Unlocking Real Value Blog

Having recently read a number of articles about the significant growth of advisor- or rep-as-PM (portfolio manager) managed accounts, a phenomenon that has actually been taking place since the 2008 financial crisis, I’ve been wondering what’s driving this trend – and do advisors really want to go there?

One such article detailed the rollout of a new trading technology platform at Merrill Lynch included the following two points:

• More than 3,800 Merrill reps participate in this program, managing assets of about $88 billion.

• A new survey from the Aite Group found that 42% of respondents think that this segment will be the fastest growing for clients with between $250,000 and $10 million in assets, which is well ahead of other fee- and no-fee-based options.

These accounts give the advisor more control over managing client accounts; in particular, they offer the opportunity to raise cash quickly. This feature is especially important during volatile markets. But, frankly, I don’t buy into this theory.

Top advisors retain control of asset allocation decisions regardless of the chosen investments; this is one of their value-added functions. Such control would include the client’s overall allocation to cash. Additionally, many investment mangers have altered their cash-raising capabilities in the face of the 2008 financial meltdown, making it easier for them to react to the market.

Why this trend then? Perhaps fees are one reason. Compensation in these accounts is generally higher to the advisor, since there is no outside investment manager involved. Fees in general are being squeezed today in the face of years of mediocre market returns. Positioning oneself to get a larger portion of the fee is one way to increase revenues.

Regardless of the reason, however, I would caution advisors that have moved, or are considering moving, the majority of their business into these types of accounts. Remember why traditional fee-based accounts have grown as they have. Hiring an outside investment manager somewhat shields the advisor from poor performance, in addition to putting them on the client’s side of the table. If an advisor hires a number of managers for a client, for example, and one begins to underperform, that manager is replaced – not the advisor.

This traditional model allows the advisor to concentrate on what most advisors do best – relationship management. It’s hard to prospect, market, service and manage investments all at the same time. It’s much more effective to hire a specialist to manage each portion of a client’s portfolio. Remember the theory of gaining control of the client by giving up control of the investments.

I don’t mean to infer that all advisors that participate in these programs are making a mistake. Some advisors truly have an aptitude for managing money. Even these advisors, however, should probably only be managing a portion of each client’s assets. Top advisors should diversify their books of business, just as they diversify a client’s portfolio.

There is a place for advisor-as-PM accounts, particularly in a partnership in which one partner can concentrate on this area. However, I question whether all the growth we are seeing in this area is a positive trend, and if advisors are doing themselves or their clients any favors by jumping on the bandwagon.

The old Morgan Keegan as we know it will soon be gone. Isn’t it ironic that the grand plan of management to resurrect the firm via venture capital financing was apparently sidetracked by the mess at MF Global among other things – when the reputation of MK was itself irrevocably harmed by its own financial mess with its RMK Funds.

The saddest thing for me is that the losers in this deal – the home office personnel of MK – are a great bunch of loyal employees and long-time friends. They are the people that are least able to afford losing their jobs, and since many have long-term ties to Memphis, the least able to pick-up and move to Florida. The other loser from this deal is the City of Memphis.

Sure, part of the deal included an undefined support center in Memphis. But I can guarantee you that it’s not going to be 900 or 1000 people for very long. The only way that a deal like this can make financial sense for Raymond James is going to be for them to consolidate operations, IT and some of the investment product areas among other support areas. Credit the folks at MK for getting some concessions so that Memphis does not lose all of its jobs. But in 12 or 18 months, when the deal gets closer to being done, the outcry over job losses will be far less than it would be today.

I do give MK upper management credit for being master negotiators even though they were not able to take over the firm themselves. The CEO of MK is now President of Raymond James and his old department, Fixed Income, is not surprisingly going to be headquartered in Memphis (as is Public Finance). So the top executives did okay for themselves. Anyone surprised?

For most financial advisors, the deal will work out just fine. In fact, a close friend who is an advisor at the firm said to me last week that Raymond James is one of the firms he would have considered going to. Advisors will be paid to stay; and if these offers are too low, they will leave and get paid by another firm. But most will continue on at the combined firm for now with only the interruption of new paperwork for their clients.

RIP Morgan Keegan – and good luck to the many loyal back office employees that made this firm great.

2011 ended with a number of studies sighting advisor frustration with social media. For example, a study by the Aite Group concluded that advisors were not getting the desired benefits of better brand awareness, competitive differentiation and revenue growth. 20% of advisors surveyed said that social media was unimportant to them while another 40% said that they were neutral on social media.

My reaction? Be patient! There are two primary reasons for advisors to become engaged with social media – the aforementioned prospecting and branding and client servicing. Many advisors fail to see this second but very important use for social media. In fact, even if you never get a piece of new business from your social media efforts, yet are able to better serve your clients, I for one would argue that your social media efforts have been successful.

In today’s 24/7 viral news world, clients are demanding information when they want it and how they want it – it’s no longer good enough to dictate to clients when you will be calling or meeting with them. Social media provides a great outlet to get your ideas out to clients in a timely fashion, and it’s not a lot of  additional work to offer your clients multiple social media outlets – Facebook, Twitter, Google + – so that they can choose the one that they are most comfortable with. (As an aside, don’t let these social media efforts limit your face-to-face time with clients – it’s still important that you make the time to sit down with clients as often as possible.)

Also interestingly, of all of the social media sites followed by Aite Group, only LinkedIn increased its overall use between 2009 and 2011. LinkedIn does not, however, address the client servicing side of the social media question. What about e-mail marketing systems such as Constant Contact? To me, this is one of the easiest and most efficient ways to enter the social media game, and it allows you to not only provide clients with information, but also in a branded way!

Advisors did mention some positive feelings for client communications in the Alite Group survey, but it was relegated to the back of the headlines. I say move forward – come-up with a client servicing plan that makes sense and is flexible. The prospects will come, albeit more slowly. As they say, if you build it they will come.