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Tuesday, April 23, 2013

Invest in the Greatest Business in the World

Federal Reserve Bank of NY, 33 Liberty Street
Federal Reserve Bank of NY, 33 Liberty Street (Photo credit: Wikipedia)
By Investment U

Chicago, Apr.23, stock advice .- Let me tell you about the greatest business in the world... and why you should invest in it today. It's a business that sees constant demand, involves huge sums of money, generates enormous cash flow in good times and bad, and generally makes those in the industry rich. (It also requires no heavy lifting.)

I'm talking, of course, about the money management industry.

I spent 16 years in this industry. When I first entered it as a young man in my 20s, I had a net worth of approximately zero. Within a few years, I was financially independent. And my story is not an unusual one.

Stockbrokers, registered representatives and fund managers handle a lot of money. At Merrill Lynch, for instance, you're expected to gather at least $100 million in customer assets within a few years. If you don't, you are encouraged to seek employment elsewhere.

Gathering $100 million may sound tough. And it can be to those who are inexperienced or lacking in high-net-worth connections.

Plus there is no shortage of competition.

But we are a wealthy nation and there is a lot of money sloshing around out there. Gathering $100 million in investable assets is not that hard if you have a big name behind you.

If you have $100 million under management and you generate 1% a year in commissions, loads, 12b-1 fees, wrap fees and other customer charges - which is about the industry average - you are taking in a million dollars a year in fee revenue. Not bad.

But it gets even better...

When Dec. 31 turns into Jan. 1, you are looking at yet another million dollars in annual income if you just manage to maintain that level of assets. Over time, of course, some clients will leave. Some clients will die. But if you do any work at all, you are probably growing your net assets under management, not losing them.

Perfect Time for the Perfect Business

Bear in mind, for a brain surgeon to earn a million dollars a year, he has to crack open a lot of skulls.

For a successful money manager to generate a million dollars a year, he only has to show up for work and answer the phone. It's a great business (though it can be stressful in down markets).

But here's when a great business becomes a phenomenal business: when asset values are rising.

For instance, if you have $100 million in assets on Jan. 1 and you add no net assets during the year but rising markets take your assets up to $115 million by Dec. 31, you get a 15% pay increase. (And that keeps compounding as asset values keep rising.)

Of course, the firm's profit margins are growing even faster.

That's because most clearing costs and other expenses are fixed, so a rise in revenue generates a great surge in profits.

That's what is happening today.

Remember, financial assets have moved sharply higher over the last three years. When the stock market doubles - as it has over the last three years - equity assets under management double. When bonds show steady increases, so do funds and accounts holding fixed-income assets.

In short, you can expect a lot of earnings surprises in this sector in the weeks ahead.

On Thursday, for instance, Morgan Stanley (NYSE: MS) reported sales and earnings that trounced expectations. Revenue jumped from $6.94 billion in the same quarter a year ago to $8.48 billion. And management cited (ahem) strong performance in its global wealth management group. Not surprising, especially given that client assets hit $1.8 trillion. (Yes... trillion.)

Want to get in on the action? Take a closer look at Goldman Sachs (NYSE: GS), BlackRock (NYSE: BLK), Legg Mason (NYSE: LM) and Franklin Resources (NYSE: BEN).

One of the best ways to beat the money managers... is to buy the money managers.
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