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At Schwab Impact, First Conversations Focus on Election and Profits

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The theme of the 2016 Schwab Impact conference is “Join the Conversation,” including the kinds of conversations taking place at the conference itself and those an advisor should be having with clients.

In a four-day gathering (counting the preconference sessions) that features top-level speakers like Malcolm Gladwell, Ian Bremmer, Jeff Gundlach and even Magic Johnson on getaway Thursday, the tone of the presidential election campaign and the results of the November 8 voting took center stage on Monday.

Greg Valliere of Horizon Investments, a perennial curtain-raiser speaker at Impact, attracted more attendees than usual in his presentation Monday afternoon at the San Diego Convention Center, with his remarks on the foibles of the candidates and the after-effects of the election on advisors and their clients eliciting concern and laughter from the audience.

Jon Beatty of Schwab introduced the preconference markets-and-politics session with reminders of the health of the RIA market but also the challenges the independent advisor faces, and was followed by Jeff Kleintop who explored the dangers and opportunities in the markets, especially the global outlook.

Beatty, senior VP at Schwab Advisor Services, lauded independent RIAs for their growth, saying assets under management in the RIA channel have grown 12% annually over the past 10 years, compared to wirehouse assets growing only by 3% a year over that same time. In addition, the size of advisory firms is growing, with Beatty saying that the number of RIA firms with more than $1 billion in AUM has grown 74% while the number of RIAs with between $100 million and $1 billion in assets has grown 67%. Finally, the health of the industry is shown by “your 97% client retention rate,” he said, citing Schwab’s most recent RIA Benchmarking report.

But, Beatty asked, “how do you differentiate amid the winds of change?” At a time when “your clients’ lives have become more complex,” and when “you’ve set the standard” for meeting those needs, “what’s next?” Beatty then suggested that one possible differentiator for RIAs is to deliver to clients what he called “life style management,” providing advice and direction to clients on everything from health care to faciliiating generational wealth transfers to offering executive relocation services and “retirement downsizing” guidance.

While many RIAs are CFPs or CFAs, Beatty wondered if there might be a new designation that arises in the near future that helps investors not just protect their wealth, as wealth managers do today, “but enjoy their wealth.”

Beatty then introduced Kleintop, Schwab’s chief global investment strategist, who addressed what he called a “sleeper” positive development that may occur soon along with the markets and economic dangers over the longer term.

Asking if this is a “good time to buy,” Kleintop said that individual investors, the “800 pound gorilla” of the markets have so far “concluded no,” they may be about to change their minds. While “without your help investors chase performance,” when investor behavior has turned around and they’ve decided to buy into the stock market the markets have soared in response.

Kleintop then addressed the issue of corporate earnings, which “have been falling for the last couple of years” but they stopped declining at the end of February. The danger, he said, is that the gap between analysts forecasts for earnings and actual earnings is wider than it’s been over the past 20 years. “I’m worried that stocks have been following the declines in earnings forecasts,” and that in the short term, “earnings may be weaker than expected.

Kleintop then shared one of his favorite indicators on the economy, the Citgroup Economic Surprise Index for the G10 countries, which has “been going down since July.” He half-joked that “when the temperature goes down, so does the economy.” So as winter approaches the global economy may weaken, perhaps spurred on by a possible tapering of their QE programs by the European Central Bank and the Bank of Japan.

Then he addressed the topic of trade, with a nod to the Presidential election. Looking at Hillary Clinton and Donald Trump, Kleintop said what’s interesting is “not how the candidates are different, but how they’re too much the same,” with both voicing disapproval of international trade agreements. The value of world trade has pulled back over the last five years, as it did in 2008-2009, but that could be misleading and mask possibly “good buying opportunities.” Kleintop said the while the price of oil has gone down affecting the value of international trade, “the volume of oil has stayed steady.”

Channeling Mark Twain, Kleintop said the rumors of the “death of free trade has been exaggerated.” Many large companies around the world have “gone beyond globalization to localization,” selling products where thy make them, such as Toyota building cars around the world rather than in Japan and exporting them.

Corporate profit margins, he said, are in the middle of their 20-year range before concluding that “we’re likely to see longer term secular earnings growth over the next 10 years,” while globally earnings “are much more balanced across sectors” rather than being concentrated in sectors like energy and materials.

Kleintop finished his presentation by asking where people invest in equities around the world, answering that their’s a clear home bias in equity investing. Seventy-five percent of Americans’ equity investments are in U.S.-domiciled companies, for instance. The same holds true with Canada and Japan. That’s worked out well for Canadian investors since 1999, he reported, though he also said that with its market capitalization highly concentrated in oil-related companies, “Canada is one big leveraged energy ETF. Period.” That’s true even though its biggest sector is financials, Kleintop said, since it’s the Canadian banks that are lending to the energy sector.

Japan is “one big financials ETF,” Kleintop concluded, while the U.S. is “one big tech ETF.”

— Related: Schwab’s Kleintop: Stocks Are ‘Vulnerable to a Pullback’


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