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Week In Review

Investors to Continue Seeking Fixed Income, Other Safe Funds

Investors will continue to be afraid of losing hard-earned money and gravitate to fixed-income and other safe investments, The Boston Consulting Group predicts. As a result, investment management firms need to offer new portfolios and, with fees on these indexed and fixed income offerings undoubtedly lower than aggressive, actively managed funds, they will be forced to cut costs even further.

Because firms lost 18% of assets in 2008, ending the year with $48.6 trillion in global assets, profits fell 34% last year. Profits will probably decline another 30% in 2009.

Despite the robust returns in the second quarter, said Kai Kramer, director of the global asset management practice, "Asset managers cannot be tricked by green shoots and must make sure they are ready if the crisis gets worse again, where firms see more massive outflows or another drop in the market."

To gain market share, firms should specialize, review how they pay managers and consider mergers. "Fund firms have to do the things they didn't dare think about," Kramer said. "You simply can't serve every investor in every way anymore."

Obama IRAs Could Raise $100 Billion in Five Years

One of President Obama's proposed financial reforms would require employers that do not offer a 401(k) to automatically enroll their employees into an IRA. If implemented, it would give the biggest boost to the retirement savings industry since the creation of the 401(k) in 1980, enrolling 40 million new investors and attracting more than $100 billion within five years.

It would require companies with 10 or more workers that have been in business for at least two years to participate, deducting 3% of workers' salaries and investing it very conservatively, in inflation-indexed savings bonds, money market mutual funds or stable value funds. Once the portfolio reaches $3,000, it would be moved over to a target-date fund.

Experts estimate that it would cover 40 million of the 75 million Americans who do not have access to a 401(k) or other defined contribution plan. Naturally, they applaud the retirement protection the measure would offer, but they fear that small businesses could balk at the cost of having to hire a payroll service or accountant to manage the IRAs. Others criticize the plan for not investing the money aggressively enough.

Ratings Agencies Revisit Money Market Funds

Despite the repercussions from the blowup of the Reserve Fund's Primary Fund, money market funds still have not properly addressed liquidity and credit quality issues, the ratings agencies believe, and as a result, they might strengthen their standards, The Wall Street Journal reports.

Fitch Ratings is looking at whether prime money market funds can retain triple-A ratings. Right now, sources at the company say, the funds are supported by the government through the Commercial Paper Funding Facility and the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility. Once the programs end, on Sept. 18, the rating agency fears the funds could be as susceptible to a run as before.

Meanwhile, the Securities and Exchange Commission and the President's Working Group on Financial Markets are considering changes to money funds, including a floating NAV.

Government Spending, Capital Investment Expected to Lead Recovery

Just as the financial crisis is unprecedented, the recovery is also expected to chart new grounds, the St. Louis Post-Dispatch reports.

Government spending and capital investment will lead the way out of the recession, followed only much later by a return to robust consumer spending, according to experts. GDP growth will remain in decline this year and rebound only modestly in 2010.

Wells Fargo Senior Economist Gary Thayer believes the economy will contract 2.7% this year and then grow 2.1% next year.

Consumers are still deeply in debt, Baby Boomers realize they need to save more to be even remotely prepared for retirement, housing prices and sales are still down, and banks remain tight with credit.

As a result, the market will make a series of halfhearted advances and then retract, said Bill Greiner, chief investment officer at UMB Asset Management. However, he is bullish on equipment makers and computer technology companies.

Charles Rice of Rice Money Management believes that mutual funds tied to specific investment styles will falter in the coming months. Instead, he likes world allocation funds that have more leeway.

Advisers' Profits Rise 10%

In response to investors' interest in taking a comprehensive approach to their finances, financial advisers are moving even more broadly away from commissions to fees, and this is boosting their earnings by roughly 10%, the College for Financial Planning Annual Survey found in a survey of 390 advisers. Cerulli Associates assisted in the polling.

Advisers are on track to earn an average of $215,345 this year, roughly 10% more than $195,394 in 2008. While this is down 24% from the $283,079 they earned in 2007 and 7.5% from the $232,996 they earned in 2006, the 2009 profits are remarkable, given the market conditions.