Business Isnít Always Fair

This year‚s Morningstar conference in late June provided a glimpse of an industry that came so far so fast–only to be laid low by the bear market of the last three years.

The lessons shared from funds‚ experience are important for the financial advisory profession.

Thirteen years ago when I began covering financial planning, this loosely configured cottage industry was reeling from bad publicity, lawsuits and enforcement actions associated primarily with the sale of limited partnerships. Though many honest, ethical advisors were suffering as a result of actions they never committed, the general lack of public trust of financial planners through guilt by association was understandable, even if it was unfair to many. But it took years of hard work and ethical behavior by advisors, whose reputations were tarnished by the dubious behavior of others, for the business to regain its respectability.

Planners were not alone. Virtually every sector of financial services was embroiled in one scandal or another, from the savings-and-loan debacle to insider trading by investment bankers to junk bond financing solely for the purpose of generating huge fees. The only sector of financial services that was not tarred by the scandals of the late 1980s was the mutual fund business, which for some strange reason was the only financial arena enjoying strong revenue growth. There certainly was a correlation there.

Fast forward to this year‚s Morningstar conference, and the shoe is on the other foot. While financial advisors find their waiting rooms looking like crowded emergency rooms, mutual funds are just beginning to bounce back from a buyers‚ strike by investors. And as was noted by Acorn‚s Ralph Wanger, one of two recipients of Morningstar‚s lifetime achievement award, mutual funds have not committed many of the egregious sins that so many Wall Street firms seem permanently destined to do. However, Wanger was quick to add that stupidity was not a crime; if it were, the best investments would be prison construction, he added.

The other recipient of a lifetime achievement award was the equally deserving Jean-Marie Eveillard, who learned the hard way that losing advisors and their clients was better than losing their money. Eveillard‚s refusal to be seduced by tech mania in 1998 and 1999 cost his funds almost half their shareholders, but that was far more palatable to this honorable gentleman than losing half his shareholders‚ money. Eveillard, whose funds have performed brilliantly in the last three years, didn‚t blame advisors and shareholders who deserted, but he reserved some tart barbs for Fed Chairman Greenspan. In his view, Saint Alan helped create the bubble, provided intellectual justification for it, extended it, and then refused to let market forces purge its excesses when he cut interest rates a zillion times, creating a housing bubble and perhaps recreating a new stock market bubble in the process.

Morningstar Managing Director Don Phillips questioned the zeal that the fund industry devoted in the last few years to fighting disclosure of proxy votes. He noted that word had it firms like Fidelity Investments voted their proxies in the best interests of their shareholders, making some wonder why they wouldn‚t want to disclose it. One possible explanation is that they don‚t want to get kicked off a Fortune 100 company‚s 401(k) platform. So what‚s the lesson here for advisors? Even though fund companies have not engaged in the abusive behavior that Wall Street has, they have pursued their own interests aggressively, while reasoning that shareholders have their own representation. While they probably are right, they find themselves being compared to Internet stock promoters. It‚s unfair, but it‚s also their own fault.

Morningstar‚s conference isn‚t the only provocative one this year. Advisors looking ahead should seriously consider our Financial Advisor Symposium in Chicago on September 17 and the FPA‚s Success Forum in Philadelphia this November.

Evan Simonoff, Editor-in-Chief

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