The Markets September 11, 2012

PANC 2012: Keynote Presentation–Bob Doll

Delivering the opening keynote at the 2012 PLANADVISER National Conference in Orlando on Monday, BlackRock Senior Adviser Bob Doll explained why he is bullish on U.S. stocks.

Reported by

Lee Barney

Even though the U.S. economy will continue to “muddle through” as it grapples with multiple headwinds that trace back to massive debt deleveraging, “corporate America is delivering the goods, i.e., strong earnings,” Doll told the audience of 450 advisers gathered at the JW Marriott Orlando Grande Lakes. Doll also said he appears to have been right about at least eight of the 10 predictions for 2012 he made at the beginning of the year.

Advisers can form their “macro perspective for portfolio construction, investment management and asset allocation” based on one key trend that will dominate the markets and the economy for the foreseeable future, Doll said: The post credit-bust world. “As it takes years for the bubble to build, it takes years to repair—some of it voluntary, some of it forced,” Doll continued.

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“Corporate America ex-financials started deleveraging before the bubble. Companies are in the best condition since the 1950s,” Doll said. “After three years of deleveraging, consumers are making great progress on interest expense as a percentage of income. Let’s hope the government starts deleveraging someday.”

Amid the ongoing economic uncertainty and talk of a “fiscal cliff” in the U.S., globally, central banks’ monetary policy is creating a “sweet spot” for stocks, Doll maintained. “There’s a monetary party going on in this planet,” he said. “Central banks will do whatever it takes—England, China, Japan, Brazil and the European Central Bank are all trying to reflate. That is when stock markets do their best, and even when their economies get there, their markets all continue to do fine. This is lasting several years, supporting fundamentals for economic growth and earnings growth. Even with sentiment for cash and fixed income versus stocks at the extremes—this is the sweet spot.”

Doll added, “I believe yields and the U.S. growth rate will continue to be on the plus side. These have kept me invested in risk and equities. Get your underweight-equity clients to dollar-cost average back into stocks.” For 2012, returns could be in the double-digits, Doll said. For the next 10 years, Doll predicts “an 8% equity world, with 6% coming from earnings and 2% from current yield.” As for all of the talk on the fiscal cliff of 2012, “There’s complacency on the U.S.’s ability” to fix this problem, he added.

With regards to Doll’s annual 10 predictions for the coming year, he said he appears to be on track for all of the following points for 2012 except, perhaps, not yet being able to pinpoint when interest rates will rise (Prediction No. 5) or to accurately predict the outcome of the 2012 Presidential election (Prediction No. 8):

European debt crisis begins to ease, even as Europe experiences a recession.
The U.S. economy continues to muddle through yet again.
Despite slowing growth, China and India contribute more than half the world’s economic growth.
U.S. earnings grow modestly but fail to exceed estimates for the first time since the Great Recession.
Treasury rates rise, and quality spreads fall. “I’m half right, half wrong on this one, since Treasury rates have not risen, and while I have predicted they would for the past seven quarters, I now haven’t a clue when interest rates will rise,” Doll admitted.
U.S. equities experience a double-digit return as multiples rise modestly for the first time since the Great Recession.
U.S. stocks outperform non-U.S. stocks for the third year in a row. “We have plenty of problems but they have more problems,” Doll said. “Corporate America is delivering the goods, doing a magnificent job of delivering earnings and free cash flow yields. Corporate America cleaned up its act. You see that in the income statements and balance sheets.”
Dividends and buybacks hit a record high.
Health care and energy outperform utilities and financials. “Sectors remain cyclical in this risk-on/risk-off environment,” Doll said.
“Republicans retain the House and capture the Senate,” Doll predicted. “I flipped a coin for the presidency.” Doll noted that President Barack Obama is facing a decline in his “strong approval” rating of 44% at the time of his inauguration, which had fallen to 21% in December 2011. “There’s also unemployment,” Doll added. Regardless of whether Obama or Republican candidate Mitt Romney is elected, Doll has faith the government will not hit a “brick wall over the fiscal cliff, and strike a deal.”

Until June 2012, Doll spent more than three decades with BlackRock, most recently as chief equity strategist for fundamental equities. Doll told the PANC audience he is now serving as a senior analyst with the world’s largest asset manager as he decides how to spend the next 10 to 20 years of his career.

In Practice September 10, 2012

PANC 2012: Money Talks

Pricing raises myriad issues, including type of compensation model, what services are factored in, and if similarly sized plans might call for different fees.

Reported by

Jill Cornfield

At the PLANADVISER National Conference in Orlando, a panel discussed how to price fees for service.

The majority of panel attendees surveyed about how they are most commonly paid for qualified plan business (59%) said they base fees on asset size. Nearly one-quarter (23%) said they are commission-based, and 14% use a hard dollar or flat fee, regardless of asset size. Just 4% are ERISA budget or ERISA reimbursable, and 1% said fees are per participant.

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“Charge as much as you can,” advised Edward O’Connor, managing director, Morgan Stanley Smith Barney. After making a clearly humorous statement, he explained more fully that advisers should earn as much as they can and then begin to break it down into comprehensible and explainable steps.

According to O’Connor, benchmarking is a crucial first step, and there are lots of sources. “But be careful,” he cautioned, “because it can be a race to the bottom.”

Melissa Cowan, executive director, UBS defined contribution advisory program, UBS Financial Services Inc., mentioned that some advisers may hesitate to use benchmarking services for fear of locking themselves into a range. O’Connor advises against walking into a first meeting with the range of fees from benchmarking. “It’s human nature to want the smaller number,” he pointed out. Value has to be established and fees discussed, but there’s a natural build-up to such discussions.

“We try to make benchmarking about the services we are delivering and how we are delivering, not the fees themselves,” said Rick Shoff, managing director, advisor support group at CAPTRUST Financial Advisors. “That’s a slippery slope. If you’re getting paid more it’s because you are delivering more.”

Specifying tasks and keeping track of how much time each accounts for is another pitfall, according to O’Connor. “You don’t want to start punching a time clock,” he said. “Be clear and distinct, but don’t get too granular in a fee quote.”

While most attendees (72%) had not changed fee formulas in the last 12 months, 29% said they expected some change in the next 12 months. Two-thirds (66%) said they did not expect to change their pricing for qualified plan business. Panel attendees surveyed said they knew how much they need to charge on a particular plan size in order to be profitable (39%), while 44% said they did not know.

Nearly three-quarters of survey respondents (74%) felt fees are going to face some compression. Most respondents (59%) pointed to new regulations, and 15% said they thought smaller firms willing to aggressively price new business could be a cause. Another 15% said they felt larger firms might be willing to aggressively price retirement advisory services as an entry to other business opportunities, which could have an effect. Very few (3%) thought the recession was a factor.

What’s the Minimum?

The question of minimum fees was discussed, and whether a fee should be lowered in order to stay competitive. Attendees were nearly evenly split on the question of minimum fees, with 55% saying they do have one, and 45% saying they do not.

A minimum or a range is a good idea, according to Bruce D. Harrington, vice president of sales and business development, John Hancock Financial Network. “Advisers don’t like to walk away from business, but it can be a race to the bottom,” he said. Cowan added that it can help to scout the possibility in advance. That way, she said, “you can walk away if someone doesn’t meet your number.” UBS’ business is about half retail and half institutional, according to Cowan, who added, “I definitely think we put a minimum fee a few years ago so we didn’t have these really small contracts coming through.”

“Often when you feel you’re not getting what you’re worth from a client they’re taking a lot of extra time,” Shoff said. “The right minimum fee could be $25,000 or it could be $10,000.”

“Life is gray, not black or white,” O’Connor agreed. "You might go below that in an industry you want to break into, but you need to know when you’re not making money.”

Switching to the Hard Dollar Model

Switching over from a basis point model to the hard dollar role was another topic. O’Connor observed that a plan sponsor may approach the adviser. “For the mega-size plans it is hard dollar, well over 100 million, 200 million,” he said. It may be an ego boost, but advisers should understand the time and challenges involved.

A hard dollar cap can be put into a contract, Cowan noted. “I encourage people to sit down and think about how much time they’re going to spend on a plan. Maybe you can’t do education because it won’t be profitable enough,” she said. It may be difficult in the midsize market, Harrington said.

Other challenges of moving to a hard dollar model may be psychological. The asset-based fee provides a comfort zone, and it’s more transparent, O’Connor said. “Twenty-five basis points just sounds a lot smaller than $25,000,” he said.

Shoff pointed out that an organization might need to examine whether it has the actual staff necessary in accounts receivable to handle the billing aspects. Calculating the additional compensation for taking on extra ERISA duties in order to be a 3(21) fiduciary is another factor.

“If you spend 100 hours on a plan, and make 300 an hour, is that enough for you?” O’Connor asked.”You do need to be clear about the blood sweat and tears you put into this.”

Demonstrating Value

It can be tricky to ask for more money, even when the time and effort servicing a plan makes it necessary.

A holistic approach works best, according to Shoff, who noted that his firm increases fees by increasing service to existing clients. “Those are the best dollars for growth,” he said. That way you’ve added value and the complexity has changed, opening the door to telling a client, “Hey, our fee needs to go up.”

The acquisition process also deserves scrutiny, Cowan said. “More risk can bring more return. How many visits do you have to make to a new client?”

And, observed Harrington, bigger clients can sometimes be more demanding. “If you are comfortable with your value proposition it’s not difficult.”

According to O’Connor there is a lot of opportunity in plan design. If you provide distinct services, advisers can use more data and more tools to benchmark.

Cowan advised that advisers mentally walk through what they do every day that is of value to clients.

When it comes time to maximize your value, O’Connor counseled, “Convey what you are bringing to the table.” Most advisers provide more than simple advisory services. “You’re actually a consultant,” he said. “You’re an outsourced government relations department because you’ll hear government information at a conference and bring it back to your client.”