Archive for category Headlines
Reuters news by Jennifer Ablan
Bill Gross, the co-founder and co-chief investment officer of Pacific Investment Management Co, has accused departing CEO Mohamed El-Erian of seeking to “undermine” him by talking to The Wall Street Journal about deepening tensions between the two executives who have been jointly running the world’s largest bond house.
Gross told Reuters that he had “evidence” that El-Erian “wrote” a February 24 article in the Journal, which described the worsening relationship between the two men as Pimco’s performance deteriorated last year, including a showdown in which they squared off against each other in front of more than a dozen colleagues at the firm’s Newport Beach, California headquarters.
Gross, who oversaw more than $1.91 trillion in assets as of the end of last year and who is known on Wall Street as the ‘Bond King’, said in a phone call to Reuters last Friday: “I’m so sick of Mohamed trying to undermine me.”
When asked if Reuters could see the evidence about El-Erian and the allegation he was involved in the article, Gross said: “You’re on his side. Great, he’s got you, too, wrapped around his charming right finger.”
He said he knew that El-Erian, who had been widely seen as the heir apparent to Gross but is now due to leave in mid-March, had been in contact with Reuters as well as the Wall Street Journal.
Gross indicated he had been monitoring El-Erian’s phone calls.
A Pimco spokesman said in an emailed statement: “Mr. Gross did not make the statements Reuters attributes to him. He categorically denies saying this firm ever listened in on Mr. El-Erian’s phone calls or that Mr. El-Erian ‘wrote’ any previous media article.”
He added: “As a regulated company, PIMCO is required to retain records of its employees’ communications to help ensure compliance with the firm’s policies.”
Pimco’s owner, German financial services company Allianz SE, was not available for comment.
El-Erian, who was named to a part-time position as chief economic adviser to Allianz last week, could not be reached for comment.
When asked about Gross’s claim that El-Erian “wrote” the article, a spokeswoman for Dow Jones, the publisher of The Wall Street Journal, said: “This is an astoundingly incorrect claim about a thoroughly reported article that was in the best tradition of The Wall Street Journal.”
El-Erian signed a non-disclosure agreement as part of his Pimco departure terms, according to a source close to him. Reuters couldn’t ascertain the details of his exit package, including its confidentiality aspects or the size of his payout.
The February 24 Journal article detailed the unraveling of the once vaunted investment and management partnership between Gross and El-Erian. The article revealed the increasing strains between the two executives over Gross’s combative management style and whether he should trust other investment managers more.
“I have a 41-year track record of investing excellence,” Gross told El-Erian one day last June, according to the Journal article, which cited two witnesses as its source. “What do you have?”
“I’m tired of cleaning up your s—,” El-Erian responded, referring to conduct by Gross that he felt was hurting Pimco, these two people recalled, according to the article.
A source who was present at the time confirmed to Reuters that the report of the exchange was accurate.
SOME PIMCO INVESTORS ON EDGE
The latest signs of a rift between Gross and El-Erian, who once praised each other fulsomely, come as Gross is grappling with clients who are also turning their backs on the very asset class that has made him famous.
That is happening partly because the Federal Reserve continues to reduce its controversial bond buying that has provided stimulus to the U.S. and world economies.
Pimco saw its assets under management shrink by $80 billion in 2013 due to outflows and negative returns, according to Morningstar.
In February, Gross’s flagship Pimco Total Return Fund had $1.6 billion of net outflows, its 10th consecutive month of outflows, and it lagged 71 percent of its peers with a return of just 0.52 percent last month, according to Morningstar. In 2013, it suffered a negative total return of nearly 2 percent.
In mid-February, Gross sought to reassure the firm’s clients about the new leadership structure he has put in place since Pimco’s announcement of El-Erian’s departure on January 21.
Gross called his announcement of six new deputy chief investment officers a “significant improvement” from Pimco’s previous structure, which concentrated nearly all investment strategy decision making onto the shoulders of Gross and El-Erian.
“I’ve never seen Bill and Pimco scrutinized like this before. This is the most attention I have seen on them,” said Eric Jacobson, Morningstar senior analyst who has covered Pimco for nearly two decades. “A couple of high-profile stumbles and mediocre showings, coupled with some outflows – and with no identified successor for life after Bill – clearly has some investors on edge.”
Still, Jacobson said that Gross holds one of the best records in the bond industry with the Pimco Total Return fund’s 10-year and 15-year annualized returns at 6.04 percent and 6.68 percent, respectively. The fund’s returns are beating 96 percent of its peers for those time periods, he added.
Posted by: Steven Maimes, The Trust Advisor
WSJ article by Neil Shah
Surging Stock Market and Rising Home Values Deliver Benefits, Especially for Affluent
Americans’ wealth hit the highest level ever last year, according to data released Thursday, reflecting a surge in the value of stocks and homes that has boosted the most affluent U.S. households.
The net worth of U.S. households and nonprofit organizations rose 14% last year, or almost $10 trillion, to $80.7 trillion, the highest on record, according to a Federal Reserve report released Thursday. Even adjusted for inflation using the Fed’s preferred gauge of prices, U.S. household net worth—the value of homes, stocks and other assets minus debts and other liabilities—hit a fresh record.
The Fed report shows Americans have made considerable progress repairing the damage inflicted by the housing crash and recession, which ran from December 2007 through June 2009 and decimated the wealth of a wide swath of the nation. But the rebound, while powerful, has been tilted in a way that limits the upside for the broader U.S. economy and is increasingly leaving behind many middle- and lower-income Americans.
“Wealth inequality…has increased over time,” said William Emmons, an economist at the Federal Reserve Bank of St. Louis. “So, there seems to be a disconnect: There are big wealth gains, but not much follow-through on consumer spending.”
Driving most of the past year’s gains was a record-setting rally in the U.S. stock market, which saw the broad Standard & Poor’s 500-stock index soar 30% last year. The increase in stock prices has disproportionately benefited affluent Americans, who are more likely to own shares. The value of stocks and mutual funds owned by U.S. households rose $5.6 trillion last year, while the value of residential real estate—the biggest asset for middle-income Americans—grew about $2.3 trillion, the Fed figures show.
Holdings of stocks and bonds as a share of overall net worth, at 35%, is at the highest level since the dot-com bubble burst in 2000, Fed data show. That means that even as wealth increases, it’s increasingly going to the affluent.
In addition to the affluent, much of the wealth surge is going to older Americans. Both groups are less likely to spend their gains and more likely to save, Mr. Emmons said. Meanwhile, sheer demographics—the retirement of the baby boomers and America’s aging population—are increasing the ranks of the nation’s savers.
The upshot: While American households overall are getting wealthier, the benefits for the economy may prove limited until such improvements reach more people.
Younger families in particular continue to lag behind in the wealth recovery. The average young family—led by someone under 40—has recovered only about a third of the wealth it lost during the crisis and recession, the St. Louis Fed said in a recent study. By contrast, the average wealth of middle-aged and older families has recovered to roughly precrisis levels.
Tyler Martin, a 26-year-old who lives in San Francisco and works in the financial-services industry, is among those watching the recent advances carefully. Mr. Martin says he feels better now that the economy isn’t cratering the way it was during the financial crisis and recession.
He is confident enough to ponder big financial decisions, like taking on a mortgage. But he isn’t being prompted by any improvement in the economy or his wealth. Instead, San Francisco’s escalating rent costs have pushed him into buying.
Mr. Martin and his fiancée wanted to take advantage of historically low interest rates, but they have still struggled to put together a down payment and are remaining cautious about their spending. Any increases in stocks, meanwhile, don’t mean all that much to him. “My feeling of wealth is not correlated to the stock market,” he said.
The Fed’s report did have some less-ambiguous good news. One reason the economic recovery has been so weak since the end of the recession is that many Americans have been digging out of a mountain of debt. Now those debt burdens are easing, as total U.S. household debt was about 109% of disposable income in the fourth quarter, down from a peak burden of around 135% in 2007, Fed data show. A more manageable debt burden could prompt American households to borrow and spend more at a time when the job market remains sluggish and income growth weak.
Indeed, overall household borrowing rose an annualized 0.9% last year, the biggest percentage rise since 2007. Last year also saw the smallest decline in mortgage debt since 2008, a sign that fewer Americans are entering foreclosure and some more are taking out new mortgages. Other types of consumer credit grew 6% last year, though much of these gains were student loans.
As the housing-market recovery continues, more Americans are regaining equity in their homes, which makes it easier for them to trade up, refinance debts and borrow. A measure of owners’ equity as a share of the value of real-estate holdings hit 51.7% in the fourth quarter, up from 50.6%.
While a string of weak readings on job growth, retail sales and the housing market have raised doubts recently about the strength of the recovery, economists are hoping some of these improvements in household finances will help growth finally pick up this year at a rate more in line with historical trends.
“There seems to be a willingness to borrow on the part of consumers and a willingness to lend on the part of banks,” said Millan Mulraine, deputy head of U.S. research and strategy at TD Securities. “That would suggest we are getting that trigger for a virtuous cycle.”
Still, economists fret that the disproportionate share of benefits going to the well-off is contributing to the two-tiered nature of the recovery and will exacerbate wealth inequality.
Spending on luxury goods has generally held up in the aftermath of the recession. But companies whose fortunes are linked to the pocketbooks of average Americans aren’t doing as well.
“You’re seeing a tale of two cities, with the lower half of the economy tending to get hurt, and the upper half doing fine,” said John Hayes, chief executive of Ball Corp., a maker of metal packaging for the beverage and food industries. “We do our business in the middle, so that is why things are tepid for us.”
The firm, based in Broomfield, Colo., had a tough time in the first half of 2013. While revenue picked up pace in the second half, conditions are “nothing to write home about,” Mr. Hayes said. Last year’s sales, about $8.5 billion, were roughly flat compared with 2012.
Mr. Hayes said his firm’s revenues rise when middle-income Americans feel more comfortable about spending, such as construction workers buying more energy drinks at convenience stores. Unemployment and underemployment still remain high among people in their 20s, he said, translating into less spending on products like soda and beer.
“Consumers continue to be hampered,” he said.
Posted by: Steven Maimes, The Trust Advisor
WSJ article by Rachel Feintzeig
What’s the difference between a family firm and a regular business? According to one new study, an empty corner office.
Professors at Harvard Business School, the London School of Economics and Columbia University’s business school examined the schedules of 356 chief executives in India and found that family CEOs worked 8% fewer hours than managers without genetic ties to their companies. The researchers found similar disparities in Brazil, Britain, France, Germany, Italy and the U.S.
The incentives and risks that motivate professional CEOs to burn the midnight oil just might not be a factor for family CEOs, said Raffaella Sadun, a Harvard strategy professor and one of the study’s authors.
“The consequences of underperforming…are very different,” she said. “How easy is it to fire your brother?”
Overall, the jury is still out on whether family-owned businesses perform better or worse than firms with outside CEOs, say researchers and consultants who study the topic.
Morten Bennedsen, academic director of Insead’s Wendel International Centre for Family Enterprise, said that the firms often outperform nonfamily companies when the founder is at the helm but falter when passed down to the next generation. Fewer than 30% of family businesses are still standing by the third generation of leadership, according to research cited by McKinsey & Co., though a 2011 paper in the journal Family Business Review noted similar survival rates in nonfamily firms.
What does seem clear is that family CEOs spend their time differently.
Steven Gewirz, a third-generation executive at Potomac Investment Properties, a family-owned commercial and residential real-estate firm in Washington, D.C., usually leaves the office between 4:30 p.m. and 5 p.m., allowing him to eat dinner with his family. In the summer, he’ll take three-day weekends at his vacation home in Rhode Island, and he enjoys seven- to 10-day-long vacations several times a year.
Mr. Gewirz, who is the company’s CFO, and his brother, its president, pass on deals when they feel they are “busy enough” with other projects.
The business is performing well, he said, and will give his children financial freedom to pursue whatever career paths they want. “We tend to think longer term than the typical real-estate development firm,” he said.
Wesley Sine, a researcher at Cornell University’s Johnson Graduate School of Management who studies entrepreneurship, said that executives who are more oriented toward family and establishing a legacy are more likely to favor leisure.
“You have a perspective that life is more than money,” he said.
To be sure, Ms. Sadun acknowledged, hours worked is a “very crude measure of effort.”
Mr. Bennedsen believes family CEOs might be adding value to their firms in ways not captured by the hours they are formally working. They tend to focus more on networking at cocktail parties or hammering out contract details at sporting event, he said, versus professional CEOs who are more “implementers,” carrying out plans at their desks.
And many family CEOs dispute the idea that they’re skipping out early.
Charles S. Luck IV, CEO of construction building materials business Luck Cos., doesn’t think he works fewer hours than an outside manager. Mr. Luck spent several years as a Nascar racer before joining the family business and said he had to fully exhaust his love of the sport before he was ready to dedicate himself to the company his grandfather built.
He said less time in the office might be a symptom of a family member who is only devoting himself to the firm out of a sense of obligation.
“When they are raised with the mind-set that they are entitled because of [what] their last name is, that creates a really unhealthy situation,” he said.
Posted by: Steven Maimes, The Trust Advisor
NYT article by Farhad Manjoo
Nearly half a billion dollars has gone missing, and nobody knows how. Some say there was outright theft. Others suspect fraud. Many blame lax controls, poor oversight and, above all, a reckless, globe-spanning, Wild West culture — a culture that everyone agrees is ripe for wholesale reform.
I’m not talking about Bitcoin. I’m talking about Citigroup, which disclosed last week that its Mexican banking unit lost $400 million in a contracting swindle involving a shaky oil services company.
To backers of Bitcoin, the Citigroup revelation was a convenient rhetorical weapon: Look, the digital currency’s boosters say, if one of the world’s largest and most tightly regulated financial institutions can also lose a boatload of money, why is everyone getting so bent out of shape about the $470 million collapse of Mt. Gox, once the largest Bitcoin exchange? In the last few years the conventional financial system has lurched from one new fraud to another — from Bernie Madoff to MF Global to the hacking at Target — and yet nobody suggests abandoning dollars as a means of trade. Why aren’t we just as forgiving in our approach to Bitcoin?
It’s a tidy argument. But the comparison between Citigroup’s loss and the fall of Mt. Gox highlights just how unusual and untamable digital currency can be. When scandal engulfs traditional financial institutions like Citigroup, there are investigations and calls for greater oversight — human oversight. Bitcoin, though, was born of mistrust of humans and their institutions. It rests on the belief that financial safety emerges from the integrity of the technology, a computer code that controls a payment system, rather than the trustworthiness of the humans who participate in it.
To save their nascent currency, Bitcoin’s backers may be forced to alter their philosophy and embrace the same messy humans — auditors, insurers and even regulators — that the currency’s most ardent supporters have long abhorred. This raises two difficult questions: Can human oversight integrate into Bitcoin’s free-for-all ethos quickly enough to render Bitcoin safe? And, can Bitcoin be made safer without tamping down on the very openness that proponents say makes Bitcoin such a cheap, efficient and innovative financial platform? At the moment, the answers are still very much up in the air.
Some in the more mainstream part of the Bitcoin world — firms that have sought venture capital and are trying to appeal to ordinary investors and large businesses — say they’re up to the challenge. They are working to set up stringent technical and financial audits of trading sites, and to create insurance mechanisms so that holders of Bitcoin won’t be wiped out by catastrophic losses like the one at Mt. Gox. There are even efforts to pursue government oversight.
“We are reaching out to regulators, because we do want Bitcoin to be a regulated industry,” said Brian Armstrong, the co-founder and chief executive of Coinbase, a site that allows people to purchase, store and trade with Bitcoin and that has received investments from some of Silicon Valley’s leading venture firms. He said he had met with state and federal regulators to discuss Bitcoin. “Even if everybody in Bitcoin doesn’t believe in regulation, we think it’s one way to help Bitcoin grow up and have more transactions flow over the network.”
The most straightforward way of improving the safety of Bitcoin is also the most obvious: running independent audits of sites. Mt. Gox, which acted as a Bitcoin exchange site as well as a “wallet” that stored people’s coins, never once offered a public accounting showing it possessed all the funds it claimed to be storing, nor showing the technical methods it was using to safeguard those funds.
The site’s opacity will make investigating its loss more difficult. Theories about how Mt. Gox really lost all that money, and who has it now, have consumed Bitcoin discussion sites for much of the last week. Mt. Gox has said it was hacked over a period of years, apparently through a well-known but minor flaw in Bitcoin known as “transaction malleability.”
The flaw allows hackers to alter a Bitcoin payment while it’s in progress, potentially confusing a trading site into issuing a double payment. But in the absence of an audit trail, many in the Bitcoin world have trouble believing the hacking claim. On the other hand, every other leading theory for how Mt. Gox might have lost a half-billion dollars — whether government theft or cryptographic error — has been debunked, too. It’s possible that we’ll never really know what happened to that half-billion dollars. It has simply vanished.
Mr. Armstrong said that to prevent something similar from ever happening at Coinbase, the firm plans to hire independent auditors to conduct a public investigation of both its Bitcoin and dollar holdings. The site also recently published a “security audit” of its technical processes, which showed it did live up to its claim of storing most of its Bitcoin holdings in “cold storage,” meaning on machines that are not connected to the Internet.
Then there are more far-reaching efforts to secure Bitcoin. Elliptic, a British Bitcoin storage site, offers optional insurance on your holdings. For a fee of about 2 percent of your coins per year, the site promises to repay you if theft or negligence results in the loss of your funds. Another firm, Inscrypto, is working on what it calls a “decentralized version of the F.D.I.C.,” a system similar to the Federal Deposit Insurance Corporation, which protects your checking account. The system, which is still a work in progress, is far more complex than traditional deposit insurance, using derivative trades to protect against price swings or other dangers of Bitcoin. At the moment, it’s unclear how much it will cost, or even if it will work. The company, like several others in the Bitcoin world, declined to be quoted on the topic.
To some supporters of Bitcoin, the rise of these consumer protection ideas is itself proof of the digital currency’s superiority over old-fashioned currency. One of Bitcoin’s most cherished technical tenets is openness, the idea that anyone, anywhere, can set up a trading node on the payment network. Openness lowers barriers to entry; it allows sites with newer, safer, more innovative financial ideas to easily peddle their wares, while rickety concerns like Mt. Gox die under their own incompetence. It sets up a Darwinian race toward a safer Bitcoin.
In the short run, this dynamic causes terrible consequences for users, but eventually, Bitcoin’s supporters say, the worst problems will get ironed out. One frequent analogy in the Bitcoin world is to the early days of the Internet and web. Just a decade and a half ago, the web was a rough-and-tumble network ruled by pornography and illegal file-trading, a place where fraud flourished and danger lurked around every corner. Today the web is still all that, but it is also, in its more respectable corners, the place where you post pictures of your children, where you shop for Christmas presents, where you hold secure conversations with your doctor and where companies make billions of dollars every year without worry of being defrauded.
“The history of Bitcoin is going to be largely the same,” Mr. Armstrong said. It starts with a “fundamental breakthrough that lowered the cost of payments, but there will be a lot of details to get right, and like on the early Internet, it will take time for the fundamental infrastructure to get established.” Once that happens, Mr. Armstrong says he believes that digital currencies will be unstoppable. Unless, of course, the thought of a half-billion dollars disappearing without a trace makes people queasy enough to stay away from Bitcoin for good.
Posted by: Steven Maimes, The Trust Advisor
Fidelity Study Uncovers Five Key Traits of “Pacesetters” and Five Challenges to Overcome
Fidelity Institutional, the division of Fidelity Investments that provides clearing, custody and investment management products to registered investment advisors (RIAs), banks, trusts, broker-dealers and family offices, today released findings from the inaugural Fidelity Bank Wealth Management Study, for which the firm interviewed more than 140 senior bank executives.
The first-of-its-kind study found that many banks are repositioning for growth, and looking toward new revenue opportunities, particularly from fee-based businesses like wealth management. This shift comes after several years in which banks were focused primarily on compliance and cost management. Over half (55 percent) of the bank executives who participated in the Fidelity Bank Wealth Management Study expected the revenue contribution from their wealth management practices to grow 25 percent or more in the next five years.
Although the future of wealth management appears positive for banks overall in this study, given the expected growth rate, a group of Pacesetters stood out from the pack with wealth management typically estimated to represent 35 percent of total bank revenue in the next five years, versus 20 percent for other banks. The study uncovered five key traits of Pacesetters and five challenges to overcome for continued success:
Key Traits of Pacesetters
1. Leadership commitment and a continued focus on wealth management
2. Integration, not competition, with other bank lines of business
3. Comprehensive wealth management service offerings
4. Leveraging the RIA approach
5. Outsourcing non-core back office operations
5 Challenges to Overcome
1. Investor perceptions
2. Internal development and training
3. Streamlining platforms
4. Recruiting and retaining advisors with wealth management expertise
5. Keeping up with technology
“While some may assume that Pacesetters were the largest banks or clustered in certain regions, our study found that what really set these firms apart was how they run their wealth management practices,” said Mike Norton, head of the banking segment for Fidelity Institutional. “Pacesetters recognize that wealth management not only offers significant revenue-generating potential for banks, it also presents an important client engagement and retention opportunity.”
Five Key Traits of Pacesetting Firms: It Starts at the Top
While Pacesetting firms held almost twice the assets of other banks ($6.0 Billion for Pacesetting banks versus $3.3 Billion), their size and structure closely mirrors all banks in the survey, indicating that size of bank is not the greatest determinant of success. The study uncovered that five key traits set Pacesetters apart:
1. Leadership commitment and a continued focus on wealth management — The study showed that, typically, senior executives at Pacesetters were highly focused on the wealth management business, and committed to growing and developing it. This focus can be difficult as one interviewee noted, “I see a challenge in banking, structuring ourselves and ensuring the senior leadership has enough autonomy to be entrepreneurial and run their line of business.”
2. Integration, not competition, with other bank lines of business — When asked if they competed somewhat with other parts of their banks for client assets, 26 percent of all bankers said yes. However, Pacesetters were having more success addressing the issue — only 16 percent cited this competition, compared to 35 percent of other banks. Respondents noted that integration was key, “[Clients] don’t feel they’ve got a relationship with a commercial bank and then a separate relationship with wealth. It’s one wallet from the client’s perspective.”
3. Comprehensive wealth management service offerings — Many respondents defined wealth management as a holistic relationship that goes beyond deposits and lending — all wrapped together with a high level of service. In the words of one banker surveyed, “It’s the bringing together of all of our capabilities to help clients build, maintain, protect and transfer wealth.” According to the study, Pacesetters were more successful in executing on this philosophy and focused less on products that may be considered more commoditized, such as insurance and annuities.
4. Leveraging the RIA approach — While the study showed that stand-alone RIAs were not viewed as a significant competitive threat for wealth management practices at banks, a large proportion of Pacesetters (83 percent) were using RIAs as part of the delivery model. An interviewee elaborated, “The RIA model I think…will be increasingly popular…Part of that is fee-based. Part of that is a little bit more perception.”
5. Outsourcing non-core back office operations — When asked about outsourcing, bankers interviewed said, “I think you can outsource most of the functionality in back office.” The study showed that Pacesetters seemed to have experienced more success than other banks with outsourcing non-core operations and increasing advisor productivity.
Five Challenges to Overcome for Continued Growth
While banks’ wealth management practices are doing many things right, Pacesetters surveyed felt they needed to continue to hone their wealth management practices and manage:
1. Investor perceptions — Eighteen percent of Pacesetters felt clients think banks lack the investment expertise or breadth of services that other channels offer. As one banker put it, banks need to “overcome the perception by some that a bank is only there for loans and deposits and that wealth management is not a strength of an individual bank.”
• Take-away: Ensure leadership is focused on showcasing the breadth of the bank’s wealth management offerings and consider partners that can help improve branding and marketing efforts.
2. Internal development and training — Thirty percent of Pacesetters felt they needed training to help grow the business — such as how to increase share of wallet or how to get referrals. At the same time, nearly one-quarter of Pacesetters cited cultural differences between the banking and wealth management sides of the business as a challenge.
• Take-away: Devoting additional resources to training can help improve capabilities and confidence levels, while optimizing practice management efforts may ease cultural discord and competition between different areas of the bank. Together, these efforts can help nurture additional and stronger wealth management relationships.
3. Streamlining platforms — Nearly one-quarter (23 percent) of Pacesetters said they had isolated and competing platforms across banking functions with bankers surveyed responding, “You have multiple platforms that don’t necessarily talk to each other.”
• Take-away: Banks can benefit from one view of all existing relationships and reduce inefficiencies with a robust platform that can integrate accounts from brokerage to wealth management.
4. Wealth management expertise — Nearly half of Pacesetters (45 percent) said they found it challenging to increase the number of advisors/wealth managers, a critical path to their growth.
• Take-away: In addition to focusing on recruiting efforts, banks may want to consider leveraging an RIA to demonstrate wealth management expertise and expand resources.
5. Keeping up with technology — More than half of Pacesetters (58 percent) felt keeping up with technology was a challenge, as it was for all banks surveyed.
• Take-away: Banks can leverage the scale of outside firms to keep up with ever-changing technology.
Fidelity created the white paper, Perspectives on Wealth Management in Banks: Insights from Pacesetters, to help banks better understand how leading firms have established growing wealth management practices and what steps leaders can take in their own firms. For more details, visit nationalfinancial.com or contact your Fidelity Representative.
About Fidelity Investments
Fidelity Investments is one of the world’s largest providers of financial services, with assets under administration of $4.5 trillion, including managed assets of $1.9 trillion, as of January 31, 2014. Founded in 1946, the firm is a leading provider of investment management, retirement planning, portfolio guidance, brokerage, benefits outsourcing and many other financial products and services to more than 20 million individuals and institutions, as well as through 5,000 financial intermediary firms. For more information about Fidelity Investments, visit www.fidelity.com.
Posted by: Steven Maimes, The Trust Advisor
WSJ Wealth Adviser article by Daisy Maxey
More than a decade of pitching mutual funds and annuities to financial advisers convinced G.C. Lewis of two things: He wanted to become an adviser himself, and building one from nothing would be a huge challenge.
“It’s very difficult today to start a financial-advisory practice from scratch,” says Mr. Lewis. “The old days of cold calling don’t work nearly as well…Today, more investors are looking to find advisers through referrals.”
So Mr. Lewis, who is 35 years old, decided to enter the business by partnering with an adviser who already had an established practice. Tapping into the relationships he had built as a wholesaler, he canvassed literally hundreds of advisers, asking them about their practices and future plans.
That effort led him to Mike Monroe, who ran Atlanta-based U.S. Planning Group. In March, Mr. Lewis purchased the business, which became Lewis & Monroe Wealth Management. Mr. Monroe, 60, remains as a senior partner, and is helping Mr. Lewis learn how to manage the practice, which is a mix of commission- and fee-based accounts.
“Mike and I get along fabulously,” says Mr. Lewis, who is now studying for his certified financial planner designation at the University of Georgia.
Younger advisers looking to enter the business, or to quickly expand a smaller practice, are turning more often to purchasing existing practices. Industry experts see this trend as likely to persist as it becomes harder to grow one client account at a time, and as the ranks of aging advisers looking to exit the business continue to swell.
Many registered investment advisers now understand what a quick boost an acquisition can provide, says David DeVoe, founder and managing partner at DeVoe & Co., a business strategy and merger and acquisition consulting firm serving the wealth-management community.
“If you go back 10 years, RIAs were buying only a small fraction of the advisers that were selling each year, but for the past few years they’ve been one of two dominant buyer categories; it’s them and the consolidators,” such as Focus Financial and Fiduciary Network LLC, Mr. DeVoe says.
In 2013, 70% of financial advisers were 45-years-old or more, and nearly one-third planned to retire within the next 10 years, according to Cerulli Associates. But just 25% of financial advisers have a succession plan in place, a 2013 study by the FPA Research and Practice Institute, a program of the Financial Planning Association, found.
For older advisers looking to retire, or to slowly transition out of the business, but who haven’t identified and groomed an internal successor, selling to a young and ambitious adviser solves the problem. And for the buyer, it shortcuts some of the new hurdles to prospecting for clients.
Cold-calling prospects is an age-old practice in the advisory business. But Gregory Kurinec, a junior partner at Bentron Financal Group, a Naperville, Ill., commission and fee-based advisory firm, says the tactic doesn’t work nearly as well as it did many years ago. With the caller-identification technology most phones now offer, “if it’s not mom, dad, aunt, uncle or grandma, they’re not going to answer,” he says.
Mr. Kurinec, 30, is buying the books of advisers looking to retire or exit the business. “It’s the quickest way to grow a practice,” he says.
He bought his first book of business five years ago from a 70-year-old adviser who wanted to retire, and has done two more deals since. He typically structures deals that allow him to pay for the new business over time and to keep the prior owner on board for at least a year, he says.
It is important to find an adviser with the same values and lifestyle so that clients don’t suffer culture shock, Mr. Kurinec says. Advisers can meet acquisition candidates through various industry group meetings, as he did, or through introductions from other advisers, but shouldn’t expect a purchase to happen overnight, he says. “You can make it part of your plan, but it has to evolve.”
Gabriel Garcia, director of relationship management at Pershing Advisor Solutions LLC, says younger advisers are purchasing businesses in a variety of ways, but much of the activity doesn’t show up in industry data because many transactions are internal. Often, an adviser who has been a member of a firm or a group for years structures a buyout that occurs over time, he says.
Mr. Garcia is now helping a husband-and-wife team which runs a sizeable Midwest advisory firm find an adviser with a small, successful practice that would be a good fit to eventually take over their business.
Despite the statistics on the aging adviser force, it still appears to be a seller’s market, with many more would-be buyers hunting for opportunities than older owners ready to give up the business. Succession Link, which provides an online marketplace for buying and selling financial advisory practices, now has 41 advisers listing practices for sale and 1,200 registered buyers, according to Phillip Flakes, the La Jolla, Calif., firm’s co-founder and managing partner.
With advisers aging and more media attention on succession planning, Mr. Flakes says he would expect those statistics to change over the next five to 10 years.
Another challenge to young would-be buyers: Coming up with the money. “The average-sized business is $1 million, and there aren’t that many 30 year olds who can walk up and finance a $1 million intangible asset,” says David Grau, president and founder of FP Transitions, a Lake Oswego, Ore., firm specializing in the valuation and analysis of financial-services practices.
“How do you take a seven-figure intangible asset to a group of people with no money and assets? You do it slowly over time,” Mr. Grau observes. Immediate, outright sales are rare, he said.
In a typical sale, a group of two or three 30- or 40-year-old advisers buys out a business over 10 to 15 years as they work for the firm, Mr. Grau says. “They get long-term financing and an investment that comes with a mentor and a paycheck.”
Mr. Lewis funded his purchase with a combination of his savings and a small-business administration loan from Wells Fargo Bank, a bank which is familiar with advisory firm transactions, he says. He made a partial payment initially and will pay the remainder over time, he says.
Posted by: Steven Maimes, The Trust Advisor
Reliance Trust Company announced today that its retirement strategies group exceeded $100 billion in assets under management and administration during the month of January 2014.
Retirement assets at Reliance Trust have grown at an annualized rate of 17 percent over the past five years with assets increasing from $45 billion to just more than $100 billion during that time.
“We have experienced growth in all of our business segments; specifically, institutional trust, collective investment trust funds and our special fiduciary services,” said Kent Buckles, executive vice president of the retirement strategies group at Reliance Trust.
“We continue to expand our services and capabilities to meet the needs of retirement plans, TPAs, RIAs, insurance companies, investment companies and public and private companies,“ echoed Bill Harlow, president of Reliance Trust.
Harlow and Buckles cited a press release Reliance Trust issued in early January 2014, that the combination of industry leading sub-advisors on its collective investment trust funds and world-class, back-office services have been key factors further propelling the company’s growth.
About Reliance Financial Corporation
Reliance Financial Corporation is a privately held, Atlanta-based diversified financial services and wealth management company with more than $131 billion in assets under management and administration. Reliance conducts business throughout the United States through its trust companies, Reliance Trust Company based in Georgia (one of the largest independent trust companies in the country) and Reliance Trust Company of Delaware, and its other subsidiar ies and affiliated offices. Reliance offers a full array of trust and wealth management, investment, retirement plan and outsourcing services to individuals, corporations and institutions, as well as to other banks, brokerage firms and insurance companies. Please visit www.reliance-trust.com for information on all of the company’s programs and services.
Source: Reliance Trust Company
Posted by: Steven Maimes, The Trust Advisor
JP Morgan Asset Management insight by Alex Dryden and Stephanie Flanders
Investors should be prepared for further volatility, in the region and across emerging market assets.
The heat in eastern Europe has been turned up several notches in recent days by Russia’s decision to send troops into the Crimea to protect its perceived interest in the region. This threatens to turn a Ukrainian political crisis into something more serious. President Obama and the wider international community have been caught off guard by Russia’s intervention, and are rushing to frame their response. But investors can afford to take a longer-term view in considering the economic and financial implications..
Events in Ukraine have clearly pushed investors into “risk-off” mode and are likely to be a source of continued volatility, especially if Ukraine appears to be heading toward a messy sovereign default. Aside from this volatility, however, we believe the direct economic and financial fallout from Ukraine’s difficulties should be fairly limited. Russia’s involvement magnifies the scope for market contagion and increases the possibility that global energy prices will be affected both directly and indirectly, because of Russia’s previous negotiating role in the Middle East. But the biggest economic loser from a protracted standoff between Russia and the west would almost certainly be Russia itself.
Russia enters the fray
President Putin has wasted little time in trying to capitalise on the instability in Ukraine to secure a tactically significant region of Crimea. The Crimea is home to Russia’s only main naval port that is operational all year round, while also providing strategic access to the Mediterranean. This has no doubt played its part in Putin’s decision-making process. But the economic downsides are already visible and will only worsen if the standoff continues.
Russian stock prices have fallen sharply, with bank stocks particularly hard hit. Indeed, some USD 58 billion has been wiped off the main MICEX stock index in just three days. That is even more than the USD 51 billion spent on preparations for the Winter Olympics in Sochi. Russia’s currency has also been hit hard, with the ruble down nearly 10% against the dollar since the start of the year. To stem the tide, the Central Bank of Russia (CBR) has raised policy rates by 150 basis points, to 7%. This might ease the pressure in the short term, but could damage an already fragile recovery; Russia’s economy grew by just 1.3% in 2013.
Of course, the economic costs for Russia of a prolonged crisis would be greater still if the international community moved to punish Putin for his action in the Crimea. The Wall Street Journal has called on the US to impose sweeping economic and financial sanctions on Russia. We think this is unlikely. But the UK and US have condemned Russia’s actions and threatened the country with expulsion from the G8. Even the possibility of such economic and political isolation would be a further headwind for Russian economic growth in 2014.
Ukraine’s financial situation was critical even before Russia’s recent move. Although western diplomats have offered their verbal support, financial support is what Ukraine desperately needs. Negotiations between Ukraine’s interim government and the International Monetary Fund (IMF) on the terms of a bailout agreement are ongoing. In the meantime the country’s foreign reserves have fallen to record lows and so has its currency, the hryvina.
The IMF has made clear that it will do all it can to avoid a messy outcome for Ukraine. But given the fragility of the new government—and the question marks about its legitimacy—a sovereign default cannot be ruled out. The market price of insuring against a Ukrainian default has risen by 300 basis points since the summer.
Though we do not think it is the most likely scenario, a full or partial sovereign default could send further shockwaves through emerging markets. That said, we would expect the direct economic fallout from events in Ukraine to be somewhat limited. Ukraine’s economy is only 1.4% of the size of the eurozone, and a third the size of Poland. The country has little impact on global equities, as it is classified as a frontier market by MSCI, and Ukrainian equities make up only 0.15% of the MSCI Frontier Markets Index.
Adverse geopolitical movements are often associated with spikes in energy prices, especially if the region involved is a key energy gateway. Three of the four major gas pipelines that connect Russia to western Europe run through Ukraine, transporting 80% of Russia’s gas exports to Europe. Natural gas and oil have increased gradually in late January and February as the crisis has escalated.
Ukraine’s importance to the global agricultural supplies adds another dimension to the impact on commodity prices. In recent weeks, the global price of wheat and corn has risen sharply and commodity prices overall have spiked to a six-month high (see chart). Further spikes in prices cannot be ruled out as events continue to unfold. The rise in oil and gas prices is perhaps a timely reminder of why investors should have some always have some exposure to commodities in their portfolios.
Russia’s move to protect what it perceives to be its core interests in Crimea marks an escalation of the Ukrainian crisis, with potentially grave consequences for the broader region. Both Ukraine and Russia could see lasting economic and financial damage from a prolonged standoff. If not quickly resolved, the crisis could also have long-term implications for Russia’s relations with the west. Whether it will fundamentally alter the long-term global landscape for investors is more questionable.
Investors should be prepared for further volatility, in the region and across emerging market assets. They should also be mindful of potential contagion for some European banks and other companies with significant business interests in Russia and/or Ukraine. With regard to Russian equities, however, it is fair to say that a great deal of bad news is already “in the price”. At current valuations, investors would not have to take a very optimistic view on Russia’s future to see some potential upside in Russian assets once the crisis has abated.
Posted by: Steven Maimes, The Trust Advisor
Forbes article by Danielle and Andy Mayoras
While we at Trial & Heirs won’t make any Oscar predictions, we can look back at past Oscar winners like Philip Seymour Hoffman, Elizabeth Taylor, Heath Ledger, Frank Sinatra, and Marlon Brando. Their estates illustrate important estate planning lessons that everyone can benefit from — even those who aren’t walking the red carpet at the Oscars.
1. Philip Seymour Hoffman: You Can Be Creative With Your Will or Trust
There were many mistakes and pitfalls with Philip Seymour Hoffman’s estate (including no estate tax planning and his failure to use a revocable living trust, as we discuss in our article). But, Hoffman — whose portrayal of Capote earned him the Best Actor Oscar in 2006 — didn’t do everything wrong.
He gets credit for a key component of estate planning that many people overlook: creativity. Estate planning is not meant to be “fill in the blank” or “one-size fits all.” You can use your will or trust to pass along your goals, values and moral beliefs. Most people think wills and trusts only pass along assets to the next generation, but they can do so much more.
Hoffman’s will highlights this. He included language in his will to express his strong desire that his son be raised in Manhattan, Chicago, or San Francisco, or at least visit one of those cities twice each year, to be exposed to the culture, arts and architecture that those cities offer. Hoffman could have taken it a step further, especially through a well-drafted trust, but we applaud the late actor for thinking outside the box.
2. Elizabeth Taylor: The Right Way To Use A Trust
The late, great actress was known for her many marriages, business savvy, and of course, her many successful movies. Elizabeth Taylor should also get kudos, unlike many celebrities, for doing proper estate planning. Despite early reports that Taylor’s family may fight over her estate, her estate has been just the opposite: peaceful. No probate filing, no copies of her will published on the web, and no court battles.
In fact, very little is publicly known about her estate. We do know that she created the Elizabeth Taylor Trust and funded it with her assets (including her publicity rights, to manage her name, likeness and image). We also know that her eighth and final husband, Larry Fortensky, inherited about $800,000, but that was only because he told the Daily Mail that in an interview. There are unverified reports that her Trust left most of her assets to her children, grandchildren, and charities (including AIDS research foundations), but the document itself has never been made public.
Why so much secrecy? Wills are public record, and have to be filed with the probate court, which means that everyone can read them. Properly-funded revocable living trusts, however, operate outside the probate system and remain private. Even better, well-drafted trusts are much less costly to administer, usually without the need for court oversight.
So Taylor’s estate should receive another award to place on the mantel next to her two Oscars (Best Actress in 1961 and again in 1967): Best Use of a Revocable Living Trust.
3. Heath Ledger: Wills And Trust Must Be Updated
Heath Ledger won his Oscar in 2009, for his amazing performance of The Joker in The Dark Knight. Sadly, his family had to accept his award for him, due to his sudden death in 2008. Specifically, his sister and parents accepted his Oscar for Best Supporting Actor.
Those same family members were the beneficiaries under Ledger’s will, dated three years before he died. The will left everything to Ledger’s parents and sisters, despite the fact that his daughter, Matilda Rose, was born after the will was written and before Ledger died. There were media reports that the family was preparing to go to court to fight over the estate — including public accusations by Ledger’s uncle against his father — until the family agreed everything would go to Matilda Rose.
Ledger also had a $10 million life insurance policy for his daughter, whom he had with actress Michelle Williams. This raises the question of whether Ledger wanted his other assets to go to his daughter, or if the life insurance money was all he wanted her to receive. Since he never updated his will, no one really knows.
Luckily for the Ledger family, the fight never reached court, and Matilda Rose benefited in the end. But Ledger should not have left it up to chance. It is critical for everyone to update their wills and trusts after important life events, such as the birth of a child, a new marriage, divorce, or even buying or selling a business.
4. Frank Sinatra: Plan Ahead For Trouble
While Ol’ Blue Eyes was of course best known for his crooning, he was a successful actor as well. He won his Oscar award for Best Supporting Actor, in the 1954 movie, From Here to Eternity. Sinatra had a wide range of talents, and estate planning was one of them.
Sinatra did what many people in second marriage (or third) situations fail to do — plan ahead to avoid a family fight. Probate court battles between adult children and a second spouse are far too common; they can often be avoided with well-drafted documents by an experienced estate planning attorney. Sinatra’s will, made in 1993, was very detailed — it was 21 pages long. It included a thorough “no contest clause” (also known to lawyers as an “in terrorem clause“). While these clauses are common-place today, Sinatra’s will was more unusual for its day. It prohibited 13 different legal actions, so that if any of his family members went to court, they would be completely disinherited.
Sinatra’s will worked. No one challenged his will, even though his children were reportedly unhappy with how much he left his widow, Barbara.
Too many people assume that their children and spouse will get along when they die. It’s always good to plan ahead, just in case, and help insure that your wishes are followed without family fighting.
5. Marlon Brando: Don’t Rely on Verbal Gifts
Brando never followed convention. He won his second Oscar for Best Actor in 1973, for The Godfather, but he rejected the award as a protest to the treatment of Native Americans by the film industry. Too bad he failed to follow the norms when it came to estate planning.
In part due to questions about his true intentions as expressed in his will and trust, Brando’s estate was involved in more than two dozens lawsuits by 2009 — five years after his death. There were multiple lawsuits involving claims of employees who used to work for Brando saying that he had promised them certain assets or interests, even though the verbally-made gifts were not reflected in his estate planning documents.
Many people make the common mistake of assuming their family members will honor their true wishes, as expressed verbally, even if the will and trust are not changed to include the new wishes. Many alleged that was the exact case with the Brando estate, leading to multiple legal challenges. In the end, those cases settled, leaving neither side happy with the outcome. Clearer estate planning documents could have avoided — or at least minimized — many of these fights, as we detail in our book, Trial & Heirs: Famous Fortune Fights!
We use the book to teach people how the estate planning lessons from celebrities can help everyone. The same rules apply to everyone; it’s only the dollar figures that differ. These are five great examples you can share with your loved ones, or your clients, to help encourage them to do the proper estate planning. Doing so may not win you any awards, but it should earn your loves ones or clients piece of mind.
Posted by: Steven Maimes, The Trust Advisor
Growing up in the Midwest, my idea of rich was my dentist, who lived a few blocks away and had a split-level that was bigger than the rest of ours and a Cadillac in the driveway. Then I saw a copy of Forbes in his office and realized there was a different sort of wealth, a gossamer existence beyond my wildest imaginings.
Fast-forward a few decades and I ended up covering publishing in New York during the unwinding of the dot-com boom in 2001. Forbes was still chronicling the new titans, putting out a magazine every other week stuffed with heroic stories and lucrative advertising.
Although I was taught to suspect the rich as a young man, I was not immune to the blandishments of wealth. So when I was invited to a party on the Highlander, the Forbes yacht, I practically skipped past the hired bagpipers at Chelsea Piers in Manhattan and hopped aboard. Steve and Timothy Forbes, the sons of Malcolm who were charged with running Forbes, hosted a floating crowd of journalists, advertisers and executives as we feasted on lush hors d’oeuvres and remarkable bottles of Scotch.
Midtown glimmered in the dusk as we motored up the Hudson River and word came that I, along with Keith Kelly of The New York Post, were about to get a ride on a helicopter. Did I mention the yacht had a helicopter? Soaring over the Statue of Liberty, Midtown and most remarkably, the twin towers, it was, undoubtedly, one of the greatest nights of my life.
It was Sept. 10, 2001.
All good things come to an end, even for the rich, and sometime this month, Forbes will probably pass out of family control and into the hands of a foreign owner. There were reports that Fosun International, a Chinese conglomerate, would buy the magazine at a price of about $250 million, but people close to the deal, who spoke on the condition that they not be named during active negotiations, said that Fosun was not the likely buyer and that the stated price was low. Other foreign buyers are in the mix: Singapore’s Spice Global Investments has been among those mentioned, as has Germany’s Axel Springer S.E. Still, regardless of the specifics, sometime this month a magazine that was a once-lustrous emblem of American greatness, of capitalism in full cry, will most likely be sold for small money to a foreign buyer.
The Forbes family had hoped to receive as much as $400 million to $500 million for the magazine and website, and it is not hard to see why. In 2006, it sold a minority stake to the private equity firm Elevation Partners for $264 million, and Elevation, even after significant write-downs, has a preferred position, which means that at the low end of the sales range, not much would be left for the family. (That may be why some of the deals floated in the news media suggest that the family will maintain a minority stake after a sale.)
According to Ken Doctor, a news media analyst who has seen the sale-offering document, the high price was based on unrealistically rosy assumptions about costs and advertising revenue. And Forbes’s determination to operate a free website while competitors are increasingly relying on digital subscription revenue seems risky. The lack of a clear way forward may be partly why Time Inc. and other American news media businesses passed on the company after reviewing its books last year. (It’s worth recalling that Businessweek, which was hemorrhaging money, sold for about $5 million in 2009.)
Forbes has always been a robust international brand, but who would have predicted that a magazine led by Steve Forbes, a man who ran for president on a platform based on the magical power of American capitalism, would be sold to a foreign company? It is less ironic than it is telling, a reminder that the America celebrated by Forbes is best seen in the rearview. How did we get here?
To start, Forbes was conceived and built by the first generation — B. C. Forbes — but fully realized by the second. Malcolm Forbes was a media mogul in full, including a lifestyle replete with islands, palaces, ranches and private jets that embodied the brand. Under his reign, the Forbes formula of how to get/be/stay rich struck an aspirational note perfectly in tune with the times.
After Mr. Forbes’s death in 1990, the magazine and family prospered for over a decade. Forbes had a strong stable of reporters, and in the early ’90s, it played a leading role in exposing Jordan Belfort, the crooked Long Island stockbroker depicted by Leonardo DiCaprio in “The Wolf of Wall Street.”
In the wake of the dot-com bust, the pressures of operating as a stand-alone magazine created enormous difficulties. During the first tech boom, companies like AOL and Yahoo spent money on full-page ads in Forbes in a bid for credibility and traction. A decade later, those companies are not clients but are vying instead for advertising dollars. Increased competition, along with readers fleeing print, has forced layoffs, constant changes in strategy and a partnership with Elevation that failed to alter the fundamental math.
After Mr. Forbes died, the family sold his cherished collection of Fabergé eggs, mothballed the yacht, peddled the jet and offloaded the company’s historic headquarters on lower Fifth Avenue. Now it has come down to selling the magazine itself, which, beginning next year, will be based in an office tower in Jersey City. There will be no more soaring helicopter rides over Manhattan.
Like so many other media dynasties — the Bancrofts, the Chandlers, et al. — the passage of time has been accompanied by operational challenges and falling profits that have tested family ties. The Forbeses are no exception. Steve Forbes spent close to $70 million running for president — twice — with little discernible impact beyond the resentments it created with family members.
The entire category of business magazines has been punished, but Businessweek and Fortune have the benefit of being part of larger, more diversified enterprises, while Forbes has had to go it alone. The magazine doubled down hard on a digital advertising strategy with a lot of click-bait headlines and opened its platform to thousands of contributors, improving traffic but diluting its brand. In the context of the current sale, some saw that strategy as more like lipstick on a pig, a bold effort that fails to hide the fundamental ugliness of the situation.
If the Forbes brand has been dented, it has hardly been destroyed. The name has always resonated globally, partly because the Forbes 400 “rich list” is fetishized by the wealthy, many of whom will be on the list of the world’s billionaires that comes out Monday. And the Forbes Asia summit remains a popular, profitable event.
In that context, a buyer from a nascent economy on the rise make sense. The Far East is a place that is not only making much of the world’s goods, the countries there are also manufacturing wealth at an astounding rate. Forbes might be a nice trophy for a foreign buyer as a way of signaling its arrival. It would not be the first time a publication was bought as a multiple of ego rather than earnings.
But in America, there is a growing disconnect in the narrative of business magazines. The world of titans that Malcolm Forbes once so vividly inhabited has become a lot less sexy. The mix of buffoonery and greed that created the financial meltdown in 2008 dispelled the image of businesspeople as heroes. Forbes’s worldview — “Business was originated to produce happiness,” B. C. Forbes asserted — has been overtaken by the grimness of a new economy, one that still produces billionaires that end up on the Forbes list, but few jobs to go with them.
Posted by: Steven Maimes, The Trust Advisor