We present for your consideration 30 individuals who over the past 30 years–the period in which Investment Advisor has been serving independent and independent-minded advisors–have been most influential in building this profession that you practice, who provided the theoretical basis for your quotidian practicality, who used their positions among your partners and peers, in government and regulation, to make your professional life viable, and those who kept a sharp focus on what’s most important. We believe, too, that they will continue to influence your lives and those of your clients into the next 30 years.
PIONEERS & PRACTITIONERS
Founding Vanguard, the industry’s largest mutual fund company, and in 975 creating the first index mutual fund, the Vanguard 500 Index Fund, not to mention authoring seven books on mutual funds, investing, and capitalism that have collectively sold more than half a million copies, would be a list of accomplishments enough to qualify John C. Bogle for the IA30, but those only begin to explain his influence. Bogle celebrates his 81st birthday this month, and still reports to work every day at the Bogle Financial Markets Research Center, working tirelessly on behalf of American investors and to a large degree acting as the public conscience of the industry, reminding the entire financial services world–and the Congress and regulators in his recurring invited testimony–of their responsibilities to the investor. “I’d just like to bring common sense, reality, and mathematical truth back into the world of investing,” he says of his self-imposed crusade.
He decries changes in the mutual fund industry that have resulted in thousands of choices for investors but have also changed the character of the industry from one that encouraged investing for a lifetime to one of looking for a quick score. “The industry changed to becoming a much more speculative industry,” Bogle says, pointing to the creation of “a lot more speculative funds…all those kinds of funds that we now have to choose from that have very little to do with the market.”
Not surprisingly, Bogle remains evangelical in his belief that index funds are the only way to go for the average American who over the long term wants to capture the returns offered by the stock and bond markets. He observes that the current culture rewards managers for taking risks, but if those risks pay off, too much of the profits go to the managers and the company they work for, rather than to the fund’s real owners–the shareholders.
Acknowledging that it’s a radical idea in a climate where a financial consumer protection agency can’t even draw political support, Bogle says he’d like to see a federal statute of fiduciary duty requiring fund managers to put the interests of their shareholders first. He calls that the “ethical principles solution,” but he’d be just as happy to see what he calls “the Adam Smith principle solution,” in effect. Under that scenario, “investors would only look intelligently after their own interest,” he explains, which in Bogle’s opinion means buying index funds. “The index fund will capture your fair share of the market’s returns,” he says, noting that with index funds responsible for only about 20% of equity mutual fund assets, much more has to be done to educate investors.
For advisors, Bogle has some common sense advice: “Put the client first, not only in letter, but in spirit. Look to the wisdom of long-term investing and stay as far as possible from the folly of short-term speculation. Don’t reach for yield. Don’t reach for performance. Those things generally have unhappy, even tragic outcomes. Invest the money of your clients’ the way you would invest your own.”–Robert F. Keane (RFK)
(Read more of the interview with John Bogle here.)
One major theme for the next decade will be a “continued move toward fiduciary advice,” says Harold Evensky, president and CEO of Evensky & Katz Wealth Management, who in the eyes of much of the consumer world is the independent financial planner, and among his peers is the consensus eminence grise. While the Dodd legislation may not include a fiduciary standard for brokers, the SEC and FINRA “are committed to it,” he says, and even SIFMA “is coming along.” Advisors can expect to be dealing with a decade-long low interest-rate environment, so “the management of expenses and taxes is going to be extraordinarily important,” areas where advisors “can offer real value.” Since he expects a “volatile [market] environment” to continue, advisors must remain focused on “transitioning from an accumulation universe to a distribution world” which will hold a raft of new products, and where “advisors will have to understand a whole new world of annuities.”–MW
With more than 24,000 clients, 1,000 employees, and $39 billion in assets under management, Fisher Investments is about as big as it gets in the advisory world, but that doesn’t mean it’s finished growing, because as founder and CEO Ken Fisher quips, “I’ve got no market share.” Fisher observes that when he started his firm in 1979, “there wasn’t even the beginning of the sense of the ’40 Act world as being businesses,” he says. Advisory firms were “either very small and independent with no business-like quality to them, or something tacked onto the side to some other business like mutual funds, or a bank trust department. Today the investment advisory business has businesses.” Due to its size Fisher Investments can accomplish what other advisory firms can’t, such as having a vertically integrated organization with a strict separation of product sales and client service, be the industry’s largest direct marketer, and hire a formally designated chief innovation officer.–RFK
(Read more of the IA interview with Ken Fisher here.)
When Sheryl Garrett first decided to charge clients on an hourly basis for financial planning in 1998, colleagues in the industry were skeptical. Although she no longer personally sees clients, today the Garrett Financial Network has about 310 advisors in 43 states, Thailand, China, and Kenya, providing financial checkups for a flat or hourly fee to tens of thousands of individuals and families in a process Garrett describes as “like going to the dentist, but hopefully not as painful.” She’s confident that in time her business model will become much more widespread and she looks forward to a time when all advisors will be held to the same fiduciary standard, but she is aware “there needs to be thousands of us to meet the needs of the public as [they] begin to recognize what financial planning is and what we do,” adding with a laugh that she’s not sure it will come in her lifetime.–RFK
Although he shuffled off this mortal coil at the age of 82 in 1976, four years before the first issue of this magazine was published, Benjamin Graham’s influence on the advisory profession remains unparalleled. He was a mentor to Warren Buffett, who said he went to Columbia University because Graham taught there, and who has called Graham’s 1949 The Intelligent Investor “the best book on investing ever written.”
Graham, the father of value investing, stressed the fundamental differences between investment and speculation. He was in favor of businesses paying dividends to shareholders rather than keeping profits as retained earnings and took a disciplined approach to bottom-up analysis. He never deviated from his belief that the key to making sound investments meant looking at the numbers and making intelligent decisions based on them. It’s an approach that will likely never go out of style with advisors and their clients.–RFK
The evangelist of asset allocation and diversification continues to keep the faith, a faith that arises not from revealed dogma, but from the more prosaic task of running the actual numbers and using a keen intellect to descry what those numbers mean in the real world of building portfolios that perform for real people over time. This is the accomplishment of Roger Ibbotson, who knows research as the founder and former chairman of Ibbotson Associates (sold to Morningstar in 2006), who knows academia as professor of finance at the Yale School of Management, and who puts money to work in actual portfolios as chairman and CIO of Zebra Capital.
“I think of myself as an economic historian,” he said in an interview in early March, and sees his contribution as “making discoveries” about the capital markets and “bringing them into people’s lives.”
While many believe that asset allocation and diversification failed during the 2008-2009 crisis, Ibbotson calls for a more nuanced understanding of their benefits, and the numbers convince him that they continued to work even in the meltdown. He notes that in 2008, about 25% of U.S.-listed stocks lost at least 75% of their value, “but only four of the more than 6,600 unlevered open-end mutual funds available for sale lost more than 75% in 2008–so diversification does work!”
Ibbotson has revisited Brinson-Hood-Bebower’s contention that asset allocation accounts for 90% of a portfolio’s return, arguing instead that the sources of variation of returns from a portfolio are around 75% from the overall market, with the remainder about equally split from portfolio-specific asset allocation policies and from individual securities in the portfolio, along with the timing of trades, and fees.–JG
Three things will help the “relatively new” advisory profession continue on course: regulatory guidance, education, and research, says Deena Katz, who became the doyenne of financial planning practice management in her day job at Evensky & Katz Wealth Management and now midwifes the next generation of advisors as a professor at Texas Tech. “We have the body of knowledge and we’re starting to get regulatory guidance around what we do,” Katz says. She was also hoping that 2010 would be the year when all advice givers would be held to a fiduciary standard.
As for education, Katz says the CFP Board’s new requirement come 2012 that those seeking certification must prepare and deliver a comprehensive financial plan “raises the bar.”–MW
If Ross Levin, founder of Accredited Investors in Edina, Minnesota, were to update his landmark 1996 opus The Wealth Management Index, he says he would include “more of the whys, rather than the hows.” The book is out of print but you can still pick up a new copy on Amazon for only $600 (12 times its original publication cover price). The biggest changes Levin says he’s seen since he founded his firm in 1986 is the move to fee-only planning and “the democratization of financial planning. Now the subject has been brought to the masses and you can say you’re a financial planner without having to explain what that means.”–RFK
Don Phillips, managing director of Morningstar and creator of the style-box approach to investing, says the mutual fund industry today is “cleaner, fairer, and better” than it was 20 years ago. Now, advisors don’t put up with fund firms that provide sub-par services. The fund industry, Phillips adds, “has been responsive to the demands of the advisor community. Advisors want to be treated more like institutions and less like retail investors.” In fact, he says, advisors today have more “tools and investments at their disposal than the top institutions had 15 years ago.” Going forward, advisors are going to have “more and better tools to do their job,” but Phillips warns that “as you get more complex tools, the ability to wield them incorrectly increases.”–MW
At a time when retirement planning has become critical to nearly every advisors’ practice, Nobel prize winner Bill Sharpe’s innovative idea to give everyone access to retirement advice through cutting-edge technology by launching Financial Engines in 1996 cannot be overlooked. Financial Engines’ recent IPO is just one sign of its success. Of the three qualified default investment alternatives–managed accounts, lifecycle funds, and balanced funds–managed accounts “make the most sense because they are presumably customized to each participant’s circumstances,” says Ron Surz, president of PPCA Inc. Financial Engines announced last November that it now manages more than $25 billion in defined contribution assets in its managed account program.–MW
ICONOCLASTS & VISIONARIES
He’s the previously obscure man who repeatedly warned the Securities and Exchange Commission (SEC) for nearly a decade that Bernie Madoff was a fraud. Since slamming the SEC for failing to heed his warnings about Madoff during his testimony before Congress in February 2009, Harry Markopolos has become a champion to many Main Street investors, and members of Congress as well as officials at the SEC now turn to him for advice on how to fix the embattled securities regulator.
Markopolos, who now works as a full-time financial fraud investigator, details his years of tracking Madoff and his ordeal with the SEC in a new book, No One Would Listen, (John Wiley & Sons, March 2010). When asked how the SEC is doing now, a little more than a year after his scathing testimony before Congress, Markopolos (pronounced Marco-Poloes) doesn’t mince words. The SEC has “reorganized along functional lines, but they still don’t get it,” he told Investment Advisor in an April interview. “They still have lawyers in charge of all of the main functions at the SEC, and lawyers aren’t going to be able to spot any sort of financial fraud. They are not equipped for it. They’ve never sat on a trading desk, they’ve never managed money themselves, they’ve never had customers or clients. So they have the wrong people in charge.”
Acknowledging that no other federal agency “has gotten religion quicker than the SEC,” and that SEC Chairman Mary Schapiro has “made short strides in the right direction” by bringing industry professionals into the agency, Markopolos says that the SEC still needs to “make wholesale staff replacements” and bring in a “much larger number” of securities industry professionals. Even the SEC Commissioners–who are securities lawyers–should be replaced with industry professionals, he argues. Markopolos gives the SEC credit for “changing faster than the other financial regulators,” but says the Commission is “making evolutionary steps where revolutionary steps are needed.”
He admits that Ponzi schemes, which were once a “low priority” for the SEC, are now being “attacked vigorously,” and that “the SEC now knows how to solve Ponzi schemes rather quickly; they know to get third-party data sources to find out if any trading has occurred.”
Markopolos is also adamant that the SEC needs to implement an “entrance exam” so that it can be “an elite agency once again, instead of an also-ran, which is what it’s become.” Examiners on the accounting side should be CPAs with the “equivalent of Fortune 1000 public accounting or auditing experience,” he says, and their test should be tougher than the CPA exam. Examiners in the asset management division should be chartered financial analysts, and their testing should be above the “CFA body of knowledge,” he continues. The same goes for lawyers. “They need testing above the bar association.”
Another recommendation: The SEC must change its compensation scheme so that it’s commensurate with Wall Street salaries, Markopolos says.
Many have questioned why Markopolos didn’t contact NASD/FINRA about Madoff, since Madoff operated as a broker/dealer for most of his career, and only registered with the SEC in 2006. Markopolos says he didn’t dare reach out to NASD/FINRA because “my submission would have ended up in Bernie Madoff’s hands within minutes!” since Madoff was the former chairman of Nasdaq. FINRA, Markopolos says, “is nothing but an industry shield. It’s a self regulator… they are even more check-the-box than the SEC is; that’s hard to believe. They are even less competent than the SEC and certainly more subject to political influence than the SEC.”
Looking into his crystal ball, Markopolos sees the next potential economic blow-up in corporate debt. “Is it going to get paid back?” he asks. “There’s a lot of it out there that needs to be refinanced on the corporate side…mortgage-backed securities that are going to need to get refinanced, and the question becomes, ‘Can they?’ What is the value of those properties?”–Melanie Waddell (MW)
(Read more of Melanie Waddell’s interview with Harry Markopolos here.)
In the last 30 years socially responsible investing has become a force to be reckoned with, and for that you can thank Amy Domini. She was involved in the shareholder activism that leveraged U.S. companies to bring about peaceful political change in South Africa, and created the Domini 400 Social Index in 1990 with her partners at KLD Research & Analytics, to show that there was no performance penalty for using social and ethical screens in the investment process. “It proved over time there was no cost. In fact, on balance, there’s a profit,” she argues, adding that over the past 20 years the Domini 400 has outperformed the S&P 500. Not slowing down at all, the founder and CEO of Domini Social Investments most recently wrote Socially Responsible Investing: Making a Difference and Making Money.–RFK (For more, see The Green Advisor, page 92)