Unlocking Real Value Blog

Unlocking Real Value Newsletter – Avoiding A Summer Slump - July 10th, 2014

Our 3rd quarter newsletter is out! The lead article is entitled “Avoiding A Summer Slump.” Click here to read it.

The stock market is doing its best – helped by a dovish Federal Reserve – to avoid a summer slump. It has already made those who “sold in May and went away” regret it.

How about you? We all know that summer is a slow time in the financial services industry; clients are away, colleagues are away and three-day weekends scream for our attention. We can’t stop our clients from going away – as much as we would like to sometimes – but we can make our time as productive as possible by doing some of the things that we claim we don’t have the time to do the rest of the year.

Why not revisit your competitive positioning strategy, including your value proposition and other tools that help differentiate you from the competition? Can a few revisions make you even more competitive moving forward?

We have a lot of great resources on out website, and specifically, here is a link to our updated White Paper Can You Articulate Your Value Proposition?

Take some time to review the White Paper and strengthen your position vis-a-vis your competition.

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Retail Alternative Investments – The Next Bubble? - June 17th, 2014

I have been concerned for a long time that the rapid growth (number and type) of liquid alternative investment products being developed for the retail marketplace represents a potential problem. Many clients – and in fact advisors – don’t understand what these investments are, how they work and why they should invest in them – other than they are the flavor of the day.

A number of recent studies confirm my fears:

– Jackson National Life Insurance conducted a study of more than 300 investors who work with advisors and have more than $200,000 in investible assets. 43% admitted that they have no idea what the term alternative investments means. A larger study of almost 600 investors including those who work with advisors and those who don’t, yielded similar results.

– Invesco conducted a survey last year with Cogent Research which found that only 23% of 429 investors with at least $250,000 in investible assets and working with an advisor were familiar with the term “alternative investment.” 5% of the survey respondents thought that money market funds were alternative investments.

Yet the money keeps pouring in … As of May 31, net flows in five our of seven Morningstar alternative categories are up, led by nontraditional bonds.

I see two major problems. One is that there is really no industrywide consensus of what an alternative investment is. People often confuse an alternative investment with an asset class. This leads to the second problem – these surveys confirm that the education surrounding these investments has not kept up with their growth.

And this is where bubbles start. People feel like they have to invest in something so that they don’t get left out. They don’t really know what they have and they don’t even know why they have them in their portfolios. Do I have a long/short mutual fund in my portfolio because it diversifies risk or because it enhances return, or both?

Education has to start with the sponsors of these investments educating the distributors and their advisors – and providing the education materials in turn for advisors to educate their clients. I would have hoped the industry would have advanced further in this task by now; it should have.

But the education also has to incorporate the notion that liquid alternative investments are not for all investors and you can be successful without them in your portfolio. Even some sophisticated institutional investors shun alternatives for lack of a thorough understanding.

We can prevent the next bubble if we are smart about it. Lets hope the industry is! Given past history, however, I have my doubts. What about you?

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AK In The News: US Managers Win World Cup Of Marketing - June 12th, 2014

Today’s Fundfire (A Financial Times Service) has an article on how U.S. asset managers rank first (and U.K. firms second) in effective marketing – both defending their home turf from foreign competitors and competing abroad – according to a new survey by FS Associates; I was asked to comment on these results.

The results are not surprising, given the maturity of the pension markets in the two countries. To quote from the article: “The marketing domination by U.S. and U.K. firms should be expected, says Andy Klausner, principal and founder of AK Advisory Partners.

“It’s a size issue,” he says. Both the U.S. and U.K. are home to the world’s largest asset managers, and have more developed institutional investor markets, he says. “It’s the bigger players that go overseas,” he says. Available resources are important for strong marketing.”

The article also discussed how managers could grow their businesses abroad. Again, quoting from the article: “But marketing for institutional investors is inherently different than for retail investors, says Klausner. “You’re marketing yourself to that consultant,” as opposed to directly to a client, he says. Institutional managers need to focus on building their brand through relationships with consultants, particularly the large, global consultants.

If a manager can have a strong relationship with a consultant in the U.S., it’s likely that the consultant will also look at the manager for its institutional clients in other countries as well, says Klausner.

“It’s very rare that a manager would be brought into [an institutional] relationship not through a consultant,” says Klausner. But, asset managers can still focus on building brand awareness with institutions. While a consultant may drive a manager selection process, institutional clients may still request the consideration of certain managers they’re familiar with, says Klausner.”

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AK In The News: Advisors Use Preferred Lists, Don’t Admit It To Clients - June 11th, 2014

I was asked to comment on a poll which asked Ignites (a Financial Times Service) readers on the impact that the Preferred Lists provided by their firms has on their investment selection process. More than half (57%) said that they regularly use them but don’t admit it to clients. 20% said that they were highly influential in their selection process.

Now, lets be honest, when you answer a poll question you have to pick the one that is closest to your thoughts. I chuckled when I heard the results because of that extra line “but don’t admit it.” I don’t think this answer is quite as scandalous as the headline might indicate. The reason is that there is often no reason to tell the clients that you do rely somewhat on the advice of your firm – as long as you do something above and beyond just taking their recommendations.

In fact, in my mind, that is what differentiates the better advisors from their peers – they take the available information and then add some layer of their own work above and beyond it. To quote from the article: “But the extent of that influence varies by channel and advisor type.

Advisors with investment expertise — as opposed to financial planning and client service specialists — are more likely to forgo consulting recommended lists and instead pick funds based on past experiences with certain products and managers, consultants say.

Even so, such advisors remain likely to at least evaluate these firm-approved products as a starting point for their own analyses. Whether advisors look beyond the preferred list likely hinges on their comfort level with technical investment concepts, says Andy Klausner, partner at AK Advisory Partners.

“It depends on the advisor’s sophistication, their experience and the size [of their book]. It’s the newer, younger, less experienced advisors that rely more on recommended lists and model portfolios,” Klausner says. “The more experienced people want to say, ‘I pick my own manager and do my own research.’

“It’s always a good selling point to address what you do above and beyond what the firm does.”

Certain segments of the industry are also more likely than others to balk at buying products prescribed by a central research unit. Both Klausner and Fronczke say that reliance on recommended fund lists appears highest in the wirehouse and regional broker-dealer channels and least prevalent in the independent RIA space.”

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AK In The News: Platform Pumps Up SMA Menu, Crafts Models, Adds New Clients - June 11th, 2014

Today’s Fundfire (A Financial Times Service) featured an article on FolioDynamix adding a new client in the bank trust department space. I was asked to comment on whether or not this signals a new trend – banks turning more toward third-party providers of investment platforms rather than developing them on their own – and what effect this has on SMA managers.

I don’t think that this signals the beginning of a new trend, because in fact, their has been growth in outsourcing for many years. It may be new for FolioDynamix, and signal a new direction for their business, but banks that have expanded into the fee-based business arena have for many years faced the issue of building it v. buying it.

And frankly, if you don’t have the expertise, personnel or resources in-house, it is easier to buy it. While ultimately the end fees to clients may be higher because you are paying a third party, it has been a way for banks to get up and running faster and quicker.

As to the question of what this means for SMA managers, to quote from the article:

“As the shift away from proprietary offerings toward more open architecture continues, turnkey platforms, like FolioDynamix can pose an opportunity for model SMA managers to expand their distribution without having to deal directly with small bank research teams, explains Andrew Klausner, founder and principal of consultancy AK Advisory Partners.

“If a bank or trust is new to the business they’re not used to managers having to come through,” Klausner says. “From a marketing point of view it’s easier to get in with these [turnkey] firms that will showcase you.”

“It’s definitely a way that you can reach a lot of bank trusts through a single platform, as long as you’ve got the product that they want,” he says. “Getting on a platform like FolioDynamix will help, but [managers] have some work to do on their own to differentiate themselves and make their options valuable for a bank trust.”

For banks, “it makes sense to hire these third party TAMPs [turnkey asset management platform] that offer models as well,” says Klausner, the consultant. “The easiest thing to do is go out and buy the whole bundle.””

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AK In The News: Layoff Axe Still Swings Often, But With Less Force - May 1st, 2014

The recent announcement that State Street is going to lay-off 400 employees prompted Ignites (A Financial Times Service) to seek my opinion on whether or not this signaled the beginning of a trend in the industry. I do not believe that it does.

Layoffs are a natural course of business, especially as companies increase their technological capabilities. And emotions aside, this layoff number is relatively small, less than 1% of the firm’s total workforce. Layoffs are also natural after mergers and as a way to reduce duplication. While layoffs will always be an unfortunate part of any business, I don’t think too much should be read into this announcement.

The industry has done a much better job since the financial crisis of restraining itself when hiring during good times. To quote from the article:”“Before the crisis, the industry was known historically for hiring a lot during the good times and laying a lot of people off during the bad times,” says Andy Klausner, founder and principal of AK Advisory Partners. “But since 2008, the industry has gotten better. It hasn’t overhired during the good times, so the overall level of layoffs has probably declined.”

The dismissals from State Street are not part of a trend toward more layoffs industrywide, but rather a move toward leaner back-office operations and support staff workforces, according to Klausner.

“You’re not hearing about massive layoffs anymore,” he says. “You’re hearing about rationalization in servicing clients and replacing the human factor with technology.”

Indeed, industry layoffs have grown less frequent. Experts say operational employees are the ones receiving pink slips, particularly those made redundant due to technological advances and structural changes at the firm.”

What do you think?

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AK In The News: Baird Dumps Wilshire, Hauls Fund Selection In-House - April 29th, 2014

I was asked to comment on an article which appeared in today’s GatekeeperIQ (A Financial Times Service) on Baird bringing research on mutual funds in-house (and terminating its relationship with consultant Wilshire).

There can be many reasons why a B/D hires an outside firm to conduct due diligence and also why they would end such a relationship. Often times, as it seems to be in this case, it has more to do with the client’s ability to conduct the research in-house, perhaps because of growth of staff or maturation of its programs, than it is dissatisfaction with the consultant.

To quote from the article: “The decision of whether to outsource some aspects of manager research is often a question of staffing and numbers, says Andrew Klausner founder and principal of consultancy AK Advisory Partners.“When you’re building a platform or expanding a platform, it’s easier to hire an outside research shop,” Klausner says. “As you mature, add staffing and add assets, it becomes easier to justify bringing it in-house.” Taking greater control over the process provides the home office greater say over the timing of research and the ability to decide whether to include affiliated products, he says. “You have a little more control over how things get done,” Klausner says.”

A sensitive topic is affiliated managers/funds. Hiring an outside firm to conduct due diligence on these products – even if you have the ability to conduct it in-house – is often a smart move to remove any potential (or perceived) conflicts of interest. I am a firm believer that adding this level of third-party oversight, especially on affiliated mangers/funds, sends a great signal to advisors and clients that you are serious about having only the best products available.

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Wealth Management Trends – The Good, The Bad & The Ugly - April 23rd, 2014

2013 was a mixed year for the retail wealth management business, with positive highlights – such as increases in assets under management, revenues and production – hiding some disturbing underlying trends. The results provide a good baseline for individual advisors, advisor groups and their firms to evaluate their businesses and plan accordingly for the future.

(The study being referenced is PriceMetrix’s Fourth Annual State of Retail Wealth Management Report. I give a lot of credence to these reports because of the firm’s reputation as well as the size of its database, which encompasses 40,000 advisors. seven million retail investors, 500 million individual transactions and $3.5 trillion in investment assets.)

First, the good headlines news – assets under management increased 12% for the average financial advisor last year and average production grew 5%. Average household revenue increased 11%. These gains signal the continuation of an uptrend in these categories that has been in place since 2009. The average financial advisor managed $90.2 million and had revenue of $578,000 last year. Average household revenue was $3,670 per household.

But given that the market was up close to 30%, is this growth really that impressive? Here comes the bad news! Much of the growth came from market appreciation rather than growth in new clients. In fact, 6% of the growth came from existing clients and only 5% from new clients. Client retention dropped as well, with departing clients providing a 5% negative drag on growth. The average client retention rate decreased 2% to 90% in 2013, deteriorating in every size of household category. This statistic counters the often heard argument that advisors are only getting rid of smaller less profitable clients. (Bigger households actually left at a fast pace than smaller households.)

Wait – it gets worse. Average return on assets (ROA) dropped for the second year in a row, down to 0.68% from 0.72% in 2011. While part of this was due to the continuing trend of advisor’s increasing the percentage of fee-based business in their overall businesses, advisors need to grow assets faster if they are going to transaction to lower margin business. And the average age of clients is older for the second year in a row, growing faster than the overall North American population.

The overall results of the survey were well summarized by Doug Trott, President and CEO of PriceMetrix: “Advisors and their firms have a lot to consider. A key challenge, however, remains how to create, articulate and deliver a value proposition that helps to attract and keep desirable wealth management clients. Another challenge is how to create a sustainable book that is not overly reliant on aging clients.”

Growth is only good if it is the right growth.

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AK In The News: Baird Ramps Up Northwest Exposure, Snags $10B Wealth Shop - April 11th, 2014

I was asked to comment on an article in today’s Fundfire (a Financial Times Service) about Baird’s acquisition of Seattle-based B/D McAdams Wright Ragen (MWR). To me, the deal makes a great deal of sense. It extends Baird’s footprint in the Nortwest, and the employee owned boutique-firm seems to have a similar culture and operating philosophy.

But mergers are never easy – no matter how good the fit. There will inevitably be growing and consolidation pains; even the best merger partners experience some pain when they integrate operations, and any change is always traumatic on clients and in turn financial advisors. Having said that, the long-term gains from a successful merger do outweigh the pain. And in this case, I think the similarities in the firm’s cultures will keep the pain to a minimum – if they get the rest of the stuff right.

Contrast this to a merger between a B/D and a bank, or a regional B/D and a wirehouse, where in both cases the cultures are quite different and the odds of trouble in a merger are greater. The results of a merger are never perfect or easy to predict, but from what I can tell, I feel positive about this one.

To quote from the article: “”It seems like culturally the firms are a good fit – two regional players. This will help Baird increase its footprint in the Pacific Northwest. Baird has a reputation as a good regional firm and this step seems logical as they continue to expand,” says Andy Klausner, principal and founder of AK Advisory Partners. “Certainly the merger of two regional brokerage firms – from both a cultural and operational point of view – would be easier than the merging of a regional firm with either a bank or a larger brokerage firm. While Baird is larger and the acquirer, it is more a merger of equals than you see in many other mergers.””

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AK In The News: Industry Split On Greater Allianz Scrutiny Of Pimco - April 9th, 2014

I was asked to comment on an article in today’s Ignites (A Financial Times Service) about the industry’s reaction to reports that Allianz, the parent of Pimco, is going to increase its oversight and be more hands on with the subsidiary because of the continuing bad publicity the firm is getting in the wake of Mohammed El-Erian’s resignation in January. El-Erian was the heir apparent to CEO Bill Gross, and his departure has raised questions about the culture of the firm, among other things.

The article detailed results of a reader poll in which 43% of participants said that increased oversight would hurt Pimco (26% of these respondents felt that the negative effects would be significant). 38% of respondents believed that increased oversight would benefit the firm. 20% said such action would have no impact.

Parent companies in the asset management business traditionally give their subsidiaries large amounts of autonomy. In fact, Allianz increased Pimco’s autonomy in January 2012 when it gave Pimco control of its worldwide distribution. The overall fear is that micro-management of subsidies, in an industry where people are so important, could potentially lead to mass defections.

My belief is that if Allianz does become publicly involved, it is more of a way to shore-up public confidence in Pimco then to actually get in there and make significant changes. Perception is reality, and the perception in the industry today is that Pimco is broken. If Allianz can help shore-up confidence, and get the firm out of the media spotlight, perhaps it can help the firm turnaround.

To quote from the article: “Overall, the perception of damage has already taken its toll on Pimco, experts say. Andy Klausner, founder of strategic consultancy AK Advisory Partners, expects any Allianz involvement in fixing Pimco to be enacted more for public relations reasons than any other purpose, particularly due to doubts that Allianz has the appetite to restructure Pimco’s culture. With immense media coverage of Pimco recently, the real issue is that the firm’s reputation has suffered, he says. “Whether Pimco is right or wrong in the debate about their future, it does not matter,” Klausner says. “The perception of their culture being broken is important to note and it cannot be ignored.””