Industry Focus: Investment Firms

A group of Nevada’s Investment Firms executives recently met at the offices of City National Bank to discuss the trends and obstacles facing their industry.
(From left to right) Randy Garcia, The Investment Council; Connie Brennan, Nevada Business Magazine; Gregory Crawford, Alliance Trust CompanyJames Corey, Charles Schwab; Christopher Abts, Cornerstone Retirement Group; Robert Martin, BNY Mellon Wealth ManagementReed Radosevich, Northern Trust Bank; Frank Aguilar, Tricor Advisory Services; Mike PeQueen, HighTower Las Vegas; Jimmy Lee, the Wealth Consulting GroupMichael Baumgardner, Edward Jones; John Wilcox, City National Bank; Rick Phillips, Main Street Capital Advisors

The actions of some have caused investment firms as a whole to be painted with the same brush. For the past few years, Nevada investment firms have struggled to assure the community of their ethical practices while managing client expectations and working in a down economy. Recently, executives representing investment firms across the state met at the Las Vegas offices of City National Bank to discuss the challenges of their industry.

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.

What challenges does the investment industry face?

Christopher Abts: The first challenge is the lack of transparency in our industry, and the second is the lack of education. There aren’t enough people in our industry that are really properly prepared and educated to help the 70 million boomers moving towards retirement.

James Corey: One of our biggest challenges is gridlock in Congress and working to compromise to make things easy for investors. To have them focus on growing the country versus a lot of the gridlock.

Rick Phillips: Our biggest concern is this low-rate environment and generating returns since it’s been so challenging. We manage Clark County’s portfolio at $5 billion and we are used to well over $100 million in interest income. It will be $30 million this year. That impacts what they can do from a budget standpoint.

Frank Aguilar: We deal with a number of retirees. Generating sufficient income with the portfolios we have to work with is constantly a challenge for us.

What is the difference between a fiduciary and a suitability standard?

Mike PeQueen: Most financial clients don’t understand the difference between the fiduciary standard and the suitability standard. Most brokerage firms adhere to a suitability standard where the investment product being sold is essentially suitable, but it doesn’t have to be the single best and there’s a lot of latitude in what kind of product can be offered. The fiduciary standard says you must act in the client’s best interest at all times, which a lot of people will interpret to say you must limit what type of proprietary products you sell or be much more discerning in the cost structure of the products you sell. A lot of education has to be done and there are still regulations pending, but a lot of the large wealth management firms are trying to water down fiduciary standard so they can still have a business model that includes proprietary products.

Randy Garcia: Congress, the Securities and Exchange Commission (SEC) and the Department of Labor have not even agreed on this subject as of yet. They are holding back and this has taken two to three years longer than expected. They are charged with the responsibility of coming up with one uniform definition. Congress has mandated that the SEC and the Department of Labor do not come out with their own definition independently and that they coordinate that effort in terms of timing.

Why is the industry’s reputation challenged?

Reed Radosevich: All investment firms are lumped in together where wealth managers who are trying to create portfolios for their clients are thrown into the same bucket as investment bankers who are trying to reap huge profits from taking companies public.

Baumgardner: They don’t hear about guys like us who are actually trying to do a good job for our clients. All they see on the news are the Michael Milken’s and Madoff’s that are ripping people off. So they assume we’re all the same way and we’re covered by the same blanket.

Gregory Crawford: It’s not only the individuals, but it’s also the structure. Customers hear the market is rigged against them. There’s this perception that the whole structure of the investment wall leaves the individual last in terms of priorities and opportunities.

Garcia: It’s not fair just to point out the Madoffs and the Milkens. If you look something closer to home and more recent like the auction rate securities, that affected and impacted literally every major brokers firm in the world. Auction rate securities were marketed as liquid securities, as good as cash securities. All of a sudden during the recession you couldn’t get your money out although they were sold by every major financial institution as good as cash. There were firms, not-for-profits and corporations in this state that we work with that counted on that money to run their business. It’s not just those isolated incidents that give us a bad name.

What are the best investment opportunities?

Corey: We see equities as a major component of a client’s portfolio. There will be times where there will be a possible retraction of 5 to 10 percent. At those times you have to go back to your asset allocation and make sure you’re there for the long term and determine where you need to fall on your equity side and your equity exposure. With the interest rates being low and the economy growing, that’s the place to really have a good portion of your allocation now.

Abts: When someone hits about $250,000 they’ve graduated from mutual funds. I would recommend institutional wealth management where those investments are actually bought and sold in an individual’s portfolio and the actual trading costs are not marked up. There is full disclosure and those investments are purchased and sold according to what makes sense for that investor.
Phillips: So far this year, real estate investment trust and utilities have done very well with double-digit returns. Because of these low interest rates we think investors will continue to put money in those areas this year. Inflation is going to pick up more with food prices and other commodities, but that will slow growth so it will keep the interest rates that the Fed controls and the treasury market low. As such, investors will like the higher yielding securities like REITs and utilities.

Jimmy Lee: A properly diversified portfolio that is customized for that client’s objectives always works, along with managing expectations. A lot of investors believe that things they put their money in will only go up. We need to focus their expectations on the downside and make sure there are contingency plans when that happens.

Baumgardner: The best investment opportunity is the one that allows you to go home and sleep at night.

Aguilar: It’s still driven by diversification within our industry but the real challenge today is that diversification “pie” keeps getting bigger. Where emerging markets may not have been a player before, it is today. Alternative investments were almost a dirty word in the past, but it’s an important part of portfolios today. It’s still diversification but with new players that are involved in the mix.

Crawford: The greatest opportunity is private [industry]. People across the country have no succession plans and it is family-run businesses that have either been under-performing because people have lost enthusiasm for the business, their management skills are dated or they don’t have the capital. That’s not the easiest investment for a portfolio but there are people out there who are doing quite well with it.

Robert Martin: We favor equities over fixed income. We’ve had the 31 year run on fixed income and as rates rise that will become more of an issue. Most of our clients have fixed income portfolios so it’s still an important asset class to have. We favor internationally developed over emerging markets. Although emerging markets seem like they’re on sale and fees are really good, there’s a lot more relativity.

What is the most common mistake clients make when it comes to retirement planning?

Baumgardner: They assume the money is going to last a lifetime but they don’t stop to consider that what a dollar buys today isn’t what it’s going to buy 50 years from now. You have to try and get them to understand that if you don’t have growth in the portfolio you’re just going to be maintaining the status quo that you have today and you’re going to be hurting down the road. That’s the biggest thing we try to point out to our clients.

Abts: If we look at millions of people who are not ready for retirement and are going to run into some type of financial difficulty, that puts some form of burden on the other people who are prepared. It challenges things like healthcare, social security and even taxes. The second issue is getting people to understand that working with an advisor does bring significant value to the table. A very high percentage of people who actually seek out financial advisors to prepare for retirement are on track.

John Wilcox: And to do so in time. Too many people wait too late to start. We have people who talk to us a year and a half away from retirement and want us to figure out how to replicate their income. That’s a big problem. People are waiting too long before getting in the planning mode for their retirement.

Lee: A lot of investors think that they’re getting financial advisors for buying and investment performance first, asset allocation second and planning third. In their eyes, planning is the least valuable when it’s the exact opposite. It’s fairly easy to do asset allocation and most investment firms are not going to outpace each other over a long period of time, but planning can make a huge difference for whether someone is going to be successful.

Aguilar: If you look at the middle and upper class, those who have worked for a living, there’s a common trait among those who have been successful in their retirement. They’re savers and they know how to watch what they spend on a monthly basis. We deal with some very wealthy clients whom we’ve done full blown retirement plans for, and at the end of the conversation it’s determining where that money is going to come from. The wife says it’s not coming out of the household account while the husband says it’s not coming out of the business. It’s just a matter of discipline and that saver’s mentality.

How big of an issue Is staffing and retention?

Lee: Major Wall Street financial institutions are recruiting and training less people into the business now than they did five years ago. As an industry, we’re a lot smaller now than we were pre-2008 recession. Now, there’s an emphasis on growth but there is a gap between the people who are good advisors and people who are coming up to take over and manage those clients when those advisors want to retire.

Radosevich: The bigger firms need to do a better job of building a bench, being able to adequately train and making sure individuals are getting the right credentials and certifications.

PeQueen: The baby boom generation grew a lot in the last 10 to 15 years and became investors. The industry hasn’t had time to really train an equal number of people to handle those. In many cases, even very good firms are having people served by those that are far less trained than others. The inconsistency in experience and training is not serving the client’s interest well.

Corey: I haven’t seen staffing issues due to the Charles Schwab’s brand. We get quite a few applications when we have openings, but I also share good folks and potential employees with other companies. Everyone is always looking for someone good and I’m sure that will come back one day to me. A lot of networking can get good folks for your business.

What are the chances of the Margins Tax Initiative passing?

Crawford: The poll is currently 60 percent to 40 percent, in favor.

Abts: Unfortunately, I do believe there’s a high chance of it passing. The concept of how it’s worded is that it’s only two percent or the first $1 million. Up in the Reno-Tahoe area we want to see more businesses come over from California but we continue to see them skip over and head off to places like Texas. It’s extremely important to us and I get that we need the revenue for the schools but this is not the right way to get the revenue. This is a vote against business and it’s certainly not what we need right now.

PeQueen: The momentum may have been lost by the Anti-Margins Tax Coalition lately. Early on people said we have a really good chance of defeating this, but those efforts haven’t really gained the steam that they should have by this point. The next couple of months are absolutely crucial if that coalition could actually educate and get the word out. There are a lot of independent business people in our client base and we put out a lot of information on it, but there’s still a significant number of people who should know about it but don’t. It caught me off guard that there are a couple of really high profile people that didn’t know it was on the ballot this year. Of course, once you educate them they’re aghast.

Wilcox: The math says that this tax on top of the rates we’re already taxed at takes us to about a 15 percent level. California is at 8.8 percent. That completely changes the game. If you take it to a per-employee level, it takes us to one of the top five taxed states per employee for businesses in the country. It’s a game changer but not the type that we’re looking for in this economy.

How does the future look for investors?

Phillips: Stock prices and home prices are correlated to consumer confidence and they’ve all increased. People are generally feeling better and buying more.

Martin: Growth-wise from an economy, we have this slow, steady growth of three percent GDP for three years. We’re coming out of what was two percent so it’s better, but it’s not what we had in our hay day.

Baumgardner: Big ups lead to big downs; I’d rather see something nice and steady.