Financial Advisors' Corner

A significant percentage of our subscriber base is now professional financial advisors from around the world. With that in mind, this year we are launching this new monthly column, in which we will focus on new research that is relevant to the challenges faced by financial advisors.

In Australia and the U.K., there seems to be equal measures of confusion and trepidation about the impending end of trailing commissions. According to IBISWorld, in Australia these commissions, typically about half a percent of the funds under advice, have accounted for thirty five percent of the financial planning industry's revenue. However, the end of trailing commissions need not be the end of the world, as thousands of fee-based Registered Investment Advisers have demonstrated in the United States.

We also read a number of end-of-year stories that all focused on the theme of clients leaving big firms and taking their business to smaller shops. The IBISWorld survey again provides evidence of one factor behind this shift: it found that financial advisers regularly service only forty percent of their clients. Another factor, noted in a number of stories, was the desire on the part of large firm advisers to break free of the constraints on what they saw as the limited number of products that were approved for sale to clients, and, as important, the differential commissions paid on different types of investment (e.g., bonds versus stocks) that created conflicts of interest between advisers and their clients.

A new U.S. survey by Braun Research of 1,000 Americans with investable assets of at least $250,000 provided evidence of what clients are seeking: 53% reported concerns about outliving their assets in retirement. Yet Bank of America reported survey findings that 67% of retirees still didn't work with a financial adviser, which was true of only 50% of pre-retirees. Meanwhile, a survey by Spectrem Group focused on the 837,000 U.S. households with net worth of between $5 million and $25 million. What jumped off the page for us was the finding that almost half this group's assets were invested without the use of an outside advisor.

In her 17Jan10 article in the Financial Times, ("Shift Back to Basics with The Boutiques") Ruth Sullivan looked at this trend in more depth, concluding that "rich individuals who got their fingers burned in the financial crisis [the author cites average falls in wealth of 25% for people whose total wealth previously topped $30 million] are moving back to basics in search of transparent, simple, low-cost products, shifting from private banks to smaller, independent wealth managers and boutiques to get them." These trends have undoubtedly helped to drive the rapid growth of the ETF business, which, as the Economist recently noted ("Trillion Dollar Babies", 21Jan10 edition) have grown from $40 billion in assets under management at the end of 1999 to more than $1 trillion in AUM a decade later. In this new environment, the role of the financial advisor is changing, with asset allocation expertise growing in importance. As Alan Brown, Schoeders' Chief Investment Officer noted in the 3Jan10 Financial Times, in the coming years, "the role of the asset allocator will fundamentally change and become more important [and] advisors who can offer asset allocation skills will prosper."

On the other hand, the rapid development of the ETF business has not been wholly benign; as Jack Bogle long ago predicted, the creation of ever more narrowly defined indexes and ETFs has promoted frequent trading in a manner not very dissimilar to active investing in individual stocks. And speaking of Jack Bogle, don't miss his 18Jan10 OpEd in the Wall Street Journal on "Restoring Faith in Financial Markets." As always, it is a clarion call of common sense. Last but not least, a growing number of advisers are faced with the challenge of counseling clients on whether to strategically default on their home mortgages. We highly recommend two excellent background papers that help to put this difficult issue into a broader context: "Moral and Social Constraints to Strategic Default on Mortgages" by Guiso, Sapienza and Zingales, and "Underwater and Not Walking Away" by Brent T. White.

| Feature Article: What is the Proper Role of Gold | Investor Herding Risk Analysis | January 2010 Economic Update | Global Asset Class Valuation Updates Detail through December 31 2009 | This Month's Letters to the Editor: Investing for Different Time Horizons; Uncorrelated Alpha Strategies- Beneficial?; Why Didn't the Three-Year Return Forecast Change?; Equally Weighted vs Model Portfolios; Why Don't You Include Emerging Bonds as an Asset Class? | Table: Fundamental Asset Class Valuation and Recent Return Momentum | January 2010 Issue: Key Points | Global Asset Class Valuation Updates Detail through February 26, 2010 | Global Asset Class Returns | Table: Market Implied Regime Expectations and Three Year Return Forecast | Financial Advisors' Corner | Overview of Our Valuation Methodology | Uncorrelated Alpha Strategies Detail | Product and Strategy Notes: New Research Papers; Analysts' Recommendations |