Download this article in pdf format.)
The Large-Cap Gap: Are Your Clients Subject to It? by Michael Yaktus and Lawrence Tabak. Conventional wisdom and academic theory dictate the way well-versed consultants and investors construct portfolios. Unfortunately, there is often a big difference between theory and practice. The results of higher returns and lower risk have proven, more often than not, to be difficult to achieve. The two prevalent methods of building a large cap portfolio - (1) the combining of a large cap growth manager with a large cap value manager or (2) a core large cap index fund with satellite growth and value managers - typically result in a large cap gap, the exclusion of stocks that are not principally value or growth stocks, but a combination of both. Only through holdings-based analysis can a consultant be assured sufficient market coverage with reasonable balance between large growth, large value and large core. To construct a large cap position that would achieve more diversification, lower volatility with minimum overweighting at extremes, Yaktus and Tabak make the case for active core large cap managers with satellite active large cap growth and active large cap value managers for balance. (Download this article in pdf format.)
Illinois Chief Pension Administrator Cites the Importance of Investment Policy, Full Disclosure, and the Fiduciary Status of Advisors by Thomas R. Jones. As pension administrator for the State of Illinois, Tom Jones has a very interesting perspective. First, in Illinois, any advisor providing advice or providing investment products to a pension plan is a fiduciary, nullifying any arguments to the contrary. Second, in monitoring 650 public pension funds, to include Cook County and the statewide retirement system, Tom has the important educational responsibility of making sure his pension boards understand their roles and how they will be evaluated. This discipline does have a counterpart in the private sector but is invaluable in elevating the effectiveness of pension plan administration and management. This reminds us how underserved the pension market is and how important your unconflicted counsel is. Pension boards have a lot to learn. Just picture Tom addressing his pension boards with the following advice. Maybe it is something you can use with your clients. (Download this article in pdf format.)
The Web Effect: Reinventing the Financial Services Industry and Its Pricing by Democratizing Access by Stephen C. Winks. Who would argue with the point of advisors acting in their clients' best interests? Yet today, the best interests of advisor support firms in minimizing the fiduciary liability of their advisor's counsel is at odds with the investors' best interests of the advisor fulfilling their fiduciary obligations. No major advisor support firm acknowledges the fiduciary responsibility of their advisors and no major advisor trade association makes fiduciary responsibility a condition of membership. So, where is the necessary support coming from to assist the advisor in acting in their clients' best interests? Our free enterprise system is based on the merit of ideas and the web democratizes access to ideas, resources and technology that transcends the industry's cultural and structural impediments to innovation. The web has become a surrogate means of advisor empowerment and support that is not available from conventional broker/dealers. The web is becoming increasingly responsive to the needs of the advisor, as there is a perfectly symbiotic relationship between vendors of web-based resources essential to adding value and the advisor, based on the mutual success of each. Vendors have no choice but to be progressive, as only through their innovation and responsiveness can they win the all-important critical mass of early adopters and market share. The web is the free enterprise system at its best, based on the merit of ideas without constraint, for the common good of the investing public and the advisor. Learn how the web is integral to the reinvention of the financial services industry and its pricing, greatly elevating the role and counsel of the advisor, as well as their compensation. (Download this article in pdf format.)
Active and Passive Arguments: In Search of an Optimal Investment Experience by David Stein. David Stein's unique gift is that he has such a complete grasp of investments that he can make the very subtle, but all-important nuances essential to our success very clear. There is no right or wrong answer in the passive versus active deliberation. At the heart of the question is a debate between emotion and reason, between faith and skepticism, and perhaps even between hope and despair. There is a place for both, as David distinguishes between general truths, opinions and falsehoods of the arguments and counter-arguments for each. This is not only a must-read, but should be put away and reread each quarter to keep us well-grounded in our investment deliberations. David Stein is a giant in our industry who greatly contributes to our success. (Download this article in pdf format.)
Are Advisors Neglecting Their Fiduciary Responsibility with Life Insurance? by Joseph W. Maczuga, LIC. Are we sitting on a litigation time bomb with a short fuse? The transition from the old paradigm of selling life insurance to the new paradigm of fee-based counsel has brought a fundamental change so subtle that we did not recognize it - fiduciary responsibility. The introduction of no-load universal life and variable universal life changes how we use life insurance. If we are acting in our clients' best interests, how can we have a clear conscious in using the heavily loaded insurance contracts of old? Is there no on-going obligation to make sure the client is well-served? This is a brilliant insider's assessment of how life insurance should be managed. (Download this article in pdf format.)
SEC Scrutiny of Pension Consultants: A Call to Action by Ted Siedle. The full disclosure of all forms of compensation that a consultant derives from serving a client has long been a cornerstone of fiduciary responsibility. Yet, the SEC is discovering that these disclosures are less than complete and often misleading. Pension plans that are engaging the counsel of a consultant for $100,000 per year are finding they may be paying the consultant $1 million or more in directed trades. This lack of disclosure, in concert with the "pay-to-play" scandals, suggests an entirely new level of transparency should be advanced, which will not only support a fiduciary standard but will actually increase the cost of consulting services that have been subsidized by other sources of compensation. This is a candid view of how the institutional consulting industry is evolving and illustrates the wonderful opportunity for us to use full disclosure as a means to document we are acting in the clients' best interests and faithfully fulfilling our fiduciary obligations. (Download this article in pdf format.)
Behavioral Finance and the Individual Investor: Psychology May Be Key to Financial Success or Failure by Jim Marren. If a prospective client were to ever wonder whether financial advisors really add any value, we would be quick to talk about the complexity of market dynamics, the client's capability to take risk, the full range of investment and administrative values, in addition to return, that must be managed to fulfill our fiduciary obligations, and other minutia that probably has little or no practical meaning to the prospect. Yet, our most significant contribution to adding value for that prospective client lies in behavioral finance. If mental biases and "heuristics" are built into human intelligence, the financial advisor who is trained to overcome these often counter-intuitive limitations add significant value. This article cites very interesting research that clearly establishes that by simply being well-informed, you add considerable value. (Download this article in pdf format.)
Practice Management - Ben Franklin Style by Steven R. Drozdeck. Benjamin Franklin's multi-disciplinary list of accomplishments marks him as one of the world's truly great men. Interestingly, his approach to personal development can have a direct impact on your business practice. Sreve Drozdeck shows us how in this light-hearted, personal story of "Creating Nicholas the Great." (Download this article in pdf format.)
Countdown to Fiduciary Responsibility: SEC to Hold Advisors To a Fiduciary Standard Starting October 5, 2004 by Stephen C. Winks. It has long been the desire of our industry's most accomplished advisors that professional investment and administrative counsel would eventually emerge as a profession with equal fiduciary status to other professions entailing trust. That time has come. Effective October 5, the SEC will require each financial advisor to have a code of ethics that acknowledges their fiduciary status. Every advisor will have to acknowledge whether they are making well-reasoned investment recommendations or just making investors aware of their investment alternatives, requiring investors to act as their own counsel. By an advisor declaring they are rendering advice, they and their supporting firms are held to a fiduciary standard, regardless of whether they have discretionary control of client assets or whether their compensation takes the form of a fee or commission. The SEC has brilliantly empowered the financial advisor to ask more from their supporting firms and has elevated the role and counsel of the financial advisor to ensure the faith and trust of the investing public in the financial advisor's ability to act in the investor's best interests. This is a must-read for those who prefer to be on the value added side of the financial services industry. (Download this article in pdf format.)
Not at a Crisis But a Crossroad, Part III: Defining the Challenge in Processing Separate Accounts by Bevin Crodian. In a period of unprecedented technological innovation, Bevin Crodian explains the rhetorical and logical blind alleys that frustrate the adoption of a faster, better, and cheaper technological framework in which the advisor, their supporting firm and the money manager can work for the benefit of all. Crodian's enlightened depiction of the fallacies that impede an open and objective dialogue on process efficiencies that exponentially increase productivity is a rare, candid, high level view of the state of technology within the financial services industry. Crodian explains the unexplainable. This is a must-read. (Download this article in pdf format.)
Fiduciary Investment Management: The Role of the Investment Management Consultant by David J. Bromelkamp, CPA, AIFA. How do you incorporate fiduciary responsibility within your practice? David Bromelkamp explains how, in helping his clients fulfill their fiduciary responsibilities, he has built a very substantial business. Based on the groundbreaking work of the Foundation for Fiduciary Studies, David sets forth a business and service model that can be easily executed by all. The accredited investment fiduciary auditor (AIFA) designation is offered by the Center for Fiduciary Studies at the Joseph M. Katz Graduate School of Business at the University of Pittsburgh and translates into a practical, usable credential that is highly valued by investors who wish to actively manage any potential of fiduciary liability or appreciate investment and administrative counsel offered through a prudent process as required by regulatory mandate. (Download this article in pdf format.)
10 Rules Every Foundation Should Know About Compliance by Jeffrey D. Haskell, J.P., LLM. Running a private charitable foundation can be one of life's most rewarding experiences - a chance to make a real difference in the community. But it can also be a daunting task. For too many founders and directors, what begins as a positive endeavor can wind up as a time-consuming chore. Often, regulations, paperwork, and IRS filings leave well-intentioned donors frustrated. Fortunately, many of these problems can be avoided by a basic understanding of the rules that govern private foundations. Jeffrey discusses the 10 common pitfalls that are often encountered by private foundations so that they can be avoided or better managed. (Download this article in pdf format.)
The Risk of Forecasting Interest Rates by Ronald J. Ryan, CFA. Ron Ryan, the renowned creator of the Lehman Government/Corporate Index against which bond managers are measured, makes a compelling case for being interest rate neutral rather than switching durations from year to year for a more favorable spot on the yield curve. Why doesn't the industry forecast interest rates and manage to durations comparable to forecasts? Because forecasting interest rates is too risky. If the industry's most informed economists fail to get the direction of interest rates right 70% of the time, maybe this is something we "should not try to do at home" (or at the office). (Download this article in pdf format.)
Technology Blueprint: Elevating the Financial Advisor's Counsel Beyond the Human Capacity to Reason by Stephen C. Winks. How do advisors gain access to the processes and technology that literally empowers them to act in their clients' best interests and fulfill their fiduciary responsibilities? Must each advisor re-invent the wheel and create their own processes and technology with mixed results, or will we see institutions elevate the advisor and their counsel with scaleable processes and technologies that will drive down cost and democratize access? The Technology Blueprint that follows establishes the technologies required to add value and fulfill fiduciary responsibility, citing specific vendors and referencing case law, statues, regulatory opinion letters and best practices. As you will see, virtually all the technology necessary for the advisor to address and manage the full range of investment and administrative values required to fulfill fiduciary responsibility exists and that which doesn't, is the least complex to develop. The Technology Blueprint empowers you, the industry's most coveted constituency of financial advisors - fee-based advisory practices with substantial assets - to foster technological innovation and adoption and shape the course of the financial services industry. By you simply exercising your influence and interjecting a second imperative in the recruiting wars, in addition to the size of the recruiting bonus, large fee-based advisory practices can now articulate and require the processes, technology and infrastructure necessary to act in the clients' best interests. Since every firm would like to have your services, there is also an obligation that they listen. How many firms and recruiters would bone up on process, technology and fiduciary responsibility if it became an imperative? All of them. This is the industry-redefining dynamic that has been missing in fostering the adoption of breakthrough technological innovation that elevates the role and counsel of the financial advisor. If we can elevate the discussion, it will be in with substance, out with empty suits. (Go to this article.)
Not at a Crisis But a Crossroad, Part II: Defining the Challenge in Processing Separate Accounts by Bevin Crodian. The mantra of faster, better and cheaper is beginning to surface within the financial services industry with profound implications for the money manager, advisor and the financial services consumer. Bevin Crodian is one of a very small number of industry experts who has a first-hand, high level understanding of process and technology from the perspective of the advisor, their supporting firm and the money manager. Though this perspective and skill set is rare, it is essential for the development of enabling processes and technologies that serve all constituencies well, especially the advisor. In this article, Bevin describes requirements of a middle- and back-office technological platform that would streamline managed account systems, using existing technology, which would result in significant cost savings, enhanced functionality and an acceleration in responsiveness to market forces/innovation. This discussion mirrors the debate occurring in technology, by which the larger financial services industry will be driven. If you sense there are great things ahead for fee-based counsel and the industry at-large, your instincts are correct. (Download this article in pdf format.)
Private Placement Life Insurance (PPLI) - The Triple Crown of Managing Wealth: Wealth Creation, Tax Efficiency and Asset Protection by Kirk Loury, Susan Bruno, Campbell Gerrish and John Lawson. There is a very smart way to buy life insurance that even the most jaundiced of industry critics would support. For the very wealthy, whose assets transcend their working and retirement lifestyle needs, there are substantial assets that are not targeted for any specific purpose. It is these assets, not designated for specific purposes, which are the focus of philanthropy and the creation of trusts. The ultra high net worth investor wants to: (1) protect those assets from litigation and creditors, (2) minimize their tax exposure, (3) transfer wealth to subsequent generations and (4) continue to build wealth through investing in promising areas of their interest (private equities, hedge funds, managed accounts) where they have sound judgment. All this can be done through private placement life insurance (PPLI). This is a most enlightening article on the use of PPLI that will change your view on how you can use life insurance in your practice. (Download this article in pdf format.)
The Significance of Style Drift by Steven Maslow. Have you ever had difficulty persuading a client why you must, at times, terminate managers that are performing very well but whose investment management style has drifted beyond that mandated against which they were engaged to manage? Unbalanced portfolios simply do not survive the capital markets over time because the odds are overwhelming. This is one of those articles well-suited for client consumption that explains style drift in a highly engaging way that you will want to save for the day that you will surely need it. As an interesting aside, Steven Maslow is the grandson of the famous Abraham Maslow, father of the humanistic psychology and hierarchal needs of man. (Download this article in pdf format.)
Five Best Practices for 401(k) Plans by Daniel J. McGee. The middle market institution with assets between $5 million and $100 million is too small for large institutional consulting firms and too large for retail advisors engaged in commission sales. This is why the middle market institution, especially 401(k) plans, is one of the most underserved markets in the financial services industry. Advisors who engage their counsel for a fee and who work within an institutional model that acknowledges fiduciary responsibility are ideally suited to make the transition to the institutional market. Dan McGee, formerly of Sapere Wealth Management, one of the leading users of Frank Russell's investment services, shares how he cultivates the 401(k) market. (Download this article in pdf format.)
What is Advice? High Net Worth Standards Initiative Publishes Asset/Liability Study Working Document by Stephen C. Winks. The difference between fee-based counsel being a cottage industry where every financial advisor does everything differently and fee-based counsel becoming a well-run industry where function is well-defined and costs are aggressively managed with scale, is definitively establishing what is required of us as financial advisors. The challenge for financial advisors providing high-level counsel is in the absence of institutional support. Advisors have been required to create their own processes, technology and division of labor within their practices, necessary to add value and fulfill their fiduciary responsibilities. This is very labor intensive, very intellectually demanding and very expensive. In effect, this has become a daunting barrier of entry that must be removed for tens of thousands of financial advisors who would like to add value and fulfill their fiduciary obligations. To the end of removing this barrier to entry, to resolve the labor intensity of advice and to foster technological innovation that would bring high level counsel within the reach of all financial advisors, leading advisors, technologists and industry experts have, over the past nine months, been working to define advice for the high net worth market segment, using case law, statute and regulatory opinion letters as their guide to delineate fiduciary responsibility. The resulting High Net Worth Asset/Liability Study Working Document establishes what is required of us, as financial advisors, and defines the breadth and depth of our counsel. The associated "Technological Blueprint," which establishes the specific technology necessary to facilitate high level counsel, will be published next month. Once this information is in the public domain, and it becomes clear there is a definitive process and technology necessary to add value and fulfill fiduciary responsibility, market forces will determine the next generation of industry leadership. Will it be the initiative of the individual advisor or the initiative of advisor support firms that wins the day? That is yet to be determined. All we know for sure is that all investors want value to be added, and they want their advisors to fulfill their fiduciary obligations. For many within the industry, this may be the first time you have become aware of what is required of us as financial advisors. This is the important first step in elevating the role of the financial advisor and the counsel we provide. (Download this article in pdf format.)
Not at a Crisis But a Crossroad, Part I: Defining the Challenge in Processing Separate Accounts by Bevin Crodian. Technological innovation in systems and operations continues to be a point of frustration with financial advisors, the firms that support us and money managers, around which much of the industry must interact. In this day and age of the web and account transparency, the financial services industry seems stuck in the past. Innovation and processing efficiencies are defined by the limits of available technology. At this late date, the industry still does not have a common operating platform or a standard set of operating protocols. This is because very few people have the perspective to understand process from the eyes of the advisor, from the eyes of the advisor's support firm and from the eyes of the money manager. To foster productive dialogue among all interested constituencies that would lead to much sought-after innovation, I have asked Bevin Crodian to describe the problem of that ever-elusive processing platform and to discuss the fallacies that inhibit productive dialogue on this technological challenge. Bevin's unique vantage point gives him uncommon insight, which he has graciously agreed to share. As a successful financial consultant, money management executive, director of administration of a very large warehouse's consulting services division, director of their wrap business, and now CEO of Market Street Advisors (which has developed breakthrough technological innovations for this space), Bevin Crodian is one of only a few definitive authorities in the industry on the processes and technologies that foster high level counsel. In this, the first of three articles, Bevin will describe the problem we face. Having read all three, you are in for a rare treat: the initiation of a public dialogue by which everyone (the advisor, their supporting firm, the money manager) will understand our industry's challenge in technological innovation. (Download this article in pdf format.)
How You Could Have Made Money in Equities in the Bear Market of 2000-2002 by Richard E. Oberuc. If you don't believe in post-Modern Portfolio Theory after reading this, I don't know what it will take. Everyone in money management likes to talk in a certain degree of abstraction because past performance is not indicative of future results. Yet, the 3-year period between 2000-2002 (the worst period for investment performance in memory) is the acid test for investment methodologies. Even the best methodologies just lost less money in such a difficult environment. Richard Oberuc's dynamic asset allocation methodology not only generated positive returns between 2000-2002 but also beat the average S&P 500 benchmark by 27% (-14.55 vs +12.75). Most importantly, this methodology is well-documented in Oberuc's book, Dynamic Portfolio Theory and Management and can be readily executed by all. This is the type of work that elevates you and the counsel you provide. I encourage you to go deeper, beyond the article, to explore how this type of methodology might be incorporated in your practice. (Download this article in pdf format.)
Differentiate Yourself with D.O.S. by Dan Sullivan. Dan Sullivan of the Strategic Coach is the most successful, multi-industry coach to yet emerge. Though his clients transcend all industries, Dan has a large client constituency within the financial services industry. I love Dan's work because it perfectly coincides philosophically with the fee-based counsel value proposition. Dan is not a technician, but what Dan does is even more important - Dan helps us as financial advisors to emotionally connect with clients by introducing the R-factor question and the D.O.S. conversation. This is not finance, but it's what makes the client tick. The R-factor helps you determine if there is the opportunity to build a meaningful and productive relationship with prospective clients and keeps you from wasting valuable client development time. The D.O.S. ConversationTM takes you deep into what your prospective clients value the most and builds emotional ties that will last a lifetime. This is the "art side of our business" that complements the "science of portfolio construction." Together they constitute the skill required to provide high level counsel. (Download this article in pdf format.)
The Art and Science of Questions by Pam Holloway. Salesmen are often accused of talking too much and not saying anything. But what if salesmen could reformulate their statements into questions that actually engaged their prospective clients? This is the secret of consultative selling that makes investment management consulting an art form. Structuring questions that engage the client is a lost art, as the industry is structured around managing and distributing financial products rather than addressing and managing investment and administrative values most important to the client. There is no secret that the client is invariably more interested in themselves than financial products. So, why aren't we more attuned to those questions that lead to lifelong relationships? They are outside of the product focus of most firms. This is why you will find this article so refreshing. (Download this article in pdf format.)
SEC Proposes a Code of Ethics That Hold RIAs to a Fiduciary Status. Can the NASD Be Far Behind? by Stephen C. Winks. Prompted by an acceleration in the scandals which are unfolding across the financial services industry, the Securities and Exchange Commission (SEC) voted last week to propose new rules which would require registered investment advisors (RIAS) to adopt a code of ethics which would hold the RIA to a fiduciary status. Any advisor who engages their counsel for a fee is an RIA. This creates a difficult position for the NASD, the self-regulatory body that governs brokerage firms supporting financial advisors. The mission of the NASD is to ensure investor confidence, yet unlike the SEC, the brokerage firm membership of the NASD has not acknowledged the fiduciary responsibility of their financial advisors. This is not irrational on the part of the NASD membership, as in acknowledging the fiduciary responsibility of its financial advisors, highly disruptive radical changes would be required in the culture, structure and technology of the brokerage industry and thus, the catch-22. The self-interests of the NASD membership are in conflict with its mission. Unless fiduciary responsibility is resolved within the NASD, two tiers of advisors will emerge. One tier is the RIAs who acknowledge fiduciary responsibility as co-fiduciaries and endeavor to add value. The other tier is comprised of advisors who insulate themselves from fiduciary responsibility, engage in commission sales and do not have the support infrastructure necessary to address and manage the full range of investment and administrative values required by regulatory mandate. Notwithstanding the challenges it faces, hopefully the NASD will not be far behind in acknowledging fiduciary responsibility. If not, this means the tens of thousands of financial advisors who are ethically compelled to fulfill their fiduciary obligations in engaging their counsel for an on-going advisory fee will be required to work with in a different business model outside the auspices of the NASD. (Download this article in pdf format.)
Visioning: What You Can't See Will Hurt You by Michael Lovas,C.Ht. As accomplished investment management consultants, we are quick to speak persuasively about post-MPT and interesting ways we can address and manage investment and administrative values. Yet, in providing counsel to investors with $25 million or more in investable assets, it is rarely about money. They have plenty of it, may know a lot about it and have plenty of people who want to help. What interests the ultra high net worth market is the meaning they derive from the use of their capital. It is much more meaningful to them that they have endowed a chair at their college or that they have created educational trusts for their grandchildren and future generations or that they have created a foundation that supports civic causes within their community. It is not about the money; it's about what their money does and the sense of well-being they derive from their capital. These soft values of well-being require us to sufficiently understand a client so we can truly add value in terms important to them. This has nothing to do with investments or finance, but has everything to do with helping the client realize their dreams and vision. This is why an advisor can only serve 20 or so ultra high net worth clients. Helping a client realize their vision requires us to address above-the-line value-related issues that must be managed before we engaged our investment counsel in managing the below-the-line asset-related issues. This is what the old-line private banks used to do 40 years ago. Today, it has resurfaced as life planning or Macro-Strategic Planning. Specialized skill is required here that transcends finance. Michael Lovas helps us understand how invaluable "visioning" is in working with all clients and how deeply it resonates. This is an eye opener for all who would like to go upstream in cultivating their client base. (Download this article in pdf format.)
Diversification Through Commodities: Long-Only Versus Managed Options by Tim Jester. Managed futures continues to be an attractive diversification vehicle to reduce overall portfolio risk while enhancing returns. Tim Jester shares with us how managed futures work, how risk is managed, and how it and various managed futures allocations related to foreign equities, domestic equities and real estate. You will be surprised how managed futures enhances the mix. (Download this article in pdf format.)
Institutional Practices for the High Net Worth Client by David Brazeau, Claudia Barkmeier and John Barkmeier. Today, every top financial advisor has to carefully craft their value proposition and develop their own processes and technology necessary to add value. To that end, you will find the good work of David Brazeau and Claudia and John Barkmeier to be of interest, as it incorporates elements of financial planning into the institutionally accepted investment process to create a practical and familiar process through which they add value. From a first-person perspective, process is established as an important means to elevate the professional standing of the advisor that is reflected in their on-going client interactions. And, as you will see, this process is in practical reach of all financial advisors. This article effectively establishes that the massive difference between a commission salesman and a top advisor is simply the accountability, process and associated technology used to add value. (Download this article in pdf format.)
The Value of Advice: Is It Worth the Fee? by Stephen C. Winks. With insurance agents, financial planners, stockbrokers and bankers all professing to add value, how do you break through all the noise and clearly differentiate what you do from the vast majority of investors who are still engaged in commission sales? This article is intended for those of you who have taken the initiative to build within your practices the processes, technology and division of labor necessary to add value and fulfill your fiduciary responsibility. To break through all the competitive noise, this article articulates your value proposition, differentiates your good work from commission sales and makes a compelling case for the broad range of investment and administrative values you address and manage. This is a must-read for every client you serve and every prospective client you hope to serve, as it establishes the depth and breadth of your counsel and more than justifies any fee you may choose to charge. We hope this helps you to elevate your role as an advisor and helps to elevate the counsel you provide in the eyes of the consumer. (Download this article in pdf format.)
Restoring Investor Trust: The Case for Casuistic Decision-Making by Donald E. Trone, AIFA. The assurance that the financial services industry will do the right thing in acting on behalf of the investor has never been more important. Don Trone, at the Foundation for Fiduciary Studies, makes a compelling case, taken from the pages of theology and medicine, that we should apply the generally accepted practices of fiduciary conduct to clarify legal, ethical and moral decisions we make as financial advisors every day. Regulation alone will never protect the investor. In fact, some advisors and firms hide behind the letter of the law in order to escape the higher demands of the spirit of the law. Investor confidence is difficult to win and once shaken, is even more difficult to restore. It is because we, as an industry, have not been as vigilant as fiduciaries that investor confidence has been lost. (Download this article in pdf format.)
Investment Consulting Craft Trades Up to 21st Century: Update by Ron Surz. Successful investment consulting encompasses two distinct crafts: (1) the ability to develop quality advice and (2) the skill to deliver that advice. This article focuses on the pressing need for the use of current technology to bring about evolution and modernization in the first of these two crafts. Only if this occurs can clients truly benefit from what we have learned about investing over the past 20 years. (Download this article in pdf format.)
Volatility Arbitrage Using Diversified Fund of Hedge Funds Portfolio by Kenneth S. Phillips. Hedge funds are really risky, right? Well, not necessarily. Have you ever considered using them in qualified plans as a means of reducing risk, capturing alpha and generating a higher Sharpe ratio? Read this article and learn how it's done. (Download this article in pdf format.)
Your Marketing Plan: Your Most Important Ally by Lisa Gray. We all know how important investment policy is to the investment process and can readily explain to our clients how investment policy is essential to their success. From a business prospective, your marketing plan is every bit as critical to your success as investment policy is to your clients. Lisa Gray takes you deep into the formal process of creating a marketing plan, discussing a richness of detail that is the difference between success and failure. As you tell your clients, "If you don't know where you are going, any road will take you there." Lisa reminds us marketing is not just creating a brochure, it requires a business plan and the best thinking that can be brought to bear on the subject most important to you - your success. (Download this article in pdf format.)
The Educated Advisor, Part II: The Need for Certification and Continued Education by Steven Drozdeck. The veneer of sophistication within the financial services industry is very thin. What passes for education is often an advertorial. There are no minimum standards for advisor competency. Thus, the tens of millions of dollars spent on training make the advisor feel good, but rarely has a lasting impact. So, there should be no mystery as to why the industry has lost the investor's confidence. The absence of credentialed, competent advisors hurts the entire profession (even those who are capable) in the eyes of the investing public. Steve Drozdeck, who has trained more advisors (60,000+) than any other human being and who has directed professional development globally for Merrill Lynch, provides important insight and wise counsel on how we elevate the role and counsel of the financial advisor and win back investor confidence. (Download this article in pdf format.)
Surz/Senior Consultant Style Analysis: 2003 Risk/Reward Analysis I always look forward to Ron Surz's year-end risk/reward analysis as an important anchor in managing client relationships as we assess what has occurred over the past year and prepare for what the market may bring. Ron has created the following tables of data, which I hope you will find particularly useful in year-end discussions with your clients. (Download this article in pdf format.)