Posted by: Lauren Young on July 09
The already-hot debate about the fiduciary responsibility of financial advisers is scorching.
Registered investment advisers, who are regulated by the Securities & Exchange Commission as well as individual states, are legally bound to put their clients' interests first, known in industry-speak as a "fiduciary duty" or "fiduciary responsibility." Brokers, who are regulated by the Financial Industry Regulatory Authority, or Finra, can recommend what is considered "suitable," but not necessarily best, to clients. The term most used to describe this connection is a "suitability standard."
Now a group known as the Committee for the Fiduciary Standard is asking two securities attorneys to look at how Congress can best put investors’ interests first.
The committee is targeting Thomas P. Lemke, managing director at Legg Mason, Inc., and Steven W. Stone, a partner at Morgan Lewis & Bockius in Washington D.C. These two attorneys wrote an article in the June issue of Wall Street Lawyer concluding that a so-called “harmonized” standard should replace the fiduciary standard for investment advisers, and the suitability standard for brokers. In other words, they argue, fiduciary and suitability standards are more similar than different.
Harmonization is long overdue, and this laudable effort’s overriding goal should be to ensure that investors receive a uniform level of professionalism and accountability from the financial professionals they deal with, whether they choose to use a broker-dealer or an investment adviser. An additional benefit of harmonization would be the increased potential that future Madoff scandals could be prevented or, at least, identified and stopped sooner.
The group, whose members include well-respected financial advisers such as Harold Evensky, Sheryl Garrett, and Ronald W. Roge, has created an online petition and is looking to collect signatures from 1,000 investors to make sure that new laws or regulations about the fiduciary standard meet what they deem are the requirements of an "authentic fiduciary standard."
For tips on choosing an adviser, check out this BusinessWeek story, Finding An Adviser You Can Trust.
What do you think about these distinctions? Is there a difference between the fiduciary standard and sustainability requirements or can they be harmonized? Do you prefer one over another? Why?
Posted by: Ben Steverman on July 08
Of the 500 stocks in the S&P 500, (according to data from Capital IQ) fewer than 20 have actually risen in value in the economic downturn of the past 18 months. The leader of these recession-defying stocks is, far and away, Family Dollar Stores (FDO).
Since the end of 2007, Family Dollar shares are up 67%. Today, Family Dollar proved again why the downscale retailer is so attractive to investors.
In quarterly results released July 8, earnings per share of 62 cents were 35% higher than last year and 3 cents above Wall Street expectations. Family Dollar eased a few investor worries with this report.
Analysts had warned that profits might falter as "consumables" -- which have lower profit margins -- take up a bigger portion of the chain's sales. Consumables sales were up 12.6%, but profit margins widened. "The company continues to demonstrate that it can increase gross margin despite the growing sales contribution from consumables," wrote Raymond James (RJF) analyst Dan Wewer.
Also, many worry about retail results as the unemployment rate rises. But economic pain might actually be helping Family Dollar, as consumers look for bargains. Same-store sales rose 6.2%, while revenues rose 8.3%.
Mark Miller, an analyst at William Blair, reiterated his "outperform" rating on the stock. "Consumers [remain] focused on value," he wrote, noting the U.S. savings rate could almost double in the future. Another positive factor:
Major legislative initiatives that should bolster income and spending for the lower-income consumer, including the third minimum wage increase this month and added funding for the food stamp program.
But how long can Family Dollar continue benefiting from economic trends that are clobbering other retailers? Wall Street seems to think the answer is "quite a while." Family Dollar shares ended the day up 12.4% to 31.18.
Posted by: Lauren Young on July 07
Why can’t minorities—particularly those who are professionals—save more for retirement?
New research out from the Ariel Education Initiative, Hewitt Associates and several other partners shows that African-American employees who earn $120,000 or more have saved $154,902 in their 401(k)s on average, versus $223,408 for their white counterparts—a $68,000 deficit that worries retirement experts, notes my colleague Nanette Byrnes in BusinessWeek’s Management IQ blog. Overall, lower-income blacks and Hispanics also lag their when it comes to saving for retirement. Moreover, nearly two of every five African-American workers and almost a third of Hispanic workers borrowed from their retirement accounts compared to just one in five white workers.
The data comes from an extensive analysis of nearly 3 million employees who participate in a 401(k) across 57 large companies in the U.S. Hewitt has been aggregating this data for many months, so it doesn’t even include the impact on retirement savings after the recession hit America the hardest in the past year.
Back in January, I profiled McDonald’s (MCD) where nearly 20% of the 6,700 store managers are black. Thanks to the work of John Rogers, founder of Ariel and a McDonald’s board member, McDonald’s is one of the few companies trying to close the savings gap between its African-American and Latino workers in comparison to their white and Asian counterparts.
What fascinates me the most are the cultural reasons why minorities don’t save more. African Americans, for example, do not trust the financial system because it has excluded them for generations. They consistently put home ownership and college ahead of retirement goals. In the black professional community, owning a home and educating children are top priorities, particularly if you are the first person in your family to do it.
Saving for the future is controversial. "If your Mama lives with you—and others in your extended community are struggling to get by—putting aside money that you can't touch for the next 15 to 20 years feels selfish and inappropriate," according to a quote I have in my article from Andreas Tapia, chief diversity officer at Hewitt Associates, who led the data-mining project. (Hewitt also helped McDonald’s redesign its 401(k) plan.)
The story is similar in the Latino community, although the familial bonds tend to be even more intense.
To close the retirement savings gap, McDonald’s is attacking on many fronts. It is pushing financial literacy on employees, and it is using grassroots employee networking to spread the retirement savings gospel.
But McDonald’s is just one company, and my sources say it is light years ahead of its competitors as well as the rest of Corporate America on investing education. Let's hope this will be a wake up call to other companies to get workers to save more for the future. (For more information on saving for retirement, check out BusinessWeek's special issue on Rethinking Retirement.)
Posted by: Ben Steverman on July 02
Health care stocks are among the riskiest games investors can play these days. The reason, of course, is the health care reform effort, spearheaded by President Barack Obama and winding its way through Congress.
What makes this confusing is that reform could significantly help or hurt particular industries within health care -- depending on how the law is written.
BusinessWeek's Aaron Pressman discussed the debate over hospital stocks in this video.
Stifel Nicolaus (SF) recently issued a 63-page report analyzing the possible effect of health care reform on various health care stocks. A few of the key conclusions:
First, the bullish case for health care stocks is easy to understand: Health care reform could boost overall health care spending by bringing 48-million uninsured people onto insurance rolls. Stifel cites the Commonwealth Fund, which estimates a 16% increase in the insured could result in an extra $122 billion in spending each year.
But, second, Stifel analysts question this thesis, seeing an increased risk to firms' profits from health care reform. The political tone has changed because of worries about mounting deficits, "suggest[ing] that more aggressive cost cutting and increased regulation may result." That's a change from May, when health care stocks actually outperformed the market on better-than-expected earnings and hopes of positive effects from reform.
Finally, Stifel's experts warn this debate could take a long time:
Health reform legislation is likely to take most of 2009 to finalize and will continue to be a headline risk for most healthcare sectors throughout the process.
Some health care industries are less exposed to the debate -- "medical and drug distributors, generic pharmaceuticals and possibly large-cap pharmaceutical and biotechnology companies." But for most of the health care sector -- and for its investors -- this could be a long, volatile year.
Posted by: Ben Steverman on July 02
PNC, in its July 2009 Investment Outlook, asks whether the "buy and hold" investing philosophy no longer works. PNC's investment strategist, E. William Stone, does a good job of clarifying the key issue. He notes the last decade has been terrible for investors, and then writes:
Is the long-term expected real (after-inflation) return on stocks no longer positive? In other words, if the expected return is no longer positive, then an investor would need to trade in and out of stocks in order to earn a positive return.
Stone then reviews the evidence and concludes what most (though not all) financial advisors have been saying for decades. Stocks do tend to outperform other investments and also inflation over long time periods. Plus, jumping in and out of the market is difficult, because it's very hard to do so at the right time.
Whether you agree or not, some pieces of evidence from PNC are worth considering:
PNC looked at 881 rolling ten-year time periods for the S&P 500 since 1926. Adjusted for inflation, 119 of those time periods (13.5%) showed a negative return. That's a surprisingly high figure, which underscores the significant risk that investors do take when they put their money in stocks.
Second, Stone's team reviews studies, looking at dozens of countries, showing "essentially no correlation between the rate of GDP growth and real returns on stocks -- in fact the correlation is slightly negative."
That's an important point because many bearish investors expect slow economic growth for many years to come. And they cite these economic doldrums as a reason not to own stocks for now. Stone, citing this research, argues this is a poor rationale.
But how could it be that the economy could grow and equity investors earn nothing? Or that an economy is stagnant but stock investors benefit? I'm intrigued by one possible reason:
GDP can grow without gains accruing to equity shareholders. In some countries the GDP gains might accrue primarily to the government or workers.
Whether or not economic growth is slower in the next decade than in the last decade (and I think that's highly debatable), this passage raises a troubling question for investors. Might we also be facing a situation where political developments in Washington -- more generous health benefits, tighter financial regulation, pro-union labor laws and regulators, environmental rules -- limit investor gains even if the economy does grow?
We don't know the answer to this question, or to many others. And that uncertainty about the future is one reason why I remain, cautiously, a buy-and-hold investor. (The other reason is that I see few proven, viable alternatives to buy-and-hold.)
But what do you think? Is buy-and-hold still a useful investing philosophy?
