From the December 2011 issue of Research Magazine • Subscribe!

November 23, 2011

Blair, Gross, Other Experts Weigh in on Euro Tumult and Anti-Wall Street Protests

Tony Blair, Bill Gross and other prominent figures spoke about anti-Wall Street protests, European turmoil and more at Schwab Impact 2011 in San Francisco.

Former British Prime Minister Tony Blair said the resolution of today’s global economic and financial challenges could get derailed by short-term political thinking, though he remains optimistic that leaders can address long-term issues. Blair spoke Nov. 2 to about 2,100 financial advisors and about 2,000 other guests as the keynote speaker at Schwab Impact 2011 in San Francisco, noting that economic and security issues are the world’s greatest problems.

“The best short-term politics do not make the best long-term policy,” said Blair, who was prime minister from 1997 to 2007. “Right now is a moment of big decisions and key decision makers. And there is a danger that short-term politics get in the way of the best long-term policies.”

He described the challenges and changes affecting the world as similar to those affecting the financial-services industry. “The speed, scope and scale of change and the challenges themselves are immense. Challenges come together, though — when I was in office — I had hoped they would be sequential,” Blair explained. “And if you think the [financial] markets are tough, try the Middle East,” he added.

Asking the ‘Right Question’

“In a world defined by uncertainty, anxiety and low predictability, the challenge for leaders is trying to get the right answer,” said Blair. “That is the toughest job of the prime minister.” To get there, he explained, you have to first ask the right question.

In terms of the global economy, it is not productive to focus on who caused the financial crisis and how we can prevent a recurrence, in his view. “These are not dominant issues,” said Blair. “The key is how to get the economy moving and create jobs. All else should be subordinated to that.”

In responding to this, he continued, leaders need to tackle deficit reduction and also “regulate sensibly knowing that a vibrant financial sector is part — a constructive, important part — of our recovery.”

 While many businesses are flush with cash, “business needs confidence to invest,” Blair said. “We also must use the crisis [as an opportunity] to make changes to our systems and government,” including that of the European Union and Monetary Union. 

The crisis “has exposed problems, and we need to deal with those problems,” he explained. “I welcome what leaders there did a few days ago. We must put into place a long-term framework for fiscal and monetary coordination … and make reforms,” Blair said.

The European monetary union, he explained, must “function effectively with fiscal coordination and … the authority … to impose and implement changes that [need] to happen, or we’ll end up where we are now,” shared the former prime minister.  “We have wanted to pretend that the Greek and German economies were run the same way, and they were not, so now we have to adjust.”

Occupy Wall Street

In terms of protests on Wall Street and audience questions related to economic inequality, Blair suggested that looking globally for answers was important.

“We must get China to consume more and shift to help the U.S. to revive industry,” he explained. “It will be hard but is essential to do.”

Education is another way that inequality and the forces of globalization should be dealt with by the West. “The force of globalization is unstoppable,” said Blair.

“I know that people are having a tough time. Thus, we have to improve education and educational equality,” he explained. “People will have to adapt and adjust several times in life. Education cannot be just for the elite or the top 40 percent but for all.”

Hoping people meet global pressures via education, can also help more individuals find long-term benefits from opportunities emerging from economic expansion worldwide and growing interconnectedness, said Blair. “I oppose protectionism,” he noted.

As for the issue of high executive compensation in the United States, Blair said it was important to keep in mind “that those that shout loudest do not necessarily deserve to be heard most,” he shared.

“Regulating compensation is not the right debate,” Blair said. “The corporate sector needs to better align compensation and achievement. Instead, there should be a greater focus on the stimulation of jobs.”

Values Based

As with businesses and advisor practices, nations worldwide are facing fast-paced challenges and change. The rise of China and other powers, he says, should not be seen as overwhelmingly negative.

“I’d say, we are not an empire based on territory or interest alone,” Blair shared, “and a fundamental strength of the U.S. and U.K. is that [our systems] are based on values and way of life, which are based on law, liberty, justice and a society that protects the weak and as well as the broad mass of people. These values will not be made historically redundant.”

In the Nov. 1 opening session at Schwab Impact 2011, both Bill Gross, founder and co-CIO of PIMCO, and LizAnn Sonders, Charles Schwab’s chief market strategist, spoke bluntly about the global markets and the economy, with Sonders a bit more optimistic than Gross.

Gross handled the first question from moderator Tyler Mathisen of CNBC, who asked if he should be worried that “my money seems hostage to a Greek prime minister?” “You should be very worried,” Gross responded, in reference to Greek Prime Minister George Papandreou’s suggestion that the latest eurozone bailout plan should be put to a referendum by Greek voters. “At this point,” Gross continued, “it’s a question of when rather than if Greece will default.”

As for how advisors and individual investors can respond to such volatility, Sonders suggested that the worst thing was to “try and shorten your [investing] time horizon,” and that investors should try to make volatility work for them partly through regular rebalancing.

 Responding to Mathisen’s request for how Gross and Sonders might help solve the U.S. and developed world’s debt problem, Gross said that at PIMCO “we call it the time of ‘new normal’ minus,” that while the United States is doing better than its European developed countries counterparts, “we’d have to grow at 4 percent for a couple of years” to significantly reduce our debt to GDP ratio.

Sonders said the “developed world has a debt problem” consisting of high debt and low growth plus an eased monetary policy, which in turn has “weakened growth in the developing world as they tighten their monetary policies. We’re in a cul de sac” that may be difficult to emerge from while we’re in a ZIRP environment (zero interest rate policy).

When an advisor attendee asked what the Occupy Wall Street protesters want, Gross said they are sending a message: they want a job. “Globalization used to work for the U.S., he said, “now it’s working for countries with lower labor costs who have taken advantage of technology. People just want jobs.”

Echoing Sonders’ suggestion of an underreported story, Gross charged that “for 20 years we’ve been making paper rather than things, and in the process we created a number of liabilities. We’ve been like bad squirrels, not putting enough away.”

China in Focus

Joshua Cooper Ramo of Kissinger Associates told advisors and other guests at Schwab Impact that, in order to meet the challenges of the 21st Century, they need to come to grips with the abundance of shifts happening globally — especially in China.

“The rise of China is one of the most important changes of our lifetime, and the outcome remains uncertain,” said Ramo, author of  The Age of the Unthinkable. “For the U.S., it involves the challenge of ideas, economics and values and also the opportunity for cooperation,” he said at the Nov. 3 session the conference, which was attended by some 2,100 Schwab-affiliated independent advisors and 1,900 other guests.

The Chinese, explained Ramo, see the major U.S. news from Sept. 11, 2001 and Sept. 14, 2008 (when Lehman Brothers went under) as related. “They are markers of big, powerful events,” he said. Like the Arab Spring, the Chinese work to stay abreast and to understand the connections between events that cause organizations to change and/or collapse under new and different pressures.

“How do Chinese look at this? It’s the nature of the age. Looked at from their worldview, they are looking for instability. This is one of the fundamental cultural differences between the United States and China,” Ramo explained.

Ramo described “the unthinkable” as trends such as the loss of U.S. jobs and the increase in Chinese ownership of U.S. debt. But rather than seeing such developments as unpredictable, he urged the Schwab Impact audience to view them in a very broad global context.

“There’s been an explosion of world actors,” he said. This includes hedge funds, terror cells, non-governmental organizations and urban residents.  “This proliferation will not change,” added Ramo. In other words, the dramatic, often unpredictable shifts we are seeing today will only become more dramatic in the future.

In this context, there will be individuals and groups on the planet who may appreciate some aspects of the United States and its culture (namely pop culture) but do not agree with all of its foreign policies and other political stances.

Such a dichotomy, Ramo says, requires more cooperation. “In a more networked world, it means there is nowhere to hide from risk,” he explained. The tensions between change and continuity are being felt acutely in China today, which is why its leaders try to maintain strong links “to its revolutionary past,” the analyst noted.

To avoid a potential military conflict with the Chinese (and others) “requires new ways of engagement and interaction,” he said. It means that the United States has a “tremendous” responsibility to forge new, creative ties to the expanding nation. “This will define the generation. There are many reasons to find conflict, so how can we do the unthinkable?” he asked, urging America to forge new means of interaction.

Leadership Issues

Charles Schwab, founder and chairman of the investment company that bears his name, reiterated his critical views of both Federal Reserve Chairman Ben Bernanke and President Barack Obama’s economic leadership at the San Francisco conference. Schwab echoed some themes he raised in an opinion piece in the Wall Street Journal in late September. He views significant change in Washington as critical to a turnaround in the U.S. economy.

     “What Bernanke is saying is a bit of BS,” said Schwab, 73, in a discussion led by CNBC anchor Maria Bartiromo before about 2,100 advisors and other guests. “The U.S. does not have full control of prices and inflation, which can come from China or could be from oil or another commodity on which we are interdependent as a country.”

(The day before, Bernanke expressed support for the Federal Reserve’s Operation Twist program, which, as part of its overall accommodative policies, will keep the target range for the fed funds rate at zero to 0.25 percent.)

“I should say that I am generally more positive than what I see on CNBC,” added Schwab. “From a 39,000-foot view, the economy doesn’t look so bad. We have 139 million or 90 percent of the workforce employed, liquidity is incredible, we’ve deleveraged the economy … many things are highly positive.”

The U.S. economy has “good pools of labor and capital” to help it expand. “We are at a point where we can make a turn,” the former Schwab CEO shared. What must come first, he asserted, is formidable shifts in Washington.

“It requires change and a sense of change in leadership, anticipation of new tax systems, dealing with budget deficits,” Schwab said. “Someone of strength has to make these decisions, and we do not have that strength,” he explained, referring to, but not directly naming Obama. As for Republican leadership, the party has to have “someone electable,” Schwab said, noting that he sees Dodd-Frank as a “disaster.”

In terms of the Wall Street and other protests over economic inequality, he wants free-market mechanisms to lead the way: “Let’s reward success and not suppress it, and yes, we need tax reforms,” Schwab shared. “To level the playing field, we have to have a robust economic expansion. There’s no other solution. Occupy Wall Street doesn’t get how free enterprise works.”

Economic Growth

The needed jump-start to a more robust U.S. economy involves getting consumers, investors and others out of the present “funk,” he adds. “It starts at the top of companies and filters down. The same goes with the country,” Schwab explained. “There are lots of good things about the current administration, I guess,” he conceded.

But the political focus on fairness is off base, in his view. “The world is not fair; it comes down to hard work,” Schwab said, adding that not all of his children “get” this perspective. To improve our global competitiveness, a shift at the top is also desirable, he noted. “As a country, we’ve lost out in terms of a lack of leadership; we’re thirsty for that … and must have strong leadership, which I hope to see in November 2012,” he said.

He praised economic growth in China, but said Schwab is not ready to do business there yet due to regulatory and other constraints. In terms of possible U.S. regulation tied to speculation in the markets and the recent “flash crash,” Schwab said that he believes, as in every industry, that some boundaries are needed.

“With computerization, everything — like trades — is happening at high speeds,” he explained. “That’s been negative for the markets. I have some questions and would like to see boundaries here.”

Advisor Recognition

During the conference, Charles Schwab executives presented Impact Awards to three advisor firms and their leaders. “This year’s Impact Award winners raise the bar for excellence in client service and exemplary business practices for the independent RIA industry,” said Bernie Clark, executive vice president and head of Schwab Advisor Services, at the event.

Richard Stone, CEO of San Rafael, Calif.-based Private Ocean received the Leadership Award for his role in helping the International Association of Financial Planners draft a code of ethics for the industry, according to Schwab. Walt Bettinger, CEO and president of Schwab, joined Clark to hand out the award.

Stone’s firm has about $700 million in assets under management.  In addition to serving on the board of several Bay Area universities, Stone also created a scholarship program to support disadvantaged students seeking a college education.

Schwab presented its Best-in-Business Award to Budros, Ruhlin & Roe of Columbus, Ohio, for its excellence in business management. The firm was founded by Jim Budros and Peggy Ruhlin based on their commitment of the concept of fee-only financial advisory work. It manages more than $1.5 billion in assets, and its best practices include dedicating substantial resources to technology: hardware, software and the development of a team of IT professionals.

Schwab presented its Pacesetter Award to Green Square Capital of Memphis, Tenn., which manages more than $1 billion. The team grew 30 percent last year and has instituted a policy of “client delight.”

On behalf of Stone, Schwab made a $25,000 donation to 10,000 Degrees and Dominican University.  Schwab made a $10,000 donation to the Budros, Ruhlin & Roe Fund at the Columbus Foundation and contributed $10,000 to the Make-A-Wish Foundation of the MidSouth on behalf of Green Square Capital.

The 2011 Impact Award winners were selected from a pool of nearly 7,000 independent investment advisory firms by a panel of judges, including Julie Littlechild, president of Advisor Impact; Sean R. Walters, executive director and CEO, Investment Management Consultants Association; Dr. Thomas R. Robinson, managing director of education, CFA Institute.

Breakaway Brokers

Tim Oden, a Charles Schwab executive who spoke with reporters during the conference, said that as far as the firm’s concerned, the breakaway-broker phenomenon is going strong. The proof, he said, is the number of prospects attending this week’s Schwab Impact conference in San Francisco, which has attracted about 2,100 advisors and roughly 1,900 other guests.

“We have 87 prospective breakaway brokers at this year’s Impact, double last year’s number,” said Oden, senior managing director of business development for Schwab Advisor Services. “They can come all week. We have one day of breakout sessions for them, regional dinners and other ways for them to interact with advisors, vendors and staff.”

A big reason for this uptick, Oden said, it that a large number of wirehouse brokers will see the terms of their retention bonuses end in January 2012. “They have retention packages that will sunset next year, and so they’re earnestly kicking the tires,” Oden explained. “This is when they could decide to make a move.”

The prospects, he said, mainly come from the wirehouse firms (Merrill Lynch, Morgan Stanley, Wells Fargo and UBS). However, some also come from independent broker-dealers, while others are RIAs who custody with rivals and “are revisiting that relationship,” said the executive.

“A great deal of the talks we are engaged in with prospects concerns the sunset provisions of their retention packages, which means they are through with the major decision-making process. They have made it and are now being thoughtful about when” they make the move to independence, said Oden. And this decisiveness “bodes well” for recruiting in the first and second quarters of 2012, he noted.•

Note: Jamie Green contributed to this report.

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