I was asked to comment on an article in today’s Fundfire (A Financial Times Service) about F-Squared Investment’s settlement with the SEC. The firm, a very large exchange traded fund (ETF) strategist, agreed to pay $35 million and admitted wrongdoing in the case concerning false performance advertising.

The firm advertised real performance which was in fact hypothetical back-tested data. They also made a performance calculation which inflated performance by 350%, and the former CEO has also been charged with making false and misleading statements to investors.

I was asked how this would affect the firm’s distribution. Simply, I think it will be fatal. This is not simply a case where the SEC has alleged something, which may or may not be true. The firm has admitted that it has done what it has been accused of. From a due diligence point of view, and considering fiduciary responsibility, how can a sponsor firm, who is after all making recommendations to its advisors, who is in turn making them to investors, allow this firm to remain on their platform?

Many firms put the firm on “Watch” when the allegations surfaced – the correct move – and did not allow assets to be added. But now, the only correct move is to terminate F-Squared and help clients move the assets elsewhere. The firm obviously lied in the due diligence process, so this seems like a very clear case of sponsor’s being better off moving on. I personally can not see any rationale for not terminating this relationship.

To quote from the article: “The result of the investigation, and the fact that F-Squared admitted wrongdoing, could have serious consequences for the firm’s distribution prospects, says Andrew Klausner, a strategic consultant with AK Advisory Partners.

It could be “a kiss of death in terms of distribution through broker-dealers and RIAs,” Klausner says. Since the firm admitted wrongdoing, “I don’t know how [broker-dealers and RIAs] could justify keeping them on their platform.””

The firm does have new management,and in time, they should be allowed to present their case, but I would be hard pressed if I was in charge of a sponsor’s due diligence to allow them in now. I would much rather be competing against a sponsor who continues to use the firm than to be that firm!

Thoughts?

The ultimate goal of any marketing strategy is to help you grow your business and increase your brand awareness; cementing trust with current clients is a nice by-product as well. How does it work? Developing awareness of your brand  – who you are, what you do and why you are uniquely qualified – should in turn help you generate leads which, through education and dripping on prospects, will lead to more clients.

In order for a marketing strategy to be successful, it must be multi-faceted, realistic and implemented consistently over time. There aren’t a lot of short cuts here – it takes time and patience. Depending on your resources, there are a number of ways in which you can accomplish each of the above steps; only spend what you can afford to, and make sure that you and your staff have the requisite time to dedicate to marketing without negatively impacting your current business.

Your marketing plan – the written description of your market strategy – should:

• Detail specific activities you intend to undertake;
• Identify the audience each activity is targeted to;
• Specify how you’re going to measure success;
• Be flexible enough to allow adjustments as necessary; and
• Stipulate who on your team is responsible for each activity.

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It’s time to look back at my predictions from a year ago and see how I did. All in all, a mixed bag of results. Next week, I’ll have my 2013 predictions. (Each predication is followed by comments in bold.)

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. I was wrong on this one. The Republicans did pick a candidate that could have won, however, I think it’s fair to say that he didn’t run a very compelling campaign – he let his opponent define him from the beginning of the campaign. I think over time, Republicans will view this as one of their greatest disappointments ever – if was their election to lose, and they did.

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. Pretty much right here except that the majority is a little larger in the Senate although that doesn’t make a whole lot of difference. Again, this was more the Republicans losing than the Democrats putting up a compelling case.

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. I got this one right – but since Obama was reelected it won’t be as contentious next year as it would have been. There will be no repeal.

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. Pretty close here – although the year-end rally has been held in check by the fiscal cliff discussions. It has definitely been a stock pickers market though.

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. Kinda right, kinda wrong. No recession in the US, but problems do remain in Europe. Unemployment has not gone back up – but it hasn’t gone way down either. Housing, however, has made a good recovery, which bodes well for the future.

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. Many of the European countries have gone back into recession, and Euro problems are far from being solved. 

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! The Euro did survive. I’m not sure how many summits there actually were, but it does seem like there were fewer than last 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. I was on target here – the Occupy movement has pretty much disappeared from public view. I do have to say, however, if you walk in front of the Trinity Church, by Broadway and Wall Streets, there are still people there. However, the only reason I know that is because I was there recently – it has faded from media interest.

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. I am a little early on this one – didn’t happen in 2012, but… On Morgan Keegan, the sale to Raymond James was a good strategic fit, but the jury is still out if Regions survives.

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. I was right on target here. The RIA space did continue to grow – but as I have said many times, the wirehouses aren’t going anywhere.

2012 was an interesting year from both political and economic prospectives. Can’t wait to see what 2013 holds.