Only 18 months after counseling investors that most fixed-income securities were unattractive investments and equities offered better potential returns, Pimco's Bill Gross reverted to pronouncing equities dead, a position he has previously embraced on the most inopportune occasions. Why equities were so much more desirable in 2010 than they are today isn't clear.

In this issue, we're fortunate enough to have Nick Murray conduct a detailed examination of Gross's argument on page 41. Unquestionably, Gross is a brilliant bond investor and, like Murray, he happens to be an excellent wordsmith. When it comes to logic, however, that's another matter.

Shortly after I read Murray's dissection of the flaws in Gross's argument, a white paper from Grantham Mayo, hardly an outfit populated with perma-bulls, crossed my desk, taking the bond maven to task as well. Written by Ben Inker, GMO's asset allocation chief, it explains equity returns and their relationship to other economic variables.

Among other things, Inker notes that stock market returns can be "significantly higher than GDP growth in perpetuity without leading to any economic absurdities." He produces data from Dimson, Marsh and Staunton, revealing that during the 20th century, equities did indeed outperform GDP growth in most industrialized nations.

In fairness to Gross, it was Warren Buffett who in the late 1990s questioned how stocks could keep climbing 15% to 20% while GDP was growing at 3% to 4%. Shortly thereafter, equities ceased their ascent to the stratosphere.

What explains the equity risk premium? Inker posits that the most plausible explanation is that equity markets tend to perform miserably at the most inconvenient time." When stock markets underperform for a sustained period of time, these losses are simply "necessary" so that prices can revert to sustainable levels, a condition needed for long-term stability.

In this month's cover story, Senior Editor Jeff Schlegel writes on page 72 about a survey that Financial Advisor conducted with Don Trone's 3Ethos and Boston Consulting Group examining advisors' fiduciary attitudes.  For a subject that frequently inspires contention, hopefully the article and the survey may offer an opening for a more reasoned discussion.

As Trone himself says, there is a disconnect between principles and practices. SEC-regulated RIAs scored the highest, but the "B" grade they earned for fiduciary practices shouldn't be cause for celebration or self-congratulation. Trone concedes he previously thought the industry was "further along" than the study found.

Hopefully, this survey and future studies give this business some signposts on the path to superior client services.

Evan Simonoff, Editor-in-Chief
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