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Sunny and One Thousand (CIMA) Degrees

Sunny and One Thousand (CIMA) Degrees

A group of top financial professionals this week took a break from worrying about their clients to turn their attention inward.

The setting for this self-evaluation was the Investment Management Consultants Organization (IMCA) annual conference, held this year in Boca Raton.

This year’s attendees were specifically concerned with whether they were adding enough value to the process of investment management. The evaluation is seen through the prism of declining management fees, single-digit market returns for the near future and increased regulatory oversight.

The views on how the industry could—or should—change were far from unanimous. Indeed, there was enough dissention at the conference to touch off occasional audience grumbles during some of the presentations.

Some of the messages the speakers delivered were more welcome than others. For instance, the keynote speaker, Sallie Krawcheck, CEO of Smith Barney, pointed out that investors who have advisors and use effective investment research can potentially increase returns by more than 700 basis points per year.

She added that given Wall Street’s recent transgressions establishing trust with clients, regulators and the press is still a difficult proposition.

“I remember when guys used to say ‘Trust me.’ The second they did, I didn’t,” she said, drawing laughter, which prompted this aside to the audience: “You know what I’m talking about.”

Krawcheck pointed out the “damned if you do, damned if you don’t” nature of the environment now, noting that for years industry observers declared commission trades to be a flawed and inherently conflicted offering. Lately, those sentiments have been replaced by reports that the NASD is looking into whether fee-based accounts are appropriate investment for the masses. She said the gathered crowd would have to get used to this back-and-forth, at least for the time being.

The potential compression of fees was on the mind of the nearly 1,000 attendees at the conference, held at the Boca Raton Resort & Club. Burton Malkiel, professor of economics at Princeton University, predicted that single-digit returns were going to be the norm for some time in the market. He estimated returns of around 7.5 percent a year for the foreseeable future. As such, he said consultants should consider making the core of client portfolios index products—to hold down costs.

“I think the evidence is overwhelming in favor of indexing,” he said. “Almost three-quarters of managers over a 10- or 20-year period are outperformed by the index…turnover is expensive, and turnover has increased dramatically.”

Among his slides was a graphic showing that of the 355 mutual funds in existence 30 years ago, 216 of them do not exist now. Of those that did, only five funds outperformed the benchmarks to a significant degree.

Other speakers took aim at a different type of fees—those charged by financial consultants themselves.

John Lohr of Howling Wolf Publishing, and the former chief general counsel of Lockwood Financial, predicted that in coming years more brokers will wash out of the industry, leaving more business for the largest producers.

“We were guilty of making investment management a product,” he said in an interview. “We brought out dozens of wrap free products—anybody can pull these off a shelf, but how qualified is anyone to do this?”

He conceded that diversification was achieved for the right type of client through these products—but added that much advice wasn’t justifying the 1 percent fee.

“The real key is, it’s got to be inexpensive,” he said. “If I could give it away, I would.”

A number of advisors interviewed at the conference, agreed that costs will continue to come down and that a large majority of registered reps don’t truly understand consulting. But they nonetheless see their fees as justified.

Krawcheck noted in an interview that fees will continue to drop—and the strategy for large firms such as Smith Barney will be to gather more of the clients’ assets to become their primary provider of financial services.

“Clients aren’t saying, ‘I want to work with a regional firm,’ ” she said. “They have one relationship—with you.”

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