Poll: Is the SEC’s plain language requirement for Form ADV Part 2 a good idea?

SEC-registered advisors must rewrite Part 2 of their Form ADV using plain language. The requirement takes effect in 2011.

You won’t be surprised to learn that I favor plain language, but I’m curious to know what you think of the new requirement.

Please answer the poll in the right-hand column of my blog, asking  “What do you think of the plain language requirement for Form ADV Part 2?”

  • Bad idea
  • Okay, but will cost too much time and money
  • Good idea, but I’m not sure if it’ll be implemented effectively
  • Great idea, I’m looking forward to it
  • None of the above (please leave a comment)

By the way, the SEC’s plain English handbook is a great resource for your Form ADV rewrite, as Deborah Bosley and Libby Dubick point out in “Lemonade from legislative lemons: New ‘plain language’ rules for Form ADV give advisors a chance to stand out.” Investment News (Oct. 4, 2010, registration required).

Reader challenge: What’s the writing lesson from Physicians Mutual?

You’re getting smarter about writing investment and financial communications, so I’m giving you a challenge: watch this video and then tell me what lesson it teaches writers.

I look forward to hearing from you!

Notable quotes from the CFA Institute’s emerging markets conference

So many great emerging markets presentations, so little time to blog about them.

Below you’ll find quotes or paraphrases of opinions voiced by speakers at the CFA Institute’s  “Investing in Emerging Markets” conference held in Boston on October 19. If these snippets pique your interest, watch the CFA Institute website for podcasts or other records of selected presentations. Also see my recent blog posts, “Bubble?–Emerging markets scrutinized by CFA Institute conference,” “ISI’s Straszheim: China’s interest rate hike is ‘tapping the brakes’,” and “Cautious optimism on emerging market stocks from SSgA’s Hoguet.”

Paulo Vieira da Cunha, Tandem Global partners

  • There is no decoupling. Two-thirds of global consumption and trade is in the advanced economies.
  • There are lots of interesting plays in Brazil today, if you are careful.
  • It’s very clear the Brazilian economy is overheated.
  • China was a big factor in Brazil’s post-2008 recovery.

Kristen Forbes, MIT Sloan School of Management

  • There are few options for emerging market countries to control the impact of capital inflows.
  • Experts disagree about whether emerging market countries should impose temporary taxes on capital inflows.
  • Academic literature says capital controls have little impact, especially long-term. At best, they can shift inflows to safer composition.

Sivaprakasam Sivakumar, Argonaut Global Capital

  • The best opportunities in India are investing in first-generation entrepreneurs. Look for the next Infosys.

Tina Vandersteel, Grantham, May, Van Otterloo & Company

  • When you invest in local emerging market debt, you face the “roach motel risk” of “you can check in, but you can’t check out.” Sometimes currencies can’t be converted.
  • “You are picking up pennies in front of the train” when you invest in certain kinds of emerging market debt.
  • Invest in emerging market debt for value and diversification, not for “safety,” betting against the U.S. dollar, or an inflation hedge.

Cliff Quisenberry, Caravan Capital Management

  • There is a significant different between frontier countries in the index and the other frontier countries.
  • Country selection is more important in frontier markets than in emerging markets.

AlisonAdams, Alison Adams Research

  • Emerging markets’ share of global market capitalization could overtake developed markets’ share by 2030, according to Goldman Sachs.
  • Most emerging market governments are reasonably market-friendly.
  • Extreme events can present buying opportunities, as with the Mumbai attacks in India in 2008.

Bubble? — Emerging markets scrutinized by CFA Institute conference

Is now a good time to invest in emerging markets?

The answer depended on which speakers or attendees I listened to at the CFA Institute’s “Investing in Emerging Markets” conference held in Boston on October 19.

The overall mood was cautiously optimistic for the long-term. “We’re not in a bubble yet,” said George Hoguet of State Street Global Advisors, who also mentioned some concerns about emerging markets.

At least one speaker said some emerging markets are already in a bubble and several attendees told me they’re waiting for a pullback before they put money into emerging markets.

It’s not only emerging market stocks that worry investment professionals. While some investors are eager to pick up an extra six percent (600 basis points) or so by investing in emerging market debt, Grantham, Mayo, Van Otterloo & Company’s Tina Vandersteel suggested that emerging market bonds may not be as safe as you think. This is especially true of external debt, which has a 32% probability of default vs. only 2% for local debt, although spreads of about 3% (300 basis points) provide a cushion for defaults, she said.

What about you? Are you ready to invest in emerging markets today?

Cautious optimism on emerging market stocks from SSgA’s Hoguet

Emerging markets have been hot enough that the CFA Institute organized a one-day conference on the topic, held in Boston on October 19.

Here’s how George Hoguet, global investment strategist specializing in emerging markets at State Street Global Advisors, summed up his outlook when he spoke about “Decoupling or Contagion: How Will Fiscal Consolidation in Developed Markets Impact Emerging Markets?”:

The Great Recession has enhanced the secular case for investing in emerging markets, but the reduction in potential GDP growth in many developed markets will negatively impact emerging markets.

One of Hoguet’s comments resonated with me more than the others: “Japan as Number 1 is a reminder of the difficulty of long-term forecasting.” As a former teaching assistant for author Ezra Vogel, I remember the uproar about Japan’s predicted domination of the global economy. The Land of the Rising Sun had seemed unstoppable, which worked to my benefit when I led training seminars on “How to Do Business with the Japanese.” My, how times have changed.

Another warning from Hoguet: Economic growth does not necessarily lead to superior investment returns, as Korea shows. Still, he suggested that investors focus on large economies with sustainable domestic demand. He also recommended that investors overcome their home-market bias to market-weight emerging markets and be open-minded about newer types of investments, such as farm land and long-short funds.

One of the many pluses mentioned by Hoguet was that debt/GDP ratios are lower for emerging markets than for developed countries. In addition, current emerging markets are not “demanding” at about 13-times-earnings for the next 12 months,

We’re not in a bubble yet,” concluded Hoguet.

ISI’s Straszheim: China’s interest rate hike is “tapping the brakes”

“China raised interest rates and everybody is all upset about that,” said Donald Straszheim at the start of his Oct. 19 presentation on “China’s Growth Prospects and Risks” to the CFA Institute’s “Investing in Emerging Markets Conference.” Earlier on Oct. 19, China raised borrowing and deposit rates by 0.25% (25 basis points).

Perspective on Oct. 19 Chinese rate hikes

But Straszheim, the head of China research for ISI Group didn’t seem upset by China’s rate hikes. Instead, he presented it as a reasonable way to “tap on the brakes” to slow China’s economic growth. Looking at the history leading up to the rate hikes, Straszheim said that China implemented a big stimulus following the 2008-2009 economic meltdown. This led to China overheating later in 2009 and into 2010. Although attempts to slow the economy to engineer an economic “soft landing” were  having an effect, inflation was at 3.5% and rising too quickly. Food, which makes up more than 30% of China’s consumer price index, could potentially boost the country’s inflation to 5% as a result of weather issues, said Straszheim. Also, the economy is still strong and the housing market is booming. Hence, the rate hikes.

“I don’t think this is the beginning of the end,” said Straszheim. “I don’t think this is the beginning of another major tightening cycle,” although more rate hikes may follow.

China is heading for a “soft landing” and is likely to experience 3%-4% inflation and 8% growth in 2011, added Straszheim.

Slower growth is coming

China’s fastest economic growth is behind it, said Straszheim, for the following reasons:

  1. Demographics. China’s “one child” policy will hurt it. The average growth of China’s labor force had been 12 million per decade. Growth will fall to four million for this decade and then shrink by two million in the next decade, said Straszheim.
  2. Technology. The technology gap between China and the rest of the world has narrowed dramatically.It can still make gains, but they won’t be as big.
  3. China’s key export markets. The U.S., Europe, and Japan will grow more slowly than in previous decades.
  4. Scale effects. The economy has grown a lot. It’s harder to grow quickly off a big base.

Straszheim’s predictions for China’s economic growth are

  • 2010-2014: 8%
  • 2015-2019: 7%
  • 2020-2024: 6%
  • 2025-2029: 5%

Chinese challenges: Housing shortage, bank loan problem, yuan vs. dollar

China faces some challenges:

  • China needs almost twice as many housing units as are being built.
  • Its banks hold many nonperforming loans.
  • There is tension between China and the U.S. over exchange rates. What goes unnoticed in the U.S. is that the Chinese currency has fallen vs. most key currencies other than the dollar. The main risks to his forecast are in the areas of trade and currency, he said.

Despite the challenges, Straszheim expects China will grow faster than much of the rest of the world for a long time to come.

Guest post: “Investment analysts and social media”

Pat Allen of RockTheBoatMarketing is one of my “go to” people when I’m looking for information on how asset managers use social media. If you’re interested in tracking this topic, follow Pat’s Twitter feed at RockTheBoatMKTG and check out her Twitter list of investment managers. If your interests focus more on financial advisors, then Pat’s AdvisorTweets Twitter account is for you.

In her guest post below, Pat suggests that investment analysts and portfolio managers need to learn how to do research using social media or risk missing–or being late to obtain–information that influences the prices of securities.

Investment analysts and social media

By Pat Allen

Institutional analysts and investors rely most on information that comes directly from companies.

This was a finding in a survey conducted last year by the Brunswick Group that I remember reading and finding unremarkable.  And yet it’s increasingly obvious that corporate information can be relied upon for a company’s plans and intentions—but how an organization moves forward will be influenced by a marketplace reacting in real-time.

To be sure, that complicates things and not just for corporations pursuing business agendas but also for analysts and investors trying to assess companies’ prospects.

Social media is messy. There are zillions of media and networking sites and blogs, lots of noise and plenty of false signals. Still, we think it’s a faulty investment decision that’s made today without consideration for what consumers and influencers are saying.

Gap’s October 4 introduction of a new logo is a recent case in point.

In an October 7 essay on the Huffington Post, Gap North America president Marka Hansen explained that the company’s product selection and retail presence was evolving.

“The natural step for us on this journey is to see how our logo–one that we’ve had for more than 20 years–should evolve. Our brand and our clothes are changing and rethinking our logo is part of aligning with that,” wrote Hansen.

“The natural step for us on this journey is to see how our logo–one that we’ve had for more than 20 years–should evolve. Our brand and our clothes are changing and rethinking our logo is part of aligning with that,” wrote Hansen.

Not so long ago a company executive might have mentioned a new logo on a conference call. If the company’s marketing was believed to be stale and a growth inhibitor, a rebranding plan might have bolstered investor confidence–if only temporarily–prior to the market’s reaction to the change.

In thinking about this post, I flashed back to Peter Lynch’s One Up on Wall Street: How to Use What You Already Know to Make Money in the Market. I was pretty green when I read that book but even then I was skeptical about Lynch’s thesis. Listen to what shoppers said at one store in one mall and invest based on that? I had my doubts and there was something about it that I found condescending. Surely that’s not how professional investors did it?Institutional analysts and investors rely most on information that comes directly from companies.

But Lynch’s recommended approach foreshadowed what is today called online listening. The difference today is that the vast majority of social media sites are architected to serve as databases—easy for interested parties to query, filter and subscribe to for efficient listening and ongoing temperature-checking.
Company information, primary market research, real time subscription information services, analyst research, the business media—all are inputs that ranked higher than “new media” in the 2009 Brunswick research into what influences analysts’ decisions or recommendations. New media, defined as blogs, message boards and social networking sites, were consulted by just 4% of respondents.

The next time such research is conducted we’d expect the monitoring of new media to soar as professional investors learn more about social influence.

Pat Allen is a Chicago-based digital marketing strategy consultant whose Rock The Boat Marketing firm helps investment companies think through what they do on the Web. Pat also operates AdvisorTweets.com, a site that aggregates the tweets of U.S.‐based financial advisors.

Guest post: “What’s a tomato got to do with getting your fund discovered?”

Mutual fund marketing is the focus of this week’s guest post by Dan Sondhelm. His post originally appeared on SunStar Strategic’s FundFactor blog.

What’s a tomato got to do with getting your fund discovered?

by Dan Sondhelm

Have you ever grown a tomato? If so, you know it’s not as simple as just putting a seed in the ground. In fact, passionate tomato farmers often start their seedlings indoors several weeks before planting season. Once outside, they need a good dose of sunshine and the right amount of water, not to mention great soil, shelter from chill winds and a strong trellis. You get the idea.
Growing a fund requires similar specialized knowledge and attention. According to Morningstar, in the open-end mutual fund industry of over $7 trillion assets, the top 10 fund firms hold 58%. That’s one big tomato! The next 40 hold 28%, while you and the remaining 600 plus firms compete for the remaining 14%. And, fund flows follow a similar pattern.
In the past few weeks, I’ve been privileged to speak on panels addressing distribution for smaller funds. I’ve met dozens of smaller fund managers there. Some are managers with unique investment processes. Others are experts in their asset classes, still others have amazing performance. Yet, they’re frustrated by lack of fund flows, anxious about mounting expenses and hungry for ideas about how to get the recognition they deserve in this crowded market place. So, how do you differentiate your fund from the others and get discovered?

Like growing tomatoes, gaining visibility – and resultant sales – requires commitment. As a small firm, you’re competing for attention with firms who spend significant dollars on their marketing activities, both in the advisor market and at the retail level. They spend hundreds of thousands of dollars for TV commercials, glossy magazine style annual reports and sponsorships with major distribution platforms and public venues.

Making the Commitment to Grow.
Distribution is at the heart of the potential for success. But just getting on platforms is the equivalent of tossing your tomato seed in the dirt and hoping for the best. Successful distribution lies in nurturing the effort. Like adding water and light, protecting from the frost and spraying for bugs, growing your fund requires consistent attention. You have to ensure you’re in the right channels, and that advisors and investors know you, know your people and know your products.

We understand smaller firms are often made up of a handful of people. Not all firms can afford a wholesaling staff or have resources to sustain a significant marketing presence. So, how do you make it work?

Design a Distribution Strategy.
Write it down. Make someone accountable for each step. We all know that what gets measured gets done. Traditional marketing wisdom says you must address the four P’s: Product, Price, Place (Platforms), Promotion. This applies to fund distribution, too. But what about a fifth P, Performance? It’s true, not many investors will flock to a poor performing fund, but relying solely on performance is risky business. While performance may get you your 15 minutes of fame, performance chasers will drop your fund for the next hot item if they don’t really understand your investment philosophy and process or know the fund manager well.

Cover all the bases

• Build a story around your investment process that highlights the opportunities of your asset class and process and differentiates you from your competition.
• Add personality by discussing your current sector strategy and top investment selections. Let investors know about the good decisions you’ve made in the past and the fund’s current positioning.
• And of course, commit to excellent performance.
• Set competitive pricing – You’ll notice I didn’t say lower than average. Many managers think this is important, but many funds with lower-than-average expenses don’t sell. What does matter is how your fund compares overall to other funds that are selling.
• Set your share classes so that you are priced appropriately for the advisor types you are targeting. The preponderance of flows are going to no-load and load-waived shares. For smaller firms without existing relationships or sales teams, no load may be the way to go.
Place (Platforms)
• Select the distribution channels and share classes that make sense for your fund.
• Get on Schwab, TD Ameritrade, Fidelity, and Pershing – these are the most appropriate for smaller firms with limited distribution. Then, establish a relationship with your account manager, who can guide you through the maze of opportunities available to reach platform advisors.
• Be realistic in your expectations. If you have no prior relationships with wirehouse firms, you are too small to meet their criteria and/or there is no demand from their representatives, it’s unlikely they will add you to their platform in the short term.
• Establish relationships with advisor firm research teams to get and stay on their radar. Where applicable, find out and work toward meeting criteria to be placed on preferred/recommended lists.
• Take advantage of marketing opportunities offered by some platforms. Develop a strong relationship with your account manager so you are alerted to and aware of opportunities for proprietary mailings or sponsorship opportunities at local and national events.
• Consider Virtual Wholesaling – use third party endorsements and technology to communicate with advisors in a structured and timely way to attract and retain investors, while building your brand.
o Proactively engage the media. Let the financial press sell you; third-party endorsed news coverage in national and local business publications adds credibility.
o Leverage third-party endorsed reprints in your other sales and marketing efforts, in print, through social networks and on your website.
o Keep your website up to date with timely commentary and news coverage. Regularly post themes about your fund and the good decisions you made. If your site doesn’t allow you to add timely information, upgrade it. Advisors won’t come back if there is nothing new.
o Communicate. Regular communication with advisors is critical in order to keep your story top of mind. Consistently offering useful, meaningful information will position you in their minds as the expert on certain topics.
o Use monthly email newsletters to drive advisors to new content and fresh ideas on your website such as recent commentaries, Webinar promotions and media coverage.
o Host Webinars or conference calls for advisors on a quarterly basis.
o Take advantage of platform outreach programs to stay in front of their advisors; many of these are free.
o Develop a social media strategy to distribute timely information in the networks investors frequent. Social media allows you to listen to shareholder concerns and become part of the conversation.
Growth will happen if you take the right steps. Like a tomato, the more care and attention you provide, the greater the likelihood for success. Healthy growth depends a great deal on creating relationships. With today’s email, internet and social media opportunities, expanding your reach is easier than ever before. Make a commitment to building strong relationships where advisors and investors can learn to trust and respect your firm and its expertise.
Dan Sondhelm provides personalized services to money management firms and service providers, REITs, public companies and pre-IPO companies seeking to attract and retain investors. Dan is also the executive editor of the company’s online blog, Fund Factor.

Lessons from “Presentation Skills for Investment Professionals”

You can never learn too much about how to give an effective presentation, especially about weighty topics such as investment management. That’s why I logged into “Presentation Skills for Investment Professionals,” a recent presentation to the CFA Institute by Dave Underhill of Underhill Training & Development.

Some of Dave’s advice resonated with advice I give my writing students. For example, don’t get deep into details before you tell your audience the value of what you’re discussing.

Boil down the tsunami

Take a tsunami of data and boil it down to most important point,” said Dave. It’s a mixed metaphor, but I love his point. Look at the data and pretend you’re an audience member asking “So what? Why should I care about this?”

This is a topic I’ve addressed in “Focus on benefits, not features, in your marketing.” As I say in my writing workshops, your audience is looking for the WIIFM, which is short for “What’s In It For Me.”

Leave time for questions

Don’t make your presentations too long. Allow time for questions, suggested Dave.

Figure that one PowerPoint slide will 60-90 seconds to discuss. For goodness sakes, don’t READ your slides, as I did when I first started speaking in public.

Show, don’t just tell

Among the techniques that Dave uses to improve the power of his presentations are:

  1. Telling a story
  2. Using numbers, not just words — I suggest you use a graph, rather than a simple table, if your data lends itself to a more visually appealing display
  3. Using gestures to demonstrate your ideas

Go the extra mile

I was very touched that Dave took the time to email an answer to the question I’d sent in. It was a question without broad audience appeal, but he answered anyhow. That’s a classy thing to do.

To learn more of Dave’s tips, register to watch the replay of “Presentations Skills for Investment Professionals.”

Guest post: “Would you like to know how financial advisors are choosing products?”

Investment marketers want to know what’s driving financial advisor behavior, so I asked  Lisa Cohen, CEO of Momentum Partners, for a guest post.

Financial advisors, what do you think of the RepThinkTank findings that Lisa discusses? Are you–like the advisors whom she mentions–planning to increase allocations to emerging markets and international stocks?

Would you like to know how financial advisors are choosing

products and making investment decisions in this market?

By Lisa Cohen

We thought you might. We did too. The recently-released first report in the RepThinkTank Distribution Dynamics series provides comprehensive information on investment selection and asset allocation trends. The study includes data from more than 1,000 financial advisors across all channels.

Key findings include:

  • Continued commitment to a short list of top managers and families (American Funds, Franklin Templeton, PIMCO), and
  • High regard for growing managers including Davis Investment Advisors, Ivy Investment Management, First Eagle Investment Management, and Thornburg Investment Management
  • Plans to increase allocations to Emerging Market Equities and International Core, among other asset classes, and to slightly decrease exposure to fixed income
  • Changing risk/return expectations and the financial crisis are a top driver of recent changes in the asset allocation of client portfolios
  • Advisors’ median allocation across all channels to passive investments is 20%. Data suggests a growing appreciation for using passive investing as both a core allocation and as a way to adjust investor exposure to specific asset classes.
  • Use of third party portfolio construction tools by nearly a third of advisors in all channels. In light of advisors’ anticipated increase in use of mutual fund wraps, this data suggests the continued outsourcing of asset allocation.

The complete report is available from any of the RepThinkTank partners and is priced at $7,500. RepThinkTank is an experienced, integrated team of leading financial services research, advisor practice management, and advisory firms. Learn more at www.repthinktank.com. You can contact Lisa at 866-995-7555.