Brooke’s note: Everyone wants to know what advisors really think. If anyone knows, it’s Bob Veres and you will understand what I mean after reading this article.
As I’m sure most of you remember, I asked the Inside Information community to give me the benefit not only of your thinking, but also your concerns. What keeps you up at night? What shocks or surprises should advisors be thinking about and preparing for on behalf of their clients?
And also: what events do you think might surprise us on the upside? Missing opportunities can be just as painful as experiencing downturns. See: Bob Veres’ vision: Scalable, multi-partner RIA firms will be profitable and powerful enough to beat the wirehouses.
Of course, I had my own expectations about what you’re thinking about when you stare into space or wake up at night. I envisioned an article devoted to the ramifications of mounting U.S. debt, the almost-inevitable bursting of the bond bubble and a lot of hand-wringing about the possibility that FINRA will take over RIA regulation.
As it turns out, when more than 300 messages were tallied up, those were the third-, fourth- and fifth-most mentioned issues and concerns, coming in way behind No. 1. I was surprised, and when the exercise was finished, I was really proud of my thoughtful audience and the profession, and when you read through this, I think you will be, too. As it turns out, this is about more than just future scenarios. See: Bob Veres adds his bottom line to valuation debate started by Mark Hurley.
I’ve grouped the messages I received into 10 categories, a top-10 list, if you will. I think some of you will be surprised not only by the order, but also by the wide-ranging nature of issues that were raised by the Inside Information community.
1. Constantly, gradually eroding investor confidence in the investment markets, in the fairness of the investment system and in the stability of the global economy.
“Peoples’ sensibilities are scorched after billions of dollars have been spent over two years, and 1 million television ads, telling us all how bad things are,” wrote one advisor.”
Add to that the blogs, the cynical comedians, the newspaper reports on the fiscal cliff and all the rest, and you are driven to a belief that investing is rigged, that the future is dark, that there is more downside potential than upside. Advisors know the opposite to be true: that the markets are driven by the underlying efforts and decisions of millions of business owners and workers, of great choices and creative ideas and hard work contributed every day to business enterprises and the economy as a whole. But that message is apparently much harder to convey today than it was a decade ago, and advisors are getting tired and overwhelmed by the constant work they have to do to keep their clients from losing faith in our economic system.
This response came from more advisors than the bottom seven issues/concerns combined. It was the runaway No. 1 issue that keeps advisors awake at night.
Some of this is related to the knee-jerk reactions of clients who are suffering from a deep depression over the outcome of the recent elections, who marched into their advisors’ offices demanding to sell everything. But, for many of you, client confidence in the markets has been undergoing a slow, steady erosion since the Tech Wreck bubble burst. Clients have seen investment professionals embroiled in a scandal over cynically manipulative analyst reports at brokerage firms, and front running on mutual funds. They have been visibly harmed by the Wall Street excesses that nearly brought down the global economic system, and they have waited in vain for an end to the Great Recession. They have watched advisors named Madoff, Stanford and Corzine cause billions of dollars to implode into thin air, and they have waited with growing impatience for a satisfactory response to the debt crisis here and abroad. See: What do advisors care about? The new SEC that emerged in July, for one thing..
Will the next shock cause some of your longtime clients to finally give up on investments and capitalism? “My clients see a slow drip, drip, drip of falling behind,” one advisor wrote. “They see economic growth below sustainable levels to maintain our systems and population demographics, low returns that nullify their assumed distribution rates and pensions, and they extrapolate that out into the future.”
Another talked about the probability that, sometime in the future, quarterly returns will drop for several quarters in a row “We’ll start to hear clients tell us, 'I can’t take this any more, sell everything. I just don’t know what to believe,’” he says. “What can I tell them that I haven’t said a dozen times already?” See: Liz Ann Sonders: Markets may have to tank before lawmakers step back from the fiscal cliff.
“Everyone feels screwed,” another advisor wrote. “The scammers are living off the backs of hard-working individuals, and it’s an exhausting task to keep convincing them not to lose hope.”
Another major shock to the system could further undermine the credibility of the investment system, which leads right into the second-most-articulated concern from advisors:
2. Another self-inflicted global economic meltdown triggered by Wall Street and the players in the derivatives markets, along with crony capitalist scammers and Ponzi schemers too tight with the regulators to be properly regulated.
“My biggest fear is that the investment banks will create another economic meltdown as a result of their continuing risk-taking,” one advisor wrote. “Too big to fail has become 'much more too big to fail’ All of the incentives exist to continue their behavior and there are no disincentives in the form of accountability. Another attempt by our government at another bailout would have an even more draconian, drastic impact on society and the economy.”
“The thing that keeps me up at night is the lack of faith in the financial markets and the system due to the Madoffs and other Ponzi schemes,” said another advisor. See: Four questions that financial advisors and clients need to ask in a post-Madoff, post-meltdown era.
This fear manifested itself in a variety of ways in the more than 100 messages that I received on the subject. But perhaps the most difficult aspect of this front-burner advisor concern is the double whammy these scandals have on the advisor-client relationship. Every wirehouse scandal not only calls into question the fairness of the markets, but also the credibility of honest fiduciary advisors who are trying to convince clients about the continued viability of investing. See: 5 ways for incumbent advisors to get — and keep — their clients’ vote of confidence.
“In the public’s mind, 'financial planner’ is approximately equal to 'money manager,’ money manager is approximately equal to Wall Street, Wall Street is approximately equal to evil,” an advisor wrote. When brokers make headlines, and perhaps even more when another Madoff is uncovered, the overall level of client trust goes down — right when you want to reassure clients that it’s never a good idea to make a long-term bet against the growth and returns of the investment markets.
3. Government debt levels/irresponsible government policies.
This one was expected, and although it was cited by only about 85 of the respondents, the vehemence of their messages suggests a high level of frustration. “A government that borrows 40% of the money it spends is on a path to disaster,” said one advisor, “and I see no meaningful effort on the part of any politicians on either side of the aisle to seriously address this issue.”
“How long will it take before the debt implosion pushes the world’s economy into a recession if not a depression?” asked another. “The value of our currency is being depreciated due to our nation’s addiction to debt.”
However, I also heard from advisors who think there may be more upside than downside in our current debt situation. There were a variety of arguments, but the thread is that “more of the same” is fully reflected in the share prices of stocks today, so any improvement in our nation’s balance sheet could be viewed as an unanticipated market-boosting event.
“Don’t you think it will be hard for the government to deflate our currency when every major country wants a lower currency value to boost exports?” one advisor asked.
Others laid out a scenario that, in composite, looks something like this:
-After Tim Geithner resigns, Erskine Bowles is appointed as the Treasury secretary, and his primary goal is to put the United States on a sustainable fiscal path as his legacy.
-The bipartisan Simpson-Bowles debt reduction road map is resurrected as an initial framework for serious congressional discussions.
-The president has a “Nixon in China” moment, twisting his Democratic colleagues’ arms and saying that reining in the unsustainable growth in entitlement programs must be part of any fiscal legislation. The Republican leadership grudgingly accepts required tax hikes in return for a simplification of the tax code, which they would take credit for.
“Suddenly, businesses would know what to plan for, the deficit would be kept reasonably under control, and the vast uncertainties of the future of the U.S. economy would be put to rest (at least for a time),” the advisor wrote. “The stock market takes off (though bonds fall due to increases in interest rates as a result of economic activity picking up); and we find ourselves in a new decade of prosperity.”
“Many of the corporate executives that I have spoken with, who are collectively sitting on hundreds of billions in cash, are interested in expanding their operations and hiring more people,” another advisor commented. “But they’re paralyzed by a government that has kicked the can down the road with respect to fiscal reform and corporate incentives. If the two parties reach a grand bargain,” he continues, “which finally has become in the best interest of both parties, then what happens to the economy when all the cash on the sidelines begins to be put to use? We will get a spike in economic activity,” he adds, answering his own question, “plus a decrease in unemployment, a multiplier effect on the monetary supply as currency will be put back into circulation, and we have the potential for companies to do more long-term planning — which they have postponed for several years as the government has continued to kick the can down the street rather than establishing new rules and policies.
“I think many financial advisors, myself included, have been preparing our clients for an economic slowdown paired with a decline in the investment markets,” the advisor continued. “We have the potential for some modest inflation and growth in the prices of equities if the corporate cash comes off the sidelines. We are a resilient country founded by optimists. I think that investors are also predominantly optimistic. I think the potential for positive investment results needs to be weighed in decision making.”
Where do we sign?
4. The Bond Bubble doesn’t burst; it explodes.
“My worry is what happens when the U.S. Fed has to extricate itself from all the monetary policy it has aggressively pursued the past four years,” one advisor wrote. “Granma wonders why her T-bond statement shows an 8% decline in one month. And the bond meltdown begins.” See: Why the only thing bigger than the bond bubble is the bubble of bond doom-sayers.
Another advisor worries that inflation will pick up as the Fed tries to inflate away government debt, causing Treasury inflation-protected securities to lose value.
Many advisors said, in one way or another, that we (you and I, the government, the regulators) have no idea what kind of bets have been made on bond rates in the shadowy world of derivatives, but you can bet that trillions of dollars are involved. This could bring down another major firm or a high-profile hedge fund, raising once again the specter of counterparty risk. Yikes!
Even if the bubble doesn’t explode, advisors are concerned about the long-term consequences of rising interest rates after more than three decades of steadily declining borrowing costs have provided a tail wind for businesses and the markets. “We could be looking at three decades of head winds in market returns,” one advisor said.
But other advisors were less pessimistic. “Higher rates are simply not tolerable for our federal cash flow,” one wrote. Any rise in rates will lead to a very quick intervention by the Fed.
5. Death by FINRA.
This, too, was expected, but I thought it would be much higher on the list. In this category, I placed messages that worried not just about overregulation, but also about a continued regime of regulation that is ineffective against the financial predators (including Wall Street), even as it makes it difficult for honest advisors to function.
“The SEC and FINRA over-regulate broker-dealers and financial planners and drown us with paper requirements because they have no idea how to find and catch a thief,” one advisor wrote. “How do you regulate the regulators?” See: One-Man Think Tank: Six reasons that FINRA should be dismantled.
“If FINRA succeeds in hijacking supervision of financial advisors, with no distinction between fiduciary and salespeople,” said another, “it will drive many smaller advisors out of business.”
One advisor even talked about relocating his practice to Canada, and continuing to give advice to his U.S. clients from the far side of the border. The term “death by FINRA” came up in a subsequent e-mail. See: Why advisors see FINRA as the devil.
Is there any way to address this threat, other than the lobbying effort by the Financial Planning Coalition and the Investment Advisers Association? There were few solutions among the 50-plus messages that cited this issue, but the messages included one very creative idea: As a supplement to our current lobbying outreach, why not have fiduciary advisory firms show their value to federal and state regulators and legislators by offering all of them a full financial plan from a fiduciary advisor? This would give them a taste of the value of the fiduciary standard.
6. Tax rates — but not always in ways you might expect.
Roughly 40 advisors said, in one way or another, that an increase in taxes would strangle prosperity and harm the recovery, and I received a few very long messages that articulated, in great detail, the unfairness of a government confiscating the wealth of their clients to build a socialist state. Others complained about raising rates on their clients but not on everybody else.
What surprised me was how few of those kind of responses I received. Many more advisors were more concerned about the uncertainty of future tax rates, and frustrated that Congress always seemed to be inclined to fiddle with them. “The constant changes in the tax code, and the constant wrangling over what it will look like, causes people to lose confidence in our ability to model and forecast the future — the service at the heart of the planning process,” commented one advisor. “I worry that our clients will begin to lose faith in and appreciation of the financial planning process. When the rules of the game constantly change or tax rates constantly change, our long-term planning becomes tainted, and it causes our clients to question the value of the process.” See: Fiscal Cliff is ready for his close-up — whether we are or not.
On the other side, more than a few advisors questioned the scenario I outlined, where higher tax rates on dividends would cause the market value of dividend-paying stocks to go down — at the same time that interest rates might be rising, giving investors the same yield from what they might consider to be safer investments.
There might, in fact, be a potential upside to consider, a silver lining in the cloud of higher rates.
“The one GIANT benefit of rising rates is that $14 trillion of Treasury money would look for a new home,” said one advisor. “Early in the game it will go to dividend-payers which are still paying more than most bonds.” And, he asked, “why should we worry if dividends are taxed as income? Remember that bonds are taxed as income, and investors can’t get enough of them these days, can they?”
Another advisor brought up an issue that I, frankly, would never have considered. “I believe taxes SHOULD go up,” she said, “because right now there is no incentive to hold investments for the long term. The current rates reward high-speed trading, which is not investing.”
7. Geopolitical issues that could whack trillions off the investment markets.
Three of these were cited in many of the messages that talked about this issue:
-War in the Middle East. (Alternatively, Iran lays some mines in the Strait of Hormuz.)
-A hard economic landing in China
-A eurozone break-up or sovereign debt default.
Others talked about another terrorist attack, including the possibility that the nuclear genie would get out of the bottle and terrorists would detonate either a full-fledged bomb or a dirty bomb on U.S. soil. “No black-swan event would shake our foundations quite like that would,” one advisor commented.
The terrorist attack would almost certainly be an unalloyed negative for all investment vehicles except, perhaps, gold, but the other scenarios might already be factored into current prices. “We’ve been exposed to frightening headlines about a eurozone collapse for three years now,” said one advisor. “It looks to me like the European leaders have gotten pretty good at bandaging the wound whenever it starts to bleed.”
Advisors acknowledged that planning for black-swan events is especially difficult, and more than a few said that they had no inclination to change their investment philosophy simply because a dreaded event worries them. “The reason you do planning instead of giving clients a plan is that you have to make course adjustments,” one advisor wrote. “If a big negative black-swan event happens, it will make what we do that much more valuable.” See: Why the Yale endowment model has potentially calamitous pitfalls according to … Yale itself.
8. A different kind of black-swan event.
This started out as a grab bag category; whenever somebody sent me something that didn’t fit neatly into any of the other categories, it went here. But after I’d received 30 or so messages, the category developed a certain internal consistency “The black-swan events of the future will be politically/socially driven, rather than the more common worries about tax laws, equity returns, currency valuation, etc.,” one respondent predicted.
What kinds of events are we talking about? Suppose, for example, that researchers find a treatment or cure for Alzheimer’s disease. The impact would be hugely beneficial for humankind, but would produce a mixture of good and bad outcomes for different sectors of the economy.
On the plus side, the Alzheimer’s cure would drastically reduce the need for long-term care, since very few lengthy nursing home stays are associated with non-cognitive problems. But it would also cause a downturn in any investments associated with the nursing home industry. It would undoubtedly alleviate medical costs and Medicare and Medicaid expenses in this country. But it would also have a huge negative impact on sales of long-term-care insurance. See: What do RIAs care about?.
Another issue that very few advisors brought up, but which seems to have more than the usual number of potential repercussions, is greatly extended human lifespans due to biotechnology advances. If people lived 25 years longer, one advisor wrote, what would be the impact on the actuarial assumptions behind Social Security and Medicare? Or, for that matter, on retirement plans? Would it dramatically raise counterparty risk for insurance companies that sell annuities? See: Not without criticism, TD Ameritrade opens an 'insurance agency’ for RIAs that want to provide annuities.
“If the extension is accompanied with a general increase in health,” wrote one advisor, “might not that have a salutary effect on health insurance, as treatment costs would be reduced? But,” he continued, “would that be offset by increases in psychiatric treatment costs as humans struggle with the consequences of their longer life span? What about employment for the young, with the older members of society working 25 years longer? What about the deepening of pools of wisdom in organizations that would have workers with 75 years’ experience?”
On the negative side, consider these entirely plausible possibilities raised by one Inside Information reader:
-A widening gap between the haves and have-nots, leading to increased political instability and lower economic growth.
-A longevity “divide,” where a large part of the population experiences a shorter life expectancy because these people don’t have access to longevity-enhancing treatments.
-A retirement age divide, where people on the bottom half of the economic scale stop working earlier for health reasons — primarily because lower-wage jobs tend to be harder on the body.
-Greater volatility in weather, food, energy, etc.
-A bioterrorism attack.
On the other side of the equation, he envisions some potential upside surprises.
-The biotech revolution could be as big as, or bigger than, the computer revolution.
-Local energy smart-grids — think massively distributed energy generation and storage (which would make large power plants increasingly irrelevant).
-Engineered foods – including “meat” made from plants and insects, lowering food costs.
Another advisor noted that globalization has driven down the cost of repetitive (noncreative) labor, but robotic devices will virtually extinguish it. “This will have profound impacts on the working poor and lower middle class,” he wrote. Societies as a whole are not ready for this, or the ethical issues of genetic modification in the womb, legalization of performance enhancing drugs and, eventually, human/machine direct interfaces.”
Finally, what about the potential for unlimited energy from fusion plants? Imagine if we shifted fairly quickly from a petro fuel economy, and energy was practically limitless and costless. It would change the geopolitical dynamics, boost the economy, decimate the oil industry and foster a dramatic worldwide retooling of everything from cars to power plants.
9. Major changes to the profession.
Remember that the theme of this exercise is things that keep advisors awake at night or that they think they might have to prepare for in the future. I might have lumped the responses here together with the dark unhappy potential for FINRA regulation, but this category includes more-creative future scenarios that could change the way you do business positively, negatively—or both at the same time. See: We’re better than this: The 10 words and expressions that should be expunged from the RIA business.
For instance, consider the business implications of meaningful tax reform. “A dramatically simplified tax code would put a large percentage of our current industry participants out of business,” one advisor speculated. “A tax code that is as simple as it ought to be would put many CPAs and accountants out of business. Many of them would logically move into the financial planning profession, and they would begin to win business. This would probably be great for the profession as a whole (not to mention its consumers), but not so great for current advisors.”
Another advisor envisioned the commoditization of investment advice from an interesting new direction. “I imagine that the trend of using trading algorithms will trickle down to where a descendant of MoneyGuidePro will gather a client’s financial information in real time,” he said. “As the client’s goals change, allocations will change. It will have some aspects of behavioral economics to encourage clients to save more if necessary to meet their goals. You will get a notice in your Google Glasses display that you might not want to purchase that new self-driving car, as it will delay your retirement by two years.” See: MoneyGuidePro back on a roll after the.
10. Advisors will focus on all the negatives, and spend their time on all the things to worry about and forget that the positives vastly outnumber the negatives in our society and investment/economic markets.
I should probably have put this category higher, since it might plausibly include all the people (and there were many) who wrote to me to say that they were declining my invitation to share their worries because they felt like their time was better served focusing on the real and immediate, and the positive and optimistic.
A few messages talked about giving advice from the perspective of abundance rather than fear. And, indeed, an interesting theme of this exercise — surprising to me — is that when advisors articulated their worries in a world that has so many negative headlines swirling around our awareness, they gave equal time to the upside potential that they were concerned that their clients might miss.
By far the best articulation of this view came from Janet Tyler Johnson, author of “Finding Financial Fulfillment,” who practices in Fitchburg, Wis.
“I hold a very optimistic view of our future — both for myself and my clients,” she wrote. “We’ve been through some of the roughest years in the markets that I’ve ever seen, and I think we’re due for some good things to happen. See: Wall Street thriller 'Margin Call’ is a cautionary tale — even for RIAs.
“Our planet is awakening, people all over the world are more connected than ever, people are working on solutions — to everything from poverty, oil shortages, water shortages, to food supply issues — that have never existed before,” Johnson continued.
“I just started reading the book 'Abundance, the Future is Better Than You Think,’ by Peter Diamandis and Steven Kotler, and it’s fascinating and very uplifting. See: The 2012 Schwab IMPACT conference comes off with a theatrical flair.
“Perhaps I’m in the vast minority here, but since I believe that my thoughts create my reality, I do not spend one minute worrying about anything. I don’t have my head in the sand; I simply do my best to spread prosperity-thinking to anyone who will listen, and deal with things as they occur.
“Living in fear and/or worry is not my answer. I think it behooves us as financial planners to NOT instill any fear into our clients’ lives (or our own) no matter what the circumstances. We have the unique ability to touch peoples’ lives, and I feel we need to do that in a positive way.
“In my own practice, I weathered the 2008-09 meltdown with minimal, if any, impact to my business except in all positive ways. I deepened my relationships with my clients and attracted several new ones. I took a short-term hit on income due to the market decline, but with the increase in business, I’m now in better shape than ever.
“Worrying about anything doesn’t accomplish anything, since 95% of what we worry about doesn’t happen anyway.
“Maybe in your next e-mail,” Johnson wrote, “you can ask what possibilities we, as financial planners, see for the future.”
Bob Veres is publisher of Inside Information, the information service that reliably helps independent advisors become more effective, efficient and successful. His Future of the Profession white paper can be downloaded, at no cost, at: http://www.bobveres.com.