Unlocking Real Value Blog

Why Are More Investors Going It Alone? - November 30th, 2012

So much of the focus today in the advisor world is on the relative growth of RIAs vis-a-vis their competition at wirehouses and other traditional B/Ds, what often gets lost is the investors that they are all going after. And recent statistics show a worrisome trend – the trend of investors deciding to “do-it-themselves” has taken on momentum.

This trend favors banks and self-directed firms and the expense of full-service firms. According to a recent study by Hearts & Wallets, most firms showed a decline between 2011 and 2012 in investors “intent to invest more” and “intent to recommend.” (Two exceptions were Vanguard and T. Rowe Price.) Full-service brokerages share of households with $1 million or more to invest fell from 36% in 2011 to 32% in 2012. On the other hand, banks share increased from 13% to 17% during the same period of time; the survey data used included 5,400 households. According to the results, less than 2/3 of investors now use an investment professional.

The question is, why are investors so frustrated? The study indicates that investors:

  • Don’t understand their advisors’ (or potential advisors) value proposition
  • Don’t understand the pricing models; and
  • Don’t feel that they have a way to evaluate advisors other than using absolute return.

I actually see some good news in this. All three of these frustrations, while understandable, are easily addressed. Let’s take them one at a time.

If an advisor doesn’t have an easily understandable and visible value proposition which they can articulate, then they don’t deserve the business. Whether you have an elevator speech, a tag line or a mission statement, you better make it clear very early on why you are different from the thousands of other advisors out there. If you don’t, shame on you.

As for pricing, if you aren’t upfront about your pricing, and if it isn’t fully transparent, then you have a problem. This is another issue that if addressed head-on early in the relationship can actually be used as a selling and differentiating point. If you wait until the client has to ask about it, then it’s probably too late.

And on the measurement issue, advisors would be well served to adapt some version of goals-based analysis. If you take the time upfront to learn about the client, help them define goals and milestones, and show them a pathway to get there (and measure progress along the way), you should have a long-term client; if you don’t, then maybe you’re in the wrong business.

There is great opportunity for those advisors that rise to the occasion – because I have no doubt that many of these investors who try to go it along are going to be very unhappy with the results and will be looking for an advisor again very soon.

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AK In The News: Wealthy Fear Fiscal Cliff Tax Hikes - November 26th, 2012

I was asked to comment in FundFire (A Financial Times Service) on the results of a poll seeking to find out what high net worth individuals feared  most about the fiscal cliff. 56% of respondents feared increases in income taxes and capital gains taxes the most (the top two answers), following by 21% fearing equity market turmoil.

My thoughts on the matter, to quote the article: “Even if a deal is made, and more progress is made next year, it’s likely that the many deductions the wealthy have enjoyed will vanish, says Andrew Klausner, founder of New York, N.Y.-based AK Advisory Partners. “The mortgage interest deduction may be trimmed or eliminated. Taxes on dividends are likely to increase,” he says. “The poll reflects the growing realization that taxes in some form are going up for investors.””

Political views aside, the only way to solve this country’s fiscal problems will be a balanced approach – revenue increases and spending reductions. Nothing else will work – despite what the politicians are saying.

Some taxes are already slated to go up with the implementation of some aspects of Obamacare next year. The implications for advisors is that they should be meeting with clients now to review their individual tax situations. Planning and taking appropriate action now will reduce the number of negative surprises your clients will face next year.

I don’t see any reason to panic, or make rash decisions about your stock portfolios. But prudence dictates that you at least take a look, weigh your various options, and act appropriately. You still have about a month!

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What Do Successful Advisors Have In Common? - November 19th, 2012

PriceMetrix, a leading industry think tank, recently issued a new report entitled “Moneyball For Advisors.” The study’s name is a takeoff on Michael Lewis’ book which detailed how the Oakland A’s used statistics – rather than high priced players – to assemble a championship-caliber baseball team. If you would like a copy of the study, please contact me.

The question PriceMetrix set out to answer is whether or not analytics can be used to gain an informal advantage in recruiting and advisor development. Their answer – and the data do seem to support it – is definitely yes. While I will focus on how advisors can learn from this study, PriceMetrix also analyzed the data in a way that should help recruiters and companies hire advisors who have a better chance of succeeding in the long-run (and thus in many cases justifying the paying of a large up-front bonus).

So, according to the statistics, what should advisors do to maximize their future production?

  • Maximize the percentage of fee-based business in their book;
  • Have a high number of households with more than $250,000 in assets;
  • Have a willingness to “fire” households with less than $250,000 (and to minimize the number of them);
  • Have deep client relationships (measured by multiple accounts per client and having a large number of retirement accounts); and
  • Be experienced – all other things being equal, past success bodes well for future success.

Advisors can control every aspect of their future production except for the last one. While there is little new in these results, they do reinforce much of today’s conventional wisdom.

As advisors consider their 2013 business plans, unless they have a natural niche that goes against conventional wisdom (and I will be the first to admit that some advisors do and can do well in these areas), they should target larger clients where there is the potential to build a deeper relationship by capturing more assets (and more family members if possible), and they should focus their sales and asset management on fee-based (or recurring) assets.

Food for thought to any advisor looking to the future.

(As a side note, one of the reasons I like to use PriceMetrix, and have confidence in their reports, is the breadth of their sample size. This study use aggregated retail brokerage data representing 6 million investors, 500 million transactions, 1.6 million fee-based accounts, 7 million transactional accounts and over $3.5 trillion in investment assets.)

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AK in the News: Mutual Funds and the Election - November 7th, 2012

I was asked to comment for an article in today’s Ignites (a Financial Times Service) which indicated (not surprisingly) that people in the mutual funds industry prefer Romney to Obama. (The ignites poll indicated that 58% preferred Romney to 39% for Obama.) The comments were made before we knew the results of the election.

My quote from the article: “Wall Street obviously would prefer a Romney victory because he is perceived as being pro-business. The hope is that business confidence would increase more quickly under a Romney administration which would translate into more hiring. If investor confidence increased, that would also be good for fund flows, as some of the money sitting on the sidelines might flow back into the equity markets.”

Further, “Regardless of who is the next president, a split Congress is likely, which makes earth-shattering legislative changes unlikely, according to Klausner. Regarding regulation, “Romney would push quicker for a reform of Dodd-Frank reform — not no regulation, but less strenuous regulation. Even some Democrats might agree that the legislation needs to be reformed — but again, under either scenario, large changes are unlikely,” he explains. Due to the fiscal cliff — expiring tax cuts, new taxes and automatic spending cuts that start in January if lawmakers can’t reach an agreement by the end of this year — Congress and the president probably will have to make a short-term deal on taxes, Klausner notes.””

So, now that Obama has won the election, businesses will remain jittery until there is some resolution to the fiscal cliff. The lame duck Congress is likely to come-up with a short-term solution to get us through the end of the year. Then – who knows. If the President can show some real leadership – leadership that was lacking in his first term – perhaps a grand deal can be struck next year. If not, the proverbial can will be kicked further down the road.
And on regulation – any changes to Dodd-Frank just became far less likely and the cumbersome nature of the legislation will continue to be a drag on business moving forward.

 

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Don’t Apologize Goldman Sachs - October 22nd, 2012

Greg Smith is the proverbial straw that broke this camels back!  Having endured constant criticism of the financial services industry and its participants since 2008, I have had enough. Goldman Sachs is not perfect. The industry is not perfect. But Greg Smith is an opportunist, and I wouldn’t waste a penny on his book or a minute more watching him on TV.

Yes I’m mad. As with everything in life, the truth of this situation probably lies somewhere in the middle. Goldman Sachs has made mistakes and employees probably talked about some of their clients behind their backs in less than flattering terms. But let’s be realistic – it happens in every industry and every company. Capitalism is not always pretty, and yes we need to have effective regulation – but the free enterprise system is the best one out there.

And Mr. Smith was probably a decent employee; if he wasn’t, he wouldn’t have lasted a year in that environment. And we will never know if he did in fact ask for $1 million during the financial crisis and when others were being laid off (he didn’t answer that question when directly posed to him on 60 minutes).

What we do know is that he took his $500,000 a year in compensation for a number of years, don’t we? He was able to stomach the environment long enough to make some money. I guess he was able to put his disgust aside…..

I was upset when he first quit via a New York Times editorial – I thought then, as I do now, that it was grandstanding and self-serving. The release of his book is more of the same. I understand that American’s love gossip, and everyone loves to hate Wall Street and Goldman Sachs. But there is nothing earth-shattering in this book according to the reviews and interviews. It’s just part two of his plan to make himself more money.

I see nothing more than an opportunist here looking to take advantage of an anti-financial services environment to his own benefit. Period. Angry? Yes I’m angry. What gets lost again are all of the honest people. Goldman Sachs is not the enemy. Financial Services is not the enemy. Lets fix things – not try to make them worse and more divisive.

Mr. Smith – you have done yourself and the industry a disservice. I hope that your 15 minutes of fame is soon over for good.

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The Future of the Wirehouses – and its Advisors - October 10th, 2012

There’s been a lot of talk over the past few years over what the future holds for the wirehouses – Morgan Stanley, Merrill Lynch, UBS, Wells Fargo, etc. If the future is indeed as negative as many believe, what are the implications for advisors?

A recent report by Cerulli Associates, Inc. indicates that these firms will lose 7% more market share over the next three years; today their market share is 41.4%, and they are expected by Cerulli to lose market share more quickly than other segments (such as RIAs).

Here’s an interesting, yet often overlooked, part of the equation. While no one disputes that the wirehouses are losing advisors to RIAs and regional brokerage firms, a large percentage of this market share loss has occurred at the lower end – the wirehouses have been shedding these advisors both by choice (in order to increase profit margins) and to competitors.

The Cerulli report does not split the losses between these groups. The conclusion that these losses are a large negative for the wirehouses is conjecture at best in my opinion. While I believe that the wirehouses are losing some top producers, the situation is not as dire as many have concluded from this and other studies.

At the end of the day, there are certain advisors who will flourish at wirehouses and others who are more suited for either smaller brokerage firms or independent firms (which they either join or start). The case can be made that products and services offered to advisors might actually improve at the wirehouses as they’re able to focus on a core group of higher end advisors and their needs.

Whether an advisor flourishes or not depends mostly on his/her personality. Becoming an RIA is akin to becoming a business owner or partner, which would take some personality types out of their element. Likewise, some personality types will flourish under the freedom that is gained by leaving the restraints of the heavily compliance-oriented, less entrepreneur brokerage firms.

Neither type of firm is going away. An advisors ultimate success is less dependent on what type of firm they work for, and more dependent on them working in the type of firm that best suites their personality and skill set.

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Preparing for 2013 and Beyond - October 3rd, 2012

Our 4th Quarter Unlocking Real Value newsletter is out and features our latest White Paper: “Preparing for 2013 and Beyond.”

As 2012 enters its final months, it’s time to either start planning your marketing for 2013 and beyond if you haven’t done so yet, or, if you have, review your marketing plan to ensure that it remains on target.

The competitive landscape within financial services remains tough. Bad press continues to plague the industry, individual investors remain skeptical and the fiscal cliff looms.

Against this backdrop, successful planning is one of the best ways to hedge yourself and your business against the unknown, and to increase the odds that you’ll be successful. Your marketing plan must be detailed yet flexible.

For each section of your marketing plan, make sure that you:

  • Detail specific activities;
  • Identify the audience each activity is targeted to;
  • Know who is responsible for each activity;
  • Know how you’re going to measure success; and
  • Are prepared to make adjustments if necessary.

This White Paper contains tips for helping you adapt to this changing environment as you develop or revise your marketing plan. As you go through this process, be sure that you have the time and resources to implement it without negatively impacting your business.

Click here to download the White Paper.

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Investors Are Worried – What Should Advisors Do? - September 27th, 2012

Many individual investors, still spooked by the 2008 financial crisis, have remained out of equities, and have missed most or all of the rebound. With many indices at or near multi-year and/or all time highs, it’s even harder to get these investors back into the markets now, as they fear a correction.

A new study released by Hearts and Wallets confirms the fear among individual investors. There is little appetite for risk-taking in general, and 41% of the 5,400 households surveyed say that they are “inexperienced” when it comes to investing. This number is up more than 50% in just one year. The results were consistent across all ages and lifestyles. Only 25% of respondents said that they were comfortable accepting investment risk in order to achieve higher returns.

As an advisor, what do these results mean? Well, I need to tell you one more thing to complete the story – along with this reluctance to take risks among investors is a continuing lack of trust in financial services firms. The authors of the study, who have been tracking this trust issue for a number of years, have identified three unmet needs. Investors want answers to the following questions:

  • What do you do?
  • How do you get paid?
  • How do I evaluate you?

It’s all about developing the relationship and earning the prospective clients trust first. Part of this process includes educating them on the markets, which will hopefully help them to overcome their fears of investing over time. Once they understand concepts such as diversification and asset allocation they should be more willing to dip their toes back into the markets.

Ultimately, they need to feel comfortable with you, view that you are in it for the long-term and trust that you have their best interests in mind. The consultative sales process does this – but it takes time and multiple meetings. And patience on your part.

Additionally, a large part of developing this relationship is taking the time to learn about the prospect and their family on a personal level – what they like to do, what their values and dreams are, etc. This is part of building a relationship and being seen as being on their side, as opposed to being seen as a product pusher. Unfortunately, there is no quick easy solution; but no one ever said this business was easy!

(As an aside, since the distrust seems to be leveled at firms as much as advisors, those of you with your own firms or who work for smaller lesser-known firms have a leg up. If you work an as advisor for a larger firm, especially one that has received bad press, you need to work extra hard to separate the value that you add from that of the company; the prospect needs to feel comfortable that the firm will not get in your way.)

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AK In The News: Weak U.S. Growth Sapping Equity Flows - September 20th, 2012

I was quoted in an article yesterday in Ignites (A Financial Times Service) about why retail investors remain on the sidelines. A recent poll indicated that industry participants believe that investors will return to equities once employment and income growth return. This was the most popular belief, followed by progress by Congress on reducing the deficit and fixing the federal tax system.

While I don’t disagree with these answers, I also believe that it’s a little more complicated than that. For one thing, as I am quoted: “Investors who missed the equity markets rebound may also be fearful of “getting in again at the wrong time” because they are hearing that indices are nearly back to their all-time hight. Additionally, even investors already in the equity markets are “nervous and cutting exposures” because of uncertainty over the presidential election and about the federal budget.”

Many investors also still fee the scars of 2008, so it’s not as simple as one event getting them back into the market. Herein lies the opportunity for advisors – educating investors about the equity markets, and getting them comfortable with the ups and downs, is an important way to start to get them to be more open to once again investing in equities, and then when some of the economic and political mess starts to clear, they will be more likely to do so.

As I say in the article, it’s more about “helping investors get comfortable with investing than thinking any one event will precipitate a mass entry into the market.”

Advisors should be patient, take the time to educate clients and prospects via White Papers and perhaps one-on-one educational counseling sessions, and make it clear that they are with the client for the long-term, irregardless of when that long-term begins.

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AK In The News: Advisor Group Dumps “Nickel-and-Dime” Fees - September 13th, 2012

I was quoted in an article in GatekeeperIQ (A Financial Times Service) this week about a recent decision by Advisor Group to reduce the number of so-called “nuisance” fees it charges on mutual funds and on accounts with low balances and little activity. The firm also added access to many more no-load mutual funds.

This change comes at a time for the firm when it is digesting the addition of 1,400 advisors from its purchase of Woodbury Financial Services. The change, however, reflects more than just the desire to retain these advisors; it reflects the changing competitive landscape where firms are fighting hard to keep advisors.

Advisors don’t like it when their clients are assessed these types of fees; it can endanger the relationship. Would such fees in and of themselves cause an advisor to move? Probably not. But it’s part of the total package of working at a certain firm, and I think it’s smart that in this case Advisor Group sees the benefit of not imposing such fees over the potential loss of revenue from them.

Having said all this, and being fully in support of dropping such fees, I do have to say that on the flip side, such fees do help get rid of smaller, dormant accounts that are probably ones the advisor wants to lose in any case. They take up his/her time and are a distraction from other revenue-generating accounts.

Sponsors like Advisory Group would be best served by doing away with these types of fees on one hand, while also helping to educate advisors on how to segment clients and services and how to manage their businesses more efficiently on the other. This type of a dual strategy is a win-win for everyone – the client, the advisor and the firm.

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