Former Fed Vice Chair Reflects On Financial System Slump
It's the recovery, stupid. Forget all the endless talk about a recession. What's really important is how the economy performs over the next two or three years, not whether the GDP needle moves into marginally negative territory the next two or three quarters.
That was the message former Federal Reserve Vice Chairman Alan Blinder gave to attendees at TD Ameritrade Institutional's Partnership 2008 Conference for advisors in Orlando on February 7. In his view, the U.S. economy is facing two serious problems: a spending slump, particularly on new homes, and a paralyzed financial system. Housing represents about 4% of GDP. "Will the 4% infect the 96%?" Blinder questioned. "The two problems are not really inseparable."
Blinder intimated that the shape of the recovery, from either slowdown or recession, would be pivotal in shaping the way the economy evolves, first with a new administration and then in a new decade. He told attendees the 0.6% growth in the U.S. economy registered in the last quarter easily could continue for another quarter or two.
It's not yet clear whether the economy will limp out of the slowdown with minimal job growth like it did in 2002 and 2003, when it was hamstrung by the tech bubble collapse, September 11 and the accounting scandal trifecta. Or it could display modest vigor as it did in 1991 and 1992, or come roaring out of the box like it did in 1983.
Blinder, who was pinch-hitting as keynoter for Los Angeles Dodger manager Joe Torre, relied on baseball analogies to describe the economy. "The slump in spending is a bit like a batting slump. Sometimes hitters break out of slumps, sometimes you change the batting order," he explained. "But you don't turn the team upside down."
In contrast, the paralysis in the financial system could be like a more problematic pitching slump. "Many markets are frozen," Blinder said, while noting the long lags associated with monetary policy. "Cutting interest rates 225 basis points is like a slow-acting cure. [The impact of] interest rate cuts won't be felt until late this year."
Although the Princeton University economist noted that "the vast majority" of private sector economists "don't expect" a recession, he added that the economics profession has a notoriously poor record at predicting recessions. There are reasons "to think the export boom will continue and offset" much of the housing slump, he declared.
Private capital should be rushing in to capitalize on falling asset prices, but it's not. "The Fed has rates that are about 150 basis points below what I'd call neutral," Blinder contended. Despite a very accommodative Fed policy, "banks are hoarding liquidity and shoring up their capital."
Traditional monetary policy always has its limitations, and that may explain why Blinder says, "We may need an RTC-like (Resolution Trust Corp.) institution," quickly adding that it would be a "political loser." But he went on to say that many forecasters are predicting up to 2 million foreclosures in 2008 and 2009, and he doesn't believe the nation "could accept that politically."
Alternatively, Blinder proposed an institution more along the lines of Franklin D. Roosevelt's Home Owners Loan Corp. (HOLC), which FDR created in the early 1930s to stave off a wave of foreclosures. "HOLC [stopped lending] after three years and actually turned a profit," he said. It may sound like socialism, but Treasury Secretary Henry Paulson said a week later the government stands ready to provide further stimulus if the recently approved stimulus package comes up short.
In the meantime, Blinder urged attendees to watch the retail sales figures to determine to what degree the housing slump will spill over into the rest of the economy. One week later, the equity market surged after the government reported a stronger-than-expected 0.3% jump in retail sales.
Gen Xers A Long Way From Retirement In More Ways Than One
Generation X aren't kids anymore, particularly those at the older end of that 25- to 40-year-old age group, so it's not too early to start lumping them into the retirement conversation. They do think about retirement to some extent, and evidently they don't feel good about where they're at. According to a study commissioned by Charles Schwab, just 13% of Gen Xers feel strongly that they're on the right track for retirement or know exactly what they need to do to prepare.
The study found that 89% of Gen Xers say they have at least one major financial concern regarding retirement. But at the same time, 78% say that retirement planning isn't as important as meeting daily expenses, paying off debt or buying a home. Only 27% of respondents look at retirement planning as a priority.
For financial advisors, Gen X will someday represent the next wave of clients. But at least for now, many of that generation are still trying to get financially established. "Waiting to invest-or even taking a break from investing-will result in a lot of catch-up work down the road," says Rene Kim, senior vice president of Schwab Investors Services. "Devising a simple plan and sticking to it goes a long way toward helping Gen Xers ensure their financial fitness now and in the future."
The Gen X survey found that only 24% are funding individual retirement accounts and only 53% who are saving for retirement are doing so in an employer plan such as a 401(k).
Focus Financial Buys UK Advisory Firm
Focus Financial Partners LLC, a New York-based holding company with 15 independent wealth management firms and more than $26 billion in client assets, in February made its first international acquisition with the purchase of Greystone Financial Services Ltd., a British wealth management firm with more than US$1.6 billion in assets under advisement. With offices in London and Manchester, Greystone has more than 5,000 clients that include high-net-worth individuals, corporations and trustees. Terms of the deal, which is expected to close on April 1, were not disclosed.
"The U.K. is a financial services hub and it's a growth market," says Rudy Adolf, Focus Financial's founder and CEO, who adds that the Financial Services Authority (the British version of the SEC) has launched a program to upgrade the quality of advice dispensed to the U.K. investing public. "Ultimately, the U.K. will have comparable standards to U.S. fiduciary standards of objectivity and disclosure," he says.
Adolf says Focus Financial contacted Greystone six months ago through its U.K. network, and that it came highly recommended by industry experts there for its fiduciary approach and wealth management capabilities that are on par with U.S. advisory firms. After a series of meetings-including some with Focus Financial's partner firms-Greystone managing director Paul Heap says he found a collection of like-minded firms regarding how they approach the business. "We found soul mates, if you like, on the other side of the Atlantic Ocean," he says.
Focus Financial's strategy centers on acquiring advisory firms with assets of at least $350 million. It generally purchases between 40% and 70% of a firm's cash flow in exchange for cash and stock. In return, Focus Financial provides support ranging from back-office and technology to marketing and business development.
Heap believes Greystone's relationship with Focus Financial can benefit his firm in such areas as improved information technology and access to hedge funds, while he says Greystone has a lot to offer the other firms with its wealth management program.
Adolf views Greystone as the first step toward greater expansion into the U.K. market and beyond in Europe, although he says expansion in the U.S. remains the company's main priority. Focus Financial's ultimate goal is to go public someday, notwithstanding recent turmoil surrounding financial stocks. "We're very well funded, profitable and growing at an outstanding rate," Adolf says. "There's no imminent need for an IPO." And if and when it does go public, he believes its business model based on the fast-growing, high-margin comprehensive financial planning space will play well on Wall Street.
Focus Financial began two years ago with four firms and $3.5 billion in assets, and was funded by the private equity group Summit Partners.
Tax-Time Tips, Tricks And Traps
Recent developments in taxation have important ramifications for clients, accountants and advisors alike this 1040 season.
The broadening of the wash-sale rule is one example. Internal Revenue Service Rev. Rul. 2008-5 disallows a loss when "substantially identical" securities are purchased in the taxpayer's individual retirement account within 30 days. Revenue rulings are not as weighty in authority as the law or regulations, says CPA Michael J. Jones, a partner in Thompson Jones LLP, a Monterey, Calif., accounting firm. "They indicate what IRS thinks is the correct treatment," he says. "But I think some professionals are going to find this ruling questionable, at least when it comes to employer-sponsored IRAs," such as simplified employee pensions, SIMPLE plans, and deemed IRAs.
Elsewhere, preparers seeking to avoid the accuracy-related penalty generally must document certain conversations with a client or attach a disclosure to the return if they don't think a position taken on the return has at least a 51% chance of being sustained on its merits. "In the past, the standard was a much lower one-in-three chance of being sustained," says Milwaukee tax attorney Michael G. Goller, a shareholder at Reinhart Boerner. Circumstances dictate the preparer's exact obligation, as provided in IRS Notices 2008-11 through 2008-13.
Regarding partnerships, a new law lets couples who jointly operate an unincorporated business elect out of partnership treatment and file instead as two sole proprietors, provided they file jointly and are the venture's only members. This might result in lower tax-preparation fees versus a partnership return, says Gina L. Gwozdz, a CPA in Bullard, Texas. "But partnerships have lower audit rates," she says.
Another new item comes courtesy of the Pension Protection Act of 2006, which mandates that receipts are required when deducting cash charitable contributions, regardless of size. Either a bank record or note from the charity showing its name, the date and amount donated is acceptable.
And advisors who helped clients make charitable contributions from their IRAs should inform their accountant of the transaction because qualified charitable distributions don't show up on the Form 1099-R issued by the custodian, says CPA Robert Keebler, a partner at Virchow, Krause & Co. LLP, in Green Bay, Wis.
On the AMT front, December's so-called "AMT patch" prevented 20 million taxpayers from owing alternative minimum tax. If your client isn't one of them, it may help that certain AMT credits are now refundable. See IRS Publication 553.
Mitigating the AMT bite might require contrarian thinking. Under the regular tax system, clients can claim either sales-tax or state and local income-tax deductions-income taxes provide the bigger deduction for most folks. That reduces their regular taxes, but in the perverse world of AMT that might also be a bad thing. "As counterintuitive as this may sound, claiming the smaller deduction could get you out of AMT," explains Tom Ochsenschlager, a CPA and vice president of tax at the American Institute of CPAs. Why? Because deductions are added back for AMT calculation purposes; so while a smaller deduction might mean smaller deductions on the regular tax, it could also avoid triggering the AMT. Ochsenschlager says it depends on the spread between the client's deductible taxes.
For municipal bond investors, a lot is riding on how the U.S. Supreme Court rules in Kentucky vs. Davis. Depending on the outcome, investors may be entitled to refunds of state income tax they paid on out-of-state muni-bond interest. "The issue is, you don't want the statute of limitations for getting a refund from the state to lapse," says Keebler, the Green Bay CPA. Your state may have a form taxpayers can file to keep returns "open"-that is, amendable-until a decision comes down.
Finally, this tale: Last April 15 a woman wrote checks to both the IRS and her state, but she mistakenly mailed them in each other's envelope, and the IRS cashed her $2,000 check made out to the state. Encourage clients to do things right, too.
-Eric Reiner
Brokers And Advisors More Likely To Switch Firms in '08
The number of brokers and advisors likely to consider leaving their current employer and switching to another firm in the next 12 months nearly doubled to 9%, from 5% last year, according to the third annual National Financial Broker and Advisor Sentiment Index. And it's not always about the money.
Among brokers and advisors who recently switched companies, the survey found the top reason was a change in the prior firm's direction. For those considering a change, the top three reasons for making a possible move are better pay, the desire for more independence and displeasure with their firm's current direction.
The survey also found a greater percentage (62%) of those likely to jump ship favor independent broker-dealers, regional firms and RIAs, with bank and insurance firms seeing declining interest.
"With nearly twice as many brokers and advisors considering switching firms, combined with the fact that the top reason for actually switching is driven by a change in their employer's direction, it is imperative that broker-dealers maintain a positive work environment and take into account how decisions affecting their firm's futures will influence broker loyalty," says Sandra Metraux, executive vice president, National Financial.
The sentiment index, sponsored by Fidelity Investments affiliate National Financial, was based on online interviews with 1,201 U.S. brokers and advisors from across the spectrum, ranging from wirehouses to independents.
Among other findings, the survey showed that on a scale of one to 10, job satisfaction fell slightly to 7.5 versus 7.71 last year. The biggest factors in job satisfaction include a firm's work environment and clearing and settlement, followed by compensation, professional development, products, and tools and technology.
Furthermore, 42% of brokers and advisors who switched firms say that finding new customers is their biggest challenge, which National Financial says indicates a need for broker-dealers to develop more sophisticated referral programs.
Investors Want To Invest Green
Investors see the environment as a powerful long-term investing opportunity and they're looking for financial advisors for help in this area, according to a survey released by Allianz Global Investors.
The online survey of 1,003 investors with financial assets of at least $100,000 found that 71% put a "buy" rating on environmental technology, while 54% say that environmental investing will be an important focus for them in the future. In addition, 17% have already invested in the sector.
"As an investment, the environment has all the hallmarks of information technology in the early '90s, with popular attention, robust demand, high innovation, abundant capital, an enduring need and rising valuations," says Bozena Jankowska, lead portfolio manager of the Allianz RCM Global Eco Trends fund.
Solar energy was named the leading investment opportunity (62%), followed by wind power, hybrid vehicles and water purification (all in the 50% range). Ethanol (37%) and eco-tourism (17%) were the least-rated areas.
Of those surveyed, 73% say they know a fair amount about both the greenhouse effect and the Energy Star efficiency rating. That's only four percentage points less than those who say they know a fair amount about mutual funds.
"Our research shows that investors understand that significant environmental issues represent potential lucrative opportunities for businesses endeavoring to bring real solutions to a global market," says Jankowska, who doubles as head of the RCM sustainability research team.