As one financial advisor said of the recent election, "You couldn't make up this stuff." The good news, not to be muted by the din of post-election vote recounts and bipartisan histrionics, is that, in the words of Christine Callies, Merrill Lynch chief U.S. investment strategist for the institutional marketplace, "The economy is in good shape and will remain so no matter who is elected."
While we went to press without a declared presidential winner, it appears that George W. Bush would have little more than a marginal mandate in Congress--and Al Gore none--with Republicans holding tight to a wafer-thin margin in the Senate and a slight edge in the House.
High Frequency Economics, based in Valhalla, New York, which forecasts market developments for investors and traders, believes that the narrow splits in House and Senate mean change in fiscal policy from the top will be much less dramatic than the candidates' stump speeches led us to believe.
In general, if Bush is elected, we will see fewer Microsoft/Big Tobacco-like cases, slightly less pressure on healthcare reform, rising defense budgets, and possible tax cuts, according to John Zaro, managing partner of Bourgeon Capital Management, an investment management firm in New York City. Look for President Gore to beat up on big business and healthcare, but get ready for more of the status quo, with an increasing focus on environmental issues.
These minimal changes in White House policy may have a positive impact on investors. Zaro puts it this way: "The best scenario is a split of the White House and Congress, either way, between Democrats and Republicans. The balance is essential to have any real hopes of maintaining a promising investment climate."
Kurt Schansinger, managing director and senior portfolio manager of Merrill Lynch Balanced Capital Growth Fund, agrees that the market will view the legislative gridlock favorably, arguing that this serves two positive ends. First, budget surpluses, which Merrill's Chief Economist Bruce Steinberg believes are going to be preserved at least for the time being, will go toward debt repayment, which should be good for fixed-income prices. Second, legislative inaction also suggests that the Federal Reserve would have more flexibility in managing monetary policy. With either Bush or Gore at the helm, Schansinger predicts a stronger bond market, with the equity picture less clear.
If Gore is elected, virtually none of his spending plans would become reality, and his grand prescription drug plan will have to become considerably less grand. Since Gore believes that drug companies are making obscene profits, George Marotta of Marotta Asset Management, Inc., in Charlottesville, Virginia, says that under his presidency, drug stocks would decline, and recommends selling such stocks. In terms of the oil industry, Bush would let markets determine prices, while Gore would probably step up regulation. In the latter case, Marotta suggests investing in energy alternatives such as ethanol, and solar and wind power.
If elected, Bush has vowed to pursue a repeal of the estate tax, which has endured a Clinton veto of a Republican bill to phase the levy into oblivion by 2009. Gore as president would try to simplify estate tax exemptions while raising exemptions for family farms and small businesses. What's likely to occur is that there will be some degree of tax relief, but it won't be exactly what either had in mind. Look for a bipartisan legislative package for 2001 that will address the Alternative Minimum Tax, charitable giving, and health insurance.
Regarding taxes, Marotta notes that reducing the top marginal rate has historically produced an economic expansion to fuel bull markets. But Bush's big plan, a 10-year, $1.3 trillion tax cut, has engendered such strong opposition, not just from Democrats but from within his own camp, that he'll have to settle for far less.
Bush's other key plan--the partial privatization of Social Security--faces grim opposition from Senate Democrats and a paucity of widespread popular support; it will probably take a southerly route on his agenda. Gore proposes a more modest (and more likely of implementation) $480 billion in targeted tax cuts over 10 years, with no change in the overall rate structure. This doesn't mean that as a result our tax laws won't become even more complicated than they already are. With this scenario, Marotta favors investing in companies that help people cope with government regulations, such as H&R Block and Paychex Corporation, which provides payroll services for small businesses.
Another point to consider, says Schansinger, is that since the president appoints most regulators, the implications of a Bush or Gore presidency will be considerably more significant on an industry- or company-specific basis.
In terms of other appointments, it's worth noting that Fed Chairman Alan Greenspan began a new four-year term in June. Jeffrey Applegate of Lehman Brothers sums up the implication thusly: "A significant departure from existing monetary policy seems most unlikely."
Applegate points out that when it appeared that Gore had won the election, bonds went up, stocks went down, and the dollar weakened. "When it seemed that the Governor was the victor, each market reversed course." The reasons? In the event of a Gore victory, "the markets' initial assessment was that fiscal policy would remain fairly tight and monetary policy unchanged." With Bush as the winner, "the markets' assessed that the policy risks were in the direction of looser fiscal policy and tighter monetary policy." He adds that it ultimately isn't at all clear that a Bush victory would necessarily be better for the stock market than a Gore victory, which at first seemed the case, based upon the market's initial response to a premature Bush win.
Realizing that at this point a victory for either candidate will be Pyrrhic indeed, what do ordinary citizens want of their new administration, apart from there being one? While they are, like the candidates themselves, split on issues that range from Social Security to health care, from the national debt to jobs and the economy, they'd like nothing better than for the good times to roll right on. We think they will.
--Cort Smith with Melanie Waddell
Netting a Partner
The Evensky Group switches from Schwab to Fidelity
It's no secret that advisors are battling a growing pool of competitors. Nearly every financial services firm has morphed into an advice giver, creating an environment where luring and retaining new clients hinges on who can showcase the most compelling services.
The Evensky Group, launched in May by Evensky, Brown & Katz to set up Private Family Offices (PFOs) across the nation catering to the affluent market, isn't dawdling. In November, it said it was shifting its client accounts ($360 million in assets) and back-office support from Charles Schwab to Fidelity Investments' Institutional Brokerage Group, saying it wanted to leverage Fidelity's technology, product development, marketing and investment prowess.
Evensky & Katz went shopping for a partner, but found Schwab unwilling to provide what it called "exclusive" features to Evensky Group clients. Lance Berg, a Schwab spokesman, says that while it regrets losing Evensky as a client, Schwab declined to accommodate Evensky in his new venture because "he was asking for a prominence and exclusivity that went above and beyond what we provide to other advisors." Financial services executives say Evensky Group is in better hands with Fidelity, though, because its reputation as a back-office service provider surpasses Schwab's, and Fidelity has expertise in serving a wider swath of clients.
Jay Lanigan, division executive of the client group at Fidelity Investments Institutional Brokerage Group, says partnering with Evensky was easy because the advisory firm has "a great name in the marketplace," and its PFOs are the "next generation of advisor services."
Harold Evensky said that "Fidelity stepped way out of the box, and said, 'We are excited about your vision.'" That vision includes providing PFOs to the affluent family market--those with investable assets of more than $1 million or incomes over $200,000. The Evensky Group PFOs are modeled on the family offices that have been serving the super-wealthy for years, but they will go beyond run-of-the-mill wealth management, investment services, estate planning, and tax services. "We will be managing the financial and many non-financial aspects of clients' lives," Evensky says. These services would include counseling for college planning, and negotiating car leases and home mortgages. And in areas where the financial planner lacks expertise, it will act as a buying agent with law and accounting firms to negotiate the best price.
Another service will come through leveraging Fidelity's technology smarts. Evensky Group plans to deliver "dynamic net worth statements" or aggregated and consolidated statements, to its clients within the next six months. Fidelity is now looking to partner with aggregation software maker Yodlee.com.
Geoff Bobroff, an independent consultant in East Greenwich, Rhode Island, says Evensky's PFO model is a nice idea, but "no one has proven that rolling up these types of services is successful."
The Evensky Group's first PFO is set for launch in early 2001. Evensky has an ambitious growth model: acquire five other financial planning firms in 2001, and add two more per quarter for three years. The end goal will be 26 firms with $19 billion in assets under management.
But Bobroff is skeptical that Evensky can reach that goal. "Ramping up to $20 billion in assets is going to be hard," he says. Of course, that's what they used to say about Fidelity.--Melanie Waddell
Foliofn, which offers some unique tools for investors, makes a bid to serve advisors
Yet another Internet company is entering the advisor market, and this one could fundamentally change the way independent advisors do business. The company is called FOLIOfn, and its direct-to-consumer, retail division has been up and running since March. The company is now launching an advisor division called FolioAdvisor.
While new Web-based application service providers (ASPs) targeting advisors have been popping up almost weekly in the last few months, this company is the most intriguing. For one thing, it has an innovative idea about managing money via the Web. For another, founder and CEO Steve Wallman is a former member of the SEC. In addition, the startup is funded with more venture capital than the other new advisor ASPs, some $100 million. Finally, while the other ASPs want to be your back office, Foliofn is the first one to be a full-fledged self-clearing custodian, and thus is a direct competitor to Fidelity, Schwab, and Waterhouse.
Foliofn lets you buy and trade personalized portfolios of stocks. It combines the simplicity and diversification of mutual funds with the control and tax management of direct stock ownership. And the clincher is that you can buy and trade a basket of stocks, called a folio, with no commissions or transaction charges.
You can choose from 90 ready-to-go folios, or you can build your own. So you can buy a folio of the Standard & Poor's 500 index with just $1,000, and Foliofn will figure out the fractional shares in each of the 500 stocks that you'll be buying. But let's say you want to exclude 20 tobacco, alcohol, and environmentally-destructive companies from the 500. Or you want to exclude Intel because your client already owns a big slug of it. In either case, FOLIOfn figures out how much of each stock your $1,000 will buy. It also calculates for you how much of the 480 stocks you should buy or how much of the 499 you'd own if you exclude Intel. And it handles tax lot accounting.
Folio's advisor division is headed by Jeff Helms, former president and CEO of The Advisor Group, an independent B/D. Helms says his division will offer portfolio reporting and benchmarking to advisors and their clients, so it's a service bureau for performance reporting. Professional tools for modeling portfolios will also be created. Since most independent advisors do not want to be stock pickers, in January 2001 FolioAdvisor.com will offer a separate account manager platform that Helms says will cost less than anything else now available. Later next year, a mutual fund platform will follow. He says fees will be less than 50 basis points plus a per client charge of about $200 a year. You'll be able to create up to five folios for each client.
FolioAdvisor will offer some unique technology. But Helms admits the existing custodians could copy it. He says Schwab, Waterhouse, and Fidelity would need about two years to create the technology, but admits this could happen. "It's a big pond," Helms says. "The other firms will face a significant challenge and we destroy their margins. The technology we've created does away with ticket charges, market making, and commissions, and that happens to be the areas where those institutions make the most money."
Another challenge is how advisors could move their existing business over to Foliofn to use its online platform and outsource their portfolio reporting. Other custodians are unlikely to supply data feeds directly to FOLIOfn because they'll view it as a competitor. So advisors who want to use FolioAdvisor as their back office for accounts not custodied at Foliofn will have to upload their Centerpiece and Advent reports to FolioAdvisor.
Foliofn also raises another interesting quandary. Say you're an advisor using Foliofn's separate account manager platform. You could put a single client into a top rated separate account manager's portfolio. Every time that star manager makes a trade, you'd know it because it would show up immediately intraday in that client's account. So you could then create a folio piggybacking everything that great manager does and put 100 other clients into an identical portfolio. Essentially, you could mimic that manager's research and style and not pay him for any of it. Don't you just love technology!
Easing Those Withdrawal Pains
Software that makes sense of tricky IRA withdrawals
While minimum required distribution (MRD) rules kick in for IRA owners at age 70 1/2, that's about the only clear thing about them, because MRD rules are perhaps the most complex area of financial planning. But it's an important planning concern to high-net-worth individuals and the stakes are high for advisors who don't walk this minefield carefully.
Making a bad choice in MRD planning is one of the few irreversible mistakes that individuals can make because in the calendar year that you turn age 70 1/2, you're required to choose a distribution method that you're stuck with. So mistakes can be costly. But here's some help.
A new software tool has been created to help you with these cases. The software, MRD Determinator, by NetWorth Strategies, Inc., is a strong new entrant to the field and will appeal to the nerdiest of advisors.
MRD is important for high-net-worth individuals who don't need their IRAs for current income. In such cases, individuals aim to stretch their IRAs as long as possible--withdrawing as little as legally possible so that most of their plan's assets can grow on a tax-deferred basis.
Figuring out how to withdraw as little as possible from an IRA requires an understanding of the rules on life expectancy calculations and other rules affecting withdrawal calculations. Books have been written to explain the matrix of rules, and entire conferences have been devoted to this subject. In a nutshell, if an IRA owner chooses someone much younger than he or she as beneficiary of the IRA, this can dramatically stretch out the number of years over which an IRA must be depleted. More assets can thus remain in the IRA to compound tax-free for a longer time.
In addition, the IRS lets you pick three different calculation methods: term certain, recalculation, and a hybrid method combining the two. This, too, can stretch the IRA. Planners must struggle with the matrix of distribution possibilities. You have to see how withdrawals with different beneficiaries will affect the IRA years from now, and then see how using the different calculation methods further affects the equation. That's what MRD Determinator does well.
"The feature that I found most valuable was the ability to do simultaneous side-by-side case modeling," says Kevin Gahagan of Boone Financial Advisors in San Francisco. MRD Determinator lets you compare up to six cases side by side.
You get into the program by entering your data in an "input wizard" that queries you. As you input data, hidden fields appear. So you're only asked to enter data when it's relevant.
Steve Weydert of Gary N. Bowyer & Associates in Park Ridge, Illinois, now uses his own spreadsheets to do the same planning chores tackled by Determinator. He's been happy with his home-cooked method. Still, he may switch to the program because it will save him from having to follow every IRS letter ruling and rule change affecting the process. "It takes only one slip-up to miss a private letter ruling and you could make a major mistake that could cost you a client," he says.
In addition, small firms often have just one hardcore planner who will create and run home-spun spreadsheets. So if a mistake is made in a formula, you could have little or no backup to check for mistakes. Laying the task off on a software company may be smarter.
The software costs $295 a year for a single user. NetWorth Strategies, based in Bend, Oregon, has another program, StockOpter, that analyzes employee stock option alternatives. The two programs both use Excel as their platform.
Michele Schaff, a CPA with Ardor Financial group in Northfield, Illinois, says she's looked at other programs that make MRD calculations but dismissed them as black boxes because she could not see the formulas that went into the calculations. "Most other programs fall short on situations that fall outside of basic textbook examples, so I never felt comfortable relying on them," says Schaff. "MRD Determinator solves complex computations that its competitors cannot and does so in a very user- friendly way."
Legislation now pending in Congress would give IRA owners a chance to change their MRD calculation method in 2002. Michael VanWaas, chief technology officer at NetWorth Strategies, says the company has already created a version of the program to reflect the proposed legislation. If that legislation is enacted, this software is likely to become very popular.
Put Me In, Coach
Advisors turn to business coaches to fix what ails 'em
It was 6:30 p.m. on a Friday in 1991, and Keith Cox was still at his desk. He could take no more. His independent advisory firm, Premier Financial Management of Baton Rouge, Louisiana, was making him a victim of his own success. "I just had had enough," recalls Cox. "Employee problems were getting to me and paperwork was stacked six inches high and I was working at 6:30 p.m. on a Friday."
Three weeks earlier, Cox had heard a speech by Tom Parsons, a business coach. "His speech went entirely over my head," admits Cox. But that Friday evening, Cox remembered Parsons' message, picked up the phone and called him. A few days later, Cox met with Parsons and they began a relationship that Cox says has been an "excellent experience."
For an independent advisor, hiring a business coach can be a life-changing event. While each of the six advisors interviewed for this story reported practical business benefits in hiring a coach, several of them also reported that it improved their personal lives as well.
"It's made me concentrate more on what I want my relationship to be like with my wife and son," says Larry Beeman of Beeman & Johnson in Oak Ridge, Tennessee, who has been attending Dan Sullivan's Strategic Coach program for nearly a year. Sullivan's coaching program, perhaps the best known in the industry, focuses on managing time properly to improve your quality of life, and ways to run your business more efficiently. Other coaches focus on specific business issues.
For instance, Gabe Burczyk of The Investment Center in San Francisco hired his coach to help resolve a conflict with a key employee. Burczyk, who managed more than $100 million in assets, says the woman did not want him to expand his business. Since she handled client relations, Burczyk felt hemmed in. He hired a coach.
The coach, Nikki Cohn Tureen of Working Dynamics, tried some conflict resolution techniques between Burczyk and the employee, and told Burczyk she would need to get to know his business better. She did personality tests of Burczyk and his staff to assess their strengths and weaknesses, and helped him identify which part of his business was most profitable.
Tureen then performed a job that other advisors who use a coach say can be very profitable: she established a manual that detailed each employee's procedures for carrying out key job functions.
"So when we took all these details and plugged it all in, we could see how it all matched with our mission statement. That allowed us to refocus everyone on specific goals to help the firm meet its mission," says Burczyk, who pays his consultant $2,000 for each four-week period in which she works 20 hours and at a rate of $150 for each additional hour. "It's expensive, but I'd do it again in a heartbeat," he says.
Some broker/dealers are sending in coaches for their reps. For instance, Norm Politziner says his B/D, National Life of Vermont, defrayed the cost of consultation with Gary Kinder of Kinder Brothers, a consultant to many insurance advisors. Politziner, along with five other reps, meets with Kinder once every two months.
Rick Stram, a Securities America rep, had three specialists--experts in technology, human resources, and operations--spend two days in his office. "Half of the advice you get from a coach is common sense, things that you may think of doing on your own but need to hear recommended by an expert," says Stram. "But the other half is beyond my strength, things only a consultant can help you with."
While some advisors say they want a coach from outside the advisor business, Stram is certain it's best to get a coach who specializes in working with small financial services firms.
Kevin Timmerman of Steele Capital Management in Dubuque, Iowa, says his coach, Robert Teichart, specializes in working with advisors and helps his firm hire new staff by interviewing prospective employees. In addition, Timmerman says Teichart helps keep his relationship with his partner running smoothly. "Once in a while, my partner and I need help sorting through a disagreement; he helps us resolve conflicts."
Like other advisors who reported successful coaching experiences, Timmerman says Teichart helped him focus on doing what's most profitable in his business and delegating everything else. Says Timmerman, "Using a coach forced us to think about things that we don't want to think about, and about other things we didn't know we should be thinking about."