Unlocking Real Value Blog

AK In The News: Passive Products Appeal To Fund Industry Pros - June 5th, 2013

I was asked to comment in today’s Ignites (a Financial Times Service) about the results of a poll which indicated that many mutual fund industry pros are investing their own money in passive investments (such as ETFs). More than two-thirds of respondents indicated that they have a sizable portion of their own assets in passive investments.

These results are not surprising given the outflows that many active funds have seen as well as the negative press active management has received over the past few years, largely the result of so many of these funds underperforming their benchmarks. Industry professionals are in essence practicing what they preach – investing their own assets in a fashion similar to how they are investing their client’s assets. To quote from the article:

“Andy Klausner, founder and principal of AK Advisory Partners, says it “seems reasonable” that nearly 70% of industry participants have at least some assets in passive investments. Still, it is “hard to know exactly what percent of their personal assets are in passive investments,” he notes.”

Active management is far from dead, however. I believe that there will always be a segment of the profession that stays away from passive management, so I wouldn’t expect this percentage to increase significantly over time. Again, from the article:

“However, given some professionals’ personal preference for active management, experts do not expect many of those who are now abstaining from passive to be swayed in the future. Both Klausner and Dannemiller anticipate that the percentage of assets fund professionals invest in passive products expressed in Tuesday’s Ignites poll will stay about the same over time.”

 

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AK In The News: Industry Cautiously Optimistic On 2013 Pay - May 29th, 2013

I was asked to comment on the results of a recent Ignites (A Financial Times Service) poll on 2013 compensation. Overall, respondents were optimistic about their pay prospects, but hardly euphoric. 36% believed that their pay would be slightly higher this year, while 10% believed that their pay would be much higher. In contrast, only 11% of respondents believed that their pay would go down, and 4% felt that their pay would be much lower.

The results are not surprising, given how the markets have been doing this year. Presumably, anyone paid on commission or with bonuses tied to firm performance would expect their pay to increase. That only makes sense. But what is more encouraging to me is that the optimism, while there, seems guarded.

I think that this shows the dose of realism that the last financial meltdown left on the industry, and is positive in that hopefully it points to the industry not making the same types of mistakes in the future that it has made in the past. To quote from the article:

“Given the positive performance of equity markets this year, it is not hard to see why nearly 50% of respondents believe their employers will be more generous with pay come bonus time, says Andrew Klausner, founder of strategic consultancy AK Advisory Partners.

Klausner believes that today’s upbeat forecast for pay, as expressed in Tuesday’s Ignites poll, is much more sustainable when compared to the excessively cheerful outlook seen before the financial crisis.

“The magnitude of the latest crash has made everyone a little more realistic. Yes, hiring and pay have picked up, but probably at a much lower rate than previously, which is a good thing,” he says. “Wall Street has always over-hired and overpaid during good times and then slashed during bad times.””

A more stable and realistic Wall Street is good for the markets and the people that work in the industry.

 

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AK In The News: LPL Compliance Makeover Spotlights Manager Risk Controls - May 28th, 2013

I  was quoted in an article in today’s GatekeeperIQ (A Financial Times Service) about the implications of some of the problems that LPL has been having on the compliance side recently – not the kind of news they want!

Some LPL advisors have come under scrutiny with some state regulators for selling non-traded REITs inappropriately, and the firm itself was recently sited for a huge compliance failure on its monitoring of emails.

What are the ramifications for LPL moving forward? First, they obviously need to fix these compliance deficiencies and demonstrate to both the outside world – the regulators – that they have their act together – and then the inside world – their own advisor groups – that this public relations nightmare will be put successfully behind them.

Easier said that done. LPL can fix the compliance issues and increase its communications and education to advisor groups. But they walk a fine line between satisfying the needs of the regulators and ensuring that they are following all applicable laws (as are their advisors) on one hand, and overreacting and making these compliance changes so burdensome that they lose a lot of advisors on the other.

Unlike traditional B/Ds that can mandate strict compliance to their advisors from the top down, LPL, as an independent, is in a little bitter of a tougher position. I think it’s fair to say that advisors at an LPL, most having likely already moved from a wirehouse or other independent, would be more likely to switch firms if things become untenable more quickly than traditional B/D advisors (who are more used to that type of compliance world.)

To quote from the article: “That culture also puts LPL in “a very tough position” in disseminating the home-office driven compliance overhaul, according to Andrew Klausner, founder and principal of AK Advisory Partners. “While on the one hand they do have to clean up their compliance procedures, they have to do so without over-burdening their advisors,” he says. While advisors at wirehouses and regional firms may be accustomed to product and procedure mandates passed down from headquarters, at an independent shop, such dictates can threaten retention. “If LPL were to try such tactics, I would imagine that they would see a large exodus of advisor groups to other independent sponsors.””

What do you think?

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What Is An Alternative Investment? - May 21st, 2013

Hardly a day goes by that another firm doesn’t either enter into the retail alternative investment space, or expand their offerings; Fidelity and Schwab just announced major initiatives. Becoming more common as well, however, are firms closing retail alternative investment products; two firms recently shuttered their alternative (long/short) investment ETF offerings.

As investors seek higher yield in today’s low return environment, they naturally are turning to alternative investments and the hope and promise of higher and often uncorrelated returns. This trend scares me – almost a  much as today’s stock market, which is fueled by the Fed’s free money policy more so than by economic fundamentals. The complexity of many alternative investments have necessitated that they have historically been for institutional or very high net worth investors only – has anything really changed to fuel today’s growth in the retail marketplace?

I caution advisors to tread carefully if they are exploring or increasing their clients’ exposure to alternative investments. At least make the commitment to educate your clients fully on the inherent risks of these types of investments. You don’t want to be one of the last to jump on the bandwagon just before …

Back to my question: What Is An Alternative Investment? The answer is quite complicated, because the category spans everything from private equity to mutual funds to ETFs – from liquid types of investments to illiquid types of investments – from those that require investors be qualified (meeting certain income and net worth requirements) to those that don’t. In fact, investing in timber is considered by many to be an alternative investment.

My point? Advisors need to be extra careful in ensuring that before clients venture into any alternative investments that the investment is appropriate for their investment profile and asset allocation and that they fully understand the risks involved as well as any liquidity restraints. Is the additional risk being taken worth it?

I am not opposed to alternative investments – when and where they fit. I just fear that they are becoming the latest bubble in the industry, and that clients who are still struggling from the losses incurred since 2008 are about to make another mistake. Advisors – it’s your job to help your clients avoid such mistakes as opposed to helping them chase return.

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Characteristics of High Net Worth Clients - May 8th, 2013

PriceMetrix just released a report on the characteristics of high net worth clients (defined by them as people having a net worth of at least $2 million). There are a few very interesting pieces of information that advisors should consider in their ongoing planning processes.

(The breadth of the client database at PriceMetrix – 7 million retail investors and 500 million transactions – always gives me confidence in the validity of their reports.)

1) The most interesting aspect of this report to me is that the study found that just 3% of households with less than $500,000 when a relationship began, became high net worth clients over the subsequent five years. I can’t say it any better than the Doug Trott, the CEO of PriceMetrix: “The number of times small households become high net worth clients is simply too few to merit an advisor’s attention. Advisors should concentrate on finding, not manufacturing big clients. Seventy five percent of high net worth clients were high net worth from the very beginning of their relationship with their advisor.”

Other than family relationships, where you are trying to cultivate future relationships, I agree that it makes little sense to target smaller investors with the hope that they will become larger. Advisors should consider raising their account minimums if they have been targeting prospects with lower net worths.

2) The study confirmed that high net worth investors tend to spread their investments among account types and advisors. This argues for advisors adopting a business model where they accept this fact, and rather than try to convince clients to consolidate their assets with them (at least initially), they develop the ability to be the primary advisor – the one who can provide complete account performance (even for assets held away) and multiple services so that they can be the “go to” person.

3) While high net worth clients typically pay lower fees, the range of fees found was significant account to dispel the rumor that fees drive relationships. To quote Mr. Trott again: “They (advisors) shouldn’t deeply discount their prices because it won’t help and they should limit their number of small households because large numbers will impair their ability to appropriately service high net worth clients.”

4) Finally, the study validated the well known fact that high net worth clients tend to have more in fee-based accounts and migrate away from mutual funds as their net worth grows. Fifty one percent of high net worth clients have fee-based accounts, while only 36% of households with between $250,000 and $500,000 in assets have fee-based accounts.

Some good information to help advisors plan for the future.

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Creating A Successful Marketing Strategy - April 16th, 2013

The ultimate goal of any marketing strategy is to help you grow your business and increase your brand awareness; cementing trust with current clients is a nice by-product as well. How does it work? Developing awareness of your brand  – who you are, what you do and why you are uniquely qualified – should in turn help you generate leads which, through education and dripping on prospects, will lead to more clients.

In order for a marketing strategy to be successful, it must be multi-faceted, realistic and implemented consistently over time. There aren’t a lot of short cuts here – it takes time and patience. Depending on your resources, there are a number of ways in which you can accomplish each of the above steps; only spend what you can afford to, and make sure that you and your staff have the requisite time to dedicate to marketing without negatively impacting your current business.

Your marketing plan – the written description of your market strategy – should:

  • Detail specific activities you intend to undertake;
  • Identify the audience each activity is targeted to;
  • Specify how you’re going to measure success;
  • Be flexible enough to allow adjustments as necessary; and
  • Stipulate who on your team is responsible for each activity.

How do you create awareness, generate leads and drip on prospects? Click here to read our complete new White Paper.

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AK In The News: HighTower Loses Advisor Who Had $1B Practice - April 11th, 2013

I was asked to comment by Fundfire on the departure of Margaret Towle from HighTower Advisors, less than two years after she joined the very successful RIA. This follows the departure of another advisor who left last month, the latest two departures from the firm which has been growing rapidly. The firm lost one other advisor last year, who left to run a hedge fund.

The question on everyone’s mind is, do these departures signal problems at HighTower? Probably not. To quote from the article:

“Towle’s exit, along with the other recent partners, isn’t necessarily a “red flag” for HighTower, nor a sign that it has gone from rakish industry upstart to “mature” firm, says Andrew Klausner, principal of AK Advisory Partners. “Maybe better than the word ‘mature’ is ‘growing pains,’” he says. “There are not too many firms that have had their success, and they’ve certainly had more success than failures.”

Klausner says it’s believable that personality and culture could be snags for an outfit like HighTower, where the partners take roles in the firm’s management. “You don’t know 100% that the fit is going to be there,” he says. “When you have a model like that, where you’re attracting the best, inevitably you will have some conflicts.””

We will all be keeping our eyes open to see what happens at HighTower – but I am guessing that they will continue to attract more new advisors than they lose and that they will continue to be a highly successful firm.

(The other advisor who left had joined the firm from Goldman Sachs and reportedly left HighTower to join Credit Suisse. My guess here is that it was an issue of fit – going from a boutique investment firm to an RIA and back to a boutique may signify that this advisor was just more comfortable in that type of firm.)

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Getting The Edge On Other Managers - April 2nd, 2013

I am speaking this week at the Investment Management Institute’s Consultants Congress in San Francisco. The topic is “Getting The Edge On Other Managers.” With so many thousands of investment managers to choose from, it’s important for managers to develop trusting relationships with consultants – as they are often the gatekeepers who control access to institutional clients. In many ways, developing a relationship with a manager is similar to trying to get new clients – just like you try and find out as much as you can about prospects, and tailor your presentations to them, the same is true for consultants.

I have broken the process into two pieces – when you are reaching out to the consultant to introduce yourself and your firm, and what to do when you have actually been able to get a meeting with them.

Reaching Out

  • Do your research upfront and find out as much about the consultant as possible. Tailor your approach to match.
  • Highlight your Value Proposition/Mission Statement. Answer the question: All things being equal, why should your firm be considered?
  • Focus on your firm’s strengths and don’t compare yourself to the competition. That’s not your job, and will make you look bad.
  • Highlight your capabilities above and beyond managing money – educational programs, thought leadership, etc.
  • Ask about their preferred method and frequency of contact.

Meeting With The Consultant

  • Bring the right people to the presentation, including those people that will be interacting with prospects/clients.
  • Describe your overall business philosophy– talk about profitability, resource prioritization, distribution, etc.  How are you retaining key talent? What changes have you made over the past 12 months?
  • Describe any process adjustments that you made in reaction to the 2008 financial crisis. Were these changes permanent or temporary?
  • Explain any unusual fluctuation in AUM. Differentiate between market losses and client terminations. Explain how you’re adapting to the uncertain and changing regulatory environment. Focus on transparency.
  • Be humble – but confidently ask for the business!

You probably what was missing in the bullet points – a discussion of your performance. There are lots of great performing managers out there – in every asset class. It is often the intangibles that will help you stick out more.

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AK In The News: Firms Prefer To Keep Staff ‘Lean’ - March 27th, 2013

I was asked to comment on an article in today’s Ignites (A Financial TImes Service) which summarized a recent poll on staffing levels within the financial services industry. 38% or respondents said that their firms current staffing levels were “lean,” while 34% said that the firms were too lean and staff overworked. 16% of respondents felt that staffing levels are just right, and 12% that staffing levels were a little bloated but all employees were necessary.

So what are the take aways?

First, our industry has historically been known for hiring too many people in good times, then letting them go when things get rough – then hiring them right back. This time seems different, however. Perhaps it is because the economic recovery has been so shallow, or perhaps it is because so many financial services firms have been hit extremely hard, but I think this time we may have learned our lesson. To quote from the article:

“Since the financial crisis and typical of downturns in the industry, firms cut back on staff and services. While usually hiring picks up when things get better, that has not really happened this time,” says Andrew Klausner, founder of AK Advisory Partners, a strategic consultancy. “The reality is, staffing levels in the industry are down and they are going to remain down. I don’t see a hiring wave coming.””

Second, not only do the firms seem to be realizing this, but so do employees – those who presumably answered the survey. I would have expected more complaining that firms were understaffed. Again, to quote from the article:

“But Klausner sees a bright side. “It’s positive that more people said lean as opposed to overworked,” he says. “This implies a certain understanding perhaps that we do live in a resource-limited world and that as business goes, so goes the level of support.””

The other explanation for this seeming understanding of resource allocation may be the fact that more advisors have gone independent, and they, because they are running their own businesses, understand the need to run efficient operations. This is in contrast to those who work for larger companies and don’t have to worry about such things. Its hard to say without knowing the make-up of respondents if this is indeed the case.

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Do Your Clients Trust You? - March 26th, 2013

Most advisors would probably answer this question in the affirmative – “Of course my clients trust me.” While no one wants to admit that they aren’t viewed positively, asking yourself this question, and honestly reviewing your business practices and relationships might help lead you to a more prosperous future.

I say this after reading the results of another study showing that many investors really don’t trust their advisors and/or financial services providers. A study by Hearts and Wallets, which includes an annual study of 5,400 households, concludes that 55% of respondents are afraid that they will be ripped off by their advisor, and less than 20% fully trust their provider – down 5% since 2010.

Aside from the obvious, that you want your clients to trust you, the study also reveals that providers who are trusted enjoy an average share of wallet that is nearly double low trust relationships. These clients are also more likely to have their advisors help them in the planning process, and they are more likely to own more products and be open to new concepts, according to Hearts and Wallets.

So – the all important question is – what helps build trust?

  • How well the investor understands how the advisor and the firm earn money. People aren’t as concerned with specific fees as they are with understanding how the system of incentives works.
  • Investors want to feel that their provider is unbiased and puts their interests first, understands them and shares their values.
  • Investors want to work with people who are responsive.

It never ceases to amaze me that it always seems to come back to explaining fees – not the fees themselves – but clearly articulating how everyone is paid. The fee discussion should be at the forefront of meetings with prospects – if the client has to ask – it’s probably too late! It also comes down to client service – being responsive, and setting up your practice to keep clients informed on their own terms.

Finally, one last statistic from the report – 33% of investors report that their main motivation to consolidate their assets is based on rewarding proven results – another key trust builder. And with an estimated $16 trillion in assets ripe for some sort of movement (rollover, consolidation), this question is worth thinking about.

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