Hartford Business Journal

20 Hartford Business Journal • June 4, 2018 • www.HartfordBusiness.com EDITOR'S TAKE Bond covenants good step despite risks G overnment finance is a mundane topic, but the state is experimenting with new fiscal restraints that have raised red flags among diverse constituencies, including business leaders. If that line made you do a double take you're not alone. Yes, some business leaders are concerned about efforts lawmakers have taken to rein in spending and borrowing. The issue will come to a head June 4, when the state conducts a $500 million bond issuance that will bear fiscal covenants mandated by state lawmakers last fall. A so-called "bond lock" provision requires that all state debt issued from May 15, 2018 to July 1, 2020, bear certain covenants including restrictions on how much state law- makers can borrow and spend over the next five years. For example, the new covenants prevent annual growth in state spending from exceeding the average rate of personal in- come growth in Connecticut or inflation, whichever is greater. And a bond cap prohibits the state from issuing more than $1.9 billion in bonding per year, a limit that will adjust annually to reflect the federal Consumer Price Index's inflation rate. There is also a volatility cap that requires lawmakers to save income tax rev- enues from quarterly filings that exceed a certain amount. Personally, I think these covenants are a step in the right direction in terms of reining in irresponsible budgeting and borrowing that has defined state govern- ment for far too long. Even Wall Street, which has knocked Connecticut count- less times in recent years, applauded the move, with Fitch Ratings grading the debt issue an "A+." But I'll admit, there could be unintended consequences from enacting the new covenants, and they've raised enough concerns that even the CEO-led Com- mission on Fiscal Stability and Economic Growth urged lawmakers to delay the financial restraints by at least a year so that further analysis could be made on the long-term impact. (The Connecticut Business & Industry Association has supported the new restrictions.) One of the chief concerns is that it provides the state little to no financial flexibility to respond to a crisis, like another deep recession or a natural disaster, which could require the state to spend more money. If Connecticut is restricted as to how much it can borrow or spend during a crisis, it could adversely affect the future credit rating of the state and its municipalities. Those were concerns echoed by Bill Cibes, the former budget director under Gov. Lowell P. Weicker Jr., who has essentially called the new covenants a potential financial calamity. Worst yet, Cibes and others have said, is that the covenants will hand over power to control public policy to bondholders instead of taxpayers and elected officials. That is a legitimate concern because bond covenants, unlike many of the promises state lawmakers make, can't be easily broken, leaving Connecticut, which faces billion-dollar deficits in the years ahead, little financial wiggle room. However, there are safeguards in place that make the risks worthwhile. Law- makers, for example, agreed this spring to reduce the bond-lock pledge to five years instead of 10 years. There is also an emergency provision that allows law- makers to alter the caps or debt limit if the governor declares a fiscal emergency and three-fifths of the House and Senate approve the change. What this debate demonstrates is that there are no easy answers to Connecti- cut's fiscal woes. Between short-term, billion-dollar deficits and long-term un- funded liabilities, Connecticut faces tough financial times ahead and we'll have to make sacrifices one way or another in order to one day achieve fiscal stability. The problem is lawmakers have been unwilling (or lack the capacity) to make many of the difficult decisions that would bring true fiscal reforms to the state. That's why they agreed to have bondholders hold us hostage in the first place, because when left to their own devices, spending and borrowing is in the DNA of many state legislators. OTHER VOICES Wealth managers must practice transparency to earn clients' trust By John Fuller I nvestment professionals are responsible for managing trillions of dollars of assets and growing wealth for both institutional and individual investors. The CFA Institute is a global not-for- profit organization of investment pro- fessionals that distinguish themselves through both maintaining the highest standards of professional competency and by their commitment to ethical prac- tices. The CFA Society Hartford is one of 151 chapters of the CFAs Institute worldwide and has approximate- ly 700 members from the Greater Hartford region. At our second annual "Putting Investors First" conference held May 17 at the Hartford Club, a significant focus was placed on sharing the results of a new CFA Institute survey on the importance of trust in the investment management industry. The good news is that the level of trust by investors in the financial ser- vices industry has increased since the survey was last done in 2016. Never- theless, the survey reveals a significant gap between what retail investors expect from their financial advisers versus what many advisers actually deliver. The misalignment between investor expectations and the value proposi- tion conveyed by advisers has brought to light the need for advisers to think and act differently. Investors' needs are changing and so are the tools and resources available to them. As advocates for best practices that uphold fairness and integrity, the CFA Institute provides a roadmap for how the investment industry can increase its credibility and allay investor con- cerns. By adhering to the core tenets of professionalism — putting the in- terests of clients first, being transpar- ent about fees and performance, and demonstrating expertise — advisers will earn the trust of their clients. A wave of younger clients is now challenging the definition of value in the adviser-client relationship. New tools and technologies are disrupt- ing the traditional model and offer investors new options for consum- ing financial services. Combined, these trends raise the importance of cultivating professional standards to ensure that the advisory function de- livers premium customer outcomes. The customer is king and is ready to hold advisers accountable. Thriving in this new era will require considering the value proposition of- fered to each and every customer more closely than ever before. To be sustain- able and grow the business, wealth managers must demonstrate greater relevance to the current and future needs of clients and prospects. This includes reaching out to individuals who have not historically seen value in working with a financial adviser. Of over 3,000 retail investors sur- veyed, 25 percent do not currently have professional advice concerning their finances. Advisers must actively seek to engage with their audience by truly understanding their needs. Trust and value in the mind of the investor comes from demonstrated credibility and pro- fessionalism on the part of the adviser. The rigorous requirements for earning the CFA Institute sponsored Chartered Financial Analyst (CFA) designation provides a strong founda- tion of advanced investment analysis, real-world portfolio management skills, and the ethical framework to give charterholders a real advantage in the marketplace. It is the most respected and recognized investment management designation globally. Successful candidates take an aver- age of four years to complete the program. It includes passing three exams and accumulating 48 months of approved work experience. Each exam level generally requires six months of preparation. Ninety- six percent of CFA charterholders surveyed believe that the designa- tion has broadened their expertise around private client investments. Advisers will only earn the trust of their clients by being transparent about fees and performance, dem- onstrating their financial knowl- edge and putting the needs of their clients first. John Fuller is president of the CFA Society Hartford and vice president, director of operations for the investment advisory group of Hooker & Holcombe in West Hartford. Opinion & Commentary Greg Bordonaro Editor John Fuller

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