Enron: The Watergate Of Financial Services

The ripples of the Enron collapse have shaken investors‚ confidence in the stock market and the believability of corporate earnings–creating a Watergate-like crisis in the financial services industry, according to a new study. But Enron apparently hasn‚t caused investors to doubt the stocks of the companies for which they work.

The survey of 363 investors found that 43% have less confidence in the market in the wake of Enron, yet at the same time, 70% say they are comfortable with the amount of their company‚s stock they hold in their retirement plans.

Only 19% of respondents in the TowersGroup survey say they would prefer to hold less company stock, while 9% say they want to own more.

Respondents were much more distrustful of the market and Enron. Indeed, 88% say they believe Enron‚s executives, board of directors, auditors or attorneys intentionally misled investors about the company‚s financial condition.

Only 23% expressed a strong belief in the stock market‚s ability to fairly value stocks. But 33% do believe that investment information will become more reliable as a result of the Enron collapse, compared with 27%, who are less confident about such information.

"Enron‚s blow to investor faith is the Watergate of business," says Alan Towers, president of TowersGroup. "Trust will no longer be assumed. Companies will have to earn it with behavior, communications and leaders that inspire confidence."

Some financial advisors report that the Enron affair has shaken clients‚ confidence more than any single event in recent decades, including the 1987 stock market crash, the 1998 Asian crisis and the bursting of the Nasdaq bubble in 2000.

"I‚ve received more calls about Enron than any other event in my career," says Susan John, an advisor in Wolfeboro, N.H. Her clients include current and retired businessmen who always viewed the Big Five accounting firms with great respect.

Financial advisors, however, can take solace from that fact that they remain among the more trusted of financial professionals. The survey asked investors to rate the honesty and integrity of financial professions on a scale of 1 to 5, with 5 being the highest. The groups with the highest (4 and 5) scores were bankers, with 39% in that range; mutual fund companies, 38%; and financial planners, 37%.

Despite the accounting irregularities tied to the Enron scandal, accountants ranked right behind planners, with 35%. Leading in the 1- and 2-score rankings were stock brokers, 36%; senior management of publicly traded companies, 36%; and boards of directors of publicly traded companies, 34%. Security analysts received mixed reviews, with 29% giving them a 1 or 2, 21% giving them a 4 or 5, and 42% giving them a 3 ranking.

Opinion Research Corp. conducted the survey in February. Respondents participated in 401(k) or other retirement plans and also had invested outside those programs in stocks or mutual funds during the past two years.

FPA Opposes Thrift Exemption In Proposed Bill

The Financial Planning Association (FPA) is drumming up opposition to a proposed bill that would exempt thrifts from the Investment Advisers Act of 1940.

The association has started asking members to write or e-mail their congressional representatives, urging them to vote against the proposal.

Thus far, the association has contacted members whose representatives sit on the House Subcommittee on Financial Institutions and Consumer Credit. The thrift exemption is contained in a bill–the Financial Services Regulatory Relief Act of 2002–being considered by the subcommittee.

The FPA has opposed exemptions to the advisers act, maintaining that all investment advisors should be on a "level playing field" when it comes to federal regulation.

"It‚s a huge market, and we‚d like to see anyone getting into that market play by the same rules," says Duane Thompson, the FPA‚s director of government relations.

As it stands now, banks and, to some extent, large broker-dealers are exempt from regulations contained in the advisers act, while registered investment advisors are not.

The regulations cover a variety of matters, including advertising, compensation, record keeping and the privacy of client information, professional qualifications and disclosures of potential conflicts of interest.

Morningstar Study Finds Holdings-Based Analysis Superior

Holdings-based style analysis is a superior analytic tool to returns-based style analysis. That‚s the conclusion of a new study comparing the two techniques conducted by Morningstar and released in mid-March.

The study was done by John Rekenthaler, president of Morningstar‚s online advice business; and Michele Gambera and Josh Charlson, two Ph.D.s at the firm.

Returns-based style analysis rose dramatically in popularity during the 1980s, after it was developed by William Sharpe. It proved particularly useful for situations in which information about a fund or a portfolio‚s direct holdings was not available. It has been widely used for the last decade by pension consultants, financial advisors and plan sponsors.

However, the authors note returns-based analysis possesses several limitations. In particular, it can serve only as a constrained estimate of a portfolio‚s current positions. So a critical issue is measuring the margin of error. "The returns-based approach runs into more trouble with more flexibly managed portfolios," Rekenthaler says.

For instance, a fund whose manager moves from Pepsi to John Deere to eBay is likely to have a higher error factor than one who moves from Pepsi to Coca-Cola.

A major problem with holdings-based style analysis is the timeliness and cost of the data. Mutual fund companies now are required to publish their holdings only on a semi-annual basis. "What was surprising was that a 12-month-old portfolio will match up more closely with what‚s in the portfolio today than returns-based analysis," Rekenthaler says. "Holdings-based style analysis is more timely than most people think."

He cites an example of a fund that allocates 37% of its assets to large-cap growth stocks. Returns-based analysis might show the fund‚s large-cap growth position at 25%, while holdings-based analysis would measure it at 33%, he adds.

Hedge Funds On A Roll

The hedge-fund industry–helped by manager performance and an inflow of new money–grew 38% last year to total $563 billion in assets, according to a recent survey.

The survey by the Hennessee Hedge Fund Advisory Group also found that individuals continued to be the largest source of new capital, followed by the fund-of-funds industry.

"Our greatest concern continues to be the ability of the industry to absorb the incoming money flow without diluting the talent pool and thus hurting performance," says E. Lee Hennessee, chairman of the Hennessee Group. "However, most managers seem to have a good sense of their capacity limits."

The annual survey, introduced in 1994, consists of responses from 766 hedge-fund managers representing more than $141 billion in assets.

Among the other findings:

• Thirty-seven percent of fund managers say high-net-worth individuals and family offices were the fastest-growing source of capital in 2001. They were followed by corporations, 25%; pension funds, 10%; endowments/foundations, 9%, and fund of funds, 9%.

• The percentage of hedge-fund managers who were RIAs was 54% last year, up from 47% a year prior, due to the increased number of banks and insurance companies offering hedge products.

• Individuals contributed $270 billion, or 48%, of total hedge-fund assets, and fund of funds followed with a 20% contribution. In 1994, individuals were responsible for 80%, or $79 billion, of assets.

Raymond James Financial Names Helck President

After starting with Raymond James Financial Services Inc. (RJFS) as a recruiter 13 years ago, Chester B. (Chet) Helck has been elected the company‚s president and chief operating officer.

Helck is responsible for all retail sales and marketing and will be assigned additional line duties as he becomes more familiar with his new roles. Helck, formerly executive vice president of RJFS with responsibility for the independent broker-dealer‚s recruiting activities, will attempt to meld the firm‚s infrastructure with that of the parent‚s regional brokerage, Raymond James & Associates.

Francis S. (Bo) Godbold, whom Helck replaced as president, was elected vice chairman and will serve as an advisor to Chairman and CEO Thomas A. James..

"After an extensive search for a new chief operating officer was conducted, it became clear that Chet was the best candidate," James says. "While there were several outstanding, well-qualified internal and external candidates, Chet possesses extensive experience with retail, which makes up 70% of our business."

More Consumers Consulting With Advisors

Financial advisors are helping take some of the sting out of the soft economy, according to a recent survey.

The survey showed that more consumers are using financial advisors and are more likely to be satisfied with their personal finances when they do.

"Given the current economy, it‚s not surprising to see Americans getting more practice about managing their finances," says Elaine Bedel, chair of the CFP Board of Standards, which undertook the consumer survey. "It‚s heartening to see that Americans are deciding to take control of their financial futures by reaching out to qualified financial professionals."

The survey consisted of written questionnaires from 996 households, which had income in the top quartile in the age group of the person completing the survey. The survey was conducted between October 23 and November 19. It was the board‚s first such survey since 1999.

The survey showed an increase in the number of people reaching out to financial planners. Thirty-seven percent said they consulted with a planner, compared with 32% in 1999. And the percentage that use a planner as their primary financial advisor increased from 19% to 22%. Those who serve as their own financial advisors declined, dropping from 48% to 45%.

Those expressing extreme satisfaction with their financial advisors went from 39% to 47% and from 41% to 55% for those who consult with a CFP certificant.

Companies To Launch Fund Of Funds

Three more companies have entered the race to bring hedge funds to the masses. LJH Global Investments LLC announced strategic alliances with Phoenix Investment Partners Ltd. and Attica Portfolio Management to launch new fund of hedge fund products.

The alliance with Phoenix is to create a product for individual investors that will feature an investment minimum lower than that of a typical hedge fund, the companies say.

"We‚re looking at something between $25,000 and $50,000, but it hasn‚t been finalized yet," says LJH spokeswoman Charlotte Luer.

Under the alliance, LJH will develop and manage the fund, while Phoenix will handle the sales, marketing and distribution.

LJH and Attica–with offices in London, Amsterdam and Zurich–are teaming to create a fund of hedge funds product line for European institutional investors and high-net-worth individuals.

"This is a complimentary relationship where LJH provides our robust hedge fund manager selection process in combination with Attica‚s hedge fund skills and product range," says LJH Global Investments-Europe Managing Director Ronald M. Neumunz.

For Phoenix, this is the second hedge fund alliance. In June, Phoenix and Arden Asset Management agreed to a similar arrangement for the launch of a fund of funds for institutional investors.

"Phoenix‚s objective is to offer a continuum of wealth-management products that meet the needs of institutional and high-net-worth investors," says Michael E. Haylon, Phoenix‚s chief investment officer and head of its alternative financial products division.

Dow Jones

Investors More Interested In Insider Trading

If you can‚t beat the big executives who might be trading on inside information, you might as well track their moves.

That has been the growing sentiment among small investors in what appears to be another side effect of Enron Corp.‚s collapse. Anger has been brewing over seemingly prescient trades by top Enron executives who sold large chunks of stock just before the energy-trading company‚s collapse. And some investors are taking actions to be better prepared if it happens again.

Calls from retail investors have increased at companies that track insider information from people pursuing signs of further corporate downfalls. Enron executives reportedly sold about $1 billion in company stock in the three years leading up to the bankruptcy, while encouraging employees to load up on company stock in their retirement plans. And the Houston company isn‚t the only example. Executives at Global Crossing Ltd., which filed for Chapter 11 bankruptcy protection in January, reportedly sold stock during a period when federal agencies suspect the company inflated revenue numbers.

"I‚ve never seen more interest" in insider-trading information, says Lon Gerber, research director at Thomson Financial/Lancer Analytics. "It‚s the perfect storm," with the woes of Enron and Global Crossing hitting the news simultaneously, he says.

But investors keeping close tabs on executive trades might be disappointed to discover that they will probably never uncover another Enron or Global Crossing by simply watching the trading habits of corporate insiders.

Understanding the implications of big trades is complex and often confusing. Dozens of insider transactions are reported every day to the Securities and Exchange Commission, and most appear typical. Further complicating the matter, some insider transactions remain hidden for more than a year after they take place. Enron executives were able to keep out of the public eye some sales of company stock by selling shares to their company instead of on the open market. Under SEC rules, sales to the company can be reported to the commission 45 days after the end of the fiscal year in which the company accepted the stock.

"Insider activity should always be used as part of a research basket," not alone, Gerber says. Waves of corporate stock sales often mean nothing or are hard to interpret, he adds. "Buying is always a more powerful symbol."

Consumers Are Trying To Manage Debt Better, Survey Shows

The fragile economy has jolted many Americans into a determination to reduce their credit-card debt, a survey on financial well being indicates.

While workers‚ primary long-term financial worry continues to be saving for retirement, paying off plastic and other short-term debt is in the forefront these days, according to the new quarterly Well-Being Index report from Principal Financial Group Inc. (PFG).

The survey of 1,500 employees at various firms also found that 25% have recently postponed major purchases, citing economic conditions. The credit-card debt concern is somewhat ironic, since a previous survey had found most people intending to spend at least as much over the year-end holidays as they had in 2000, when times were generally brighter.

"There was a Goldilocks mindset that things were going to get better and better," says Daniel Houston, senior vice president at Principal Financial, a financial services firm in Des Moines, Iowa. "But here we sit with roughly the same economic outlook we had six to nine months ago."

The Enron debacle apparently is causing significant rethinking about the security of retirement nest eggs. The survey found that about 30% of the respondents said they have made recent changes in their strategy. In the previous quarter, 17% had indicated they had reallocated assets from volatile to more stable kinds.

But despite rising concern about their well being, most respondents rely on family or friends rather than professionals for advice on investment decisions and financial options. Accountants, stockbrokers and insurance agents were consulted only by about 11% of those surveyed, Principal says.

The above was furnished by Dow Jones Financial Advisor Service. © Dow Jones. For a free trial, log on to www.fa-mag.com.