The financial services industry has experienced a few rough years but, like many other industries, is beginning to see a bit of a turn-a-round. With individuals beginning to show an interest in wise investments and a slow unclenching of funds, the financial industry is poised for a good year.
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 pertinent to their industries. Following is a condensed version of the roundtable discussion.
Is the regulatory environment getting more relaxed?
Michael Baumgardner: Never. There is always a new product or a new strategy coming up. Our federal government just loves to regulate things when it comes to money, our business and clientele. They always think they are doing what is best by giving us a new law to go by. Every time you turn around there is one more thing you have to read or study or take another test for. It’s just time consuming and frustrating.
Joseph Gatt: They never let up. It’s so redundant that it just absolutely drives you crazy. It’s overdone. They treat everybody like they are Bernie Madoff and I’ve been in business for 43 years. Our objective is to help poeple set up financial programs that they are going to benefit from. It’s not having to spend enormous amounts of time with administration. With overbearing regulatory issues, you have to take six or seven exams over the computer every year, that’s probably the biggest irritation.
James Corey: There is going to be more regulations coming down. You have to embrace it. It’s tough to stop it. What we’ve done as a firm is have our advisors’ compensation on-line. It’s about disclosure.
Brian Loy: There is a bigger requirement. Every one of us has to file a disclosure form every year and they ask us to write it in plain English. Filling out that form doubled in time this year.
Rick Phillips: We hired an attorney that does it. Ours is a little unique with fixed income. It was more costly and more time consuming. Congress is human and we usually overreact to a crisis and that’s what they did with the Dodd-Frank new regulation that a lot of us are talking about.
Loy: It was 2,000 pages and [Congress] had 26 deadlines they were supposed to comply with by April of last year and not one of those deadlines was met. Then we have this big fiasco with consumer protection. So much of the regulations are built on solving the problems, but that is not the way to address it.
Have regulations been effective in protecting the consumer?
Baumgardner: It’s overkill because all of the regulatory rules didn’t stop Bernie Madoff. We had other regulations in there. If they enforce the law it probably wouldn’t happen.
Gatt: A regulation doesn’t make you honest.
Nelson: I guess you’re right with that. The issues are not additional regulations. It’s enforcing the regulations as they exist today. All of these horror stories didn’t occur because there wasn’t regulations prohibiting it. There was a lack of enforcement, that’s all. So additional regulation isn’t going to serve any productive purpose except frustrate people like us and our clients.
Are ethics a problem in your industry?
DePasquale:Yes, I think ethics are a problem. It comes down to the individual. It doesn’t matter if you’re a doctor, lawyer, CPA or financial advisor. A lot of people in our industry don’t fully understand the differences between RIA-based fees, only broker, FINRA and SEC. If we don’t fully understand it, how do we expect that our clients do? They are very important distinctions. There are so many different ways to run this business. It’s near impossible for the average layman client out there to really understand. It comes down to trust. You have to find who you trust and who is going to take care of you, whether it’s a broker, RIA or whoever it may be.
What is the difference between a registered investment advisor and a financial broker?
Tony DePasquale: A registered investment advisor (RIA) firm acts like a CPA or attorney would work, they are not brokers. The primary difference is you have the fiduciary responsibility to your clients. Brokers have a fiduciary liability, but it’s structured differently under the law.
Chris Abts: The average person out there understands financial advisor and that is pretty much it. A broker has a suitability responsibility. They can just come in and sell someone a mutual fund if that is a suitable mutual fund. A RIA is held to a higher standard which is the fiduciary standard. They must do what is best for that client and put that client’s interest ahead of their own.
Loy: There is a big argument in our industry about fiduciaries that have to act in the best interest of the clients versus brokers. The brokerage wording is just providing advice that is suitable.
Baumgardner: I have to have an RIA designation because we have managed programs. So, in order to even sell or present it to a client I still have to have a registered investment advisor title and pass the test. If we advise them to use that program as compared to foregoing individual stocks and bonds then that is a shared responsibility between us and the company.
Loy: You are registered both ways. The issue is whether a broker can call himself a financial advisor.
DePasquale: Even if you want to take on that liability as a broker, you’re not able to. The only three firms that can do it is a bank, insurance company or registered investment advisory firm. Banks and insurance companies will write out that liability in their contracts. They have a fiduciary warranty or guarantee inside of those plans. They are not physically able to take on that responsibility and liability because there is an inherent conflict of interest. Another difference is that RIAs are either licensed or regulated by the state or Securities and Exchange Commission (SEC), and brokers on the other hand are regulated by the Financial Industry Regulatory Authority (FINRA) which is two separate entities and a whole different set of regulations and requirements.
Doug Nelson: When you talk about individual licensing or certification that a lot of us have, it takes it a step further. I’m a CPA by training and background and have to abide by those rules on top of RIA rules. Many of the people in this room are also Certified Financial Planners, a whole new layer of suitability and semi-regulatory environment just ups the standard. Neither one is right, wrong or better. They are just different, that’s it.
What type of questions should a business executive ask when shopping for an investment firm?
Nelson: First of all they need to understand the difference between advisor and money manager. Then, the questions that I recommend all clients to ask are: how they are compensated, their years of experience, their professional credentials, whether they are a certified financial planner, if they are in good standing with the organizations they belong to and about their references. Those are the important things.
Loy: The client has to have confidence in the advisors whether there is a shared value and belief system or a common interest in education, those things have to fit and that’s that gut or inner feeling.
Corey: One of the things I would say for investors to ask is what the company’s mission is and what are they there for. Our ultimate position is to make everybody financially fit. It’s different for every client. If the firm is only one dimensional it may not be a good fit for that particular client. So you have to find a firm that fits everything throughout your stages of life, early, mid and retirement.
Are individuals still afraid to invest in what some consider a volatile market?
Corey: Even with a lot of the information out there 24/7, there is going to be times when it’s difficult to understand what is going on, just like the last few years. One day things are really challenging and the next it’s great. What we tell clients is once we have a plan that fits you individually, stick with what you know. Remember your time horizon, it is not short. When it’s volatile even at 65, you maybe have 30 more years along the way. We always talk about reducing your position size to reduce your position in volatile market. Diversify. Don’t have everything in one stock where you wake up one morning and your life is changed. Diversify even in fixed income, even throughout different investment vehicles.
Phillips: If you look at the daily volatility that they have dated back to the 1900’s at Dow, we’re at the highest volatility besides the great depression. However, if you look at monthly volatility, we’re lower than the last 40 years just like the S&P. It puts us flat on the year we had. That volatility will even itself out and revert back to the mean. In the last 10 years, we’ve had 250 percent down cycles, but they have come back up substantially too. It’s in the investment horizon.
What is the best investment in this market?
Corey: The Federal Reserve says that interest rates are going to stay lower for the foreseeable future at least through 2013. Clients have to determine their maturities on their fixed income side and especially on the fixed income stagger. We believe you have to look at high quality corporate bonds and money bonds for the client that really wants a bit more risk, about 20 percent of their portfolio looking at the high yield bonds that they will facilitate at a time to increase their yield. Ultimately, yields are going to be low for some time. Talk to your financial consultant or advisor about what to do in this environment because things can change quickly.
Phillips: Last year one of the best investments was long-term government bonds with the S&P cutting the rating treasuries. They thought they were going to be crushed. We had a 34 percent return risk free rate where European stocks and others got crushed. We’re in that same catch. Our main game is fixed incomes. We think interest rates are going to remain low for a long time, longer than feds think, actually. We’re encouraging investors on fixed incomes to extend durations and be careful on quality. That is where diversification comes in for our portfolios. We can buy bonds from the big primary dealers for individual clients. That’s the difference between bond funds or bond ETF (exchange-traded fund) versus individual bonds.
Loy: A lot of retired clients are looking for cash flow and interest rates are on the bottom of the ground. There is a little return that is an education process with clients talking to them about total return. Maybe it’s appreciation on this, like owning a piece of real estate; you get cash flow from the rent and appreciation down the road. That is a total return. You have to communicate with the clients that you have to look for other areas of returns other than income alone.
How have you kept clients from making mistakes in this market?
Baumgardner: I talk to clients a minimum of once every three months and more frequently if they’re new. You get used to the calls to look over portfolios. I’ve had to spend more time convincing people not to do things like wanting to sell perfectly good portfolios because they are scared or nervous. I understand you have stock being six percent. It’s been around 100 years, why would you want to sell it. I’ve had people saying in the stock market, “I want out.” So to me it’s been frustrating in that regard.
Phillips: We’re taught a principle of recency. You go to the gas pumps and see prices fluctuate or refinance your mortgage every seven years, you save a lot more money doing that. You see that principle of recency where the stock markets are volatile. There has never been a 20 year holding period where you would have lost money in stocks. We show historical things to give them a perspective. Education has been so important to us over these last years when it’s been so volatile.
Is recruiting and retaining talent a challenge?
Baumgardner: We can find good quality candidates, but because so much has gone on in the last few years, it’s hard to find a good candidate that does not have a financial history that would preclude them from coming into the business.
Corey: An advisor’s ultimate goal is to handle the client’s money. They have to be well-educated, understanding of the environment and financially fit themselves. When I bring someone into the firm, I want to be comfortable with them. I want to meet them various times and understand them as a person because they are going to be working with high-net worth individuals. A lot of firms take more time to interview and recruit. It saves them time in the long run.
Loy: There is a huge growing demand for safety and security in retirement. The age of the boomers is a growing demographic. There are more high-net worth individuals in these emerging companies and certified financial planning programs are trying to get into it. As the world’s wealth grows, it needs people looking for ways to preserve it and pass it on.
DePasquale: It’s all about relationships and trust. When you bring somebody on, you want to make sure they understand what your philosophy is and the way the firm conducts business. They have to know what they are asking and have like minded needs for clients. You’re working with people that have spent a lifetime to accumulate this wealth and it shouldn’t be turned over to just anyone.
How selective are you when considering new clients?
DePasquale: I have taken clients that are start-ups that have 300 bucks in the bank because I like them and I believe in their business. I’ve turned down ten million dollar clients because I didn’t feel comfortable with them. It goes both ways and everybody has a different philosophy.
Nelson: It takes about three meetings before we actually have a client commit to anything. They are not committed to us and we are not committed to them. We want to see if it’s going to be a nice fit.
Leavitt: You can’t be all things to all people. Some clients are looking for things that just really go against your core principles or philosophies in the firm and I’m the first to admit if it’s not a fit.
Nelson: If we feel they are doing things that are adamantly against their financially future we don’t want to be a part of that.
How competitive is the industry?
Corey: It’s very competitive, which is a good thing for consumers. If they find a firm they trust and have confidence in, then that firm grows because they will refer clients to them. That’s ultimately what all firms are looking for, trust and confidence in referring their friends and family, which says they’re doing a great job.
What is the outlook for 2012?
DePasquale: One thing to keep in mind is that this isn’t 2008, when we were looking at the five biggest banks going bankrupt. Right now equities are sitting on three trillion dollars of cash from equity. I think there is a good outlook. One of the big things we teach our clients is to be actual investors as opposed to being a speculator. We’re not speculating what is going to happen with the markets, we build a well-rounded diversified portfolio and monitor and grow it.
Nelson: It’s hard to get through to clients telling them this is a long-term type of strategy. There’s going to be ups and downs as there is in anything.
Phillips: Visitor volume is increasing. Other than property taxes all the other taxes are going up. We had a record New Year’s Eve and room rates are going up. So we can see that continuing, but it’s nowhere like it was in the early boom times.
Abts: More people seem to be concerned about out-living their retirement money than ever before. In the end of 2007 through 2008 their portfolios dropped in value and they didn’t understand how much money they could lose. They saw tremendous losses and that created concerns in the back of their minds asking if we will have another correction, how much of this am I going to lose. They are getting answers to those questions before that happens which helps to create that peace of mind. That’s one of the most important things we can do for our clients.