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What the World Has LearnedWhat the World Has Learned& What It Is Still Learning:& What It Is Still Learning:

A Global ForecastA Global Forecast

Jay Taparia, CFAJay Taparia, CFAManaging Director, Sanskar Group of CompaniesManaging Director, Sanskar Group of Companies

Lecturer of Finance, University of Illinois @ ChicagoLecturer of Finance, University of Illinois @ ChicagoMedia Consultant, CFA InstituteMedia Consultant, CFA Institute

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About Jay Taparia, CFAAbout Jay Taparia, CFA On behalf of CFA InstituteOn behalf of CFA Institute, a public speaker / educator of , a public speaker / educator of

business journalists on investments, financial statement business journalists on investments, financial statement analysis, and accounting tomfoolery since 2001.analysis, and accounting tomfoolery since 2001.

Managing Director, Managing Director, Sanskar Group of CompaniesSanskar Group of Companies (Sanskar (Sanskar Investments, Sanskar Tax & Accounting, and Sanskar Investments, Sanskar Tax & Accounting, and Sanskar Insurance Services),Insurance Services), Chicago, IL. Chicago, IL.

Former Senior Portfolio Manager, Bank One Investment Former Senior Portfolio Manager, Bank One Investment Advisors (now called Chase). Advisors (now called Chase).

Author of Author of Understanding Financial Statements for Understanding Financial Statements for JournalistsJournalists ( (www.marionstreetpress.comwww.marionstreetpress.com or or www.amazon.comwww.amazon.com).).

Finance Lecturer, Finance Lecturer, University of Illinois at ChicagoUniversity of Illinois at Chicago, since , since 1999, in financial management, corporate finance, 1999, in financial management, corporate finance, investments / personal finance, and international finance, investments / personal finance, and international finance, and more recently new venture investing.and more recently new venture investing.

Contact Information: Contact Information: jtaparia@sanskar.comjtaparia@sanskar.com

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What is a Forecast?What is a Forecast? A forecast is simply an educated guess, but it is still a A forecast is simply an educated guess, but it is still a

guessguess We as analysts will always be wrong – so we might as well treat We as analysts will always be wrong – so we might as well treat

this as an art.this as an art. Being a number-cruncher may be a disadvantage. Having Being a number-cruncher may be a disadvantage. Having

experience in “randomness” may be an advantage. Abstract experience in “randomness” may be an advantage. Abstract thinkers like artists may actually be better employees than thinkers like artists may actually be better employees than economists? economists?

So there is no point to be part of a “consensus” if all of us are So there is no point to be part of a “consensus” if all of us are giving essentially the same numbergiving essentially the same number

Why is it that economists have failed to predict the last Why is it that economists have failed to predict the last 7 of the 9 recessions (aka the key turning points)? 7 of the 9 recessions (aka the key turning points)? Fear of being different from the rest of the “consensus” and thus Fear of being different from the rest of the “consensus” and thus

losing their job?losing their job? Econometric models may be “overused?” What do we need to do Econometric models may be “overused?” What do we need to do

differently? differently? Why conform? Aesop’s Fables re: the Ant ColonyWhy conform? Aesop’s Fables re: the Ant Colony

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Where Should We Really Start?Where Should We Really Start? Start from the Top, then Drill DownStart from the Top, then Drill Down

The economy is made up of industries.The economy is made up of industries. Industries are made up of companies.Industries are made up of companies. Companies are made up of people.Companies are made up of people.

So instead of watching statistics, why not watch So instead of watching statistics, why not watch people? We are generally more chaotic and people? We are generally more chaotic and definitely more interesting than “bird watching.”definitely more interesting than “bird watching.”

We all love to watch “people,” right? The We all love to watch “people,” right? The randomness and craziness of ourselves (i.e., randomness and craziness of ourselves (i.e., validates Reality TV). validates Reality TV).

The Story of Husbands and Wives – Jay’s experience The Story of Husbands and Wives – Jay’s experience in Meeting with Private Clients and discovering who in Meeting with Private Clients and discovering who made the most investing mistakes.made the most investing mistakes.

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Process Should Be What Now?Process Should Be What Now? Instead of relying on one statistic, why not Instead of relying on one statistic, why not

put several together to get a better put several together to get a better conclusion?conclusion? Average age of Xbox User vs. Average Age of Average age of Xbox User vs. Average Age of

Marriage => Expected Age of Divorce?Marriage => Expected Age of Divorce?

Why believe too much in the numbers and Why believe too much in the numbers and have no life? When you can have a drink, have no life? When you can have a drink, mingle, get to make friends, and hear the mingle, get to make friends, and hear the real truth at a cocktail party (not just rumors, real truth at a cocktail party (not just rumors, but new factoids from other people’s but new factoids from other people’s inebriations)inebriations)

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Blunt Statement on Analyst Blunt Statement on Analyst ForecastsForecasts

Hypocrisy between what we are taught (PV of Hypocrisy between what we are taught (PV of cash flow) vs. what we see in reality (EPS and cash flow) vs. what we see in reality (EPS and PE Ratios) to determine the value of the stock. PE Ratios) to determine the value of the stock.

Analysts need to get rid of the expensive Analysts need to get rid of the expensive Italian suits, eating real food, and start Italian suits, eating real food, and start sticking their hands in the dirt to get to the sticking their hands in the dirt to get to the real truth (what was ever wrong anyway with real truth (what was ever wrong anyway with playing in the sandbox?) playing in the sandbox?) Conformity is our true disadvantage to our Conformity is our true disadvantage to our

innovation and service to the customer.innovation and service to the customer. I think we could look at the author Herman Hesse I think we could look at the author Herman Hesse

(his book called Siddhartha) on reflecting on his (his book called Siddhartha) on reflecting on his rebellion as a good example of what we really rebellion as a good example of what we really need to do more – question what we already need to do more – question what we already know.know.

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Our AgendaOur Agenda The Big Picture – The Big Picture – What Have We LearnedWhat Have We Learned

What We Still Have to Learn – What We Still Have to Learn – Key Global Key Global Issues Issues Impact of DemographicsImpact of Demographics Natural Resource Supply and DemandNatural Resource Supply and Demand Technology and ScienceTechnology and Science The New Expensive Wars We Fight – Terrorism, The New Expensive Wars We Fight – Terrorism,

Corporate Fraud and Financial Reporting Corporate Fraud and Financial Reporting AbusesAbuses

Changes in the Financial Services Industry - Changes in the Financial Services Industry - Beyond the Impacts of Key Global IssuesBeyond the Impacts of Key Global Issues

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The Big Picture – What We Have The Big Picture – What We Have LearnedLearned

The Longest History of World Peace The Longest History of World Peace since WWIIsince WWII We have experienced increases in personal We have experienced increases in personal

wealth, wealth, rather than destruction (even literally)rather than destruction (even literally)

Technological advances have modernized our Technological advances have modernized our lives,lives, but also commoditizing itself and other but also commoditizing itself and other industries (deflationary)industries (deflationary)

Large leaps in medicine/biotech Large leaps in medicine/biotech and human and human longevitylongevity

The world has gotten closer – The world has gotten closer – with cultural, with cultural, language, and economic barriers lower – increased language, and economic barriers lower – increased mobility, immigration, and trademobility, immigration, and trade

Higher efficiency of world financial marketsHigher efficiency of world financial markets due due to electronic research, electronic funds transfer and to electronic research, electronic funds transfer and electronic exchanges (i.e., technology)electronic exchanges (i.e., technology)

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Bottom Line – Bottom Line – We prefer life (and advances in life) We prefer life (and advances in life) and are possessive of it – profit and and are possessive of it – profit and

happiness being key motivators!happiness being key motivators!

This is driving our future actions This is driving our future actions politically, economically, and politically, economically, and

sociallysocially

This makes forecasting very easy. This makes forecasting very easy.

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Impact of DemographicsImpact of Demographics

World population expected to increase to World population expected to increase to 7.2 billion by 2015 7.2 billion by 2015 up from 6.1 billion currently -up from 6.1 billion currently - Rate of population growth will have Rate of population growth will have

diminisheddiminished from 1.7% annually in 1985 to 1.3 from 1.7% annually in 1985 to 1.3 % today, to 1% in 2015.% today, to 1% in 2015.

More than 95% of increase in world More than 95% of increase in world population will be found in developing population will be found in developing countriescountries, , nearly all in rapidly expanding urban nearly all in rapidly expanding urban areas (India, China…still)areas (India, China…still)

The world’s population is becoming bipolarThe world’s population is becoming bipolar (no pun intended) – with emerging market (no pun intended) – with emerging market populations on the rise while developed nations on populations on the rise while developed nations on the declinethe decline

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Impacts on Various MarketsImpacts on Various Markets Emerging Markets - Emerging Markets -

In particular, Asia and Latin AmericaIn particular, Asia and Latin America GDP will be strained or offsetGDP will be strained or offset by such population by such population

growthgrowth Countries will have to “innovate” or use “innovation” Countries will have to “innovate” or use “innovation”

(technology leaps) to maximize existing resources(technology leaps) to maximize existing resources 50% of India’s population is < the age of 18 and has the 50% of India’s population is < the age of 18 and has the

highest rate of growth in IT professional graduateshighest rate of growth in IT professional graduates

Developed Markets – Developed Markets – Increased life expectancy, and falling fertility rates will Increased life expectancy, and falling fertility rates will

contribute to a shift toward an aging populationcontribute to a shift toward an aging population GDP will be strained or offsetGDP will be strained or offset by higher pension costs by higher pension costs Health and social systems will be pushed to the max Health and social systems will be pushed to the max

(40% of costs attributable to 3% of patients in the US)(40% of costs attributable to 3% of patients in the US)

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Identify Opportunities – Identify Opportunities – Learning from Our ProblemsLearning from Our Problems

Emerging Markets – Emerging Markets – Have advantage to apply new technologiesHave advantage to apply new technologies to to

maximize resources in urban areasmaximize resources in urban areas Have advantage to direct knowledge and Have advantage to direct knowledge and

technological resources to young populationtechnological resources to young population base in the areas of technology (India, China, base in the areas of technology (India, China, Philippines)Philippines)

Privatizations (if done properly) is the only way Privatizations (if done properly) is the only way to unlock value and re-direct resourcesto unlock value and re-direct resources to fund to fund growth – not always a well-received solutiongrowth – not always a well-received solution

Must upgrade Income and Capital Spending – Must upgrade Income and Capital Spending – Takes time and is LT. Takes time and is LT. This becomes an investment This becomes an investment criteria for looking at new opportunities. (Singapore, Inc.)criteria for looking at new opportunities. (Singapore, Inc.)

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Identifying Opportunities – Identifying Opportunities – Learning from Our ProblemsLearning from Our Problems

Developed Markets – Developed Markets – Strong GDP growth can be created by “youthful”Strong GDP growth can be created by “youthful”

demographics that have earnings potential.demographics that have earnings potential. 80% of the U.S. wealth is concentrated with 40% 80% of the U.S. wealth is concentrated with 40%

of the populationof the population age 50+(100 million Baby age 50+(100 million Baby Boomers)Boomers)

Worse age imbalances found in Europe and JapanWorse age imbalances found in Europe and Japan Longer life expectancies are strainingLonger life expectancies are straining Health, Health,

Welfare, and Retirement Systems (Florida often Welfare, and Retirement Systems (Florida often referred to as “God’s Waiting Room”) = referred to as “God’s Waiting Room”) = Hospitals are Hospitals are considered seasonal.considered seasonal.

Solution is via ImmigrationSolution is via Immigration – – the U.S., Canada, and the U.S., Canada, and Great Britain have grown LT technologically,Great Britain have grown LT technologically, and and thus, economically via “importing” new perspectives and thus, economically via “importing” new perspectives and personalities – this has been key growth driver for the personalities – this has been key growth driver for the U.S. – 3.7% per year for past decade = U.S. – 3.7% per year for past decade = sustainable sustainable growthgrowth

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Natural Resource DemandNatural Resource Demand Sustained economic growth + population Sustained economic growth + population

increases will drive nearly 50% increase increases will drive nearly 50% increase in in demand for energy over the next 15 years.demand for energy over the next 15 years.

Total oil demand will increase from 75 MM Total oil demand will increase from 75 MM barrels per day to more than 100 MM barrels barrels per day to more than 100 MM barrels per day per day by 2015 (equal to current production levels)by 2015 (equal to current production levels)

Natural gas will be key energy source of choice Natural gas will be key energy source of choice (growth of 100% by 2015) (growth of 100% by 2015) mainly stemming from mainly stemming from tripling of gas consumption in Asia.tripling of gas consumption in Asia.

Asia will be key consumer of oil from the Middle Asia will be key consumer of oil from the Middle East, East, while the West lessens its dependency (and while the West lessens its dependency (and hence, cyclicality in its economy)hence, cyclicality in its economy)

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Natural Resource SupplyNatural Resource Supply 80% of world’s available oil 80% of world’s available oil still in groundstill in ground 95% of world’s natural gas 95% of world’s natural gas also still in the groundalso still in the ground

Renewable energy resources still expensive and Renewable energy resources still expensive and still R&D - still R&D - Governments haven’t figured out how to subsidize Governments haven’t figured out how to subsidize

developmentdevelopment Prone to cutbacks since R&D is a luxury expense Prone to cutbacks since R&D is a luxury expense

outside of pension and interest costsoutside of pension and interest costs

No change in use of nuclear energy usage – No change in use of nuclear energy usage – stays stays at current levelsat current levels

We are still biased toward fossil fuels given easy We are still biased toward fossil fuels given easy access and lower costaccess and lower cost

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Identifying Opportunities –Identifying Opportunities –Learning from Our Problems Learning from Our Problems

Suppliers will still have LT pricing power given Suppliers will still have LT pricing power given availability and low costavailability and low cost

Urban areas will be key users of energy usage, Urban areas will be key users of energy usage, especially from Asiaespecially from Asia

However, the new urban areas will be However, the new urban areas will be environmentally challengedenvironmentally challenged Pollution control not addressed for Emerging Markets Pollution control not addressed for Emerging Markets

– not interested in hindering growth via higher costs– not interested in hindering growth via higher costs Technology (fuel-cells and hybrid engines) will only Technology (fuel-cells and hybrid engines) will only

reduce this concern as their costs decline.reduce this concern as their costs decline. Environmental (global warming) and health care Environmental (global warming) and health care

costs are going to be backend-loaded.costs are going to be backend-loaded.

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Technology and ScienceTechnology and Science Technology is also making profitability in Technology is also making profitability in

the tech sector almost non-existent – the tech sector almost non-existent – Technologists are not financially-adept = they Technologists are not financially-adept = they

love just building things (Lucent / Bell Labs & love just building things (Lucent / Bell Labs & phone innovation example)phone innovation example)

Many thought that technology had its own Many thought that technology had its own secular trend and was not tied to the economic secular trend and was not tied to the economic cycle – cycle – how so untrue!how so untrue!

Technology is a capital input as much as the Technology is a capital input as much as the typewriter or new manufacturing equipment.typewriter or new manufacturing equipment.

Excess competition exists and hence, expect Excess competition exists and hence, expect consolidation and a few large players to consolidation and a few large players to survive in the endsurvive in the end

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Opportunities in Technology Opportunities in Technology SectorsSectors

Wireless – saturated, but new technology life Wireless – saturated, but new technology life cyclecycle Telephony saturated – little growthTelephony saturated – little growth Data application is the new life cycle, however, Data application is the new life cycle, however,

adoption rates slower given that applications are adoption rates slower given that applications are not necessarily useful to average usernot necessarily useful to average user

Small screens on phone and PDAs limit usability Small screens on phone and PDAs limit usability by mainstreamby mainstream

But wireless data applications are the key to the But wireless data applications are the key to the future when integrated with existing network future when integrated with existing network systems.systems.

In the U.S., where we suffer from In the U.S., where we suffer from “workaholism,” convergence is key with one “workaholism,” convergence is key with one machine having cell phone, PDA, broadband machine having cell phone, PDA, broadband wireless email, and eventually some form of wireless email, and eventually some form of telepathy technology linked to the bosstelepathy technology linked to the boss

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Who Has Advantage? – Who Has Advantage? – The UserThe UserLearning from Our ProblemsLearning from Our Problems

Technology User Gains > Technology Technology User Gains > Technology Manufacturer GainsManufacturer Gains

The Technology Industry has shot itself in the The Technology Industry has shot itself in the foot with deflationary pricing power - foot with deflationary pricing power - Extreme CompetitionExtreme Competition ~ U.S. / European Football / ~ U.S. / European Football /

CricketCricket Moore’s Law –Moore’s Law – data density on a chip is still data density on a chip is still

doubling every 18 months and will continue to do so doubling every 18 months and will continue to do so until 2017 according to Moore himselfuntil 2017 according to Moore himself

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Who Has Disadvantage? – Who Has Disadvantage? – The The UserUser

Learning from Our ProblemsLearning from Our Problems Workaholism – “all work and no play” Workaholism – “all work and no play”

Instead of freeing us, technology has “bound” us to Instead of freeing us, technology has “bound” us to work - Multitasking reduces our productivity and brain work - Multitasking reduces our productivity and brain resources for processing resources for processing ((2 tasks ↓ 29%,2 tasks ↓ 29%, 3 tasks ↓ 3 tasks ↓ 53%)53%)

Avg Vacation Days including Holidays = Avg Vacation Days including Holidays = US = 13,US = 13, Italy = 42, France = 36, Germany = 35, Britain = 28, Italy = 42, France = 36, Germany = 35, Britain = 28, Japan = 25 (has declined)Japan = 25 (has declined)

Surveys point out that getting 2 weeks of extra Surveys point out that getting 2 weeks of extra vacation more desirable than 2 weeks of extra payvacation more desirable than 2 weeks of extra pay

We in the US still have to learn that downtime We in the US still have to learn that downtime means more productivity – despite our insatiable means more productivity – despite our insatiable need to promote shareholder valueneed to promote shareholder value – – for now anti-for now anti-depressants should continue to do well in futuredepressants should continue to do well in future

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Science Trends – The DemandScience Trends – The Demand Demographics driving health costs, but industry Demographics driving health costs, but industry

not equippednot equipped Large 50+ generation in developed nations driving Large 50+ generation in developed nations driving

future health care costs future health care costs (historically viewed as (historically viewed as “necessary evil“ by CEOs)“necessary evil“ by CEOs)

Bang for the buck higher in technology than in health Bang for the buck higher in technology than in health care, especially during recessions – hence CEO care, especially during recessions – hence CEO reluctancereluctance

16% of US GDP spent on medical care16% of US GDP spent on medical care – within a – within a decade this will be 25%! decade this will be 25%!

Search for the “fountain of youth” by big Search for the “fountain of youth” by big SocietySociety = for now in the form of just looking younger = for now in the form of just looking younger and better lookingand better looking

If you believe a little bit of Darwin’s Theory, this is If you believe a little bit of Darwin’s Theory, this is deeply rooted in other mammals (female birds)deeply rooted in other mammals (female birds)

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Science Trends – The SupplyScience Trends – The Supply Health Care Productivity Poor in general – Health Care Productivity Poor in general –

Grew at 0.7% from 1995-2000 vs. 2.6% annual rate Grew at 0.7% from 1995-2000 vs. 2.6% annual rate for the rest of the U.S. economyfor the rest of the U.S. economy

Imagine what this is like for socialistic, government-Imagine what this is like for socialistic, government-run systems!run systems!

An efficient industry and generally not receptive to An efficient industry and generally not receptive to software technology to improve quality of servicesoftware technology to improve quality of service

This is the only industry that added jobs in the last This is the only industry that added jobs in the last decade here in the U.S.decade here in the U.S.

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Science Trends – The SupplyScience Trends – The Supply In drug development, all “easy fruit” and In drug development, all “easy fruit” and

“cosmetic drugs” have been picked – “cosmetic drugs” have been picked – We have become a very “Botox and Silicon” WorldWe have become a very “Botox and Silicon” World 50% of all patents expiring in next 5 years among 50% of all patents expiring in next 5 years among

big pharmasbig pharmas Cancers, heart disease, gene therapies considered Cancers, heart disease, gene therapies considered

expensive R&Dexpensive R&D Hence, consolidation and higher legal billsHence, consolidation and higher legal bills

inevitable to maintain growth and prevent drugs inevitable to maintain growth and prevent drugs from going generic so quicklyfrom going generic so quickly

Big PharmaBig Pharma – all testing a new business model = – all testing a new business model = merged entitiesmerged entities

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Science Trends – The Science Trends – The EquilibriumEquilibrium

Health care costs are increasingly viewed as an Health care costs are increasingly viewed as an “investment” -“investment” - Studies show society spends $1 on health care in the Studies show society spends $1 on health care in the

1980s, and receives up to $2 of benefits1980s, and receives up to $2 of benefits Treating low birthweight babies have added 12 years Treating low birthweight babies have added 12 years

to life expectancy, producing net benefit to economy to life expectancy, producing net benefit to economy of $200,000 per child in the U.S.of $200,000 per child in the U.S.

U.S. spends $1 billion a year treating migraines – the U.S. spends $1 billion a year treating migraines – the opportunity cost is $13 billion annually in lost work opportunity cost is $13 billion annually in lost work days and reduced productivitydays and reduced productivity

Age related illnesses (heart disease, strokes, Age related illnesses (heart disease, strokes, arthritis, and back problems) already account for arthritis, and back problems) already account for 20% of health care spending => 20% of health care spending => This will only rise This will only rise in the future for most developed nationsin the future for most developed nations

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Opportunity in Science TrendsOpportunity in Science TrendsLearning from Our ProblemsLearning from Our Problems

Health cost reduction found in Prevention and Health cost reduction found in Prevention and Detection -Detection - Reducing high levels of obesity, smoking, alcoholismReducing high levels of obesity, smoking, alcoholism Early diagnosis of diabetes and high blood pressureEarly diagnosis of diabetes and high blood pressure R&D in the area of minimal invasive therapies – drastic R&D in the area of minimal invasive therapies – drastic

reduction in heart treatmentsreduction in heart treatments General awareness to public that “health is truly wealth” General awareness to public that “health is truly wealth”

– even in the areas of alternative medicine– even in the areas of alternative medicine

Cost reductions also found via bias toward generic Cost reductions also found via bias toward generic drugs -drugs - Generic manufacturers stand to gain in the Long Term Generic manufacturers stand to gain in the Long Term

and not necessarily STand not necessarily ST They are branching into being “specialty” drugmakers to They are branching into being “specialty” drugmakers to

hedge legal battles with big pharmas – eventually they hedge legal battles with big pharmas – eventually they will have to work together – they need each otherwill have to work together – they need each other

Arbitrage opportunity still exists in buying drugs from Arbitrage opportunity still exists in buying drugs from overseas – not just Canada, but India, E. Asia as well.overseas – not just Canada, but India, E. Asia as well.

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The New Expensive Wars We Face -The New Expensive Wars We Face -Global TerrorismGlobal Terrorism

A total disregard for human life – A total disregard for human life – When it was normal to “win” if bad guys could When it was normal to “win” if bad guys could

lose out of fear of capture – now they have no lose out of fear of capture – now they have no fearfear

What the Greeks have coined a What the Greeks have coined a Pyrrhic VictoryPyrrhic Victory where both sides lose even if one side winswhere both sides lose even if one side wins

Industries Impacted –Industries Impacted – Expands the security industry (+)Expands the security industry (+) for the for the

whole world given increased integration and whole world given increased integration and global interactionglobal interaction

Insurance industry also impacted (-)Insurance industry also impacted (-) with with infinite (and still uncertain) amounts of premium infinite (and still uncertain) amounts of premium to pay for extreme uncertainty.to pay for extreme uncertainty.

The Sears Tower in Chicago noticed its The Sears Tower in Chicago noticed its insurance costs skyrocket by 50% post 9/11. insurance costs skyrocket by 50% post 9/11.

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Tragedy and Pain…Tragedy and Pain…

Unfortunately, are ways we humans Unfortunately, are ways we humans actually learn how to share and improve actually learn how to share and improve the way we do things – the way we do things – 9 /11 and various ethnicities in World Trade 9 /11 and various ethnicities in World Trade

CenterCenter Iraq and the Middle EastIraq and the Middle East

I have personally built another 9/11 into I have personally built another 9/11 into my forecast – it is a new war we have to my forecast – it is a new war we have to consider and you really cannot forecast consider and you really cannot forecast this with an econometric modelthis with an econometric model

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The New Expensive Wars We Face – The New Expensive Wars We Face – Financial Reporting Abuses & GovernanceFinancial Reporting Abuses & Governance

Recent survey by an executive research firm Recent survey by an executive research firm has extracted how that on average 40% of a has extracted how that on average 40% of a CFOs time CFOs time is spent looking for a new jobis spent looking for a new job

On average, auditors who bring up On average, auditors who bring up accounting issues and changes with accounting issues and changes with management are refuted 40% of the time management are refuted 40% of the time (in (in other words, they give in)other words, they give in)

Who Wins with Higher Reporting Who Wins with Higher Reporting Requirements and Sarbanes-Oxley? Requirements and Sarbanes-Oxley? Accountants themselves = higher salariesAccountants themselves = higher salaries Investors still have to learn financial Investors still have to learn financial

statements – only then they will win.statements – only then they will win.

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So Where Do We Go From So Where Do We Go From Here?Here?

As a the Finance Professional & As a the Finance Professional & Industry?Industry?

As the Investor and the Stock / Bond As the Investor and the Stock / Bond Markets?Markets?

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Impacts to the Developed Markets & Impacts to the Developed Markets & InvestorsInvestors

Bonds are going to be a key asset class given Bonds are going to be a key asset class given demographic shifts in retirees and pension demographic shifts in retirees and pension protection needsprotection needs – the game with spreads will only get – the game with spreads will only get more complicated in under-standing the risk premia that more complicated in under-standing the risk premia that go into itgo into it

Credit analysis is going to require in-depth Credit analysis is going to require in-depth knowledge of off-balance sheet debt knowledge of off-balance sheet debt and pension and pension accounting (currently bond traders only quote debt ratios accounting (currently bond traders only quote debt ratios based on ON-balance sheet debt, not OFF)based on ON-balance sheet debt, not OFF)

Information flow is burgeoning and with higher Information flow is burgeoning and with higher speed of dissemination – expected higher volatilityspeed of dissemination – expected higher volatility across all markets and asset classesacross all markets and asset classes

Large market booms hardly likely in the futureLarge market booms hardly likely in the future, but , but will exist in the form of style fads (like the evolving flair / will exist in the form of style fads (like the evolving flair / bell-bottom pants)bell-bottom pants)

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Impact to the Finance ProfessionalImpact to the Finance Professional Knowledge is power – higher need for Knowledge is power – higher need for

continuing education continuing education We must practice “voracious reading” – but not just We must practice “voracious reading” – but not just

on company financials and industry trendson company financials and industry trends

As an individual advisor As an individual advisor – I– I can truly say the can truly say the demand for knowledge in both financial planning / demand for knowledge in both financial planning / structuring and product is high.structuring and product is high.

Additional Education Needs of the Financial Additional Education Needs of the Financial Professional or CFA CharterholderProfessional or CFA Charterholder Financial PlanningFinancial Planning Tax Rules and Tax Law, including Estate PlanningTax Rules and Tax Law, including Estate Planning Life, Health, LTC, Disability Insurance and how it Life, Health, LTC, Disability Insurance and how it

impacts Assets under Managementimpacts Assets under Management

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Impact to the Financial Services Impact to the Financial Services ProfessionProfession

According to a survey in 2002, 1/5According to a survey in 2002, 1/5thth of of millionaire investors around the world millionaire investors around the world are working without a financial advisor are working without a financial advisor and increase of 30% over 2001.and increase of 30% over 2001. Mostly of sample working with full-service Mostly of sample working with full-service

brokerage firms and increasingly dissatisfiedbrokerage firms and increasingly dissatisfied Brokers got a D grade, Financial Planners Brokers got a D grade, Financial Planners

got a B gradegot a B grade 23% of millionaire households now use 23% of millionaire households now use

planners instead of brokers up from 14% in planners instead of brokers up from 14% in 2000. 2000.

There are 3x the number of advisors chasing There are 3x the number of advisors chasing after the $3 million + net worth populationafter the $3 million + net worth population

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Impact to the Financial Services Impact to the Financial Services ProfessionProfession

Bottom Line? – The marketing phrase Bottom Line? – The marketing phrase “wealth management is a joke” without “wealth management is a joke” without continuing education. continuing education. We are still plain Jane asset managers and We are still plain Jane asset managers and

are not equipped to give a larger realm of are not equipped to give a larger realm of advice to our clients.advice to our clients.

Clients will still be left “confused” on Clients will still be left “confused” on conflicting information from many conflicting information from many different providers and thus will not feel different providers and thus will not feel “trust.”“trust.” Something well known to us if they make Something well known to us if they make

movies like “The Boiler Room” and “Wall movies like “The Boiler Room” and “Wall Street” on our industryStreet” on our industry

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Thank You!Thank You!