Picking a Registered Rep. “Ten To Watch” list can be like diversifying a portfolio. Find some top wirehouse executives (large-cap equities), a few growing indie firms (small-caps), a money manager with new ideas (commodities), a government official with industry influence (munis), maybe someone from academia (cash). Okay, that may be stretching it but, the point, is, like selecting stocks, you want people with a good story to tell. Another similarity to investments: You expect interesting developments over the coming 12 months. (After all, we don't call the list the Ten We Remember Vaguely.)
So it is with this month's annual feature. Some of the names are easily recognized, others less so. Bill Gross, for instance, ought to jog a memory. The man is the Bond Market (writ large), and he is taking a bold position on U.S. Treasuries: He is bearish. How his bet fares will have major implications not just for bonds but for the global economy.
You'll find people on our list whose expertise will be challenged in the months to come. Greg Fleming, president of global wealth management over at Morgan Stanley, for example, will be charged with making a tough integration work in a tough environment. But he seems to have started on the right foot.
And don't be surprised if a name or two on this year's list is a bigger player a couple of years from now. Two years ago, we included Elizabeth Warren, chairwoman of the Congressional TARP Oversight Panel; she's since become one of the more controversial figures in Washington. Behind the scenes, she's quietly managed to assemble a formidable Consumer Financial Protection Bureau, a centerpiece of Dodd-Frank, even as her nomination to lead the bureau is being blocked by Republicans.
Of course, these prognostications cut both ways, too. A year ago we selected Denise Crawford, past NASAA president, who played a major role in helping to get state regulatory jurisdiction over mid-sized RIAs under Dodd-Frank and expected to continue to work with RIAs on that process. She promptly announced her retirement a few months after our issue went to press. Perhaps that's another similarity between Ten to Watch and investment picks for portfolios: Past performance doesn't guarantee future results.
Position: Minnesota representative, founder of House Tea Party Caucus, candidate for Republican presidential nomination
Location: Washington, D.C.
Education: B.A. Winona State University; J.D. Oral Roberts University; LL.M William & Mary School of Law
Financial services firms: Expect a few valentines from U.S. Rep. Michele Bachmann (R-Minn.) in the coming year. As a candidate for the 2012 Republican presidential nomination, the strident, government-bashing Tea Party legislator is sure to seek the industry's support. She already has a record of sponsoring pro-financial services legislation: In January, she proposed a full repeal of Dodd-Frank regulatory reform — a proposal that never made it to the floor of the House.
“I'm pleased to offer a full repeal of the job-killing Dodd-Frank financial regulatory bill,” Bachmann said at the time. “Dodd-Frank grossly expanded the federal government beyond its jurisdictional boundaries. It gave Washington bureaucrats the power to interpret and enforce the legislation with little oversight.” Bachmann said the reform legislation also failed to address the problems of taxpayer-funded Fannie Mae and Freddie Mac, the real cause of the downturn and recession.
Bachmann, who was once an IRS tax lawyer, has also called the U.S. tax code a “weapon of mass destruction” and advocated scrapping it all together. In particular, she would like to eliminate taxes on capital gains, as well as the alternative minimum tax and the estate tax. She has also said she believes that everyone should pay some income tax, and she'd like to cut the top corporate tax rate from 35 percent to 9 percent.
Bachmann remains a joke among liberals in Washington due to a number of high-profile gaffes. But she is popular with Tea Party conservatives, who are increasingly the voice of the Republican Party, especially outside of the Capitol. Indeed, right-wing billionaire brothers David and Charles Koch have backed her, making a $10,000 donation to two committees connected with Bachmann on a single day in May. She is seen as a more politically palatable version of Sarah Palin, in part due to formidable fundraising skills and a touch more polish. Pundits say she has a shot at the Republican nomination. Her challenge will be convincing the Republican establishment — and the deep pockets on Wall Street — that she can beat Obama, who has been slipping in the polls.
And while none of the 38 bills she has sponsored have made it out of committee, according to Govtrack.us, a nonpartisan congressional research tool for the public, they do have the potential to grease the way for other less radical conservative legislation. — Kristen French
Position: CEO, Richard Bernstein Advisors
Location: New York
Education: B.A. Hamilton College; MBA New York University
Richard Bernstein is shunning emerging markets and focusing on U.S. stocks. It is the kind of contrarian call that advisors have come to expect from Bernstein, a formerchief investment strategist. Most of the forecasts have proved on target. In the late 1990s, he told Merrill advisors to emphasize unloved energy stocks and be wary of high-priced technology names. During the housing boom of the past decade, he avoided homebuilding stocks.
Bernstein left Merrill Lynch in 2009. In October 2010, he resurfaced as the portfolio manager of Eaton Vance Richard Bernstein Multi-Market Equity Strategy (ERBAX), a mutual fund that follows his contrarian style. The young fund has already attracted $470 million in assets, with much of the money coming from Merrill Lynch financial advisors, who have not forgotten Bernstein's enviable track record.
The fund picks equities from around the world. Bernstein makes top-down calls, emphasizing unloved countries and sectors. Bernstein jokes that his investing style is patterned after the approach taken by Mafia loan sharks. The gangsters find desperate borrowers and charge them high fees. In a similar manner, Bernstein looks for industries that are starved for capital. Such unloved sectors often produce the best 10-year returns, he says.
Bernstein is avoiding emerging markets because they are too popular with investors. “In 1998, emerging markets were starved for capital,” he says. “People thought emerging markets were way too risky. Now people think emerging markets can do no wrong, and the emerging markets have so much capital they don't know what to do with it.”
Many stocks are failing to meet earnings expectations. In addition, inflation is climbing, and many central banks are raising interest rates.
Bernstein benchmarks his allocations against the MSCI All Country World Index. Recently he had only 1 percent of assets in emerging markets, compared to 14 percent for the benchmark. He had 66 percent in the U.S., compared to 43 percent for the index. He is particularly bullish about the outlook for small U.S. stocks. With banks reluctant to lend, small companies have been hard-pressed to raise capital. That should set the stage for a boom in small stocks, he says. — Stan Luxenberg
Position: U.S. Attorney for the Southern District of New York
Location: New York
Education: A.B. Harvard College; J.D. Columbia Law School
“Greed, sometimes, is not good,” said U.S. Attorney Preet Bharara when he announced the arrest of Raj Rajaratnam of Galleon Group in the highest profile insider trading case in Wall Street history on Oct. 16, 2009. He could have added, greed, sometimes, does not pay. As is well known by now, Rajaratnam was convicted in May of 14 counts of securities fraud and conspiracy and faces up to 25 years in prison.
Was Rajaratnam unique, or is a culture of deceit and fraud rampant on Wall Street? If it is pervasive, those who see a little bit of themselves in Rajaratnam and his associates could be encouraged to clean up their acts. Bharara has made no secret of the fact that he is willing to pursue securities fraud aggressively — and to use controversial methods, like wiretapping, to catch his man. According to a recent profile of the Galleon case by George Packer in The New Yorker, Bharara's willingness to make financial crime a priority, and his approach to sniffing out fraud, have some on Wall Street in a panic. “There are a lot of nervous people out in the Hamptons,” one criminal lawyer is quoted as saying.
Will Bharara go after big bank executives next? In an interview with Packer, he bristles at accusations that the Justice Department is coming up short on indictments and turning a blind eye to the real villains on Wall Street — the chief executives of the major financial firms that sold shoddy mortgage derivatives. “We have grand-jury secrecy — I don't go out and announce my investigations. But I got to tell you something: where there's smoke, we take a look. Do you have any idea how much people want to bring the case if it exists?”
Timothy Noonan, managing director at Russell Investments, suspects that the Galleon verdict will result in a lot of angst in corporate boardrooms. “The last time there was a judgment as dramatic as that one was Michael Milken. It causes people to be more careful about what kind of information they share and with whom,” Noonan says. “What was unusual about the case, is that the nature of this guy's network, was very rarified. That sends a chill not so much through trading floors but through boardrooms, because of the nature of his relationship with directors.”
Ultimately, the result of the Galleon verdict could be greater fairness in the markets. But it could just as easily convince investors that the market really is rigged, that all the crooks can never be caught, and deter them from investing. — Kristen French
Position: Founder and chief executive, Advent Software Inc.
Location: San Francisco
Education: Bachelor of Science degree in Business Administration from the University of California at Berkeley
When Advent Software Inc. announced in May that it was buying Black Diamond Performance Reporting for $73 million, industry observers figured it was a case of, “If you can't beat 'em, buy 'em.”
Black Diamond's web-based software systems were aimed at the financial advisory market and had been making inroads into Advent's client base; Presidio Financial Partners switched systems just a few months before the Black Diamond deal was announced.
“If there was one place where we were losing customers, it was to Black Diamond,” Advent founder and Chief Executive Stephanie DiMarco concedes, but she adds, “Across the other segments of our business, we'll lose occasionally, but our win rates and our retention rates are very, very high.”
Advent is still the bigger player in this drama; Black Diamond has about 300 financial advisor clients, while Advent has 2,000 advisors on its products, Advent President Peter Hess says. But it's counting on Black Diamond to strengthen its presence among financial advisors. When the company started out nearly 30 years ago, it focused on back office services in the asset management market. Over time it evolved into more front office products in the hedge fund segment, which accounts for about a third of its business today.
But Axys, Advent's biggest product, is getting long in the tooth. Introduced in 1993, the product line is gradually shrinking as Advent transitions clients to its Geneva platform for hedge funds and its APX platform for asset managers.
Hess said Advent could have built something new for the financial advisors — it had $284 million in revenues last year, and it spends 20 percent of its revenues on R&D — but it would have come at the expense of the attention that the company wants to maintain on other sides of its business.
“This was really about focus,” he said of the Black Diamond deal.
For now the plan is to let its latest acquisition do what Advent has bought it to do. The acquired firm is operating as a separate unit within Advent. DiMarco has high praise for its management, calling Black Diamond “a small jewel of a company” — no pun intended.
— Jerry Gleeson
Position: Chief executive officer, United Capital Financial Partners
Location: Newport Beach, Calif.
Education: BS in Finance and Marketing, Saint Louis University (MO); MBA degrees from Columbia University and the University of California at Berkeley.
Are financial advisors who hunger for growth willing to cast their lot with a national RIA whose chief executive promotes a “consistent experience” for clients, a la Starbucks or McDonald's? The CEO, Joseph J. Duran, is betting the answer is yes.
Duran helped found United Capital Financial Partners in 2005; it now reports more than $15 billion in assets under advisory, including more than $5 billion under management, with 31 offices around the country. In January it announced three deals totaling $2.2 billion in assets. Duran says the goal is to add $1 billion to $2 billion in assets annually, and $10 million to $20 million in revenue.
United Capital, backed by private equity funds Bessamer Venture Partners and Grail Partners LLC, isn't for everyone, Duran warns. He uses the word “humility” a lot when talking about the ideal advisor. “If somebody wants to keep doing everything they've done in the past, we're just not the right partner,” he says. “The guys from the big wirehouses with big egos who want to be kings of the universe, that's never going to be our guy or gal.”
Advisors get a partnership stake in the company, but they also get the company's name on the front door instead of their own. There are processes aimed at creating greater efficiencies, including a checklist for the things that must be covered at all client meetings to ensure that the investor experience is consistent from office to office. One standard exercise is called “Honest Conversations;” it employs a set of cards with value statements to help draw out clients on their feelings about money and financial decision-making. Duran is enthusiastic about its ability to cull insights from investors that he says can surprise advisors. When advisors join United Capital, “The most radical thing they are going to do is change the way they approach their clients,” he says.
Duran co-authored a white paper this year entitled “The Consumer Revolution,” which argued in part that investor clients will be seeking qualitatively different experiences from financial advisors. Practices that provide customized experiences will thrive. The idea that the industry needs revolution and not evolution has struck a chord, Duran says: “We are screwed if we don't come up with a better way of working.” — Jerry Gleeson
Position: President of Global Wealth Management, including Morgan Stanley Smith Barney and Morgan Stanley Investment Management
Location: Purchase, N.Y., and New York City
Education: BA in economics, summa cum laude, Colgate University, Yale Law School
Greg Fleming, who was brought in to run the Morgan Stanley Smith Barney joint venture early this year (succeeding veteran Charles Johnston of Smith Barney), “has his work cut out for him,” as one Morgan Stanley executive puts it. “Talk about an f*#ing headwind!”
It's not just that it's going to take about two years to fully integrate legacy Smith Barney advisors onto the Morgan Stanley technology platform (which has been recently souped up), but he's also got to improve profitability, keep advisors from leaving, and help recruit top-quality FAs. That said, in the second quarter, Fleming's Global Wealth Management unit reported strong earnings gains. Average annualized revenue per MSSB FA also rose to $785,000 from $679,000 in the year-ago quarter. But total advisor headcount declined by a net 160 in the quarter to 17,638. Of course, the firm is pruning underperforming FAs. Total client assets rose to $1.7 trillion in the second quarter on market appreciation but also on net asset inflows of $2.9 billion. That's well below pure play brokerages, such asand TD Ameritrade, but then almost a third of MSSB's clients are worth more than $10 million.
Most agree Fleming has the moxie to get the MSSB unit integrated and performing at its best. The technology integration should begin to be rolled out in the third quarter. That would eventually allow legacy Smith Barney real estate to be sold off. Oh, and that profitability improvement? Morgan CEO James Gorman has stated many times that he wants a 20 percent pretax operating profit margin. (The margin for MSSB was 9 percent in the second quarter of 2011 versus 7 percent in the same period a year ago.)
Fleming is certainly a player at MS, but his credentials are huge. He began his career at Merrill Lynch on the institutional side, in public finance and then corporate investment banking. He eventually rose to become co-president of Merrill Lynch. Fleming steered the merger of Merrill Lynch Investment Management and BlackRock; the marriage created one of the world's biggest asset managers. As acting president of Merrill Lynch after CEO Stan O'Neal's ouster, he is credited with getting Ken Lewis, then captain of Bank of America, to pay $29 per share for the ailing behemoth. “Thus saving its employees and shareholders from the same fate as Lehman Brothers,” says a Morgan executive. — David Geracioti
Position: Co-Founder and Co-Chief Investment Officer, PIMCO. Manages $243 billion Total Return Fund.
Location: Newport Beach, Calif.
Education: B.A., Psychology, Duke University; M.B.A., UCLA
While Bill Gross' prominence as manager of the world's largest bond fund is unquestioned, in the past several years he has emerged as spokesperson and chief gadfly on the federal government's poor financial management. His criticism of the administration's shortchanging of debt holders in favor of unsecured union obligations in the auto industry bailout gave notice that Gross was now willing to use his clout to advocate prudent financial policy.
In fact, Gross' scathing criticism of U.S. Treasury bonds over the last year has placed him firmly as chief spokesman for the “bond vigilantes,” as they are known, in the eyes of the investing public. For Gross the public speaker, that means relentless criticism of the spiraling debt/GDP ratio, warnings on everything from current yield curves to the over-consumption of education services by American citizens: He thinks too many people are going to college. It also means that Gross the mutual fund manager has taken to a form of “buyer's strike,” reducing his flagship's bond fund investment in U.S. Treasuries to a net position of zero. That's quite a statement.
Since beginning his budgetary vendetta, Gross thus far has been a prophet unheeded, as U.S. Treasury yields have sunk even lower. This has left Gross trailing the indices slightly this year, and underperforming 70 percent of his peers for the last 12 months, far from his 8 percent ranking for the last decade. But Gross is undeterred, and his fund now holds stakes in investment grade and emerging market sovereign debt, as well as big slugs of mortgage bonds; in essence, he holds a broad sampling of everything BUT Treasury bonds.
For Gross, whose massive fund requires a multiyear investment horizon, this short-term underperformance may cost him some assets. His flagship fund has shrunk modestly from its October 2010 peak asset level of $256 billion. But his stature as an enforcer of market discipline will likely earn him both accolades and profits over a longer time horizon. In the meantime, he will continue his new commute from Beverly Hills to Newport Beach, having just paid $42 million for Jennifer Aniston's former mansion. With a new pad to enjoy, and a net worth of over $2 billion, Gross can afford to endure short-term criticism. We're betting he ends up laughing all the way to the bank, or at least to the offices of his own quarter-trillion-dollar fund. — Nate Wendler
Position: President of ETF analytics and the global head of editorial for Index Universe
Location: San Francisco, Calif.
Education: B.A., philosophy and environmental studies, Bowdoin College
These days, what keeps Matt Hougan up at night is an 800-pound gorilla in the packaged products analytics space — Morningstar. Why? “Because it's a big, smart corporation with a lot of resources,” Hougan admits.
Aside from Morningstar, Hougan's Index Universe was the first to announce plans to roll out a ratings system specifically designed for exchange traded funds, which will go live in the next few months. Unlike other systems out there, the new tools allow investors to analyze ETF-specific factors, such as tracking error, liquidity, hidden costs, analysis of sector and capitalization allocation, rather than just performance and holdings data.
While Hougan says his main challenge will be getting the system's data up to snuff over the next few months, an even bigger challenge this year will be to differentiate Index Universe's system from that of Morningstar, which has a foothold on the advisor community by way of its mutual fund ratings.
“Index Universe has the potential to become the Morningstar of the ETF industry,” says Christian Magoon, CEO of Magoon Capital, an asset management consulting firm.
Those are some big shoes to fill, and Morningstar already has ETF ratings of its own to round out its analysis of mutual funds and stocks. But Magoon says that what differentiates Hougan's system is that it was built from the ground up for ETFs, while Morningstar simply modified its mutual fund methodologies. Hougan says Morningstar evaluates ETFs as index funds, which have been in the company's wheelhouse since the beginning.
That said, no one can deny the fact that Morningstar has some respected, brilliant ETF analysts on its roster, including Scott Burns, Paul Justice and Robert Goldsborough. Adam Patti, CEO of ETF provider IndexIQ, says this is one reason the race will be so close. Also, “They're both going to be really good systems.” The winner will be the one with the best analytics and the one that can reach advisors.
Magoon says Index Universe won't have a problem reaching core ETF users, especially those that already use the company's resources, because they understand the nuances. But to be truly successful, Hougan will have to reach the mass mutual fund investors, many of whom are loyal customers of Morningstar. — Diana Britton
Position: Chairman and CEO, FINRA
Location: Washington, D.C./New York
Education: J.D., New York University School of Law; B.A., Tufts University
Today, there's a brutal fight on for the role of top watchdog on Wall Street, with the Financial Industry Regulatory Administration pitted against the Securities and Exchange Commission. Richard Ketchum, who joined FINRA in 2009, has been at the center of that fight.
For one, he has been vocal about wanting to become the SRO for investment advisors. In March, FINRA hired Michael Oxley, the former Republican congressman from Ohio and co-author of the Sarbanes-Oxley Act of 2002, to lobby for the agency's control over RIAs on Capitol Hill and during the first quarter, FINRA spent $300,000 lobbying in Congress. But investment advisors aren't eager to report to FINRA. David Tittsworth, executive director of the Investment Advisers Association, which has long supported the SEC as the best alternative, says the job should not be outsourced to FINRA because of its lack of accountability and transparency, its track record and its bias toward the b/d model.
To show that FINRA can be a tough cop, the group has heightened its enforcement efforts against b/ds this year, especially around private placements and structured products. Ketchum says the agency is stepping up enforcement as part of a renewed focus on preventing problems, rather than reacting to them. “We want to be stopping activity before investors are harmed — not just cleaning up after the damage is done. You're going to see a lot more cases coming out more quickly, and cases that really matter.”
In 2010, FINRA brought 1,310 disciplinary actions, with fines totaling $42.5 million. In comparison, the SEC brought only 681 enforcement actions last year, but levied more than $1 billion in penalties. So far in 2011, FINRA has surpassed its figures for actions filed and fines levied for the comparable period of 2010. If it continues at the same pace, it will have issued more than $67 million in fines this year.
Some complain that FINRA is too much in the industry's pocket to effectively regulate. FINRA's top 10 execs earned $12.7 million in 2010, $2.6 million of which went to Ketchum, and those salaries are paid by FINRA member firms. By comparison, the SEC Chair Mary Schapiro made $163,000 last year. “By doing that, we hope to attract exceptional talent and not experience the high rate of turnover that characterizes financial government regulators,” Ketchum said. — Diana Britton
Position: Chief Operating Officer UBS Wealth Management Americas
Location: Weehawken, N.J.
Education: Ph.D. in Atomic and Molecular Physics and First Class Honors degree in Physics and Applied Mathematics, Queens University of Belfast, Ireland; Masters in Public Policy and Management, Carnegie Mellon University
Anita Sands, a molecular physicist by training, is orchestrating the massive undertaking of transforming, upgrading and generally reshaping the technology platform at UBS Wealth Management Americas (WMA). What she develops could be a model for the rest of Wall Street, say some industry insiders.
Sands talks excitedly about the M Branch, the mobile “branch of the future” she's helping put together in Weehawken for UBS. She joined UBS the same week, in October 2009, as her boss, McCann, initially as a consultant. If Sands can help McCann and his close-knit team of managers drive growth at the brokerage, she should be in a sweet new spot.
So far, the results are looking good. The brokerage division of UBS has seen complex processes re-engineered, new broker workstation technology introduced, and money saved. “I'm confident the solutions we are formulating, particularly in mobile, will leapfrog the competition because we see it as a platform of the future,” Sands told Registered Rep.
Sands is no techolongy rookie. She served as executive director of the Software Industry Center at Carnegie Mellon University and later in a series of other senior posts, including in operations and technology at.
Sands has a Ph.D. in Atomic and Molecular Physics (and a First Class Honors degree in Physics and Applied Mathematics) from Queens University of Belfast, up the road from her historic hometown, Drogheda, in her native Ireland. In those days, Sands devoted time to public policy research, in particular innovation and emerging technologies, and how they could enable economic growth for companies to succeed.
But don't confuse Sands with some dusty college professor. Sands, who plays the piano, runs, and is a public speaker, demonstrates the kind of upbeat practical leadership needed to manage a team that includes 2,000 technology and operations staff, say insiders.
— John Aidan Byrne
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