LIVE FROM IMCA’s ANNUAL CONFERENCE

Heading Towards the Cliff in Washington

By David Armstrong
5pm, Tuesday

Because the bi-partisan "super committee" on deficit reduction failed to come to any real conclusions, get ready for the fight over the debt ceiling to return in December, with all the rhetoric over impending federal default and credit downgrades, says Greg Vailliare of the non-partisan Potomac Research Group. If congress fails to act before the end of the year, the mandated sequestration spending cuts of $1.2 trillion kick in, hitting the defense budget.

Likewise, decisions will have to be made before the end of the year on the extension of the Bush tax cuts. If nothing is done estate tax exemption levels will back to $1 million, income rates will return to higher levels and dividends will be taxed as ordinary income.

Vailliare calls the impending changes the "dark clouds" that need to be cleared away if we are to avoid taking the economy "over the cliff." Because these changes are slated to kick in with the new year, a lame duck Congress will only have some 20 days in session to come to some conclusion.

Some analysts predict failure to resolve these issues would knock three percentage points off of GDP, Vaillier said. It's an unlikely outcome - virtually "inconceivable." But, he notes, the last time he used that word he was considering the likelihood of the collapse of Lehman Brothers. 

Richard Thaler: Client Risk Questionnaires Don’t Work

By Kristen French
4:30pm, Tuesday

Client risk tolerance questionnaires don’t work, said Richard Thaler, the father of behavioral finance, co-author of Nudge, a professor at the University of Chicago Booth School of Business and the founder of asset management firm Fuller & Thaler Asset Management. Thaler was speaking with John Nersesian, Chairman of the Investment Management Consultant Association’s in a keynote Q&A at IMCA’s annual conference outside Washington D.C. on Monday.

“Oh, I wish you hadn’t asked me that question,” said Thaler, when asked about risk questionnaires. “I think it’s very difficult to discern risk tolerance with a questionnaire, because people don’t know their risk tolerance” said Thaler, during the wide-ranging interview, which covered hindsight bias, the NFL draft, Michael Lewis’ Moneyball, the mortgage crisis, doctors and 401(k)s.

“Even as individuals we’re not consistent,” he said. “You’ll have a guy who has a hobby of sky diving and all his money in T-bills.” Where does he fit on the spectrum? And then there are those individuals who say they have high-risk tolerance, but then find their tolerance vanishes as soon as markets head south. Thaler said he and Daniel Kahneman, winner of the Nobel prize in economics in 2002 and professor of psychology and public affairs at Princeton University, spent a lot of time trying to write better questionnaires. “I don’t know if such a thing is possible,” he said. “Yeah, next question.”

Keep Going East, Young Man

By David Armstrong
1pm, Monday

Burton Malkiel, economics professor at Princeton and author of the classic A Random Walk Down Wall Street gave the opening presentation at the Investment Management Consultants Association annual conference with a simple message: You probably don’t have nearly enough exposure to Chinese stocks in your portfolio.

Malkiel is bullish on China. After a brief history lesson charting China’s ascent in the early 1800s to its nadir during the era of Mao, Malkiel reeled off the familiar statistics that fuel the bullish bet: 17% debt to GDP; a 30% to 40% savings rate; a relatively low rate of non-performing loans on the books in Chinese banks; Hundreds of cities with over 1 million residents. For Malkiel, the unprecedented growth rate may indeed slow, but it won’t stop. The Chinese are looking at decades of continued prosperity that will be the envy of the world.

So it’s a shame, Malkiel says, that most portfolios have on average only 2% exposure to China. The better number should be closer to 9% and probably as high as 13%, he says. That matches China’s percentage of global GDP. Chinese equities are priced at a modest 10 to 11 times earnings, and they pay dividends of 2.5 to 3% - in cash.

Unfortunately for a guy who likes to approach investing with low-cost index funds, the indices that might be used to capture some of the Chinese market are woefully inadequate. Many, like the MSCI World Index, are too heavily weighted toward banking, oil and telecom companies in the country. (It may not surprise you to learn that Malkiel co-founded a firm, AlphaShares, that claims to have created a better Chinese index. The Guggenheim China All-Cap ETF based on the index – YAO - has returned 14% year to date.)

But aren’t the China bears beginning to get the upper hand in this debate? Can we trust the numbers coming out of China? What about the newly built but empty shopping malls and skyscrapers? The extreme economic inequality? Wasn’t this the time we are all supposed to start shorting China and wait for the hard landing?

Keep waiting, says Malkiel. Yes, the real estate market entered a bubble that is in the process of deflating. Volatility is high. No matter: He may not be able to trust the official numbers from China, but he does trust General Motors, and when they say they are seeing no sign of a significant slowdown, he believes it. All of us, he thinks, should dramatically increase our exposure or risk leaving money on the table. “Why would you want to be underweighted in the fastest growing econ in the world?”

Don’t Ask For Referrals, Says Speaker Richard Weylman

By Kristen French
12pm, Monday

Don’t ask for referrals, said Richard Weylman, founder of the Weylman Center for Practice Management in a talk at the annual Investment Management Consultant Association’s conference in Potomac, Md. Monday morning. It’s a controversial piece of advice, considering referrals are constantly touted as the one and only way to grow a financial advisory business. But Weylman qualified his point a little bit. He said you just don’t want to ask clients to provide you with the names of their friends. Don’t ask them to do the work for you. Bring them a list of people they may know who you want to meet, instead.

For instance, if you have a top client who is an orthodontist, put together a list of 15 local orthodontists you want to meet and present the list to the client. Or present the client with a list of 15 members of his country club you want to meet, and ask him or her if he knows any of them.

Weylman, who is a member of the United States Luxury Board, started his career selling cookware, then went on to become head of sales and marketing for the Robb Report and was later an executive at a Rolls-Royce dealership. In an animated talk during which he leaped across he stage, waved his arms in the air, swayed, joked and stamped his feet to make a point, Weylman said clients want warmth, friendliness, and personal interest from their financial advisor, and urged them to “elevate” the client experience in order to create “delighted advocates.”

He offered some specific details that can enhance the client experience: Have reading materials in the office and lobby art work that are focused on client dreams and aspirations (travel and luxury magazines, not financial services publications; pictures of client families, not plaques on your own achievements), offer a beverage in a gracious manner, ideally in nice China cups, make sure everyone in your office greets the client by name, meet the client in the lobby and walk them back to the office, put together an owner’s manual for the client, have umbrellas on a rainy day.

“Pay attention to the little things; The little things lead to bigger things,” he said.

A few others: Have you support colleagues meet 10 min. each morning; write out service protocols in an education manual; listen for client prospect requests so you can continually elevate client experience; be aware that incrementally all these things can be accomplished over time; create a PLAN and execute; create a series of 90 day plans to focus your elevated service efforts.; have a vision for who you could be in the market; list out challenges you will face
detail action items.

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