Tag Archive for: CFA

Poll: Which high-impact prospecting technique works best for you?

/2 Comments/in , , , , /by

Some marketing techniques work better than others for financial advisors.

The five most effective techniques for freelancers (who share key characteristics with financial advisors) include the following, as described in The Wealthy Freelancer:

 

  1. Tapping your network
  2. Getting more out of existing clients
  3. Investing in smart local networking
  4. Leveraging social media as a networking tool
  5. Employing direct mail

My network has always worked best for me, but the other four techniques help, too.

My referrals come mostly from current and past clients, many of whom subscribe to my monthly e-newsletter, another big contributor to my marketing successes. Although my clients typically work for large companies that aren’t big on social media, they seem impressed by my social media visibility. Social media has expanded my network to include some great professional colleagues, referral sources, and an occasional client.

Smart local networking inspired me to launch my business. Many Bostonians have been generous with their time, advice, and connections. The Boston Security Analysts Society became one of my first clients and its timely presentations have provided the topics for many of my blog posts.

Direct mail has been the least effective technique for me. But I probably haven’t given the U.S. mail a fair chance because I’ve been so lucky with referrals from my network.

Thank you, all of my colleagues and referral sources, who have encouraged me! Every little bit helps.

What works best for you? Please answer the poll in the right-hand column of this blog. Feel free to leave a comment, too. I’ll report on the results in my January 2011 e-newsletter.

Brokers, CFA charterholders, and fiduciary duty: Charterholders are not always fiduciaries

/in , , , /by

CFA charterholders have strong feelings about fiduciary duty. This showed up in responses to my blog post on ” ‘CFA credential implies a standard of care not always upheld,’ says Forbes opinion piece,” which discussed brokers and fiduciary duty. So I’m happy to see that the CFA Institute has addressed this topic in “What’s a Broker to Do? Fiduciary duty and obligations under the CFA Code and Standards (registration required)” by Jonathan Stokes, head of Standards of Practice at the CFA Institute.

CFA charterholders who are brokers aren’t always fiduciaries

Stokes sums up the obligations of CFA charterholders who work as brokers as follows:

Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. (Bold added by Susan Weiner.)

Obligations vary by broker type

Charterholders challenges and obligations vary by broker type, according to Stokes’ article.

Execution-only brokers are not subject to fiduciary duty, but conflicts of interest should be disclosed. “Among the conflicts brokers should disclose are whether they offer different levels of services to all clients and whether they pay referral fees to outside organizations,” writes Stokes.

Retail brokers‘ clients should understand they’re in a relationship with conflicts of interest. I wonder how many grasp this. Clients often don’t absorb the significance of what’s written in a hastily skimmed client agreement.

Stokes says

For those who work in a sales capacity rather than a true advisory role, the client relationship is often based on the understanding that the range of investment advice is limited to that firm’s proprietary products or to other firms with distribution agreements with the brokerage firm…. Where the client agreement clearly states the nature of these conflicts, the client is deemed to understand that he will receive selective and potentially conflicted investment advice.

Institutional brokers “pose a particularly challenging area for application of the Code and Standards,” says Stokes. He notes that “disclosure of all relevant transaction details, including costs and commissions, is essential.” Moreover, “With multiple clients’ interests and objectives at stake, the institutional broker must remain impartial and reconcile (to the best of his or her ability) any conflicting client directions.”

Notable quotes from the CFA Institute’s emerging markets conference

/1 Comment/in /by

So many great emerging markets presentations, so little time to blog about them.

Below you’ll find quotes or paraphrases of opinions voiced by speakers at the CFA Institute’s  “Investing in Emerging Markets” conference held in Boston on October 19. If these snippets pique your interest, watch the CFA Institute website for podcasts or other records of selected presentations. Also see my recent blog posts, “Bubble?–Emerging markets scrutinized by CFA Institute conference,” “ISI’s Straszheim: China’s interest rate hike is ‘tapping the brakes’,” and “Cautious optimism on emerging market stocks from SSgA’s Hoguet.”

Paulo Vieira da Cunha, Tandem Global partners

  • There is no decoupling. Two-thirds of global consumption and trade is in the advanced economies.
  • There are lots of interesting plays in Brazil today, if you are careful.
  • It’s very clear the Brazilian economy is overheated.
  • China was a big factor in Brazil’s post-2008 recovery.

Kristen Forbes, MIT Sloan School of Management

  • There are few options for emerging market countries to control the impact of capital inflows.
  • Experts disagree about whether emerging market countries should impose temporary taxes on capital inflows.
  • Academic literature says capital controls have little impact, especially long-term. At best, they can shift inflows to safer composition.

Sivaprakasam Sivakumar, Argonaut Global Capital

  • The best opportunities in India are investing in first-generation entrepreneurs. Look for the next Infosys.

Tina Vandersteel, Grantham, May, Van Otterloo & Company

  • When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
  • “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
  • Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

Cliff Quisenberry, Caravan Capital Management

  • There is a significant different between frontier countries in the index and the other frontier countries.
  • Country selection is more important in frontier markets than in emerging markets.

AlisonAdams, Alison Adams Research

  • Emerging markets’ share of global market capitalization could overtake developed markets’ share by 2030, according to Goldman Sachs.
  • Most emerging market governments are reasonably market-friendly.
  • Extreme events can present buying opportunities, as with the Mumbai attacks in India in 2008.

Bubble? — Emerging markets scrutinized by CFA Institute conference

/2 Comments/in /by

Is now a good time to invest in emerging markets?

The answer depended on which speakers or attendees I listened to at the CFA Institute’s “Investing in Emerging Markets” conference held in Boston on October 19.

The overall mood was cautiously optimistic for the long-term. “We’re not in a bubble yet,” said George Hoguet of State Street Global Advisors, who also mentioned some concerns about emerging markets.

At least one speaker said some emerging markets are already in a bubble and several attendees told me they’re waiting for a pullback before they put money into emerging markets.

It’s not only emerging market stocks that worry investment professionals. While some investors are eager to pick up an extra six percent (600 basis points) or so by investing in emerging market debt, Grantham, Mayo, Van Otterloo & Company’s Tina Vandersteel suggested that emerging market bonds may not be as safe as you think. This is especially true of external debt, which has a 32% probability of default vs. only 2% for local debt, although spreads of about 3% (300 basis points) provide a cushion for defaults, she said.

What about you? Are you ready to invest in emerging markets today?

Cautious optimism on emerging market stocks from SSgA’s Hoguet

/2 Comments/in /by

Emerging markets have been hot enough that the CFA Institute organized a one-day conference on the topic, held in Boston on October 19.

Here’s how George Hoguet, global investment strategist specializing in emerging markets at State Street Global Advisors, summed up his outlook when he spoke about “Decoupling or Contagion: How Will Fiscal Consolidation in Developed Markets Impact Emerging Markets?”:

The Great Recession has enhanced the secular case for investing in emerging markets, but the reduction in potential GDP growth in many developed markets will negatively impact emerging markets.

One of Hoguet’s comments resonated with me more than the others: “Japan as Number 1 is a reminder of the difficulty of long-term forecasting.” As a former teaching assistant for author Ezra Vogel, I remember the uproar about Japan’s predicted domination of the global economy. The Land of the Rising Sun had seemed unstoppable, which worked to my benefit when I led training seminars on “How to Do Business with the Japanese.” My, how times have changed.

Another warning from Hoguet: Economic growth does not necessarily lead to superior investment returns, as Korea shows. Still, he suggested that investors focus on large economies with sustainable domestic demand. He also recommended that investors overcome their home-market bias to market-weight emerging markets and be open-minded about newer types of investments, such as farm land and long-short funds.

One of the many pluses mentioned by Hoguet was that debt/GDP ratios are lower for emerging markets than for developed countries. In addition, current emerging markets are not “demanding” at about 13-times-earnings for the next 12 months,

“We’re not in a bubble yet,” concluded Hoguet.

ISI’s Straszheim: China’s interest rate hike is “tapping the brakes”

/1 Comment/in /by

“China raised interest rates and everybody is all upset about that,” said Donald Straszheim at the start of his Oct. 19 presentation on “China’s Growth Prospects and Risks” to the CFA Institute’s “Investing in Emerging Markets Conference.” Earlier on Oct. 19, China raised borrowing and deposit rates by 0.25% (25 basis points).

Perspective on Oct. 19 Chinese rate hikes

But Straszheim, the head of China research for ISI Group didn’t seem upset by China’s rate hikes. Instead, he presented it as a reasonable way to “tap on the brakes” to slow China’s economic growth. Looking at the history leading up to the rate hikes, Straszheim said that China implemented a big stimulus following the 2008-2009 economic meltdown. This led to China overheating later in 2009 and into 2010. Although attempts to slow the economy to engineer an economic “soft landing” were  having an effect, inflation was at 3.5% and rising too quickly. Food, which makes up more than 30% of China’s consumer price index, could potentially boost the country’s inflation to 5% as a result of weather issues, said Straszheim. Also, the economy is still strong and the housing market is booming. Hence, the rate hikes.

“I don’t think this is the beginning of the end,” said Straszheim. “I don’t think this is the beginning of another major tightening cycle,” although more rate hikes may follow.

China is heading for a “soft landing” and is likely to experience 3%-4% inflation and 8% growth in 2011, added Straszheim.

Slower growth is coming

China’s fastest economic growth is behind it, said Straszheim, for the following reasons:

  1. Demographics. China’s “one child” policy will hurt it. The average growth of China’s labor force had been 12 million per decade. Growth will fall to four million for this decade and then shrink by two million in the next decade, said Straszheim.
  2. Technology. The technology gap between China and the rest of the world has narrowed dramatically.It can still make gains, but they won’t be as big.
  3. China’s key export markets. The U.S., Europe, and Japan will grow more slowly than in previous decades.
  4. Scale effects. The economy has grown a lot. It’s harder to grow quickly off a big base.

Straszheim’s predictions for China’s economic growth are

  • 2010-2014: 8%
  • 2015-2019: 7%
  • 2020-2024: 6%
  • 2025-2029: 5%

Chinese challenges: Housing shortage, bank loan problem, yuan vs. dollar

China faces some challenges:

  • China needs almost twice as many housing units as are being built.
  • Its banks hold many nonperforming loans.
  • There is tension between China and the U.S. over exchange rates. What goes unnoticed in the U.S. is that the Chinese currency has fallen vs. most key currencies other than the dollar. The main risks to his forecast are in the areas of trade and currency, he said.

Despite the challenges, Straszheim expects China will grow faster than much of the rest of the world for a long time to come.

Lessons from “Presentation Skills for Investment Professionals”

/2 Comments/in , , , , , /by

You can never learn too much about how to give an effective presentation, especially about weighty topics such as investment management. That’s why I logged into “Presentation Skills for Investment Professionals,” a recent presentation to the CFA Institute by Dave Underhill of Underhill Training & Development.

Some of Dave’s advice resonated with advice I give my writing students. For example, don’t get deep into details before you tell your audience the value of what you’re discussing.

Boil down the tsunami

“Take a tsunami of data and boil it down to most important point,” said Dave. It’s a mixed metaphor, but I love his point. Look at the data and pretend you’re an audience member asking “So what? Why should I care about this?”

This is a topic I’ve addressed in “Focus on benefits, not features, in your marketing.” As I say in my writing workshops, your audience is looking for the WIIFM, which is short for “What’s In It For Me.”

Leave time for questions

Don’t make your presentations too long. Allow time for questions, suggested Dave.

Figure that one PowerPoint slide will 60-90 seconds to discuss. For goodness sakes, don’t READ your slides, as I did when I first started speaking in public.

Show, don’t just tell

Among the techniques that Dave uses to improve the power of his presentations are:

  1. Telling a story
  2. Using numbers, not just words — I suggest you use a graph, rather than a simple table, if your data lends itself to a more visually appealing display
  3. Using gestures to demonstrate your ideas

Go the extra mile

I was very touched that Dave took the time to email an answer to the question I’d sent in. It was a question without broad audience appeal, but he answered anyhow. That’s a classy thing to do.

To learn more of Dave’s tips, register to watch the replay of “Presentations Skills for Investment Professionals.”

Should the Morningstar style box go 3-D? Quality counts, says Atlanta Capital

/2 Comments/in , /by

Investment professionals and financial advisors are familiar with the Morningstar style box, which categorizes stock funds by market capitalization and style. A recent CFA Magazine article made me wonder if Morningstar should turn the style box into a style cube by adding a third dimension: quality.

Stock quality may overwhelm size and style

Quality counts for just as much as size and style.

That’s according to Brian Smith, director of institutional services and principal at Atlanta Capital Management, in “3-D Investing” in the Sept.-Oct. issue of CFA Magazine. The CFA Magazine article is based on a longer white paper, “The Third Dimension: An Investor’s Guide to Understanding the Impact of ‘Quality’ on Portfolio Performance.” To access the original white paper, click on “Publications” across the top of the Atlanta Capital website.

“…our research indicates that ignoring quality and investing solely by capitalization and style dimensions is unwise. In fact, the performance of high- and low-quality stocks can have a significant influence on an investor’s risk and return characteristics, in many cases overwhelming the influence of either size or style,” writes Smith in his CFA Magazine article.

I wondered if there might be something other than quality at work.  Could one style be more associated with quality than another?

Smith notes in the white paper that certain value and growth styles are sometimes associated with high- or low-quality stocks. “Conservative growth” and “relative value” tend toward high-quality vs. low-quality for “absolute value” and “aggressive growth,” he says. Smith refers to this as a “hidden quality bias.”

Smith compared returns by quality, size, and style using Russell indexes and custom benchmarks based on the Standard and Poor’s Earnings and Dividend rankings. Looking at 2009 returns, he found that “Clearly, each size, style, and quality index responded differently to the same economic stimuli….”

In other words, the correlations among the quality, size, and style indexes were weak.

The “quality cycle” in the stock market

Smith suggests that a “quality cycle” exists because fluctuations in the performance of high- and low-quality stocks are associated with the economic and stock market cycle. Low-quality stocks briefly outperform high-quality stocks at both ends of a market cycle. This is probably because they’re more sensitive to the economy, the availability of credit, and investor speculation. High-quality stocks win the rest of the time.

Smith concludes,”If history is a guide, high-quality stock should post stronger relative returns in 2010 and 2011….”

Do you agree? You’ll probably want to read more of the CFA Magazine article or Atlanta Capital white paper before you decide.

“CFA credential implies a standard of care not always upheld,” says Forbes opinion piece

/11 Comments/in , , /by

Edward Siedle questions the integrity of some CFA charterholders in “Investors Misled By Brokers Masquerading As Fiduciaries: CFA credential implies a standard of care not always upheld,“ an August 9 “Expert View” on Forbes.com. Siedle is a former SEC attorney and the president of Benchmark Financial Services.

While I think Siedle overstates his case, he raises an interesting point.

Suitability standard vs. fiduciary duty

His basic argument: If CFA charterholders work for broker-dealers, they’re bound to a standard of suitability, rather than fiduciary duty. This is a conflict I hadn’t thought about before reading his article.

Apparently many brokerage firms handle the potential conflict by forbidding use of the CFA credential by those who use the suitability standard.

Siedle quotes Robert Dannhauser, the CFA Institute’s director of advocacy outreach. Dannhauser says, “…in many such instances, the firms do not allow CFA charterholders to display the CFA designation after their name on business cards or other publicly available material, so that clients do not perceive any different standard than what the firm has adopted for all of its employees. This hopefully offers clients a clearer view of what they’re getting. The key is for practitioners to not represent themselves as one thing but offer a different level of service than might otherwise be expected given that representation.”

Siedle counters by saying, “However, in my experience, many brokers do use their CFA status in marketing themselves to investors–especially to institutional and high-net-worth investors who are most likely to be familiar with the designation.” Moreover, “Unfortunately, it’s only after the retail broker dressed up like a fiduciary screws up that the investor might discover that he and his employer do not accept a fiduciary standard of duty.” I don’t know the details of the case that Siedle uses as an example.

Siedle seems to imply that every charterholder who works for a company such as Bank of America works for a broker-dealer. This is an exaggeration. The companies he names are not pure broker-dealers. Many of the charterholders at these firms may work for registered investment advisors that explicitly require them to act as fiduciaries.

Challenge for the CFA Institute’s ethics curriculum

Still, I’d be curious to know if the conflict between fiduciary duty and the suitability standard comes up in the CFA Institute’s ethics curriculum. If not, it sounds like a good topic for the future. As a CFA charterholder myself, I feel confident that the CFA Institute will tackle this issue.

“Where Are We Heading? The Future of Investment Management in Boston”

/1 Comment/in , /by

The future of investment management in Boston was the focus of a panel presentation to the Boston Security Analysts Society’s annual meeting on June 24.

The view that Boston is being left behind made the greatest impact on me, but I’ll report some of the opinions of the four speakers, all of whom are industry veterans.

Reamer: Emphasis on actively managed equities hurts Boston

The investment world is shifting toward aggressive hedge funds and passive quantitative funds, said Norton Reamer, vice-chairman and founder, Asset Management Finance LLC. There’s also currently an emphasis on fixed income. This is because the public has been discouraged by the stock market returns of the past two years. They want defensive, safe investments. On a related note, large pension funds are moving more toward indexing.

These trends don’t favor Boston, the home of the original mutual fund, because local firms emphasize actively managed mutual funds. At least these trends don’t bode well in the immediate future.

For Boston to prosper, it must attract assets from around the world, said Reamer. However, he sees the action shifting to New York, London, and even Philadelphia and California. Boston has only one of the 10 largest hedge funds and three of the 30 largest. While Boston has a history of venture capital, venture capital is less important than private equity, which is concentrated elsewhere, said Reamer.

One of Reamer’s comments held a glimmer of hope. Universities–along with arbitrage groups, traders, and others–are the source of the new ideas that are changing the investment world. Boston has some great universities. Perhaps the universities can fuel the region’s resurgence as an investment center. I’m happy to note that the Boston Security Analysts Society’s program committee has a subcommittee devoting to inviting speakers from academia.

Putnam: Four trends will create many losers, few winners

Investment management is a craft, said Don Putnam, managing partner of Grail Partners, who moderated the panel. He emphasized the need to avoid losing sight of the craft before he described the four trends that he believes are changing the industry.

As a result of these trends, there will be many losers and few winners, said Putnam. The winners will be global firms as well as small cadres of capable people. The big challenge for money management will be to connect these two groups.

Trend 1: The long, complicated supply chain is reordering. For example, people are seeing the problems with “the slices taken off for people who deliver golf balls.” I assume Putnam was referring to wholesalers and the broader issue of 12b-1 fees and the like, though he said that he was not making a case for fee-only advisors. Changes are coming as a result of regulatory pressures, client demands, and “better mousetraps,” such as ETFs and active ETFs. Putnam said he’s sceptical about growth opportunities for the mutual fund industry.

Trend 2: The relevance of specialization is declining. Why? Because the efficient frontier–and the need to diversify into many slices of the market–has been challenged. “It has been proven to be nonsense for the client,” said Putnam. Clients’ “true utility equation” can be delivered more efficiently with quantitative solutions, he added.

Trend 3: The arithmetic of the investment business is changing with the rising importance of asset allocation. As the utility of money management has declined, fees have risen, said Putnam. This can’t last. While clients have bought the “myth of comfort and control,” the past three years have increased client dissatisfaction.

Trend 4: Technology is increasing in importance. Technology should be woven into every aspect of money management, said Putnam. Technology’s influence on money management has barely begun.

Manning: Structure your firm to have an edge over your competition

You must deliver great results to keep assets, said Robert J. Manning, who spoke as CEO of MFS Investment Management, but is scheduled to become the firm’s chairman on July 1. This means you must structure your firm to have an edge over your competition. Manning discussed three key elements of MFS’ structure.

1. Follow a long-term investment philosophy. The world is preoccupied with short-term investment returns. However, MFS believes that you need a culture of long-term investing backed by an appropriate compensation structure. When MFS conducts performance reviews, it only considers periods of three years or longer.

2. Create a global footprint. If your people are only in Boston, you can’t be a winner, said Manning. For example, if you don’t have staff in Europe, you can’t respond quickly enough when credit default swaps widen in Europe. As part of the global footprint discussion, Manning emphasized the need to integrate the firm’s fixed income and equity teams.

3. Analysts are more important than portfolio managers. The old model is broken, said Manning. The most important employees are career analysts who have expertise in specific sectors. MFS has eight global sector heads. These are the people who, if they “see a storm coming” get the entire firm out before it hits.

The increased importance of analysts has been driven partly by the fact that clients want to buy “specialized sleeves of alpha.” This is reflected in analysts’ compensation. At MFS, analysts earn more than portfolio managers.

We sell the global research platform, not the portfolio manager, said Manning. The portfolio manager simply assembles the alpha streams from the analysts the way that clients want.

Hughes: Confident in Boston’s future

Larry Hughes, CEO of BNY Mellon Wealth Management, said that Boston’s talent and innovation makes his firm feel confident about Boston’s future.

Still, the next decade will pose challenges for wealth managers in terms of how to protect clients against continued market volatility and how to capture the related opportunities. Hughes suggested three areas for focus.

1. Investment innovation–The “set it and forget it” ways of the past won’t work any more, said Hughes. It’s important to capture trends that develop–and disappear–in months, or perhaps even just weeks.

2. Seamless and dynamic planning–Wealth managers must “plan across silos,” considering all aspects of clients’ lives, including taxes, estate planning, health care, and more.

3. Better manager-client engagement–It’s important to speak in your clients’ terms. Clients don’t talk about the efficient frontier, standard deviation, or r-squared, said Hughes. So neither should wealth managers. Instead, wealth managers should present issues in straightforward terms, such as “helping you maintain your lifestyle.”