Nobody can predict the markets. But it is possible to forecast the challenges that financial advisors and planners will face in the next 12 months, or at least provide a warning system for impending threats.
Here are my top 10 issues to think about as we enter 2014 – offered with humility and respect for the world’s ability to surprise us.
1. Investment turbulence
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
I’m not predicting a downturn, and I’m not saying the market will continue the long recovery that started in March 2009. Both of those are certainly possible. My prediction is that we will experience some rough investment weather in 2014, which will test client relationships and cause more than a few investors to panic. How well you handle client emotions, and how well and often you communicate with clients as we approach whatever twist of the rollercoaster awaits us will go a long way toward determining your ability to keep your clients, acquire new ones, and help everybody you work with avoid the panic that drives a big gap between investor and investment returns.
What could cause this turbulence? Most of us are still shaking our heads at the remarkably high returns we received from domestic and European stocks in 2013. The markets didn’t climb a wall of worry; they scaled a sheer cliff of abject fear, an environment where we were constantly looking over our shoulders at the Correction That Never Came – despite the Fed’s constant back-and-forth wavering on the taper, despite a 14-day government shutdown and credible threats that the U.S. would voluntarily default on its debt obligations. According to some analysts, the shutdown took $24 billion out of U.S. GDP, but the markets hardly blinked.
That serenity can’t last forever, and history is full of examples of events that jolted investors out of complacency. I can think of a few candidates, starting with the next threat of a refusal to raise the debt ceiling in the first quarter of next year. But I’m personally more worried about the psychological impact of rising bond rates – which I don’t think will rise as dramatically or catastrophically as many are predicting. Nevertheless, who knows what huge leveraged interest rate bets lurk in the dark alleys of the multi-trillion dollar derivatives markets, ticking away on the balance sheets of the large investment banks and hedge funds? What effect might the taper, amplified by a few leveraged bets, have on the global economy?
Or, potentially worse, what would happen if a measured rise in interest rates caused a tipping point with relatively illiquid securities held in bond funds that have reached for yield – something Michael Aronstein of the Marketfield Fund has warned about in the most explicit terms. If there is a run on even a small number of funds, and they’re having trouble unloading their illiquid shares to meet redemptions, they’ll have to sell some of their other bond holdings at depressed prices; that will cause a re-valuation of a broader array of paper. People receive statements that show big drops in value in the supposedly safe part of their portfolios, and they bail, causing a run on a broader array of funds in one of those self-feeding cycles that could impact the equity markets as well.
Advisors who can help their clients see a panic downturn as a buying opportunity will create enormous value. But they can only do that if they are already communicating regularly about the importance of staying calm as the markets correct. The key message: We can’t predict when or where, but we can predict that the markets will follow an uneven path, and that downturns have always, in the past, been excellent buying opportunities.
2. Regulatory certainty will be more disruptive than regulatory uncertainty
It now appears that the SEC under Mary Jo White will issue new fiduciary standards for RIAs and brokers in the coming year, and this will unblock the Department of Labor’s efforts to create similar standards affecting advisors who give out advice on qualified plans and IRA accounts. Congressional Republicans whose opinions have been purchased by the brokerage industry lobbyists have demanded that the two initiatives be harmonized and that they be backed by economic-impact studies. Those demands will be met in the coming year.
What will the new standards look like? The SEC and DOL have two choices: They can clearly require everybody who gives advice to live up to a standard of behavior as strict as what RIAs live under now, or they can create a somewhat tougher version of the suitability standard which will make it possible for brokerage firms to continue to mislead consumers into thinking that their reps are putting their interests first in their recommendations. The DOL and Phyllis Borzi are clearly leaning toward the former. The SEC has traditionally leaned in the opposite direction, perhaps realizing that it would be a nightmare to try to regulate the brokerage industry as it tries every alternative to changing its lucrative business model.
See full article on Ten Predictions for Advisors in 2014 by Bob Veres, Advisor Perspectives