Unlocking Real Value Blog

Published on June  17, 2010 – FUNDfire – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The continuing cuts by wirehouses of sales assistant positions have an amplified effect on how advisors run their practices and how clients perceive these advisors.

What was a trademark downsizing move circa fall 2008 is unfortunately showing no signs of abating. This was most recently witnessed by Morgan Stanley Smith Barney’s decision to cut sales assistants along with other support staff at the brokerage. An industry recruiter summed it up best by telling FundFirelast month that such cuts make it harder for advisors to be happy. “Sales support on the local branch level is very important…You will chip away at morale,” the observer remarked.

When firms eliminate the support sales assistants provide, the advisors must take time away from their most important business duties: client-facing activities and investment management. The cuts force advisors to take on tasks like processing trades, answering requests for account statements and other general administrative inquiries. In addition, these cuts also hurt the advisor’s ability to schedule client appointments that can build future business.

Consider, too, that the sales assistants at wirehouses today may be taking on other important duties, such as office receptionist work, due to previous support staff reductions. That means that it isn’t just the sales assistant’s work that may be piling up on the advisor’s desk.

The impact on client service quality is substantial. Remember that the more time advisors have to proactively call clients on investment issues, the better off their relationships are. If advisors must spend more time on administrative duties, they fall into a perpetual state of catch-up on client service matters. Their frustration increases while productivity decreases.

What makes the situation far more troubling is the fact that many advisors with sales assistants are not spending quality time with clients. Just look at the facts.

Wirehouse advisors reportedly spend only 27% of their time meeting with existing clients, according to a Cerulli Associates advisor time allocation study done in conjunction with the College for Financial Planning, the Financial Planning Association, IMCA and Morningstar. While this is more time than RIAs reported they spend with investors – about 22% – it is still much less time than most advisors would prefer. (Advisors actually say they have even less time to spend on investment management, which takes up 25% of wirehouse advisors’ time and 23% of RIAs’ time.)

Additionally, FA Insight research found that advisors spend just 50% of their time on client servicing, including meetings with existing clients and other revenue-generating events. Smaller practices tend to get hit harder in this regard.

The harsh truth for the wirehouses is clear. Their advisors are at risk of losing clients if they become spread too thin and also have less time to prospect for new business. While other types of firms have cut support levels, wirehouses especially can’t afford to neglect their primary producers while they also weather a large number of defections. And the argument that these brokerages are cutting back because of integration efforts following mergers shouldn’t apply to the sales assistants if we’re not seeing advisors being let go in the same proportions.

I understand that wirehouses must be bottom-line conscious in light of current economic conditions. However, I particularly question the continued cutting of sales assistant support. This may very well be one of the quickest ways to negatively impact an advisor’s business and alienate clients all at once.

Published on May 19, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company
By Gregory Shulas

Mutual funds that embrace alternative investment strategies will face tougher scrutiny in the wake of the May 6 “flash crash.” That’s according to a vast majority of Ignites poll respondents.
 

Roughly 74%, or 124 voters, said mutual funds that use derivatives will face tougher reviews in the months ahead from regulators and investors. That made it the most popular option selected in an Ignites survey that asked whether the mysterious market gyration will result in more scrutiny of alt-style mutual funds.

Of the majority vote, 43%, or 72 voters, expect a moderate increase in scrutiny, while 31%, or 52 voters, said a significant increase in oversight awaits such funds.

In contrast, 26%, or 44 voters, said it will be business as usual for mutual funds that use alternative strategies, such as futures contracts, swaps or commodities. That made that option the survey’s least popular choice.

Waddell & Reed’s Ivy Asset Strategy fund came under a microscope after Reuters reported that it was responsible for an unusually large wave of futures selling that allegedly contributed to the “flash crash.”

The Kansas City area-based firm unloaded 75,000 e-mini contracts, or S&P 500 derivatives, during the 20-minute equities plunge, according to a Chicago Mercantile Exchange document that Reuters obtained. The document apparently identified Waddell as the unnamed trader that Commodities Futures Trading Commission chairman Gary Gensler mentioned in congressional testimony this month.

Waddell & Reed has refuted claims that it was responsible for the disruption. The company has cited an analysis showing how its trading accounted for 1% of the volume traded in the S&P 500 on May 6. The gyration at one point caused the Dow Jones Industrial Average to fall by nearly 1,000 points while temporarily pushing well-established companies into penny stocks.

Regardless of what investigators ultimately find, the incident is spurring questions about the effect alt-oriented funds can have on the market, acknowledges Andy Klausner, principal of AK Advisory Partners, a Boston-based consulting firm.

Until the pending financial reform bill is finalized, it’s hard to know where regulators will stand on retail funds that emphasize derivatives, Klausner says. A legitimate concern for the industry is whether Congress and other government agencies will rush to judgment and impose unnecessary restrictions on alt-oriented products, he says.

“I think there is still so much uncertainty with what happened on May 6,” Klausner says. “Let’s hope regulators don’t react too quickly to what happened. We… need to determine what exactly happened first.”

Alternative-oriented mutual funds have grown in popularity as financial advisors have sought exposure to asset classes that have low correlations with traditional equity strategies. By accessing alternatives in a mutual fund structure, investors receive lower fees and more transparency than they would in a hedge fund, industry experts argue. Further, alt-style mutual funds are free of the hedge fund gates that lock up clients’ assets until performance recovers.

Nearly 170 readers participated in the survey as of 3 p.m. Tuesday. The survey is an unscientific sampling of Ignites subscribers, who include money managers, service providers and financial advisors. Participants were self-selected and voted only once.