Unlocking Real Value Blog

2011 has certainly been an interesting year – with many economic, financial and political issues unresolved as the year ends. What this bodes for next year is that 2012 will be another tumultuous year – in fact a year very much like this one.

In no particular order, therefore, my top ten predictions for 2012:

10 – The Presidential election is the Republicans to lose. I retain this view even as the Republicans (led by the House) are self-destructing and opening the door for Obama. If the candidate is Romney, Huntsman or someone with similar moderate views that can attract independents AND there is no third-party candidate, then Obama is out. If, on the other hand, the candidate is Gingrich, Paul, Bachman or some other candidate who can not attract independents AND/OR a third-party candidate emerges, then we will have four more years of Obama. I know that that is a lot of “ifs,” but we are still early in the race. My money is on a Romney presidency starting in 2013.

9 – The Democrats will retain control of the Senate, although with a smaller majority, in part because like in 2008, the Republicans will put up some unelectable candidates (can anyone say Rhode Island?). The Republicans will retain the House of Representatives, which will look pretty much the same as it does now. Sorry Nancy.

8 – The Supreme Court will uphold the legality of Obama’s Health Care plan, but this will make it an even more polarizing issue in the election (since the decision should come in the Spring). If a Republican is elected President, it will be continue as an even more contentious subject in 2013 and beyond, as the legislative branch will take the lead in repealing parts of the plan.

7 – The stock markets will end slightly up for the year, helped by a year-end relief rally after the election. Volatility should be relatively low, as many investors will stay on the sidelines because of all of the political uncertainty. Another “lost” year like this one. It will remain a stock pickers market – driven largely by earnings in the few sectors of the economy that will do well.

6 – The U.S. economy will not go into recession, though following continuing turmoil in Europe, will get dangerously close. Unemployment will dip somewhat then increase again to about 9% at election time because there will be no significant job bills enacted and political gridlock will dampen demand. Housing will remain in the dumps. The positive economic news of the past month is deceiving.

5 – Europe will go into recession (maybe not all countries but as a whole). There will have to be a number of emergency summits once again, as everyone realizes that the actions enacted in 2011 were only band-aid measures and that real problems remain. The divergence between the stronger Northern European countries and weaker Southern European ones will continue.

4 – The Euro will survive 2012 – barely – and I imagine a year from now the outlook for its continuation past 2012 will be very bleak. Back to those summits for a second – hopefully there won’t be 8 or 9 like there were this year!

3 – The Occupy movements will continue sporadically throughout the year as economic conditions stagnate. I don’t think they will pick-up significantly, however, and absent the emergence of any real leadership – to voice a unified concern or theme in a cohesive manner – the November elections might signal their end.

As for the financial services industry:

2 – At least one major brokerage firm will be sold or spun off by its bank-parent (this excludes Morgan Keegan; in this case, if MK is not sold by the end of the first quarter, I predict that Regions Financial itself will be gobbled up by a larger bank). The bank/brokerage marriages have in large part not worked, so 2012 could be the beginning of the end for many of these relationships. Hint – ML.

1 – The wirehouses will continue to lose advisors to the independent, RIA and semi-independent channels. The attractiveness of working for one of the big four is just not what it used to be – both from a reputational point of view as well as an ease of doing business one. The wirehouses aren’t going to disappear though – just continue to become less dominant.

In any case, 2012 should be another fun and interesting year.

Happy Holidays and a Happy and Healthy New Year to all – regardless of the macro-world, may 2012 bring you and your family health and prosperity.

Dear MF Global Board of Directors:

What were you thinking? Have you been asleep since 2008? Do you think that just because John Corzine has an impressive resume you should have given him carte blanche to leverage your firm like that? Did you ever consider  the more than 1,000 employees, and their families, that you have now negatively impacted? Where were the institutional and compliance controls that would have alerted you to the co-mingling of client asses with your own? Really?

(I waited a few weeks before I wrote this to cool down … But I  really haven’t!)

These are just a few of the questions that I would like to pose to both the Board and to John Corzine. While I don’t expect them to necessarily think about the rest of the industry before they plan their strategy, what they have effectively done is give all of us who work in the industry another black eye just at the worst possible time – while arguments over the proper level of regulation still abound and the “Wall Street” v. “Main Street” debate intensifies.

What is honestly surprising to me is that this entire affair hasn’t gotten more bad press – because it certainly is a poster child for those that want to regulate Wall Street more and accentuate the divisiveness that now permeates our country. I’m really not sure why this lack of outrage has been the case – especially when the story first broke. The past two weeks has been more explainable, as the scandal at Penn State has made all other stories pale in comparison.

But at some point this story will come back to more prominence. The reputation of John Corzine has probably been tarnished beyond repair; so has to some extent the reputation of Goldman Sachs, as the actions of its former employees always reflect back on the firm. But the saddest thing is that some in the industry have learned little from the events of the past few years – and now thousands of employees and customers are suffering. It is now reported that more than $1.2 billion is missing and may never be recovered.

What were you thinking?

For investment managers, winning a finals presentation is a balance between adapting to the past and being forward-looking, and between presenting general firm information and specifics as relates to this prospect. The top 10 are key points that should be addressed in the presentation – if the client has to ask about these issues, it’s probably too late!

(This list was prepared for a presentation made to the IMI Consultant’s Congress in Stamford, CT)

• Number 10: Explain any unusual fluctuations in AUM. Differentiate between markets losses  and client terminations, withdrawals and redemptions.
• Number 9: Describe any process adjustments that you made in reaction to the 2008 financial crisis and this year’s Euro-crises. Where these changes permanent or temporary?

There have been a lot of headlines lately about the announcements by the wirehouses that they plan to reduce their number of advisors over the next few years. Surprising? No. Necessary? Yes. Behind the headlines, however, there is perhaps another story.

A recent survey by Cerulli Associates Inc. shows that the warehouses’ share of retail assets under management fell from 49.7% in 2007 to 42.8% at the end of 2010. (The warehouses are today defined as Morgan Stanley Smith Barney LLC, Bank of America Merrill Lynch, Wells Fargo Advisors and UBS AG; the above numbers do not include Merrill Edge advisors or Wells Fargo’s Finet channel for independent advisors.) As an aside, the regional brokerages and independents are picking up this market share.

The number of advisors at these firms, during the same time period, declined from almost 57,000 to just under 51,000. Cerulli estimates that 20% of these advisors left by choice and the rest were terminated.

So what do we deduce from these numbers? For one, the warehouses are obviously focusing more on productivity than share numbers; in fact, during this same period of time, the average AUM per advisor increased to $94 million. It no longer makes sense to be the biggest – what makes sense is to the best and most productive. With costs rising – both platform as well as total compensation (health care anyone?) – fewer, more productive advisors, makes business sense.

The implication for advisors is that the human cost aside, this trend actually increases competition. It makes sense to extrapolate that the remaining advisors will be the cream of the crop – the weak links are getting stronger.

The industry is getting smaller – and that is probably a good thing. For the individual advisor, however, this change will make it more competitive, not less – as counter intuitive as that sounds. The public perception of advisors is still negative and the market environment is still tough – these numbers don’t do anything to change that.

Advisors must continue to strive to differentiate themselves and clearly articulate their value-added proposition. After all, there are still more than 50,000 at the wirehouses alone!