Ken Fisher is bullish on next year’s market and economy but decidedly bearish on the future of RIAs.
Implementation of the Dodd-Frank Act’s fiduciary features would be the death knell for RIAs, he predicts. Within a decade, the entire channel would be absorbed by broker-dealers.
The famed value investor and chairman and CEO of Fisher Investments manages $50 billion in assets of prominent institutions and affluent individuals. He developed the price/sales ratio and is well known for groundbreaking research on investment cycles. In 1990, Fisher called the start of the decade’s booming bull market.
Son of the legendary investor Phillip A. Fisher, Ken, 62, has written Forbes’ Portfolio Strategy column for 29 years. His most recent book — his 10th — is Plan Your Prosperity (Wiley-2012).
In two recent phone interviews with ThinkAdvisor, the money manager, speaking from his Woodside, Calif., offices, expounded on the game-changing effects of Dodd-Frank, dissed the Federal Reserve and Securities and Exchange Commission, and lay open his investment strategy for next year.
Here are highlights from those conversations:
ThinkAdvisor: What should advisors be thinking about most right now?
Fisher: If you’re a BD, get out your knife and fork and get ready to eat the RIAs as dessert because that’s probably where it’s going. If you’re an RIA, you’d better get un-naïve: the RIA world is at threat of being taken over by BDs in a regulatory sense. There’s a good chance that the entire RIA world is gone in 10 years. The SEC doesn’t seem to understand what it’s doing.
All the features of the potential fiduciary standard, including mandatory arbitration elimination, are likely to backfire and blow back — maybe fatally — on the naïve RIA world. BDs will likely subsume and exterminate the RIA world because the BDs would like to take it over: Money has been coming out of BDs and going into RIAs for 40 years. The RIA world has been growing rapidly at the expense of the BD world. And the BD world hates that.
But isn’t there a great deal of financial services lobbying happening in Washington?
The RIA world doesn’t lobby very well; the BD world does. The BD world always has been the “evil empire” and is effectively posturing the regulators for their benefit in all this stuff coming out of Dodd-Frank pertaining to the interrelationship between BDs and RIAs.
What’s the BD world’s real strength?
The big BDs have seen huge increases in concentration of market share. Twenty firms have all the money, and they’re going to keep getting more because they have all the lobbying power. The RIA world is native in thinking implementation of the fiduciary standard will be done in ways that will impede the BDs and help the RIAs. That’s stupid, wrong and backward.
What else might happen?
If there’s one thing the BD world would love is to have the RIA world taken over by [the Financial Industry Regulatory Authority] — and the SEC isn’t totally opposed to that. I don’t think they’ve thought through the implications. Many BDs try to play a hybrid role. A lot of them claim to be fee-only advisors when in fact they are not. There doesn’t seem to be any true discipline applied.
What’s your take on the temporary fix for the debt ceiling-default deadlock, which allowed the government to reopen after its 16-day October shutdown?
Wait a minute! The government isn’t shut down? I haven’t seen them doing anything! During the whole shutdown the market was doing just fine. Markets move in advance of such events. The shutdown isn’t something most of America really cares about — just journalists!
What’s your outlook for the economy next year?
It’s moving along in a slow but steady recovery. Markets move in advance of the economy. The stock market is one of the strongest of the 10 components of the leading economic indicator series (LEI).
To what extent has quantitative easing been of help?
I’m eagerly waiting for it to be over. That’s the most bullish thing we can do. Everybody under the sun has got quantitative easing wrong. It’s not a stimulus; it’s depressive. We’re doing well not because of it but despite it. It flattens the yield curve and slows things down. Historically, the steeper the slope, the more bullish for the economy ahead.
But the Fed insists that quantitative easing is a stimulus.
They say it is – but they lie a lot. Central bankers don’t necessarily tell the truth. [Fed Chairman Ben] Bernanke’s goal has been not to increase the quantity of money but to build bank balance sheets, which he has done very successfully. Quantitative easing doesn’t increase the quantity of money. That’s gone up less in this expansion than any economic expansion in our lifetime.
But isn’t Bernanke pulling the wool over Americans’ eyes in saying that quantitative easing is stimulating the economy?
It has never been incumbent on central bankers to be open, transparent and to tell the truth. If they did, somebody would trade ahead of them and profit. Central banks have never been particularly straight-up. Some things — like God’s little green apples — are what they appear to be. Central banks are one of those things that aren’t exactly the way they appear.
Are we still in a long bull market?
We’re moving slowly into the back half of the bull market. [Great stock picker] John Templeton said bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. We’ve got one foot in skepticism and the other in optimism. Everything takes a long time in bull markets. We’re five years into this one and haven’t reached optimism yet. That means we’ve got years to get to euphoria. Standard corrections can pop up at any point, but we have a long period of bull market to go because we haven’t got past all the skepticism.
What’s a specific sign of that?
When Twitter came out [on Nov. 7], it had a spectacularly successful IPO, but most of the other IPOs that same week did badly: they came out on the low end of their price range, and some were even pulled back and never brought to market. That was a sign there isn’t any kind of real optimism and euphoria: If there were euphoria, they wouldn’t come out on the low end.
What are the chances of a recession next year?
You can predict the economy six months out by looking at the LEI. It always works. Not only hasn’t it fallen; it’s been going up. We’ve never, ever had a recession while it was high and rising — never, ever, ever.
What impact will problems with the Affordable Care Act website and difficulty in enrolling in insurance plans have on the market?
Markets move in advance of things like that. If it hurt the market, it would have done so months and months ago. The market looks at health care and doesn’t care. Markets aren’t kind and sweet and gentle. There’s none of that empathy stuff. They’re like an extreme version of Asperger’s syndrome.
What’s your forecast for fourth-quarter corporate earnings?
Pretty much the way they appear — at all-time highs and progressing at a moderate rate. Revenues are growing at a respectful but not phenomenal rate. Fourth-quarter earnings will be just like the last four or five quarters, with moderate growth — slightly stronger than people expect, approximately 70% of earnings exceeding expectations.
What are your thoughts about revenue growth versus the overall economy’s sluggish growth?
Revenue growth has been slightly faster than growth in the economy, and corporate profits have been slightly faster than that because they’re a combination of revenue growth and increased productivity. If a corporation could figure out how to make stuff with no employees at all, they would.
What’s the biggest threat to the market next year?
Some new big, bad thing that we don’t talk about or know about now. The biggest single likelihood is that it could come from stupid government policy.
What are the chances of a market crash in 2014?
Remote. It’s a good year now, and 2014 will be a good year. It’s always possible to have a crash, but that would require new big, bad things.
What sectors do you like for next year?
We’re in a long bull market, so that means you move into a realm where big, high quality pays off: pharmaceuticals; big, boring names in technology; a little energy; consumer staples. Midsize banks and [non-European] foreign banks look pretty good — banks that are in the business of taking in deposits and making loans.
What’s your outlook for international investing?
My preference is not international but global. Next year will be just fine. The U.S. stock market has done better than the world. Now, as we move through the rest of this bull market, that begins to equalize. Emerging markets are beaten up pretty badly and will probably get a bounce-back. European stocks are starting to play catch-up.
What will happen with interest rates next year?
Assuming quantitative easing ends, long rates go up and short rates stay low; and the spread between short and long rises. Short-term rates won’t go anywhere because they’re stuck at zero — the Fed keeps them there. In the last two months, as long-term rates have gone up, the rate spread has been going up. That’s been the strongest single component of the LEI. The steeper you make long rates relative to short rates, the more eager banks become to lend.
What type of monetary policy is that?
Accommodative supply-side. Since 2008, the idiotic Fed has been using demand-side monetary policy. Demand-side doesn’t work. If you put both short rates and long rates at zero, no bank will ever lend a penny. Mr. Bernanke and crew are “bass-ackward” people. That’s a technical phrase really only understood on the West Coast.
So, then, what’s your outlook for bonds for next year?
Not so good — flattish, slightly negative-ish in total return.
Your thoughts on Federal Reserve Vice Chairwoman Janet Yellen’s nomination as Fed head?
Fed chairs’ activities before they head the Fed have not been terribly predictive of what they’ll do — though Mr. Bernanke remembered some of the things he knew before, and what he knew was wrong! The best thing the Fed head can do is to remember: First do no harm.
What are your expectations about Mary Jo White, SEC chairwoman?
She will be more of what you could view as anti-financial services than recent SEC heads. But I don’t think that will change anything very much.
Are the additional compliance regs instituted during the past few years helping investors?
According to the [University of Chicago economics professor Sam] Peltzman theory, people engage in riskier behavior than otherwise when there are rules in place that make them think they’re safer. When you take away those rules, they engage in safer behavior. So the perception that the SEC will protect people will actually cause them to take on riskier behavior because they feel more secure.
A final comment on the possible demise of the RIA world?
Everything that will probably end up benefiting BDs and hurting RIAs is exactly the reverse of what was intended when Dodd-Frank was put to Congress in 2010. Congress passes bills and then says, “We’ll worry about the details later.” But the details end up getting honed toward the benefit of those who are most successful at lobbying.
What will it take for investors to get to the optimistic stage of this bull market?
You mean: time heals all wounds?
Absolutely. We’re just grinding through getting away from the ghost of 2008-2010.
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