How Great Leaders Inspire Us to Take Action

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The speaker was Simon Sinek, Renowned Leadership Expert and author of Start With Why.

“There are ‘leaders’ and ‘those who lead’,” Simon asserted.  Most companies have no clue why their customers are their customers.  They only think they know. Simon explained that there are two ways to change human behavior — through manipulation or through inspiration.


There are numerous ways that companies try to manipulate people to buy, Simon proposed.  The biggest one is fear, but others are price cuts, aspirational messages and peer pressure.  A company might claim that ‘70% of the industry is using our service’.  But what about the other 30%?  Maybe they know something that we don’t?

There’s a huge difference between innovation and novelty, Simon argued.  Real innovation changes the course of industries, if not society itself. Take the fax machine versus the camera phone.  The first is innovative and changed the way we communicate.  The other is just a feature added to an existing product. It’s novelty. “Novelty isn’t innovation,” Simon reminded us, emphatically.  Innovation is often less, not more, since less is more powerful than more (see Apple’s minimalist line of products).

Adding features doesn’t breed loyalty, so how do we stand out in a crowded marketplace? The alternative is inspiration.


Regardless of industry, great communicators think, act and communicate the exact same way, which is the complete opposite to everyone else.  They have the most loyal companies and employees.  What are they doing differently?

The Golden Circle

This looks just like a bullseye, with the words ‘why’, ‘how’ and ‘what’ inside. Innovative companies work from the inside out. They define ‘why’ they exist before anything else. All other companies do the opposite. They decide ‘what’ they will make or do and ‘how’ they will do it, but never get to the ‘why’, Simon commented.

By WHY, he means why does your organization exist? Why do you get out of bed every morning? And why should
anyone care?

Innovative companies like Apple and SouthWest Airlines have clear, consistent values and are experts at communicating them. Many visionaries aren’t leaders because they lack the ability to communicate effectively.

Apple’s employees love it there because they’re given a reason to come to work — they find an industry where the status quo has always been accepted and they destroy it.

What is a company? Simon’s definition is, “it’s a group of people with a common set of values and beliefs”. People respond to the unfamiliar by seeking out other people that share their values and beliefs. An owner of an Apple computer can instantly connect with another Apple computer owner. The computer they purchased becomes a symbol and defines who they are. Anyone else that displays the same symbol most likely shares their values and beliefs. It’s human nature to seek out symbols to feel like we belong.

The difference is between buying a product or service because you ‘like’ the company versus buying it because you ‘love’ the company.  People ‘like’ Dell, but they ‘love’ Apple.  Love is an emotion and drives behavior.  It’s irrational. Like is a feeling and is quite rational.  Getting people to love your company is the difference between repeat business and customer loyalty.

Taking Advantage of the Global Economic Expansion and Recovery

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator for this session was Richard Hoey, Chief Economist, Bank of New York Mellon. The panelists were Michael Atkin, Head of Sovereign Credit Research, Putnam Investments, David R. Bailin, Managing Director and Global Head of Managed Investments, Citi Private Bank and George Iwanicki, Jr., Global Emerging Markets Macro Strategists, J.P. Morgan Asset Management.

Michael started off by explaining that he’s concerned about short term market volatility, largely because the global economy has reached a significant inflection point. We’ve been in an environment where policy has been extremely accommodative almost everywhere. Interest rates have been kept low by central banks, accompanied by massive fiscal stimulus.

The US policy environment is changing at the same time that the recovery in the rest of the world is losing a little bit of it’s dynamism, Michael continued. These sort of inflection points in the economy, where financial conditions are being tightened a little bit, where there’s uncertainty over the shorter term trajectory of the economy, those are environments where you’d expect some volatility. “I think the short term environment is where we should expect some volatility and in most of our fixed income funds we’ve dialed down the risk somewhat,” he said.

George reminded the audience that when the financial crisis occurred, emerging markets were furthest from the epicenter. Combined with their clean public and private balance sheets meant that emerging markets were both willing and able to provide stimulus to their economies. And more importantly, they got full response from their stimulus.

There are a handful of countries where the inflation pressures are beginning to embed and place cyclical risk on economies, George observed. The good news is that these are only a few economies, but the bad news is that it is some of the larger ones.  These are the larger economies that are at risk, according to George:

1) India – They have the highest risk. Inflation expectations have begun to “de-anchor” and now the central bank is starting the catch up process and becoming more aggressive. So, JPM is still cautious on India, in part because valuations are rich, but also since the inflation cycle hasn’t been halted.

2) Indonesia – To some degree it falls into the same boat, where they had a booming recovery. The exchange rate has rallied in a way that has contained some of the inflation pressures.

3) Brazil – Their central bank did about half of a tightening cycle last year and it looks like they’re finishing the job now. Inflation pressures look so far as to have been reasonably contained.

4) China – The slowdown is becoming more evident. They have been tightening the longest. They were the first out of the recession, the first into recovery, the first into the boom and the first to tighten. If you look at the import numbers that just came out, we’re starting to see an accumulation of evidence that the economy is starting to respond to tightening by slowing down. Accordingly, the inflation pressures look as though they’re poised to be reigned in.

Based on some of the dynamics that are unfolding in markets today, George’s opinion is that the strong recoveries in the emerging world combined with dollar weakness have been a very powerful tonic for commodities.

Following up on George’s comments on risk, regarding investors in general, David said, “risk is clearly back on.” However, investor’s views of asset allocation have changed, he cautioned. Their holdings of cash and liquid investments are permanently staying at significant levels. We’re seeing a very different vantage point in terms of timing. When we look at closed to venture capital and private equity alternatives, we see them diminished. Investors have a shorter term views of their portfolios, many of them are seeking to get paid now in the form of dividends. You can see that in the way that fixed income spreads have come in. When we talk about volatility, one of the reasons why we believe that volatility is real, is that we believe that there is a bit of complacency due the markets having tolerated so much incredible news, he stated.

What is going to happen with the situation in Greece?

Germany should thank the Greeks and Spaniards for contributing to the weak Euro, since it has kept their exports cheap, Dick commented.

Michael responded by listing three key issues that will determine the timeline and what is likely to happen:

1) Everything is being driven by the timetable of German politics. Their leaders know that they are going to have to pay for all this. They want to pay as little as possible, as far into the future as possible. But they also want to exact a very high price in order to discourage other countries from behaving badly.

2) Greece is insolvent. Almost everybody knows this. People are very uncertain about Portugal, Spain and Ireland also being insolvent. However, solvency is endogenous to market conditions. The Europeans want to make it possible for these countries to show themselves to be solvent. That requires a certain trajectory of interest rates and also requires that they not be too explicit as to how insolvent Greece is because they’re worried it could become contagious.

3) The EU banking system is over- exposed to peripheral countries. The EU has been very slow in responding. The banking system hasn’t improved its balance sheet as dramatically as the US and UK have. We know that Greece has to restructure, but the EU wants to put it off as long as they can since doing it quicker will hurt the European banking system and will also increase the likelihood that Portgual and Ireland will also have to restructure. Then the problem will become too big to manage.

Can Socially Responsible Investing Succeed in Advisory Solutions?

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator was Thomas Kostigen, Editorial Contributor, Dow Jones Market Watch and the panelists were Stuart J. Boesky, CEO, The Pembrook Group, John M. Buley, Jr., Managing Director, J.P. Morgan and Sean Greene, Associate Administrator for Investment, U.S. Small Business Administration (SBA).

The goals of Socially Responsible Investing (SRI), are to provide above average returns for investors while simultaneously meeting political or social needs. The market size for SRI, also referred to as Impact Investing, is approximately $50 billion with a ten-fold increase projected over the next ten years, Thomas reported.

The Pembrook Group has levered off government programs to provide their investors an above-market, risk-adjusted return, according to Stuart. They felt that if they could master the utilization of government programs to support the flow of capital for certain political and policy reasons, there would be an advantage in producing returns for their investors.

They have a Private Equity product that produces a high, current return by taking advantage of the lack of capital in the commercial real estate market and using first mortgages, bridge and mezzanine loans. What makes this a better investment is that Pembrook figured out how to leverage government programs that require U.S. banks to invest in urban areas or areas that have been designated for redevelopment.

Pembrook is also working on a tax- exempt program using the Community Re-Investment Act. These investments receive an exemption from federal income taxes, which translates into a 35% increase in net return (at the highest taxable federal rate). This is the only asset class where the owner of a mortgage can get term financing, with no mark to market issues, and the net result is that returns on these bonds is approximately 17%.

The JP Morgan Social Finance Group was started in 2007, John noted. Their definition of impact investing is where the intent of the investor is to seek not only a financial return but to also an extra return in the form of a social or economic impact. JP Morgan provided a $100 mm in 2008 for impact investments predominantly in emerging markets. The focus on the poor and underserved throughout the world. Most of the investments that they have made have gone to the “base” of the economic pyramid. John reminded us that 70% of the world population lives under circumstances where they have no access to capital, clean water or formal education. Micro-finance is one of the tools by which skilled people are bringing capital solutions to poverty remediation. They’re missing a system which brings capital to entrepreneurs, where they can build small and medium sized enterprises.

They’re not part of the JP Morgan foundation, they’re part of the investment bank, but their motives are not pure profit maximization. In fact, their definition of impact investment relies on the strict measurement of outcomes, John stressed. They ask questions such as, “What have you done that has a measurable impact in emerging market societies?” Return is important, but it’s not the only measurement.

The government is also participating in the SRI trend. Sean revealed that the SBA is committed to deploying $1 billion of capital in impact investing over the next five years. Two-thirds of net new jobs come from small businesses, he said. More than 90% of those new jobs are concentrated in just 4-5% of small firms.

The Small Business Investment Company (SBIC) program that provides access to capital for small businesses. It is a fund of funds with $16 billion AUM, half private, half public. It has funded formerly small businesses such as Intel, Fedex and Costco. The fund costs taxpayers nothing because the government is paid back by profits, Sean explained.

The government funds the program with debt, which provides additional upside due to the low cost of its leverage.

Delivering Advice in Unpredictable Markets

This post is a summary of a session from the MMI’s 2011 Annual Convention.

The moderator for this session was Anthony Rochte, Senior Managing Director, Head of North American Intermediary Business Group, State Street Global Advisors. The panelists were Hans Asoera, Principal, Financial Advisor, Edward Jones, Stephen J. Cucchiaro, Founder and Chief Investment Officer, Windhaven Investment Management and Mary B. Mullin, Managing Director – Investments, Merrill Lynch Wealth Management.

Anthony started off by quoting from an investor survey done by IBM that asked one simple question, ‘Would you recommend your financial advisor to someone else?’ Only 13% would recommend, 50% would not, while 33% didn’t even care!

How Efficient Are Markets?

According to research done by Windhaven Investments, most markets are macro-efficient and micro-inefficient, Stephen reported. There’s so much competition in trading individual companies, that Windhaven decided to invest only at the asset class level. They focus on the world’s top 20 asset classes, all in ETF index form,  since they’re a very tax efficient and a cost efficient way to participate in many asset classes.

Markets are never in equilibrium, they’re always in a state of flux, Stephen noted.  Therefore, Windhaven employs a dynamic asset allocation since prices don’t fluctuate randomly, they often make very wide swings.  They look for opportunities and take advantage of inefficiencies, he said.

“The very notion of ‘market equilibrium’ is phantom,” according to hedge fund manager, Bo Peng, from his blog post, Why the Market Is Never Right.  He continues:

This is arguably the biggest myth perpetuated in financial theory. The market is a chaos system (but with a big dose of intrinsic randomness added), with intrinsic non-linear positive feedback, that never settles down.

Can you build an endowment model for a retail investor?

Merrill Lynch doesn’t use endowment models for retail investors, Mary said.   However, more advisors are using all cap strategies to increase liquidity, she reported.  Correlation theory isn’t working, so advisors are trying to lower risk using ETFs and mutual funds.  But are they getting alpha?  “How are they measuring risk?”, Mary asked.

The head of the Windhaven advisory board “invented” the endowment model when he was at Harvard Management, Stephen responded, and he would be the first to say that it isn’t appropriate for every client. The main problem is liquidity, since endowments often invest in illiquid securities. This became a problem during the downturn in 2007.

The issue of liquidity problems when implementing an endowment model is the main reason why advisors should use caution before recommending an endowment model to investors.  As explained in the book, The Endowment Model of Investing: Return, Risk, and Diversification (Martin L. Leibowitz), advisors should know that:

The modern endowment model is not a magic potion that will smooth returns and lower short term volatility, but rather a strategy for accumulating incremental returns and achieving more divergent outcomes — over the long term.  One critical implication is that the endowment model should continue to be an attractive option for long term investors that are able to ride out periods of significant short term volatility.

How do you measure client satisfaction?

Edward Jones uses a metric called “client service excellence,” Hans explained. Analysis of the results identified three specific movers that improve client satisfaction: 1) Frequency of contact, 2) Clear understanding of fees, 3) The number of transactions.

Advisory accounts have an advantage over brokerage accounts when comparing scores in client service excellence, Hans argued, because 1) more time is available for contacting clients since investment management is outsourced; 2) explaining fees is easy since asset classes don’t have different compensations rates; 3) there are no commissions on transactions.

What is behind Windhaven’s success in the past five months?
Windhaven had about a 60% annual growth rate from 2002 when they had $70mm in assets to 2011 when they have $6 billion, Stephen noted. A lot of this is due to their team and relationships to advisors and brokers, he said. Clients today are more aware of risk. Model portfolio theory, which was invented in the 1960’s, doesn’t get to where the real risk lies. Windhaven’s ability to control risk has helped them generate trust with clients.

Clients don’t want to strike out, Stephen noted.  By staying diversified it’s possible to smooth out your returns.  After experiencing liquidity problems in 2008, investors are looking for safer solutions, Stephen commented. Windhaven’s portfolios are 100% ETFs, Stephen said, but instead of buying from the retail market they go right to manufacturers of the ETFs to get better prices for their clients.

“I don’t have to hit a home run, the occasional double or triple is fine, I just don’t want to strike out,” Stephen joked.

Does your firm use alternative investments?

Edward Jones doesn’t use alternative investments, “we’re too conservative,” Hans stressed.

Merrill Lynch’s research recommends allocations to alternatives at all risk levels and all liquidity levels, Mary commented. However, their lack of transparency, lack of liquidity, and tax reporting issues make them difficult to manage and their fees often can’t be justified. They’ve tried to find AI proxies with mutual funds. While they’re not perfect, they can be used to replicate the space. “We pretty much avoid traditional AI in order to stay liquid,” Mary said.

Some of Windhaven’s growth comes from investors looking for alternative returns. “We’ve been called “the alternative to alternatives,” Stephen claimed.