Archive for November, 2010

Schwab Managed Accounts – Top 5 and Rising

Tuesday, November 30th, 2010

There is probably no greater evidence of how the managed accounts sponsor world has changed then the recent statistics released about the growth of the Schwab managed accounts platform vis-a-vis its competition:

* According to Cerrulli Associates, the Schwab managed accounts platform has had the highest growth rate of the top 10 programs this year;

* It is currently the 5th largest platform, and accounted for 52% of the $6 billion total of net new flows during the first six months of 2010; and

* At $44 billion, the Schwab managed accounts platform has increased its AUM by 31% over the past year.

And, UBS at $48 billion in managed accounts AUM and Wells Fargo at $49 billion in managed accounts AUM, are certainly in danger of being surpassed by Schwab if the current growth rates continue.

While the wirehouses have fought back over the past year, they still are the favorite targets of both media criticism and of the recruiting efforts of RIAs and hybrids. And the bank programs are still suffering from the problems that their parents are experiencing.

These numbers are illustrative of two main points:

1) The quality of advisor leaving the established wirehouses and banks continues to increase (as advisors who participate in the managed account world typically have larger and more stable books of business); and

2) It won’t be long before Schwab becomes one of the, if not the largest managed accounts sponsor.

I am not forecasting the death of traditional broker/dealers. They will continue to be successful and they will continue to have top quality advisors. They will just become the bottom 5 of the top 10 rather than the top!

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Why ETF Criticism Stings – but Won’t Stick

Tuesday, November 23rd, 2010

Published on November 23, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The recent negative publicity surrounding exchange-traded funds validates the old saying that success breeds contempt. Or, put another way, all good things must come to an end. The growth of ETFs since their introduction in 1993 has been impressive. Assets under management in ETFs are approaching the $1 trillion mark; trading in ETFs equals close to 25% of all trading on U.S. exchanges today; and ETFs are gaining market share at the expense of mutual funds.

But as the product continues to grow, so does the criticism about ETFs and the different risks inherent in these products. ETFs are now being haunted by two characteristics that have traditionally been seen as positive: their ability to be sold short and to be purchased on margin. A Nov. 8 report by the Ewing Marion Kauffman Foundation claimed that short selling of ETFs can generate liquidity risks when demand for the underlying security, even if it is from authorized participants and not the asset manager itself, overtakes supply. The report also seeks to connect the rise of ETFs to the May 6 flash crash.

The ability to short and purchase ETFs on margin stems from the fact that the product can be traded like stocks, continually throughout the day, as opposed to mutual funds, which are bought and sold at the previous day’s ending net asset value. What happened with ETFs is that as they became more successful, market participants found ways to create derivatives on them. Now today’s more aggressive leveraged ETFs are designed to move two or three times more than their underlying indices. The risky characteristics of these ETFs are a far cry from those of the SPY — the iShares S&P 500 ETF. Commodity ETFs have also been getting some negative press, with detractors claiming that they distort the value of the underlying assets; the jury on this is still out.

Without a doubt, it is these newer ETFs that are at the crux of today’s controversy. And unfortunately, controversy often overshadows business as usual. Many of the conclusions of the recent negative reports on ETFs, including the Kauffman Foundation study, have been diligently and effectively disputed by industry participants. A few of the criticisms, including that ETFs are responsible for the slowdown in IPOs and the flash crash, seem to be groundless. Similarly, the arguments concerning the shorting of ETFs, namely that this might cause the funds to run out of cash in a “short squeeze,” seem unlikely given the role of market makers in creating and retiring shares as demand increases or decreases.

However, we all know that when it comes to the market, perception can be reality. Even as the industry repudiates these studies, the fact remains that as ETFs have evolved, the number of risky derivative-like ETFs is increasing. And this scares people, and rightfully so, since they are inappropriate for most retail investors.

What the public needs to know is not that ETFs are bad or structurally flawed — because they aren’t. It’s that a small number of the most aggressive ETFs, which are in large part utilized by hedge funds and day traders, are driving the criticism with the help of those authoring these scathing reports. Let’s not throw out the baby with the bathwater. Most ETFs do what they are designed to do; they mirror the performance of the underlying index or commodity that they are modeled on.

More investor education on ETFs is crucial. Advisors need to proactively educate their clients on the characteristics of ETFs — both positive and negative — and make the argument that certain ETFs are effective investment tools that can be used as part of a diversified long-term investment portfolio. ETFs such as the SPY are not the ones being heavily traded by day traders and hedge funds. With more than 900 ETFs to choose from, advisors should also stress their due diligence process in identifying those ETFs that are most appropriate for their clients.

Mutual funds have had their good days and bad days, as have most other investment vehicles. Have no fear, this too shall pass for ETFs.

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Advisor Websites – What Makes ’em Good

Wednesday, November 17th, 2010

I presented at MarketCounsel’s Member Summit today with Angela Nielsen from One Lily (Web Design) on what makes for a good advisor website (while the presentation was geared toward advisors, the material is relevant to any financial services website). The presentation was entitled Advisor Websites: The Right Design + The Right Content = Success (Last item under presentations).

The title is pretty self explanatory – in order for a website to be successful, it must have both good design and good content. You have a very short period of time to attract a visitor’s attention, so both the look and the content must “hit” the viewer immediately and compel them to explore further. The design and ease of use of the home page is extremely important. For example, if it takes time for the front page to load a large video, you’ll probably lose the interest of the reader. Make is simple – yet elegant.

Also, many people really do not like it when music starts when a website opens. Forgo some of the “glitz,” and you stand less chance of annoying the user. If you annoy the user they will go elsewhere guaranteed!

Now that you at least get them to stay on your site  a little longer – again not always an easy task – the content has to grab them. Don’t make the user work – be very clear on what you do, who you do it for and your value-added – give the user a compelling reason to look further.

If you can accomplish the above – have a site that has both a great design and great content – then you have accomplished a very important goal in creating your website – and them, as they say, Res Ipsa Loquitur!

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Hybrids Picking Up Steam

Monday, November 15th, 2010

We hear so much today about the battle between wirehouses and RIAs (Registered Investment Advisory firms), often lost in the discussion has been the growth of hybrid wealth managers. Hybrid wealth managers combine a fee-based advisory business with traditional commission-based transactional business. Hybrids enable advisors to tap into an affiliated RIA license as well as keep transactional business through a FINRA-approved brokerage.

In many respects, the hybrid model mirrors the wirehouse world, so logically it is a good potential fit for wirehouse advisors looking to make a move. Advisors who move to a hybrid model/firm don’t have to give-up their transactional business when they go independent. Even if the goal is to eventually stop doing transactional business, the hybrid model certainly eases at least this aspect of the transition. No need to go cold turkey!

While the hybrid model has seemingly not gotten much notice in the news, HighTower Advisors, one of the most successful new firms in the business over the past few years is indeed a hybrid. A recent entrant into this marketplace in Houston, U.S. Capital Advisors, was founded by a former wirehouse branch and complex manager, and the first team recruited was, surprise surprise, from that wirehouse! And other large sponsors – such as LPL – have publicly stated that they plan to expand their hybrid businesses.

I expect the growth of hybrids to continue as they are an attractive alternative for many advisors. Wirehouse advisors do have a choice between staying where they are (or moving to a similar firm) and becoming more independent – both from an investment as well as structural point of view. This very viable business model is going to receive more attention moving forward as entrepreneurial advisors realize that there are ways that they can minimize the disruptions that any moves will have on their current business.

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The Growing Emergence of Emerging Managers

Thursday, November 11th, 2010

It has traditionally been hard for emerging managers – here defined as having AUM under $3 billion – to convince institutions to hire them. Their shorter track records and relatively low level of assets have excluded them from the minimums set in the search/hiring parameters of many firms. But this trend seems to be changing.

Not only have these managers performed well – emerging managers outpaced the S&P 500 in 5 of the 8 bear quarters over the past five years by a cumulative 3.7% – but as consultants and institutions have looked for new ways to find managers that can add value in the wake of the financial crisis, they have been more willing to consider such managers.

Along with performance, there is now a greater recognition that smaller size may actually present an advantage in some cases; for example, emerging managers may be able to more effectively reduce risk because they can change market positions more easily (given their lower asset levels). In addition, as firms grow, marketing and asset gathering become more important – maybe at the expense of investment execution.

So, given these trends, how does an emerging manager take advantage of today’s environment and succeed? As outlined in a presentation I recently prepared for an Investment Management Institute (IMI) conference entitled Emerging Managers – The Foundation to Growth, if consultants and institutions are willing to “forgive” a shorter track record and lower AUM, then managers must concentrate on the other traditional pillars of due diligence – the strength of the investment discipline, the quality of the investment professionals and the stability of the organization.

Communication and persistence is still as important as it has always been. And for all managers – even those with longer track records and proven success – an important component of success is making sure that consultants and clients are never taken by surprise. Managers must be upfront about changes to their organization or poor stock picks. Honesty is still the best policy. And over-communication is always the best policy.

In some cases it still may be an uphill battle for emerging managers, because regardless of the strength of the discipline, for example, the only real proof of success is in reality longevity. But the playing feel has definitely leveled to some extent, a positive for emerging managers.

Posted in General Interest, Investment Managers | No Comments »

New Study – Client Service Matters – Duh!

Monday, November 8th, 2010

A recent study by Chatham Partners and Investment Metrics found that 40% of client satisfaction for institutional investors is attributable to service-related factors. 60% of overall satisfaction is related to investment performance. (I would venture to add that similar if not higher results titled toward client service would be found on the retail side of the business and that the results are applicable to all industry segments.)

My initial reaction is that if any organizations did not know the importance of client services before they read this article, they are in big big trouble. Further, I would guess that these firms have already lost significant assets and are pretty far behind the eight ball. Especially after the markets of the past few years, you have to wonder whether any firm can survive without a solid client service team and strategy.

Now that I have gotten that off of my chest, I did find the following interesting – the study identified five factors that are critical to a managers’ success:

1) Including the market and investment knowledge of the portfolio team;

2) The clarity of the investment reports;

3) The client representative’s problem-solving skills;

4) The frequency of contact for the client service representative; and

5) The timeliness of the manager’s investment reports.

Yes, client service matters – and the companies that succeed are able to incorporate client service into their practices in a systematic and efficient manner. It is worth looking at your own client servicing capabilities to see if there are improvements that can be made.

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Early – Very Early – Thoughts on the Election Results

Tuesday, November 2nd, 2010

The election results are starting to roll in – and regardless of whether or not the Republicans win the Senate, it seems pretty obvious that there will be split power in Washington for the next few years. That is good news for the markets, because split power – gridlock – means that it will be very difficult if not impossible to enact major – and expensive – legislation. This is good for the deficit. Now, obviously we need to make some serious progress on the economy over the next few years. But this gridlock scenario helps put a ceiling on spending – and that is a positive. Read more from our last newsletter article entitled Political Gridlock Looms … Markets Cheer!

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