Unlocking Real Value Blog

The On-Going Importance of Your Brand - September 5th, 2012

Many financial services firms remain conservative in their corporate spending, particular on marketing, even as the markets have improved this year, and for many, revenues are once again on the rise as part of their continuing post-financial crisis recoveries.

A recent study of asset managers, for example, found that most planned small increases in their marketing budgets even as revenue growth rebounds. The study covered firms of all sizes, ranging from $5 billion under management to +$100 billion.

Interestingly, however, the respondents in the same study also recognized the importance of branding and messaging, as they rated this the highest priority of any marketing-related category to invest in.

Why is branding and messaging so important? Because one thing that you must always do is promote the integrity of your firm. Especially during tough market times, and in today’s political environment where banks and financial services firms continue to get beat up in the press, reminding clients and prospects alike of your value proposition and why they do business with you must remain a top priority.

At the end of the day, all you or your firm has is its reputation. Protect it, promote it – always. Even if you are reducing your marketing budget, or your advertising budget, ensure that the money that you do spend helps your branding and messaging. It doesn’t have to be expensive – e-mail marketing systems and social media has made getting information to your target audience(s) a quicker and cheaper proposition.

Perhaps you need to think not so much about how much you spend in this area, but how wisely you are spending it!

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Financial Services Pros Still Don’t Get Social Media - August 29th, 2012

Well, I do … but it seems that despite some gains, financial services professionals remain reluctant to incorporate social media into their business models. A recent poll in FundFire (A Financial Times Service) among financial services professionals found that 60% found that social media had either no impact or was risky, 30% found that it was moderately helpful and only 11% felt that it provided a boost to their businesses.

Surprising is that 11% is down from 17% in a similar poll taken last year by the same organization. Now, we all know that voluntary polls like this are not too scientific, but it is surprising that this number went down given the same potential audience of respondents, especially since a number of sponsor firms, Morgan Stanley Smith Barney for one, have expanded their efforts in this area.

I believe that the most rational explanation for these results is that some of my fellow “Type A” financial services professionals are just not being patient enough to see results. It takes time! Additionally, while everyone would love to get new business from their social media efforts, and eventually this may come, the more immediate impacts are harder to quantify and gauge, namely greater brand awareness and client servicing.

I understand that many in the industry cite compliance reasons for not participating in social media, but advances in understanding and software have alleviated many of these concerns. Granted, if you work for a firm that does not allow or limits social media, there is not much you can do. But if you are the decision-maker, or can influence the decision, remember to take a longer-term perspective.

Social media allows people to get to know you on their terms – which is how people want it these days.

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Fitting Fee-Based Business Into Your Practice - August 22nd, 2012

Last week I blogged about a new report from PriceMetrix which highlighted that advisors who are aggressively transitioning to fee-based business performed better over the past three years, and grew their businesses faster, than slower-converting peers. Now I want to highlight a few more interesting findings from the report, which shed light on how fee-based business can fit into any advisor’s practice.

The trend toward fee-based business continues, but transaction business is not going away. Over the past three years, as reported by PriceMetrix, the percentage of industry assets in fee-based accounts has increased from 21% to 28%. While 91% of advisors have at least one fee-based account in their book of business, the still remaining overall high percentage of transactional business illustrates that fee-based business has a very long way to go.

In fact, only one percent of advisors have 90% or more of their client’s assets in fee-based accounts. The important point here is that while transitioning makes sense, and as PriceMetrix points out faster may be better, it would be a mistake for advisors to try to move all of their clients into fee-based business – don’t force business where it doesn’t fit. Having hybrid households (where clients have at least one transactional account in addition to one fee-based account) is becoming more the norm than the exception, and that’s okay.

The report also found that a large percentage of the increase in fee-based accounts came from new relationships, about two thirds. The implication here is that advisors might be wise to adopt a two-pronged transition strategy – one for current accounts, which might again result in more new hybrid relationships, and one for new relationships where there is no preconceived notion or expectations.

Finally, the report concluded that clients between the ages of 40 and 64 have the highest propensity to use fee-based accounts, and less experienced advisors tended to be more enthusiastic about fee-based accounts. This tells me that next year’s report might find younger clients migrating more to fee-based accounts, not only because their presumably younger advisors are advocating it, but also because of the proliferation of new model-based managed accounts, which has resulted in the lowering of account minimums in many programs, thereby making them more affordable to a younger demographic.

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Advisors: More Fee-Based Business = More Success - August 15th, 2012

PriceMetrix released a new report today that found that advisors moving clients more aggressively into fee-based accounts saw revenue growth of 47% over the past three years compared to an average growth rate of 21%; these advisors also had above-average growth in assets under management as well as return on assets.

(PriceMetrix is a well-respected practice management solution provider. The validity of the report partially rests on the size of the study, which represented data covering 3.2 million investors, 500 million transactions, 1 million fee-based accounts, 4 million transactional accounts and over $900 billion in assets as of May 2012.)

Some other results from the study which support fee-based accounts include:

  • The average fee-based account is 46% larger than the average transactional account;
  • The average fee-based account generates three times as much revenue – $2,900 per account v. $870; and
  • Households with at least one fee-based account generate a return on assets that is 40% -70% higher than households that are purely transactional.

There is a lot more in this study, but for now it suffices to say that advisors who have been considering the move into fee-based business should take note. For years, there has been a debate in the industry less about “if,” but more about “how fast” an advisor should convert this/her book (or at least a portion of it), from transactional business to fee-based business, recognizing that your income may initially go down.

The flip side is that while this reduction in income phenomenon may be true in the short-run, switching your business mix toward fee-based business will leverage your time, thus allowing more time to grow your business while also giving the peace of mind that on January 1st of each year you have already “guaranteed” a large portion of your income with more sticky assets.

A final statistic about the subset of advisors who grew their fee-based business by at least 25% during the three-year period studied: the average advisor in this group saw a 49% increase in assets under management and a 41% increase in recurring revenue. They also almost doubled the number of households in their book which generated more than $5,000 or more in revenue each year while significantly reducing those clients that generated less than $500.

Definitely some food for thought! The question on advisors minds should not be if they should convert part of their book, but how fast!

 

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Is There An Optimal Size for Asset Managers? - August 8th, 2012

Casey Quirk, the U.S. Institute and McLagan just released a survey which indicated that larger asset management firms are having a harder time rebounding from the financial crisis than their smaller counterparts. (Larger firms are defined in the survey as managing more than $250 billion, medium-sized firms between $50 billion and $250 billion and smaller firms under $50 billion.)

The survey included 96 managers with more than $21 trillion under management, and concluded that revenues at larger firms are down 24% since 2007, compared to down only 4% at medium-sized firms and down 5% at smaller firms.

Coincidence or reality? Probably a little of both I think. There is definitely something to be said about the law/rule of large numbers – as in managing a large mutual fund, as your size grows it does become more difficult to perform well, as you are somewhat beholden to the whims of your investors/clients. And many larger firms offer multiple products, so at any one time some of these styles will be out of favor and inevitably experience outflows. Additionally, they may be hurt if they see clients going to lower-fee products – equity to fixed income, for example.

On the flip side, however, a smaller firm, which only has one or maybe a few strategies, has a viability problem if this style goes out of favor. What has favored many of these smaller firms lately is that that many are in “specialized’ areas such as alternatives and global products, which have been in greater demand as investors seek greater returns in a low-return environment.

Some might argue that medium-sized firms are in the best position, especially if they offer a diversified style mix. These firms would therefore not have the risk of going out of business because they are too dependent on one style that may be out of favor, yet they are more nimble than their larger counterparts and can react more quickly to any market “noise.”

At the end of the day, however, I think it’s too simplistic to say one size is better than another. You can have well run and profitable firms of any size, and you can have poorly run firms of any size. But it would behoove investors and fiduciaries to consider, among other things in their analysis, the size and asset mix of any firms that they are considering investing with so that they can determine for themselves if the firm is well positioned for future success.

 

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AK In The News: Bond, Index Funds Big Flow Winners In First Half - August 3rd, 2012

I was asked to comment on an article that appeared in today’s Ignites (A Financial Times Service) about the fact that bond and index funds were the top five asset gathers for the first half of the year.

These results are not surprising to me, as this reflects investors’ “overall negative mood on equities and aversion to risk. Investors in equities have not been rewarded over the past decade, and the gyrations of the past few years — where the calendar years have started out great and then fizzled — have not helped this confidence. Record amounts of money have been kept on the sidelines, and given that there is little optimism that the equity markets are going to perform very well until all of the political uncertainty here and abroad subsides, those individual investors who choose to leave cash are looking for safety. Institutional investors continue to dominate the marketplace.”

While there are risks to investing in bonds and bond funds, of course, is it typically less than investing in stocks.

The above explanation covers investing in bond funds, but why index funds as well? To quote from the article again: “The growing concern that institutions “have and will continue to have the advantage over individuals” is also partially responsible for making index funds the “vehicle of choice” for investors willing to take on the inherent risk in the stock market, according to Klausner. We all know that the stock market is a market of individual stocks, and it is becoming harder and harder for individuals to manage their own portfolios. Index funds are a good alternative,” he says.”

Do you agree?

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AK In The News: Are Small Portfolio Accounts Worth Pursuing? - July 19th, 2012

I was asked to write an opinion piece for Fundfire (A Financial Times Service) on the question of whether it makes sense for advisors to seek smaller accounts as a business-building strategy. This comes in the wake of LPL Financial’s decision to lower the minimums in its model wealth portfolios to $25,000.

While one of the great things about being an advisor is that you can build your business any way that you want, and I have usually shied away from a small account strategy, I have come around to believe that you can be successful with such a strategy – if you build your business the right way.

There are two general principles that advisors should keep in mind when developing an asset-gathering strategy:

  • Always act in clients’ best interests; and
  • Focus on building a profitable and sustainable business.

If advisors consider both factors, they should be able to determine which clientele is best for them.

Now, having said this, and firmly believing that each advisor ultimately needs to set his or her own direction, and understanding and accepting that advisors can make a good living servicing a large number of small accounts, my bias still rests with a larger minimum built around a top-notch service organization that emphasizes a differentiating value proposition.

This leads to long-term, stable and profitable client relationships and a healthy, thriving business.

Contact me if you want me to send you the entire opinion piece.

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AK In The News: Brokers Have Affiliated-Fund Bias - July 16th, 2012

I was asked to comment last week on a poll in Ignites (A Financial Times Service) on how common in-house bias is in the industry. The question came in the wake of allegations by former JP Morgan advisors that they were pressured to use proprietary funds in the face of better performing and less expensive alternatives.

(I blogged about this a few weeks ago – The Danger of Selling Proprietary Products – posted on July 5th)

While the poll results indicated that most respondents said that bias is very common, which I agree with, what was surprising to me was that the poll also seemed to indicate that advisors/brokers tend to favor these funds. I strongly disagree with this assessment.

To quote from the article, and in keeping with my previous post:

“Andy Klausner, founder or strategic consultancy AK Advisory Partners, says the Ignites poll results are surprising given the wealth management industry’s emphasis on selecting best-of-breed money managers, as opposed to the firm’s proprietary products . “I don’t think it is true” that brokers favor in-house products, he says, “I think the reality is that most advisors don’t want any perception of conflict of interest.

However, it would be naive to think that there is no pressure put on advisors. Recently it was JP Morgan, and last year there were questions about Merrill Lynch selling Bank of America banking products.” Klausner says. “But if advisors feel pressure, they should stand up for themselves. Advisors should always be proactively showing clients how they come up with the recommendations that they make.””

What do you think?

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It’s All About Your Clients - July 13th, 2012

This is the title of our third quarter Unlocking Real Value newsletter. Given today’s economic, financial and political uncertainty, there isn’t a better time to focus on your client relationships and reinforce in their minds why they hired you in the first place. Let them hear from you, lest they focus on the negative press about JP Morgan, which has indirectly tarnished all of us who work in the industry.

Our newsletter focuses on two of our White Papers that can help you in this endeavor:

Click here to download the newsletter, or click on either of the links above to download a White Paper.

Take advantage of the usual summer lull to fine-tune your menu of offerings and your client servicing strategy. Make sure that you’re giving your clients what they want – or someone else will.

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The Danger Of Selling Proprietary Products - July 5th, 2012

When it rains it usually pours, but the last thing that JP Morgan needed was more bad press this past week, not only in industry publications but the New York Times as well. A number of former financial advisors claim that they were encouraged to favor JP Morgan’s own products even when there were better-performing and/or cheaper options available.

The issue of selling proprietary v. non-proprietary products goes deeper than JP Morgan however, and had been around for years. As an example, last year’s internal disagreement that became public at Bank of America/Merrill Lynch over whether or not pressure was, and should be, put on advisors to sell bank products to clients.

This latest focus on JP Morgan is bad timing for financial advisors – coming at a time of continuing anti-Wall Street sentiment and an investing environment where returns are hard to get. In football, they call it piling on!

(I’m going to focus here on how advisors should react to this ongoing stream of bad press. I’m not going to pass judgement on JP Morgan and others for their actions. Undoubtedly, pressure exists within certain financial institutions to sell proprietary products; one would have to be naive to assume otherwise. But the burden falls on advisors as well to resist this pressure; there is enough blame on all sides to go around.)

So what should advisors do? As with any potentially negative issue, they need to get in front of this one and proactively demonstrate to their clients that they always act in their best interest.

For advisors that have sold proprietary products, I suggest that you devise a plan to show clients how the investments that you have recommended to them made sense for, and fit into, their portfolios. Talk to them before they start asking questions. Take responsibility for your actions and don’t blame the company or anyone else for putting pressure on you – that’s a sure way to lose credibility.

If you haven’t sold proprietary products, discuss this issue with clients as well, because if you don’t, they will wonder about your motives (sad but true in the world we live in). Whether individually or through your social media outlets, reiterate how you work with clients and how your process is unbiased and your product choices holistic rather than profit-driven.

You have to and should defend your choices – why not turn it into a positive?

 

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