The 2015 IA 35 for 35

In his foreword to Rob Arnott’s book “The Fundamental Index,” Harry Markowitz summed up fundamental indexing this way: “What I will refer to as an efficiency-weighted portfolio will outperform a capitalization-weighted portfolio.” In a footnote in the book, Arnott wrote that “many of the critics of the Fundamental Index concept are our friends and even mentors,” noting that Jack Bogle himself encouraged Arnott to launch his firm Research Affiliates. In turn, Arnott “views Bogle as one of his heroes […] and sees the Fundamental Index concept as a natural and important extension of Bogle’s impressive legacy.”

So what of the legacy of John Bogle, the champion of index investing, the creator of the Vanguard culture and the unswerving advocate for the individual investor? Another member of this year’s IA 35, George Kinder, had this to say about him: “One of the things Bogle has said is that the only mistakes he ever made were when he made a decision based on business or based on marketing. His great decisions were based on the consumer, what the consumer cared about.”

In 2013, IA Editor-at-Large Bob Clark wrote about a conversation he had with Markowitz, the Nobel laureate and the founder of modern portfolio theory, which with the publication of the 1986 Brinson, Hood and Beebower paper “became the foundation of today’s independent advisory industry,” wrote Clark. What did Markowitz say to Clark? “Perhaps the most important job of a financial advisor is to get their clients in the right place on the efficient frontier in their portfolios, but their No. 2 job, a very close second, is to create portfolios that their clients are comfortable with.”

Our fifth man to honor is Eugene Fama, who still teaches at the University of Chicago, and who also won the Nobel in Economic Sciences for his work on creating the efficient market hypothesis. Speaking last year, a former student and teaching assistant of Fama’s, Cliff Asness of AQR Capital hedge fund fame, pointed out that despite their different takes on the efficiency of the market, “along with Jack Bogle, he’s one of my investing heroes.”—JG

Behavioral finance has become widely accepted in financial planning circles as the industry recognizes that sometimes perfectly intelligent clients do very stupid things. In endeavoring to learn why that is and prevent it as much as possible, there may be no more respected thinker than Daniel Kahneman.

Steven Pinker, a psychology professor at Harvard University, called Kahneman “the world’s most influential living psychologist.” In an article for The Guardian, he said, “He pretty much created the field of behavioral economics and has revolutionized large parts of cognitive psychology and social psychology.”

Kahneman received the Nobel Memorial Prize for economics in 2002. British economist Richard Layard said that that award “has made happiness respectable—not only as a subject of study but as a goal for society.”—DA

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One of the biggest changes to occur in the independent advice industry over the last 35 years is that the advisors who comprise it have come to realize the importance of what they do, according to Deena Katz.

The co-chairman of Evensky & Katz/Foldes Financial and associate professor at Texas Tech University said it’s not just what the advisor does for the client, it’s the way they engage the client in the planning process.

“We now understand how valuable that process is, and how valuable it is to take people through their life issues and have them weigh in on what’s happening and be a productive part of the planning aspect,” she told Investment Advisor.

Advisors who are doing a good job recognize their clients’ weaknesses and decide what needs to be done first, she said.

“We do the things that we think are most important, and then we begin to tackle the other things. We don’t ignore them, which is where a lot of the industry is now. [They say,] ‘We just do asset management.’ That really is optimizing returns, not optimizing financial life.” Consequently, Katz doesn’t see robo-advisors as a threat, but worries that they focus too much on investments and returns and leave out the planning.—DA

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Nobody had any idea what the life planning movement was in the ‘70s and early ‘80s, said George Kinder, founder of the Kinder Institute of Life Planning, and by the ‘90s, only a “few dozen people” were practicing it. Now Kinder has taught life planning courses in “28 countries, on all six continents.”

Kinder expects the fiduciary movement will continue to expand in the future. “You’re going to see that beginning this year, it’s mostly considered a movement having to do with pricing of our product, and the transparency of that pricing of our offering as financial advisors.”

One of his boldest predictions, though, is that “35 years from now, and I feel pretty confident about this, instead of financial advisors being at the bottom of trust surveys, financial advisors will be at the top of trust surveys.”

That will be because of three things: the move to a fiduciary standard of advice giving; adoption of life planning as part of financial planning; and recognition that advisors aren’t delivering financial plans and products, but freedom. “It’s delivering into the client’s life a degree of freedom that they didn’t realize was possible.”

Serving the underserved will continue to grow, Kinder said, and will “drive prices down for us advisors. The value of investment advice will less and less be in assets under management, and more and more be in the conversation.”—DA

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When Sallie Krawcheck, chair for Ellevate Network and its associated firm, Pax Ellevate Management, started as a research analyst in the ‘90s, she was told “that Wall Street was the only industry in the world in which one could become wealthy by simply being mediocre and essentially hiding in the pack.”

These days, the Wall Street veteran is adamant about the importance of women in management and for the long-term health of the financial industry. “Women are […] underserved,” Krawcheck said. The industry is “going to have to think differently if we want to attract and approach and engage with this enormous market.” (According to Ellevate Network and Pax Ellevate, women control about $20 trillion in investment dollars and represent some 9% of the world’s billionaires.)

When asked what she thought about robo-advisors, she cautioned against taking a purely negative approach. “We’re dismissing them; but in fact, it’s very important for our industry to continue and accelerate the trend of investing in technology,” she said.—Janet Levaux

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Five years after Bernie Madoff was sentenced to 150 years in prison for conducting the biggest Ponzi scheme in history, investor confidence still hasn’t fully recovered.

While Madoff managed to steal $65 billion over decades from investors, the total amount distributed in the Madoff liquidation proceeding to date exceeds $7.2 billion, covering more than 54% of the losses of allowed claimants. The overall figure of $7.2 billion includes $823.7 million in committed advances from the Securities Investor Protection Corp.

When additional settlements awaiting distribution are taken into account, SIPC says, the total recovery to date in the Madoff liquidation proceeding totals $10.551 billion.—MW

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There are three things that “really highlight the trends over the last 35 years” in the industry, Moshe Milevky, finance professor at the Schulich School of Business at York University, said.

First is that in 1980, interest rates were at “abnormally high levels,” between 15% and 20%. Over the next 35 years, they fell to almost zero.

Second, the services advisors provide are different. Milevsky recalled that “35 years ago, investment advisors and money managers were stock pickers. […] Even mutual funds hadn’t become entrenched, let alone ETFs and managed portfolios.”

The final big change over the past 35 years is in the nature of retirement. Three and a half decades ago, retirement was “a couple of years, a long vacation, and you get a pension from where you worked.” Now investors have to figure out how to make the money in a 401(k) or IRA last for a few decades.

Although he pointed to specific transformations that have brought us to today, Milevsky insisted predicting the changes of the next 35 years was an impossible feat. “Forecasting the future is a mug’s game,” he said. “In some sense, I think that part of the secret to being useful and valuable is not trying to forecast.”

He conceded that over the next few decades, the industry could change so much it would be unrecognizable to the advisor of 2015. The next generation of advisors needs to keep in mind that they may need to have very different skill sets in 30 years.

“A financial advisor may be a social worker 30 years from now. A financial advisor may be a gerontologist 30 years from now. They may be a life coach. They may be doing things other than managing their money, because that’s all going to be done by robo-advisors and online platforms,” he said.—DA

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Investment Advisor recognized the long-term impact Chuck Schwab had on the industry when we included him in our inaugural IA 25 list back in 2003. “If all that Charles Schwab had done was to found a discount brokerage that loosened the wirehouses’ stranglehold on stock trading, his place in history would be secured,” Jamie Green wrote then.

That wasn’t all he did, though. Schwab’s custody platform made the RIA model possible. Now, the firm serves 7,000 advisors with $1.13 trillion in client assets.

Schwab continues to be a disruptor, to the point that it’s disrupting the longevity of other disruptors. When the firm launched in March its robo-advisor offering, Schwab Intelligent Portfolios, Cerulli Associates said it was a “serious threat to [robo-advisors’] continued existence.” Not only is the robo-advisor model easy to duplicate, big firms like Schwab can offer more services at a lower cost, according to Cerulli.—DA

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Many—most—advisors still don’t have a formal succession plan, but Eric Schwartz does, for himself and for his broker-dealer reps. Many advisors are struggling with the best revenue model for their businesses, since robo-advisors are putting price pressure on advisors whose “value” comes from picking a diversified portfolio of actively managed mutual funds while commissions are drying up. Schwartz’s Cambridge Investment Research broker-dealer is not confused by revenue models.

The now-34-year-old Cambridge with 2,700 reps was a pioneer in promoting fee-based business in the independent broker-dealer space; as of year-end 2014 (according to data gathered for IA’s annual broker-dealer survey in June), Cambridge had $36 billion in AUM in its fee-based business, delivering $332 million in revenue.

Perhaps you think that’s an old story, but consider CPG, a separate company Cambridge set up in 2010 that has more than 165 Cambridge reps as partners, reflecting over $15 billion in AUM (and at least one outside RIA, with more in the pipeline, Schwartz said). CPG provides capital to those reps for both acquisition purposes and so that the next generation of advisors can eventually acquire control of the individual firms. Schwartz said that while “I built CPG for the senior partner” as a succession planning entity, “the real beneficiary is the next generation.” 

The next generation of leadership at Cambridge itself is already in place, notably in the person of President Amy Webber, while Schwartz’s succession program includes a plan that will keep Cambridge in private hands.—JG

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Bill Sharpe’s Financial Engines might be called the first robo-advisor. When he co-founded the firm in 1996, he had already won the Nobel Prize in Economic Sciences. Two years later, the firm launched what the firm calls the “first independent online advice platform,” which uses Monte-Carlo-based planning to help consumers plan for retirement.

Financial Engines has found a lucrative role in retirement planning, providing technology-enabled retirement help to more than 9 million employees at more than 600 companies, partnering with major retirement plan companies like Vanguard and Fidelity.

Then there’s the Sharpe ratio, which Sharpe first described in 1966 to measure risk and reward, and is still a popular measure of a fund’s volatility.

Though retired from Financial Engines, Sharpe still serves as director emeritus on the firm’s Board of Directors.—DA

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For the superstitious, 13 is considered an unlucky number, but when it comes to Mark Tibergien, it’s a lucky 13 times that the Pershing Advisor Solutions CEO has been named to the IA 25. The number of years the IA 25 has been named? Thirteen.

While no man is an island—and Tibergien in particular can count his devoted custody and consultant advisor clients in the thousands and his mentees in the hundreds, including many other leaders of the business—Tibergien introduced the idea of applying rigorous business analytics to independent advisory firms. He has consistently sounded the alarm about the human capital shortage we’re already seeing in the industry. He has encouraged, cajoled—everything but threatened—advisors to do the right thing when it comes to succession planning—right for advisors, right for clients. He’s also run a couple of high-profile, innovative businesses with colleagues who share his passion and insights.

He has done it all with a relaxed intelligence and a sometimes pointed (and always on-point) sense of humor that disarms his critics while driving home his point.—JG

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Don Trone’s transition from Coast Guard helicopter pilot to a fiduciary leader was a personal one: “A mortgage broker took advantage of me and I hated the feeling. I reported the incident to the regulators and they did nothing.”

After leaving active duty in 1987, Trone began working on his Master’s thesis titled, “Integrating a Fiduciary Standard of Care into an Investment Advisory Practice.” While compiling the thesis’s bibliography, “I could only find three books on the subject of fiduciary responsibility,” Trone recalled. “What struck me is how could you have a topic that impacts so many people have so little academic rigor? That’s when I made the decision to pursue what we now call the fiduciary movement.”

He’s been in the driver’s seat of that movement ever since—first launching the Foundation for Fiduciary Studies, becoming principal founder of fi360, to now heading 3ethos.

Any fiduciary rule issued by the Securities and Exchange Commission, Trone said, will be a “compromise so it will be the minimum standard,” with “another 25 or so questions [being added to] the Series 7.”—MW

If you want to build a profession, you need fiery visionaries and tub-thumping evangelists who can energize the grass roots. You need folks with specific technical knowledge and contacts among legislators and the profession’s regulators. You also need someone like Marv Tuttle, who headed the Financial Planning Association from 2004 until his retirement in 2012 and who has been a quiet, conciliatory force—with a steel backbone and clear-eyed ethics—in forging the profession beginning way back in 1983 when he became communications director for the ICFP.

Tuttle’s vision and guidance was seen in the successful merger of the ICFP and IAFP to form the FPA in 2000, but also in multiple FPA moves that served to build the profession—and better serve clients—even if it meant FPA itself could suffer some financial and membership consequences.

In writing about Tuttle at the time of his retirement, IA Editor-at-Large Bob Clark said that naming “Marv as CEO was the smartest thing any financial planning association has done in the 30 years I’ve been observing the profession,” and concluded that Tuttle’s crowning achievement was his ability to bring together FPA, NAPFA and the CFP Board into the Coalition for Financial Planning, “which someday could form the basis of a cohesive advisory profession.”—JG

By design, the 2015 edition of the IA 25—this year, the IA 35—is meant to take the long view, specifically looking at the people who have influenced the industry in its first 35 years. We would be remiss, however, not to honor those visionaries and business builders who are influential now, will be over the next year and may well be for the next 35 years. One editor made a strong argument, for instance, in favor of Michael Kitces, the polymath of financial planning, as being someone who is already among the most influential people in and around the industry; similar arguments could be made for all this year’s honorees.

Take Laurie Belew, who in addition to her day job as a planner at FJY Financial (that’s Fox, Joss and Yankee) and chair of the firm’s investment committee, is also the 2015 president of the FPA’s NexGen community. Using their own experiences, she literally wrote the paper with two colleagues on how to implement an internship program at a planning firm (called “Implementing Internships”).

Through his writings and speeches, and the generosity of his online time, Kitces has become the instigator of so many interesting and important discussion threads online and off that his influence is only matched by the number of his frequent flier miles.

Wade Pfau has been on the IA 25 list before for his ground-breaking—and conventional-wisdom-challenging—work on retirement planning. Like the other members of the Five to Watch, social media is where many followers first met Pfau: His Retirement Research blog—WPfau.BlogSpot.com—is a must-visit for planners interested in the best ways to save for, and withdraw from, a retirement portfolio.

Cam Marston is one of the funniest speakers you’ll ever hear, but his humor is an entrée into some of the hard facts and insights into how the generations differ in expectations and behavior. If you doubt you could learn any more about Gen X or Gen Y or millennials or boomers as clients, you’re mistaken, but if you hold a position of authority at a planning firm or a partner to advisors and you have anything to do with hiring young people, you must listen to Marston.

If most advisors have finally realized that they should be active on social media—or at least their firm should be—one of the people you can thank is Clara Shih, the founder and CEO of Hearsay Social (and a board member at Starbucks at age 29, taking the place of her now mentor, Sheryl Sandberg). Shih and Hearsay developed the means by which large companies—customers include Raymond James, HD Vest and Vanguard, to name but a few—could use social media for business purposes, and do it in a way that keeps the compliance people happy, no mean feat in itself.

It will be interesting to see in which directions these young visionaries lead the industry next.—JG