Hollywood, Fla. -- At Pershing's Insite 2010 conference in June, three top financial advisors outlined the steps they've taken to succeed during the financial meltdown and beyond. Further perspectives came from former Treasury Secretary Henry "Hank" Paulson Jr., who lauded advisors for what he saw as "heroic" actions during the crisis, and Wharton finance professor Jeremy Siegel, who gave an optimistic view of stocks going forward.
Advisor John Rafal, head of Essex Financial Services in Essex., Conn., spoke to 1,000-plus advisors during a panel discussion by three advisors on June 10 at the Insite 2010 conference. Rafal, who leads a group of 55 professionals with nearly $3 billion in assets under management, said his motto of the past few years has been: "Don't let a crisis go to waste."
Rafal told the audience that he took such an approach during the banking crisis of the late '80s and formed important partnerships with community banks. This helped him refine the personal service he extends to clients, which was a major factor for five wirehouse advisors who approached Rafal recently about joining Essex.
In addition, Rafal cut his own salary in 2008 by 75 percent in order to invest in technology and staff. Such drastic steps are needed, he said, if advisors want to take their practices to "the next level."
Another panel member, Frank Marzano, managing principal of the GM Advisory Group in New York, stated: "I ask prospective clients, 'How have your advisors changed their approach during the past two years?' and many say not at all." Marzano leads a group of 10 professionals now doing most of its business as a fee-based RIA. The group has boosted assets 15 percent year to date, after growing them by 60 percent last year.
"We want to anticipate what we can in order to break through the brick wall (or business plateau), update our business plan and change our infrastructure," he said.
During the crisis, GM Advisory Group decided to introduce its own hedge fund, so clients could have a product that was not highly correlated with the S&P 500. "And we communicated all the time with clients about changes in the markets and tax reform," noted Marzano. "We have to articulate what we do that is different," he added.
For panel member Xavier Maza, president of Actinver Securities, helping clients manage expectations has been a key focus. "There are no good or bad investments," Maza said. "There are only good and bad expectations."
These top advisors take the time to check in regularly with clients about their expectations and their day-to-day concerns. In addition, they reach out to prospects who turned them down to see how the competition is doing with respect to meeting client expectations.
"It's worth calling prospects back a year or so down the road," said Rafal. "You may want to meet with them again, because they could be receptive to you."
View from Treasury
Paulson, who was Treasury secretary from June 2006 to January 2009, spoke at the conference's opening session on June 9. He congratulated financial advisors on their roles as unsung heroes of the financial crisis of 2008-09. "At a time when regulators and others made plenty of mistakes, your work was heroic," he asserted.
While saying he was generally sure of himself and his decisions during the crisis, he contended that his biggest errors during his time in office were in communications.
For instance, he said, rather than stressing how the $700 billion Toxic Asset Relief Program (TARP) funds were needed to prevent a sweeping market meltdown, his message should have focused on how such action was essential to protecting Main Street.
During the Pershing session, Paulson answered questions from Ted Bragg, a Pershing managing director and fixed-income trading executive. Bragg focused on issues and opinions shared in Paulson's recently published book On the Brink.
The former Goldman Sachs leader described the government's decision to not rescue Lehman Brothers in 2008 as more of a non-decision. "We did not have the power to bail Lehman out," he said, "and we could not find the legal authority [or other ways] to guarantee the liabilities and to inject capital."
Valuations are still right for stock buyers, and long-term trends should give them substantial returns versus other asset classes like bonds and gold, according to Siegel, the Wharton professor, who gave the closing presentation.
"I feel like I'm the last optimist standing," quipped Siegel at the start of his speech, which highlighted the outperformance of stocks since 1802.
Over the 1802-2009 period, stocks have averaged 6.6 percent annual returns vs. 3.6 percent for bonds and 0.5 percent for gold, he noted, adding: "Gold is overvalued now like in 1981."
The finance expert stressed that global stocks also have performed well in the past 110 years with 6 percent real returns on average during this time period. "Yes, the story is the same globally," he noted.
Siegel believes that price-to-equity ratios should remain in the double digits, because rates for Treasury bonds are not expected to return to the double-digit levels of the late '70s and early '80s. "Today, the yields are nothing like that," he said.
Siegel drew advisors' attention to research done by Strategas, which found that in periods of low inflation, the average price-to-equity ratio is 17.7. For instance, with inflation of 2-3 percent, this ratio is 15.8 percent. He described recent findings of the ISI Group, as well. "By all measures, we are about 15-22 percent undervalued," he said.
Siegel is generally bullish on the EU and euro, at least in the short term. "The EU got too big" too fast, explained Siegel. "But this means European exporters are set to gain," he pointed out.
"I do not think the EU and the euro have hit the bottom yet and should go to parity," the professor explained. "But, that said, stocks there could improve," so investors need not sell and run.
While describing his appreciation for Pimco's "new normal" outlook, Siegel outlined his disagreement with the bond group. Pimco's outlook, he says, is based on a Keynesian analysis of the economy, which failed to predict the boom that came after World War II.
"Such predictions can be OK for the short term but don't work in the long term," he cautioned. "For the long run, you have to look at productivity growth."
On average, U.S. productivity growth has been 2.2 percent a year. "It's been 6.3 percent in the last four quarters!" he exclaimed.