PRUDENTIAL INVESTMENTS MULTIMEDIA
RW:Good afternoon everyone. This is Rich Woodworth in national sales. It's four o'clock. It's Thursday. So it's time for our managed money client retention SS fore-call(?). Today we have three speakers with us. First off, we're going to have Bill Santos, who is chief marketing officer from Montgomery Asset Management. Bill, are you with us?
BS:I am.
RW:All right, great. Thanks for joining us on the call today.
BS:Thank you.
RW:Right. Second off, we're going to have Glen Kenneth(?), who is an FA from our Roosevelt office. Glenn, you with us?
GK:I'm here.
M:Great, welcome aboard. Today, to moderate the call, today we have from IMF Dave Archer. Dave, you there?
DA:Yes, I am.
RW:All right. Without further adieu, I'll turn the call over to you.
DA:Thank you, Rich, and good afternoon everybody. As Rich said, this is the IMF weekly call on client retention. We're pleased to have Bill Santos from Montgomery. Bill is going to be doing a presentation on using asset allocation and indirectly client retention. His topic is Moving Clients in a new Direction: Diversification Through Asset Allocation. We also have an FA, Glenn Kenneth, from Roosevelt, CA, first vice president. He's been in the business for about six years and he's got more than $10 million in Pru-Choice(?). He's going to talking about how to use free choice and asset allocation in general and in particular as it pertains to client retention. With that, let me hand it over to Bill Santos. Bill?
BS:Thank you, David, and good afternoon to everyone. As David said, the title of my presentation is Moving Clients Assets in a New Direction: Diversification Through Asset Allocation. I recognize that some of you might have the presentation in front of you and others may just be following along by listening. I just want to point you to the internet to either the action daily or the action archives to pull up the presentation (Inaudible, poor sound) year to date. Excuse me, I have a cold. I'd like to start by way of introduction just kind of giving you some sense of the overall sense, it's something that we're all feeling. I know basically it's a difficult market environment that we've been experiencing. Some of you, I know I certainly have, have been finding it a bit challenging to go out in terms of the conversations that we're trying to have with our clients. I think it's safe to say that in these times that client retention is critical. I'm sure one of the tactics that you all might be using (Inaudible, poor sound) client portfolios. I'd like to present a case for you to go to your clients with, an offshoot of this notion of a portfolio agreement. That is around understanding the amount of risk your client is exposed to today in their portfolio and how they may improve on that risk and the returns that they're (Inaudible, poor sound) through an asset allocation program. I'll get into this more in a few slides, but I do want to share some recent research that we had Spectrum do for Montgomery. For those of you who do not know who Spectrum is there are a research group that focuses on the affluent market state(?) in financial services. One of the key findings that they came up with, and I'm bringing it up now because you'll hear the same arguments here(?), of their survey respondents 80 percent of them said that they generally have not been advised on asset allocation by their adviser. Key points that I want you to keep in the back of your mind is the importance of asset allocation (Inaudible portion). For today's agenda how I want to walk through this first talk about how your clients assets are allocated today, looking at it from a risk-return scenario and over the last 10 years in today's market environment. Then we'll look at how to lower the overall risk and volatility in your client's portfolio. We'll talk about the benefits of asset allocation (Inaudible, poor sound). Lastly, I'd like to talk about the Montgomery Short Duration Government Bonds Fund and how might that fit into a balanced portfolio for them. For those of you who are following along in the presentation, we're on slide two. Let's start with and look at today's investment landscape. We'll take a look at what's going on out there. The outlook for stocks in the future is certainly weaker. Over the past three years we've seen a fair amount of volatility and we've seen that across all the major markets. Putting this together it's really made it difficult or challenging in these kind of markets on some continuous basis to be able to achieve positive returns, even more importantly to build capital for your clients in this kind of environment. Over time what research has shown us and academia has shown us that diversification through asset allocation has resulted in consistent performance with individual stocks but with substantially less risk, and I'll make that point I'll show you that (Inaudible, poor sound) with repeating slides I have here. The last point I'd like to make on this line here is just to point out that the continued outlook, a volatile market, looking to lower the overall risk in your client's portfolio should be a key strategy for you. Keep that point in mind as we go through and I share some more of the Spectrum research survey that compares how important risk-return and volatility is with a target client that you might be going after. Okay. So on slide three I have your standard risk-return, standard deviation chart up showing you a chart here over a 10-year period ending June 30 of this year. The purpose of this chart is to illustrate for you how the major markets and a balanced portfolio might look over the long haul. Then I want to bring this forward over the last 10 years and make some key points. On the standard deviation chart that I have in front of you over the 10-year period, for those of you who have the chart in front of you and those who don't, we're seeing the S&P 500 over this 10-year period giving us returns of roughly 11 percent or so, where the standard deviation or volatility risk measurement is 15 percent, roughly(?) in 2000 a little bit lower than that in terms of deterrence, about 20 percent risk, NASDAQ out at about 30 percent risk, even a little bit lower than that in terms of returns. In the upper left-hand quadrant of this chart I'm showing you a balanced portfolio, which is made up of 70 percent equity and 30 percent bonds. You can see that on this chart here the volatility that one is taking with a balanced portfolio is about eight percent, with a return of a little over eight, maybe nine percent. The important part of this as I tie it back really is a full point of volatility and the sensitivity to it your perspective clients might have. Let's move forward to the next page. Let's take a look at the same chart over a three-year period and the standard deviation and return and what might that look like in a volatile market that we've been experiencing. Well, first of all what you'll see if you look at the bottom line from a standard deviation standpoint is that the indices have moved further up. NASDAQ was at about 30, it's now about a 40 percent standard deviation, with a negative return of roughly about 17 percent. The S&P moved down slightly further with about 16-17 percent standard deviation (Background noise). If you look at the balanced portfolio, the standard deviation moved out slightly from about eight percent to about nine, and its returns over this three-year period is about flat, zero slightly (Inaudible). A couple of few points I want to make here. When you look at volatility, if you look at the importance of lower volatility and being able to minimize some of the up and down, the up and coming down in returns, think about the whole notion of compounding and conserving(?) capital. If you're now down almost 10 percent in the S&P (Inaudible) over the last few years, how much more you have to make up to get there versus a balanced portfolio that has lower risk and is flat over the long haul. The second key point I want to make for you here is if you're managing a portfolio for your client of individual stocks, the whole point of over the last three years and seeing the burst in the technology bubble, for those of us who have had our clients in individual securities that are not NASDAQ-based, you can see what it has done overall, even if you had a good performing stock, you get affected by the sector and overall you're taking on more volatility and your percent down is much greater than what maybe it might be in a balanced portfolio. The point I'm trying to make is it isn't about beating the market, it's about meeting your clients' goals. You're going to see shortly when I share with you the research that your clients' goals are around maintaining a level of risk minimizing the volatility in their portfolio. This is probably a very good way for you to go back and introduce a portfolio review around the concept of understanding the amount of risk they have in their portfolio and introducing the overall asset allocation. I'll talk more about that. All of you know that your clients have more than one relationship, and the fact of going through an asset allocation you get to know where all those other assets are, and it also helps significantly the whole point of client retention. So moving to page five of the presentation, let's talk about the case for asset allocation. My point earlier about continued volatility in a global market makes a strong case for the benefits of asset allocation. It's about managing risk. Most economists out there today are saying that for the foreseeable future we'll see an increased about of volatility and we'll see returns that will be lower than historical averages in the equity markets. What asset allocation does for you in this kind of an environment is really to help maximize returns at an acceptable risk level. Remember that key point around clients are more sensitive to the amount of risk they're taking versus the overall returns that they're realizing. The second key point I'd like to make here is about this whole diversification and a balanced portfolio, by doing so you reduce the risk by investing in an asset class that (Inaudible) that don't move in tandem(?). So you introduce more bonds, you introduce different styles(?), you introduce different exposures to the global market, you protect yourself in a diversifying way. Most importantly, asset allocation helps your client proceed more confidently in these kinds of markets. Think about that. It improves your likelihood of your client loyalty and retention. The point I made earlier about 80 percent of them say they haven't been advised overall on asset allocation and really those benefits from you, the fact that you're going and putting this in front of them in the kind of markets that are going up and down and having this kind of volatility, that bodes very well for you in terms of the likelihood of client loyalty and retention, if you're looking at it in that regard, and you're talking about how can you reduce risk, how can you help better diversify your portfolio. So, how do you go to your client? How do you get your client to move to action? Well, a couple of thoughts that I had here and I mapped down on this chart. Going at them from the perspective of let's take a look at your portfolio and let's look at how might we reduce the volatility and the risks that you're taking today in your portfolio. At a minimum we know that a lot has happened in the last three years. You might have growing cash(?). You might be overweight or underweight in some areas. It doesn't matter. Let's take a look at from the standpoint of the characteristics of your portfolio. Talk about it from the perspective of striving for achieving consistency and diversification and lowering the overall risks. Lastly, talk to them about developing a game plan, a strategy, that focuses on lowering the risk and balancing that portfolio for them. I talked to you about the survey that we sponsored with the Spectrum Research Group. On slide seven, here it is. Some of the key findings from that survey and high net worth affect(?). Eighty-two percent of the respondents feel that it's important that their adviser understand their total financial picture. That goes back to the point earlier they might have other accounts away from you; bringing that all together they feel that is very important when they make a decision and giving advice. The second key point is, and here is where I want to hammer home the point, they are more troubled by investment return volatility than by overall performance. The point I was making earlier about focusing on risk and volatility. The last point that I made earlier about 80 percent felt that their advisers were making decisions with their investment objectives in mind, yet they have generally not been advised on asset allocation. You take the first point, around 82 percent feel that it's important that the adviser understand the overall picture, coupled with they want an asset allocation, and you factor on they're more risk sensitive versus overall performance, I think that starts to paint a picture for you in terms of that portfolio review taking a focus on let's understand how much risk you have in your portfolio and let's take a look at how we might lower that risk overall for you. Investment return volatility is very significant as we go forward, especially in the kind of market where we're coming off of three years of down market. So, who is that target client? From the survey that we did with the Spectrum Group, the average age on the next page here is 53 years old. They are professionals with college degrees. One of their key objectives is they're looking to assure a comfortable retirement. Their incomes average about $150,000 and they have $750,000 in investable assets. I'm sure many of you have a lot of these clients in your books. I share this with you because this is maybe a good starting point. As you go through your book, if you look at who might fit this profile, there is a high likelihood that the responses that we've gotten from this overall survey they would be in lockstep with the view of what they would like from you and their views on risk overall asset allocation. So, let's move to talk about asset allocation and Pru-Choice. To start, what I'd like to do is start thinking about as you go through their book(?), which assets should you consider reallocating when you're looking at your client's portfolio? Many of your clients and yourself with them have talked about and moved a fair amount of their assets into cash. They may be overweighted there. You might have assets that are sitting in individual stocks and underperforming assets out in technology-related or others, and you may have stocks that I would look at from a high-risk standard deviation. You might have exposure to emerging markets or other higher risk type of type of investments. Coming into the fourth quarter, this is a good time to be thinking about taxes and taking those writeoffs and losses this year. Last week, looking at tax-deferred or rollover 401k's, a good place for these kinds of (Inaudible) and an asset allocation model. Let's move on and let's talk about how Pru-Choice can help you and your assets as well as your client keep better diversification. First of all, let's talk about the benefits. When you think about the benefits of what you have in Pru-Choice because it's a phenomenal program. It's this whole point of customized asset allocation, being able to balance an asset allocation model for your client based on their risk and return profile. Risk management. You've heard earlier, and I want to continue to bring home this whole point, that the target client is most troubled by investment return volatility, not necessarily overall performance. If I say that over and over and over again, know that we're very much in tune in thinking that risk management in this kind of environment is probably the single biggest thing you can be doing for your client. Ongoing portfolio review and optimal automatic rebalancing. For those of you who might be balancing a portfolio of individual stocks for your clients, think about the work that you're doing and how difficult that might be. Furthermore, probably because the amount of work that you do on their own there might limit you in terms of the number of your clients that might be able to do this for. This about the benefit of having that ongoing review done for you, the automatic rebalancing of benefits that you do in your practice, and then overall what's behind the (Inaudible), the professional research that comes with that that's highly rated and the monitoring process that goes on quarterly, how that could help you in your practice, and really give you something to go back go your clients with on a repeated and ongoing basis. Lastly, a point I'd like to make here is this whole notion of moving into (Inaudible) an asset allocation program, the whole notion of ongoing revenue stream for you and for Prudential, as opposed to the transaction-based business that you might be doing today. In these kinds of markets, when little amount of equity trade activity is going on, an ongoing revenue stream type of program that you can put your client into might be very attractive, not only for you but I think you can see the benefits for your clients and how that might benefit you overall with royalties and as well as incorporate it into client retention. So, that's what I wanted to say about the program and about the point on thinking about portfolio reviews with your client from a risk-management perspective and looking at a way that you might be able to lower the overall risk and balancing out a portfolio for your client and having a great tool like you do today with Pru-Choice. The second part of my comment is how we might fit into that for you. Lastly, I want to talk about and would like you to consider the Montgomery Short Duration Government Bond Fund, for the fixed income portion of your client's portfolio. In this kind of market, being short during potentially reduces the risk of interest rates, if you're concerned about that. The product that we have in your system, the Montgomery Short Duration Government Bond Fund, is a product that for all periods, and it's coming up on its 10-years in December, has been a top decile(?) performer by Olympus(?) in its rankings. In fact, from its inception date in December 1992 it is rated the number one bond in its category by Olympus. (Background noise, music). With that I'd like to turn it over the David.