Thirty for Thirty Part II

ICONOCLASTS & VISIONARIES

Harry Markopolos
He’s the previously obscure man who repeatedly warned the Securities and Exchange Commission (SEC) for nearly a decade that Bernie Madoff was a fraud. Since slamming the SEC for failing to heed his warnings about Madoff during his testimony before Congress in February 2009, Harry Markopolos has become a champion to many Main Street investors, and members of Congress as well as officials at the SEC now turn to him for advice on how to fix the embattled securities regulator.

Markopolos, who now works as a full-time financial fraud investigator, details his years of tracking Madoff and his ordeal with the SEC in a new book, No One Would Listen, (John Wiley & Sons, March 2010). When asked how the SEC is doing now, a little more than a year after his scathing testimony before Congress, Markopolos (pronounced Marco-Poloes) doesn’t mince words. The SEC has "reorganized along functional lines, but they still don’t get it," he told Investment Advisor in an April interview. "They still have lawyers in charge of all of the main functions at the SEC, and lawyers aren’t going to be able to spot any sort of financial fraud. They are not equipped for it. They’ve never sat on a trading desk, they’ve never managed money themselves, they’ve never had customers or clients. So they have the wrong people in charge."

Acknowledging that no other federal agency "has gotten religion quicker than the SEC," and that SEC Chairman Mary Schapiro has "made short strides in the right direction" by bringing industry professionals into the agency, Markopolos says that the SEC still needs to "make wholesale staff replacements" and bring in a "much larger number" of securities industry professionals. Even the SEC Commissioners—who are securities lawyers—should be replaced with industry professionals, he argues. Markopolos gives the SEC credit for "changing faster than the other financial regulators," but says the Commission is "making evolutionary steps where revolutionary steps are needed."

He admits that Ponzi schemes, which were once a "low priority" for the SEC, are now being "attacked vigorously," and that "the SEC now knows how to solve Ponzi schemes rather quickly; they know to get third-party data sources to find out if any trading has occurred."

Markopolos is also adamant that the SEC needs to implement an "entrance exam" so that it can be "an elite agency once again, instead of an also-ran, which is what it’s become." Examiners on the accounting side should be CPAs with the "equivalent of Fortune 1000 public accounting or auditing experience," he says, and their test should be tougher than the CPA exam. Examiners in the asset management division should be chartered financial analysts, and their testing should be above the "CFA body of knowledge," he continues. The same goes for lawyers. "They need testing above the bar association."

Another recommendation: The SEC must change its compensation scheme so that it’s commensurate with Wall Street salaries, Markopolos says.

Many have questioned why Markopolos didn’t contact NASD/FINRA about Madoff, since Madoff operated as a broker/dealer for most of his career, and only registered with the SEC in 2006. Markopolos says he didn’t dare reach out to NASD/FINRA because "my submission would have ended up in Bernie Madoff’s hands within minutes!" since Madoff was the former chairman of Nasdaq. FINRA, Markopolos says, "is nothing but an industry shield. It’s a self regulator… they are even more check-the-box than the SEC is; that’s hard to believe. They are even less competent than the SEC and certainly more subject to political influence than the SEC."

Looking into his crystal ball, Markopolos sees the next potential economic blow-up in corporate debt. "Is it going to get paid back?" he asks. "There’s a lot of it out there that needs to be refinanced on the corporate side…mortgage-backed securities that are going to need to get refinanced, and the question becomes, ‘Can they?’ What is the value of those properties?"—Melanie Waddell (MW)

(Read more of Melanie Waddell's interview with Harry Markopolos here.)

Amy Domini
In the last 30 years socially responsible investing has become a force to be reckoned with, and for that you can thank Amy Domini. She was involved in the shareholder activism that leveraged U.S. companies to bring about peaceful political change in South Africa, and created the Domini 400 Social Index in 1990 with her partners at KLD Research & Analytics, to show that there was no performance penalty for using social and ethical screens in the investment process. "It proved over time there was no cost. In fact, on balance, there’s a profit," she argues, adding that over the past 20 years the Domini 400 has outperformed the S&P 500. Not slowing down at all, the founder and CEO of Domini Social Investments most recently wrote Socially Responsible Investing: Making a Difference and Making Money.—RFK (For more, see The Green Advisor, page 92)

Steve Jobs
The average advisor does not use a Macintosh at work, and Blackberries are far more common in advisor cellphone holsters than iPhones, but independent advisors couldn’t exist without the user interface approach that Apple’s Steve Jobs popularized, and his company’s commitment to making personal computers that could easily be used by non-technical folks lies at the heart of every broker/dealer or custodial technology platform that independent advisors use daily. If it’s true, as LPL’s Todd Robinson said in an April interview that advances in desktop computing over the past 30 years made it possible for "professional portfolio management to be brought to the individual," then Jobs’s graphical user interface made it possible for the advisor to manage that PM tool. With mobile computing the next technology frontier, Jobs and Apple are still leading the way with the iPhone, iPhone apps, and the iPad.—JG

Michael Milken
His indictment for racketeering and fraud and his second career as a philanthropist and innovation incubator are not why Michael Milken was chosen for the IA30, but rather his role in introducing high-yield bonds to the advisor’s investment toolchest and the entrepreneur’s capital options. As head of bond trading at Drexel Burnham Lambert, Milken helped build a junk bond market that was worth about $150 billion by 1990 and financed a raft of mergers, acquisitions, buyouts, and hostile takeovers as well as providing funding for a number of today’s leading corporations. After his 1989 guilty plea to six securities and reporting violations, Milken spent two years in prison and was barred from the securities industry for life, but in 2009 Forbes ranked him in a 25-way tie for 158th wealthiest American with a net worth of $2 billion.—RFK

Chuck Schwab
If the measure of success for a business owner is that the business can run just fine without him, and if imitation is indeed the sincerest form of flattery, then Charles Schwab is even more successful, and more flattered, than he has been at building the top discount broker, then the first mutual fund supermarket, and his crowning achievement for IA 30 for 30 purposes, finally the premier custodian for independent advisors. Schwab Advisor Services, the institutional house that Chuck built, continues to focus on servicing its existing advisors and staying ahead of the curve whether by playing matchmaker for breakaway brokers with existing Schwab clients or, most recently, transforming the business model of the exchange traded fund marketplace by offering its own stable of commission-free, low-cost ETFs: the flattery has already started.—JG

Eric Schwartz
Thirty years ago, independent broker/dealer reps were mostly commissioned salespeople who differed from their wirehouse brethren only in their higher payouts and in getting 1099s rather than W-2s. Eric Schwartz, founder, chairman, and CEO of Cambridge Investment Research, helped change all that by being the first broker/dealer to wholeheartedly embrace the fee approach long before the term "hybrid advisor" entered common parlance, with the open-architecture platform that a fee-friendly approach requires. Despite the early fee adoption—which nearly all independent B/Ds have since emulated—Schwartz was less a zealot than a pragmatist who saw a business opportunity and grabbed it. As a founding member of the FSI, Schwartz helped unify the entire IBD industry, and as the group’s chairman last year, he was particularly proud of bringing smaller firms into the FSI fold—firms that were the size of Cambridge until the fee mantra helped drive Cambridge’s growth.—JG

Mark Tibergien
In the eight years that Investment Advisor has been identifying the most influential people in and around the advisory profession, only one name has been included every year—Mark Tibergien. Currently the CEO of Pershing Advisor Solutions, Tibergien established his reputation as the industry’s foremost practice management guru during his years as principal and partner in charge of the securities niche at Moss Adams in Seattle, author of several books, and as a long-time Investment Advisor columnist.

"I think that one of the biggest changes that has occurred is that advisors are now dealing with clients who are more informed, but they’re not more knowledgeable, necessarily," Tibergien observes. "This puts a special onus on the advisor for how they deliver advice."

An even more profound change is the emergence of advisory practices as businesses. "Thirty years ago there was more of a tendency to see this business as large employer-based companies," he says. "Now you see literally thousands of independent financial professionals running their own enterprises, whether they’re affiliated with an independent broker/dealer or operating as an RIA." The special challenge for those thousands? "Not only do they have to be current and sophisticated in how they render advice, but they have to have the ability to run a business as well."

Looking toward the future, Tibergien sees an increasing regulatory burden being placed on advisors as just one factor. "The profession generally is experiencing market squeeze," he continues. "Clients are becoming more sophisticated in the questions they’re asking and more cynical about the advice they’re getting. There is an acute talent shortage, yet there’s an oversupply of clients." One of the biggest challenges will be how the profession handles the succession of the current generation of firm owners, he predicts, and whether it can provide a "compelling career track" to attract young advisors in sufficient numbers to meet the demand.—RFK

(Read more of the interview with Mark Tibergien here.)

Don Trone
You could call him Mr. Fiduciary. Don Trone, CEO of Strategic Ethos, has been championing the fiduciary standard for decades, long before founding the Center for Fiduciary Studies, the Foundation for Fiduciary Studies, and Fiduciary Analytics in 1999. Trone was recently commissioned by the Financial Planning Association (FPA) to create a series of books that define a fiduciary standard for each of the financial planning pillars. "If you think about the historic work that I’ve been involved in, it’s been focused on defining a fiduciary standard for investment management," Trone says. The fiduciary guides will be called Fiduciary Ethos-FPA Edition, and volume one will detail the investment management fiduciary standard. Additional volumes will focus on the general principles of financial planning; insurance planning and risk management; employee benefits planning; income tax planning; retirement planning; and estate planning.—MW

Skip Viragh
Advisors who take their fiduciary duties seriously in building a well-diversified portfolio are sure to include some alternative investments, and not because their clients want to be able to brag that they’re invested in a currency ETF, or because a given alternative strategy might be yielding a higher return at the moment. No, they’re included because these alternatives provide actual diversification and can ameliorate risk in a portfolio, and nobody gives it a second thought. It wasn’t always that way, however, and the late Albert "Skip" Viragh can be given credit for that sea change. As founder of Rydex Investments, now part of Securities Global Investors, Viragh, who died in 2003, was instrumental in launching a wave that has become a tsunami: bringing institutional-level investment vehicles to the individual client level, while keeping advisors in the mix to ensure those sophisticated investing tools are used correctly.—JG

Al West
You may not know Al West, but you know the company that he co-founded in 1968—SEI—and you likely take advantage of the approach that he helped pioneer: outsourcing. SEI began life as a tech outsourcing firm to bank trust departments, but West helped translate that approach into investing, building a powerhouse public company that through its SEI Advisor Network subsidiary serves 6,500 advisors (250 RIAs added in 2009) with back-office administration services and manages more than $27 billion in advisor AUM. Its practice management offerings are gaining traction, too, all of which appears to pay off for advisors—a 2008 Moss Adams survey found that broker/dealer reps who affiliated with SEI boasted significantly higher client AUM, revenue, and clients.—JG