Unlocking Real Value Blog

Advisors – How Do You Compare To Your Peers? - March 14th, 2012

PriceMetrix – an industry-leading data aggregator – just released its annual review of the retail wealth management business. The study confirmed some of the trends that have been playing out in the industry for the past few years and offered up some interesting data which advisors can use to see how they match up with their peers.

(One of the reasons that PriceMetrix is highly regarded is the breadth of their surveys – their data represents 3.2 million investors, 500 million transactions, 1 million fee-based accounts, 4 million transactional accounts and over $900 billion in investment assets.)

Some of the general results of the survey include:

  • Advisors and firms significantly moved away from smaller and less productive households to larger and more productive ones. The average number of households per advisor dropped 8% last year while the average revenue per household increased 7%. (Smaller households are defined as having less than $250,000 in investible assets.)
  • Overall, the industry percentage of smaller households decreased from 71% to 65%. And the percentage of larger households (defined as having more than $1,000,000 in investible assets) increased 12% and now represents 57% of all new assets added.
  • The trend toward fee-based accounts continued, with the number of fee-based account per advisor increasing 10% on average in 2011. Fee-based revenue, as a percentage of total revenue rose 10%.
  • The average return on assets declined slightly to 1.19% (it was 1.23% in 2009). The average new account had a ROA of 1.06%, confirming that the trend is to price new accounts lower than existing accounts.

None of these trends are surprising. Many advisors understand that it is much easier to service a smaller book of larger clients. The trend toward fee-based accounts has also been in place for a number of years. Somewhat disturbing, however, is the trend toward lower ROA. Even though we are in tough economic times, advisors who are able to articulate their value-added should not have to discount their fees to be competitive.

Take a look at your business and see how you compare to the average advisors in the study in the following four metrics:

  • Number of households – 177
  • Average household revenue – $3,174
  • Percentage of households with more than one account – 56.2%
  • Average household revenue of households with more than one account – $4,525

So advisors, what are the implications of this report? If nothing else, look at your book of business and see if you are using your time and resources efficiently. Are you providing the best client service? Are you operating efficiently? Are you being paid adequately for your time? Are you pricing your accounts correctly?

The goal here is not to see if you are “average.” But rather to see if there are ways that you can use these statistics to make improvements to your business model.

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Bank Of America Still Doesn’t Get It - March 7th, 2012

The seemingly endless discussion of whether advisors at Merrill Lynch are benefiting from their marriage with Bank of America continues; the most recent war of words was sparked by Merrill Chief John Thiel, who defended the partnership after his predecessor made disparaging comments on the subject upon leaving the firm.

Bottom line? Band of America just doesn’t get it. Ever heard the expression perception is reality? Well, in this case the perception has been – and will likelihood continue to be – that the negatives of this relationship outweigh the positives – certainly from the perspective of many advisors who have always been loathe to be told what to sell.

This mentality among advisors is unlikely to change – so why fight it? I’m not saying that Merrill Lynch should stop trying to help advisors cross-sell so that they can deepen their client relationships. And I’m not saying that Merrill clients won’t benefit from the broad range of banking services that Bank of America offers. But management – why do you have to be so vocal about it? A little defensive, maybe? Why not just do what you are doing and allow advisors to utilize the services that they want when they want? If you build it they may come; if you force feed it they will not.

Advisors prize their independence, and the sanctity of the client relationship to many advisors is based on proving unbiased advise and services at all times. That’s not to say that many won’t use Bank of America banking products – they will if they feel that a particular offering is in their clients best interest and that the actions of the bank won’t cost them their client relationship. Anyone remember the $5 debit fee fiasco a few months ago?

The latest evidence of Merrill’s continued misreading of the situation was a Fundfire ( A Financial Times Service) survey last week. 41% of respondents (many presumably Merrill advisors) said that while the acquisition was good for the bank, it has not been good for the brokerage or advisors. This was the most popular answer. The second most popular answer, given by 30% or respondents, was the even more negative choice that the merger has proved bad for both parties, and is a bad fit with no lasting benefits. And just this week, Investment News reported that over the past three months, seven of the ten largest advisors moving firms left Merrill for greener pastures.

Hey John Thiel – stop talking about the benefits and let nature take its course. You can’t win this one in the press – win it quietly!

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A Growing Threat To Financial Advisors - March 2nd, 2012

The E*Trade baby commercials might not be so funny after I tell you about the latest comments from Cerulli Associates on the growing threat of direct providers such as Fidelity, Schwab, E*Trade and other similar firms.

The offerings of these firms in areas such as asset allocation, managed accounts programs and access to financial planners are today, according to Cerulli, “robust enough to mimic traditional financial advisor models.” Cerulli believes that the most at-risk clients are those with between $100,000 and $ 2 million to invest, which seems reasonable to me.

Many advisors might not want a lot of clients at the lower end of this range, but I bet most would not want to believe that their $2 million client relationships are at risk. Now, while a segment of those that go direct probably includes people that don’t want to ever pay a fee, and thus don’t represent a threat to many advisors – don’t get too comfortable yet.

Another Cerulli reports points out a scary dichotomy – while only 20% of advisors think that their clients have other advisors and/or direct accounts, 75% of clients surveyed said that they owned direct accounts. According to Cerulli, “Clients think of their direct accounts as a place to try their own investing ideas or as an emergency fund, which is segregated from their main pool of assets.”

This last point may be a saving grace for many advisors. However, given that I have reported before in other stories that many wealthy clients have more than one advisor, and given the fact that many clients do not seem to be forthcoming in admitting these relationships, advisors would be wise to focus more on this threat than they would be to rest easy.

My recommendation is to view direct providers as as large of a threat as other competitors and to make sure to continually point out to clients your competitive advantages vis-a-vis them, as you do everyone else. Ask the question of whether they have such accounts; offer to add these accounts into your performance analyses (as you hopefully do for all of their outside accounts); demonstrate to them why your fee is more than justified and you deserve to be their “Alpha” advisor.

Your brand should be able to set you apart, as should your client experience. But take the threat seriously so that you can still laugh at those commercials!

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AK In The News: Mutual Fund Industry’s Top Challenge - February 29th, 2012

Today’s Ignites (A Financial Times Service) highlights the results of their poll on the top challenges facing the mutual fund industry today. Respondents were given five choices to select from. The results on the top challenge were as follows:

  • Market volatility and economic uncertainty (43%)
  • Competition from ETFs (21%)
  • The proposed money market reforms (16%)
  • Tougher scrutiny by SEC, Finra (8%)
  • Encouraging flows into equity products (6%)

I was a little surprised by these results, as in my mind I have the top two answers reversed – with ETFs being the biggest threat. Interestingly, a similar poll done in February of last year indicated that 45% of respondents chose ETFs as the biggest threat, making it the most popular choice. (That poll did not include the economic uncertainty option.)

My thoughts on the results, as indicated and quoted in the article are:

“”Long-term, of course, economic uncertainty always will be a factor. But this uncertainty impacts all types of investments, not just mutual funds,” Klausner says. Competition from ETFs represents a more daunting challenge to the mutual fund industry than economic uncertainty because it is a specific, rather than a generalized threat, according to Klausner.

“Given the ongoing press about the underperformance of active management, I would think that ETFs, most of which are managed passively, would continue to be a large threat to mutual funds. This comes in conjunction with the growth of ETFs and the increase in the number and type of ETFs available: sector, industry, commodity, et ceterara,” he says.”

What do you think?

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How To Succeed In Institutional Sales ….. - February 23rd, 2012

FundFire ran a series of articles last week that chronicles the woes currently facing many institutional money managers and in turn their sales people – fewer searches, smaller searches, a longer sales cycle, more emphasis on alternatives at the expense of traditional managers, etc., etc. Don’t forget widespread under performance as well, and the recent “bashing” of active management. It’s also become harder to get and keep the attention of the gatekeepers.

Against this backdrop, institutional sales professionals are struggling. While many of these macro issues account for these woes, there were some definite opinions cited from those interviewed about lack of marketing support from their firms, personnel turnover, etc.. These issues did pale in magnitude, however, to the more macro battles to most.

So how does an institutional sales professional succeed in this environment? There are a few things that come to mind:

1) Make sure that your firm’s brand is strong and that you are clearly articulating the distinct factors that differentiate you from the competition. Internally, get with your marketing people and portfolio managers and make any adjustments that are necessary to highlight your competitive advantages – in your website, marketing materials, client presentations, etc.

2) Educate the rest of your firm on today’s environment and garner support for your efforts. This might be a little CYA – but the more your firm recognizes your challenges, the more willing they will be to help you as necessary. For example, the reluctant portfolio manager might be willing to come to a presentation that you feel he should. OR more marketing dollars might be budgeted.

3) Be patient – you won’t be able to change the world tomorrow, but in the words of one of the people quoted in the article’s – be professionally persistent. Confirm with the gatekeepers that you are giving them the information that they want, how they want it and when they want it. Relationships take time to build, and while you may at time frustrate some of these gatekeepers, by being persistent they will remember you and your firm when an appropriate opportunity arises.

I’m not going to sugar-coat this and say that it is easy out there today – it isn’t. But there will always be opportunities and movement in the institutional money management world – those patient enough and smart enough will succeed, while those that blame others and throw up their hands will not; this is the way that it always is after all.

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AK In The News: Talent Contest Tightens For High-End Advisors - February 14th, 2012

I was just quoted in an article in Fundfire (A Financial Times Service) which focused on two main points – the hiring prospects for high-end advisors in 2012 as well as the outlook for continued restructuring (code word for budget cuts and layoffs) at home offices in the brokerage community.

While I was not asked to comment on the first question, I agree with the gist of the article that 2012 will be another good year for hiring. The brokerage firms continue to recruit, understanding that wealth management will continue to be a driver for profitability (as they see investment banking revenues decline). And the RIA world, which has been in a growth mode, will continue to be in such a mode, as they continue to attempt to take market share.

As to whether or not the home office restructuring for brokerage firms is over, I disagree with the other gentlemen quoted, who feels that this downsizing has worked its way through the system.

To quote the article: “Not everyone shares this outlook, however. Various factors – such as market competition, evolving technology that automates more processes, pressure on fees from demanding clients, and the temptation to further streamline branches in congested markets – all will encourage more big-brokerage staffing cuts, says Andy Klausner, principal of AK Advisory Partners.

How can they be more profitable without cutting more people in this environment? he asks. I don’t see any reason why you won’t continue to consolidate branch operations. If you have four branches in Cleveland with four operations centers, that’s a place [firms may target]. I think we have more to go.” (I didn’t mean to pick on Cleveland – that is where I am from – I just used it as an example! Also, by operations centers, I am referring to the cages.)

What do you think?

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Beware The Rise Of Advisor-As-PM Managed Accounts - February 2nd, 2012

Having recently read a number of articles about the significant growth of advisor- or rep-as-PM (portfolio manager) managed accounts, a phenomenon that has actually been taking place since the 2008 financial crisis, I’ve been wondering what’s driving this trend – and do advisors really want to go there?

One such article detailed the rollout of a new trading technology platform at Merrill Lynch included the following two points:

  • More than 3,800 Merrill reps participate in this program, managing assets of about $88 billion.
  • A new survey from the Aite Group found that 42% of respondents think that this segment will be the fastest growing for clients with between $250,000 and $10 million in assets, which is well ahead of other fee- and no-fee-based options.

These accounts give the advisor more control over managing client accounts; in particular, they offer the opportunity to raise cash quickly. This feature is especially important during volatile markets. But, frankly, I don’t buy into this theory.

Top advisors retain control of asset allocation decisions regardless of the chosen investments; this is one of their value-added functions. Such control would include the client’s overall allocation to cash. Additionally, many investment mangers have altered their cash-raising capabilities in the face of the 2008 financial meltdown, making it easier for them to react to the market.

Why this trend then? Perhaps fees are one reason. Compensation in these accounts is generally higher to the advisor, since there is no outside investment manager involved. Fees in general are being squeezed today in the face of years of mediocre market returns. Positioning oneself to get a larger portion of the fee is one way to increase revenues.

Regardless of the reason, however, I would caution advisors that have moved, or are considering moving, the majority of their business into these types of accounts. Remember why traditional fee-based accounts have grown as they have. Hiring an outside investment manager somewhat shields the advisor from poor performance, in addition to putting them on the client’s side of the table. If an advisor hires a number of managers for a client, for example, and one begins to underperform, that manager is replaced – not the advisor.

This traditional model allows the advisor to concentrate on what most advisors do best – relationship management. It’s hard to prospect, market, service and manage investments all at the same time. It’s much more effective to hire a specialist to manage each portion of a client’s portfolio. Remember the theory of gaining control of the client by giving up control of the investments.

I don’t mean to infer that all advisors that participate in these programs are making a mistake. Some advisors truly have an aptitude for managing money. Even these advisors, however, should probably only be managing a portion of each client’s assets. Top advisors should diversify their books of business, just as they diversify a client’s portfolio.

There is a place for advisor-as-PM accounts, particularly in a partnership in which one partner can concentrate on this area. However, I question whether all the growth we are seeing in this area is a positive trend, and if advisors are doing themselves or their clients any favors by jumping on the bandwagon.

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AK In The News: Active Management Down, But Not Out - January 26th, 2012

Active management has unquestionably been under fire lately, especially since the vast majority of actively managed funds have underperformed the market the past few years. So is active management down and out, or just down? Ignites, a Financial Times Service, conducted a poll of its readers last week and roughly 83% of respondents felt that active management will come back; almost 800 people responded to the survey.

I was quoted in the article – and I agree – active management may be down but it is not out. My quote:

“It has unquestionably been a tough time for active management. Witness the outflows at American Funds and some other mutual fund complexes. I do agree that stockpickers will be back and some have actually done quite well despite the overall trend. At the end of the day, it is important to remember that it is a market of stocks. Some will do better than others based on company-specific characteristics and industry specifics.” I added “The rise of indexing and exchange-traded funds will continue, but portfolios still will be composed of both actively and passively managed funds.”

I also want to add that in the case of American Funds, which has been hit hard in the press, it’s also an issue of size. As any fund gets bigger it gets harder to outperform as they are forced to invest new cash regardless of their current outlook on the market. As they become larger, they become more like the market – and thus outperformance becomes more difficult.

So let’s be careful not to confuse size and underformance with the death of active management. This isn’t the first time that this discussion has taken place in down times, and it probably won’t be the last!

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RIP Morgan Keegan - January 19th, 2012

The old Morgan Keegan as we know it will soon be gone. Isn’t it ironic that the grand plan of management to resurrect the firm via venture capital financing was apparently sidetracked by the mess at MF Global among other things – when the reputation of MK was itself irrevocably harmed by its own financial mess with its RMK Funds.

The saddest thing for me is that the losers in this deal – the home office personnel of MK – are a great bunch of loyal employees and long-time friends. They are the people that are least able to afford losing their jobs, and since many have long-term ties to Memphis, the least able to pick-up and move to Florida. The other loser from this deal is the City of Memphis.

Sure, part of the deal included an undefined support center in Memphis. But I can guarantee you that it’s not going to be 900 or 1000 people for very long. The only way that a deal like this can make financial sense for Raymond James is going to be for them to consolidate operations, IT and some of the investment product areas among other support areas. Credit the folks at MK for getting some concessions so that Memphis does not lose all of its jobs. But in 12 or 18 months, when the deal gets closer to being done, the outcry over job losses will be far less than it would be today.

I do give MK upper management credit for being master negotiators even though they were not able to take over the firm themselves. The CEO of MK is now President of Raymond James and his old department, Fixed Income, is not surprisingly going to be headquartered in Memphis (as is Public Finance). So the top executives did okay for themselves. Anyone surprised?

For most financial advisors, the deal will work out just fine. In fact, a close friend who is an advisor at the firm said to me last week that Raymond James is one of the firms he would have considered going to. Advisors will be paid to stay; and if these offers are too low, they will leave and get paid by another firm. But most will continue on at the combined firm for now with only the interruption of new paperwork for their clients.

RIP Morgan Keegan – and good luck to the many loyal back office employees that made this firm great.

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2012 Success – It’s As Easy as 1-2-3 - January 10th, 2012

A new year brings new challenges.

For many it’s about the balance between growing the business on one hand and providing good client service on the other. Luckily, these choices are not mutually exclusive.

Finding a balance between your time, energy and focus may be easier than you think. Our newest White Paper, entitled “2012 Success – It’s As Easy As 1-2-3,” highlights three basic concepts that underlie successful businesses:

  • Differentiate yourself from the competition
  • Segregate your clients and prospects into niche market segments
  • Communicate consistently and effectively
Practitioners and businesses that follow a strategy that incorporates these principles will position themselves for success vis-a-vis their competition. However, it’s important to point out that including these principles is not enough – you must successfully implement them as well.

Click here to see the complete White Paper.
Click here to see our 1Q2012 Unlocking Real Value newsletter.

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