Live from Las Vegas: IMCA Annual Conference

News Editor Steven Lamb is reporting live from IMCA’s 2011 Conference in Las Vegas, Nevada, Monday, May 16 to Tuesday May 17th. IMCA’s mission is to give advanced investment and wealth management professionals the knowledge to advance their careers and practices. This year’s conference theme is “Beyond the Basics”.

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That’s it for my coverage of IMCA’s 2011 Annual Conference. I’d like to thank IMCA for hosting a fantastic event and the conference staff for ensuring everything went so smoothly.

Be sure to check out the June Special Report for more on these sessions.

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Nancy Petrucelli on Growth by Design: Building Your Ideal Practice.

4:23: Untargeted marketing will bring in too many of the wrong kinds of clients. Targeted marketing consists of introductions from clients. Your best clients’ friends and colleagues are usually the types that you want to attract.

4:20: There are 4 reasons why this is the best time to acquire affluent clients since 1982:

• Boomers are inheriting wealth
• business owners are selling
• executive stock options and restricted stock
• retirees are rolling over their savings into pay-out

4:15: Symptoms of “financial cancer”:

• portfolio risk: many are taking on too much
• performance: many investors are lagging commensurate with their risk
• price: if they have multiple advisors, they are likely paying duplicate fees
• personal service: are they getting the attention they deserve?

4:09: One excellent question to ask both clients and prospects: “Do you understand what your own and why you own it?” They don’t need to know every detail, but they need to understand the overall strategy. With the prospects, you’re looking for that deer-in-the-headlights look.

4:05: Once you establish this ideal client base, you need to bullet-proof your clients: Take them through a comprehensive wealth plan, including their lending needs, their catastrophic event plans, their tax and estate planning. Leave no hole in the amour, or it will be exploited by the competition.

3:56: Planning remains a desired goal: 56% say they do not have a financial plan. Put it in writing, 2-3 pages, so they can see that they have a plan.

3:55: Wealth replacement is the primary concern of the affluent after 2008. 46% say they are not prepared to leave their heirs or legacy as much money as they had originally planned.

3:47: There is so much that you can’t control (returns) so focus on what you can control: doing more business with existing affluent clients, and acquiring more affluent clients. You can’t just stick in retention mode, or else you’re shrinking.

3:43: A lot of these clients might not even feel there is a relationship. They might just be with you because they’re with you.

3:40: The Fill or Kill Project: Show your lower clients that your firm is increasing fees on small accounts. The firm might have solutions to transition low-end clients. You might know an up-and-coming advisor who would welcome the new client.

Ask the low-end: Besides what your have here, what else do you have going on to get you to your goals. They might have huge sums in employee stock plans that you don’t even know about. The key is that you don’t make any assumptions. Make one of these 5-10 minute calls per day.

3:37: Review “personality challenged” clients, because life is too short to work with these people.

3:36: Now look at the amount that your client #151 brings in. How many of these do you need to meet your goals? A lot.

3:33: Your value statement has to include the emotional value you provide to your clients. “Providing clients with peace of mind” etc. Be sure that your top clients can articulate this to their friends. This training has to be subtle, though. “Our goal is to not just have a great relationship, but to …”

3:32: If you determine the gap between your 2011 production goal and your 2010 production, your can divide that by how much your ideal client brought in, giving you the number of new ideal clients needed to make your goal. Most advisors are surprised to see they only really need 5-7 of these new clients.

3:30: Your ideal client is affluent, gives you a lot of business, and respects, values and cares about you as much as you respect, value and care about them. These are the clients that “get it.” Once you define this ideal client, you know who your target clients are. 3:27: The top end clients move in the circles that you want to attract as clients.

3:25: “Wow service” is both proactive and reactive; both expressed and unexpressed. Clients don’t see you dropping everything to take their call as “service”, let alone “wow service”. Unexpressed service is providing solutions before they know they have a problem. You can’t do this for everyone.

3:21: What do you do with your other 160 days? Social prospecting with your core clients. Elevate your service level to a “truly wow” experience for the Top 50.

3:20: This all takes 4-5 outgoing calls per day; 150 annual reviews=70 days, leaving 180 days in the year. Take 20 days vacation, you deserve it. You’ve got 160 days to build your business. Service is key to retention, penetration and advocacy.

3:18: Top clients tell surveys they are not getting enough service. The A+ clients want 12/4/1 contacts. That monthly meeting is not meant to discuss investments. They want to discuss their lives…show you care. The quarterly meeting is a portfolio review, and the annual meeting looks at the entire plan. The “next 100” clients get 4/1 meetings.

3:15: Apply the concept of billable hours to your practice. If there are 2000 working hours in the year, divide your gross revenues by 2000 to determine what your billable hour gross is. Once you realize that your business earns $500/hr, you can determine which clients are worth spending time with. When you try to please everyone, you’ll end up making the top end unhappy — too little contact.

3:12: Quantum leaps are made by shrinking your number of households. You can do exponentially more business with fewer clients. Its expensive trying to keep everyone happy, so fewer is better.

3:11: The target number of households is only 150 per advisor, which allows you to give great service while building your business. Of these, 50 at A+ clients.

3:10: A fee-based business frees you from the “daily nut” grind of producing revenue over the 250 business days of the year.

3:09: The industry and the media have not done a good job in educating the public on the shift from transactional brokers to wisdom-providing wealth managers.

3:07: The industry has changed dramatically: pre 1988 it was transaction-oriented. Between 1988 and 1992, it turned into an asset gathering business. From 1992 to 1999, financial planning took over. Since 2000, it has become a wealth management industry–where you are all things to your target market.

3:04: You and your team need to be able to articulate who you are, what you do, who it’s for, and how it’s scalable.

3:03: Client acquisition needs to focus on bringing in ideal clients, not just random growth.

3:03: Practice management is often the weakness of asset managers. Client segmentation and time management assure you are delivering a high-touch service.

3:01: Somehow we’ve decoupled enjoyment and success. Money can’t buy happiness, but it allows you to suffer your misery in some spectacular places.

3:00: The ideal practice is different from advisor to advisor. If you had only “ideal clients” and were able to focus on the things that you love the most, that is the ideal practice. Key to this is delegating the things you don’t like doing.

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Michael Underhill (Capital Innovations) on Global Infrastructure.

On China, the central government has spent so much, especially on transportation. Project finance is stunning, and the respect for human life is nil. They have no common law. If they want to build a freeway, eminent domain takes on a whole new dimension. They are building out gas generation, which is driving up gas prices and the need for gas infrastructure.

P3s are not going to fly in the U.S. for the next 5 years or so, because of the political blowback. Private-to-private is where investment banks are focusing.

A: In the U.S., it’s beyond broken. Several states are tragic in their deficit/infrastructure problems. It will take private investment, regulatory/policy changes…it’s a marathon. We’re into another election cycle already, which muddies the waters. Like politics, all infrastructures are local. Energy is the next logical area to invest, as the U.S. is the only country without a real energy policy.

Q: What do government deficits do to these endeavours? Also, what needs to change in China to open its sector to investors.

A: 5% will move the needle. 52% of the time the assets are pulled out of a real asset, as well as from bond allocations.

Q: What do you take assets out of to invest in infrastructure and how much do you put in?

2:24: Investors want liquidity, along with their cashflow. Be sure you aren’t locking them up into a long-term commitment

2:22: A lot of money has been raised in energy MLPs, but you should really do your due diligence on these, as they may have hidden tax implications. Hire a separate manager to invest in MLPs for you.

2:21: Everyone is hot for emerging markets again, but portfolios need some boring assets to balance this out.

2:17: Despite being seen as the bastion of capitalism, the U.S. actually lags Europe, Asia and Australia in implementation of infrastructure investing.

2:16: Infrastructure provides smoother returns than REITs, the most popular real asset securities. The correlation between infrastructure, REITs and TIPs–all inflation hedges–is attractively low.

2:14: Global warming will halve the number of days that much of Africa can produce food to a 61 day growing season, so irrigation demand is growing. 2:12: Globally, we’re starting to see more publicly traded securities in transportation and telecoms.

2:11: MLPs and listed public securities are increasingly being used not only by small investors, but by large institutional investors, even though they can access direct investments and private equity funds.

2:10: Publicly traded securities include ETF, ETNs, MLPs, and provide governance, T+3 settlement, liquidity, and access to global opportunities.

2:06: Pooled funds are more diversified than direct ownership, with operations in the hands of experts, but fees are higher and you have limited control. Some pools will charge their management fee on undeployed capital.

2:05: Just because a project is interesting, it doesn’t mean that adding leverage to it will make if spectacular. Maybe a spectacular failure.

2:04: Investing in emerging markets infrastructure can be tricky, though. You need to be sure there is proper rule of law: India trumps China in this regard.

2:03: Infrastructure has low risk of capital loss and huge barriers to entry.

2:01: Regulated monopolies have the ability to pass through pricing to consumers, while most other real assets must rely on market forces to pass through inflation–car washes don’t raise prices in a recession.

1:59: Infrastructure has been embraced by corporate and government pensions, religious organizations (usually fits SRI screens) and sovereign wealth funds.

1:57: Infrastructure has been an asset class in UK and Australia for two decades, as both countries wanted to move these liabilities off their books.

1:56: Agreements tend to be longer term (7-10 years) with built in indexing, so they don’t have to negotiate every year, and cashflows rise with inflation. When a recession hits, people don’t stop using infrastructure (like showering).

1:54: Infrastructure provides stable cash flow, potential inflation hedging, and can be seen as a hybrid of both fixed income and capital gains.

1:51: There is about $4 trillion in global listed infrastructure assets, ranging from utilities and toll roads to water and hospitals.

1:50: More and more we’re looking at a risk budgeting model.

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David Garff (Accuvest Global Advisors) on Investing in Global Equity Markets: Do Countries Matter Anymore?

1:27: Just be sure you know why you are buying, say, Peru. You’d better have a better reason than “it’s hot right now.”

1:25: Dealing with contagion: How exposed is the U.S. to contagion? It caused the last crisis, but barely caught the disease. Of course, this ignores the persistent debt problem in the U.S.

1:24: Correlation between countries is bound to fall, as monetary and fiscal policies start to diverge.

1:23: The largest 10 stocks being correlated to their home markets was expected over the 5 to 10 year period, because they make up the largest parts of their indexes, but over the shorter term its surprising that they aren’t more global-sector correlated.

1:21: To implement the strategy we use would take $50 million to $100 million to be market effective, so we use ETFs to get an “absolute steal” of just 50 to 60 bps.

1:19: Your options include single country ETFs, small cap single country ETFs, regional ETFs. global sector ETFs, emerging market sector ETFs, and U.S. sector ETFs. Small cap foreign countries provide more meaningful diversification because they are more reliant on their home market.

1:16: Creating an investment model based on country: you should factor in fundamentals (country growth, as well as company growth), momentum (technicals, money flows), valuation (absolute, relative), and risk (political, currency…are you investing in a country with an overvalued currency?)

1:07: Can the investor opt for multinationals as a proxy for global investing? It turns out that the largest 10 stocks in each country are more highly correlated to their home market than they are to the global sector. Global diversification is desirable even in the face of rising correlation.

1:04: Among 38 countries, no trend arises since 1991 in terms of performance rank.

1:02: Arguments in favour of country diversification: low historical correlation; currency diversification; low economic correlation; political/tax differences and divergent fiscal and monetary policy.

1:00: Among emerging markets, there is no study to argue that anything is more important than country in determining performance. In the developed world, sector, style and country come in and out of prominence as performance drivers.

12:58: The country of domicile is relatively unimportant. Country correlations are increasing.

12:56: Academics debate whether country matters more than sector. The research finds that country effects in the long run have been more important than sectors, but recently sectors have become more important, and there is no way of knowing which will be more important in the near future.

12:54: Investors want to sleep better at night, so they convince themselves that they know more about their local market than they do about foreign markets. This is a fallacy, though.

12:53: Home country bias is just as strong in the rest of the world, if not stronger: Canada makes up just 3% of the world equity markets, yet our pension funds allocate 49% to Canadian equity.

12:50: Among endowments with more than $1 billion, there is a home bias of 10% versus benchmark, compared to those under $25 million, with a home country bias of 31%. The large fund bias is still considered significant.

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Arun Muralidhar (AlphaEngine Global Investments, who asked “Is the CAPM Dead? The Case for ‘Smart’ Investing”.

11:04: Leaving money with an underperforming manager is a tactical bet. How sure are you that he’s about to break out, and not just bad at his job?

11:00: Rather than being dogmatically a value investor OR a momentum investor, its smarter to allocate to both strategies: one will be early to the party but cash out before the asset peaks, while the other will arrive late, but see the peak.

10:58: With the rule in place, the investment manager can focus on the decision, not the data.

10:56: You have to remove emotion from your investment decisions. You have to get 4 things right: what to do (overweight?); how much to do (what percentage?); when to do it; and need to know why you’re doing it, in a simple explanation.

10:53: All of us came up with long-term portfolios (say, 60-40) with ranges that are acceptable. If the portfolio strays outside of the range, we revert to neutral. While it floats within the range, you’re taking an active bet. If stocks are down but within the range, you’re already underweight…is this what you think is right? Is rebalancing the neutral really the right move? Maybe you should rebalance to be overweight stocks.

10:48: You need to formalize analysis, risk management and governance; a systematic rules-based technique.

10:47: We spend too much time worrying about the manager of a single component (i.e. U.S. large cap value), versus the topline allocation to stocks.

10:46:The idea that market timing is bad is a stupid idea. If you no nothing, that’s a market bet. Rebalancing is a market timing bet.

10:44: Rebalancing is another massive bet made on a static basis.

10:43: CAPM taught us to put portfolios together, but it didn’t provide a “watchout” that warns us of what can make the portfolio fall apart. The target date fund is the worst portfolio ever. They have a single watchout: age. These are products that are destined to fail. You are making a bet in a static way for a dynamic future.

10:40: Correlation is a blunt statistic which masks the relationship of various factors to asset performance; these can be oil prices, interest rates, seasonality, economic growth and volatility.

10:39: The deep value manager is prone to being fired before their assets recover. Drawdown is the true risk against which we need to manage.

10:38: You cannot fund your retirement with “less losses”.

10:37: Principals and agents have an impact on the markets. The theory says that they principal has no way of monitoring the skill of the agent. The principal can handle a big drawdown, and the agent will get fired. This distorts the behavior of the agent.

10:34: CAPM assume a 10 year window, and when you get the year 10, it doesn’t matter how you got there. You can be a value investor and survive, but if you are managing for a client, your strategy cannot be static in a dynamic market, or else you’ll get fired.

10:33: Academics look at the portfolio in its entirety, not at its components. The theory assumes that you manage your own money and manage risk. If that was true, there wouldn’t be financial advisors. You can’t price assets in isolation.

10:31: “Not only is it not right, its not even wrong” applies to CAPM.

10:30: Optimal portfolios are a silly idea, you should be looking for optimal strategies. Just because you have the best running back, that doesn’t mean you only run running plays. CAPM keeps us locked into this pattern.

10:29: We are bombarded by information. The job of an advisor is to keep the portfolio on a steady track. Most were taught the capital asset pricing model, but this is fraught with errors.

10:24: We in the industry have a tendency to make things more complicated than they need to be. Are Alternatives the New Core? with Ricardo Cortez (Broadmark Asset Management)

10:06: Building a target for institutional investors, they want a 5% base return, another 3% to cover inflation, 1% real return, and operating costs of .5% to 1%. That comes out to a target of 9.5%-10%. Can you do this with a traditional stock-bond portfolio? Not with the end of the bond market rally. You’ll need alternatives, because shooting for 10% in a long-only stock portfolio is just too risky.

10:02: 2008 put the lie to the idea that hedge funds could do well in any market. If investors had known that they could lose 28% in a 50% down-market, they would have been more accepting of it, but they were largely blindsided–you need to manage expectations.

10:01: These are picking up in Europe as well. Outside of the U.S., relative performance never really caught on, because the higher volatility drives investors to prefer absolute returns.

10:00: The new model is to structure hedge funds under mutual fund structure, with daily liquidity and much lower investment minimums.

9:58: In the past ten years, the rules have changed, allowing easier fund-raising (feeder funds, fund of funds), which allowed for lower minimum investments. Money managers were allowed to take on more clients (used to be limited to 499 investors).

9:55: I don’t think this is the end of the hedge fund story, with the retail investor left holding the bag, because the managers will be closely scrutinized, with managers under SEC registration, This will appeal to institutional investors as well, after the Madoff scam demonstrated the problems with non-registered managers.

9:52: There are now 300 of these funds with over $100 billion in assets.

9:52: The downturn of 2008 convinced hedge funds managers that they needed to provide better liquidity to their investors. You now have a proliferation of alt-strategy mutual funds. Some don’t work, though. It’s hard to offer daily liquidity on a strategy designed for annual liquidity.

9:49: I’m not a fan of alt indexes–they have too much survivorship bias. You have to take all these index returns and bring them down 1-2% to get closer to reality. The volatility measures are a little off as well.

9:47: The traditional core of unmanaged passive indexes providing beta is just not enough anymore…not when the market can drop 40% as it did in 2008. If your core can drop that much, it’s not the core that you want. The core is supposed to be the safer money.

9:45: If you are able to avoid 60% of the downside in the market, you only need to capture 55% of the upside to match the cumulative returns of the S&P 500. If you blend long-only (return focus) with alts (risk focus) you can do this.

9:44: The focus needs to shift from returns to risk management. If you bought and held between 1990 and 2008, you were up 5% (annually); if you missed the best 40 days, you lost 4.92%; if you missed the worst 40 days, you’d be up 16%.

9:42: Institutional consultant searches have shifted to alternative managers. In 2009 the top search was for international/global equity, with hedge funds ranked 4th. In 2011 hedge fund consultants were the top search.

9:39: The emerging framework is breaking out the liquid (CTAs) and illiquid alternatives (timber land), while the equity-based hedge funds (long-short) are being treated as part of the overall equity bucket. Same with bond-based hedge funds.

9:38: Between $50 million and $1 billion individuals, every one of them holds alternatives to some extent. The wealthier they are, the more they hold. Alts are becoming the core for UHNW individuals.

9:37: Alternatives are not in every portfolio, largely because hedge funds are restricted to the wealthy. For Harvard and Yale, the question of whether alternatives are the new core has been answered.

9:33: Trading ranges are common throughout history, and frequently involve periods of conflict…no surprise then that we’re in one of these periods, starting with September 11, 2001. We need new tools to cope with these markets.

9:30: Risk management has become more important in the past 2-3 years, and clients are asking for more tactical allocation. No more set-it and forget-it.

9:29: We were taught that “core” is beta, with alpha wrapped around that in the form of alternatives and active management.

9:28: It was only in the late 70s and 80s that wee parsed people into style boxes. Before that wee had balanced managers.

9:24: Alternatives are going to be increasingly part of institutional and HNW portfolios for the next few years at least. Alts are going to blend into the traditional portfolio.

Strategic Insights panel, with Robert Doll (BlackRock), David Kelly (JP Morgan Funds), and Michael Ryan (UBS). This session is moderated by John Moninger.

RD: People need to accept the idea of funding their lifestyles from systematic withdrawals from the overall balanced portfolio, not just from income generating assets.

DK: Americans need to understand that the economy will continue to expand, and that rates and stocks will rise. Secondly, people need to look beyond bonds for their income generating assets. You need to diversify within bonds, but you need dividend and REIT income.

MR: Still most concerned with fixed income. People are complacent, thinking the fixed income portion of the portfolio is bullet-proof. We need better risk management.

MR: The markets are broadening and deepening. This cycle has just begun.

MR: The emerging markets have demographics on their side, but they also have few of the problems of the developed world, like debt. The EM will become 20% of the world market cap, up from 2% in the 80s.

MR: Based on earnings trend, we expect 8.5 to 9% returns on the S&P.

MR: There will be no repeat of the lost decade in stocks. These lost decades are rare, and don’t happen sequentially. The entry point into the market over the last decade was challenging, but now stocks are a lot cheaper.

MR: Traveling the country, there’s a lot of uncertainty still. The events of the past 2.5 years need to be put in context.

Q: What’s the decade ahead look like?

RD: Municipal bonds are going to behave like stocks, rather than moving in tandem, there will be winners and losers.

MR: The implosion of nominal insurers has dried up much of the liquidity in munis, so that’s a new risk.

RD: Most states and cities are seeing their revenues rise.

DK: I’d rather lend to a municipality than to the federal government these days. If they default, you still get 2/3 of your money back. State finances are very cyclical, with sales tax revenues recovering with the economy.

Q: What about Munis?

MR: On the private capital side, no one is borrowing.

DK: I still like high yield, with 500bps in spread you’re being paid for that risk.

RD: As soon as confidence returns, rates will go up a tick.

DK: The market cannot be a slave of emotion and a seer of the future at the same time. People are so complacent in the bond market, and people are investing in bond funds again. The reason rates are not rising is because investors continue to pour money into bonds.

MR: On the credit side, we’re starting to get toward the late part of that trade.

MR: On Treasuries, I thought rates would be higher by now. What is the bond market telling us, that we are missing? Either rates need to be lower for longer, or there is more support than wee realize from non-investment buyers like the Fed.

Q: What about the fixed income market?

RD: The stock market may have doubled, but it hasn’t kept pace with corporate earnings. There won’t be margin pressure until confidence rises enough that CFOs start loosening the corporate purse strings and start investing in growth.

DK: The profit recovery has been very strong. Commodities are only a small part of corporate costs: workers are afraid to ask for a raise, and interest costs are cheap.

RD: There is a correlation between commodity prices and corporate profits (to a certain point), so the decline in commodities has probably hurt U.S. profits.

DK: I’m nervous about EM because they’ve never had a boom so good, so it’s hard to take away the punchbowl in a country like India. Europe has to figure out how to transfer capital from the strong core to the weak periphery, this is a political problem, not a financial one. If they can solve this, then European stocks can do well, because they are so underpriced right now.

MR: The headwinds outside the U.S. are strong. We think EM can outperform, but they have cyclical issues (inflation).

RD: Emerging markets are starting to be challenged. For the first time in a long time, people should be overweight in U.S. stocks, largely because the rest of the world is so challenged. Expect double digit growth.

RD: The U.S. will see 2-3 million jobs created in 2011, with unemployment falling to 9%.

RD: Fiscal stimulus is giving way to self-sustaining recovery. The U.S. market has been beating the MSCI World and lately even the emerging markets index.

RD: It’s going to be a bumpy ride, though.

RD: The economy is in expansion since the first quarter, not recovery. The GDP is at an all time high.

RD: When the Fed raises rates, there will be a collective sigh of relief: The deflation is over.

DK: The Fed needs to start signaling that rates will rise. Stop telling everyone that these rates will be around forever.

MR: The role of QE2 was to shore up confidence, the question is whether the economy is confident enough to end QE.

RD: The willingness to make loans includes the potential borrower, who has not been asking for loans.

DK: Washington tells banks to avoid “risky” loans, but these are the loans that give the economy the biggest bang for the buck.

MR: The dynamics of small business is yet to kick in. They are facing new tax certainty and starting to get new financing. Small biz hiring will start to take off.

DK: I don’t think the end of QE2 will hurt the economy, but the 30-year Treasury rally is over.

DK: One of the upside risks is that confidence could return. There is incredible churn in the jobs market. There are literally a million people being hired every week in the U.S.

RD: We are seeing good job growth–not record setting, but good enough. We’re moving from relying on government spending to the recovery becoming self-sustaining.

DK: You diversify because of what can go wrong, but you invest because you see opportunity.

DK: The U.S. has the ability to deal with its debt: cut spending on Medicare, and defence, raise taxes. The public is willing to make these changes–there’s just no political will. If the debt ceiling is not raised, the U.S. will see another Great Depression…the gov’t would have to cut/tax $1.6 trillion to balance the budget.

DK: Monetary policy in the emerging markets is just as lax as in the developed world. Some of them will see their boom go bust.

DK: Inflation is not coming to the U.S. High commodity prices will not drive wages up, so those prices will not stick. The threat of deflation is diminished, but there is no serious threat of inflation.

DK: Job growth is back, though slow. Don’t expect a double dip, the U.S. is still recovering.

DK: The recovery has been muted compared to the downturn, suggesting that the economy will grow faster in the latter half of the 2011, because we haven’t seen a full rebound in several key indicators, such as vehicle sales, housing starts, private inventories. These sectors cannot collapse, because they are still in the basement.

DK: Think U2’s One: Is it getting better or do you feel the same? The answer is yes, and yes. A large number of Americans believe the country is still in recession, despite the fact that it ended in 2009.

JM: What’s going on in the economy?

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Richard Marston (Wharton School) on Key Debating Issues for Investors.

A: You can’t point out that there’s low correlation, without pointing out that its volatile too, with the GS commodities index falling 50% in the crisis. Maybe a 5% allocation, but remember that the clients will hold it against you if they tank, even if you warned about the volatility. But commodities are a great way to diversify the portfolio.

Q: Again, for the $1-million account, what would you do with commodities?

A: It was Gross who dropped the “R”, but the board I’m on will never touch Russia because of governance reasons. We invested in Croatia, won’t touch Russia. Looking beyond the BRICs, we see investors are treated relatively well in several countries. Let the emerging market managers do their job and make those calls.

Q: Why drop Russia from the BRICs, and what will be next.

A: For ordinary investors, its real estate. While REITs are somewhat correlated to equities, it’s the only thing you can really do to add diversification at that asset level.

Q: What does a $1 million portfolio need to do?

A: The markets rose on its announcement, and again on its implementation. Bernanke has said the end of QE2 is only the end of buying, not the start of selling. A lot of people believe that if you stop shoveling coal on the fire, it will go out. We need to stop further QEs. QE2 was too much of a good thing, since the banks are not lending anyway.

Q: What are the implications of the end of QE2?

6:06: In the meantime, let’s make sure we enjoy the current cyclical rebound.

6:05: The developed markets are slowing because of the aging population and ill-informed immigration policies. Aging population will be drawing assets out of the market, removing equity supports. We should take Bill Gross’s pessimism seriously.

6:04: Emerging markets have awakened, but there is a lot of risk in these economies. The BICs (note Russia has been excluded) will continue to outperform the developed economies by 200 bps, partly because the U.S. and Europe will be so weak.

5:59: There is no developed market currency to replace the dollar. The yuan can’t replace it, since it isn’t traded. China wants its export machine to keep chugging along, which will keep the population content. Maybe later Beijing can threaten the dollar.

5:55: The U.S. dollar–is it really falling apart? The euro can’t replace it, because the euro zone’s bond market is a wreck. The Greeks are going to default–it won’t be like Argentina, it will be far more subtle. They will either extend the maturities, or cut the rates.

5:53: The bad scenario: a bond market shock brings us to our senses. Even if there’s progress on the fiscal deficit, we have to worry about how the Fed will drain all of the extra cash from the banks. The commercial banks are holding a massive spike of cash…up to $1.6 trillion.

5:50: Part 2 of the new normal–Focusing on stable income. But the bond market is in trouble, due to Washington’s spending. Scenario 1: adults come forward and bond market is stabilized at 5%. The bull market in U.S. bonds is over.

5:49: Unemployment falls with higher education. No High School? 14.6% unemployment. Finished collage? 4.5%.

5:47: The new normal is that employment has changed over the past decade. We don’t need as much labour due to higher productivity. Production in manufacturing is twice as high as it was in 1980. But this has been done with the manufacturing workforce falling from 18.5 million 11.5 million.

5:45: The economy has been growing for 7 quarters, the man on the street just needs to realize it. The bad news is the employment picture. U.S. was down 8.5 million jobs, but it’s recovered slightly to 7 million unemployed.

5:43: Exports are higher than pre-recession levels, the only place where there is not a recovery is in business spending…in fact they are depleting inventories.

5:41: The media tells us the U.S. consumer has gone on strike. But spending has been rising since 2009. It’s now significantly higher than pre-recession spending.

5:40: For clients that bailed out, in the winter/spring of 2009, they missed out on 100% rally, and will never get their money back.

5:38: Since Gross’s call, the U.S. and EAFE are up 90%+, with the emerging markets up 154%. Is this a new bubble? Nope, this has happened after every recession. The rally almost always starts to rally before the end of the recession. Once it starts, the market rises rapidly. Sure the timing varies, but this always happens.

5:36: Are we facing a new kind of future? Is Bill Gross right in calling this the New Normal? The 60/40 split is dead along with the notion that stocks always outperform. We must focus on stable income and accept that the U.S. dollar might not be the global reserve currency.

5:33: 200 bps of the 430 bps is due to Yale’s access to superior managers. It’s tough to get access to these best managers even if you are an advisor at one of the top firms.

5:32: If you have the assets and the access, you can do much better. Example: the Yale Endowment is 78% alternatives (largely private equity, real assets). Since 1985, it’s earned 4.3% higher returns than the conventional portfolio.

5:30: Adding alternatives is not a game-changer, but you have to find the right managers. There is a huge gap between the best and the rest.

5:29: You need to roll the dice–not in the casino–but by starting a business. This is where real wealth comes from. “The only time you make huge returns is when you roll the dice.”

5:27: Putting 10% in hedge funds, another 10% in private equity and 5% in real estate, we earn an extra 100 bps. (The remaining 75% of the portfolio is still in U.S., foreign equity and bonds). You aren’t going to get rich on this portfolio.

5:26: The ultra HNW ($50-100 million) can broaden their portfolio into private equity and direct real estate holdings.

5:25: Many investors shun commodities because they are not comfortable with them, even though they can raise risk-adjusted returns.

5:24: Let’s add some hedge funds, opting for 10% for HNW clients, with 15% in real estate. This portfolio earns an additional risk-adjusted return of 70 bps.

5:23: David Svenson (Yale) suggested retail investors hold 20% of their portfolio in commercial real estate, using REITs.

5:21: What happens when we add in real estate? Between 1975 and 2006 (pre-collapse), most of the U.S. saw owner-occupied real estate lose money. Only in California would you eke out a 2% real return.

5:19: While they may be more correlated, they aren’t providing the same returns. In the 70s, MSCI Pacific blew the doors off the U.S. and even Europe beat the U.S.

5:36: What about adding foreign stocks? It used to work, but not a huge return driver. If you add 10% EAFE, you can add 40 bps. But since the 1990s we’ve seen correlation rise between U.S. and foreign stocks. As early as 1979, there was no risk-adjusted additional return.

5:14: We used to diversify with small caps in our large cap portfolio. If we got really exotic, there might be up to 10% foreign stocks. But today there’s virtually no diversification in this. Small caps add only a little extra performance, but there’s no risk-adjusted return to them.

5:13: Asset allocation is not dead, but the old model of it isn’t working anymore. Click through below to read what Matt Oechsli had to say about Winning in Tough Times.

Matt Oechsli on Winning in Tough Times.

4:40: Social media is the future. It is today, where the internet was 15 years ago. No one knows how to use it. LinkedIn is the most professional. Use it to find the linkages between clients, prospects and professionals.

4:36: 15% of advisors say they are good at prospecting, but only 1.5% are rainmakers, so even they need to improve their skills. Sales skills need to be very refined so the point that they are invisible.

4:30: Getting personal with clients, socializing with them, more than doubles the referrals given in a 12 month period (1.56 versus 0.6).

4:30: Prospecting the affluent is all about word of mouth. How did the affluent find their current advisor?

• 44% introduced by family or friend
• 19% introduced by another professional
• 15% other (i.e. he’s my neighbour)

4:25: The “New World Advisor” is proactive, guiding and advising clients through tough times. They are passionate regardless of the market conditions.

4:23: The affluent want someone with an open mind (not locked into dogma) and a solid knowledge base.

4:17: The affluent prefer face time over all other forms of communication. Beware the lure of email. Frequent intimate client events should be fun…this is the time for social prospecting. Employ “surprise and delight” touches; they want personalized attention. Stop cold-calling; focus on developing strategic referral alliances. If you ask for a referral, they’ll feel awkward. Instead, you should source a name from the client, and then ask if they can introduce you. Turn referrals into introductions.

4:14: Never send your client to an expert without you. You need to ensure the expert stays on topic and doesn’t get too technical. Be the interpreter. Besides, the visit gives you more quality time with the client.

4:12: Most advisors say their clients have a financial plan, but only 25% of affluent clients say they have a financial plan. The disconnect is probably the result of bad implementation or communication of the plan.

4:09: When a prospect asks “what do you charge?” don’t get defensive. It’s a buying signal. Tell them you cannot possibly know what you would charge until you’ve taken an in-depth look at their situation. “A second opinion is probably a good idea these days…”

4:07: There are 16 commandments of what affluent want from advisors:

• clear and timely communication
• resolve problems quickly and to my satisfaction
• focus on overseeing my family’s financial affairs, not marketing his/her practice
• meeting my investment performance expectations
• possess comprehensive breadth and depth of industry knowledge
• having my family’s best interests behind every financial recommendation
• fully disclose all fees—if you can demonstrate hidden fees to a prospect, you can sever their relationship with their current advisor with a butter knife
• keep me informed of any events that might impact my family’s finances
• delivering high-level personal service
• care more about me than just my investments
• fully understand my family’s goals and needs
• help me create and execute a formal financial plan
• develop and communicate a financial recovery strategy for my family
• coordinating all my family’s investment decisions
• help me organize and keep up-to-date all my important financial document
• using outside experts to help with other financial areas

3:54: They have four distinguishing traits: Extreme ambition; discipline; self-awareness; and a deliberate practice.

3:53: Elite advisors differ from planners in that they implement the plan and are involved in all areas of the client’s financial life.

3:52: Be very careful about using terms like “affluent” around the client. They are mostly self-made, with middle class upbringing, that’s imprinted on their self image. There are two things they resent: high taxation, and sales pitches.

3:49: Part of being a rainmaker is being a politically atheist. Listen to the client or prospect, and then mention that you can help with what their concerns are. You also have to be prepared to give a positive second opinion; if the other advisor is doing fine, tell the prospect. They will admire your honesty and question why their advisor didn’t communicate better.

3:47: The primary concerns of affluent are healthcare costs and outliving their assets.

3:46: Why are so few succeeding? The rainmakers said in their focus group that those falling behind were essentially lazy for not getting into this fast lane.

3:45: Rainmakers see this environment as the stars aligning to bring in new assets but “you’ve got to have game.”

3:45: The rainmakers are repositioning their services to ensure they are relevant to affluent clients. They don’t want to be seen as just another broker. They are working feverishly to bring in new business. These are the top 1.5% of advisors.

3:42: Social marketing is what cold-calling was 25 years ago, or seminars were 15 years ago. But they make 2 mistakes: They talk too much, and focus on their own investment acumen. They sound like financial salesmen.

3:41: The advisor-client relationship has also changed. It’s all about relationship management and relationship marketing.

3:39: This crisis has created a new world, fundamentally changing the way people think, just as the Depression and World War 2 did. The McMansion world is gone. For the affluent, it’s all about family values and personal health.

3:37: A loyal client will not entertain a second opinion, and will introduce you to their centres of influence and family.

3:33: In a January 2011 focus group of affluent clients, with $1 million to $10 million in investable assets, found all were satisfied with their primary advisor. The one element where the advisor could do better was communication. Another question asked if they would entertain a second opinion from a trusted advisor: all said they’d be interested. The big if is that they would need to encounter an advisor who was clearly superior. Lesson: Satisfaction is not loyalty. It’s the baseline of acceptability.

Thomas Schneeweis (U.Mass Amherst) on Post Modern Asset Allocation.

3:15: When everything is up, everyone is up. When the market tanks, every fund tanks. Your value is in managing the risks as the markets fluctuate wildly. If it was simple, your clients would hire a monkey and feed it bananas.

3:13: The trade off on lower risk portfolio, of course, is that it will lag the volatility of a massive rebound, as seen in 2009.

3:05: Some alternatives aren’t really alts. Private equity is just another equity product, so it belongs in the equity bucket. Most hedge funds are correlated to credit, it turns out. Virtually all the traditional asset classes turned out to be correlated to the S&P in the 2008 downturn.

3:03: Also, remember that your model is anchored in the past. It might not be true in the future. “You never hear about the evil porpoise that pushes a sailor’s head under water, instead of pushing him to shore. It’s survivorship bias.”

3:00: Be sure you use the actual investment vehicles to model your return estimates. What’s that mean? Don’t use the S&P 500 as your estimate if you’re investing in an ETF that tracks it…you have to factor in the fee.

2:57: A traditional expectation of 12% return on stocks and 8% on bonds, gives a 50-50 allocation an expected return of 10%. That’s still only the “most likely” return…it could be 11% or 9%.

2:54: Historical bond returns are typically cited as 8%, but who believes that this is the medium term outlook on bonds? So why are we using historical returns in our return estimates?

2:53: The good news is that understanding all these changes to risk estimation and regulation drive up the value of the advisor who can manage these risks.

2:50: A highly rated bond may have more risk attached to it than a lower rated bond.

2:48: Regulatory risk: Some rules created to manage investment risk may actually increase investment risk, rather than reduce it. Is the manager constrained into holding 40% U.S. Treasuries? Is that where they want to be in this environment? Or you might be required to track a benchmark that is heading for a 40% decline.

2:46: Risk is a fuzzy concept, and doesn’t sit well in marketing literature. Risk estimates are derived from historical data with the false assumption that the future risk of an asset mirrors that of the past. You can lift one day out of a historical monthly data set and the data is completely different.

2:44: Risk is multidimensional, whereas asset risk is often seen as the standard deviation, correlation and beta. What is correlation in a portfolio that has puts and calls in it?

2:41: Return estimation: If you don’t know what risk is, you can’t estimate returns, because it’s a function of risk. Risk tolerance? People’s view of risk is a lot different when there’s 9% unemployment than when it’s only 4%.

2:40: At its most basic, asset allocation is only about risk estimation, return estimation, and investors desired risk exposures. But what is risk? It depends on so many factors.

2:38: Examples: You could hire a manager to limit volatility to 20%, then the market falls 40%: “Yes, but I tracked the market” That’s return-management (and poor at that), when you hired for risk management.

2:35: Where we are going: a lot of how we look at risk will come back as a risk management vehicle. Asset allocation methods are based on risk management. If risk is the fundamental aspect of asset management that makes our jobs easier: it’s hard to forecast returns, but a lot easier to forecast risks.

2:33: Example: The history of corn and sugar is irrelevant. They are no longer breakfast, they are energy commodities.

2:32: Where we are now, asset allocation is based on the nature of the asset class—now acknowledges a larger set of assets and what is required is a full understanding of the market and risk factors driving asset returns as well as the conditional nature of those returns.

2:30: Simple stories are nice, but they won’t get us across the waters and past the monsters on the old maps. Simple stories are good for people who are content to stay on shore in Europe and never board the ship.

2:30: So that’s where we’ve been. Asset allocation is traditionally wrapped around MPT, CAPM, and Efficient Market Theory, all of which are 40-60 years old.

2:28: By the 2000s, hedge funds were valued daily because they faced risks that could blow up in the middle of the month, not just at the end of each month.

2:26: The firm at the centre of the 1987 crash was just 2-3 weeks away from moving from an options based strategy to a futures based strategy. If it had made it, it would have steered clear of the crisis.

2:23: 1950s style diversification was overwhelmed in the 1970s, when options and derivatives swept the market. By the 1980s we had alpha-transfer, securitization, and portfolio insurance.

2:21: We need to remember what an asset class really is: something that offers diversification characteristics that aren’t easily available from other asset classes.

2:19: We should realize that Modern Portfolio Theory is now 60 years old. It should probably be called Initial Portfolio Theory. It’s a pretty simple mathematical construct, which says nothing about return or forecasting.

2:18: We still have stories of past asset allocation theories, but we’re in a new place today. Calling something an absolute return fund doesn’t make it one.

2:16: You can create a fund that does almost anything, so long ass you use historical data. Too often the risks taken are not spelled out…non-market, non-price risks, like liquidity, sector risks, etc.

2:14: The idea that “absolute return funds” can produce excess return with limited risk, that’s one of those stories to tell your kids at bedtime. We now talk about “excess return funds”.

2:12: View history as a set of myths, and “lies well told that live forever”. “I don’t mind lies. I don’t like lies that I don’t know are lies.”

2:11: Same with the hedge fund industry and its historical returns. The industry has had different focuses every two years.

2:10: You can ignore the past history of the S&P 500, because it only represented the regulatory, economic and technological world of its time. Besides, it’s really only the S&P 50, with 450 stocks no one cares about.

2:08: We don’t have art the way we had it 100 years ago, because the materials have changed and so have tastes. Asset allocation has changed in similar ways.

2:06: Investors may be looking at the world as 16th century Europeans viewed navigation maps, with warnings of: Here be monsters. But we also know that there are rewards for venturing beyond our comfort zones.

2:05: Asset allocation, like art, has a long evolutionary history. What was new 20 years ago is now old. So what is the new new?

2:03: We are already in a different place from “how we got here”. Much of the past, while interesting, has little to do with what we are facing today. Click through below for Innovation in Exchange Traded Products.

Before lunch we heard from Paul Justice (Morningstar), Christopher Brightman (Research Affiliates) and Craig Lazzara (Standard & Poor’s), on Innovation in Exchange Traded Products.

CB: None of the strategies will guarantee you don’t hold overpriced stocks, but cap-weighting guarantees that more than half of your portfolio is in overpriced stocks.

CL: It’s a very different thing to say “generally, small caps do better than large caps” than to say “small caps always do better” They don’t always.

CB: The sweet spot on rebalancing is annual. More frequently it increases correlation and costs more.

CB: Surprisingly, fundamental weighting provides better returns with stale data. If you use five year sales data, you’ll have far less correlation to the cap-weighted index, because current data is factored into the current price of the stock.

CB: If every single investor took an index approach, then there would be no price discovery, and the market would be horribly inefficient. The problem with the optimized strategies is the high turnover drives up transaction costs. Investing in the smaller stocks of even the S&P 500 (big companies) have high transaction costs because they are relatively illiquid. Small cap stocks are even more illiquid, and therefore far more expensive to trade. This low volume in trading can make the stock look less volatile, simply because it seldom trades.

Q: Does this threaten efficient market theory? Should we just all own small cap, and value?

CL: Volatility seems to persist, at least in the medium term, so there is little turnover. If you can’t stand tracking error, though, then the low volatility index strategy is not for you.

CL: The low volatility S&P 500 takes the 100 least volatile stocks on the 500, and weights them by the inverse of their volatility. This provides insulation against volatile downturns, but also gives up some of the upside in a rampant bull market.

CL: Typically, equal weighting indexes have a tilt toward value, tend to have smaller capitalization, and are automatically rebalanced. Most active portfolios are far closer to equal weighting than cap-weighting. Therefore, the equal weight S&P 500 outperforms active management, net of fees. It’s also a more accurate benchmark.

CL: Equal weighting focuses on the same constituents, and tinkering with the weighting. Over time, the S&P 500 equal weight index beats the 500, as does the S&P 500 low volatility index. How much of this performance is beta effect, though? The EQW S&P 500 captured 120% of up markets, and only about 90% of the down market capture.

CL: There’s no theoretical reason to believe that an active manager cannot outperform the benchmarks, because even the benchmarks are only a small slice of the overall market.

CL: The premise of the market is that all investors collectively own the entire market. By definition, passive investors, as a group, own a replica of the market. So too do active investors, but active management is more expensive, so therefore “the average actively managed dollar must underperform the average passively management dollar, net of costs,” quoting William Sharpe.

CL: If I had to walk away from a portfolio for 10 years, what would I want to leave behind for that period? Thoughtful index choice is a value-add for financial advisors.

CL: There are some defenses of cap-weighting. They remain useful for benchmarking active managers. Indexing is a simple process: you select constituents, weight them and rebalance periodically. The same can be said for active management, but the indexer is not seeking alpha. The decision to add and remove stocks can be driven by other factors, such the size of the issuer.

CB: If you believe that the markets are perfectly efficient, then cap-weighted index funds are right for you. But if you do not believe the markets are efficient, you really should avoid cap-weighting.

CB: Ignoring implementation costs, the risks and returns of the various fundamental indexes are pretty much the same.

CB: There’s really no advantage to fundamental weighting versus equal weighting. Most of the outperformance can be attributed to value factors, but don’t mistake this for an active value strategy. The value factor disappears in periods of huge volatility.

CB: Any metric that breaks the link between price and weight will generate higher returns. Fundamental indexing uses various accounting measures to create a proxy for the economic size of the holding.

CB: Simple equal weighting provides better returns than cap-weighting, beating it by a couple percentage points per year. Cap weighted indexes overweight overpriced stocks, and underweight undervalued stocks.

CB: with the crash of the dot-coms, investors questioned efficiency of the markets. A decade later, there are alternatives to cap-weighting for create an index: Equal weighting; fundamental indexing; and diversity weighting.

CB: The assumption in the past was that markets were efficient, and that traditional indexes were efficient as well. The idea that you would deviate from the cap-weighting represented an active bet in this environment.

PJ: While there are over 7000 mutual funds available in the U.S., they do not offer the same breadth of asset classes available through the 1200 ETFs—such as foreign sector funds. Overwhelmingly investors are choosing ETFs for country bets.

PJ: People have been flocking to ETFs because of the lower cost, daily liquidity and relative tax efficiency.

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Top Advisor Panel, with Steve Lockshin (Convergent Wealth Advisors), Gregory Vaughan (Morgan Stanley Smith Barney), and Alexander Williams (UBS Financial Services), moderated by Kevin Sanchez (UBS).

AW: There’s so much you can’t control, I just hope that no one on my team does anything incredibly dumb.

GV: We’ve gone to colleges to hire the best grads from their class, teach them by osmosis, and then help them go back through business school with less debt. We’re waiting for the first one to graduate to complete the cycle.

SL: Ever-present challenge of finding great people. You do all that work to bring in a client, you need to have the right person to hand them off to.

Q: What unresolved challenge do you face still?

GV: One of my best clients started with $1million, despite our minimum of $5 million. If the client blossoms, then you continue to serve them. If not, you can re-examine the relationship.

Q: Minimums?

AW: I didn’t want to create a new business, just focus on practice management. Steve’s independent model is great, but it’s not what I wanted to do. I spend 80% of my time doing what I love, and 20% doing chores. I’d like to make that 95% and 5%.

GV: Being part of JP Morgan, UBS, etc, is an asset. You can bring a lot of resources to bear for the clients.

Q: Are there limits to the growth of your practice, linked to the large companies that you are with?

GV: When a client refers someone, you need to put your best foot forward. You can’t just say “this won’t work, sorry, goodbye.” You need to guide them to the right service provider for their situation.

Q: How do you manage around a non-qualifying referral from a prized client?

AW: We try to treat clients like family, so we’re treating family the same was as clients.

Q: What do you do with family and friends that might not meet your ideal client profile? Shea also shares some best practices:

• Go back to the pitches that didn’t work out and ask how things are going now.
• Use a robust contact management system
• Get to know the next generation; build a relationship on their own turf so they see you as their advisor, not just the patriarch’s
• Focus on team roles: get aptitude tests, hire coaches; show team that you are willing to invest in them personally
• Understand the service experience needed to keep clients happy
• Learn from your clients; ask their opinion to help you build your brand.
• Now is the time to hire smart young talent, while the economy is still struggling.
• Match new hires to mentors
• Make conversations count; based on client defined goals. Don’t focus on investment results.
• Re-direct clients’ interests from wants to needs. (i.e. want more predictable income vs. need inflation sensitive cash flow)

Sterling Shea, from Barron’s, shares the common themes among top advisors:

• client analysis and selection: fewer and better clients; discipline in client selection; establish a set of triggers around key client identification.
• team focus: Spend time and energy on team development; be proactive, build the tea around your vision of the future.
• self awareness: Understanding what you do best is important in a fertile hunting environment
• Multi-generational wealth: educating younger generation on how to handle money. Get involved in will, trusts and estates. When a patriarch hands off asset management to spouse, advisors can expect a 40% retention rate. When handed off to next generation, that falls to just 2%
• Market conviction: Uncomplicated, succinct investment philosophy; make it confident and optimistic.

AW: Send your clients a book with a little handwritten note. Little stuff like that can go a long way. Principles work. Maintain your discipline; rebalance in a downturn. Don’t be afraid to stick to your time-tested principles.

GV: You have to be the hardest working person in your environment. It’s a service industry, not a sales industry. Treat people well. You have to reach out to people even when its bad news.

SL: If you always do the right thing; honesty, integrity and humility help you serve the client.

Q: What are your 1-2 best pieces of advice?

GV: Mentoring is important for young advisors. We should all offer to mentor the younger members of our firms.

SL: There’s no secret sauce that we’re trying to protect.

SL: There are advisors that have a thousand clients and they can still do well. There are advisors wired to sell, and some are wired to maintain the service level. You can grow your book by having the right people focused on their strengths.

GV: (130 across his team) Specialization is required, that by definition means you have to ask some clients to leave. It’s tough though, because you’ve made a commitment to them at the outset, and then you’re asking them to leave. Plus many of the clients were brought in by clients that you want to keep. Be smart about the clients you bring on.

AW: (30 clients) We focused on ultra HNW and institutional clients. We didn’t make a transition, we started out with this focus.

Q: How did you pare down your books from 250+ to the 30 or 130 that you have now?

GV: You have to let them know if they are setting themselves up for a catastrophe. Don’t button your lip, even if they are senior execs, they need to be challenged.

SL: I used to think we’re hired to do a job; clients don’t want or need to socialize with us. Now I understand that they need to trust us implicitly, and that comes through social contact. We also manage the amount of information that we push out to them, and balance between dumbing it down and being too technical.

Q: What are the big mistakes that you wish you’d avoided?

AW: They want aligned interests and great contact.

GV: Our best clients are someone else’s best prospects. Client contact is important…at least 2 face-to-face meetings per year, and one contact per quarter.

AW: The only difference between my clients and the rest of the CIMAs here is the size of their assets. They might not be worried about how to put their kids through schools, but they want to keep their money.

SL: I agree with Greg. The pitchbook puts you on a path that you might not be able to deviate from. The client wants someone to listen to them and tell them what they need to hear. Tax planning it vital, as the trusts and estate plans can have a far bigger impact than anything you do on the investments side.

Q: What’s your approach to that first meeting?

GV: You can throw away your pitch book and walk into a meeting with a note pad and a pen. The client must have something on their minds or they wouldn’t be meeting with you. You have to be a good listener. Our clients are our best marketing department.

AW: We were very transaction-oriented when we started in the 1990s, because a lot of our clients were receiving large quantities of stock as their companies were bought out. We realized we couldn’t be all things to all people, so we focused on knowing the client. We’ve turned business away if it doesn’t fit the model. We do “super-networking” among our existing clients.

Q: Where do you fit into the various roles of prospecting, etc.

SL: We started out running our business as a business. We invested in a CFO and COO, and built the structure of a proper company. About 3 years into the business we hired a COO. We saw results immediately, because we were able to focus on what we do best.

GV: I work in Menlo Park, at the centre of Silicon Valley, so part of it was being lucky enough to be in the right place at the right time. But if you put in the effort to grow, you can do it. Focus on having a business, not a group of clients.

Q: What does it take to get to the pinnacle of the industry?

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A: This is what motivates Dodd-Frank. Experts succumbed to group-think, deciding on a trajectory and sticking to it. The indicators were not as clear or unambiguous as they now appear.

Q: Why did the banks ignore the falling permits and housing starts? They all seemed to think the bubble would continue. Why were they pushing for more mortgages to repackage?

A: Look to Volcker’s era. Policymakers need a strong moral compass and need to speak their minds. Greenspan used the phrase “irrational exuberance” only once, then stopped because the market had tanked. It wasn’t his job to worry about market reaction.

Q: What is the role of policymakers? A: When people are sick of losses on the stock market, they want to invest in something tangible, like their home. People are mad at the financial industry, but it’s still a great career for young people to enter. The financial system is driving the emerging markets, lifting millions out of poverty.

Q: What influence does the stock market have on real estate.

A: More people are retiring because they are unemployed and their benefits have lapsed. If they qualify for Social Security, this is their best bet. Probably also suggests that suburban real estate will not be a good investment.

Q: how do retiring boomers fit into unemployment data?

9:06: Schiller accepts that no one can predict stock markets over the next decade, but thinks the balance of data points to disappointing returns. Aggressive diversification is the best defence, he says. Not just nibbling around the edges of the markets. His personal call is to put half the portfolio in stocks, and half in TIPS. Farmland and commodities are also good hedges.

9:05: Since 2000, roughly 80% of HNW individuals have said the stock market will rise in the year ahead. Confidence that there will not be another crash has been on the rise since 2009.

9:00: Using a 10-year cycle for the cyclically adjusted price-earnings ratio creates more useful data than a single year cycle, and Schiller says it is a better predictor of stock market directions. He says a real return of 2-3% per year, including dividends, can be expected over the next decade or so, as the CAPE ratio is still relatively high, at 23.

9:00: On the equities front, from a long historical perspective, we’re still early in the aftermath of the 2000 stock peak.

8:55: Schiller sees U.S. farmland as the next possible bubble, but the price rising also reflects the fact that new farmland cannot be created, unlike residential housing. There may have been a flaw in homebuyer’s logic, thinking that home prices were related to the land value, but only 20% of home value is the land…the other 80% is the structure, which can be replicated all across the country.

8:52: Prior to 2000, housing markets across the country were uncorrelated. In 2000, we saw the major cities become correlated, indicating a nation-wide shift in focus.

8:49: Talk of a house bubble started in 2005, when real-estate traffic nosedived. People turned on the housing market.

8:48: Its’ easy and even comforting to blame regulators and policymakers, but there was a massive shift in people’s mindsets toward home-buying.

8:45: The upswing in home prices in the 2000s marks a ridiculous spike, as steep as the post-war housing boom, but 2.5x higher. The belief was that house prices could never fall…people bought into the stories they were hearing and seeing.

8:43: American confidence was shaken the worst in the oil shocks of the mid-1970s and again in 1979. But confidence has been in decline since around 2000, and seems to be heading lower still.

8:41: A poll question on the direction of the country’s economy shows confidence is approaching an all-time low.

8:38: People naturally pay more attention to stories than data, which is almost a good thing, as one measure of unemployment pegs it at 15.9% if you include people who are involuntarily working part time.

8:34: Inflation expectations generate inflation. Workers demand higher wages, believing their cost of living will rise. This boosts the cost of doing business, which feeds through to the consumer.

8:33: Everyone understands that the economy is built on confidence and good faith in your counterparties.

8:27: The problem with the inquiry commission is that it didn’t get down to the sociological level to explain how these things happen.

8:24: We all want someone to blame, but these kinds of major historical event can’t be pinned on one or two people. It’s not like the nation was calling out for more regulation.

8:21: It’s hard to pin down the causes of financial crises. The recent Financial Crisis Inquiry Commission offered only shallow analysis of the situation, blaming easy credit, scant regulation and—you guessed it—the housing bubble these generated. But why?

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