Diversification Struts Its Stuff

Some people could look at the current situation on Wall Street-corporate corruption, plummeting indexes, investors running for dear life-and see utter chaos.

Roger Gibson, on the other hand, sees something else: a textbook example of the importance of diversification and asset allocation, strategies he's preached for decades. "The reason you do it is simply because you can go through multiple year periods where equities go down and not up," says Gibson, who runs Gibson Capital Management in Pittsburgh. "It gives you the staying power you need to not panic."

Indeed, there are advisors out there who say their clients remain a fairly content bunch despite the dark cloud hanging over Wall Street. The reason, they say, is not any special investing prowess on their part. It's just that they continued to diversify, even during times when there was enormous pressure to dump everything into technology and large-cap growth.

"What's saved us is the same stuff that had us lagging in 1999," says Dan Moisand, president of Optimum Financial Group in Melbourne, Fla. That stuff would include REITs, international equities, bonds and hard assets such as commodities, advisors say. Tilts toward small cap and value have also reaped rewards, they note.

By allocating in these sectors, for example, Gibson says he's been able to limit the losses of his typical client to between 3% and 4% since 2000. Moisand, meanwhile, says his clients' portfolios range between flat and drops of 1% to 2% this year.

"It's actually working better than you'd expect it to," says Gibson. One of the reasons, he says, has been the outstanding performance of real estate. During the 27-month period stretching from first quarter 2000 to June 2002, the NAREIT equity index is up 59%. During that same period, the S&P 500 has dropped about 40%.

Diversified portfolios caught a break in this regard, he says, because there have been only a few times in history when real estate and equities were so negatively correlated. "This is one of those times, and boy was it handy," he says.

Curt Weil, principal of Weil Capital Management LLC in Palo Alto, Calif., says that along with diversification, frequently conditioning clients to focus on the long-term picture also keeps nerves steady during times of panic. In his end-of-year report to clients in December, Weil highlighted the fact that the market could indeed sink lower in 2002 since no one knew if things had hit bottom.

"We sent out a personalized letter to each client showing them what their actual numbers would be with declines of 10%, 20% or 30%," he says. "We said, 'If this is going to cause you to bail out, then we need to sit down and review your portfolio.'"

By convincing clients to look at long-term horizons, they are more inclined to stay in the market during these tough times and not miss out when the market makes a quick turnaround, Weil notes.

The irony, Gibson says, is that these tough times are probably the easiest times for an asset allocator. The tough times were the 1990s, when he was putting money in REITS while other people were getting rich on dotcoms.

"The reward that our clients are receiving now, they paid for in 1998 and 1999 when they chose not to have all their money in large cap stocks or technology," he says. "It's just asset allocation doing what it should do."

Not all clients are so sanguine when it comes to the brutal bear market of 2002. One Colorado advisor reports a large client called to cancel a meeting in July. "They said, 'I don't blame you, the stock market's not your fault, but I don't really want to talk about it, either,'" this advisor says.

Rick Adkins, CEO of The Arkansas Financial Group in Little Rock, says some clients worry there is no bottom. "I've had more conversations with clients about the market in the last two weeks than I've had in the last 20 years," he says. "People are very worried even though they haven't lost much money, but so far none of them have done anything stupid."

Report Predicts More Advisory Firms To Be Sold

Conditions are ripe for an increase in the buying and selling of advisory businesses-meaning advisors should have a succession plan, according to a recent report.

Tiburon Strategic Advisors predicts that upwards of 500 transactions of fee-only financial advisor businesses will happen over the next five years. "First, more advisors are reaching retirement age," says Tiburon managing principal Chip Roame. Also driving the sales are institutional players, such as banks and CPA firms, which look upon fee-based advisory services as a good way to diversify revenue streams, he says. "And third, a variety of consultants and online supermarkets have emerged to support transactions."

The report cites five keys to a successful transaction:

Developing a strategy.

Valuing a firm and positioning it for sale.

Conducting a search.

Negotiating the transaction and securing financing.

Preparing for the close and making the firm work after the deal.

The report notes that a wide range of buyers has emerged, including institutional purchasers, competitors, and current partners and employees. The ideal buyers, the report concludes, are strategic buyers such as banks and CPAs. "Strategic buyers should always be able to pay the most in real terms," the report says. "Banks have especially paid some high multiples, because they will be able to extract revenue or cost synergies from advisory firms."

As for valuations, fee-oriented businesses have the advantage, the report concludes. It found that commission-only advisor businesses have sold for an average multiple of 1.1 times revenue. Fee-based and fee-only businesses have average multiples of 1.7 and 1.9 respectively.

ING Advisors Network Appoints Simmers As CEO

A founder of Financial Network Investment Corp. has been appointed CEO of ING Advisors Network.

John Simmers, 52, replaces Miles Gordon as head of the umbrella organization, which oversees eight ING subsidiary broker-dealers comprising 10,700 registered representatives and $3.5 billion in assets under management. Among the broker-dealers is Torrance, Calif.-based Financial Network, which ING bought in 2000. Gordon was also a founder of Financial Network and has worked side by side with Simmers since the broker-dealer was created in 1983.

Previously chief operating officer, Simmers took over as ING Advisors Network CEO July 1 after Gordon announced his retirement for health reasons. Gordon and Simmers have headed the Advisors Network since it was created by ING in 2000.

"Miles' and my relationship is very much one of a partnership in which we were both very much involved in running the organization," Simmers says. Remaining competitive and "providing goods and services to our top-end planners and their customers" were at the top of his agenda, he adds. Among his first acts as CEO were the appointments of Cindy Hamel, formerly the Advisor Network's chief of technology, as chief operating officer, and Mark Marr, formerly CFO of Financial Network, as CFO of Advisors Network.

In addition to Financial Network, ING Advisors Network includes Washington Square Securities of Minneapolis; Locust Street Securities of Des Moines, Iowa; Investors Financial Group of Atlanta; Multi-Financial Securities of Denver; Primevest Financial of St. Cloud, Minn.; Vestax Securities of Hudson, Ohio, and Financial Northeastern of Fairfield, N.J.

Raymond James Names Broker-Dealer President

A 24-year veteran of Raymond James Financial has been named president of Raymond James & Associates, the firm's broker-dealer subsidiary.

Dennis W. Zank, currently the firm's executive vice president of operations and administration, will replace Thomas S. Franke, who announced his retirement from line-reporting management after 12 years with the firm. After a transition period, Zank will take over October 1, the firm says.

"Dennis has performed at an extremely high level in every position he has held since joining the firm," says Thomas A. James, chairman and CEO of Raymond James Financial. "He also has personally serviced client accounts, enabling him to appreciate current issues."

Zank received his bachelor's degree in accounting from the University of South Florida in 1976 and a master's in business administration from the University of Tampa in 1982. He joined Raymond James' accounting department in 1978 and became controller in 1982. He was named treasurer in 1985, senior vice president in 1986 and appointed to his current position in 1992. He serves on the boards of directors of both Raymond James Financial and Raymond James & Associates. His current title places him in charge of securities and customer operations, client services, information technology, office services, human resources, financial and regulatory reporting, and international operations.

Safety Rises To The Forefront

The sputtering stock market has high-income professionals more concerned about safety than yield when it comes to their investments, according to a recent survey.

Volatility in the stock market has made such investors less willing to take risks, according to a survey by Nationwide Financial Services (NFS) Inc. As a result, they are showing more interest in products such as income annuities, fixed annuities and whole life insurance.

The survey, which polled 500 people with annual household incomes of more than $150,000, found that 61% of respondents were unwilling to take substantial financial risk for substantial gain. That's up 10% from a year ago.

With the aversion to risk, the survey found that investors had less regard for products such as mutual funds, individual stocks and money market accounts. Positive responses to these products decreased by as much as 10 percentage points from a year ago, according to the survey.

At the same time, investors showed an increased regard for products with protection features, such as annuities and life insurance.

"Affluent clients are increasingly interested in, but still have little knowledge about, annuities, life insurance and other protection products," says Michael C. Butler, senior vice president of NFS Distributors Inc. "Investment professionals must make it a priority to educate clients about these product solutions to meet the client's greatest need."

Investors apparently also are finding it more important to be educated about their investments. Forty-five percent rated education about financial markets as a very or extremely important service provided by advisors-up from 36% in 2001.

FPA Supports Reforms In Accounting Industry

The Financial Planning Association (FPA) has joined the rallying cry of those calling for reforms in the scandal-ridden accounting industry by supporting two bills in Congress aimed at beefing up oversight.

One proposal, the Public Company Accounting Reform and Investors Protection Act of 2002, would create an independent accounting oversight body and put restrictions on consulting services that accountants can offer clients they also audit. The FPA is urging the adoption of the Senate's version of the bill, which the organization says goes further in regulating accountants than proposals by the House and the Securities and Exchange Commission.

The FPA says it also strongly supports a second bill that would increase the SEC's budget by 77% and dedicate much of the increase to accounting and Wall Street enforcement.

FPA President Bob Barry noted the association was pushing for reforms even before accounting scandals at Enron, WorldCom, Xerox and other companies rocked Wall Street. Two years ago, the FPA endorsed a proposed SEC rule that would have prohibited certain consulting services by accounting firms engaged in independent auditing.

CFP Board Works To Get Its Message Out

The CFP Board of Standards has teamed up with human resources professionals to bring some financial planning expertise to the workplace.

The board launched the program in June, when it provided free materials to attendees at the annual convention of the Society for Human Resource Management.

The materials, which the board will continue to provide to human resource professionals for free, include posters, fliers, statement stuffers, newsletter articles, presentation materials and Web links.

The CFP Board also hopes to assist with workplace financial planning seminars.

Board officials say Enron collapse and the resulting damage to employees' retirement investments exposed the lack of financial planning in the workplace. "It's important for employees to understand their financial planning options," says CFP Board Chairwoman Elaine Bedel. "Many employees aren't aware of how little they've actually saved for retirement."