Editor's Note: In late April, Editor-In-Chief Evan Simonoff caught up with Nick Murray to get his take on the economic crisis and its impact on the advisory business.
Simonoff: With the failure, takeover or simply disgrace of many investment banks and brokerage houses, some advisors believe the balance of power has shifted to the independent channel. Do you buy this?
Murray: I don't know what the phrase "balance of power" means, in this context. But there's no question that, on the one hand, major institutions are terribly tarnished, and that their advisors no longer feel that their big names give them any advantage. And on the other hand, the better broker-dealers have made quantum leaps in their technology and product/platform offerings. So yes, I guess I'd say that the independent mode is in the ascendancy right now. And probably will be, as long as advisors feel it's easier to say, "You can trust and believe in me, personally," rather than, "You can trust and believe in my big-name firm."
Simonoff: But trust is a key issue today. Not a day goes by that there isn't another Ponzi scheme, fraud, blown-up hedge fund or similar sham. How does an ethical advisor work to re-establish trust?
Murray: Forgive me, but trust isn't a key issue today; it's the key issue every day. And you're assuming an ethical advisor has to re-establish trust, when in fact he or she ought never to have lost it. Clients can second-guess an investment strategy, and today many do. But no one can fairly doubt the sincerity of belief that gave rise to that strategy. If I started a 65-year-old couple buying equities for retirement ten years ago, and they're looking essentially at a zero return right now, I was certainly not unethical. And I would go further, and argue that I wasn't even wrong.
Simonoff: Yet after ten years of no return, climaxing in a 57% market decline, many advisors are re-examining their commitment to equities and modern portfolio theory in retirement planning, and especially to a buy-and-hold approach to equities. Aren't they justified in this to some significant extent?
Murray: They are, in my judgment, locking the barn door after the horse has been stolen if they're cutting back on long-term equity allocations now. After the four or five other times in 200 years that equities have provided no return for ten years, the returns of the next ten years have been far above average, and my guess is they will be again this time. And I still don't see any way to fight off 30 years of rising living costs in retirement without the historical premium returns of equities over inflation. As for buy-and-hold, it is surely an onerous and at times hateful discipline, and I will cheerfully give it up just as soon as someone demonstrates a reliable way to gain a consistent timing advantage over the market. I'm not holding my breath.
Simonoff: A year ago, most investors were too sanguine about the developing crisis. Have they got it about right at this point, do you think, or have they overshot in the other direction, and become too pessimistic?
Murray: When the balances in money market funds and bank passbook savings accounts exceed the market cap of the Wilshire 5000, as I expect they finally did in March, that is terror on a once-in-a-century scale, and it cannot be right for very long. I think years from now the whole world will look back on that statistic, and say, "That's when we should have known it had gone too far."
Simonoff: And yet there has rarely if ever been so sudden or steep a cutback in consumer spending as we've seen since September. Many observers feel that some of this downshifting will be permanent. With the population aging rapidly, and feeling much less confident about its retirement income, don't you think that just stands to reason?
Murray: I can only hope so. Two years ago, we were shrieking and rending our garments about how people weren't saving enough, but overspending, running up credit card debt and using their homes as ATMs. Now we're shrieking about lower consumption, even as the savings rate soars. I think we need to make up our minds.
You also have to differentiate, I believe, between the panic-driven drop in ordinary consumption in 4Q08 and 1Q09-which is quite clearly abating already-and what you correctly characterize as potentially permanent downshifting. If you think people are no longer going to try to maintain a primary McMansion, a beach house and a ski chalet, with an SUV in all three garages and a boat docked at two of those homes, I hope and expect that you're right. This is already leading to more saving, and must ultimately lead to more investment, and to a saner, more frugal set of expectations. Bring it on, say I.
Simonoff: On the issue of lowered expectations, an April survey of working Americans by the Employee Benefit Research Institute found that only 13% were highly confident about their ability to enjoy a comfortable retirement, down from 27% two years earlier. Is this just a knee-jerk response to a howling bear market, or has the economic and market downturn served as a wake-up call for many?
Murray: Again, let us fondly hope it's the latter. No rational advisor would wish it otherwise. Two years ago, the entire baby boom generation was hallucinating that a comfortable three-decade retirement was something akin to an entitlement, and they were whipping and driving their advisors for more and more "performance." Now they see that it's going to take a lot of patience, discipline, thrift and deferral of gratification, if they're to have any hope. I cannot regard this as anything other than an unalloyed good.
Simonoff: But is it permanent, or of a long-term fundamental nature?
Murray: Of course not. It's just until the next bull market, human nature being immutable. But we'll cross that bridge when we come to it. Sufficient unto the day are the small blessings thereof, and lowered expectations are blessing enough for today.
Simonoff: Last November's election seems to have ushered in a new era of bigger government, more regulation, and major social engineering regarding issues such as health care and climate change. How much do you think bigger government threatens private-sector growth and thus, ultimately, the investment outlook?
Murray: Government misallocates resources. Big government misallocates resources big time, essentially by making decisions based on perceived social desiderata rather than on incentives.
The new administration is, quite understandably, doing what it believes it was elected to do. It's using the current economic and financial crisis as cover for its whole social agenda, which I would characterize as being philosophically anti-incentive. In this, it is probably overreaching-just as FDR did, and just as LBJ did-and if it isn't yet, it soon will be, as it moves to render carbon energy uneconomic via "cap and trade," and to nationalize health care.
Then, as it attempts to increase taxes, fees and regulation in a vain attempt to pay for this agenda, it will set off a backlash, and the pendulum will begin to swing back the other way. In the meantime, entrepreneurship and innovation will find ways to work around the obstacles.
I freely concede that I'm somewhat less worried about this than are many other observers. But Americans are not Europeans yet, and remain, in my judgment, unlikely to want to turn into them. And I seem to remember that it took four years of Jimmy Carter to make Ronald Reagan finally possible.
Simonoff: I haven't heard one optimistic prediction about the economy or the financial markets in more than a year. What's your outlook for the next five or ten years?
Murray: The fact that you can't remember hearing one upbeat forecast should speak volumes to you. I take it to be a gauge of the generalized pessimism that's abroad in the land. That near-unanimity of pessimism is its own perverse indicator.
In the larger sense, I just don't get pessimism. Never have. It's counterintuitive. Go to a hospital and watch a demonstration of robotic microsurgery. Or just sit home and look at Apple's recently posted presentation of the new iPhone 3.0, which has more computing power than there was on earth in 1950. Then remember that Moore's Law is going to roll over five times in the next ten years, such that the cost of computing will drop to about 3% of what it is today. Information technology is the key to entrepreneurialism, to innovation, and to productivity. And information technology continues to get exponentially more powerful, less expensive and more universally accessible. Apprehending this, even in broad outline, how can anybody be pessimistic?
Simonoff: If you were still an advisor, what would you be doing right now?
Murray: Prospecting as I'd never prospected before. Advisors will never again in their careers find so many people, sitting on so much cash, so desperately in need of zero-basing their retirement plan, and yet-rightly or wrongly-so disillusioned with their current advisor. This is simply prospecting heaven.
One can choose to obsess about how upset one's own clients are. That's what victims do, and it paralyzes them. An opportunist will instead elect to obsess about how upset everybody else's clients are, and will be galvanized by the opportunity to go after them.
As I recently said in my newsletter, do the math. Eighty million boomers (after subtracting deaths and adding immigration), say 40 million of whom have no money at all, and the other 40 million of whom-currently aged 45 to 63-have all the money in the world, or what's left of it. Assume the whole generation is mad at their advisor. By my count, that's about 500 people (tops) who are mad at you, and 39,999,500 people who are mad at somebody else. You would have to be clinically depressed not to love those odds, and you would have to be flat out nuts to wish things were any other way.
Simonoff: One additional question, because I know our readers miss your regular column. How has the world been treating you since you left us last fall?
Murray: Very kindly, all things considered. I published a new book for advisors in December called Behavioral Investment Counseling. Subscriptions to my newsletter-which you folks publish-are up over 50% since I stopped writing the column. And I've organized a day-long event in New York next October, exclusively for newsletter subscribers, which sold out in a week. Plus, I ran my first-ever 5K on Thanksgiving Day, at age 65. Life is good.
Simonoff: Well, we're glad to have this opportunity to catch up with you.
Murray: Always a pleasure, Evan. Thank you. Let's talk again soon.