Unlocking Real Value Blog

How do Advisors Mismanage Their Practices? - February 25th, 2011

Published on February 25, 2011 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

When we analyze advisors, we usually focus on traits that successful advisors share. But are there traits that are shared by underperforming advisors as well? The answer is yes. If you’re mismanaging your practice, the odds are that you’re deficient in at least one of four closely linked areas. Taking corrective action in your weak area can help position you for future success. Here are the top traits that we see among underachieving advisors:

Lack of business plans: Whether you’re a single practitioner or part of a team, planning is an important component to your business success. The key is to match your resources with your growth expectations. The metrics used are typically desired assets under management and revenue. Where do you want your business to be in one year, or in three years? When combined with your desired minimum account size, you can determine the number of clients that you business should have. Armed with the information, you can analyze if your resources – both human and financial – are a match for your goals. Once resources and goals are in sync, you can begin to address the question of how you get there. Make sure that everyone in your organization understands the goals and how success will be measured.

Lack of a distinct value proposition: Why is someone going to do business with you? What value do you add that they can not get somewhere else? What is unique about you or your services? These are the types of questions successful advisors ask themselves. You notice that I didn’t mention the word “product.” That’s because the product is the commodity; the advisor is the differentiating point. Creating a unique value proposition is part of the process of developing your brand identity. A good brand is one in which every time a client sees something from you, they know it’s from you, and they are reminded of the unique value that you add.

Poor Client Service: Multiple surveys find that client service – even more than investment performance – will dictate whether clients stay with you or not. Part of the planning process for all successful advisors is devising a client service strategy that accomplishes two primary goals: provide the client a unique, enjoyable and profitable experience, and offer the service in an efficient manner. Good client service begins by asking clients what they want and how they want their services delivered (for example, in-person, telephone, e-mail). Challenge your staff to create your own unique client experience and make it part of your brand.

Being reactive instead of proactive: Finally, it’s the old saying that if the client has to ask, it’s too late. Successful advisors anticipate client questions and concerns, especially during volatile times. Call clients before they call you and make them feel like true partners in the relationship. Conduct client surveys as a good way to get feedback. Embrace social media to the extent allowed by your firm so that you can push out ideas to your clients on an on-going basis.

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AK Quoted: Poll: Competition From ETFs Is Top Industry Challenge - February 24th, 2011

Published on February 24, 2011 – Ignites – An Information Service of Money-Media, a Financial Times Company – written by Gregory Shulas

Competition from exchange-traded funds ranks as the biggest challenge facing the mutual fund industry. That’s according to a plurality of Ignites poll respondents.

Roughly 45%, or 155 voters, said ETFs, along with collective investment trusts, are the biggest threat to mutual funds. That made it the top option in a survey asking readers to identify the industry’s top challenge.

The high ranking comes more than two months after ETFs hit the milestone of $1 trillion in assets under management, and as more active mutual fund firms seek to launch their own ETF products. Some industry observers contend that the growth of ETF products is coming at the expense of mutual funds.

The Dodd-Frank Act received 17%, or 58 votes, coming in a distant second. The lackluster showing may reflect the lack of clarity regarding the law’s ultimate impact on the industry, due to Congress’s current reluctance to fully fund the legislation.

The industry’s concerns about poor equity product inflows appear to be diminishing as only 13%, or 45 voters, said weakness in that asset class is a top concern. Meanwhile, 9%, or 31 voters, said 12b-1 reform is a top challenge.

Rounding out the results were “mitigating the risks, losses imposed by low-yielding money market funds,” with 8%; “tougher scrutiny by SEC, Finra,” which received 6%; and delays in getting derivative-oriented products approved by the SEC, which collected 3% of the vote.

The top ranking for ETFs as a competitive threat to the industry is a development that fund professionals should take note of, says Paul Justice, director of ETF research at Morningstar. The option’s popularity partly stems from the fact that passive product advocates are having an easier time selling their story to post-crisis investors than their active management counterparts, he says.

“I think people responded this way because mutual funds have a harder time defining their value proposition to investors. ETF providers have effectively explained the tax efficiencies and the low costs of their products, saying, ‘Look at my expense ratio.’ What the mutual fund industry has failed to do is say that we charge more but we provide better services,” Justice adds.

Andy Klausner, principal at AK Advisory Partners, says the readers’ concerns about ETFs mirror what he sees firsthand in the industry. “I am not surprised by the poll results. ETFs have become increasingly popular and have been a focus of the press for more than a year. While there has been some negative publicity over some of the more esoteric and risky leveraged ETFs, mainstream ETFs have gotten positive feedback overall,” Klausner says. He adds that the mutual fund industry has a right to be concerned.

“Investors have never really understood the pricing of mutual funds — the many so-called hidden fees — and I don’t think the industry has ever done a good job of explaining them,” Klausner says. “Many sophisticated investors today are still confused about mutual fund fees. On the other hand, ETF fees are pretty straightforward and low.”

Brian McCabe, partner at Ropes & Gray, is surprised that Dodd-Frank collected only 17% of the vote. “I would have expected that, given the importance and sheer volume of regulatory changes occasioned by Dodd-Frank, respondents would have considered it, if not the top industry challenge, certainly a closer second than what the poll revealed,” McCabe says. “I’m not surprised to see that competition from ETFs and collective investment funds finished high on the list, but the margin by which it bested Dodd-Frank is surprising,” he adds.

Yet the industry still seems to believe that mutual funds have the strongest prospects, despite ETFs’ market gains. In a Dec. 14 Ignites reader poll, 51% said ETF assets won’t surpass mutual fund assets in the near term. That made it the top sentiment expressed in the poll. Of that group, 26% said it would take another 20 years for ETFs to surpass mutual funds, while 25% indicated it will never happen.

As of 3 p.m. Tuesday, nearly 350 Ignites subscribers participated in the survey, which is an unscientific sampling of the publication’s subscribers. Readers voted only once on a voluntary basis. Ignites’s audience consists of financial advisors, money managers and service providers.

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AK Quoted: Private Bank Retools Leadership, Investing Model - February 14th, 2011

Published on February 14, 2011 – FundFire – An Information Service of Money-Media, a Financial Times Company – written by Tom Stabile

Key Private Bank has ushered in new leadership as it continues an effort to open its investment platform and build out its staffing to pursue more new clients within its existing 13-state footprint. The changes include a greater reliance on outside managers by the private bank, which oversees about $22 billion for high-net-worth clients, apart from its separate brokerage and Victory Capital Management institutional asset manager business lines.

Tim Swanson stepped up last month from his role as CIO of Key Private Bank to now head the entire operation, a move in tandem with the elevation of his predecessor, Tim Lathe, to a newly created post as executive v.p. and sales executive for Key Community Bank. Swanson – who took on the CIO post in 2009, coming over from a similar role at crosstown rival National City’s private client arm – now plans to hire his successor as CIO through an ongoing search that includes internal and external candidates.

Since his arrival, Swanson has contributed to an overhaul of the Key private banking model that has expanded a largely proprietary investing approach involving stock-picking by its own portfolio management teams to add more external managers and offer more of an open architecture platform.

“I have been part of the group that has put Key Private Bank on the path that we’re on, and that we’re continuing on,” he says. “Our view is that our clients deserve our best answer, and at times we believe we are the best answer, but we’re not so arrogant to think we have all of the answers.”

The push has included adding more external separately managed accounts, mutual funds, exchange-traded funds and alternative investments to its menu, while tapping into the due diligence consulting and product access support of Prima Capital for traditional investments and Fortigent for alternative investing strategies. It had hired Prima several years ago and added Fortigent last year.

Swanson says Prima and Fortigent provide a first level of research to identify strategies that meet Key’s investment criteria. An internal due diligence team adds another layer of review to apply the private bank’s own view to zero in on products that are the best fit for its clients. He says the private bank also has internal research processes – investment strategists, research specialists and portfolio managers – covering equity securities, fixed income and derivatives.

Numerous private banks have opted to mix open architecture with their legacy proprietary approach in recent years, acknowledging an evolution of client demands and the axiom that “you can’t be all things to all people,” says Andrew Klausner, principal of AK Advisory Partners, a consulting firm. “Typically, a trust department or private bank will be good at one style, but can’t offer you the diversification with [internal resources]. If they can show they supplement what they do with [outside managers], it’s not as profitable, but clients today appreciate that.”

Klausner adds that using Fortigent and Prima shows the marketplace that Key is “serious” about its open architecture effort. He says private banks that put their own strategies under the same review as external managers probably can respond to most client questions about whether their proprietary investing options are free of conflicts.

Swanson says the private bank has made a “meaningful investment” to upgrade its platform over the past few years. On the staffing side, the push to expand resources will largely focus on adding staff to its existing private bank locations in the Midwest, Northwest, Northeast and Southeast, with outposts stretching from Anchorage, Alaska east to Portland, Maine and south to Fort Myers, Fla.

The private bank has about 120 lead client relationship managers and more than 700 trust, tax or other wealth management planning specialists overall. The private bank staffers tend to work in standalone locations, though sometimes are based in Key retail bank branches.

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What Makes a Mission Statement Good? - February 10th, 2011

A Mission Statement – a short statement of a company’s purpose – is an important part of your brand (or corporate identity). It helps distinguish you from the competition by articulating your value-added proposition in an intriguing and engaging way. A good Mission Statement makes the reader want to read more about you and your services.

It should be short – especially if people see it for the first time on your website – because if it isn’t, people won’t read it. As in your elevator speech – if you can’t articulate your value succinctly – it’s time to go back to the drawing board!

Having said that, there are three additional important components of a good Mission Statement:

1) It should clearly define the product and/or service that you provide;

2) It should clearly define who the target audience for your product and/or service is; and

3) It should contain a measurement metric so that you can evaluate its effectiveness.

It might sound daunting to accomplish these goals in a short statement, but it’s definitely possible. To view some samples of Mission Statements please click here. Slides 5-6 of this presentation provide general examples as well as a few specific ones from the financial services industry. (Contact me if you want to know the companies whose Mission Statements are listed on slide 5.)

Send me a draft of your Mission Statement and I’ll give you my two cents.

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Business Planning for Advisory Firms - January 31st, 2011

This is the title of a presentation I am giving Wednesday at TD Ameritrade Institutional’s 2011 National Conference. Click here for a full copy. The five sections of the presentation include:

1. Mission statements – how to start off on the right foot with a targeted and unique mission statement that encapsulates your value-added proposition and differentiating characteristics.

2. Business planning – How to develop a business plan that will assist you in taking your practice to the next level.

3. Client strategies – How to build goals and segment clients so that your capabilities and goals are in synch.

4. Performance management and measurement – How to measure your progress.

5. Resource allocation – How to allocate or reallocate your resources to put them to their best use.

I hope you find this information useful. Many view business planning as a necessary evil – and in some ways it is! But you and your business will be better for going through and sticking with the process.

(Contact me if you want copies of the worksheets that accompany the presentation.)

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My Two Cents on the Fiduciary Standard - January 27th, 2011

Since the release of the SECs report on the Fiduciary Standard last weekend, it has been the talk of the industry. I therefore feel compelled to add my two cents on the issue, especially since it will be one of the most discussed and debated issues of the year (and perhaps next year).

But before I speak to that issue, the SEC also released its report on the need for enhanced examination and enforcement resources for investment advisors; both studies were mandated by the Dodd-Frank Act. This study has gotten far less press, but its implication are just as important. To quote from the results “State regulators may not have adequate resources to continue to assume increased regulatory responsibilities, and investor protection could be compromised if such resources are lacking.”

The study made no final recommendations, but my concern is that regardless of how the fiduciary standard issue finally concludes, lack of effective enforcement will significantly decrease its effectiveness. Especially in today’s atmosphere of governmental budget cuts, don’t overlook the importance of how any eventual legislation is supposed to be enforced. Given the spotty recent records of the regulatory agencies, this study should be garnering a lot more the public discussion.

Now, on to the fiduciary standard. To borrow from another commentator, if this were a baseball game, we would probably be in the third inning – this issue will not be settled for a long time. At issue is if brokers should be held to the fiduciary standard that investment advisors are held to today. Under the recommendation, anyone providing personalized investment advice to retail customers would have to adhere to the fiduciary standard.

Part of the rationale given for the recommendation is that client’s do not understand that there are differences in the standards in place today. The SEC argues that harmonizing the regulation of advice providers would increase investor protection (although no specifics are given). The new standard would require that advisors show that any recommendations they make is defensible and that the paperwork is in place to ensure that investors understand exactly the service they are expecting.

A summary of my two cents:

– This issue will not be decided for a long time, and as the publicity continues the arguments are probably going to confuse investors more than anything;

– Instituting a fiduciary standard that is not enforced will not protect investors;

– Just because investment advisors today are held to this standard does not mean that all investors are protected; and just because brokers are not help to this standard does not mean that investors are being harmed;

– The burden continue to fall on the advice giver (broker or investment advisor) to explain how they act in the client’s best interest – to describe their process and how they hold themselves to a fiduciary standard (regardless of whether anyone else does).

At the end of the day, successful advice givers will be able to articulate their value-added proposition and succeed. The rest of this seems to me just to be a lot of noise……..

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Book Review: My Top 10 Thoughts on “Too Big To Fail” - January 21st, 2011

I decided to read “Too Big to Fail: The Inside Story of How Washington and Wall Street Fought to Save the Financial System – and Themselves” by Andrew Ross Sorkin after it was recommended by a friend. Up until now I have avoided reading many of the books on the financial crisis – maybe you can call it overload.

Well – you need to read this book! Not since reading “Barbarians at the Gate” (about RJR Nabisco)  have I enjoyed a business book so much. Yes, there was certainly some gossip in the book which made it all the more intriguing and enjoyable. But there are also many lessons to be learned and I have not been able to stop thinking about its continued relevance.

Here are my top thoughts and observations on this book – please read it and let me know yours. (Note – these are in no particular order.) I also apologize in advance for the length of this blog – but there is so much to think about in this book!

10 – Wow – we were really close to a total meltdown of the entire financial system! I mean really close! I knew this before – but now I know a lot more of the details. And we are very lucky that the solutions ultimately worked (namely the decision to use some TARP money to loan banks money). It’s still hard for many of us free marketers to stomach bailouts – as it was hard for those in power to do at the time – but I am more convinced now than ever that it had to be done.

9 – It could happen again – actually will probably happen again – and it may be quickly. To be honest, I’m not sure that we learned a whole lot from the experience; it doesn’t seem to have greatly affected the behavior of many. This is the scariest thing to me. We continue to create derivatives of derivatives and products like triple-leveraged ETFs and nobody – and I mean – nobody really understands what they are. This leads to my next observation:

8 – Title and position are not necessarily correlated to knowledge. We all know this intuitively, but the fact is that many of the CEOs of the largest banks and financial institutions had no idea what was on their own books. The sophistication of the products at some point greatly surpassed most people’s ability to understand them. Everyone accused the leaders of Wall Street of being greedy; while this is probably true to some extent, part of the crisis was not about greed but more about mis-management. Business schools certainly failed us! Risk management? Didn’t exist!

7 – I have more respect for Tim Geithner than I did before (I don’t want to give too much away here – read the book!)

6 – Conflicts of interest are so rampant that to even pretend that they can be avoided is naive. I didn’t know that Hank Paulson got a special waiver which nullified his agreement not to deal with Goldman Sachs (the firm he used to run) during his tenure as Treasury Secretary, did you? If I had a dime for every time they mentioned GS in this book……

5 – Luck pulled us out of this as much as anything – which is scary for the future. The way the government came up with the $700 million for the TARP program would have made Houdini proud! So scary though – what if they had been a few hundred million shy? What if Paulson had not been Treasury Secretary?

4 – It still doesn’t make sense to me – or most people in the book I think – why Lehman was allowed to fail and others were not. Luck of the draw? Personal vendettas? Dick Fuld’s personality?

3 – So many random decisions were made – many which luckily worked out for the best. But this does not bode well for the future. We continue to allow bubbles to expand without knowing the true implications. I don’t think we learned a whole lot from what happened. Maybe this is human nature. Maybe this is where greed comes in. I’m not sure. Municipal bonds, student loans .. what will cause the next crisis? Will luck pull us through again? And it will have to be luck because I don’t see any evidence that anything has really been put in place as a backstop.

2 – TARP started out as a 3-page bill that was expanded to about 50 pages. Certainly there were not enough details in the original heat-of-the-moment proposal. Last year’s financial services reform (and health care reform) bills were in the thousands of pages, many of which were probably never read – or understand. Maybe we use 100 pages as a goal moving forward? There is something to be said for short and sweet – and clear and understandable!

1 – We the people – us little people – really have no control.  I hate to agree with those that have always claimed that individual investors, for example, are at the mercy of the institutions. In some respects, what has happened over the past few years has verified that the system is really rigged. Maybe that is inevitable in a system that has grown so large and bureaucratic.

I still need to think through this book – I will probably have more thoughts at a later date. In the meantime, please read the book!

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1Q2011 Newsletter – A New Year, a New Congress … - January 17th, 2011

We have published our first quarter newsletter, which features our new White Paper “The 10 Keys to 2011 Marketing Success.”

Click here to see the entire newsletter. Our introductory letter, entitled “A New Year, a New Congress …” talks about the dichotomy between the outlook for the markets and the outlook for the economy as we move into 2011.

While the outlook for the economy is improving somewhat, concerns remain over the speed and magnitude of the recovery. On the other hand, most market participants are more optimistic about the outlook for the stock markets as we enter a very important earnings season. Even though there is a lot of optimism, however, earnings were so good last quarter there is some caution and concern if earnings this quarter will be as good.

Against this backdrop, we all need to run and grow our businesses. Enter our White Paper, which discusses marketing in today’s environment.

Have a great quarter – we would love to hear your feedback on our newsletter and White Paper.

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The 10 Keys to 2011 Marketing Success - January 12th, 2011

We just completed our newest White Paper – The 10 Keys to 2011 Marketing Success.

The White Paper begins:

The economic events of the past two years have brought with them the reality that while referrals are great, and will always be part of growing a business successfully, many practices that have relied on referrals exclusively have more recently needed to supplement these referrals with a more active marketing approach.

For those who have not had to actively market for a number of years, or those who have not been happy with their marketing success – or lack thereof – one of the stark realities is that marketing has changed. Competition has increased, clients have become more discerning and social media has had a dramatic impact on the types of activities that are most effective.

Click on the link above to read the rest of the Paper. It can also, along with the other White Papers referenced in it, be found on the Resources tab of our website.

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Giving Advisors What They Want - January 7th, 2011

I’ve read a number of articles over the past few days analyzing why communications between advisors and wholesalers break down. Many mutual fund companies and investment managers continue to struggle with the best way to earn the trust of advisors, and in turn become one their core investment offerings.

Well – I have a news flash – it really is not all that complicated! The one caveat is that good performance must be there – because if an investment firm is consistently under-performing, it will be very difficult for any wholesaler to establish a long-term relationship with any advisor. Let’s not be naive – this is all about business. The wholesaler wants to help the advisor, but if no business comes his way, this support will inevitably diminish.

I don’t view this as a conflict of interest as much as a reality of life. Top-notch advisors do business with multiple providers of investments, and it’s fine that the level of support and communication is a factor in the decision-making process. After all, they need to provide their clients with information on an on-going basis.

So, what are the keys to success in this advisor/wholesaler relationship?

The first key to success is one that does not have a lot to do with the wholesaler per se. It’s important that the firm that the wholesaler works for communications openly with the home office of the advisor so that the rules of the road are clear and that the priorities of the sponsor become those of the investment provider (and in turn the wholesaler). Advisors do not want to do business with firms that will potentially bring him into conflict with the powers that be at his firm. A strong firm-to-firm relationship makes the job of the wholesaler easier from the start.

Then it is up to the wholesaler. Begin by asking what the advisor wants  – not by telling them what you offer and can do for them. The best salesmen – and wholesalers are after all salesmen – listen more than they talk. While there will be a lot of common answers – like value-added presentations or financial support for seminars (if allowed by the firm) – each advisor will want to get information and communicate with you in his own way.

Make the advisor feel like the services you area providing, and the way that you are providing them, is unique and custom to his needs. Treat him like the client that he is. Ask how often he wants to hear from you and in what form. Ask for permission to contact him in case of “emergencies” that need to be communicated quickly.

In other words, treat the advisor as a partner. Advisors spend a lot of time making sure that their clients are happy – wholesalers should do the same. The most successful wholesalers understand that advisors want this same level of attention given to them in their relationship. See – its not that complicated! But it does go beyond having the best value-added training modules.

Its the relationship, the relationship, the relationship. And communication, communication, communication.

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