(Hollywood, Fla.) When former Federal Reserve Chairman Alan Greenspan speaks, advisors listen. This truth was eagerly acknowledged by Frank La Salla, Pershing managing director who introduced Greenspan on the first day of the Pershing’s INSITE 2008 financial products and services conference (June 4-6). “We finally got you,” La Salla jokes, referring to how popular Greenspan is as a speaker and commentator worldwide and how tough it can be to capture some of his time.
Greenspan’s Latest Viewso Commodity prices: a result of demand and supply, globalization and population growth — not speculation. o Inflation control: the most vital element in sustaining economic growth; by concentrating on inflation, policy-makers guarantee the other. o Current housing crisis: no evidence that low interest rates since 2000 were responsible. o Housing prices: will have to stabilize before the current crisis ends.o U.S. dollar’s current weakness: a result of the interest-rate differential with the euro, which will revert as U.S. rates rise. o Power of central banks: has fallen with the proliferation of sovereign wealth funds and hedge funds, which is why we see less intervention in foreign-exchange markets. o Future of U.S. economy: With the aging U.S. population, expect higher taxes or cuts in benefits as productivity gains (historically 3 percent a year) cannot keep up with higher health-care costs; globally, countries with younger populations are at an advantage.
Source: U.S. Global Investors, Pershing
The first theme highlighted by Greenspan was the rapid pace of change, which is only becoming quicker and quicker in the 21st Century, the former Federal Reserve chairman insists. “And this creates turbulence,” as well as angst about the painful issues that arrive from change and the creative destruction of the markets.
Stagflation, for example, is a risk, according to Greenspan, and it follows 20 years of disinflation. “There’s no evidence of it” yet, he insists. But “politicians must handle [the risk] thoughtfully.”
Food and energy costs are in an upward trend in the long term, and that means “the old notion of core inflation that excludes food and energy prices is no longer the way to look at the world.”
Have we dodged a recession? “It’s too soon to say,” Greenspan says, adding that the odds of a mild vs. a severe recession are roughly equal at 50-50. The verdict won’t be clear “until we see the end of the decline in home prices,” which he doesn’t expect to happen “for months.”
Greenspan says, “When you can guess a crisis [is coming,] the markets adjust.” But that was not the case with the sub-prime crisis that spread worldwide in August 2007. “There are dangers, when you don’t anticipate something.”
But he cautions policymakers and observers about being too quick to address such problems with regulation. “If the market does not resolve [a problem], then regulation will not help,” Greenspan explains.
In terms of the fallout from the credit crisis, including his legacy, he doesn’t shy away from the issue of whether or not the low interest rates he oversaw in recent years were so low for so long that they have hurt the United States. “This could be credible, if the data said this,” but it hasn’t, he concludes.
In addition, he points out, “This is a global issue,” Greenspan says. And he describes how central bankers in Washington, D.C. and elsewhere “lost control” of long-term rates. “There was little we could do to influence long-term global interest rates,” he adds, referring to the first theme of his presentation, the rapidity of change.
At the end of Greenspan’s presentation, he shared his overall opinion on the U.S. presidents with whom he’d worked. This includes Gerald Ford (from 1974 to 1977), when Greenspan led the Council of Economic Advisors, and Presidents Ronald Reagan, George H.W. Bush, Bill Clinton and George W. Bush (1987-2006) during his tenure as chairman of the Federal Reserve.
Richard Nixon: “Very intelligent, but extraordinarily conflicted, personally.”
Gerald Ford: “Not able to be tough for the [presidential] election, but my favorite president, a remarkable human being.”
Jimmy Carter: “Very little contact with him.”
Ronald Reagan: “More intelligent than most people realize, very effective and remarkably consistent.”
George H.W. Bush: “A real professional, knowledgeable in foreign affairs, a friend for decades, but we did not get along well [during his time in the White House] because of his views on monetary policy.”
Bill Clinton: “Big surprise, we were the odd couple. We got along exceptionally well.”
George W. Bush: “He respects the Federal Reserve Board’s independence, like Clinton.”
In describing his respect for Reagan, Greenspan says wisdom is the ability “to recognize good creative ideas when you hear them” and “to know what sound advice is best [to follow].” Such judgment was critical to Reagan’s success, he concludes.
And what’s his key piece of advice for the next U.S. president? “Let the central bank and the Federal Reserve do what has to be done.”
On the second day of the conference, Pershing President and COO Brian Shea asked the event’s 1,700 attendees, “Are we delivering?” and then indirectly answered this in the affirmative by pointing to Pershing’s key customer-growth indicators. One such indicator shows that the clearing firm’s advisor clients are growing their assets under management at a compound annual growth rate of 10.2 percent. “And the 11th consecutive year of growth should be 2008,” Shea says.
At a 10.2-percent clip, that means advisors are nicely outperforming the S&P 500′s recent growth, which is 6.6 percent. According to Shea, Pershing-affiliated advisors have nearly $950 billion in assets under management. The average client account size is $181,262.
In terms of the average portfolio, assets — as of April 2008 — have been split as follows: equities, 37 percent; mutual funds, 28 percent; money-market funds/cash, 15 percent; fixed-income products, 14 percent; and the remaining 6 percent in other holdings.
“Cash holdings are at a record,” says Shea, noting that cash has usually represented about 10 percent of portfolio holdings. “The clear inference is that there is a flight to safety,” he adds.
Some products experiencing the most dramatic growth in between April 2007 and April 2008 are ETFs, offshore funds and retirement products. Mutual-fund assets at Pershing, for instance, have grown at nearly 17 percent a year in the past four years, while the industry’s growth rate has been about 13 percent.
“You are winning,” he explains to conference attendees, most of whom are independent advisors. They are seeing about 1.4 incoming-account transfers vs. 1 outgoing-account transfer and $1.6 in incoming assets vs. $1 in outgoing assets.
At the conference, Pershing managing director Jim Crowley gave a progress report on the clearing firm’s retirement-solutions program, which now has some $215 billion in assets under management, and encompasses Treasury accounts and health-care savings accounts. Other asset-gathering vehicles, such as donor-advised funds, allow advisors to keep in step with “the social values of clients,” he says.
Crowley says Pershing rolled out an ETF center earlier this year and has launched a paperless account-opening solution for RIA customers, which will be available for broker-dealer customers and their investment professionals in the fourth quarter. The firm also plans to launch a lifecycle-management program later this year that will include an enhanced rollover process, paperless distributions, third-party administrator alliances and practice-management support.
The paperless-account opening solution relies on electronic signatures and “significantly reduces the time and effort it takes to open new accounts and transfer assets,” the company says.
In early June, Pershing added American Funds, JennisonDryden, OppenheimerFunds and Van Eck Global to its no-transaction-fee mutual fund platform, FundVest. This platform includes access to nearly 2,700 mutual funds managed by more than 180 fund companies.
And in late May, the firm launched a trust network for its introducing broker-dealer and independent registered investment advisor customers. Pershing says its trust network is an open-architecture platform that allows investment professionals to offer clients a wide range of trust services and solutions from AST Capital Trust Company, Reliance Trust Company, Santa Fe Trust and Wilmington Trust.
“Our strategic plans are driven by your feedback and are validated by our ‘Advisor of the Future’ study,” concludes Shea. For instance, he says, the development of the next generation of its NetExchange platform relied on input from some 500 investment professionals. “We invest $300 million annually in your information technology at Pershing.”
Janet Levaux, MBA/MA, is the managing editor of Research; reach her at email@example.com.