Unlocking Real Value Blog

Creating A Successful Marketing Strategy - July 16th, 2013

Our latest White Paper, Creating A Successful Marketing Strategy, is now available!

While referrals are great, and will always be part of growing a business, many who have relied on referrals exclusively in the past have more recently needed to supplement these referrals with a more active marketing approach. And the world has changed – competition has increased, clients have become more discerning and social media has had a dramatic impact on the types of marketing activities that are the most effective.

In order for a marketing strategy to be successful, it must be multi-faceted, realistic and implemented consistently over time. The messaging should be focused on developing awareness of your brand and on building trust around that brand.

  • Detail specific activities you intend to undertake;
  • Identify the audience each activity is targeted to;
  • Specify how you’re going to measure success;
  • Be flexible enough to allow adjustments as necessary; and
  • Stipulate who on your team is responsible for each activity.

 Click here to download the entire White Paper.

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Retail’s Dangerous Shift Toward Alternative Investments - July 8th, 2013

I’ve been warning about the trend toward retail alternative investments for a long time. With yields so low, many investors have been looking for ways to increase return; and the financial services industry has been more than happy to introduce many new products for retail investors. (The alternatives market has been historically an institutional one, with high net worth and income requirements.)

Now FINRA – the Financial Industry Regulatory Authority – has woken up ,and is warning investors of the risk of alternative investment mutual funds. These warnings are good for investors, and can be good for advisors who heed the warning and ensure that they only employ alternatives for clients that truly understand the risk/reward trade off.

(As an example, Morningstar’ alternative funds category includes the following types of funds: bear-market, multi-currency, long/short equity, managed futures, market neutral, multi-alternative, nontraditional bond, trading-inverse commodities, trading-inverse debt and trading-miscellaneous.)

To quote Gerri Walsh from FINRA: “Investors should fully understand the strategies and risks of any alternative mutual funds they are considering. FINRA is warning investors to carefully consider not only how an alt fund works, but how it might fit into their overall portfolio before investing.” Other warnings include the fact that many of these funds are new, and thus don’t have long track records, and many have higher fees than traditional mutual funds.

I agree with these warnings, and in fact, the reality is that most individual investors don’t have the capability to analyze these investments on their own and make informed decisions.

Advisors do have an opportunity to fill the knowledge/information gap and provide advice and education. Advisors would be well served to talk to their clients about alternatives, especially given the publicity they are now getting. Even if such investments are not appropriate for a client, given their risk profiles, clients should appreciate the fact that the advisor has taken the time to explain why such investments should not be purchased; this will also probably dissuade them from doing it themselves, outside of their accounts with the advisors.

While alternative investments might be appropriate for some retail investors, advisors should address the issue head on with their clients and prospects and take the lead role as educator and counselor. Use this FINRA warning as an opportunity to proactively contact clients and help them through the haze of information. You are potentially helping them avert large investment mistakes.

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Advisors – Website Content And Presentation Matters - June 18th, 2013

J.D. Power & Associates just released its 2013 U.S. Self-Directed Investor Satisfaction Study, and overall client satisfaction declined from last year. This headline is good news for full-service advisors, many of whom have been fighting the trend of investors trying to go it alone.

Hidden behind this headline are some other interesting tidbits of information for all advisors as well:

1) The reason that Scottrade finished in first place was the clear communication about their pricing which could be found on their website. Investors – especially those that do self-direct – are extremely fee conscious. For all advisors, however, the message is clear – be upfront and transparent about your fees, and explain them clearly and prominently. (Scottrade was followed by Vanguard, T. Rowe Price, TD Ameritrade, E*Trade Financial and then Fidelity in the study.)

2) The study concluded that these firms were struggling to “find the right method and frequency of communication with investors.” Yes, client communications does matter. Especially in today’s world of social media and mobile communications, advisors must be able to deliver to clients what they want, when they want it and how they want it.

3) A major reason for the decrease in satisfaction was dissatisfaction with the websites of the firms. The complaint was that there was too much information on their websites, and many investors felt that much of the information presented was irrelevant to them. Content does matter – you don’t want too much information, and you have to make the most relevant information the easiest to find.

4) And related to (3) above, because there is so much information out there, and so many new products, investors are looking to the websites for educational materials.

I think that there is great information in this study for all advisors. It provides hope that perhaps the trend toward self-advice is waning (a positive for full-service advisors) and it emphasizes the importance of client service and transparency. And it reemphasizes the importance of having a great website that provides clear and useful information to investors.

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AK In The News: Opinion – SMA Death Rumors Are Greatly Exaggerated - June 11th, 2013

I was asked to write an opinion piece in today’s Fundfire (A Financial Times Service) on the future of SMAs and SMA managers; please contact me and I would be happy to send you the complete piece.

As a summary:

1) While other types of fee-based programs have been growing more quickly than SMAs recently – including UMAs, model portfolios, advisor-managed, alternative investments and ETFs – SMAs still have by far the largest share of assets under management and will not be going away anytime soon. While the growth of these other programs may limit their growth in retail wrap programs, I still see them doing well on the institutional side – where assets are stickier – and with advisors who see themselves as “purists,” and who avoid ETFs and alternative investments for most clients.

2) SMA managers that adapt will do well; those that don’t will probably suffer. But the world will look different to these managers: growth will be greater on the institutional side, at lower fees, which will eat into profit margins. But since sponsor firms on the retail side are taking a greater role in running model portfolios, these managers can probably reduce their distribution and marketing costs (as fewer wholesalers will be needed). In addition, as technology advances, for example on the currency and fixed income trading sides, they may be able to increase the breadth of their product offerings and venture into new areas.

The fee-based investment world is ever evolving, and many of the programs we see today were probably never envisioned a few years ago. But there is room enough in this growing area for multiple products and programs. The rumors of the death of the SMA are truly greatly exaggerated.

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AK In The News: UMA Programs Face Advisor Adoption Challenge - June 6th, 2013

I was asked to comment on a piece in yesterday’s FundFire (A Financial Times Service) concerning the future of UMAs. While UMAs have grown considerably – assets have grown 84% in the past two years – the overall size of such programs, at $237.5 billion according to Cerulli Associates, is still far below that of SMAs (which are approaching AUM of almost $750 billion).

There are a number of reasons why UMAs have not grown as quickly as forecast when they first were introduced – among them the market crash of 2008. More recently, a plethora of new types of managed account programs – including, ETF, advisor-managed and alternative investments – have introduced competition that many had not foreseen a few years ago.

While the growth until now has been somewhat disappointing, many in the industry remain hopeful that the future is still bright for UMAs. I agree, but also think that these other types of fee-based programs – including SMAs – will also continue to grow, and therefore UMAs will not become as dominant as many thought they would once be. Certainly not an SMA killer!

A few things do bode well for the continued growth of UMAs – the move toward model programs being run by the sponsor, which should actually help grow all types of programs, the emphasis at the traditional brokerage firms on promoting UMAs to its newer and younger advisors, and the conversion of some platforms to UMAs (some might call it “forced” conversions.)

Technology is also going to keep advancing, and this may help UMAs in particular because of their flexible nature and because unlike some of the more product-specific programs, the ability of UMAs to hold multiple types of investments makes them attractive to a wide variety of investors and advisors.

What do you think the future holds for UMAs?

 

 

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AK In The News: Passive Products Appeal To Fund Industry Pros - June 5th, 2013

I was asked to comment in today’s Ignites (a Financial Times Service) about the results of a poll which indicated that many mutual fund industry pros are investing their own money in passive investments (such as ETFs). More than two-thirds of respondents indicated that they have a sizable portion of their own assets in passive investments.

These results are not surprising given the outflows that many active funds have seen as well as the negative press active management has received over the past few years, largely the result of so many of these funds underperforming their benchmarks. Industry professionals are in essence practicing what they preach – investing their own assets in a fashion similar to how they are investing their client’s assets. To quote from the article:

“Andy Klausner, founder and principal of AK Advisory Partners, says it “seems reasonable” that nearly 70% of industry participants have at least some assets in passive investments. Still, it is “hard to know exactly what percent of their personal assets are in passive investments,” he notes.”

Active management is far from dead, however. I believe that there will always be a segment of the profession that stays away from passive management, so I wouldn’t expect this percentage to increase significantly over time. Again, from the article:

“However, given some professionals’ personal preference for active management, experts do not expect many of those who are now abstaining from passive to be swayed in the future. Both Klausner and Dannemiller anticipate that the percentage of assets fund professionals invest in passive products expressed in Tuesday’s Ignites poll will stay about the same over time.”

 

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AK In The News: Industry Cautiously Optimistic On 2013 Pay - May 29th, 2013

I was asked to comment on the results of a recent Ignites (A Financial Times Service) poll on 2013 compensation. Overall, respondents were optimistic about their pay prospects, but hardly euphoric. 36% believed that their pay would be slightly higher this year, while 10% believed that their pay would be much higher. In contrast, only 11% of respondents believed that their pay would go down, and 4% felt that their pay would be much lower.

The results are not surprising, given how the markets have been doing this year. Presumably, anyone paid on commission or with bonuses tied to firm performance would expect their pay to increase. That only makes sense. But what is more encouraging to me is that the optimism, while there, seems guarded.

I think that this shows the dose of realism that the last financial meltdown left on the industry, and is positive in that hopefully it points to the industry not making the same types of mistakes in the future that it has made in the past. To quote from the article:

“Given the positive performance of equity markets this year, it is not hard to see why nearly 50% of respondents believe their employers will be more generous with pay come bonus time, says Andrew Klausner, founder of strategic consultancy AK Advisory Partners.

Klausner believes that today’s upbeat forecast for pay, as expressed in Tuesday’s Ignites poll, is much more sustainable when compared to the excessively cheerful outlook seen before the financial crisis.

“The magnitude of the latest crash has made everyone a little more realistic. Yes, hiring and pay have picked up, but probably at a much lower rate than previously, which is a good thing,” he says. “Wall Street has always over-hired and overpaid during good times and then slashed during bad times.””

A more stable and realistic Wall Street is good for the markets and the people that work in the industry.

 

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AK In The News: LPL Compliance Makeover Spotlights Manager Risk Controls - May 28th, 2013

I  was quoted in an article in today’s GatekeeperIQ (A Financial Times Service) about the implications of some of the problems that LPL has been having on the compliance side recently – not the kind of news they want!

Some LPL advisors have come under scrutiny with some state regulators for selling non-traded REITs inappropriately, and the firm itself was recently sited for a huge compliance failure on its monitoring of emails.

What are the ramifications for LPL moving forward? First, they obviously need to fix these compliance deficiencies and demonstrate to both the outside world – the regulators – that they have their act together – and then the inside world – their own advisor groups – that this public relations nightmare will be put successfully behind them.

Easier said that done. LPL can fix the compliance issues and increase its communications and education to advisor groups. But they walk a fine line between satisfying the needs of the regulators and ensuring that they are following all applicable laws (as are their advisors) on one hand, and overreacting and making these compliance changes so burdensome that they lose a lot of advisors on the other.

Unlike traditional B/Ds that can mandate strict compliance to their advisors from the top down, LPL, as an independent, is in a little bitter of a tougher position. I think it’s fair to say that advisors at an LPL, most having likely already moved from a wirehouse or other independent, would be more likely to switch firms if things become untenable more quickly than traditional B/D advisors (who are more used to that type of compliance world.)

To quote from the article: “That culture also puts LPL in “a very tough position” in disseminating the home-office driven compliance overhaul, according to Andrew Klausner, founder and principal of AK Advisory Partners. “While on the one hand they do have to clean up their compliance procedures, they have to do so without over-burdening their advisors,” he says. While advisors at wirehouses and regional firms may be accustomed to product and procedure mandates passed down from headquarters, at an independent shop, such dictates can threaten retention. “If LPL were to try such tactics, I would imagine that they would see a large exodus of advisor groups to other independent sponsors.””

What do you think?

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What Is An Alternative Investment? - May 21st, 2013

Hardly a day goes by that another firm doesn’t either enter into the retail alternative investment space, or expand their offerings; Fidelity and Schwab just announced major initiatives. Becoming more common as well, however, are firms closing retail alternative investment products; two firms recently shuttered their alternative (long/short) investment ETF offerings.

As investors seek higher yield in today’s low return environment, they naturally are turning to alternative investments and the hope and promise of higher and often uncorrelated returns. This trend scares me – almost a  much as today’s stock market, which is fueled by the Fed’s free money policy more so than by economic fundamentals. The complexity of many alternative investments have necessitated that they have historically been for institutional or very high net worth investors only – has anything really changed to fuel today’s growth in the retail marketplace?

I caution advisors to tread carefully if they are exploring or increasing their clients’ exposure to alternative investments. At least make the commitment to educate your clients fully on the inherent risks of these types of investments. You don’t want to be one of the last to jump on the bandwagon just before …

Back to my question: What Is An Alternative Investment? The answer is quite complicated, because the category spans everything from private equity to mutual funds to ETFs – from liquid types of investments to illiquid types of investments – from those that require investors be qualified (meeting certain income and net worth requirements) to those that don’t. In fact, investing in timber is considered by many to be an alternative investment.

My point? Advisors need to be extra careful in ensuring that before clients venture into any alternative investments that the investment is appropriate for their investment profile and asset allocation and that they fully understand the risks involved as well as any liquidity restraints. Is the additional risk being taken worth it?

I am not opposed to alternative investments – when and where they fit. I just fear that they are becoming the latest bubble in the industry, and that clients who are still struggling from the losses incurred since 2008 are about to make another mistake. Advisors – it’s your job to help your clients avoid such mistakes as opposed to helping them chase return.

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Characteristics of High Net Worth Clients - May 8th, 2013

PriceMetrix just released a report on the characteristics of high net worth clients (defined by them as people having a net worth of at least $2 million). There are a few very interesting pieces of information that advisors should consider in their ongoing planning processes.

(The breadth of the client database at PriceMetrix – 7 million retail investors and 500 million transactions – always gives me confidence in the validity of their reports.)

1) The most interesting aspect of this report to me is that the study found that just 3% of households with less than $500,000 when a relationship began, became high net worth clients over the subsequent five years. I can’t say it any better than the Doug Trott, the CEO of PriceMetrix: “The number of times small households become high net worth clients is simply too few to merit an advisor’s attention. Advisors should concentrate on finding, not manufacturing big clients. Seventy five percent of high net worth clients were high net worth from the very beginning of their relationship with their advisor.”

Other than family relationships, where you are trying to cultivate future relationships, I agree that it makes little sense to target smaller investors with the hope that they will become larger. Advisors should consider raising their account minimums if they have been targeting prospects with lower net worths.

2) The study confirmed that high net worth investors tend to spread their investments among account types and advisors. This argues for advisors adopting a business model where they accept this fact, and rather than try to convince clients to consolidate their assets with them (at least initially), they develop the ability to be the primary advisor – the one who can provide complete account performance (even for assets held away) and multiple services so that they can be the “go to” person.

3) While high net worth clients typically pay lower fees, the range of fees found was significant account to dispel the rumor that fees drive relationships. To quote Mr. Trott again: “They (advisors) shouldn’t deeply discount their prices because it won’t help and they should limit their number of small households because large numbers will impair their ability to appropriately service high net worth clients.”

4) Finally, the study validated the well known fact that high net worth clients tend to have more in fee-based accounts and migrate away from mutual funds as their net worth grows. Fifty one percent of high net worth clients have fee-based accounts, while only 36% of households with between $250,000 and $500,000 in assets have fee-based accounts.

Some good information to help advisors plan for the future.

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