In This Issue

Interest Rates Front and Center

Tuesday, September 15, 2015

Our wealth management experts address factors affecting economic growth and the Federal Reserve is top of mind.

Participants photographed in slideshow, by Jonathan Grassi


Peter E. “Tony” Guernsey Jr.

Client Advocate and Individual Family Trustee, Wilmington Trust Company

John Hoffman

Head of Wealth Management, Greater New York Region, Northern Trust

Laura LaRosa

Director of Portfolio Management, Glenmede

Jennifer Lee

Market Executive, New York U.S. Trust, Bank of America Private Wealth Management

Chris Sheldon

Chief Investment Officer, Private Wealth Management, Fidelity Investments

Ron Fiamma

Global Head of Private Collections, AIG Private Client Group

AVENUE: What are the key factors shaping the outlook for today’s financial market?

Guernsey: Interest rates. We also have a little bit of an IPO tech frenzy going on with overvaluations, trade, and the price of oil. There are broader international subjects starting with Greece and Puerto Rico, and we may be eliminating the nuclear bomb threat in Iran.

LaRosa: Janet Yellen and the Fed are front and center. It’ll be interesting to see if rate hikes begin in September. This time around implementation will occur more gradually than it has in the past.

Lee: People seem to be taking on more risk. The equity market continues to shrug off world events. It’s just amazing that big news events which in years past would have caused weeks or months of questions about the

equity markets now cause the market to go down and then right back up the next couple of days.

LaRosa: China is interesting due to the lack of transparency or clarity. For the Chinese, weakness in the markets could be perceived as weakness in the government. As a result, the government will take every measure available to prevent that perception from becoming reality.

Guernsey: Greece represents 0.3 percent of the world’s GDP, 0.4 percent of stock market capitalization. Citizens are retiring at age 62 and receiving 95 percent of their average salary. And there are only a few people who declare that they make more than $100,000 dollars a year in a country of 11 million people. Greece is a very old story.

LaRosa: Unemployment of youth in Greece, at 49 percent, is particularly troublesome.

Hoffman: The global economy and the impending interest rate increase by the U.S. Fed are the key focal points for financial markets. We at Northern Trust believe that steady economic growth globally, coupled with low interest rates, low inflation and accommodative central bank policy, will continue to be supportive of risk assets.

Fiamma: One of the biggest issues in my world of private collections is certainly rising valuations. So despite Greece and Puerto Rico or China slowing down, a sale doesn’t go by where we don’t see record prices being made at auction or hear about a spectacular value in a private transaction. And it could be for a painting, a sculpture or a vintage automobile. In 1990 a Japanese buyer bought a van Gogh, and that painting held the world record for 14 years. Now world records occur at almost every sale.

Guernsey: When I was at J.P. Morgan, we were called to “The Factory” to try to figure out what Andy Warhol’s art was worth. There must have been 4,500 pieces. With so much art, we valued the entire estate at $25 million—now one painting sells for $35 million.

Lee: These valuations are part of a rising consumer class globally as well as a rising consumption class at the very high end.

Fiamma: In the recent past the art market was very much dominated by the United States and Europe; when one of those economies was in recession, the art market slowed down. Now it’s completely a global phenomenon. And so if the United States isn’t buying, Asia’s buying or Russia or the Middle East is.

AVENUE: What hard assets are popular today?

Lee: New York City real estate is a hard asset that the globe perceives as a store of value. This is a phenomenon no one could have predicted. When we talk about these long-run trends of an emerging global consumer class, it has a potential to just shift the entire consumer landscape for years and generations to come.

Guernsey: To put this in perspective, the best performing asset of any asset I have is an antique Indian motorcycle. It has appreciated 20 times in a 12-year time frame.

Fiamma: For the 10-year period ending in the fourth quarter of 2014, the S&P 500 compound rate of return was between 92 and 95 percent. In that same period, a garage of vintage Ferraris returned about 495 percent.

Sheldon: When thinking about real assets, it’s important to consider global supply and demand and the scarcity of the underlying asset. Today in many areas, there is an abundance of supply and lower demand. This has certainly been the case with oil recently.

Lee: It’s driven those of us in wealth management to think of asset allocation beyond marketable, tradable securities, into things like farmland and timber and hard assets that, historically, you didn’t include when you talked about the asset allocation of a client. We used to hold people’s real estate off to the side as the place they live. If that happens to be a New York City apartment, you now have to think about it as an asset.

Guernsey: What’s happening here is a couple who bought their four-bedroom apartment in the 1960s for $115,000 can now sell it for $15 million. They pay their 28 percent capital gains tax, move into a brand-new apartment building, outfitted with a health club, all new technology and security and concierge services, that costs $7 million. They then bank $5 million in their pocket or gift (tax-free) to a new trust for their grandchildren. That’s the trade which is going on right now.

Fiamma: What I find interesting is that when I travel around the country speaking to wealth advisors, it’s clear that 15 years ago they looked at collecting as a hobby their wealthy clients enjoyed. Now it’s a viable, alternative asset class that wealth advisors want to understand. They’re hungry to learn more about it. How are objects valued? What are the tax ramifications of sales? Can clients do 1031 exchanges? How are collections

protected from loss?

AVENUE: How would you describe the general health of the real estate market and the stock market, as they relate to your business?

LaRosa: We believe the U.S. equity market is squarely in the middle of a long-term expansion. From this perspective we will not see the robust returns of the last five years. While the housing market is starting to rebound, the rise in the rental markets could cause inflation. This is one of many indicators we continually monitor.

Guernsey: We all have a capital market forecast. Over the next seven years we’re looking at on average a 3- to 5-percent increase in equities, and eight percent in private equity. It’s not a great, robust time. For our older clients they are little concerned about short-term volatility, but instead worry about the yield of their entire portfolio.

Sheldon: When people are buying other types of assets for diversification, I think that’s a good thing. If they’re buying them as a substitute for something else, you have to be more careful. One of the things I’ve heard that concerns me is people looking for higher yielding substitutes for fixed income. Sometimes there just isn’t a good substitute, considering the risks. One example might be longer-term government bonds. They may serve as a hedge to equity losses that is not easily replicated.

Hoffman: We continue to be constructive on both the real estate and stock markets as again central bank policy continues to support asset price reflation. The continued steady economic growth pattern in the United States supports the key drivers of each market as income levels are increasing and consumer balance sheets are strengthening. They are both important to our business at Northern Trust in that we are a banking institution which also has a major presence as an investment manager in the ultrahigh-net-worth and institutional markets.

AVENUE: What impact is the loss of proprietary trading departments in banks having?

Lee: Our advice is to be fully asset allocated and to stick to your plan. That’s exactly what the market calls for. Getting to that right asset allocation where people can take risk that is appropriate for them is a highly

individual and personalized decision, and that’s where an advisor helps.

Guernsey: There’s a metric that’s always been there in asset allocation: your current age minus 100 dictates your allocation to risk and equities. If you’re 80 years old and not working, you need income, so you’re only

20 percent equities, 80 percent fixed income. If you are working and 30, you have a longer-term investment time horizon and can invest 70 percent of your portfolio in the market. Whether that’s old news, I don’t know. Generally, “This time feels different, but it almost always never is.”

LaRosa: Because of the stability in the equity markets people have felt safer taking on more risk. The loss of proprietary trading will be a problem when volatility or dislocation occurs. Who will make a market?

AVENUE: It’s been said that people should understand not what happened but what could happen. What are your thoughts?

Sheldon: Go back and look at historical environments that weren’t so rosy and stress test your portfolio against them.

Guernsey: When most people get older, they worry about whether they’re going to run out of money. I’ve found that those who worry about this never run out of money. It’s those who don’t worry who go back to work in their 70s.

LaRosa: We begin our client conversations by asking when was the last time your financial plan was reviewed? This gives us an opportunity to assess the overall financial health of the client.

Lee: The “How much do you need question?” is so important. It’s amazing to me how many folks ask questions like “What are my portfolio returns?” and “How did this investment do?”; however, when you ask “How much do you need?” they don’t know.

Hoffman: Our focus on a life-driven investing approach is designed to give our clients increased confidence that they will be able to achieve their financial goals. To better understand “what could happen,” we map out a comprehensive plan that considers the financial goals that a client has during his or her lifetime and match them up with an investment solution set that is best designed to meet those goals.

Fiamma: We are seeing an interesting shift in collecting trends with respect to some baby boomers inheriting their parents’ assets. As their parents pass away they are selling the art and jewelry and buying things like watches and vintage cars and wine, things they want to collect.

Guernsey: I was with a client recently looking at his Rothko that he bought 35 years ago. I asked, “When was/is it art and (at what value) did/does it become an investment?”

Sheldon: It’s art until you’re willing to sell it.

AVENUE: What happens when the Fed raises its rates?

Lee: Markets like known versus unknown. Right now it’s the unknown known, we know that they are going to, it’s just when and how much?

Guernsey: You can make a case if this doesn’t happen, it might not happen until 2017 after the elections. We might have a respite for another 15 months and the market will just go up from here.

Sheldon: People have been busy trying to call when rates go up and it certainly didn’t work well last year. A high percentage of investors expected rates to move higher, which didn’t happen. I think it is more important how fast and how high the Fed might raise rates more so than when they start.

AVENUE: Hypothetically, given what’s going on in the economy and the world, where would you have your clients put their money?

Guernsey: The LGBT community, because you basically equalized hundreds of thousands of people with this Supreme Court ruling, which will mean about a $3 billion increase to the American economy.

Lee: For those with an interest, I’d suggest taking a look at impact investing. I am having more conversations with clients lately, particularly as younger generations start to get involved with parental affairs, about investing in areas where their money will do good. We at U.S. Trust have a number of impact investing opportunities available, including those with a focus on the environment, social equality, religious values and a host of other topical areas. We even have a strategy that focuses on women and girls. If you educate and pull more women into the economy it changes the world.

LaRosa: People want to make socially responsible choices and invest in companies that have good environmental, social and governance (ESG) practices. Greater diversity and incorporation of ESG practices has been proven to result in better-run companies. The next generation of investors is educated and has many tools at their fingertips when selecting an advisor.

Sheldon: There’s clearly a trend here because I’m having more conversations than ever that center around “What are we trying to leave as a legacy?”

Andrea Doyle is a freelance journalist and president of A Doyle Communications.


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