Jeff S. Vollmer interviewed about Closed-End Funds, and the role they can play in investor’s efforts at this point in the market cycle.
When you dance with the devil, expect to get burnt.
So the saying goes. Having blindly danced into the 2008 global financial meltdown, the mega-brokerage firms are now paying the price.
Lower margins? Damaged brand names? Talent exodus? Affirmative. But, there’s more. It now appears that the top four brokerages are losing the target market they covet most: multi-millionaires.
According to a recent Reuters article, the share of high net-worth client assets held by the four mega-brokerages–Morgan Stanley Smith Barney, Merrill Lynch, Wells Fargo Advisors and UBS–has dropped precipitously since 2008. A report by research firm Cerulli Associates expects the decline to continue.
Once upon a time, the mega-brokerages dominated the affluent client segment. Burnished brand names and sterling reputations seemed to lend these firms the Midas Touch when it came to working with the affluent.
In 2007, the four mega-brokerages owned 56 percent of the multi-millionaire client segment. As of last year, that market share had dropped to 45 percent. Further, the decline is expected to reach 42 percent by 2014.
Ironically, this comes at a time when the brokerage houses have largely turned their backs on average American households with assets in the range of $250,000 or less. Relegated to call centers, dropped by their brokers, or simply overlooked in the brokerage’s current marketing activities, the average Joe’s of Main Street have been ignored by Wall Street, as the firms focus on attracting the nation’s wealthiest households.
The problem? The wealthiest households seem to have developed a sudden distaste for the very firms pursuing them.
Cerulli reports that boutique firms, trust companies and family offices have been gaining market share at the expense of the Wall Street behemoths.
Not encouraging news for firms like Merrill Lynch, which has been discouraging brokers from taking on clients with less than $250,000. Why? So that brokers have more time to find and work with million-dollar accounts.
Only, these million-dollar households are increasingly filling their dance cards elsewhere.
Cerulli’s report shows that these shifts in attitude were originally driven by Merrill’s takeover by Bank of America. As well as the tax payer bail outs of Morgan Stanley, Citigroup and UBS.
While the private client groups at some of the banks have benefited by the industry’s shifting tectonic plates, it is the registered investment advisory firms (RIAs) and family offices that have benefit most. These smaller, independent wealth management concerns grew assets under management by 18 percent in 2010. That compares with a two percent increase at the big four brokerage firms.
Just as depressing, if you happen to be an executive at one of the brokerage firms, is continuuing exodus of top talent . Increasingly, advisors are choosing to work at smaller, independent wealth management firms in a search for “greater stability or fewer conflicts of interest.”
For some time, the industry’s “free-agent mentality” held that an advisor could accept a big check, move to another firm, and then bring clients along for the ride. Even though clients rarely accrued any additional benefit–but for the fact that their financial advisor was more financially secure.
Now, many of the top advisors are opting to buy their independence instead of feathering their nests.
The destruction of brand image and perception suffered by the large firms has not helped matters.
Merrill, once among the proudest corporate cultures on the street, has seen an exodus of top talent since the firm was taken over by Bank of America.
Yet, this talent exodus is hardly exclusive to Merrill. Financial Advisor magazine recently reported a Charles Schwab & Co. survey of advisors at major brokerage firms. The results are stunning.
Growing numbers of brokerage firm advisors are considering a move to independent RIAs. Citing higher income, more freedom, and time to interact with clients as their primary motivation, the study was revealing in some of the following ways:
-51 percent of respondents found the idea of going independent appealing.
-65 percent of respondents under the age of 40, those advisors with the longest careers ahead, expressed a strong interest in independence.
-Repondents cited the ability to place a higher priority on client needs as a primary benefit to going independent.
-Advisors cited the ability to offer a broader set of investment products and services as potential benefits to joining an independent firm.
Very revealing. Yet, any way you look at it, the industry is shifting. The Reuters piece credits much of the shift to a more level playing field.
“Smaller firms are competing with Wall Street’s biggest banks in terms of investments and technology,” the article explains.
Makes sense. Technology has greatly enabled smaller firms to offer the same resources as their much larger competitors, while doing so within a more objective, independent framework.
The mega-brokerages have recruited sales skills, often at the expense of well-trained, less sales-oriented advisors who could not achieve the rigorous asset accumulation goals demanded by the firms.
Meanwhile, RIAs have been able to integrate many of these well-trained, finance-oriented advisors who were let go by the Big Four. They are provided an environment in which they can serve clients without the anxiety of production quotas, and the inflated expectations of branch managers who are paid a piece of the office’s assets under management.
Our firm is testament to this trend. Our clients have, and will continue to benefit by the available talent moving forward.
Because we can pay advisors more than the brokerage firms do for the work done on behalf of clients, our advisors are not pressed to accumulate three to four hundred relationships. They can offer asset, risk and wealth management solutions in a white table cloth setting–as opposed to a drive-through window approach.
Of course, as these trends evolve, clients will be the biggest beneficiaries. Technology, investment options, firm sizes, open architecture and degrees of specialization will continue to place the emphasis back on Main Street.
The average family wishes to achieve a modicum of financial autonomy. They aspire to do so without having to worry about conflicts of interest, isolation from the firm, lofty fees and questionable practices.
As the industry continues to offer greater choices, and technology continues to level the playing field, perhaps the balance of power will finally shift back to Main Street.
Still, don’t expect Wall Street to simply roll over.
In the movie Wall Street, Gordon Gekko explains that “Greed works. Greed clarifies, cuts through and captures the essence of the evolutionary spirit.”
Gekko was correct. Greed has been present at every inflection point in the evolution of Wall Street, and all of its ascendant industries. Let us hope that greed, in the case of the 2008 financial crisis as well as the continuing hangover, will serve as a reminder that Main Street must remain the nation’s top priority.
Anything towards that end is positive, and worth fighting for.
Early Saturday, I awoke in Land Between The Lakes, Tennessee, where I joined three teammates for a 12-hour suffer fest involving running, biking, canoeing and orienteering.
The previous evening, we’d been given 21 Universal Transverse Mercator (UTM) coordinates and were left to plot them on a map using a UTM Coordinate Converter.
For the record, I woke up Friday morning devoid of the knowledge that I happened to share this planet with anything call a Universal Transverse Mercator. So underscoring the innate human capacity to learn. Quickly.
The goal of the adventure race was to complete a 12-hour course in whatever fashion best suited the team, while getting passports stamped at each of the 21 UTM check points.
At 7:30 am, we ran into the Tennessee hills and spent the rest of the day (12 hours and 50 minutes) covering roughly 60 miles of wooded, mountainous terrain, dirt paths, dense forest, paved roads, wind-swept lake and muddy path, all on foot, mountain bike and canoe.
Equally exhausting and rewarding, the day’s events correlated well with the experience of creating wealth.
In both adventure racing and wealth creation, the goal is to take calibrated risks in the achievement of pre-determined objectives. Along the way, there will be many check points at which one can change course, regroup or simply bail out.
Once on course, one must make a series of decisions, each of which will affect the participant’s trajectory, and so the odds of successfully completing each objective. Throughout the course, one must temper all emotions, contend with the changing elements, fight the urge to take the easy–though often less efficient path, and stay focused on the goal at hand.
In both investing and adventure racing, fatigue and confusion can lead to catastrophic decisions. So the more one plans ahead, the better one’s chances for success.
As investors currently forge the wilderness of the global equities markets, there are three geographic obstacles that will impact all course participants in the near term: China, Europe, and the U.S.
China Drops Its Pace
Economists joke that, when China sneezes, Asia catches the flu. Well, the contagion may have a more global reach.
Analysts worry about the recent Chinese economic slowdown. The Chinese administration recently lowered the nation’s growth target to 7.5%, down from the 8% target maintained for years. Chinese steel demand has fallen. Chinese auto execs are forecasting lower sales in 2012.
As the Chinese economy softens, the Shanghai Composite, China’s S&P 500, has broken down like Kim Kardashian’s wedding vows. Disconcerting, because China is the largest emerging market in the world. It accounts for nearly 20% of the MSCI Emerging Market index. Since the end of 2007, the Shanghai Composite has reached inflection points before other leading global market indicators. Since equity markets generally act as indicators for broader economic trends, the Chinese equity market has become a “leading indicator of leading indicators,” as Citi analysts recently put it.
If that observation holds water, then the recent slump in the Chinese stock market may be a bearish indicator for global equities. This is all the more interesting, as I read this morning that hedge funds are just beginning to reenter the market in mass. Bloomberg reports that many hedge funds have abandoned their bearish bets and are buying stocks at the fastest rate in two years.
So, either the Shanghai Indicator remains valid, and the Masters of the Universe are jumping into the markets at the wrong time, or the Shanghai Indicator fails, and the hedge fund maestros are correct. Given the fact that the HFRX Global Hedge Fund Index has trailed the market for over three years, you figure they’ve got to get it right at some point. Especially for the fees they take.
Europe Hits The Wall
A month ago, it appeared that Europe had navigated many of the debt difficulties that stood to topple the union. While the European Central Bank still contends that the worst of the sovereign debt crisis is over, the eurozone economy has softened. PMI and manufacturing hit three-month lows last month.
The debt hydra reared its head last week as Spanish and Italian yields have recently risen. Both countries have significant amounts of fiscal tightening to accomplish in order to accomplish their 2013 deficit targets. These goals only become more challenging (if not impossible) if the eurozone economy falls back into recession.
Uncle Sam’s Hazardous Terrain
Of course, not all of our worries are foreign. The U.S. economy, while serving as a pillar of strength these last few months, faces uncertainty.
Last week’s housing data contradicted the positive performance thus far within the overall sector. Housing stocks had been moving like Jagger until last week’s sales figures sent some of them down by nearly 20%.
Analysts are wondering if the warm weather may have pulled some of the summer home sales forward, so skewing the numbers and setting up a disappointing spring. This, at a time when seasonal expectations are usually high.
Further, fiscal headwinds have re-appeared. In a recent op-ed piece in The Wall Street Journal, former Fed Vice Chairman Alan Blinder wrote of the “fiscal cliff” our federal government is rapidly approaching.
Blinder warned that unless Congress acts on the Bush tax cuts, the payroll deduction tax, long-term unemployment benefits and the $1.2 trillion in automatic 2013 spending cuts mandated by the super-committee’s failure, the U.S. could face a fiscal contraction of 3.5% of GDP next year.
Why does the U.S. face this daunting situation? Because our elected officials have failed to take decisive action at every possible opportunity. Instead, the federal overlords have chosen to kick the can down the road (tiring of that phrase) each and every time.
Last year, both parties could not achieve a compromise. So, both parties and the president created a bipartisan super committee. It also failed. So, $1.2 trillion in spending cuts will kick in automatically next year.
The Bush tax cuts. The Payroll tax reduction. Long-term employment benefits. All of these expire or are otherwise curtailed on January 1,2013. Happy New Year!
Mark my words. In December, following the election, our lame duck Congress will be dealing with all of these issues–yet again at the last minute, immediately before the Christmas/New Years vacation. Will they finally forge a last minute diplomatic pact that contributes to the long-term financial security of the nation? Of course not!
They will, once again, kick the can down the road. Along with a bit of the nation’s fiscal security and hopes for prosperity.
Bulls and Bears Jockey for Position
Since October, the market has rallied like opposing hitters facing Francisco Cordero in the ninth inning.
The S&P 500 has risen 27% these last six months. The question becomes, where are we in this market cycle? Six months into a new bull market? Three and a half years into a broader, economic-based bull market?
Bull markets tend to last about four years, and are bookended by corrections of 20% or more. Last April through October, the market corrected by 19.4%–just shy of the traditional Mendoza Line for bears. So, do we round up? Count on the perpetuation of the current rally? From a seasonal perspective, caution is counseled.
For all of those investors arriving just arriving at the party, remember the old adage, “Sell in May and go away.” Many institutional managers will have that in mind as April begins. And there are plenty of reasons for such considerations.
China’s chop-suey economy. Iran’s nuclear standoff. The “fiscal cliff” Ben Bernanke has been warning us about. The eurozone’s continuing debt issues. Any one of these could drag the market down faster than Ashton Kutcher can unfunny a sitcom.
Conversely, U.S. manufacturing is improving. Industrial production may be the strongest it has been in 15 years. Central banks continue to flood the world with liquidity, serving as an opiate to global equities.
Bottom line? The markets want to rise. Global headwinds, as always, will remain a deterrent to many who would otherwise be participating. And rightfully so. Any one of the negative blips upon our radar could lead the market to rapidly correct. Keep your downside protection parameters in place.
Like Saturday’s race, there will be times these next few months during which investors feel a bit lost. Off the course. Questioning their direction.
If you have a plan, stick with it. If you don’t–get one. Mitigate risk at every opportunity. Always default to the safest option. Remember, complacency makes for a long day. In racing, investing, and in life. Even when the path ahead is obscured by obstacles, one must forge ahead or risk never finishing at all.
Sleeping in Caves.
Last week’s newsletter received a huge amount of feedback (The Folly of Bovine Behavior). The piece focused on the shortfalls, failures and inadequacies of the retail brokerage firms. You had much to say. Mostly in concurrence.
Coincidentally, in the three days following the newsletter, two supporting pieces were published, both underscoring many of the points we made in regards to the institutional deficiencies on Wall Street.
The first was former Goldman Sachs executive director Greg Smith’s scathing resignation letter cum op-ed piece in The New York Times.
In it, Smith expressed his reasons for resigning amidst a “decline in the firm’s moral fiber.” Smith underscored the idea I touched upon last week. That is, the increasing propensity of the large firms to place their interests above those of their clients.
Following the letter’s publication, the ramifications rippled across the financial landscape as media institutions called into question the integrity and acumen of all of the tax-payer bailed out firms. Their systemic callousness towards Main Street. Their continuing compensatory generosity, even as the tax payers who bailed them out continue to struggle.
Another piece worthy of mention is Matt Taibbi’s recent Rolling Stone expose entitled, Bank of America: Too Crooked to Fail.
Taibbi argues that the bank has defrauded everyone from investors and insurers to homeowners and the unemployed. He asks why the government keeps bailing it out. And he does so before you’ve read beyond the subtitle. Worthwhile reading, to say the least.
Friday night found me in a cave in Bedford, Indiana. I wasn’t hunting third-world dictators. Nor had I been fighting with my wife. My son’s Scout troop took us there.
While the details remain inconsequential, the spelunking experience piqued my curiosity on so many topics.
Why do bats have eyes? Did cavemen have port-o-lets? How can the populations of small, rural towns support so many tattoo parlors?
At 3 am I woke in my bunk and beheld the cold, jagged cave ceiling. Without sounding cliché, I could not help but think of my ancestors, those pre-financial calculator, Neolithic-era investment advisors, sleeping in less plush caves.
We have since vacated caves for more comfortable, credit-fueled existences. Yet, we’ve somehow retained our primordial instincts. Fight or flight. The tendency to flock to safety and comfort like moths to a light.
Our ancestors would cower at many of the natural phenomena that occurred around them, most well beyond their control.
Today, we continue to cower in fear. Mostly over the idea of a 2008 redux. Instead of doubling over when thunder crashes beyond the cave entrance, we sell everything and go to cash when Brian Williams talks about protests in Athens.
Time to leave the cave. Purge the paranoia.
While policy makers were masterful in helping to steward us into the 2008 disaster, some of them have done a decent job of stewarding us out.
We still have many issues with which to contend. But, when the market opens the buffet, you’d best grab a plate and eat. Because there’s nothing worse than hunger pangs when everyone around you is stuffed.
The meltdown of 2008 occurred four years ago. While the human psyche is a fragile thing (look at Lindsey Lohan), we must put our darkest fears aside and move forward. The apocalypse is not around the next curve. In fact, when NatGeo airs a show called Doomsday Preppers, then the laws of the universe dictate that Doomsday has been pushed back for ratings purposes.
Currently, investors have much in their favor.
Individual and institutional investors remain underweight equities. As markets continue to rise, they will eventually find religion.
It’s like Dancing with the Stars. You mocked the viewers. Ridiculed the very idea of it. Pronounced that you’d never tune in. Yet, at some point, you find yourself alone, in a dark room, nervously glancing over your shoulder as you watch Nancy Grace flub the Tango.
Central banks have printed upwards of five trillion dollars through QE programs. Repo operations are the rule of thumb in Asia, South America and Europe. So long as the global market place has cash sloshing about in such great quantities, then the stock market will continue to act like frat boys at a keg party–nobody leaves while the beer is free.
Further, the risk premium, as well as the risk perception, has declined. Europe’s issues have quieted. U.S. economic indicators have strengthened. The S&P 500 had risen more by St. Patrick’s Day than in any other year since 1991.
Your instincts may tell you not to buy stocks. Likewise, mine tell me that my tongue should never be green. Yet, I never want to be the only guy in the pub whose tongue is not green on St. Patrick’s Day.
The world does not appear to be leaping into the abyss on a frayed bungee cord. And so the appetite for risk assets continues to grow. Especially when the train has already left the station, leaving so many behind.
The Investment Company Institute recently reported that equity funds continue to report outflows while bond funds continue to report inflows. So, people continue to sell stocks and buy bonds. The public has not yet bought into the recent rally. And since the public is generally wrong at market inflection points, this represents a positive contrarian indicator.
Further, even though analysts have recently turned positive on earnings revisions, they have continued to feverishly downgrade individual stocks. And analysts also tend to be wrong. Yet another contrarian indicator working on your behalf.
Eventually, the flood gates will close and the party will end. Central banks will send out the pledges to mop up the beer soaked floors. But not yet. So long as the printing presses are rockin’, the bears won’t come a’ knockin’.
The S&P 500 sits near a four-year high after closing above 1,400 for the first time since June 2008. It has left a decimated wake of bears, short sellers and disbelievers.
Recently, Treasury yields have leapt higher as bond prices were crushed, completing their largest drop in eight months. Why? Bonds hate strong economic data as it often portends inflation concerns. And bonds hate inflation like Ben Roethlisberger does a quiet evening at home.
Rising energy prices, Iranian saber rattling and thinning corporate margins are cause for concern. But not yet enough to turn out the lights.
Throw caution to the wind? Peddle to the metal? Of course not. Capital preservation remains the primary objective. Yet, safely transporting my family to wherever we might be going is also my top priority. And if I happen to be driving on a wide-open highway in favorable weather conditions, I am going to feel inclined to drive a bit faster.
Eventually, the Neanderthals created tools to assist in the tasks of daily living. Rocks. Flint. Fire. The wheel. Life became easier. More relaxed. Suddenly, people were living to the ripe old age of 20.
You are likely to live four to five times that duration. So, you better have the tools to assist in that endeavor. Shelter. Food. Fire. Wheels. A surplus of retirement capital.
Opportunities for outsized returns on invested capital can be rare. Don’t squander opportunities due to lingering fears of distant thunder.
Like the Paleolithic ancestor of my great grandfather once wrote on a cave wall, “Man with fire is lucky. Man with wherewithal to build a fire is smart. Better to be smart than lucky.”
Out of the night that covers me,
In the fell clutch of circumstance
Beyond this place of wrath and tears
It matters not how strait the gate,
, by William Ernest Henley
Capital preservation remains central when approaching today’s capital markets. Still, record-low interest rates continue to serve as manna from heaven. Inflation remains in check. Earnings remain solid. And, not that we’re promoting it, but there are still rumors of further quantitative easing. Any such announcement would send equities markedly higher.
While economic growth will not impress, equities ebbed enough in 2008 to merit further upside. Current valuations support this possibility.
Some analysts feel that stocks are poised for a once-in-a-generation run. This year? Next? Three year out? Nobody knows. But now is not the time for indecisiveness or lack of process.
Today’s road to financial autonomy is difficult. Obstacles are many. One should not have to worry about fast-talking politicians and brokers standing in the way.
Read Jeff Vollmers input in Steve Watkins latest article.
Chart Porn on Parchment. Check it out…
Best arm yourself with a stiff drink. The following reports can cause anger and disillusionment. More…