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The Un-Business Business Book

Sunday, September 26th, 2010

Book Review: Rework by Jason Fried and David Heinemeier Hansson (founders of 37Signals)

This book is probably like no other business book you will ever read – and it will probably make the folks at the Harvard Business School cringe. I call it the un-business business book (or perhaps anti-business business book would be more accurate) because it is written from the perspective of two entrepreneurs who have done virtually nothing by the book. In fact, the book is written for entrepreneurs.

That is my only hesitation to recommending reading this book to folks in the financial services industry. We can still be entrepreneurs and have that type of spirit, but unlike a software start-up like 37Signals, we do work in a highly regulated environment. So I say, read this book – but remember the context and keep in mind that you will not be able to do everything that they suggest……but some of the ideas are relevant to us all.

This book will make you laugh at times – and it will probably scare you at others – but I think it is good to read something that is so different from conventional wisdom that it will actually make you think if all of these things that you take for granted really make sense.

For example, the chapter “Learning from mistakes is overrated.” Does the concept of failure being good as a learning lesson really make sense? You know, as I thought about it – it doesn’t! Or, the chapter “Build a product, not a half-assed product.” Do you have to wait to introduce your product until it is the best and has all of the bells and whistles? Or is better to go to market quicker, learn what the market wants and make any necessary adjustments? If nothing else, questions such as this make you think or re-think many of the ideas that us MBAers take for granted.

Rework is a quick enjoyable read – take the time and let us know what you think.

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See AK Quote in Article on Social Media – Want-To-Have or Need-To-Have?

Thursday, September 23rd, 2010

Published on September 23, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Gregory Shulas

Fund companies may benefit from having a social media presence, but they don’t need a Facebook profile to effectively compete. That’s according to Ignites poll respondents.

Roughly 53%, or 147 voters, believe industry firms have no serious need to participate in social media networks such as Facebook and Twitter. That made it the top sentiment expressed in the Ignites survey about whether competing effectively today requires a social media presence.

Of the majority group, 38%, or 106 voters, said a social media profile is nice, but not a necessity today, while 15%, or 41 voters, were more cynical, calling it just a fad.

In contrast, 47%, or 130 voters, said firms must have a social media presence if they want to be competitive in the marketplace. The minority group includes 9%, or 26 voters, who said a social media presence is vital for a firm’s continued success, as well as 38%, or 104 voters, who believe it is “important” for firms to maintain a presence on social networks.

Ignites has reported on how fund companies are increasingly embracing social media strategies as a means to communicate and strengthen relationships with investors. An informal survey conducted by Ignites found that TIAA-Cref has the most popular industry Facebook site, with 13,000 “fans,” a number that exceeds Vanguard’s 9,500 fans.

Despite industry market leaders’ embrace of social media, many professionals remain cautious about adopting such strategies. Dennis Dolego, Optima Group’s director of research, says that while such platforms seem like the “thing to do” for mutual funds, there are some legitimate reasons why firms have reservations about them.

For example, the primary value a fund company offers is performance, which Morningstar provides data on, he says. So industry executives may legitimately question what real value — beyond performance figures — a fund can offer to investors through a Facebook or Twitter posting, Dolego says.

Additionally, fund companies can face problems if negative information about their product is posted online. “They see it as something to do but they don’t feel comfortable doing it; they see some of the problems involved,” Dolego says.

“Overall, social media is almost like Consumer Reports or referral marketing. You want an objective party to say positive things about what they do,” Dolego says. “The goal is to get the support from the consumer that is independent, objective and unsolicited, and then to build a buzz about products and services.” Negative postings can be counterproductive to such marketing campaigns, he adds.

Andy Klausner, founder of strategic consultancy AK Advisory Partners, disagrees with the 15% who said social media is mainly a fad. In his view, the growth of these social networks is part of a larger shift in information distribution. To succeed in this new age, fund families must be active participants in these social networks, he adds.

“Information flow and marketing has unquestionably changed from pull to push. In other words, rather than pull in clients by delivering the message that we want, clients are demanding information on their own terms — you need to push out your information, show your value-added and inform clients on their terms,” Klausner says.

“Because of this overall change, firms that successfully embrace social media are giving people the information that they want, delivered the way that they want it — and that is not a fad but a distinct competitive advantage,” he adds.

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The Recession Has Been Over For a Year … Really?

Tuesday, September 21st, 2010

The National Bureau of Economic Research announced yesterday that the recession which began in December of 2007 officially ended in June of 2009, making it the longest recession since WWII. To quote their release – “The basis for this decision was the length and strength of the recovery to date.”

I guess I have no right to argue with their methodology since they are the official government arbiter of such decisions. But coming on the same day that the President acknowledged that there are no quick fixes for the economy, I guess I have to ask whether we need to redefine the term recession. Everyone talks about the “new normal” caused by the economic downturn of the last few years. Maybe we need to redefine how we look at and describe the country’s overall economic condition.

With foreclosures still on the rise, and more Americans at or below the poverty level than in decades, is there really any other logical response other than “Really?” It doesn’t feel like the recession has ended. If anyone sees any value-added in this announcement will you please let me know?

The only thing this announcement does is officially end any talk of a double-dip recession. Why? Well, officially we are no longer in a recession and have not been since last June. Therefore if we were to once again experience two straight quarters of negative GDP growth we would be in a new recession – not a double-dip recession. It would just be another recession on top of the earlier recession. Other than this little fact, I am still scratching my head over the announcement. Please show me the “length and strength of the economy.” I don’t think many people see it.

A new definition of recession seems apropos……….Or perhaps the government should curtail their message a little if the NBER wants to have any credibility in the future.

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As Referrals Wane, Here Comes Active Marketing

Sunday, September 19th, 2010

Many advisors and advisory firms have relied primarily on referrals to build their business. While this strategy has been quite effective in the past, the market downturn of the past two years has made clients more skeptical and, as a result, this avenue of growth has slowed. The problem is that many advisors and advisory firms – even some very large and successful ones – have either never actively marketed or have not done so for a long time, and are therefore beginning the process from square one. Yes, they must learn how to market.

This phenomenon was confirmed in a study of almost 700 advisors and wealth management firms conducted for Genworth Financial. Almost three quarters of the respondents plan to spend more time on marketing, and half of respondents more money on marketing; the respondents overwhelmingly acknowledge that active marketing will replace referrals as a key driver of growth.

Interestingly, and reinforcing the above point, only 32% of respondents had an actual marketing plan, and only half of these advisors and firms have actually used their plans. As growth rates have slowed with the markets decline, and referrals have waned, the difficult reality is that advisors and firms must become better and more active marketers.

That raises the interesting dilemma many firms face – recognizing that you need to develop a marketing a plan is one thing; actually figuring out how to do so is another matter! Respondents also recognized that other complementary avenues of future growth will include either acquisitions or hiring addition business development staff. Many organizations are budget-constrained today, therefore so while in theory hiring new business development and marketing employees makes sense, this might be a longer-term strategy, which does little to help replace lost assets today.

Another interesting conclusion from this study is that respondents cited delivering top-notch client service and building and maintaining efficient operations as the two top ways to generate business opportunities moving forward. I agree – happy clients will be more apt to begin giving referrals again in the future. And operating efficiently is always important. But this will take time…..

In the end, many companies are going to have to figure out how to become more active marketers – budget constraints notwithstanding – and quickly if they hope to build their assets back to previous levels.

Posted in Advisors, General Interest, Investment Managers, Sponsors | 1 Comment »

Successful Advisors and the 80/20 Rule

Monday, September 13th, 2010

Do you know what the Pareto principle is? Named after an Italian Economist of the early 1900s, the Pareto Principle is more commonly referred to as the 80/20 rule – 20% of our efforts will yield 80% of our results.

Why is this worth mentioning? It’s another way of reinforcing the notion that the most successful advisors generally have fewer clients – but the clients that they do have are wealthier. As a recent Investment News article headline read “One key to being a million-dollar producer? Dumping smaller clients….”

While the concept that advisor success is highly correlated to having fewer overall relationships has been around for a long time – and is in fact rather intuitive – a recent study by PriceMetrix Inc. of more than 1.3 million households adds some al meat to the argument:

* On average, small accounts (less than $100,000) make up 52% of an advisors business yet generate only 9% of revenue

* The average advisor makes only $350 a year (commissions and fees) on small accounts

* Only 24% of the book of the average million dollar producer is composed of small accounts

* The average advisor who slashed small accounts by 5% increased revenue by $43,000

Hey advisors – whether you subscribe to the 80/20 theory or not – these last two bullets are actionable items – dissect your book to see where you stand, and at a minimum, slash 5% for a nice bounce to your income!

The other logical conclusion of these numbers is that if you like serving smaller accounts and want to keep them as part of your business, you better make sure that you have the client servicing infrastructure to support it – because it’s going to be a lot of work! (By the way – the study also concluded that small clients are 108% more likely to switch advisors than they are to become $1 million accounts – ouch!)

Posted in Advisors, General Interest | 1 Comment »

Control Your Own Destiny

Wednesday, September 8th, 2010

We sent out a special issue of our quarterly newsletter today entitled “Control Your Own Destiny.”

Now that Labor Day is past, and vacations for the most part are over, the focus turns to reaching 2010 goals during the remaining months of the year and setting goals for next year.

Despite today’s economic uncertainty, and knowing that there are many things none of us can control (for example, will we have a double-dip recession?), this newsletter highlights three aspects of any business that can be controlled:

* Your Brand

* Your Target or End-Markets

* How Efficiency You Run Your Business

Click here to read the newsletter. Make the rest of the year a good and profitable one!

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What’s Holding Back UMA Programs?

Tuesday, August 31st, 2010

Published on August 31, 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 growth of unified managed account (UMA) programs has been far slower than many industry experts had predicted when the investment vehicles were first introduced. Assets under management in the investment vehicles stood at $79.5 billion at the end of the first quarter, compared to $566.2 billion in separately managed accounts (SMAs) and $317 billion in programs where the advisor acts as the portfolio manager, according to Cerulli Associates. What are the reasons why the UMA has so far failed to live up to its potential?

To start with, a current focus of many UMAs – to provide a model-based investment solution – goes against two important trends:

1) The bias of top-end advisors to migrate away from “packaged products.”

2) The desire for top-end advisors to position themselves at the center of relationships and to provide many of the services that UMAs do – namely rebalancing and tax-advantaged investing.

The events of the last two years have only increased the importance of advisors retaining control of their client relationships. This has only made the road even tougher for UMAs.

I mention top-end advisors because they generally have larger clients and far greater assets under management. In fact, UMAs are more appealing to smaller accounts, where access to a diversified portfolio of individually managed accounts is not available. However, in this space for smaller accounts, UMAs are competing with – and at a cost disadvantage to – emerging exchange-traded-fund programs and established mutual fund wrap programs at most brokerages.

Another reason for the disappointing growth of UMAs is that the industry has not been able to truly make these accounts as all-encompassing as first hoped. For example, alternative investments and other less-liquid investments still do not work in the typical UMA structure. If advisors still have to do their own work to provide comprehensive client-level reporting, a main rationale for investing in UMAs disappears.

A further twist is that what some consider to be the next generation of managed accounts – the unified managed household (UMH) – is really a client-level reporting vehicle rather than an investment vehicle per-se. If, as I believe, this type of total-client reporting and functionality is what top-end advisors really desire, the growth and development of the UMH bodes poorly for the future of UMAs as well.

In order to differentiate themselves and attract larger clients, advisors must be able to demonstrate their value-add on an ongoing basis. Packaged products are a commodity, and while they have their place, successful advisors don’t build their practices on a foundation of such offerings.

In addition, the industry has not done itself any favors by selling UMAs as a primarily model-based solution and by melding their SMA programs into UMAs, as some firms have been doing recently. Pushing UMAs as a by-product of reducing the number of products you offer may increase assets under management in these programs. However, it will not really make the UMA the product the industry has long touted. UMAs seem stuck between SMAs and the next generation UMHs with no place to go.

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What Makes For a Good Financial Services Website?

Friday, August 27th, 2010

A recent report by Dalbar (a well-respected research firm in the financial services industry), which ranked the websites of top mutual fund companies, has some interesting implications for the entire industry. (I believe that the findings are germane to all segments of the industry – sponsor firms, investment managers, RIAs, etc. So take notice!)

Let’s start with the overall conclusion – it’s critical that websites are easy to navigate and that content is easy to find. In addition, continuity among the different features being offered is important; for example, the use of social media should complement the functionality of the website and fit naturally.

Poor functionality will lead to frustration on the part of the user and any value-added contained in additional content will be lost. An effective website must have good design (which includes the look as well as the functionality) as well as good content. One without the other is not enough. To quote an executive at a large fund family, “It’s all about getting the right content to the right person at the right time.”

In designing your website, make sure that you dedicate the necessary resources to both design and content!

There were a few other interesting findings in the report as well. The use of mobile, social media and interactive features is increasing. Again, while this is not surprising, it’s important to reiterate that the most effective sites allow clients as well as prospects to utilize the information and access the resources of the company the way that they want to – it’s all about the user! Make it user-friendly!

Finally, the “viral” component – the ability for readers to share the information with others – is growing significantly (the phenomenon is called social sharing.) People want to share content that they find useful, especially when it comes to their finances, and making it easy for them to do so helps spread your brand further – and faster!

Posted in Advisors, General Interest, Investment Managers, Sponsors | 1 Comment »

Why Supporting 12b-1 Reform Will Pay Off

Monday, August 23rd, 2010

Published on August 23, 2010 – Ignites – An Information Service of Money-Media, a Financial Times Company- written by Andrew Klausner, Founder and Principal of AK Advisory Partners LLC.

The recently announced SEC proposal to revamp 12b-1 fees has already — not surprisingly — resulted in a public fight between those who advocate that the fee should be changed and those who do not. The general argument of defenders of 12b-1 fees is that they are a way to cover the expense of providing ongoing service to clients. Opponents of the fee argue that they are a needless drag on performance. They say that the ongoing nature of the fee goes against the reason they were developed in the first place: to cover initial marketing costs.

What’s getting less press is the fact that most investors don’t even know what 12b-1 fees are. This lack of investor knowledge about fees is not limited to 12b-1 fees; they just happen to be the fees that are getting the most press today. The problem is not 12b-1 fees per se, but the need for even more transparency in mutual fund pricing, as well as stronger disclosure rules.

Ironically, this debate comes at a time when the following has occurred:

*The popularity of institutional mutual fund shares and exchange-traded funds (ETFs) has also cut into sales of funds carrying 12b-1 fees.

*The SEC will be spending most of its attention and time deciding the much larger issue of determining whether advisors at broker-dealers are fiduciaries. This initiative will no doubt result in more scrutiny of compensation arrangements between funds and intermediaries.

So, cutting through the noise surrounding the current debate, I believe it’s clear that industry professionals can only gain by stopping any strong lobbying against 12b-1 reform. This is because if the SEC implements changes that simplify and increase mutual fund disclosure as it relates to fees, then investors win. Therefore, it would be dangerous for anyone to be perceived as arguing against simplifying fee structures and increasing disclosure. Those investment companies or intermediaries could be painted in a very anti-consumer light by those framing the debate in pro-investor terms, putting the former groups at a competitive disadvantage. Lobbying should concentrate on making sure that the changes do not result in unintended consequences. After all, there is always such a danger when new legislation/regulations are enacted.

Ultimately, the current proposal, though costly to implement, is the right thing to do despite the potential objection of some sponsor firms. (The proposed rule would require that mutual fund companies disclose marketing and service fees as well as continuing sales charges in every prospectus, shareholder report and investor transaction.)

I believe the proposed change to move the setting of pricing terms from the fund companies to the broker-dealers will increase competition, which is a positive thing. The argument that such a move will commoditize the industry and result in price wars fails to recognize the value that the advisor brings to the table. It also runs contrary to the above-mentioned fact that the industry has been evolving away from funds with 12b-1 fees in any case.

However, caution is still needed. There are some elements of the proposal that need further discussion. For example, currently more than 40% of retirement plans charge more than 0.25% to cover their administrative costs. Any changes to 12b-1 fees should not result in higher overall prices for retirement plan participants. Another problem is that the current proposal does not cover revenue sharing, such as when a fund pays a percentage of its fees to a broker as part of the sales agreement. If 12b-1 fees are capped, then revenue-sharing agreements might be used to offset the difference. The idea of making fees more transparent would be negatively impacted — another possible unintended effect.

In the end, change is always difficult, and this debate is sure to continue for at least the next couple months, if not longer. But the goal should be clear: Any changes to 12b-1 fees should increase competition, reduce unnecessary regulation, and, above all else, simplify fee structures so that investors can understand exactly what their fees are and therefore make rational decisions based on complete information.

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Who Controls the Client Experience?

Friday, August 20th, 2010

I wasn’t surprised to see that Raymond James just announced that it was hiring a Director of Client Experience. What was surprising is that the design of this position is to communicate directly with clients. The firm acknowledged the slippery slope that it is now embarking on – how to directly interact with clients without upsetting its advisors.

This should be an interesting “experiment.” Personally, I like the idea of hiring a Director of Client Experience, but would rather have this person work with the training department to help provide advisors the resources to enhance and promote the activities that they do to make their individual client experience unique – this is part of each advisors unique value proposition and is a point of differentiation between them and their competitors.

Especially scary is the analogy the new Director made to Starbucks and how they have been able to institutionalize the client experience. (The article mentions that Starbucks is famous for bringing fast, fun friendly service to customers on a highly consistent basis.) Most sophisticated clients choose their advisors for the services they provide first and the hope that they will become long-term partners; the firm they work for, or the broker/dealer they are associated with is usually far less important. Given that fact, I for one do not see the value-added of the firm engaging in this new enterprise, and in fact see it doing potentially a lot more harm than good if it alienates enough advisors.

Call me an old dog – and I may be proved wrong – but institutionalizing client service deemphasizes the importance of the individual advisor and is more of a strategy aimed at the mass market – successful advisors today are reducing the number of client relationships that they have, concentrating on fewer larger relationships where they can make a difference. I am not sure how this new strategy can help top advisors.

Am I missing something?

Posted in Advisors, General Interest, Sponsors | 2 Comments »