From the December 2008 issue of Boomer Market Advisor • Subscribe!

The 2009 forward thinking five

What's ahead for 2009 and beyond, specifically for baby boomers and the advisor business? The market meltdown, a new administration and more problems with Wall Street firms add up to uncertainty in the new year - far more than in 2008. How low will we go before the turnaround occurs?

Once again, Boomer Market Advisor asked five industry giants for their predications for the new year. All were chosen for their creativity, enthusiasm and forward thinking agendas to address boomer retirement concerns. Some names you'll recognize, some you won't, but all provide critical insight as to how to best position your clients in the weeks and months ahead.

The Advocate - Don Philips
Don Phillips's enthusiasm about mutual funds (yes, mutual funds) is infectious. It's clear within 30 seconds of speaking with him just how vested he is in the success of the industry - and it's tough not to get on board. But it's not as if the managing director of Chicago-based Morningstar is looking through rose-colored glasses.

"Boomers, at this point in their lives, shouldn't have to question the validity of their investment vehicles," he says. "Mutual funds have been tainted along with the larger financial services industry. It certainly wasn't as bad as other players (especially after the reforms that were made in the wake of the mutual fund scandals of 2003), but there is still a loss of trust."

The problem, according to Phillips, is it now gives people an excuse not to contribute to their 401(k). Deferred saving (versus immediate consumption) is always a challenge in terms of getting people to do it.

"This just makes it harder. Funds are called trusts for a reason. Stewardship grades will be more important now. It will be a mind-set of stewardship versus a mind-set of salesmanship. It will be increasingly important for managers to have skin in the game and have a stake in the management philosophy they preach. There are high correlations between good stewardship grades and inflow rates."

Reasons to stay positive in the current environment? Solid, time-tested strategies that might have been out of favor are now back in play. Also, financial advisors and other gatekeepers are more sophisticated and discerning, so they'll keep some of the frivolous fund products out of client portfolios. And the buying opportunity in the current market is something he's particularly excited about.

"One thing I've found is that elite investors - the Bill Millers and Jeremy Granthams of the world - are aligned now more than ever in their belief that this is a great buying opportunity. If you believe in the regression to the mean, you should actually be afraid when everything is up 20 percent year-over-year, because it means it's overheated. It's at times like these that investors should actually be giddy."

One thing the financial services industry should not do, he warns, is get territorial and claim certain products were either all good or all bad.

"It's intellectually dishonest and we should stop pointing fingers at one another. We need to reward and acknowledge those that do good and punish those that do bad. Greedy people are out of the industry and good people will be more humble, so net-net, it's a positive. At the end of the day, if the investor doesn't win, then everybody else in the process loses."

The Strategist - Chip Roame
It's clich?, but accurate. Speaking with Chip Roame is like drinking from a fire hose. His rapid-fire delivery of critical information has the attention of just about every major carrier and fund company out there. He's got what they want; so much so that Roame, the managing principal of San Francisco-based research firm Tiburon Strategic Advisors, attracts top financial CEOs for his twice-yearly CEO summits. Whatever else they might have going on, they clear their schedules for the event.

"The first summit was 10 guys sitting around a coffee table," Roame says. "Now we do it every six months and we can easily produce 100 CEOs, all Tiburon clients. We have so much research and we love discussion and debate. We don't care if we're right; we care more about creating the discussion."

Roame joined McKinsey and Company out of business school and eventually landed at Schwab, just as the firm took off in the mid-1990s.

"It was a good, stinking crazy time in a lot of ways," Roame says in characteristic prose. "The advisor business was growing. Fun, exciting and all, but I'm not a corporate executive, so three years later I was done."

While looking for another opportunity in consulting, colleagues and peers routinely asked Roame for his expertise and insight, and Tiburon Strategic Advisors was born.

"There was no business plan. This was just me hanging out for a while. Today, we have 315-odd clients and we've done close to 1,200 projects."

Roame brought so much information to the interview -- given the space available -- we had to cut him off before he really got going. But he hit the highlights, and promised to share more information in upcoming issues.

Mass broker migration to the independent channel: "Everyone talks about the mass exodus from the wirehouses. I don't think it's ever happened. People have lost perspective because there are 70,000 brokers at the wirehouses. So if there's some mass defection going on then there must be thousands leaving, right? If it's hundreds leaving, then hundreds divided by 70,000 is not mass defection. It's pathetic. I don't think this happens within a year, but in three to five years I think the broker industry will be independent."

More financial service sector write-offs: "Financial services companies have written off about $330 billion due primarily to subprime mortgages. We guess that number will hit about $700 billion. In other words, we've seen less than half the writeoffs so far. I think you'll see a lot more."

UMAs - Don't believe the hype: "UMAs are a very tactical thing. This great discovery of the UMA is overhyped. My point being that everyone should have a UMA. I think we're getting confused between what's an account and what's a service. I can have an account with a stock, a bond, a manager and a mutual fund. Who doesn't want that account? It's really a brokerage account 2.0. We'll go a lot faster if we think about it that way. The advisor can be the overlay manager, the firm could be the overlay manager, a third party could be the overlay manager, but at the end of the day, I want a UMA."

The Advisor- John Rafal
"The past month has been the most stressful of my career," says John Rafal. "In my 30 years in the business, I've never seen anything like it."

Not surprising, but disconcerting to hear nonetheless.

"I have a very sophisticated clientele, but they're still extremely nervous. We're going 12 hours a day, seven days a week."

Rafal, president of Connecticut-based Essex Financial Services, has 14 planners working for him and $2.3 billion in assets under management. His average account size is $3.5 million (at least until a few months ago). Among other high-profile industry accolades, he's taken the No.1 spot two years running among the top 100 financial advisors in the country, according to Barron's and The Winner's Circle.

If Rafal's working this hard with his high-net-worth and sophisticated clients, we can only imagine what the rest of you are going through. But according to Rafal, a major saving grace is his independent status.

"I have brokers call here on a daily basis to find out how to go independent. Their firms are suffering from headline risk. Clients see the name in the paper and won't wire money in because they're afraid the firm will go bankrupt. So the migration to the independent model will continue to grow."

If the market meltdown is like nothing he's ever seen, will it ever return to (what was once considered) normal?

"I believe core financial principles still exist, but all of us will have to be extremely careful going forward because risk has been redefined. For example, who would have ever considered a standard municipal bond to be risky? You can clearly state risk, allocation and diversification parameters and you can follow the investment policy statement to a T -- and still miss big. You can do everything right and still be wrong."

Whatever happens, Rafal believes his recent hard work will pay off, and sees this as a major growth opportunity that will add to his already overwhelming success.

"At the end of the day, we're working hard, but we feel we'll be aptly rewarded with new clients. In the past three months, we've lost three clients, but probably gained 60."

The forecaster - Peter J. Wallison
Crying in the wilderness. Raging against the machine. Call it what you will, but Peter Wallison has been warning of the Freddie and Fannie meltdown for 10 years. Dismissed as "obsessed" with the mortgage giants by pundits and politicians alike, the former Reagan White House counsel and current American Enterprise Institute fellow is all over the networks (now) explaining just what the heck went wrong. We first featured Wallison on the cover of our September 2007 mutual fund issue, and we're more than happy to include him in this year's Forward Thinking Five. Maybe next time (and there will be a next time) people will listen to him.

"The problem I saw from the beginning is that they were privately owned companies with the apparent backing of the United States government. In a situation like that management will take far too much risk. Lenders have no compunction about lending as much money as they want because, from their point of view, the government will bail them out. And that, of course, is exactly what has happened."

We tried to get a CNN-style rogue's gallery of top contributors to the mortgage crisis, but the always-diplomatic Wallison wouldn't bite.

"I don't think I could name them. There are quite a lot of people involved in this. I tend to look at policies, not people. What the government does is much more important than the people who follow incentives that the government sets out for them. In the mortgage area, this is particularly true, because the government is so dominant there."

One big prediction for 2009 -- unsurprisingly, more regulation. And the irony is that the very people who blocked adequate regulation of Fannie and Freddie will now be given more power to create regulations that stifle innovation at huge costs to the credit industry.

"They're going to get much more power to do it. They'll look as though they're saving us, when in fact they're responsible for the problems we're in.

We couldn't get him to name names, but one person he praised set us back a bit.

"To give credit where it's due, Alan Greenspan saw very early on what a danger we were in. He testified before Congress on these dangers many, many times. To me, he's a hero. He may have made wrong judgments in other areas, but here he was right on target and he hasn't gotten the credit that he should."

The innovator - Bruce Bond
Exchange-traded funds continue to gain attention and market share, and generate excitement for the tax-efficient, transparent and low-cost benefits they offer. They are an answer to many of the criticisms voiced about mutual funds in the wake of market timing and after-hour trading scandals. The introduction of the first actively traded ETFs by Wheaton, Ill.-based Invesco PowerShares last April only added to the furor.

"Active ETFs are experiencing something akin to SPYDRs when they first came out," explains Invesco PowerShares CEO Bruce Bond. "It will take time for them to gain traction, but it's an exciting product and we're excited about them."

So too, it seems, is the fund industry. In early August, Morningstar granted its coveted five-star rating to two PowerShares exchange-traded funds.

"On its face this would not exactly be a 'stop the presses' moment," wrote Scott Burns, Morningstar's director of ETF Analysis. "However, what is notable is that the Dynamic Large Cap Value and the Dynamic Mid Cap Growth are the first quantitative-active ETFs to earn such a designation. Although this is a seemingly small event now, we can see this pair of five-star ratings helping to usher in a new era of ETF investing and fund creation."

Boomer Market Advisor wealth management columnist Mathew Greenwald heaped similar praise in our August 2008 issue: "Many baby boomers need to beat the index because they have not saved enough for their retirement. Passive ETFs are not appropriate in this case. Actively managed mutual funds or managed accounts are required. The first actively managed ETFs have just been introduced."

But how does Bond address skeptics who feel the transparent nature of active ETFs will work against them, since investors could potentially replicate their methodology without paying for it?

"People might be able to replicate the investment methodology of active managers, but they can't replicate the tax-efficiency, low cost and the other benefits of ETFs. So if they're not getting those benefits, why would they do it?"

Regardless, given the state of the market, Bond sees good things ahead for ETFs in general and active ETFs in particular.

"ETFs have held up well through the current downturn and they've proven to be very valuable for investors. When money comes back to the market, ETFs will be a key area that gets it."

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