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A Wider Perspective on the Crisis

A conversation with a visionary in the financial planning field.

Veena A. Kutler and Annette F. Simon, 03/26/2009

This monthly series of articles describes the many steps and occasional missteps we have taken in building our financial advisory business, Garnet Group LLC. Currently, Garnet has eight staff members, more than 90 clients, more than $300 million in client net worth under advisement, and offices in Bethesda, Md., and Boston. Veena Kutler, CFA, and Annette Simon, CFP, are the managing principals in the Garnet office in Bethesda.

The last year has been a seminal one in the financial services industry. All boats, large and small, have lost anchor, drifted and/or crashed in the tsunami. Giants like Citi and AIG make the headlines every day. But the smallest players, the independent financial advisors who don't make the news, have suffered also. We at the Garnet DC office have been relatively lucky. While we have had more meetings and phone calls than ever and our clients have been concerned and anxious most have stayed relatively calm. Our conservative portfolios and retainer fee structure have provided some cushioning of our revenues through this terrible downturn. Anecdotally, we have heard from peers who are unable to sleep at night, and struggling to keep their businesses going. We consider ourselves fortunate that we are able to continue to forge ahead.

For a wider perspective on the industry we turned to Bob Veres, an industry icon who has had his finger on its pulse for more than 20 years. Bob sometimes refers to himself in his typical humorous and self-deprecating way as the gadfly of the financial planning industry. While that may be true, his role extends well beyond that. Though not a planner himself, Bob has been involved in the planning industry in multiple roles and at every level.

Bob's impressive resume is so well known that it may not need to be recounted; but we will do so anyway. He has been editor of Financial Planning magazine, a contributing editor to The Journal of Financial Planning, a columnist and editor-at-large of Dow Jones Investment Advisor magazine, and the first editor of MorningstarAdvisor.com. Bob has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and by Financial Planning magazine, was granted the lifetime achievement award for service to the profession by the National Association of Personal Financial Advisors, and received the Heart of Financial Planning Distinguished Service Award from the FPA.

Here's our interview:

Garnet: Bob, we think you have a unique perspective on our industry. What do you think your role is and why is it singular?

Veres: Back when I was editor of Financial Planning magazine I felt the planning profession and professionals in it were all very smart collectively, but everyone was sitting in their offices thinking they were the only one. That's a lonely place to be.

Garnet: We can't recall a time like this in our professional experience, where so much has happened so fast. Would you agree or do you think its part of the normal market cycle?

Veres: In a way as bad as it is, this is part of the normal market cycle. This period is an extreme and condensed example of events we go through about every 10 years. I'm thinking back to the limited partnership meltdown--lots of advisors got out and the profession evolved dramatically from there. The next shake-out was the end of tech bubble, that was another distinct period. The down periods are generally characterized by a lot of trauma, a fairly dramatic shake-out in the business, with people shaken out of complacency, and the need to adapt and evolve. A lot of pent-up changes that have been building in the profession will now happen at lightning speed.

What's new about this market is that lots of advisors are feeling frightened, inadequate, and they are carrying around the pain of client losses. Everyone felt like they were the only one who had these feelings. I've been focusing on this in my writing. Collecting everyone's thoughts relieves guilt as planners see that they are not alone. From a rational standpoint, nobody saw this coming. You may have in the past relied on your gut telling you when to sell and when it was time to buy, but it didn't work so well this time. When the stories are shared, advisors are relieved to hear that they are not the only one who didn't get out, and who didn't have the answers. Relatively sophisticated people, including the Treasury secretary and the Federal Reserve chairman, didn't see it coming and they had more data than we did.

I am seeing now several people responding to the stimuli of the markets going down with a different perspective. They ask themselves this: Is there a different, better way to respond? It would have been great to get out before markets turned down, but they are remarkably cheap right now. So the question now is can you talk clients into getting back in when it's this cheap? The time to have the debate about getting out is not after the markets have tumbled; it's optimally at the top of a bull market. Of course, advisors can't have the "time to sell" conversation now--since it just locks in losses. Planners need to understand that everyone can't become contrarian--it's logically fallacious. Success will ultimately depend on how well do you deal with facts on the ground--now that your clients are panicking, and their goals have been delayed. PAGEBREAK

Garnet: Bob, you mentioned the changes that a crisis of this proportion always creates in the planning profession. What changes do you see coming up?

Veres: There are four changes that I think will come to the forefront:

* Practices are going to have to be a lot more efficient. Efficiency wasn't really an enormous priority when revenues were rising 10-plus percent a year. Now, firms that are not generating at least 25% return on invested capital for owners probably won't survive. Many individual practitioners don't have enough operational elasticity. So we'll see crippled entities holding each other up with the mergers of small firms. There will be a greater focus on succession planning, as eventually selling the business becomes more of a financial and retirement goal for planners. More attention will be paid to the blocking and tackling of running a business. A lot of advisors who are just not natural entrepreneurs, but are good planners, will partner with people who are good at running a business.

* There has been a lot of debate about changing the way we invest and that will continue. Buy-and-hold had become the very simple solution until now. Market experts like Woody Brock have looked at many models and feel there is no easy answer and that investors should accept that markets have shown that they are never static.

I would argue that interest rate drops over 20 years from highs over 14% to the current 2% have had a significant and non-repeatable impact. Over that period, debt levels--consumer and business--rose dramatically as borrowing became so much cheaper. The increase in debt that had been a tailwind is now a headwind. modern portfolio theory statistics don't highlight tailwinds that become headwinds. Advisors need to pay more attention to basic financial information.

The idea of valuation has to be incorporated into investment models. MPT doesn't mention price other than to assume market efficiency and fair value asset pricing. The assumption that everything is fairly priced is foolish. What is happening is that mass psychology is driving prices up and down. Some assets are overvalued, others undervalued. How do we account for this? Simplistically, we know that the market does better going forward when PE is low. But what is low? What is high and especially too high? Advisors will need to incorporate the idea of valuations into weightings in their client portfolios.

The need to diversify will continue to predominate! As always, we will need the smoothing effect of diversification. However, we cannot ignore exogenous factors--interest rates, the bubble in treasuries, China's concerns over our economy and our deficits--anymore. We will need to identify anomalies to pay attention to; some are easy to spot and others not so easy. Buy-and-hold-only will not sell.

* Advisors will spend more and more time with clients, and life planning will become more of a mainstream planning offering. More energy will be expended helping clients navigate their personal lives. How will planners spend more time planning and devote increasing time to investments and still have a profitable well run practice? The solution is that planning firms will eventually bifurcate. Most advisors are confident that they are adding value to clients on the planning side. On the investment side they are not sure that they are adding that much value. Firms will realize that the best use of their time and resources is to spend time planning and focusing on their clients. Increasingly planners will delegate the investment side to professionals who focus exclusively on investments. This will allow the advisor to tell their client that if investment performance is poor, we have to fire the money manager and find someone else. This is a much easier message to deliver to clients.

* To me the biggest change in the advisory profession is the importance of the group mind. The collective mind tells us the trends and where the future is. We as planners need to act on what we learn there. Knowledge and information are not valuable without the willingness to adapt and change and to get better. Imagine where you were 15 years ago. How many people would go back to where they were 15 years ago? In spite of the problems, everyone is generally better off now and yet we instinctively fight change. That's a dysfunction that we will lose the luxury of during times like these.
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Garnet: Bob, will the changes that you envision have any impact on the way advisors charge their fees?

Veres: Yes, outsourcing the investment side will push planners toward retainer fees. I've always felt that an AUM fee looks too much like brokerage commission. Being paid based in any way on investments is still tying the planner to the old sales model. I would like to see this lifeline broken completely. To me, a retainer fee says advice in broad areas with investments one small part of it. We all have seen that over time savings rates and habits are much more important than return on investments. A retainer fee encourages the planner to focus on all client issues in a much more fiduciary fashion.

Garnet: Lastly, Bob have you been following the exchanges between Jon Stewart and Jim Cramer? What do you make of that and the role of the financial media?

Veres: CNBC--especially as personified by Jim Cramer, is the perfect definition of a huckster. The fact is that the media reinforces rather than dissuades herd mentality and keeps it moving in the direction it's already moving. Media experts watch investors go over the cliff, and then tell everyone to bail out, which makes the cliff longer and deeper. The role of the objective informer has really been taken over by the financial planning community. Unfortunately, we don't have the reach, and gallons of ink to get the message out. We were the only ones with perspective when the market was booming, advocating caution then, and stickiness now.

Stewart is speaking the language of the fiduciary financial planner. He is pointing out to the media that this is not entertainment, its people's lives. What Jon Stewart is getting at, and what planners get at instinctively is that money runs much deeper than the numbers, the entertainment value and the news. It is tied up with our psychology, ambitions, and goals--everything that we are as people. Treating it as anything less is trivializing it in a very dangerous way. The market does what it does and the financial media has just become an echo chamber.

We could have chatted with Bob all day listening to his pearls of wisdom. What a treasure he is to our profession!

Veena A. Kutler, MBA, CFA, and Annette F. Simon, MBA, CFP, are founders and principals of Garnet Group, LLC -- www.garnetgroup.com, a fee-only wealth management firm with offices in Bethesda, MD and Boston MA. Both are NAPFA Registered Financial Advisors with more than 30 years of financial planning and portfolio management experience between them. Garnet serves the needs of high net worth individuals and families in the Boston and Washington, D.C. areas

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