More On Legal & Compliancefrom The Advisor's Professional Library
- The Need for Thorough and Effective Policies and Procedures Whethere an advisor is SEC or state-registered, RIAs must revise their policies and procedures to address significant compliance problems occurring during the year, changes in business arrangements, and regulatory developments.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
"It's a good time to be gathering," Morningstar Managing Director Don Phillips told WealthManagerWeb.com in an exclusive interview on June 18. While two--and even three--years ago, speakers at the Morningstar Investment Conference were "warning" about the markets and crisis, we've had, "an amazing run from the depths" of the financial crisis, Phillips said; the "80% increase has been stunning."
But he noted that for investors, it "has been a roller coaster ride [and it's] not clear exactly where to go," from here. For example, "PIMCO was warning that Treasury securities were overvalued six months ago...now [they are] buying" them--what does that mean?
Trend One: Regulatory Development
As the conference gets underway on June 23 in Chicago, home to Morningstar's headquarters, the House and Senate are expected to wind up their own conference meetings to reconcile the two versions of financial services reform. Many issues were still under intense and sometimes partisan debate at press time, including derivatives, how to avoid the moral hazard of saving banks that are "too big to fail," and self-funding for the SEC. Then there is the debate on whether to extend the fiduciary standard to brokers who provide advice to individual investors, as the House bill mandates, or to "study," as the Senate bill puts it, whether brokers who provide advice to individual investors "should be required to act in the clients' best interest."
Trend Two: Restoring Trust
Phillips supports extension of fiduciary standard to cover brokers who provide advice to investors and is a signatory of the Fiduciary Statement--along with Nobel Laureates George Ackerlof and Daniel Kahneman and other American investing luminaries, including Jack Bogle and Roger Ibbotson. Agroup of large, well known family offices that serve ultra-high-net-worth families have signed the Fiduciary Statement as well. The Fiduciary Statement was created under the auspices of The Committee for the Fiduciary Standard. (This editor is a member of the Committee.)
"The most important asset anyone in financial services has is trust. A huge amount of trust was violated and lost over the last couple of years," Phillips says. "Good regulation is part of creating trust. The mutual fund industry has embraced a high level of scrutiny," but with "insurance and bank" financial services, there is a "mismatch between what you pay for and what you get sometimes," he explains. "Trust at the forefront benefits the financial services industry long term."
Trend Three: Risk Remains
At the Morningstar conference this year, Jeffrey Gundlach, who founded mutual fund company DoubleLine Capital in 2010 after leaving Trust Company of the West (TCW) in 2009--will speak about the situation in fixed income markets. Chief investment officer of his new firm, Gundlach warned investors at the 2007 Morningstar conference about the mortgage markets being a "total, unmitigated disaster." Surely, attendees will pay close attention to what he says this year.
The mutual fund market, according to Phillips, is "more complex" than it had been and that's not limited to equity funds--giant bond funds have been using derivatives instead of, or in addition to, underlying bonds. Gundlach warns this has gone largely unnoticed by advisors and investors. That adds layers of complexity and risk that Gundlach told WealthManagerWeb.com earlier this year many advisors are not aware of.
Trend Four: The Issues With Complexity
"Complexity can have wonderful benefits," Phillips asserts, but much of that complexity is fairly recent and relatively untested in difficult markets. Conference attendees will hear from mutual fund industry veteran Bob Reynolds, of Putnam Investments, who has amassed "$2 billion in assets in absolute return funds--with no track record," Phillips notes. Those are some of the more complex "new and exotic" funds Phillips refers to.
In contrast, "plain vanilla" funds are still around and attendees will hear about those from William McNabb of Vanguard, Phillips says. "Investors and advisors are much more savvy," and conduct much more "due diligence," he concludes.