While the bad news continues for Pimco in the wake of CEO Mohammed El-Erian’s departure two months ago, I continue to believe that the outlook for the firm and Chairman Bill Gross is positive. I am quoted in an article in today’s Ignites (A Financial Times Service) about Morningstar’s downgrading of Pimco’s Stewardship Grade.

I don’t make much of this action to be honest. Morningstar is not the first firm to put the firm on watch, it took them two months to do so, and frankly it could have been worse. I think they are really just covering themselves in the event the turmoil continues.

To quote from the article: “But Morningstar is not the first “to essentially put Pimco on watch,” Andrew Klausner, founder and principal of AK Advisory Partners a strategic consultancy, says in an e-mail.  However, he is not too worried about the future of the firm. “The key is going to be if performance suffers and if there are major defections in the coming months,” Klausner writes. “Further downgrades to ‘sell’ from ‘watch’ by large pension plans or consultants, based on future moves, would be of concern.””

I did a longer opinion piece for Ignites, which was published on March 4, 2014. The title was “Bill Gross Should Stay Right Where He Is.” It is included below and provides a more detailed analysis of my thoughts on the matter:

The resignation of Pimco CEO Mohamed El-Erian, the expected successor to Bill Gross as head of Pimco, has sparked a lot of chatter over Gross’s own future at the firm.

A recent Wall Street Journal article titled “Inside the Showdown Atop Pmco, the World’s Biggest Bond Firm” recounted bad blood at Pimco ahead of El-Erian’s exit. Some pundits have predicted or even called for Gross’s resignation, as reported.

Reacting to the Journal piece,  Reuters columnist Felix Salmon wrote that “if Gross cares at all about the long-term fortunes of the company he built, the best thing he can do right now is simply retire.”

Despite all the noise, the reality of the situation is that Gross can and will continue to lead the firm. Thoughts of forced resignation or retirement are shortsighted and highly unlikely.

Let’s review some of the arguments that the “Gross must go” proponents are making and dispel them:

Poor recent performance and outflows in the Total Return Fund in particular. It has been a tough time for bond managers as anxiety about rising interest rates intensifies. But Pimco is certainly not alone in this respect, and it seems unfair to single out the company on this account.

After all, 14 Pimco’s bond mutual funds ranked in the top third of their category in 2013 and several had very strong performance. For example, Pimco’s New York Municipal Bond Fund stood in the top 1st percentile of all funds in its category based on its annual returns. Further, Pimco’s Emerging Markets Corporate Bond Fund (Institutional) performed in the top 9th percentile in its category peer group, according to Morningstar.

To be sure, some results have been disappointing; for example, the double-digit losses suffered by at least four bond mutual funds in 2013. However, given the difficult environment for bond funds across the board, there is nothing in Pimco’s 2013 performance that should set off serious alarm bells, particularly when the long-term returns of its bond funds are considered.

There have also been some complaints from various industry voices about Gross’s strict asset allocation policy, especially during a period of increased bond market uncertainty. However, highlighting one investment decision during a tough market sounds a lot like armchair quarterbacking.

What about Gross’s steady long-term performance and success in creating the world’s largest bond fund and bond manager? Morningstar named Gross Fixed Income Fund Manager of the Year three times (1998, 2000 and 2007) and the Fixed Income Fund Manager of the Decade for 2000–2009.

Let us not confuse the exit of El-Erian with normal market cycles. Certainly Gross and the rest of the firm deserve more time to orchestrate a performance rebound before we write his Pimco obituary.

Concerns over a lack of succession planning. Certainly when any firm loses a major contributor and heir apparent people will raise questions. But in this respect, Pimco has reacted quickly and aggressively. The firm has clearly communicated who the six new deputy CIOs are, including the last two winners of Morningstar’s Fixed-Income Fund Manager of the Year award, Dan Ivascyn (2013 co-recipient along with portfolio manager Alfred Murata) and Mark Kiesel (2012 winner).

The firm also quickly appointed a new CEO, Douglas Hodge; a new president, Jay Jacobs; and a new head of strategic business management, Craig Dawson.

One could argue that Gross has built a very impressive organization with talented investment professionals even without El-Erian. His departure also frees up a large pool of capital to compensate current employees and recruit new ones. Multiple media outlets have reported that El-Erian’s annual compensation was in the $100 million range.

People at any organization always hate to lose quality employees and leaders, but it happens and firms can certainly overcome it with savvy hires and promotions.

I am not defending executives who use domineering behavior to achieve results; it is just a reality at many asset management organizations. Historically, employees in this industry are compensated very highly, in part to make up for the stressful work atmosphere. Few people were calling for Bill Gross to retire before this event. So what has really changed?

Pimco and Bill Gross will survive El-Erian’s departure. While it is far too early to predict the long-term effects of the resignation or how the firm will perform as the bond market recovers, the firm has reacted quickly and decisively. It still has the infrastructure and the vast majority of employees that have made it successful in the past.

I would bet on Pimco in the future, not against it. And the smart wager is that Bill Gross will be around as long as he wants to be.

I was asked to comment on a poll of Ignites (a Financial Times Service) readers on whether or nor they supported American Funds’ decision to launch a number of new funds, primarily focusing on non-core areas. More than 77% of respondents agree that the firm should launch new products,as this shows that the firm is evolving and meeting advisor demand for new products.

Only about 14% of respondents disagree with the move, arguing that it will cause the firm to loose focus and may hurt the management of their current funds. Historically, the firm has been known for having a relatively small, conservative lineup of mostly domestic equity funds. The firm did, however, launch eight new funds last May, including an emerging markets fund.

I agree with the move, in part given the size and strength of the research staff at the company; I don’t think they will loose focus on what got them where they are today. My only concern is if they stray too far into the alternatives space. I have been worried for awhile about the proliferation of alternative funds at the retail level, mostly because I don’t feel that a lot of investors understand what they are investing in; this could lead to large outflows and hurt performance.

To quote from the article:  “After suffering $200 billion in net outflows over the past three years, the new rollouts make sense, says Andrew Klausner, founder and partner of AK Advisory Partners. Furthermore, he is not surprised that advisors would support the shift in strategy as long as the products deliver on performance.

“American Funds has had considerable outflows and quite a bit of negative press over the past couple of years, but advisors have a short memory, and if they want something they’re going to go to whoever can provide it,” Klausner says.

“I think the market is forcing them to look at other things,” Klausner says. Domestic equity “active management has taken a hit in the press and a lot of organizations have looked at ways to expand what they do,” he adds.”

Do you agree?

I was quoted in two articles this week – one on the trends in the RIA space and the other on bullying in the mutual fund industry.

The first story, published in yesterday’s GatekeeperIQ (A Financial Times Service), had to do with the announcement by Securities America that they were unveiling a new hybrid platform geared toward smaller RIAs. The platform allows for the use of multiple custodians and can accommodate fee-based as well as commission business.

I was asked to comment on whether this was part of a greater trend in the industry and if asset managers would be able to benefit from new platforms such as this. To quote from the article: “The custodian-agnostic platform is an attractive proposition for small advisors who want to make the switch to a fee-based practice, say Andrew Klausner founder and principal advisor of AK Advisory Partners. “This is kind of a stepping stone into that, because they don’t necessarily have to change who their custodian is and therefore move client accounts,” he says. While reaching small dually registered advisors might not be a top priority for managers, they shouldn’t ignore this space. Still, he says, such advisors require support and attention. “You’ve got a larger number of smaller producers, so to have an impact is a greater effort,” Klausner says.”

The second articles was published in today’s Ignites (A Financial Times Service) and dealt with the results of a survey about bullying in the mutual fund industry. In the survey, nearly two-thirds of respondents said that bullying was prevalent in the mutual fund industry (30% actually said “very prevalent.”) This compares to 50% in the U.S. overall.

To quote from the article: “”Bullying should never be allowed or tolerated,” says Andy Klausner, founder and principal of AK Advisory Partners. “It should be specifically defined in the employee manual, including what bullying is [as] defined by the company … and what the penalties are.””

I was also asked about the different between bullying and competition. Again, to quote from the article: “Moreover, firms should not confuse fostering competition among employees, which can be healthy for a firm, with allowing bullying to occur, experts note. As Klausner says, bullying is “completely different” from competition. He defines competition as “setting goals and rewarding appropriately” and bullying as “forcing someone to behave in a manner that you want them to.””

Any thoughts?

I was asked to write an opinion piece for FinancialAdvisorIQ (A Financial Times Service) about the types of mistakes advisors make when presenting products to clients. Mistakes can result in lost opportunities for clients and a loss of revenues for advisors. Advisors should always be upfront about fees and discuss the potential for underperformance.

Top mistakes include:

Too much jargon. Advisors sometimes use too much industry jargon when explaining how products work, rather than stressing their benefits to the client. Clients don’t care about the name of the program they are investing in. They want results. Advisors should “sell” the concept and its benefits through the consultative process and bring in the specific product names only when they have to.

Whether the strategy is a mutual fund or individually managed accounts, advisors need to explain how these products will help the client reach his or her goals. It helps to ask clients about how much detail they want. Advisors should never oversell products, because the goal in the case of underperformance should be to replace the investment, not the advisor who pushed it.

Lack of transparency. Another cardinal sin in this realm is failing to explain fees clearly and openly. Costs should be discussed up front. If the client has to ask about them, it is probably too late. Advisors should describe the types and frequency of fees and be sure to distinguish between different types of investments — a no-load mutual fund versus A shares, for example. Further, advisors should ensure that clients are able to conduct apples-to-apples comparisons between different product types when needed.

Failure to understand the product. While advisors don’t want to inundate clients with too much product information and detail, they also want to avoid getting stuck with unanswerable questions. Presentations should be customized for each client; engineers will probably want to know more of the nitty-gritty of a product, whereas doctors might be more curious about what other doctors are invested in.

Jumping on “hot dot” products. While advisors are well served by researching new products and incorporating them into their business as appropriate, running to sell the new hot product is rarely the right strategy. The product needs to be the most suitable investment at this point in the client’s investment life. The client’s larger investment goals, their unique needs and the state of their existing portfolio should play the most important role in a product recommendation.