Industry Focus: Investment Firms

Recently, executives representing various investment firms met to discuss what the future of their industry could look like.

Left to right: Randy Garcia, The Investment Council; David Dunn, Kingsbridge Private Wealth; Doug Nelson, TCI Wealth Advisors, Inc.; Joe Gatt, Financial Planning & Management Corp.; Staci Scharadin, Diamond Wealth Management; Michael Baumgardner, Edward Jones; Brian Loy, Sage Financial Advisors; Zac Redman, Snell & Wilmer

With the economic downturn, the investment landscape has changed significantly. Investors are much more careful about where they put their money and investment firms are facing a multitude of new regulations. Recently, executives representing various investment firms met at the Las Vegas offices of Snell and Wilmer to discuss these issues and what the future of their industry could look like.

Connie Brennan, publisher of Nevada Business Magazine, served as moderator for the event. These monthly meetings are designed to bring leaders together to discuss issues relevant to their industries. Following is a condensed version of the roundtable discussion.

How healthy is the investment industry?

Michael Baumgardner: It’s very healthy. My last three months were the best few months I’ve had in three years. We’re starting to see a turn-around and investors are finally starting to pull their head out of the sand a bit and take a look around and realize there’s better things to do then leave it sitting there doing nothing.

Staci Scharadin: The health of the industry has definitely improved and the health of the economy has improved. Interestingly enough though, the majority of clients are still stuck in their recession.

Doug Nelson: We’ve seen the same thing. Clients come in expecting lackluster returns and returns have really been pretty good for most portfolios. Its amazing clients are still in that “I’m afraid of everything” mindset.

David Dunn: When you look at investors you’re seeing the last 12 years and we’ve had two equity market declines in the 40 percent range and a lot of people are still anchored on that. The other thing that the industry has going for it, is the demographics. As the baby-boomers age, a lot more people are reaching 65 to 70 years old and they’re really looking towards things like fixed income and other less risky avenues of investments. It doesn’t necessarily lead them to go back into equities, it’s kind of twice-bitten in the last 12 years. That’s probably something we’re going to continue to see [going] forward, although we are seeing some frozen equities these days. I doubt that’s going to be to the extent that most people in the industry would like to see. A lot of these people need that fixed, more secure type of investment.

Randy Garcia: Our studies reflect, when we go back through the decades, we feel the conditions and the mindset of the investors today are setting up for what could be the next securable market in stocks. We can see the underpinnings of that starting to take shape right now and what that really means is stock performance would likely exceed most investor’s expectations. A securable market would be defined as one lasting for 10, maybe 20 years where performance was far and excessive of what people and investors think possible in today’s environment, given the challenges.

How has the media portrayed the industry?

Joe Gatt: The media has beat up the economy and the industry so much that it takes a while before the general public will realize that the economy is turning around and it is pretty decent.

Scharadin: They exemplify the negatives and the best example is the bailout. It’s interesting how when all the money was given out, the media flashed that, but it was a blip in the media when JP Morgan and AIG paid that money back. It was so subtle but the media blasted the other side of that. The impression from the general, uneducated public, if you will, is that it’s very one sided and that’s pretty consistent across the board with most events. The Europe meltdown throughout the European cities, same thing, they just don’t seem to put as much emphasis on the recovery as they do on the downside.

How open are clients to taking risks?

Brian Loy: People’s tolerance changes daily, it changes during life cycles and most of our clients have gotten very defensive. They would rather hold on and preserve what they’ve got. You have to do a lot more handholding to get people to accept higher return opportunities. People are concerned with the economy, inflation, and interested rates are so low that you’re trying to find more income. We’re all waiting for interest rates to skyrocket because of our debt rating crisis.

Do you spend more time educating clients now?

Baumgardner: A lot more. I have more clients today because of the low interest rates and they’re starting to look at things they’ve never looked at before. In regards to stock, when I can show a client a stock that’s been paying dividends for 85 consecutive years and it will pay more then you’re getting in your CD’s or money-market funds, they’re starting to buy it. I have people buying stock that have never bought it before and not necessarily because of my urging, but they want to see something new and something different. After a CD buy-out, it’s surprising how many are willing to take that step and say, “let’s take a look at something, like a good stock.” That’s our job, to educate them as to what’s good and what’s bad out there. I can show them a stock that might be paying 50 percent dividends today, but maybe won’t make that next month. Our job is to show them to look at something that’s better off for a long time and will establish dividend with good book value to it. Here’s what to look for and here’s why. What are you trying to accomplish? What’s your goal and what’s it going to take to get you there?

Garcia: Today’s investors are acting in a desperate matter. You have fear, you have grief, and we’re seeing desperation at this time. When we see desperation, investors are more than likely going to make a bad decision.

How is the regulatory environment affecting the industry?

Scharadin: It’s an additional cost. It’s an additional body to maintain compliance anymore and to get through the now four-more pounds of paper to process ordinary business that we processed five-years ago and were a different set of regulations. What they’re regulating against is consumer protection and what they’re creating is consumer complication. The folks in the past who have been able to exhibit criminal activity can still get through the process and can still exhibit criminal activity. It’s not stopping the folks that are able to take someone’s money and run with it and do the wrong thing. It’s just complicating things for us that are doing our business correctly.

Loy: There’s been this huge movement, with the Bernie Madoff situation, how do you protect investors from themselves? There’s overprotection but you can’t legislate good behavior.

Gatt: There are things that are working and involved in the 401K and one odious part has been suggested to limit the amount of money that you can put in a 401K based on your income. That should never happen. This government is in a situation now where they’re trying to regulate everything.

Scharadin: In conjunction with that is reducing or potentially depleting social security, the only retirement pool that people had access to. Regulating the only self-fulfilling retirement plan that you have, it’s disturbing what’s going on.

Dunn: It’s not just in our industry, it’s in many industries and I hear it all the time, people have to hire a compliance officer for a small firm which is basically just a friction cost. It takes away from your ability to focus on what you do for your clients and makes you pass on the cost. In a lot of cases, it makes you think twice about providing certain types of advice which clients may be demanding. We went down one path where we actually chartered a trust company and realized that a four-person firm just could not deal with the regulatory demands that the new regime has put on it. Small business has basically capped out and it’s going to have to go to larger businesses. They can handle the regulatory burden, which is not client centric. That’s not what our clients want and that’s not what our clients need. It becomes so that you have to create the machine to feed the machine to pay the government. I look at it as an added tax [that’s] not helping anyone. They’re not making our clients more secure and that’s the trend we’ve seen in the industry.

Zac Redman: That’s certainly the trend we’re seeing. I’m thinking of the Jobs Act and Dodd Frank, from a legal and regulatory perspective, one of the issues is that there’s been a delay because we’re dealing with the substantial mandates for rule making that the regulators just can’t keep up with. The requirements for rule making have become stricter. The crowd funding option that was authorized in the Job’s Act last year, that was supposed to come out at the end of 2012 then it got pushed back till the end of January [2013]. Now they’re predicting in maybe 2014. That’s an option for smaller businesses looking to raise under a million dollars of capital in a year. It’s a good example of the delays in the development of the regulatory frame work under the new rules that are supposed to be more flexible.

How should investors choose a financial planner?

Scharadin: The point of education for the consumer would be to be asking the right questions. There’s certified financial planning designation. The CFP gives some criteria for interviewing a financial planner. The realty is that clients find us through referrals. Their friend has had a good experience with them for 20 years and that’s really how people choose their investors. There are people who listen to Susie Orman and do everything she says. She doesn’t know you, where you’re at or where you’re going and she gives blanket advice out there. There should be criteria out there outlined for experience or complaints in one place where consumers can go and see that these are the 10 things you should meet before you ever become my financial advisor and I trust you with my future.

Nelson: There’s good information out there, but it seems like so few clients actually go out and take a look at that information and know which questions to ask. In response to Staci’s [Scharadin] point about Susie Orman, I think she provides a good source of information for the masses. Her overall program is good information, however, it’s applicable to no one.

Dunn: The digital age and information is widely available but knowledge is not very easy to discern from the mass amount of information that’s out there. Everyday I hear on CNBC all these cyber-trading commercials. I just laugh because I think who’s doing that? I certainly wouldn’t let them do that with my money and if they’re going to do it with their own money, I think they’re nuts. That company has a vested interested in trying to get people to do it because they’re selling you a trading product. They don’t really care whether it works for you or it doesn’t work for you, they just want you to buy their trading product and get their trades.

Why does the industry have so few female financial planners?

Garcia: I just conducted a national search for a senior investment advisor. I have 40 applications on my desk that are all CPAs, the requirement was two-fold: an MBA/Masters and a CPA. I have approximately 40 willing to move to Las Vegas at this time and out of those 40, I have two or three woman.

Baumgardner: We’re trying to hire more people but we can’t find enough people to come to us to even put in an application. We’re trying to get military personnel because they most likely will make pretty good advisors. They’re technical oriented and disciplined. We’ve put out ads and we can’t get them to come by the office. We say, come by the office and just talk to us and see what we’ve got and put in an application and we’ll go from there. We’re having a hard time actually finding people.

Scharadin: I see it opening up a little bit. About a 20 percent cover ration for women in the advisory, but I will tell you 10 percent of them will go away. It’s a tough business. It’s not a nine-to-five job, it’s a 24/7 business. If you’re in it, you’re in it, if you’re committed to it. Women become more emotionally invested into their clients. They are nurturing and they’re mothers but that can be counterproductive. It’s very good for clients, but it can also be counterproductive for longevity, especially when you roll through markets like we rolled through. The male domination is also difficult to navigate through. I walk into a room and I’m underestimated almost 100 percent of the time. I have to do 20 percent more to get to the same place that a man walking into the room starts out at. The other interesting thing is, when you’re seeking clients, it’s male dominated. The credibility that you have to establish as a female with the client, along with your colleagues, is that much harder, that much more work. We run an internship through UNLV and CSN and 85 percent are males that come in for the internship.

Redman: Anecdotally the business clients I work with are about the same proportion, about 20 percent are women led businesses.

Baumgardner: To show you how important we think it is, we actually have a separate division called WINGS. It’s strictly there to try to promote and encourage women to come into the business.